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1a4d16b28a141fd862d18dc90490f272 | https://www.investopedia.com/articles/investing/092316/6-reasons-beware-marketlinked-cds.asp | 6 Reasons to Beware of Market-Linked CDs | 6 Reasons to Beware of Market-Linked CDs
A market-linked CD is a certificate of deposit with a return based on a collection of stocks or a market index, such as the S&P 500. One of these CDs can also be called an index-linked CD, an equity-linked CD, or an MLCD. With few exceptions, the principal amount in a market-linked CD is insured by the Federal Deposit Insurance Corporation (FDIC) up to a maximum of $250,000.
At first glance, it sounds like a good deal that offers diversification, market-based returns, and protection of principal. The deal seems even better when you consider the low rates paid by conventional CDs. The average traditional non-jumbo CD with a term of 60 months paid just 0.32% as of Jan. 22, 2021.
Key Takeaways A market-linked CD is a certificate of deposit with a return based on a collection of stocks or a market index, such as the S&P 500. These equity-linked CDs can be profitable, but many of them underperform traditional CDs. Market-linked CDs have numerous drawbacks, including fees if you cash out early, returns that are taxable as interest rather than as capital gains, and limits on gains.
Market-Linked CDs Often Underperform
Unfortunately, there are caveats. According to a Wall Street Journal analysis from September 2016, market-linked CDs often underperformed conventional CDs after fees, limits, and other factors were taken into account. The article analyzed 147 market-linked CDs issued since 2010 and discovered that 62% of them underperformed conventional CDs.
Furthermore, roughly a quarter of them paid no return at all. Although market-linked CDs can provide better returns than traditional CDs, you should only purchase them if you understand and account for their drawbacks. Below are six potential pitfalls.
Consider These Risks
1. Penalties for Early Cash Out
If you need to cash out your CD before it matures, you may end up paying a stiff penalty. The penalty could cancel out any interest earned. In some cases, it can even cause the loss of principal, according to the Securities and Exchange Commission (SEC).
2. Returns Taxable as Interest
Although your CD is linked to the market, returns on it are considered interest. You will likely have to pay income taxes instead of the much lower long-term capital gains taxes paid by stock investors. Furthermore, interest must be declared annually, even when it is only paid at maturity. That complicates owning a market-linked CD. Consider holding your market-linked CD in a tax-deferred account, such as an individual retirement account (IRA), to avoid paying those annual taxes.
If you buy a market-linked CD, diversify your assets and avoid high-risk investments. Take note of any fees, especially those that occur on the front end.
3. Capped Upside Potential
If the stock market rises substantially for the duration of your CD, you will not receive the full benefit of that increase. That's because market-linked CDs typically have a cap on returns. They might pay only a percentage of any increase in market prices or have a specific upper limit for gains. If the cap is a percentage of any price increase, it is called a "participation rate." If it is an upper limit for gains, it is called an "interest cap."
4. Call Risk
Some market-linked CDs have a call feature. This feature allows the issuing institution, typically a bank, to redeem the CD before it matures. Your interest rate is determined by the call price, and it might be less than it would be if the CD were held to maturity. The issuer is not obligated to call a market-linked CD.
Generally speaking, the investment will be called when it is to the advantage of the issuer to do so. If your investment is called, you may or may not be able to reinvest the proceeds at the same yield.
5. Lack of Dividends
There are typically no dividends with a market-linked CD. Dividend reinvestment is not usually an option like it would be with mutual funds. For some, the lack of dividend reinvestment is a significant downside. Other investors do not care and are more concerned with potential benefits, such as principal protection and guaranteed returns.
6. Stock Market Risk
Even when your market-linked CD has a guaranteed return, the net gain may be less than a conventional CD if the market goes down. Keep in mind that some market-linked CDs pay no guaranteed return at all. If you have only principal protection, you may be left with only your original investment and no interest when the market declines.
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23b0f2e824e0a02258092dd9bba0b391 | https://www.investopedia.com/articles/investing/092413/how-currency-works.asp | How Currency Works | How Currency Works
Whether we pull out paper bills or swipe a credit card, most of the transactions we engage in daily use currency. Indeed, money is the lifeblood of economies around the world. Currency refers to paper money or coins that are in circulation. But currency is actually only a small piece of the monetary economy and just one consideration when looking at the total money supply.
Indeed, most money today exists as credit money or as electronic records stored in databases in banks or financial institutions. But still, the bread and butter of everyday transactions is currency, and that is what we will look more closely at here.
Key Takeaways Currency is the physical money in an economy, comprising the coins and paper notes in circulation. Currency makes up just a small amount of the overall money supply, much of which exists as credit money or electronic entries in financial ledgers. While early currency derived its value from the content of precious metal inside of it, today's fiat money is backed entirely by social agreement and faith in the issuer. For traders, currencies are the units of account of various nation states, whose exchange rates fluctuate between one another.
What Is Currency?
While it may seem obvious, since we all use it on almost a daily basis, the exact meaning of money can also be elusive and nuanced.
Imagine you make shoes for a living and need to buy bread to feed your family. You approach the baker and offer a pair of shoes for a specific number of loaves. But as it turns out, he doesn’t need shoes at the moment. You’re out of luck unless you can find another baker—one who happens to be short on footwear—nearby.
According to mainstream economics, money alleviates this problem. It provides a universal store of value that can be readily used by other members of society. That same baker might need a table instead of shoes. In general, transactions can happen at a much quicker pace because sellers have an easier time finding a buyer with whom they want to do business.
Most importantly, money has to be the unit of account, or numeraire, which is a fancy term for the unit that things are priced in within a society. In the U.S. that is the dollar. Once there is a unit of account, people can indeed exchange on credit without the use of physical money.
Currency is the physical paper notes and coins in circulation. By accepting the currency, a merchant can sell his or her goods and have a convenient way to pay their trading partners. There are other important benefits of currency too. The relatively small size of coins and dollar bills makes them easy to transport. Consider a corn grower who would have to load a cart with food every time he needed to buy something. Additionally, coins and paper have the advantage of lasting a long time, which is something that can’t be said for all commodities. A farmer who relies on direct trade, for example, may only have a few weeks before his assets spoil. With money, she can accumulate and store her wealth.
History's Various Forms of Currency
Today, it’s natural to associate currency with coins or paper notes. However, currency has taken a number of different forms throughout history. In many early societies, certain commodities became a standard method of payment. The Aztecs often used cocoa beans instead of trading goods directly. However, commodities have clear drawbacks in this regard. Depending on their size, they can be hard to carry around from place to place. And in many cases, they have a limited shelf life.
These are some of the reasons why minted currency was an important innovation. As far back as 2500 B.C., Egyptians created metal rings they used as money, and actual coins have been around since at least 700 B.C. when they were used by a society in what is modern-day Turkey. Paper money didn’t come about until the Tang Dynasty in China, which lasted from A.D. 618-907. Metallic money in the form of coins made from precious metals such as gold, silver, or copper have been commonplace since early civilization.
Other forms of currency that have existed include large circular stone in the Pacific Islands, cowrie shells in pre-modern America, tobacco leaves, measurements of grains or of salt, or even cigarettes and packages of ramen noodles in prisons.
More recently, technology has enabled an entirely different form of payment: electronic currency. Using a telegraph network, Western Union (NYSE:WU) completed the first electronic money transfer way back in 1871. With the advent of mainframe computers, it became possible for banks to debit or credit each others’ accounts without the hassle of physically moving large sums of cash.
Today, electronic payments and digital money is not only common, but has become the most important and ubiquitous money form.
Value in Currency
So, what exactly gives our modern forms of currency—whether it’s an American dollar or a Japanese yen—value? Unlike early coins made of precious metals, most of what’s minted today doesn’t have much intrinsic value. However, it retains its worth for one of two reasons.
First, in the case of “representative money,” each coin or note can be exchanged for a fixed amount of a commodity. The dollar fell into this category in the years following World War II, when central banks around the world could pay the U.S. government $35 for an ounce of gold. In other words, the paper money represented some claim on physical metal and could legally be redeemed for that metal on demand.
However, worries about a potential run on America’s gold supply led President Nixon to cancel this agreement with countries around the world. By leaving the gold standard, the dollar became what’s referred to as fiat money. In other words, it holds value simply because people have faith that other parties will accept it. Today, most of the major currencies around the world, including the euro, British pound and Japanese yen, fall into this category. Fiat money moreover derives its value from the trust in the government and its ability to levy and collect taxes.
Exchange-Rate Policies
While currency technically refers to physical money, financial markets refer to currencies as the units of account of national economies and the exchange rates that exist across currencies. Because of the global nature of trade, parties often need to acquire foreign currencies as well. Governments have two basic policy choices when it comes to managing this process. The first is to offer a fixed exchange rate.
Here, the government pegs its own currency to one of the major world currencies, such as the American dollar or the euro, and sets a firm exchange rate between the two denominations. To preserve the local exchange rate, the nation’s central bank either buys or sells the currency to which it is pegged.
The main goal of a fixed exchange rate is to create a sense of stability, especially when a nation's financial markets are less sophisticated than those in other parts of the world. Investors gain confidence by knowing the exact amount of the pegged currency they can acquire if they so desire.
However, fixed exchange rates have also played a part in numerous currency crises in recent history. This can happen, for instance, when the purchase of local currency by the central bank leads to its overvaluation.
The alternative to this system is letting the currency float. Instead of pre-determining the price of foreign currency, the market dictates what the cost will be. The United States is just one of the major economies that uses a floating exchange rate. In a floating system, the rules of supply and demand govern a foreign currency's price. Therefore, an increase in the amount of money will make the denomination cheaper for foreign investors. And an increase in demand will strengthen the currency (make it more expensive).
While a “strong” currency has positive connotations, there are drawbacks. Suppose the dollar gained value against the yen. Suddenly, Japanese businesses would have to pay more to acquire American-made goods, likely passing their costs on to consumers. This makes U.S. products less competitive in overseas markets.
The Impact of Inflation
Most of the major economies around the world now use fiat currencies. Since they’re not linked to any physical asset, governments have the freedom to print additional money in times of financial trouble. While this provides greater flexibility to address challenges, it also creates the opportunity to overspend.
The biggest hazard of printing too much money is hyperinflation. With more of the currency in circulation, each unit is worth less. While modest amounts of inflation are relatively harmless, uncontrolled devaluation can dramatically erode the purchasing power of consumers. If inflation reaches 5% annually, each individual’s savings, assuming it doesn’t accrue substantial interest, is worth 5% less than it was the previous year. Naturally, it becomes harder to maintain the same standard of living.
For this reason, central banks in developed countries usually try to keep inflation under control by indirectly taking money out of circulation when the currency loses too much value.
The Bottom Line
Regardless of the form it takes, all currency has the same basic goals. It helps encourage economic activity by increasing the market for various goods. And it enables consumers to store wealth and therefore address long-term needs. Currency was once limited to the domain of physical coins and bills, but today's digital economy means that money now exists as data stored in ledgers at banks, and is even transcending the possibility of tangibility with the development of cryptocurrencies such as Bitcoin which can never be made physical.
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5f011db61d5b4fa382dbdec129569ad4 | https://www.investopedia.com/articles/investing/092415/chinas-stock-markets-vs-us-stock-markets.asp | China’s Stock Markets vs. U.S. Stock Markets | China’s Stock Markets vs. U.S. Stock Markets
Since first coming to power in 2012, Xi Jinping has preached economic reform as the way to achieve “the Chinese Dream.” Some of the reform measures have been aimed at deepening China’s financial markets and giving stock markets a greater role in financing corporate investment. Considered home to the deepest financial markets in the world, the U.S. may have just the blueprints for the kind of stock market development the Chinese government is looking to foster. Below is an overview of both the U.S. and Chinese stock markets with highlights on some of the unique differences.
The Beginnings
China’s stock markets are relatively young compared to the U.S. markets. While the Shanghai Stock Exchange (SSE) dates back to the 1860s, it only reopened in 1990 after being closed in 1949 when the Communists took power. The Shenzhen Stock Exchange (SZSE) also opened that same year, making China’s stock markets a mere 30 years old.
While the Hong Kong Stock Exchange (HKG) was founded in 1891 (and Hong Kong operates as a politically autonomous region from mainland China), it first began listing the largest Chinese state-owned enterprises in the mid-1990s.
By comparison, the U.S. stock market is 228 years old, with the New York Stock Exchange (NYSE) originating upon the signing of the Buttonwood Agreement on Wall Street in 1792.
Since that time, a number of other stock exchanges have risen up in the U.S. The Securities and Exchange Commission (SEC) lists 28 registered national securities exchanges, the second most important exchange after the NYSE being the Nasdaq, established in 1971.
The Stock Exchanges
U.S.
NYSE
Market Capitalization: $29 trillion Number of Listed Companies: 2,300 Electronic Order Book (EOB) Value of Share Trading: $14.4 trillion
NASDAQ
Market Capitalization: $10 trillion Number of Listed Companies: 3,300 EOB Value of Share Trading: $16 trillion
China
Shanghai Stock Exchange
Market Capitalization: $4.7 trillion Number of Listed Companies: 1,561 EOB Value of Share Trading: $8 trillion
Shenzhen Stock Exchange
Market Capitalization: $3.5 trillion Number of Listed Companies: 2,268 EOB Value of Share Trading: $11.5 trillion
Hong Kong Stock Exchange
Market Capitalization: $4.5 trillion Number of Listed Companies: 2,477 EOB Value of Share Trading: $1.9 trillion
Role in the Economy
Despite being some of the largest exchanges in the world, China’s stock markets are still relatively young and do not play as prominent a role in the Chinese economy as America’s do in the U.S. economy.
Further, whereas U.S. companies are heavily dependent on equity financing, in China only a small percentage, often quoted around 5%, of total corporate financing is funded by equity. Chinese corporations rely much more heavily on bank loans and retained earnings.
With regard to investors, equities are a large part of household wealth in the U.S., with around 52 % of the population owning stocks. In China, property, wealth management products, and bank deposits make up a greater proportion of their investments with only about 7% of Chinese owning stocks.
Stock markets evidently play a much larger role in the U.S. economy than the Chinese economy at both the individual investor and firm levels. While this means that China’s economy remains relatively protected from disruptive ups and downs in the stock market, it also means that companies remain limited in financing opportunities, a factor that can inhibit overall economic growth.
Tool for Economic Growth?
Whereas the U.S. economy plays an important role in raising investment funding for its corporations, China’s stock market has often been likened to a casino, dominated by unsophisticated retail investors gambling their wealth rather than looking for long-term sound investments.
Some studies indicate that increasing the proportion of professional and institutional investors relative to ordinary retail investors helps to improve the quality and efficiency of stock markets. This seems to make sense as professional investors are much more adept at analyzing fundamental values instead of being motivated by fear and irrational exuberance.
While the proportion of U.S. equities managed by institutional investors stood at 62% in 2019, 99.6% of total investors in China’s stock markets were retail investors.
The unsophisticated nature of the majority of Chinese investors has been one reason that China’s stock markets have been likened to a crazy casino rather than a tool for economic growth. As China is looking to expand the depth and role of its stock markets it is going to need to change this perception in order to instill greater confidence from more professional types of investors, especially if it wishes to open its capital account to attract foreign investors.
Openness to Foreign Investment
Unlike the U.S. and every other major stock market in the world, the Chinese markets are almost entirely off-limits to foreign investors. Despite easing capital controls allowing a limited number of foreign investors to trade on the Shanghai and Shenzhen exchanges, only 5.4% of shares are foreign-owned.
China’s stock shares are divided into three separate categories: A shares, B shares, and H shares. A shares are primarily traded amongst domestic investors on the Shanghai and Shenzhen exchanges, although Qualified Foreign Institutional Investors (QFII) are also allowed to participate by special permission. B shares are primarily traded by foreign investors in both markets but are also open to domestic investors with foreign currency accounts. H shares are permitted to be traded by domestic and foreign investors alike and are listed on the Hong Kong exchange.
Even though China's stock markets are becoming more open to foreign investments, international investors remain wary of jumping in.
The Bottom Line
Despite having extremely large total market capitalizations by international standards, China’s stock markets are still quite young and play a less significant role than they do in the United States. As equity financing can be a significant factor for economic growth, China has much to gain from fostering further development of its markets. Giving greater access to foreign investors is a step towards deepening its financial markets, but the main hurdle will be overcoming investors’ lack of confidence.
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c2a10bd809eabdbf7550905df3bd6e85 | https://www.investopedia.com/articles/investing/092514/entrepreneur-vs-small-business-owner-defined.asp | Entrepreneurs and Entrepreneurship Defined | Entrepreneurs and Entrepreneurship Defined
Entrepreneurship
An entrepreneur is an individual who starts and runs a business with limited resources and planning, and is responsible for all the risks and rewards of his or her business venture. The business idea usually encompasses a new product or service rather than an existing business model.
Such entrepreneurial ventures target high returns with an equally high level of uncertainty. The entrepreneur is willing to risk his or her financial security and career, spending time as well as capital on an uncertain venture, arranging for the necessary capital, raw materials, manufacturing locations and skilled employees. Marketing, sales and distribution are other important aspects which are controlled by the entrepreneur.
Even if some of these functions are outsourced, the risk is still carried by the entrepreneur. This makes entrepreneurship different from inheriting and/or running an existing business, working for a startup or entrepreneur for a salary, being a commissioned agent, or selling already available goods or services as a franchisee or dealership.
Key Takeaways Entrepreneurs are individuals who undertake the organization of a new business and the risks and rewards that come with it.Entrepreneurs tend to be classified as those who take on high-growth, high-risk innovations while small business owners oversee an established business with an established product and customer base.Successful entrepreneurs are seen as a driving force in the modern economy.
Small Businesses vs. Entrepreneurial Ventures
There is a fine line between being a small business (SB) owner and an entrepreneur—the roles actually have a lot in common—but there are distinct differences that set them apart. Small businesses usually deal with known and established products and services, while entrepreneurial ventures focus on new, innovative offerings. Because of this, small business owners tend to deal with known risks and entrepreneurs face unknown risks.
Limited growth with continued profitability is what is hoped for in most small businesses, while entrepreneurial ventures target rapid growth and high returns. As a result, entrepreneurial ventures generally impact economies and communities in a significant manner, which also results in a cascading effect on other sectors, like job creation. Small businesses are more limited in this perspective and remain confined to their own domain and group.
Myths About Entrepreneurs
Entrepreneurs take uncalculated and unknown risks without any plans. This myth is partially true; entrepreneurs do take uncalculated and unknown risks, but they keep resources, and plan as much as they can for dealing with the unknown.Entrepreneurs start business with a revolutionary invention. This is also partially true; not all entrepreneurial ventures are true breakthroughs. Most are identifying and capitalizing on a mix-n-match approach. Google did not invent the internet, McDonald's did not invent the cheeseburger, Starbucks did not invent coffee. It’s the identification and capitalization of the idea and rapid growth rate that makes the venture entrepreneurial.Entrepreneurs venture out only after gaining significant experience in the industry. Most entrepreneurs are young, inexperienced individuals who follow their passion.Entrepreneurs complete extensive research before taking the first step. Unless an existing business is setting up a new business line on a new concept, entrepreneurs start with very limited or no research. However, they do have good awareness about the potential of their offering, which gives them the confidence to assume the risk.Entrepreneurs start with sufficient capital. Capital is the foremost requirement of any entrepreneurial venture. Most entrepreneurs fail to secure sufficient capital from outside sources unless they have somehow proven themselves or have a marketable prototype. Hence, most entrepreneurs start out with insufficient capital with an aim to secure more along the way.
Examples of Entrepreneurship
Trading goods—like buying entire lots of branded shampoo at wholesale rates and selling them at retail rates at your retail shop or online—does not constitute entrepreneurship. However, manufacturing your own innovative, herbal shampoo, obtaining a patent on it and marketing it for business using the same sales channels qualifies as entrepreneurship.
The Africa-based KickStart organization (not to be confused with Kickstarter) has been building low-cost, low-effort, high-yield products like a soil press, a machine that processes sunflower seeds into cooking oil, and manually operated water pumps that require minimal effort.
Offering that extra room in your home for a monthly fee is simply a rental business. Building a service-based model around this idea is a fantastic entrepreneurial idea.
Airbnb implemented the mix-n-match entrepreneurial approach to build a network of all such available rentals in a certain area and make it available to tourists. Without owning a single property, their innovative business model offers a win-win situation for all parties. The owners get short-term high-paying customers (tourists) instead of long-term low-paying renters. Tourists benefit from relatively low costs and a secure, home-like stay. Airbnb benefits from service charges for offering this buyer-seller marketplace model, controlling the sales channel without owning a single property.
Nothing in this world comes free. In the first example, the entrepreneur takes a risk on the time, effort and financial investments needed to manufacture the herbal shampoo, getting necessary licenses and handling legal disputes arising from any consumer complaints and competitions. In the latter example, the entrepreneur is accountable for ensuring a reliable community of property owners willing to offer proper facilities, as well as the responsibility for handling conflicts arising between various parties.
What Does It Take to Be a Successful Entrepreneur?
There are several theories put forward by researchers at leading institutes about entrepreneurship. There is no one-size-fits-all model for entrepreneurship. Broadly speaking, entrepreneurship either originates from passion or from identifying suitable business opportunities.
A person who is very passionate about developing electronic circuits may (accidently) develop a great appliance. Such an individual may not necessarily have the business thoughts in mind, but he is driven by pure passion. He doesn’t listen to anyone, goes with his gut and one day develops a highly marketable product that offers extremely high returns. He fits into the first category of passionate entrepreneurs.
A businessman with sharp business acumen sensing a profit opportunity with a mix-n-match approach fits into the latter category.
Irrespective of the originating category, an entrepreneurial idea, if well nurtured and correctly driven, can be transformed into a very profitable business venture.
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73f353f011ba2c48e983b7024f768091 | https://www.investopedia.com/articles/investing/092515/what-rule-48.asp | What Was Rule 48? | What Was Rule 48?
Implemented in 2007, Rule 48 was a procedure the New York Stock Exchange (NYSE) could invoke to to establish order in the markets during periods of extreme volatility – specifically, to avoid panic-selling at the opening bell. But after it exacerbated big price swings during a hectic period in August 2015, the NYSE abolished it in July 2016, revising other regulations to cover such contingencies.
How Rule 48 Worked
Rule 48 expedited the opening of stock market trading by suspending a daily requirement related to individual stock prices each morning. It waived requirements from another NYSE statute, Rule 123D, for a stock when it is evident that the equity in question was poised to open much higher or lower than the closing price from the previous day.
Typically, stock market floor managers must approve stock prices prior to the opening bell. But Rule 48’s implementation meant that this approval would not be necessary on that trading day for a particular stock.
Rule 48 was different than a circuit breaker, or collar, which halts trading during a trading session at times of extreme volatility. Circuit breakers are invoked during market hours at various levels: when Standard & Poor's 500 Index falls 7% (Level 1), 13% (Level 2), and 20% (Level 3) from the market’s closing level on the previous day. Trading can also be halted or suspended for an individual equity as well.
Rule 48, however, was invoked prior to market hours. Exchange leaders would determine prior to the market’s open if they anticipated panic trading prior to the session. Specific conditions to invoke the rule included:
high levels of volatility in the trading session on the prior day (including days when circuit breakers were triggered)significant volatility in foreign marketssignificant selling in the futures market before the opening bellgovernment announcements or major geopolitical events abroad
Rule 48's History
The Securities and Exchange Commission (SEC) formally approved Rule 48 on December 6, 2007, in the midst of concerns about a global recession. It was implemented on January 22, 2008. Though frequently amended, Rule 48 was invoked at least 77 times between September 2008 and September 2015, for reasons ranging from the spread of the European debt crisis (in May 2010) to a New York blizzard (in January 2015).
The rule was not without its critics, particularly because it allowed buyers and sellers to trade without a posted opening price. This lack could cause Investors to unknowingly sell stock to someone else at very low prices. The rule had the potential to cost investors with open market sell orders in place a lot of money if the price dropped far below the previous day's close.
This was the situation that occurred on August 24, 2015. The previous day, the Shanghai Composite Index had fallen 7.6% while the Shenzhen Composite slipped 7.2%. Rule 48 was invoked over concerns about the NYSE market’s exposure to these Chinese stock markets – the reference to foreign market volatility. The move resulted in highly disorderly trading, adversely affecting several stocks, and causing a record intraday drop in the Dow Jones Industrial Average. For example, Apple Inc. (AAPL) in the opening hour fell significantly, slumping to a low of $92 and allowing buyers to purchase shares at a very low level. Apple would rebound, closing the day at $108. But anyone who sold at market value when the price collapsed to $92 would have likely been able to sell at a higher level had Rule 48 not been invoked or they had used a limit order instead.
Revoking Rule 48
As a result of the chaos caused on that day and on the next two days, NYSE officials began rethinking Rule 48. On March 31, 2016, they filed a request with the SEC to delete it, stating: "based on the events of the week of August 24, 2015, when the Exchange declared extreme market volatility conditions on August 24, 25, and 26, the Exchange appreciates that the absence of any pre-opening indications may leave a void in the information available for market participants to assess the price at which a security may open." Instead, the NYSE proposed to revise Rule 15, requiring market makers to publish pre-opening indications if prices changed 5% or more, and Rule 123D, allowing securities to open electronically unless there was a price change of 4% or more.
The Bottom Line
The SEC approved the plans in July 2016, officially abolishing Rule 48.
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51f486b8aa2842bfd05263afb02c978c | https://www.investopedia.com/articles/investing/092815/6-financial-lessons-master-time-youre-30.asp | 7 Financial Lessons to Master by Age 30 | 7 Financial Lessons to Master by Age 30
It takes a lot of time and discipline to become money smart. It doesn't happen overnight. Some people go through life never saving and living paycheck to paycheck. Learning how to be able to handle your money at an early age may not seem sexy, but it will certainly put you down the right path. But if you think you have enough time to become serious about your finances, think again. You may still feel young and invincible even when you hit your 30s, but the scary truth is that you are halfway to retirement. It is time to put the financial foolhardiness of your 20s behind you and become more frugal with your cash by mastering these top financial habits.
Key Takeaways When you hit your 30s, it's important to remember that you are halfway to retirement. Remember to prepare and stick to a budget, and stop spending your entire paycheck. Be aware of and write down all your goals, and learn everything you need to know about your student loans. Get your debt under control and start an emergency fund. Even though it's still in the future, make sure you sock away some money for your retirement.
1. Actually Stick to a Budget
Most 20-somethings have played around with the idea of a budget, have used a budgeting app, and have even read an article or two about the importance of creating a budget. However, very few individuals actually stick to that budget, or any budget at all. Once you turn 30, it's time to ditch the wishy-washy process of budgeting and start allocating where every dollar you earn goes. This means if you only want to spend $15 a week on coffee runs, you'll have to cut yourself off after your third latte for the week.
The overall point of budgeting is to know where your money goes in order to make sound decisions. Keep in mind that one dollar here and one dollar there adds up over time. It's fine to spend money on shopping or fun trips, as long as these purchases fit into your budget and don't detract from your saving goals. Knowing your spending habits will help you discover where you can cut expenses and how you can save more money in a retirement fund or money market account.
Here's a complimentary tip to setting up and sticking to a budget: Document all your spending. Make sure you write down where and how much you spend, and what that does to your budget. This may require you to keep your receipts and cross-check everything to your checking account. Over time, you'll end up doing away with all the frivolous, spur-of-the-moment purchases and really be able to keep yourself in line.
2. Stop Spending Your Whole Paycheck
The wealthiest individuals in the world didn't get where they are today by spending their entire paycheck every month. In fact, many self-made millionaires spend their income modestly, according to Thomas J. Stanley’s book “The Millionaire Next Door.” Stanley’s book found that the majority of self-made millionaires drove used cars and lived in average-priced housing. He also found that those who drove expensive cars and wore expensive clothing were actually drowning in debt. The reality was that their pricey lifestyles could not keep up with their paychecks.
Start by living off of 90% of your income and save the other 10%. Having that money automatically deducted from your paycheck and put into a retirement savings account ensures you will not miss it. Gradually increase the amount you save while decreasing the amount from which you live. Ideally, learn to live off of 60% to 80% of your paycheck, while saving and investing the remaining 20% to 40%.
0:52 Parents: This is Your Worst Money Habit
3. Get Real About Your Financial Goals
What are your financial goals? Really sit down and think about them. Envision by which age and how you'd like to achieve them. Write them out and figure out how to make them a reality. You are less likely to achieve any goal if you don't write it down and create a concrete plan.
You're more likely to achieve your goals if you write them down and create a plan.
For example, if you want to vacation in Italy, then stop daydreaming about it and make a game plan. Do your research to discover how much the vacation will cost, then calculate how much money you will have to save per month. Your dream vacation can be a reality within a year or two if you take the right planning and saving steps.
The same is true for other lofty financial goals like paying off your debt or something more long-term like buying a home. You really need to be serious and have a plan if you're going to get into real estate. After all, it's one of the biggest investments you can ever make in your life and it comes at a huge cost with a lot of extra considerations. There are a lot of things you have to think about when it comes to your finances—down payment, financing and your mortgage, how much you can afford, interest payments, other expenses.
4. Educate Yourself About Your Student Loans
An undeniable reality for millennials is that many of them are confused about navigating student loan repayments. A 2016 study conducted by Citizens Bank found that more than half of borrowers don't fully grasp the process of how student loans work, making the path to serenity from debt seem far-fetched.
Six out of ten millennials reported underestimating monthly payments, while 45% were unsure of how much of their annual salary they've put toward their loans. Since the recession, rates have been historically low, alleviating some pressure from crushing student loan debt. Nonetheless, vigilance in keeping a watchful eye on how much interest will compound on your loans should be a top priority.
5. Figure Out Your Debt Situation
Many individuals become complacent about their debt once they hit their 30s. For those with student loans, mortgages, credit card debt, and auto loans, repaying debt has become another way of life. You may even view debt as normal. The truth is that you don't need to live your whole life paying off debt. Assess how much debt you have outside of your mortgage and create a budget that helps you avoid gaining any more debt.
There are many methods to eliminate debt, but the snowball effect is popular for keeping individuals motivated. Write down all of your debts from smallest to greatest, regardless of the interest rate. Pay the minimum payment for all of your debts, except for the smallest one. For the smallest debt, throw as much money as you can at it each month. The goal is to get that small debt paid off within a few months and then move on to the next debt.
Paying off your debts will have a significant impact on your finances. You will have more breathing room in your budget, and you will have more money freed up for savings and financial goals.
One important point to note. Pay down your debt, but don't get yourself back in over your head. It can be very tempting to see low balances on your credit cards and think it's okay to go ahead and start spending again. That will only put you back in a rut. Control yourself and keep your credit card usage to a minimum. You may want to consider lowering your credit limits or canceling cards you may not necessarily need over time. Anything to help you keep yourself above water.
6. Establish a Strong Emergency Fund
An emergency fund is important to the health of your finances. If you don't have an emergency fund, then you are going to be more likely to dip into savings or rely on credit cards to help you pay for unplanned car repairs and health expenses.
The first step is to build your emergency fund to $1,000. This is the minimum amount your account should have. By putting $50 from each paycheck in your emergency fund, you will hit the $1,000 emergency fund goal within 10 months. After that, set incremental goals for yourself depending on your monthly expenses. Some financial advisors recommend having the equivalent of three months living expenses in the fund, while others recommend six months. Of course, how much you are able to save will depend on your financial situation.
7. Don’t Forget Retirement
Many people either enter their 30s without having a single dime contributed to their retirement, or they are making the minimum contributions. If you want that million-dollar nest egg, you have to put in the savings now. Stop waiting for a promotion or more wiggle room in your budget. In your 30s, you still have time on your side, so don’t waste it. Make sure that you take advantage of your company’s matching contribution. Many companies will match your contributions up to a certain percentage. As long as you stay with your company long enough to become vested, this is basically free money for your retirement. The earlier you start, the more you'll earn in interest!
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03bed523ca14526357e84e9ac05f77ce | https://www.investopedia.com/articles/investing/092815/chinas-top-trading-partners.asp | China's Top Trading Partners | China's Top Trading Partners
Despite the trade war with the U.S., China's foreign trade volume rose 9.7% in 2018 to hit a record high of 30.51 trillion yuan ($4.5 trillion). It recorded a trade surplus, or positive trade balance, of 2.33 trillion yuan. However, the country's economic growth slowed to 6.6% – a 28-year low.
As the second largest economy and a leader in global trade, what happens in China doesn’t stay in China — it affects the rest of the world. So the country's recent slowdown in economic growth and the trade war has significant implications for the global economy but will have the greatest impact on China’s main trading partners: the U.S., Japan and Hong Kong.
The United States
At $20.49 trillion, the United States boasts the largest economy in the world and is China’s largest trading partner. Last year, the total value of bilateral trade between the two countries was $737.1 billion, with U.S. imports from China valued at $557.9 billion and U.S. exports to China valued at $179.3 billion.
The top goods exported from China to the U.S. and their total values for 2018 were electrical machinery ($152 billion), machinery ($117 billion), furniture and bedding ($35 billion), toys and sports equipment ($27 billion), and plastics ($19 billion).
The top goods imported from the U.S. to China and their total values for 2018 were aircrafts ($18 billion), machinery ($14 billion), electrical machinery ($13 billion), optical and medical instruments ($9.8 billion), vehicles ($9.4 billion) and agricultural products ($9.3 billion).
The U.S. exported an estimated $58.9 billion in services to China and imported $18.4 billion in services from the Asian nation in 2018.
The bilateral trade surplus that China runs with the United States may be exacerbated by China's slowdown. Not only will a slower growing Chinese economy translate into weaker demand for U.S. goods, but the devaluation of the yuan, by making Chinese goods cheaper for America, could increase U.S. imports from China. This won't sit well with a number of U.S. policymakers already critical of the large trade deficit vis-à-vis China.
Japan
Japan is the third largest economy in the world at $4.9 trillion and China’s second largest trading partner. China is also Japan's largest trading partner. In 2018, the total value of bilateral trade between the two countries was about $330 billion with Japanese imports from China valued at $180.7 billion and Japanese exports to China valued at $149.7 billion.
Japan’s top exports to China and their total values for 2018 were machinery ($36.5 billion), electrical machinery ($32 billion), chemicals ($24 billion) and transport equipment ($14.4 billion).
Japan’s top imports from China and their total values for 2018 were electrical machinery ($52.4 billion), machinery ($31.1 billion), clothing and accessories ($18.3 billion) and chemicals ($12.1 billion).
Japanese exports to China rose by 6.8% percent and imports from China rose by 4% in 2018. The country blamed sluggish demand from China and slowdown in its economy for its first global trade deficit since 2015, which was 1.2 trillion yen in 2018.
Hong Kong
With a GDP of $362.9 billion, Hong Kong has only the world’s 35th largest economy. However, it is tightly integrated with the economy of its closest neighbor. In 2018, the total value of bilateral trade between the two regions was $570.5 billion, with Hong Kong’s imports from China valued at $278.8 billion and Hong Kong’s exports to China valued at $291.7 billion.
However, almost all exports to China from Hong Kong are re-exports since the latter has no tariff on goods entering its borders and is ranked the freest economy in the world. Besides this, almost 44.2% of Hong Kong’s domestic exports went to China and 46.3% of its total imports came from China in 2018.
The major categories of goods exported from China to Hong Kong and their value in 2018 were electrical machinery ($160 billion), machinery ($44 billion) and medical or surgical instruments and apparatus ($10 billion). China imports from Hong Kong were mainly electrical machinery ($198 billion) and machinery ($39 billion).
Slow growth in China, the trade war between the two largest economies of the world, and civil unrest are no doubt putting downward pressure on Asia's largest financial hub.
The Bottom Line
As the second largest economy in the world and the largest trading country worldwide, China’s global importance cannot be underestimated. Its escalating dispute with the U.S. has investors and analysts concerned about economies all over the world.
"There are no real winners in this U.S.-initiated trade war. Countries facing new tariffs, including the United States, experience declines in real exports and GDP. Other countries are hit indirectly through weaker demand for their own exports, either through supply chains or in response to weaker global economic growth," wrote IHS Markit.
"While the short-term effects of higher U.S. tariffs are manageable for China, the longer-term ramifications for growth are more serious and largely underestimated," said a S&P Global Ratings note in May. "This is more a supply than a demand shock. The technology sector is where the combined effects of investment restrictions, export controls, and tariffs will be felt. And it's on technology and its ability to raise China's stumbling productivity growth that the country's prospects for a smooth rebalancing depend."
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d787671248f37d2a4deb5eb43c93c97e | https://www.investopedia.com/articles/investing/092815/risks-investing-inverse-etfs.asp | The Risks of Investing in Inverse ETFs | The Risks of Investing in Inverse ETFs
Inverse exchange-traded funds (ETFs) seek to deliver inverse returns of underlying indexes. To achieve their investment results, inverse ETFs generally use derivative securities, such as swap agreements, forwards, futures contracts and options. Inverse ETFs are designed for speculative traders and investors seeking tactical day trades against their respective underlying indexes.
Inverse ETFs only seek investment results that are the inverse of their benchmarks' performances for one day only. For example, assume an inverse ETF seeks to track the inverse performance of Standard & Poor's 500 Index. Therefore, if the S&P 500 Index increases by 1%, the ETF should theoretically decrease by 1%, and the opposite is true.
Important Inverse ETFs carry many risks and are not suitable for risk-averse investors. This type of ETF is best suited for sophisticated, highly risk-tolerant investors who are comfortable with taking on the risks inherent to inverse ETFs.
Key Takeaways Inverse ETFs allow investors to profit from a falling market without having to short any securities.Because of how they are constructed, inverse ETFs carry unique risks that investors should be aware of before participating in them. The principal risks associated with investing in inverse ETFs include compounding risk, derivative securities risk, correlation risk and short sale exposure risk.
Compounding Risk
Compounding risk is one of the main types of risks affecting inverse ETFs. Inverse ETFs held for periods longer than one day are affected by compounding returns. Since an inverse ETF has a single-day investment objective of providing investment results that are one times the inverse of its underlying index, the fund's performance likely differs from its investment objective for periods greater than one day. Investors who wish to hold inverse ETFs for periods exceeding one day must actively manage and rebalance their positions to mitigate compounding risk.
For example, the ProShares Short S&P 500 (NYSEARCA: SH) is an inverse ETF that seeks to provide daily investment results, before fees and expenses, corresponding to the inverse, or -1X, of the daily performance of the S&P 500 Index. The effects of compounding returns cause SH's returns to differ from -1X those of the S&P 500 Index.
As of June 30, 2015, based on trailing 12-month data, SH had a net asset value (NAV) total return of -8.75%, while the S&P 500 Index had a return of 7.42%. Additionally, since the fund's inception on June 19, 2006, SH has had a NAV total return of -10.24%, while the S&P 500 Index has had a return of 8.07% over the same period.
The effect of compounding returns becomes more conspicuous during periods of high market turbulence. During periods of high volatility, the effects of compounding returns cause an inverse ETF's investment results for periods longer than one single day to substantially vary from one times the inverse of the underlying index's return.
For example, hypothetically assume the S&P 500 Index is at 1,950 and a speculative investor purchases SH at $20. The index closes 1% higher at 1,969.50 and SH closes at $19.80. However, the following day, the index closes down 3%, at 1,910.42. Consequently, SH closes 3% higher, at $20.81. On the third day, the S&P 500 Index falls by 5% to 1,814.90 and SH rises by 5% to $21.85. Due to this high volatility, the compounding effects are evident. Due to rounding, the index decreased by approximately 7%. However, the effects of compounding caused SH to increase by a total of approximately 10.25%.
Derivative Securities Risk
Many inverse ETFs provide exposure by employing derivatives. Derivative securities are considered aggressive investments and expose inverse ETFs to more risks, such as correlation risk, credit risk and liquidity risk. Swaps are contracts in which one party exchanges cash flows of a predetermined financial instrument for cash flows of a counterparty's financial instrument for a specified period.
Swaps on indexes and ETFs are designed to track the performances of their underlying indexes or securities. The performance of an ETF may not perfectly track the inverse performance of the index due to expense ratios and other factors, such as negative effects of rolling futures contracts. Therefore, inverse ETFs that use swaps on ETFs usually carry greater correlation risk and may not achieve high degrees of correlation with their underlying indexes compared to funds that only employ index swaps.
Additionally, inverse ETFs using swap agreements are subject to credit risk. A counterparty may be unwilling or unable to meet its obligations and, therefore, the value of swap agreements with the counterparty may decline by a substantial amount. Derivative securities tend to carry liquidity risk, and inverse funds holding derivative securities may not be able to buy or sell their holdings in a timely manner, or they may not be able to sell their holdings at a reasonable price.
Correlation Risk
Inverse ETFs are also subject to correlation risk, which may be caused by many factors, such as high fees, transaction costs, expenses, illiquidity and investing methodologies. Although inverse ETFs seek to provide a high degree of negative correlation to their underlying indexes, these ETFs usually rebalance their portfolios daily, which leads to higher expenses and transaction costs incurred when adjusting the portfolio. Moreover, reconstitution and index rebalancing events may cause inverse funds to be underexposed or overexposed to their benchmarks. These factors may decrease the inverse correlation between an inverse ETF and its underlying index on or around the day of these events.
Futures contracts are exchange-traded derivatives that have a predetermined delivery date of a specified quantity of a certain underlying security, or they may settle for cash on a predetermined date. With respect to inverse ETFs using futures contracts, during times of backwardation, funds roll their positions into less expensive, further-dated futures contracts. Conversely, in contango markets, funds roll their positions into more-expensive, further-dated futures. Due to the effects of negative and positive roll yields, it is unlikely for inverse ETFs invested in futures contracts to maintain perfectly negative correlations to their underlying indexes on a daily basis.
Short Sale Exposure Risk
Inverse ETFs may seek short exposure through the use of derivative securities, such as swaps and futures contracts, which may cause these funds to be exposed to risks associated with short selling securities. An increase in the overall level of volatility and a decrease in the level of liquidity of the underlying securities of short positions are the two major risks of short selling derivative securities. These risks may lower short-selling funds' returns, resulting in a loss.
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ee5a8e3b95df7f3870cc3f223192423a | https://www.investopedia.com/articles/investing/092915/how-invest-real-estate-without-buying-property.asp | Investing in Real Estate Without Buying Property | Investing in Real Estate Without Buying Property
Investing in real estate can be very lucrative, but getting started in real estate investments requires a large amount of capital.
That being said, if you do not have hundreds of thousands of dollars on hand, there are other options to invest in real estate without buying a physical property. (See also: What Are the Differences Between Investing in Real Estate and Stocks?)
Invest in a REIT
An REIT, or real estate investment trust, is a company that owns and manages real estate and related assets, such as mortgages or mortgage bonds. The majority of a REIT's income and assets must be linked to real estate. To qualify as a REIT, companies must meet these standards, plus additional rules defined by the Securities and Exchange Commission:
Invest at least 75% of total assets in real estate assets Derive at least 75% of gross income from property rent or mortgage interest Have a minimum of 100 shareholders after its first year as a REIT Have no more than 50% of shares held by five or fewer individuals Pay at least 90% of taxable income as shareholder dividends
That last rule is significant for individual investors. REITs are not simply companies that own real estate; they are businesses that provide cash flow to their investors. If you invest in a REIT with dividend reinvestment, you can grow your portfolio until you reach a point where you can purchase individual properties yourself, or continue to invest in managed real estate portfolios. (See also: 5 Types of REITs and How to Invest in Them.)
Invest in a Real Estate Focused Company
Many companies that own and manage real estate are not structured as a REIT. The stocks of these companies typically pay a much lower dividend than a REIT, but the businesses have more freedom to reinvest profits to expand.
Some companies in other industries behave like a real estate company even though that is not the primary service they offer. Examples include hotel chains, resort operators, and shopping mall and strip mall managers.
Of course, there are traditional real estate companies available for investments as well. Companies include real estate services companies like RE/MAX Holdings Inc. (RMAX), commercial real estate operators like CBRE Group (CBG) and shopping center companies like Equity One (EQY).
As with any individual stock investment, always do plenty of research before making an investment decision. Investing heavily in one stock or industry relative to the rest of your portfolio opens you up to portfolio concentration risk.
Invest in Home Construction
Real estate is not just about buying and profiting from existing companies. There is an entire industry of homebuilders responsible for developing new neighborhoods in growing metropolitan areas. These companies may be involved with multiple aspects of the home construction process.
When evaluating homebuilders, look at all aspects of the business. Ask yourself if the company is focused on a region with poor real estate performance if the company is focused on only very high- or low-end homes, and compare the focus to real estate trends.
Large homebuilders include Lennar Corp. (LEN), D.R. Horton Inc. (DHI), KB Home (KBH), PulteGroup Inc. (PHM) and NVR Inc. (NVR).
Keep in mind that homebuilder performance can be highly correlated to the economy. When job growth is strong, people want to buy new homes. When the economy is sluggish, new home sales tend to fall.
Invest in a Real Estate Mutual Fund
One of the most difficult hurdles in real estate investing is diversification. As a retail investor in the stock market, it is not difficult to find a wide range investments. Shares of many companies trade at a low enough price that achieving a diversified portfolio can be reached at a reasonable price point through planning. Real estate is quite a bit different. In real estate, a single asset typically costs well into the six-figure range. Only one company, Berkshire Hathaway Inc. (BRK.A) trades at that level. Few stocks reach high into the four-figure level.
To get diversification in real estate, investors can turn to real estate focused mutual funds, index funds, and ETFs. Some real estate funds work just like a traditional mutual fund, primarily invested in real estate stock. Others are focused on REITs or even direct purchases of real estate.
An example of a popular REIT ETF is the Vanguard REIT ETF (VNQ). This ETF trades just like a stock but gives you instant exposure to a portfolio of REITs. This fund holds 145 different stocks. Top holdings include Simon Property Group Inc. (SPG) and Public Storage (PSA).
If you prefer a real estate mutual fund, Prudential Global Real Estate Fund (PURAX) is a global real estate fund. The fund is 97.5% invested in real estate: 52% of holdings are in North America, with the remainder invested in Europe (13%) and Asia (19%). This fund is primarily focused on developed markets, with less than 2% of funds invested in emerging markets.
The Bottom Line
Investing in individual properties requires a lot of capital and comes with a high risk. Investing in other options available through the stock market -- REITs, mutual funds and ETFs -- can give your portfolio real estate exposure without having to lay out hundreds of thousands of dollars. As with any investment, investing in real estate and related companies comes with some risk. Evaluate any investment option before buying to ensure it lines up with your investment goals.
American and global real estate has performed well in recent years, but not all markets are alike. Some real estate exposure provides an excellent hedge against other market fluctuations, but too much real estate concentration leaves you open to losses when the real estate market falters, as it did with the recent years with the real estate bubble and mortgage crisis.
However, once you have a good understanding of your investment goals and how real estate can play a part, you can confidently invest and make real estate a portion of your portfolio for both short-term and long-term investment goals.
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1335949afa8e74187eb0440d240f16fe | https://www.investopedia.com/articles/investing/093015/4-countries-produce-most-chocolate.asp | The 4 Countries That Produce the Most Chocolate | The 4 Countries That Produce the Most Chocolate
The top four countries responsible for the production of chocolate are the United States, Germany, Switzerland, and Belgium. It is estimated that, while Western Europe accounts for approximately 35% of total world chocolate production, the U.S. accounts for an additional 30%. Interestingly, none of the major producers of chocolate are major sources of cocoa, and none of the major cocoa-producing countries are major chocolate manufacturing centers.
There's no real reason that European countries are among the world's leading chocolate manufacturers other than the popularity of chocolate in Europe since its introduction. The U.S. inherited its love of chocolate through its European immigrants, and companies such as Mars Inc. and the Hershey Foods Corporation sprang up to take advantage of consumer demand.
1) The United States
The U.S. is one of the top producers of high-quality chocolates, with U.S. chocolate manufacturers bringing in over $20 billion annually in retail sales. The largest chocolate company in North America—and one of the most recognized chocolate brands worldwide—is the Hershey Foods Corporation, more commonly known as Hershey’s. The company is headquartered in Hershey, Pennsylvania, and it was founded in 1894 by Milton S. Hershey.
Key Takeaways While 35% of chocolate production takes place in Europe, the United States produces almost 30%.Hershey's is the largest chocolate producer in the United States, while New York City is home to many famous chocolate shops.Switzerland started making chocolate in the 17th century and the Swiss are the largest consumers of chocolate per capita.Belgium is one of the largest producers and much of the chocolate is still made largely by hand.Two-thirds of the cocoa used in making chocolate is from West Africa.
Most corporations engaged in the manufacture of chocolate in the U.S. and elsewhere purchase their cocoa beans from the Ivory Coast in Western Africa. The home ground for specialty chocolate shops in the U.S. is New York City. Famous shops in the city include the Chocolate Bar, MarieBelle, Li-Lac, and Richart Design et Chocolat. San Francisco is also home to a significant number of famous chocolate shops, and it is a substantial center of U.S. chocolate production.
2) Germany
German chocolate manufacturers represent nearly a $10 billion per year industry. Cologne is often regarded as the chocolate capital of Germany. Chocolate shops in the U.S. often import chocolates from the city to sell alongside U.S. chocolate brands. Stollwerck Chocolates Company is one of the most famous chocolate manufacturers in the country; it also has production plants in Belgium and Switzerland. Other famous chocolate brands in Germany include La Maison du Chocolat, Tortchen, and Leonidas Chocolates.
3) Switzerland
Switzerland is well-known for its chocolates and principal chocolate manufacturers. The production of chocolate is an important source of wealth for the country. Zurich is often considered the foundation for the country’s chocolate production. World-renowned chocolate brands that originated in Switzerland include Nestle, Toblerone, Lindt, and Sprungli.
Chocolate production in Switzerland dates as far back as the 17th century. From the 19th century forward, until the end of World War II, the Swiss chocolate industry was heavily export-oriented. Today, the Swiss are the largest consumers of the chocolate produced within their own country. In 2000, approximately 54% of the country's chocolate was consumed by the Swiss. Switzerland also has the highest per capita rate of chocolate consumption in the world, which is nearly 30 pounds every year. Total annual revenue from chocolate sales is estimated to be $14 billion.
4) Belgium
Belgium is also world-renowned for its chocolates, and it is a major chocolate manufacturing center. There are approximately 15 chocolate factories and more than 2,000 chocolate shops in Belgium. One of the most famous chocolate companies in the world, Godiva, makes its home in Brussels. Belgian chocolatiers generate annual sales of approximately $12 billion.
Since 1884, the composition of Belgian chocolate has been regulated by law. To ensure the purity of the chocolate and to prevent reliance on low-quality fat from outside sources, Belgian law mandates that a minimum of 35% pure cocoa must be used in production. The craft of producing chocolate, and the country's pride in the production process and resulting product, leads the industry to adhere to traditional manufacturing techniques. This includes a ban on artificial, vegetable, or palm oil-based fats in all products that carry a "Belgian chocolate" label. A significant portion of the chocolate firms in Belgium produces chocolates largely by hand, without the aid of modern production equipment.
Cocoa Beans
Cocoa beans are the primary ingredient in the production of chocolate and West Africa produces approximately two-thirds of the world's cocoa beans. Nearly 45% of that cocoa bean production is sourced from the Ivory Coast. The World Cocoa Foundation (WCF) reports that somewhere around 50 million individuals depend on cocoa production and the cocoa industry as a source of livelihood.
Nestle, along with several other chocolate companies, formed the WCF in 2000, largely to address issues that affect cocoa farmers and stabilize cocoa production. Among the stated objectives of the foundation are increased cocoa farmers' income, the establishment of environmental programs, and encouraging the use of sustainable farming techniques.
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2bae25e299a5141952c92c51031708dd | https://www.investopedia.com/articles/investing/093015/how-exactly-do-movies-make-money.asp | How Exactly Do Movies Make Money? | How Exactly Do Movies Make Money?
From a distance, the movie business might look pretty glamorous. Celebrities and producers glide down red carpets, clutch their Oscars, and vacation in St. Barts—just because they can. While there's a lot of money to be made in the film industry, the economics of making movies are far from simple.
Something you’ll likely hear if you walk through the halls of any movie studio is “nobody knows anything.” And that’s true. The public can be fickle, and the industry is in flux. Just about any movie is an extremely risky investment, even a film starring big-name actors and actresses. According to the Motion Picture Association of America's (MPAA) Theatrical Market Statistics Report for 2019, the U.S. and Canadian box office came in at $11.4 billion. Globally, the box office for films hit $42.2 billion in 2019.
It is not nearly as straightforward as the early days of cinema when a movie would come out in theaters, make the vast majority of its revenues via ticket sales, and then disappear. Major studios and indie filmmakers alike now spend much of their days looking for new sources of revenue, because ticket sales are no longer the be-all and end-all for films. Unfortunately, the closing of most theaters during early 2020 makes other streams of income more important than ever.
Key Takeaways While there's a lot of money to be made in the film industry, the economics of movie-making are far from simple.There's no sure path for a film to turn a profit since factors like brand awareness, P&A budgets, and the desires of a fickle public come into play.Theater attendance in the U.S. has been challenging over recent years, making it even more important to earn money in foreign theaters.Ever since Star Wars, merchandising has played a major role in revenue for films that appeal to children.Television rights, video-on-demand, and streaming services are increasingly important sources of income for movie studios.
Movie Budgets and Costs
In general, major studios don’t disclose the full budgets for their films (production, development, marketing, and advertising). This mystery arises in part because it costs far more to make and market a movie than most people expect. For example, the production budget for a summer blockbuster like Marvel’s "The Avengers" is estimated as $220 million. Once you factor in marketing and advertising costs, the budget spikes.
Indeed, for many films, print and advertising (P&A) costs alone can be extremely high. A $15 million film, which is considered a small-budget movie in Hollywood, might have a promotional budget that is higher than its production budget. Many films that don’t have a built-in audience (such as those based on bestselling books like "The Hunger Games" or even "50 Shades of Grey") need a way to get people into the theater. Romantic comedies or some children's films need to promote themselves via TV commercials and media advertisements, and those costs add up quickly. For a movie budgeted between $40 and $75 million, its P&A budget might be over $20 million.
For any type of film, whether a blockbuster or an indie production, things like tax breaks and revenues from product placements can help pay the bills. If they're given an incentive to shoot a film in Canada or Louisiana, producers will usually hustle to do so.
Going back to the "nobody knows anything" mantra, there are some surprise hits like the indie film “Little Miss Sunshine.” That movie is a Cinderella story when it comes to film finance. Its budget was around $8 million, and it sold to distributor Fox Searchlight for $10.5 million at the Sundance Film Festival. The film made $59.89 million in U.S. theaters, which is almost unheard-of for an indie. By contrast, you have the Walt Disney (DIS) movie "John Carter." It had an estimated budget of over $250 million but only made $73 million at the U.S. box office.
So there's no sure path for a film to turn a profit since factors like brand awareness, P&A budgets, and the desires of a fickle public come into play. Still, there are a few tried and true ways to make money from films.
Ticket Price Revenue
Theater attendance has been challenging over recent years, making it even harder for studios and distributors to profit from films. Usually, a portion of theater ticket sales goes to theater owners, with the studio and distributor getting the remaining money.
Traditionally, a larger chunk went to the studio during the opening weekend of a film. As the weeks went on, the theater operator's percentage rose. A studio might make about 60% of a film's ticket sales in the United States, and around 20% to 40% of that on overseas ticket sales.
The percentage of revenues an exhibitor gets depends on the contract for each film. Many contracts are intended to help a theater hedge against films that flop at the box office. That is achieved by giving theaters a larger cut of ticket sales for such films, so a deal may have the studio getting a smaller percentage of a poorly performing film and a higher percentage of a hit film's take. You can see the securities filings for large theater chains to see how much of their ticket revenue goes back to the studios.
Studios and distributors generally make more from domestic revenue than from overseas sales because they get a larger percentage. Despite this arrangement, foreign ticket sales became more important in the early 21st century. That is part of the reason why you see more sci-fi, adventure, fantasy, and superhero movies. Action and special effects require no translations. They’re easy to understand, whether you’re in Malaysia or Montana. It is much harder to build a foreign audience for an indie comedy.
Merchandising Dollars
It all started with Star Wars. Since the George Lucas sci-fi saga began back in 1977, the franchise has made billions in revenue from toys alone, not to mention licensing income from other third-party companies. In 2015, "Star Wars: The Force Awakens" brought in $700 million in retail sales.
This strategy obviously doesn't work for every film. You don't see a lot of action figures for romantic comedies. However, merchandising is a cash cow for big-budget films that appeal to kids and Comic-Con fans alike. For example, Disney’s “Toy Story” franchise has brought in billions of dollars in retail sales.
On the other hand, some analysts suggest remaining on the lookout for movie fatigue. Kids are increasingly attracted to newer types of entertainment, such as video games and YouTube.
Foreign Sales
When a producer cobbles together the budget for an independent film, selling the distribution rights in foreign territories is crucial. It helps to cover the film’s budget and hopefully brings in revenue. Independent filmmakers can actually make money if they have a great foreign sales agent who can sell their movies in key overseas markets.
Producers will often make their “wish list” when casting a film, and the list will typically be full of well-known names that “travel” overseas. If you have Tom Cruise or Jennifer Lawrence as your star, you’re much more likely to find a partner willing to buy the rights in China and France. That isn’t a guarantee that the film will make millions (or billions), but it's about as safe a bet as you can get in this business.
Some American films make more money internationally than they do in the United States.
Television Rights, Streaming, and VOD
Once upon a time, it was all about DVD sales. Now, it’s far more about television rights, video-on-demand (VOD), and streaming.
For some producers, selling TV and international rights is a significant source of profit because the producer doesn't have to pay for marketing and P&A costs. Films have to leave the theater at some point, but they can remain evergreen on TV. How many times have you flipped through channels and come across “The Notebook” or “The Shawshank Redemption” yet again?
As for VOD, revenue from these deals should add hundreds of millions to a studio's bottom line. For indie films, there are several VOD release strategies: day-and-date (movies released simultaneously in theaters and VOD), day-before-date (VOD before theatrical), and VOD-only. Many films that don't have the special effects and big-name stars to lure people to the theater often profit from this model.
Streaming video is a new source of revenue for Hollywood movies. VOD revenues tend to dry up after a few years, but movie studios can still make money from older films by licensing them to Netflix or Amazon Prime. However, the success of original content on the streaming services also draws audiences away from traditional movies.
The Bottom Line
As the saying goes, nobody knows anything in Hollywood. The film industry is in flux, and ticket sales alone don't drive revenue. There’s merchandising, VOD, streaming video, foreign sales, and a plethora of other distribution channels that can help filmmakers, producers, and studios turn a profit. So who knows, the little indie that you invest in could just be the next "Little Miss Sunshine." Or not. In Hollywood, there are no guarantees.
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eb7da5b8f65df99926f9b32ad6c28d54 | https://www.investopedia.com/articles/investing/093015/understanding-private-equity-funds-structure.asp | What Is the Structure of a Private Equity Fund? | What Is the Structure of a Private Equity Fund?
Although the history of modern private equity investments goes back to the beginning of the last century, they didn't really gain prominence until the 1980s. That's around the time when technology in the United States got a much-needed boost from venture capital.
Many fledgling and struggling companies were able to raise funds from private sources rather than going to the public market. Some of the big names we know today—Apple, for example—were able to put their names on the map because of the funds they received from private equity.
Even though these funds promise investors big returns, they may not be readily available for the average investor. Firms generally require a minimum investment of $200,000 or more, which means private equity is geared toward institutional investors or those who have a lot of money at their disposal.
If that happens to be you and you're able to make that initial minimum requirement, you've cleared the first hurdle. But before you make that investment in a private equity fund, you should have a good grasp of these funds' typical structures.
Key Takeaways Private equity funds are closed-end funds that are not listed on public exchanges. Their fees include both management and performance fees. Private equity fund partners are called general partners, and investors or limited partners. The limited partnership agreement outlines the amount of risk each party takes along with the duration of the fund. Limited partners are liable up to the full amount of money they invest, while general partners are fully liable to the market.
Private Equity Fund Basics
Private equity funds are closed-end funds that are considered an alternative investment class. Because they are private, their capital is not listed on a public exchange. These funds allow high-net-worth individuals and a variety of institutions to directly invest in and acquire equity ownership in companies.
Funds may consider purchasing stakes in private firms or public companies with the intention of de-listing the latter from public stock exchanges to take them private. After a certain period of time, the private equity fund generally divests its holdings through a number of options, including initial public offerings (IPOs) or sales to other private equity firms.
Unlike public funds, the capital of private equity funds is not available on a public stock exchange.
Although minimum investments vary for each fund, the structure of private equity funds historically follows a similar framework that includes classes of fund partners, management fees, investment horizons, and other key factors laid out in a limited partnership agreement (LPA).
For the most part, private equity funds have been regulated much less than other assets in the market. That's because high-net worth investors are considered to be better equipped to sustain losses than average investors. But following the financial crisis, the government has looked at private equity with far more scrutiny than ever before.
Fees
If you're familiar with the fee structure of a hedge fund, you'll notice it's very similar to that of the private equity fund. It charges both a management and a performance fee.
The management fee is about 2% of the capital committed to invest in the fund. So a fund with assets under management (AUM) of $1 billion charges a management fee of $20 million. This fee covers the fund's operational and administrative fees such as salaries, deal fees—basically anything needed to run the fund. As with any fund, the management fee is charged even if it doesn't generate a positive return.
The performance fee, on the other hand, is a percentage of the profits generated by the fund that are passed on to the general partner (GP). These fees, which can be as high as 20%, are normally contingent on the fund providing a positive return. The rationale behind performance fees is that they help bring the interests of both investors and the fund manager in line. If the fund manager is able to do that successfully, they are able to justify his performance fee.
Partners and Responsibilities
Private equity funds can engage in leveraged buyouts (LBOs), mezzanine debt, private placement loans, distressed debt, or serve in the portfolio of a fund of funds. While many different opportunities exist for investors, these funds are most commonly designed as limited partnerships.
Those who want to better understand the structure of a private equity fund should recognize two classifications of fund participation. First, the private equity fund’s partners are known as general partners. Under the structure of each fund, GPs are given the right to manage the private equity fund and to pick which investments they will include in its portfolios. GPs are also responsible for attaining capital commitments from investors known as limited partners (LPs). This class of investors typically includes institutions—pension funds, university endowments, insurance companies—and high-net-worth individuals.
Limited partners have no influence over investment decisions. At the time that capital is raised, the exact investments included in the fund are unknown. However, LPs can decide to provide no additional investment to the fund if they become dissatisfied with the fund or the portfolio manager.
Limited Partnership Agreement
When a fund raises money, institutional and individual investors agree to specific investment terms presented in a limited partnership agreement. What separates each classification of partners in this agreement is the risk to each. LPs are liable up to the full amount of money they invest in the fund. However, GPs are fully liable to the market, meaning if the fund loses everything and its account turns negative, GPs are responsible for any debts or obligations the fund owes.
The LPA also outlines an important life cycle metric known as the “Duration of the Fund.” PE funds traditionally have a finite length of 10 years, consisting of five different stages:
The organization and formation. The fund-raising period. This period typically lasts two years. The three-year period of deal-sourcing and investing. The period of portfolio management. The up to seven years of exiting from existing investments through IPOs, secondary markets, or trade sales.
Private equity funds typically exit each deal within a finite time-period due to the incentive structure and a GP's possible desire to raise a new fund. However, that time-frame can be affected by negative market conditions, such as periods when various exit options, such as IPOs, may not attract the desired capital to sell a company.
Notable private equity exits include Blackstone Group's (BX) 2013 IPO of Hilton Worldwide Holdings (HLT) that provided the deal's architects a paper profit of $8.5 billion.
Investment and Payout Structure
Perhaps the most important components of any fund’s LPA are obvious: The return on investment and the costs of doing business with the fund. In addition to the decision rights, the GPs receive a management fee and a “carry.”
The LPA traditionally outlines management fees for general partners of the fund. It's common for private equity funds to require an annual fee of 2% of capital invested to pay for firm salaries, deal sourcing and legal services, data and research costs, marketing, and additional fixed and variable costs. For example, if a private equity firm raised a $500 million fund, it would collect $10 million each year to pay expenses. Over the duration of the 10-year fund cycle, the PE firm collects $100 million in fees, meaning $400 million is actually invested during that decade.
Private equity companies also receive a carry, which is a performance fee that is traditionally 20% of excess gross profits for the fund. Investors are usually willing to pay these fees due to the fund's ability to help manage and mitigate corporate governance and management issues that might negatively affect a public company.
Other Considerations
The LPA also includes restrictions imposed on GPs regarding the types of investment they may be able to consider. These restrictions can include industry type, company size, diversification requirements, and the location of potential acquisition targets. In addition, GPs are only allowed to allocate a specific amount of money from the fund into each deal it finances. Under these terms, the fund must borrow the rest of its capital from banks that may lend at different multiples of a cash flow, which can test the profitability of potential deals.
The ability to limit potential funding to a specific deal is important to limited partners because several investments bundled together improves the incentive structure for the GPs. Investing in multiple companies provides risk to the GPs and could reduce the potential carry, should a past or future deal underperform or turn negative.
Meanwhile, LPs are not provided with veto rights over individual investments. This is important because LPs, which outnumber GPs in the fund, would commonly object to certain investments due to governance concerns, particularly in the early stages of identifying and funding companies. Multiple vetoes of companies may educe the positive incentives created by the commingling of fund investments.
The Bottom Line
Private-equity firms offer unique investment opportunities to high-net-worth and institutional investors. But anyone who wants to invest in a PE fund must first understand their structure so they are aware of the amount of time they will be required to invest, all associated management and performance fees, and the liabilities associated.
Typically, PE funds have a 10-year duration, require 2% annual management fees and 20% performance fees, and require LPs to assume liability for their individual investment, while GPs maintain complete liability.
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a5894fc92445961132e152e63ab6b3cf | https://www.investopedia.com/articles/investing/093016/managed-payout-funds-vs-annuities-how-do-they-compare.asp | Managed Payout Funds vs. Annuities: How Do They Compare? | Managed Payout Funds vs. Annuities: How Do They Compare?
One of the key benefits that annuities can provide investors is a guaranteed stream of income for life. But this guarantee comes at a cost because the investor effectively forfeits control of the money in return for the income guarantee. Mutual fund companies have therefore sought to compete with annuities by creating managed payout funds that also provide streams of income, although they are not guaranteed.
key takeaways Managed payout mutual funds are income funds that are designed to provide investors with equal and predictable monthly payments. Managed payout fund investors have daily access to their money, unlike annuity holders. Unlike annuities, managed payout funds offer no guaranteed minimum payouts and are subject to a greater array of taxes.
How Managed Payout Funds Work
Managed payout mutual funds are income funds that are designed to provide investors with equal and predictable monthly payments, similar to annuities but with some differences. When interest rates are low, these funds will try to provide yields in the 1% to 5% range. When rates are higher, they aim for yields in the 8% range. The investor’s monthly payout is determined by the amount of time left until the target date is reached and the fund’s performance in the interim.
However, immediate annuity payouts will generally not rise with inflation, unless a COLA rider is available in the contract. Managed payout funds are more likely (though not guaranteed) to rise with inflation, which is normally accompanied by a rise in interest rates. Their yields will float with the markets instead of remaining constant. Of course, they cannot provide an ironclad guarantee of income and may lose principal. But they also allow investors to access their principal if they need to, which is virtually impossible to do with an annuity once the payout has begun. Managed payout investors have daily access to their money, as shares can be sold for cash at any time.
Real-Life Examples of Managed Payout Funds
One popular fund is the Vanguard Managed Payout Fund (VPGDX), which has the objective of providing a 4% payout to investors. The fund has a current yield of 3.76%, and a $100,000 investment in the fund would provide investors with a monthly payment of about $313. It requires a $25,000 minimum investment. Charles Schwab Corp. also manages three payout funds, a moderate payout fund (SWJRX), an enhanced payout fund (SWKRX), and a maximum payout fund (SWLRX).
Fidelity Investment’s Fidelity Income Replacement Funds differ from their competition in that they are designed to exhaust the investor’s principal by the target date in the fund, which they try to target around 20 years from the initial investment.
The Pros and Cons of Managed Payout Funds
Investors usually look to managed payout funds for three reasons. Some are unsure about the financial stability of annuity companies, while others cite investment costs and liquidity restrictions as key issues. “Mutual fund companies are trying to understand what clients want in a monthly income product. Their goals of having high income and managing volatility can be at odds with each other,” Omar Aguilar, the CIO of Equities at Charles Schwab Investment Management, told Investment News.
The question that advisors have to ask is whether managed payout funds can provide superior payouts to comparable annuity contracts. Immediateannuity.com shows that a couple who invests $100,000 in an immediate annuity contract could get $430 a month as long as one of them is living. This would obviously be a better deal than Vanguard’s fund could provide, assuming that the insurance carrier offering the annuity remains solvent.
Taxes are another issue to consider. An annuity payout will consist of a mix of return of capital and interest, which is taxed as ordinary income. The income from a managed payout fund can be a mix of return of principal, interest, dividends, and long and short-term capital gains. Investors may pay tax at different rates on each type of income received.
The Bottom Line
Despite the advantages that they offer over annuity contracts, managed payout funds have been slow to catch on with investors. The income generated from these funds is often less than that of a comparable annuity contract, and their lack of principal and income guarantees mean higher risk as well.
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11cd41bb154a4ec3cfdcf8101e2179d8 | https://www.investopedia.com/articles/investing/100115/use-options-data-predict-stock-market-direction.asp | Use Options Data To Predict Stock Market Direction | Use Options Data To Predict Stock Market Direction
Every trader and investor asks, “Where is the overall market (or a specific security price) headed?” Several methodologies, intensive calculations, and analytical tools are used to predict the next direction of the overall market or of a specific security. Options market data can provide meaningful insights on the price movements of the underlying security. We look at how specific data points pertaining to options market can be used to predict future direction.
This article assumes reader’s familiarity with options trading and data points.
Options Indicators For Market Direction
The Put-Call Ratio (PCR): PCR is the standard indicator that has been used for a long time to gauge the market direction. This simple ratio is computed by dividing the number of traded put options by the number of traded call options. It is one of the most common ratios to assess the investor sentiment for a market or a stock.
Multiple PCR values are readily available from the various option exchanges. They include total PCR, equity-only PCR, and index-only PCR values. Total PCR includes both index and equities options data. Equity-only PCR contains only equity-specific options data and excludes index options. Similarly, index-only PCR contains only index-specific options data and excludes equities options data.
The majority of the index options (put options) are bought by fund managers for hedging at a broader level, regardless of whether they hold a smaller subset of the overall market securities or whether they hold a larger piece. For example, a fund manager may hold only 20 large cap stocks, but may buy put options on the overall index which has 50 constituent stocks.
Due to this activity, the index-only PCR and the total PCR (which include index options) values do not necessarily reflect the precise option positions against the underlying holdings. It skews the index-only and total PCR values, as there is a greater tendency to buy the put options (for broad-level hedging), rather than the call options.
Individual traders buy equity options for trading and for hedging their specific equity positions accurately. Usually there is no “broad-level” hedging. Therefore, analysts use the equity-only PCR values, instead of the total PCR or the index-only PCR.
The historical data from November 2006 to September 2015 for CBOE PCR (equity-only) values against the S&P 500 closing prices indicate that an increase in PCR values was followed by declines in the S&P 500, and vice-versa.
Image by Sabrina Jiang © Investopedia 2021
As indicated by red arrows, the trend was present both over the long-term and in the short-term. No wonder then that PCR remains one of the most followed and popular indicators for market direction. Experienced traders also use smoothening techniques, like the 10-day exponential moving average, to better visualize changing trends in PCR.
To use PCR for movement prediction, one needs to decide about PCR value thresholds (or bands). The PCR value breaking above or below the threshold values (or the band) signals a market move. However, care should be taken to keep the expected PCR bands realistic and relative to the recent past values. For example, from 2011 to 2013, PCR values remained around 0.6. The trend seemed to be downwards (although with low magnitude), which was accompanied by upward S&P 500 values (indicated by arrows). The sporadic jumps in the interim provided a lot of trading opportunities for traders to cash in on short-term price moves.
Any volatility index (like VIX, also called the CBOE volatility index) is another indicator, based on options data, that can be used for assessing the market direction. VIX measures the implied volatility based on a wide range of options on the S&P 500 Index.
Options are priced using mathematical models (like the Black Scholes Model), which take into account the volatility of the underlying, among other values. Using available market prices of options, it is possible to reverse-engineer the valuation formula and arrive at a volatility value implied by these market prices.
This implied volatility value is different than volatility measures based on historical variation of price or statistical measures (like standard deviation). It is considered better and more accurate than historical or statistical volatility value, as it is based on current market prices of option. The VIX Index consolidates all such implied volatility values on a diverse set of options on the S&P 500 Index and provides a single number representing the overall market implied volatility. Here is a comparative graph of VIX values versus S&P 500 closing prices.
Image by Sabrina Jiang © Investopedia 2021
As can be observed from the above graph, relatively large VIX movements are accompanied by movements of the market in the opposite direction. Experienced traders tend to keep a close eye on VIX values, which suddenly shoot up in either direction and deviate significantly from recent past VIX values. Such outliers are clear indications that market direction can change significantly with larger magnitude, whenever the VIX value changes significantly. The visible long-term trend in VIX indicates a similar and consistent long-term trend in the S&P 500 but in the opposite direction. Options-based VIX values are used for both short- and long-term market direction predictions.
The Bottom Line
Options data points tend to show very high level of volatility in a short period of time. When correctly analyzed using the right indicators, they can provide meaningful insights about the movement of the underlying security. Experienced traders and investors have been using these data points for short-term trading, as well as for long-term investments.
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8de4bac3f744da60bbda3840f8eabd86 | https://www.investopedia.com/articles/investing/100215/mutual-funds-are-not-fdic-insured-here-why.asp | Mutual Funds Are Not FDIC Insured: Here's Why | Mutual Funds Are Not FDIC Insured: Here's Why
The primary way the FDIC protects depositors from losing hard-earned dollars in the event of financial collapse is by insuring deposits known as FDIC-insured accounts. As of 2018, the FDIC insures deposits up to $250,000 per depositor, per insured bank, based on account type. If an insured bank becomes insolvent and fails, depositor funds are insured by the FDIC up to this maximum. While banks may fail, the FDIC protects individual Americans from needlessly suffering the same fate. Many account holders know about this, but that brings the question: are mutual funds FDIC insured?
Unfortunately, mutual funds—like investments in the stock market—are not insured by the Federal Deposit Insurance Corporation (FDIC) because they do not qualify as financial deposits. This article will explore the purpose of the FDIC and what financial investments are protected.
Background of the FDIC: Its Purpose
The FDIC is an independent, government-established agency formed in 1933 in response to the widespread failure of America's banks in the 1920s and 1930s, which contributed to the Great Depression. The debilitating impact of the financial crisis prompted the government to develop strategies for preventing future economic collapse.
One way to prevent the kind of domino effect of the Great Depression is to isolate economic turmoil in one industry and prevent it from bleeding over into the rest of the economic structure. By monitoring potential threats to banking and thrift institutions, the FDIC seeks to minimize the impact of the economic downturn on depositor funds and the rest of the economy.
Though created by Congress, the FDIC does not receive any government funding. Instead, financial institutions pay a premium for deposit insurance, much like an individual pays a premium for homeowners or auto insurance. In addition, the FDIC invests in government-issued Treasury bonds (T-bonds) that generate regular interest income.
Key Takeaways Formed in 1933, the Federal Deposit Insurance Corporation (FDIC) seeks to minimize the impact of the economic downturn on depositor funds and the rest of the economy by monitoring potential threats to banking and thrift institutions. Mutual funds are not insured by the FDIC because they do not qualify as financial deposits and carry a certain amount of risk that the investor opts in to bear. The FDIC only insures deposits such as your checking account, savings account, money market deposit accounts, certificates of deposit (CDs), money orders, cashiers' checks, and business accounts.
Which Types of Assets Are FDIC Insured?
The FDIC only insures deposits, not investments. This means the following accounts are probably all insured unless your financial institution has declined FDIC coverage (which is unlikely):
Checking account Savings account Money market deposit accounts Certificates of deposit (CDs) Money orders Cashiers' checks Business accounts, which are afforded the same coverage as individual accounts
What Is Not FDIC Insured?
Investment vehicles are typically not insured by the FDIC. In addition to mutual funds, this includes investments in stock and bond markets, annuities, life insurance policies, and Treasury securities. Even the stocks, bonds, or other vehicles that you might have purchased through your bank's investment department are not insured.
There is often some confusion when it comes to money market mutual funds because money market deposit accounts are FDIC-insured. The difference between these two types of accounts lies in their respective risk levels. While it is technically possible, though unlikely, to lose your original investment in a money market mutual fund, money market deposit accounts generate interest but carry no risk to your deposited funds.
Individual retirement accounts (IRAs) are another common source of confusion. IRA savings can be invested in several different ways, some insured by the FDIC and some not. If a given type of account is FDIC-insured when it includes regular funds, it is also insured when those funds are part of an IRA. IRA funds deposited in a standard savings account or money market deposit account, for example, are insured. Any IRA savings invested in mutual funds or stocks are not.
Why Are Mutual Funds Not Insured?
Mutual funds, like investments in the stock market, are not insured by the FDIC because they do not qualify as financial deposits.
The goal of the FDIC is to ensure another financial crisis does not bankrupt the citizenry. When banks failed during the Great Depression, individual depositors were unable to withdraw their funds because the banks did not have the cash to back up all their deposits. Poor business practices on the part of the banking industry ended up costing millions of innocent Americans their life savings. Prior to 1933, there were no federal protections in place to prevent injustice. The aim, therefore, of the U.S. government in creating the FDIC was not to protect Americans from ever losing money, but rather to protect them from losing money through no fault of their own.
Unlike checking or savings accounts, mutual funds and other securities carry a certain amount of risk. While some amount of risk may be necessary for big profits to be made, investors know going in there is a chance they could lose everything. This is why the FDIC does not insure investments.
Investing is high-tech gambling. While you expect an insurance company to reimburse you if your insured property is stolen from your home, you do not expect a casino to reimburse you if you lose money at the poker table. All gamblers know the risk of loss as soon as they set foot on the casino floor; the same should be true of investors.
Securities Investor Protection Corporation
Though no entity insures you against investment loss due to market fluctuation, the Securities Investor Protection Corporation (SIPC) does protect investors from loss if their brokerage firms fail. Customers of SIPC-member institutions who lose money as a result of company liquidation are insured up to $500,000, with a $250,000 cash sub-limit. In addition to mutual fund investments, the SIPC protects investments in stocks, bonds, options, Treasury securities, and CDs.
How to Limit Mutual Fund Risk
Of course, not losing your capital in the first place is always better than any insurance policy. Luckily, there are ways to invest in mutual funds without incurring too much risk, all but eliminating the need for federal protection.
One of the chief benefits of mutual funds is their customizability. Most fund managers offer portfolio options that cater to a wide range of investing styles. While stock funds tend to be higher risk, they also carry a greater chance for big profits. However, if you are looking to minimize risk, stock funds are not your best bet.
On the other end of the spectrum are money market mutual funds, which invest only in short-term debt securities, such as government and municipal bonds. These types of investments do not generate huge returns but are backed by the reputation and credibility of the U.S. government, making them highly stable. Often referred to as cash equivalents, money market funds are a great alternative to standard savings accounts.
If you are slightly more risk-tolerant but not yet ready to take on the volatility of a stock fund, you can likely find a bond or balanced fund that meets your risk requirements. Bond funds include a variety of corporate and government bond investments. While they are slightly riskier than money market funds, most bond funds are generally considered safe, stable investments. Balanced funds are the most customizable of all because they include both stock and bond investments in a wide range of ratios. This means you can easily find a balanced fund that has just the right amount of risk for your investment style.
The Bottom Line
Though it is not the same as an FDIC safety net, a little research and some careful planning can enable you to invest in mutual funds with confidence, knowing you minimized risk while still putting your money to work.
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b27d148803d89e5b2dc04f7616fa62d9 | https://www.investopedia.com/articles/investing/100313/financial-analysis-solvency-vs-liquidity-ratios.asp | Solvency Ratios vs. Liquidity Ratios: What's the Difference? | Solvency Ratios vs. Liquidity Ratios: What's the Difference?
Solvency Ratios vs. Liquidity Ratios: An Overview
Solvency and liquidity are both terms that refer to an enterprise's state of financial health, but with some notable differences.
Solvency refers to an enterprise's capacity to meet its long-term financial commitments. Liquidity refers to an enterprise's ability to pay short-term obligations—the term also refers to a company's capability to sell assets quickly to raise cash.
Key Takeaways Solvency and liquidity are both important for a company's financial health and an enterprise's ability to meet its obligations.Liquidity refers to both an enterprise's ability to pay short-term bills and debts and a company's capability to sell assets quickly to raise cash.Solvency refers to a company's ability to meet long-term debts and continue operating into the future.
1:24 6 Basic Financial Ratios And What They Reveal
Liquidity Ratios
A company with adequate liquidity will have enough cash available to pay its ongoing bills in the short run. Here are some of the most popular liquidity ratios.
Current Ratio
Current ratio = Current assets / Current liabilities
The current ratio measures a company's ability to pay off its current liabilities (payable within one year) with its current assets such as cash, accounts receivable, and inventories. The higher the ratio, the better the company's liquidity position.
Quick Ratio
Quick ratio = (Current assets – Inventories) / Current liabilities
OR
Quick ratio = (Cash and equivalents + Marketable securities + Accounts receivable) / Current liabilities
The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets and therefore excludes inventories from its current assets. It is also known as the "acid-test ratio."
Days Sales Outstanding (DSO)
Days sales outstanding (DSO) = (Accounts receivable / Total credit sales) x Number of days in sales
Days sales outstanding, or DSO, refers to the average number of days it takes a company to collect payment after it makes a sale. A higher DSO means that a company is taking unduly long to collect payment and is tying up capital in receivables. DSOs are generally calculated quarterly or annually.
Solvency Ratios
A solvent company is one that owns more than it owes; in other words, it has a positive net worth and a manageable debt load. While liquidity ratios focus on a firm's ability to meet short-term obligations, solvency ratios consider a companies long-term financial wellbeing. Here are some of the most popular solvency ratios.
Debt-to-Equity (D/E)
Debt to equity = Total debt / Total equity
The debt to equity (D/E) ratio indicates the degree of financial leverage (DFL) being used by the business and includes both short-term and long-term debt. A rising debt-to-equity ratio implies higher interest expenses, and beyond a certain point, it may affect a company's credit rating, making it more expensive to raise more debt.
Debt-to-Assets
Debt to assets = Total debt / Total assets
Another leverage measure, the debt to assets ratio measures the percentage of a company's assets that have been financed with debt (short-term and long-term). A higher ratio indicates a greater degree of leverage, and consequently, financial risk.
Interest Coverage Ratio
Interest coverage ratio = Operating income (or EBIT) / Interest expense
The interest coverage ratio measures the company's ability to meet the interest expense on its debt, which is equivalent to its earnings before interest and taxes (EBIT). The higher the ratio, the better the company's ability to cover its interest expense.
Special Considerations
There are key points that should be considered when using solvency and liquidity ratios. This includes using both sets of ratios—liquidity and solvency—to get the complete picture of a company's financial health, since making this assessment on the basis of just one set of ratios may provide a misleading depiction of its finances.
As well, it's necessary to compare apples to apples. These ratios vary widely from industry to industry, to ensure that you're comparing apples to apples. A comparison of financial ratios for two or more companies would only be meaningful if they operate in the same industry.
Finally, it's necessary to evaluate trends. Analyzing the trend of these ratios over time will enable you to see if the company's position is improving or deteriorating. Pay particular attention to negative outliers to check if they are the result of a one-time event or indicate a worsening of the company's fundamentals.
Solvency and liquidity are equally important, and healthy companies are both solvent and possess adequate liquidity. A number of liquidity ratios and solvency ratios are used to measure a company's financial health, the most common of which are discussed below.
Solvency Ratios vs. Liquidity Ratios: Examples
Let's use some of these liquidity and solvency ratios to demonstrate their effectiveness in assessing a company's financial condition.
Consider two companies, Liquids Inc. and Solvents Co., with the following assets and liabilities on their balance sheets (figures in millions of dollars). We assume that both companies operate in the same manufacturing sector, i.e., industrial glues and solvents.
Balance Sheets for Liquids Inc. and Solvents Co. Balance Sheet (in millions of dollars) Liquids Inc. Solvents Co. Cash $5 $1 Marketable securities $5 $2 Accounts receivable $10 $2 Inventories $10 $5 Current assets (a) $30 $10 Plant & equipment (b) $25 $65 Intangible assets (c) $20 $0 Total assets (a + b + c) $75 $75 Current liabilities* (d) $10 $25 Long-term debt (e) $50 $10 Total liabilities (d + e) $60 $35 Shareholders' equity $15 $40 Balance Sheets for Liquids Inc. and Solvents Co.
*In our example, we assume that "current liabilities" only consist of accounts payable and other liabilities, with no short-term debt. Since both companies are assumed to have only long-term debt, this is the only debt included in the solvency ratios shown below. If they did have short-term debt (which would show up in current liabilities), this would be added to long-term debt when computing the solvency ratios.
Liquids Inc.
Current ratio = $30 / $10 = 3.0Quick ratio = ($30 – $10) / $10 = 2.0Debt to equity = $50 / $15 = 3.33Debt to assets = $50 / $75 = 0.67
Solvents Co.
Current ratio = $10 / $25 = 0.40Quick ratio = ($10 – $5) / $25 = 0.20Debt to equity = $10 / $40 = 0.25Debt to assets = $10 / $75 = 0.13
We can draw a number of conclusions about the financial condition of these two companies from these ratios.
Liquids Inc. has a high degree of liquidity. Based on its current ratio, it has $3 of current assets for every dollar of current liabilities. Its quick ratio points to adequate liquidity even after excluding inventories, with $2 in assets that can be converted rapidly to cash for every dollar of current liabilities. However, financial leverage based on its solvency ratios appears quite high.
Debt exceeds equity by more than three times, while two-thirds of assets have been financed by debt. Note as well that close to half of non-current assets consist of intangible assets (such as goodwill and patents). As a result, the ratio of debt to tangible assets—calculated as ($50 / $55)—is 0.91, which means that over 90 percent of tangible assets (plant and equipment, inventories, etc.) have been financed by borrowing. To summarize, Liquids Inc. has a comfortable liquidity position, but it has a dangerously high degree of leverage.
Solvents Co. is in a different position. The company's current ratio of 0.4 indicates an inadequate degree of liquidity with only 40 cents of current assets available to cover every $1 of current liabilities. The quick ratio suggests an even more dire liquidity position, with only 20 cents of liquid assets for every $1 of current liabilities. But financial leverage appears to be at comfortable levels, with debt at only 25 percent of equity and only 13% of assets financed by debt.
Even better, the company's asset base consists wholly of tangible assets, which means that Solvents Co.'s ratio of debt to tangible assets is about one-seventh that of Liquids Inc. (approximately 13 percent vs. 91 percent). Overall, Solvents Co. is in a dangerous liquidity situation, but it has a comfortable debt position.
A liquidity crisis can arise even at healthy companies if circumstances arise that make it difficult for them to meet short-term obligations such as repaying their loans and paying their employees.
The best example of such a far-reaching liquidity catastrophe in recent memory is the global credit crunch of 2007–09. Commercial paper—short-term debt that is issued by large companies to finance current assets and pay off current liabilities—played a central role in this financial crisis.
A near-total freeze in the $2 trillion U.S. commercial paper market made it exceedingly difficult for even the most solvent companies to raise short-term funds at that time and hastened the demise of giant corporations such as Lehman Brothers and General Motors (GM).
But unless the financial system is in a credit crunch, a company-specific liquidity crisis can be resolved relatively easily with a liquidity injection, as long as the company is solvent. This is because the company can pledge some assets if required to raise cash to tide over the liquidity squeeze. This route may not be available for a company that is technically insolvent since a liquidity crisis would exacerbate its financial situation and force it into bankruptcy.
Insolvency, however, indicates a more serious underlying problem that generally takes longer to work out, and it may necessitate major changes and radical restructuring of a company's operations. Management of a company faced with an insolvency will have to make tough decisions to reduce debt, such as closing plants, selling off assets, and laying off employees.
Going back to the earlier example, although Solvents Co. has a looming cash crunch, its low degree of leverage gives it considerable "wiggle room." One available option is to open a secured credit line by using some of its non-current assets as collateral, thereby giving it access to ready cash to tide over the liquidity issue. Liquids Inc., while not facing an imminent problem, could soon find itself hampered by its huge debt load, and it may need to take steps to reduce debt as soon as possible.
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712765b25d501eaddec24003c6bdf591 | https://www.investopedia.com/articles/investing/100313/reviewing-liabilities-balance-sheet.asp | Reviewing Liabilities On The Balance Sheet | Reviewing Liabilities On The Balance Sheet
Of all the financial statements issued by companies, the balance sheet is one of the most effective tools in evaluating financial health at a specific point in time. Consider it a financial snapshot that can be used for forward or backward comparisons. The simplicity in its design makes it easy to view balances of the three major components with company assets on one side, and liabilities and owners' equity on the other side. Shareholders' equity is the net balance between total assets minus all liabilities and represents shareholders' claims to the company at any given time.
Assets are listed by their liquidity or how soon they could be converted into cash. Liabilities are sorted by how soon they are to be paid. Balance sheet critics point out its use of book values versus market values, which can under or over inflate. These variances are explained in reports like “statement of financial condition” and footnotes, so it's wise to dig beyond a simple balance sheet.
Liabilities
In general, a liability is an obligation between one party and another not yet completed or paid for. In the world of accounting, a financial liability is also an obligation but is more defined by previous business transactions, events, sales, exchange of assets or services, or anything that would provide economic benefit at a later date. Liabilities are usually considered short term (expected to be concluded in 12 months or less) or long term (12 months or greater). They are also known as current or non-current depending on the context. They can include a future service owed to others; short- or long-term borrowing from banks, individuals or other entities; or a previous transaction that has created an unsettled obligation. The most common liabilities are usually the largest like accounts payable and bonds payable. Most companies will have these two line items on their balance sheet, as they are part of ongoing current and long-term operations.
AT&T 2012 Balance Sheet
Assets Liabilities Current Assets Current Liabilities Cash And Cash Equivalents $4,868,000 Accounts Payable $28,301,000 Short Term Investments - Short/Current Long Term Debt $3,486,000 Net Receivables $13,693,000 Other Current Liabilities - Inventory - Other Current Assets $4,145,000 Total Current Liabilities $31,787,000 Total Current Assets 22,706,000 Long Term Debt $66,358,000 Other Liabilities $52,984,000 Long Term Investments $4,581,000 Deferred Long Term Liability Charges $28,491,000 Property Plant and Equipment $109,767,000 Minority Interest $333,000 Goodwill $69,773,000 Negative Goodwill - Intangible Assets $58,775,000 Accumulated Amortization - Total Liabilities $179,953,000 Other Assets $6,713,000 Deferred Long Term Asset Charges - Stockholders' Equity Total Assets $272,315,000 Total Stockholders' Equity $92,362,000
Current Liabilities
Using the AT&T (NYSE:T) balance sheet as of Dec. 31, 2012, current/short-term liabilities are segregated from long-term/non-current liabilities on the balance sheet. AT&T clearly defines its bank debt maturing in less than one year. For a company this size, this is often used as operating capital for day-to-day operations rather than funding larger items, which would be better suited using long-term debt. Like most assets, liabilities are carried at cost, not market value, and under GAAP rules can be listed in order of preference as long as they are categorized. The AT&T example has a relatively high debt level under current liabilities. With smaller companies, other line items like accounts payable (AP) and various future liabilities like payroll, taxes and ongoing expenses for an active company carry a higher proportion.
AP typically carries the largest balances, as they encompass the day-to-day operations. AP can include services, raw materials, office supplies or any other categories of products and services where no promissory note is issued. Since most companies do not pay for goods and services as they are acquired, AP is equivalent to a stack of bills waiting to be paid.
Examples of Common Current Liabilities
Wages Payable: The total amount of accrued income employees have earned but not yet received. Since most companies pay their employees every two weeks, this liability changes often.Interest Payable: Companies, just like individuals, often use credit to purchase goods and services to finance over short time periods. This represents the interest on those short-term credit purchases to be paid.Dividends Payable: For companies that have issued stock to investors and pay a dividend, this represents the amount owed to shareholders after the dividend was declared. This period is around two weeks, so this liability usually pops up four times per year until the dividend is paid.
Current Liabilities Off the Beaten Path
Unearned Revenues: This is a company's liability to deliver goods and/or services at a future date after being paid in advance. This amount will be reduced in the future with an offsetting entry once the product or service is delivered.Liabilities of Discontinued Operations: This is a unique liability that most people glance over but should scrutinize more closely. Companies are required to account for the financial impact of an operation, division, entity, etc. that is currently being held for sale or has been recently sold. This also includes the financial impact of a product line that is or has recently been shut down. Since most companies do not report line items for individual entities or products, this entry points out the implications in aggregate. As there are estimates used in some of the calculations, this can carry significant weight. A good example is a large technology company that has released what it considered to be a world-changing product line, only to see it flop when it hit the market. All the R&D, marketing and product release costs need to be accounted for under this section.
Non-Current Liabilities
Considering the name, it’s quite obvious that any liability that is not current falls under non-current liabilities expected to be paid in 12 months or more. Referring again to the AT&T example, there are more items than your garden variety company that may list one or two items. Long-term debt, also known as bonds payable, is usually the largest liability and at the top of the list. Companies of all sizes finance part of their ongoing long-term operations by issuing bonds that are essentially loans to each party that purchases the bonds. This line item is in constant flux as bonds are issued, mature or are called back by the issuer.
Examples of Common Non-Current Liabilities
Warranty Liability: Some liabilities are not as exact as AP and have to be estimated. It’s the estimated amount of time and money that may be spent repairing products upon the agreement of a warranty. This is a common liability in the automotive industry, as most cars have long-term warranties that can be costly.Lawsuit Payable: This is another liability that is estimated and requires more scrutiny. If a lawsuit is considered probable and predictable, an estimated cost of all court, attorney and settled fees will be recorded. These are common line items for pharmaceutical and medical manufacturers.
Non-Current Liabilities Off the Beaten Path
Deferred Credits: This is a broad category that may be recorded as current or non-current depending on the specifics of the transactions. These credits are basically revenue collected prior to it being earned and recorded on the income statement. It may include customer advances, deferred revenue or a transaction where credits are owed but not yet considered revenue. Once the revenue is no longer deferred, this item is reduced by the amount earned and becomes part of the company's revenue stream.Post-Employment Benefits: These are benefits an employee or family members may receive upon his/her retirement, which are carried as a long-term liability as it accrues. In the AT&T example, this constitutes one-half of the total non-current total second only to long-term debt. With rapidly rising health care and deferred compensation, this liability is not to be overlooked.Unamortized Investment Tax Credits (UITC): This represents the net between an asset's historical cost and the amount that has already been depreciated. The unamortized portion is a liability, but it is only a rough estimate of the asset’s fair market value. For an analyst, this provides some details of how aggressive or conservative a company is with its depreciation methods.
Conclusion
The balance sheet, liabilities in particular, is often evaluated last as investors focus so much attention on top-line growth like sales revenue. While sales may be the most important feature of a rapidly growing startup technology company, all companies eventually grow into living, breathing complex entities. Balance sheet critics point out that it is only a snapshot in time, and most items are recorded at cost and not market value. But setting those issues aside, a goldmine of information can be uncovered in the balance sheet.
While relative and absolute liabilities vary greatly between companies and industries, they can make or break a company just as easily as a missed earnings report or bad press. As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date. Many ratios are pulled from line items of liabilities to assess a company's health at specific points in time.
While accounts payable and bonds payable make up the lion’s share of the balance sheet's liability side, the not-so-common or lesser-known items should be reviewed in depth. For example, the estimated value of warranties payable for an automotive company with a history of making poor-quality cars could be largely over or under valued. Discontinued operations could reveal a new product line a company has staked its reputation on, which is failing to meet expectations and may cause large losses down the road. The devil is in the details, and liabilities can reveal hidden gems or landmines. It just takes some time to dig for them.
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cc7e9889488adadaa484175809b2d3e6 | https://www.investopedia.com/articles/investing/100515/learn-how-trade-crude-oil-5-steps.asp | 5 Steps to Making a Profit in Crude Oil Trading | 5 Steps to Making a Profit in Crude Oil Trading
Crude oil trading offers excellent opportunities to profit in nearly all market conditions due to its unique standing within the world’s economic and political systems. Also, energy sector volatility has risen sharply in recent years, ensuring strong trends that can produce consistent returns for short-term swing trades and long-term timing strategies.
Market participants often fail to take full advantage of crude oil fluctuations, either because they haven't learned the unique characteristics of these markets or because they're unaware of the hidden pitfalls that can eat into earnings. In addition, not all energy-focused financial instruments are created equally, with a subset of these securities more likely to produce positive results.
Key Takeaways If you want to play the oil markets, this important commodity can provide a highly liquid asset class with which to trade several strategies. First, decide what is appropriate for you: a spot oil (and if so what grade); a derivative product such as futures or options; or an exchange-trade product like an ETN or ETF. Then focus on the oil market fundamentals and what drives supply and demand, as well as technical indicators gleaned from charts.
1:00 How Can I Buy Oil As An Investment?
Here are five steps needed to make a consistent profit in the markets.
1. Learn What Moves Crude Oil
Crude oil moves through perceptions of supply and demand, affected by worldwide output as well as global economic prosperity. Oversupply and shrinking demand encourage traders to sell crude oil markets, while rising demand and declining or flat production encourages traders to bid crude oil higher.
Tight convergence between positive elements can produce powerful uptrends, like the surge of crude oil to $145.31 per barrel in July 2008, while tight convergence between negative elements can create equally powerful downtrends, like the August 2015 collapse to $37.75 per barrel. Price action tends to build narrow trading ranges when crude oil reacts to mixed conditions, with sideways action often persisting for years at a time.
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.
2. Understand the Crowd
Professional traders and hedgers dominate the energy futures markets, with industry players taking positions to offset physical exposure while hedge funds speculate on long- and short-term direction. Retail traders and investors exert less influence here than in more emotional markets, like precious metals or high beta growth stocks.
Retail's influence rises when crude oil trends sharply, attracting capital from small players who are drawn into these markets by front-page headlines and table-pounding talking heads. The subsequent waves of greed and fear can intensify underlying trend momentum, contributing to historic climaxes and collapses that print exceptionally high volume.
3. Choose Between Brent and WTI Crude Oil
Crude oil trades through two primary markets, West Texas Intermediate Crude and Brent Crude. WTI originates in the U.S. Permian Basin and other local sources while Brent comes from more than a dozen fields in the North Atlantic. These varieties contain different sulfur content and API gravity, with lower levels commonly called light sweet crude oil. Brent has become a better indicator of worldwide pricing in recent years, although WTI in 2017 was more heavily traded in the world futures markets (after two years of Brent volume leadership).
Pricing between these grades stayed within a narrow band for years, but that came to an end in 2010 when the two markets diverged sharply due to a rapidly changing supply versus demand environment. The rise of U.S. oil production, driven by shale and fracking technology, increased WTI output at the same time Brent drilling underwent a rapid decrease.
U.S. law dating back to the Arab oil embargo in the 1970s aggravated this division, prohibiting local oil companies from selling their inventory in overseas markets. This ban was removed in 2015.
Many of CME Group's New York Mercantile Exchange (NYMEX) futures contracts track the WTI benchmark, with the "CL" ticker attracting significant daily volume. The majority of futures traders can focus exclusively on this contract and its many derivatives. Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) offer equity access to crude oil, but their mathematical construction generates significant limitations due to contango and backwardation.
4. Read the Long-Term Chart
Image by Sabrina Jiang © Investopedia 2020
WTI crude oil rose after World War II, peaking in the upper $20s and entering a narrow band until the embargo in the 1970s triggered a parabolic rally to $120. It peaked late in the decade and began a torturous decline, dropping into the teens ahead of the new millennium. Crude oil entered a new and powerful uptrend in 1999, rising to an all-time high at $157.73 in June 2008. It then dropped into a massive trading range between that level and the upper $20s, settling around $55 at the end of 2017. As of January 2021, it was trading at about $47.
5. Pick Your Venue
The NYMEX WTI Light Sweet Crude Oil futures contract (CL) trades in excess of 10 million contracts per month, offering superb liquidity. However, it has a relatively high risk due to the 1,000 barrel contract unit and .01 per barrel minimum price fluctuation. There are dozens of other energy-based products offered through NYMEX, with the vast majority attracting professional speculators but few private traders or investors.
The U.S. Oil Fund offers the most popular way to play crude oil through equities, posting average daily volume in excess of 20-million shares. This security tracks WTI futures but is vulnerable to contango, due to discrepancies between front month and longer-dated contracts that reduce the size of price extensions.
Oil companies and sector funds offer diverse industry exposure, with production, exploration, and oil service operations presenting different trends and opportunities. While the majority of companies track general crude oil trends, they can diverge sharply for long periods. These counter-swings often occur when equity markets are trending sharply, with rallies or selloffs triggering cross-market correlation that promotes lockstep behavior between diverse sectors.
Some of the largest U.S. oil company funds are:
SPDR Energy Select Sector Fund (XLE) SPDR S&P Oil & Gas Exploration and Production ETF (XOP) VanEck Vectors Oil Services ETF (OIH) iShares U.S. Energy ETF (IYE) Vanguard Energy ETF (VDE)
Reserve currencies offer an excellent way to take long-term crude oil exposure, with the economies of many nations leveraged closely to their energy resources. U.S. dollar crosses with Columbian and Mexican pesos, under tickers USD/COP and USD/MXN, have been tracking crude oil for years, offering speculators highly liquid and easily scaled access to uptrends and downtrends. Bearish crude oil positions require buying these crosses while bullish positions require selling them short.
The Bottom Line
Trading in crude oil and energy markets requires exceptional skill sets to build consistent profits. Market players looking to trade crude oil futures and its numerous derivatives need to learn what moves the commodity, the nature of the prevailing crowd, the long-term price history, and physical variations between different grades.
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30403392cf25ad12ed4413284b8e0a1b | https://www.investopedia.com/articles/investing/100515/what-exactly-are-arbitrage-mutual-funds.asp | Arbitrage Mutual Funds: Benefits and Drawbacks | Arbitrage Mutual Funds: Benefits and Drawbacks
An arbitrage fund is a type of mutual fund that appeals to investors who want to profit from volatile markets without taking on too much risk. Before investing in one, it is crucial to understand how they work and if they make sense for your portfolio.
KEY TAKEAWAYS Arbitrage funds can be a good choice for investors who want to profit from a volatile market without taking on too much risk. Although arbitrage funds are relatively low risk, the payoff can be unpredictable. Arbitrage funds are taxed like equity funds. Investors need to keep an eye on expense ratios, which can be high.
Arbitrage Funds: An Overview
Arbitrage funds work by exploiting the price differential between assets that should theoretically have the same price. One of the most important types of arbitrage takes place between the cash and futures markets. A typical fund purchases stocks with the hope of selling them later after the price has gone up. Instead, an arbitrage fund purchases stock in the cash market and simultaneously sells that interest in the futures market. The differences between stock prices and futures contracts are usually very small. As a result, arbitrage funds must execute a large number of trades each year to make any substantial gains.
The cash market price of a stock, also called the spot price, is what most people think of as the stock market. For example, suppose that the cash price of a share of ABC is $20. Then, you can purchase a share for $20 and own that portion of the company when the trade is executed.
The futures market is slightly different because it is a derivatives market. Futures contracts are not valued based on the current price of the underlying stock. Instead, they reflect the anticipated price of the stock at some point in the future. Shares of stock do not change hands immediately in the futures market. With futures, shares are transferred on the maturity date of the contract for the agreed price.
ABC might sell at $20 per share today, but perhaps the majority of investors feel ABC is primed for a spike next month. In that case, a futures contract with a maturity date one month down the road may be valued much more highly. The difference between the cash and futures price for ABC stock is called the arbitrage profit.
Arbitrage funds take advantage of these different prices. They buy stock in the cash market and simultaneously sell a contract for it on the futures market if the market is bullish on the stock. If the market is bearish, then arbitrage funds purchase the lower-priced futures contracts and sell shares on the cash market for the higher current price.
Arbitrage funds may also profit from trading stocks on different exchanges. For example, they might purchase a stock at $57 on the New York Stock Exchange and then immediately sell it at $57.15 on the London Stock Exchange.
Index arbitrage is another popular type of arbitrage. In this case, an arbitrage fund might seek to profit by buying shares of an exchange-traded fund (ETF) that is selling for less than the value of the underlying stocks. The arbitrage fund would then immediately redeem the ETF for shares of stock and sell them to make a profit. The fund must be an authorized participant in the ETF market to use this strategy.
Benefits of Arbitrage Funds
Arbitrage funds offer several benefits, including:
Low Risk
One of the chief benefits of arbitrage funds is that they are low risk. Because each security is bought and sold simultaneously, there is virtually none of the risk involved with longer-term investments. Arbitrage funds also invest part of their capital into debt securities, which are typically considered highly stable. If there is a shortage of profitable arbitrage trades, the fund invests more heavily in debt. That makes this type of fund very appealing to investors with low risk tolerance.
Another significant advantage to arbitrage funds is that they are some of the only low-risk securities that actually flourish when the market is highly volatile. That is because volatility leads to uncertainty among investors. The differential between the cash and futures markets increases when prices are unstable. A highly stable market means individual stock prices are not exhibiting much change. When markets are calm, investors have no reason to believe stock prices one month in the future will be much different from the current prices.
Volatility and risk go hand in hand. You cannot have huge gains or huge losses without volatility. Arbitrage funds are a good choice for cautious investors who want to benefit from a volatile market without taking on too much risk.
Taxed as Equity Funds
Arbitrage funds are technically balanced or hybrid funds because they invest in both debt and equity, but they invest primarily in equities. Therefore, they are taxed as equity funds since long equity represents an average of at least 65% of the portfolio. If you hold your shares in an arbitrage fund for more than a year, then any gains you receive are taxed at the capital gains rate. This rate is much lower than the ordinary income tax rate.
Depending on your specific investment goals and risk tolerance, bond, money market, or long-term stock funds may be more stable and consistent than the roller coaster ride of arbitrage funds.
Drawbacks of Arbitrage Funds
Drawbacks that need to be considered include:
Unpredictable Payoff
One of the primary disadvantages of arbitrage funds is their mediocre reliability. As noted above, arbitrage funds are not very profitable during stable markets. If there are not enough profitable arbitrage trades available, the fund may essentially become a bond fund, albeit temporarily. Excessive time in bonds can drastically reduce the fund's profitability, so actively managed equity funds tend to outperform arbitrage funds over the long term.
High Expense Ratios
The high number of trades required by successful arbitrage funds means their expense ratios can be quite high. Arbitrage funds can be a highly lucrative investment, especially during periods of increased volatility. However, their middling reliability and substantial expenses indicate they should not be the only type of investment in your portfolio.
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c30919eaedc9bf63d83382d203d6c094 | https://www.investopedia.com/articles/investing/100614/interested-invesing-africa-heres-how.asp | Interested in Investing in Africa? Here's How | Interested in Investing in Africa? Here's How
Africa’s journey from when it was tagged as the “The Hopeless Continent” on the cover of The Economist in May 2000 to December 2011, when the same publication put “Africa Rising” on its cover (and then “Aspiring Africa” in March 2013) has been anything but boring. Africa has become the newest destination for emerging markets investors. From 2000, according to the World Economic Forum, "half of the world's fastest-growing economies have been in Africa." Ghana and Ethiopia showed real GDP growth of over 8% in 2018.
Key Takeaways Over the last 20 years, Africa has gone from being seen as a "hopeless continent" in terms of its financial potential, to an interesting prospect for emerging market investors.The continent has extensive natural resources, a young and increasingly educated workforce, more stability in terms of governance, and more prospects for economic growth than in years past.For new investors looking to make a small investment, mutual funds or exchange-traded funds make the most sense. More experienced investors may also consider American depositary receipts (ADRs) as a way to participate.
Vast Natural Resources
The African continent is incredibly rich in natural resources. It has huge, untapped reserves of natural gas and oil (10% of the world’s reserves) and largely unexploited hydroelectric power. It is home to vast gold, platinum, uranium, iron ore, copper and diamond reserves. Currently, only 10% of Africa’s arable land is being cultivated, yet it holds around 60% of the world’s cultivable land. As such, Africa has become a magnet for foreign direct investment (FDI).
Africa also has the advantage of a large and relatively cheap educated labor force. The continent is undergoing a demographic transformation, with youth as its theme; there is a very high proportion of Africans in their 20s and 30s with fewer dependents – both old and young – that will play out over the next decade.
There is stability in terms of governance; the countries that witnessed terrible periods of unrest have emerged as success stories. There are better policies in place, trade has improved and so has the business environment.
According to the World Economic Forum, by 2030, over 40% of Africans will belong to the middle or upper classes, and there will be a higher demand for goods and services. In 2030, household consumption is expected to reach $2.5 trillion, more than double that of 2015 at $1.1 trillion.
Much of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%) and South Africa (11%). But Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia will attract companies seeking to enter new markets. The sectors expected to grow the most in the next 30 years are food and beverages, education and transportation, housing, consumer goods, hospitality and recreation, healthcare, financial services, and telecommunications.
Stocks Mirror the Economy
Sub-Saharan Africa has around 29 stock exchanges representing 38 countries including two regional exchanges. These exchanges have a lot of disparity in terms of their size and trading volume. The continent has a handful of prominent exchanges and many new and small exchanges that are characterized by small trading volumes and few listed stocks. Efforts are being put in place by all countries to boost their exchanges by improving investor education and confidence, improving access to funds, and making the procedures more transparent and standardized. The table below depicts the dollar-adjusted returns (as of 2018) of select stock exchanges in Sub-Saharan Africa (listed alphabetically).
STOCK MARKET 1M 1Y 3Y 5Y 10Y YTD Botswana Stock Exchange -1.2% -13.6% -24.9% -28.7% -31.0% -18.5% BRVM -10.4% -25.2% -39.7% -28.7% -18.2% -31.0% Dar es Salaam Stock Exchange -2.2% -4.0% -18.5% -21.5% 9.0% -15.8% Egyptian Exchange -9.7% -9.0% -20.9% N/A N/A -12.3% Ghana Stock Exchange -6.0% 8.9% 10.3% -38.8% N/A 3.5% Johannesburg Stock Exchange -10.0% -19.4% -15.3% -26.4% 58.3% -31.0% Lusaka Stock Exchange -0.5% -13.7% -3.8% -51.3% -37.3% -16.1% Malawi Stock Exchange -3.0% 33.1% 31.8% 18.3% N/A 28.0% Nairobi Securities Exchange -4.5% -9.2% 5.2% -9.1% 73.1% -14.5% Namibian Stock Exchange -2.4% 1.1% 20.5% 30.2% 171.8% -12.6% Nigerian Stock Exchange -1.1% -12.2% -39.0% -62.2% -71.7% -15.8% Rwanda Stock Exchange -2.5% -4.6% -36.4% N/A N/A -6.5% Stock Exchange of Mauritius 0.3% 1.9% 23.7% -1.9% 61.3% 0.1% Uganda Securities Exchange -3.4% 1.7% -8.9% -26.7% 32.9% -13.4% Zimbabwe Stock Exchange 28.9% -0.6% 291.4% 144.2% N/A 58.1% S&P500 -6.9% 5.3% 30.4% 54.4% 184.2% 1.4
Source: investinginafrica.com
How To Invest
African stock markets come in different flavors, and they require deep understanding to select the appropriate stock exchange. Investing through a mutual fund or exchange-traded fund (ETF) is a better bet for small investors looking to taste a bit of Sub-Saharan Africa.
Direct Access
The way to directly access African stocks is to open a local brokerage account. This can be a bit complicated, as investors need to shortlist stocks, as well as stock exchanges. Some of the brokerage firms that cater to foreign investors interested in a single country include:
Tanzania: Orbit Securities, Vertex Securities;
Kenya: Faida Investment Bank;
Ghana: CAL Brokers, FirstBanc Brokerage Services and Stanbic Bank Ghana Brokerage
Nigeria: Zenith Securities, Meristem and Cowry Securities;
Zimbabwe: EFE Securities and Lynton Edwards;
South Africa: Nedbank Online Trading and Sanlam iTrade.
Some of the noteworthy companies across different exchanges are KenolKobil Ltd., Dangote Cement PLC, CRDB Bank, National Microfinance Bank (NMB), African Alliance, Bank of Kigali, Bralirwa Ltd., Equity Bank, KCB Bank, ARM Cement, Ecobank, UBA Plc, CIC Insurance, Britam, Courteville Business Solutions PLC and Naspers Ltd.
The Johannesburg Stock Exchange (JSE) is the largest stock exchange in Africa by market capitalization.
ETFs and Mutual Funds
Investing via ETFs and mutual funds comes with the built-in advantage of ease (traded on U.S. exchanges), diversification and professional management. Some of the prominent ones are:
The Market Vectors Africa Index ETF (AFK), which tracks some of the largest and most liquid stocks in Africa. It holds about 114 stocks and has a country allocation of Egypt (21.4%), South Africa (20.7%), Nigeria (15%), United Kingdom (12.6%) and Morocco (6.6%).The SPDR S&P Middle East & Africa ETF (GAF) is allocated 78.39% to South Africa, followed by the United Arab Emirates (8.23%), Qatar (7.72%), Egypt (3.97%) and Morocco (1.61%).The iShares MSCI South Africa Index (EZA) is allocated 99.5% to mid-sized and large companies in South Africa in the financial, consumer discretionary and telecommunication services sectors.The Market Vectors Egypt Index ETF (EGPT) gives access to Egypt, the third-largest economy in Africa, with an allocation of around 85%. The remainder is spread to geographically diversify across Luxembourg, Canada, and Ireland.The Global X Nigeria Index ETF (NGE) concentrates on Nigeria with financials, consumer staples, energy, materials, and industrials as the top sectors.The Cloud Atlas Big50 ex-SA ETF (AMIB50:SJ) is an ETF domiciled in South Africa. The exchange-traded fund invests in 50 representative companies across the African continent, excluding South Africa, through 15 African stock exchanges.
Mutual funds that invest in Africa include the Alquity Africa Fund (ALQAFBG:LX), Investec Pan Africa (INVPNAS:GU), Neptune Investment funds II – Neptune Africa Fund (NEPAFRB:LN), JPM Africa Equity (JPMAACU:LX), Commonwealth Africa Fund (CAFRX) and Nile Pan-Africa Fund A (NAFAX).
For market participants new to investing in African companies, mutual funds and ETFs are the safest bet, followed by the American Depositary Receipts of select companies.
ADRs
American depositary receipts (ADRs) are a good way for investors in the United States to pick select African stocks trading on U.S. exchanges. Many of these are natural resources plays, such as AngloGold Ashanti (AU), DRD Gold (DRD), Gold Fields (GFI), Harmony Gold (HMY), Randgold (GOLD), Sibanye Gold and Sasol (SSL). All of the previously mentioned companies are in mining, with the exception of Sasol, which is in the oil and gas business. In addition, MiX Telematics (MIXT) is in the logistics technology business. There is a wider universe of African stocks that trade on the Pink Sheets or over-the-counter (OTC) market. Pink sheets are less regulated and are traded in thin volumes.
The Bottom Line
Africa still has a lot to combat. Political and social unrest, lack of infrastructure and poverty are common problems. But the bigger picture portrays the continent's progress; increasingly, there is political stability, economic growth, and advances in its banking systems, with better accounting and transparency. There is increasing demand from its growing middle class, and local companies are filling that need expanding. Nobody can predict the growth trajectory with accuracy, but Sub-Saharan Africa is poised for growth.
Disclosure: The author did not hold any of the mentioned stocks/funds at the time this was written.
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ea68e53b051114c586bc23ca7727e7b1 | https://www.investopedia.com/articles/investing/100614/oil-price-analysis-impact-supply-demand.asp | Oil Price Analysis: The Impact of Supply and Demand | Oil Price Analysis: The Impact of Supply and Demand
Oil is the crown jewel of commodities that is used in a multitude of ways in our lives, from plastics to asphalt to fuel. The oil industry is an economic powerhouse and the movements of oil prices are closely watched by investors and traders. Changes in oil prices can send shockwaves throughout the global economy. Every movement on the production and consumption side of oil is reflected in the price. Oil is not a diamond or caviar, luxury items of limited utility that most of us can live without. Oil is abundant and in great demand, making its price largely a function of market forces. (For more, see: What Determines Oil Prices?)
There are many variables that affect the price of oil, but let's take a look at how one of the most basic economic theories, supply and demand, impacts this precious commodity. The law of supply and demand states that if supply goes up then prices will go down. If demand goes up then prices will go up. So the key question is, what affects the supply and demand of oil?
Simple Supply and Demand
The consumption side consists of hundreds of millions of us, who individually have limited power to influence prices, but collectively have plenty. The production side is a little trickier. Which nation is the world’s largest oil producer, day in and day out? The answer for 2019 is a little different than normal.
Typically, the United States has been the largest oil producer in the last few years, outpacing the country which most would think is the largest producer: Saudi Arabia. The U.S. surpassed Saudi Arabia as the world's largest oil producer in 2013. The reason is due to shale fracking in Texas and North Dakota. However, in 2019, Saudi Arabia's oil production was down for the year compared to normal levels due to attacks on its oil fields, which disrupted production.
In 2019, the U.S. produced approximately 19.5 million barrels of oil per day. Saudi Arabia produced approximately 11.8 million and Russia produced approximately 11.5 million barrels per day. No other country is producing even half as much oil as any of the top three. Canada is a very distant fourth at 5.5 million barrels per day.
Capacity and Reserves
If you’re curious as to why it seems that the nations that produce the most oil and the ones that are most commonly identified with an abundance of oil aren’t necessarily the same, you’re not imagining it. There is an important distinction between oil production and oil reserves. Oil reserves are oil in the ground that hasn't been turned into supply.
Venezuela is the leader in that category, with reserves estimated at 300 billion barrels. However, most of their oil is offshore or deep underground, making it hard to reach. It is also dense oil, which makes it harder to refine into usable products, such as gasoline. Saudi Arabia has the second-largest reserves, with 267 billion barrels. This is 62 years’ worth of oil if you assume that production won’t increase or reserve estimates don't change between now and 2082.
As for the United States, its proven reserves are less impressive than its current capacity. The U.S. has 36.5 billion barrels in reserve as of 2017, far behind Canada (170 billion), Iran (158 billion), Iraq (143 billion), and Kuwait (102 billion). The remaining countries ahead of the U.S. include some cordial ones (the United Arab Emirates, 98 billion), some antagonistic ones (Russia, 80 billion) and some whose friendliness is tentative (Libya, 48 billion.)
It is important to determine the number of oil reserves that are proven reserves (90%+ chance that the oil will be able to be extracted), probable reserves (50%+ chance that the oil will be able to be extracted), and possible reserves (extraction is less than 50%). Determining this information helps to determine where future supply will come from and the ability of future supply to meet demand.
From Well to Fumes
So what does a barrel of oil represent, let alone 13 million of them? It’s hard for people outside of the industry to visualize the production numbers, so let’s attempt to make sense of them. Most crude oil in the United States is used to make petroleum. Petroleum is used for fueling vehicles, providing electricity, heating buildings, making plastics, and many other goods. Current statistics are only available for 2018 where the U.S. consumed 20 million barrels per day, much higher than their own production levels.
The breakdown in the use of petroleum was: 69% transportation, 25% industrial, 3% residential, 2% commercial, and 1% electric power. Consumption of motor gasoline was 9.3 million barrels a day, 45% of petroleum consumption. Gasoline is clearly the leader in terms of petroleum use (For more, see: What Determines Gas Prices?)
Pumping, Refining, and Distribution
Basic supply and demand theory states that the more of a product is produced, the more cheaply it should sell, all things being equal. It’s a symbiotic dance. The reason more was produced in the first place is because it became more economically efficient (or no less economically efficient) to do so. If someone were to invent a well stimulation technique that could double an oil field’s output for only a small incremental cost, then, with demand staying static, prices should fall.
Something similar has happened in recent years. Oil production in North America is at an all-time zenith, with fields in North Dakota and Alberta as fruitful as ever. As well as new supply from shale fracking. Since the internal combustion engine still predominates on our roads, and demand hasn’t kept up with supply, shouldn’t gas be selling for nickels a gallon?
One problem, and this is where theory butts up against practice; production is high, but distribution and refinement aren’t keeping up with it. They are still catching up with the boom. The United States does not build refineries often. Six refineries were built between 2014-2019, to keep up with production, but before 2014, the last refinery was built in 1998. Construction had slowed down to a trickle after the 1970s. A total of only two refineries were built in the 80s and three in the 90s, and these weren't built for large capacity. There’s actually a net loss: the United States has fewer refineries than it did in years prior. Currently, the U.S. has 135 refineries in operation. So even though there is a large supply of oil, the ability to refine it and get it to market is limited, affecting the actual supply that is available for consumption.
OPEC: Only So Much Influence
Then there’s the problem of cartels. The Organization of the Petroleum Exporting Countries (OPEC) was founded in the 1960s. Although the organization’s charter doesn’t state this explicitly, they fix prices. By restricting production, OPEC can force oil prices to rise, and thereby enjoy greater profits than if its member countries had each sold on the world market at the going rate. Throughout the 1970s and much of the 1980s, this was a sound if immoral strategy for OPEC.
To quote P.J. O’Rourke, the American journalist, "Certain people enter cartels because of greed; then, because of greed, they try to get out of the cartels." According to the U.S. Energy Information Administration (EIA), OPEC member countries often exceed their quotas, selling a few million extra barrels and knowing that enforcers can’t really stop them from doing so. With Canada, China, Russia, and the United States as non-members, OPEC is limited in its ability to, as its mission states, “ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers.”
Foreign Unrest
The oil industry is a global game and what happens in the world impacts the price of oil, especially since a large proportion of the world's biggest oil producers are in unstable areas, mainly the Middle East. Saudi Arabia, Iraq, Iran, Kuwait, and Libya all fall in this region. Russia has been a nefarious player in global politics and suffered sanctions for being so, and Venezuela is in a political crisis. Terrorist attacks, sanctions, and other regional matters influence how these countries supply oil, which then determines how oil prices move. If these countries cannot supply oil because they are impeded from doing so, and demand remains constant, oil prices will go up.
2019 saw plenty of these regional impacts. The terrorist bombings on Saudi oil fields, renewed sanctions on Iran, Venezuela in turmoil, tanker bombings in the Gulf of Oman, and pipeline contaminations in Russia, are only some of the regional disasters beleaguering the oil industry.
The Bottom Line
The oil industry is a complex one with many different components and many different players. Natural laws of supply and demand come in to play, as with any free-market, but each is impacted by the components that make up the oil industry, such as refining capability, oil reserves, and foreign affairs.
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f965adfb7c595cff3d64374d5efd7e9f | https://www.investopedia.com/articles/investing/100615/investing-100-month-stocks-30-years.asp | Investing $100 a Month in Stocks for 30 Years | Investing $100 a Month in Stocks for 30 Years
If you asked the average saver if it's safer to invest $100 in the stock market or to put $100 in a savings account, most would pick the savings account. This makes sense in the short term; stocks can lose value, but the Federal Deposit Insurance Corporation (FDIC) guarantees savings accounts. However, the long-term answer is the exact opposite – it is much riskier to continue to sock money away into savings than it is to invest it. It is certainly possible to make money in stocks.
This is one situation where short-term rationality does not equate to long-term rationality. The $100 put into a savings account will earn a very low interest rate, and over time, it will likely lose value to inflation; a real loss in purchasing power is almost inevitable. The $100 invested into the stock market may have up days and down days, but the lesson from history is that stocks outperform virtually everything else over a period of several decades. (Caveat: Needless to say, we are not talking about putting all your money in high-risk penny stocks or similarly risky investment vehicles.)
Key Takeaways Investing just $100 a month over a period of years can be a lucrative strategy to grow your wealth over time. Doing so allows for the benefit of compounding returns, where gains build off of previous gains. Investing in such a manner also allows for dollar-cost-averaging, whereby money is invested when the market is going up as well as when it is down. Making room in your finances for $100 a month to put towards investing may require careful budgeting.
Compounding Returns
Monthly contributions really begin to make sense when you understand the concept of compounding. Compound returns act like a snowball rolling downhill; it begins small and slowly at first, but picks up size and momentum as time moves on.
The two key elements of compound returns are reinvestment of earnings and time. Stocks generate dividends that can be reinvested, and over time this acts as a self-feeding source of financial growth. At its core, compound investing is all about letting your interest generate more interest, which ends up generating even more interest down the road.
Suppose, for example, that a 30-year-old individual has $5,000 invested in equities earning 8% a year, which is a little below the historical average of 10%, as of January 2020. At the end of the first year, the investor's portfolio earned $400 in interest ($5,000 x 1.08). If the investor re-invests the interest, the same 8% growth will yield $432 in year two ($5,400 x 1.08). Year three will generate $466.56, year four generates $503.88 and so on. At age 35, the re-invested portfolio is worth $7,346.64, all without any additional non-interest contributions by the investor.
Follow this pattern for another 25 years, and the investment reaches $50,313.28. This represents more than a 10-fold increase, despite a lack of additional contributions.
Investing $100 Monthly: An Example
Now suppose the same 30-year-old investor finds a way to save an additional $100 per month. He contributes the extra $100 to his portfolio and keeps reinvesting his dividends and interest payments. His investment still earns 8% per year. For simplicity's sake, assume compounding takes place once per year in January.
After a 30-year period, thanks to compound returns and a small monthly contribution, his portfolio will grow to $186,253.14 (as compared to $50,313.28 without the monthly contributions). While $186,253.14 is not enough money to retire on, especially after 30 years of inflation, remember that this is just with $100 a month in contributions and returns below historical averages.
Suppose the annual return is 9%, which is closer to historical averages for a 30-year period. With a $5,000 principal investment and $100 monthly contributions, the portfolio grows to $229,907.44. If the investor is able to save $200 a month for contributions, the future value of his portfolio is $393,476.48.
Why Invest in Stocks?
Equities (such as stocks or mutual funds) are the best investment option for those who are decades from retirement. Stocks are more likely to lose value in the short term than bonds, certificates of deposit (CDs), or money market accounts, but they have been proved to be a better long-term value than any common alternative.
This is especially true in low-interest-rate environments. CDs, bonds, money market accounts, and savings accounts all yield less when rates are low. This often pushes savers to equities to beat inflation and bids up the price of stocks and other equity assets.
Research by Dr. Jeremy Siegel and John Bogle, the founder of Vanguard, looked back over a period of 196 years and compared the real returns of stocks, bonds, and gold. They found that if an investor had started around the year 1810 (the New York Stock Exchange was actually founded in 1817) and put $10,000 in gold, his inflation-adjusted portfolio would be worth just $26,000. The same investment in bonds would have grown to $8 million. However, had the investor picked stocks in 1810, he would have turned his $10,000 in $5.6 billion.
Stocks are still the big winner if you select a more realistic time frame; most investors have a 30- to 40-year horizon, not 200 years. Between January 1980 and January 2010, the average annualized growth rate of the S&P 500 was 8.15%. The Dow Jones averaged 8.81% over the same period, while the NASDAQ jumped 9.51% per year. Bond returns averaged less than 3% between 1980 and 2010. Inflation robbed cash of 62.2% of its purchasing power over those 30 years, meaning that $1,000 in a savings account in 1980 would only have a real value of $378 in 2010.
The 30-year period between 1985 and 2015 was even stronger. The S&P averaged 8.73%, the Dow Jones averaged 9.33%, and the NASDAQ averaged an impressive 10.34% per year.
Ways to Save $100 Each Month
The first step in investing $100 a month is to save $100. There are a number of simple steps the average person can take to cut costs; it doesn't require drastic lifestyle changes.
Shopping at warehouse stores (Costco and Sam's Club are two good options) for bulk items is a good idea. Bulk purchases cost less per item, so maybe make one trip to Costco each month rather than three or four trips to the local grocer. If you eat out a lot or buy your lunch every day, this is probably a better place to start.
If you need a little more discipline in your checking account activity, set up an automatic transfer each month from checking to savings. Savings are more difficult to dip into, and this could end up saving you a lot more than $100 a month by preventing frivolous purchases.
If you pay for utilities, you can save on air conditioning by opening a window or buying a small fan. The opposite is true in the winter when you can close your blinds or throw on a sweater to help avoid high energy bills.
Younger workers can save by going out on the town one or two fewer nights a month, which could save at least $50 to $150 a month. Homeowners can refinance their mortgage to lower their interest payments. Credit card users can sometimes save by just transferring their balance to a card with a lower interest rate.
If you don't think you can save $100 a month, try tracking all of your purchases for a month. This is a healthy financial habit that can help you find extra savings by limiting impulse spending.
The Bottom Line
Investing $100 a month adds up over time, especially with compound interest. Making small sacrifices every day to consistently add $100 to your stock investments every month will benefit you in the long run.
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ac740fd65c093fa9009e999fc3762bb3 | https://www.investopedia.com/articles/investing/100615/top-3-commodities-mutual-funds.asp | Top 3 Commodities Mutual Funds | Top 3 Commodities Mutual Funds
Investing in commodity mutual funds is one of the best means of hedging a portfolio that is otherwise dominated by stocks against unexpected financial or political crises or ordinary economic downturns. For example, in the wake of the Great Recession, during the late 2000s into the early 2010s, gold prices advanced from around $800 an ounce in 2008 to almost $2,000 an ounce in 2011. There is a historical tendency for an inverse relationship between stocks and commodities; when the overall stock market is in a bear market, commodities tend to experience a bull market.
Mutual funds provide investors with easy exposure to the commodities markets while avoiding the complications and additional risks of directly trading highly leveraged commodity futures. Commodity mutual funds typically invest in both the stocks of companies involved in commodities such as mining companies and in commodities proper. One advantage of this approach to commodity investing is that commodity mutual funds may perform well even when commodity prices overall are not. Mining company stocks may rise even during a period when the spot price of the mined commodity is falling. Other factors in addition to commodity prices that impact the stock prices of companies in commodities-related businesses include the companies' debt and cash flow situations.
Gabelli Gold Fund Class A (GLDAX)
The Gabelli Gold Fund Class A is a good mutual fund for investors specifically seeking exposure to the gold and precious metals markets. Launched by Gabelli Funds in 1994, its primary investment aim is long-term capital growth. Under ordinary circumstances, at least 80% of the fund's $510.36 million in assets is invested, along with borrowed capital for investment, in both U.S. domestic stocks and foreign stocks of companies principally engaged in gold-related business operations. The fund manager looks for gold-related stocks that are currently undervalued and that have above-average growth potential. A substantial portion of assets may be dedicated to foreign stocks since many of the major gold-mining companies are headquartered outside the United States. Any dividends or capital gains are distributed annually.
Metals and mining sector stocks account for approximately half of the fund's portfolio holdings. Major holdings of the fund include Barrick Gold Corp and Newmont Corp, each of which commands about 8.54% and 8.07%, respectively, of portfolio assets. Other significant holdings are Franco-Nevada Corporation, Wheaton Precious Metals Corp, and Agnico Eagle Mines Ltd.
The fund appeals to those investors seeking long-term goals, like retirement, and if the risk appetite is higher, with the understanding that the payoff is in long-term returns.
Invesco Balanced-Risk Commodity Strategy Fund Class A (BRCAX)
The Invesco Balanced-Risk Commodity Strategy Fund Class A offers investors a broader basket exposure to the total commodities market. This Invesco fund is relatively new, having been launched in 2010. The fund has $601.7 million in assets that it uses to pursue the investment goal of maximum return on investment (ROI). The fund's assets are typically invested in derivatives and other commodity-based investment instruments that are expected to reflect the overall performance of the underlying commodities and that provide exposure to four of the major commodity market segments. Those segments are precious and industrial metals, energy, and agriculture. Such investments commonly include futures and swap agreements. The fund also invests in U.S. Treasury securities and debt securities of other countries. The fund may also make use of investments in commodity-based exchange-traded funds (ETFs) or exchange-traded notes (ETNs). Capital gains or dividends are distributed annually.
Major holdings in the fund are Commodity 3X EqWgt BARCAP20 CLN at 7.59%, S Soybean Future at 6.58%, and Commodity 2X EqWgt BARC/WrldBnk 16 CLN at 5.42%.
As of Aug. 31, 2020, Morningstar gave the fund an "overall rating of 4 stars out of 100 funds and was rated 3 stars out of 100 funds, 4 stars out of 84 funds and N/A stars out of 40 funds for the 3-, 5- and 10- year periods, respectively."
BlackRock Commodity Strategies Fund (BICSX)
The BlackRock Commodity Strategies Fund, launched by BlackRock in 2011, offers investors exposure to four principal commodity groups: energy, precious metals, industrial metals, and agriculture. The fund's investment aim is long-term capital appreciation. The fund implements two basic strategies to achieve the fund's stated investment goal of capital appreciation, splitting the fund's $211.1 million in assets into roughly equal amounts devoted to each strategy, with the exception of precious metals, which is only allocated 6.21%. Agriculture leads with 19.56% of the fund's equity. The first strategy focuses on investments in commodity-related derivatives. The other focuses on equity investments in commodity-related companies, including mining, energy, and agricultural companies. The fund is invested in U.S. domestic and foreign stocks.
The fund is rated five stars overall by Morningstar against 100 Commodities Broad Basket Funds based on risk-adjusted total return. Some of the fund's holdings include Newmont Corporation 2.48%, Barrick Gold Corp at 2.13%, and Chevron Corp at 1.46%.
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28e4b9131b7059b02c53afc253495db7 | https://www.investopedia.com/articles/investing/100615/why-financial-literacy-and-education-so-important.asp | Why Financial Literacy Is So Important | Why Financial Literacy Is So Important
Financial Literacy in Decline
As consumer habits and financial products change, financial literacy has taken a blow. In past generations, cash was used for most daily purchases; today, it's rarely flashed—particularly not by younger shoppers. The way we shop has changed as well. Online shopping has become the top choice for many, creating ample opportunities to use and overextend credit—an all-too-easy way to accumulate debt, and fast.
Meanwhile, credit card companies, banks, and other financial institutions are inundating consumers with credit opportunities—the ability to apply for credit cards or pay off one card with another. Without the proper knowledge or checks and balances, it is easy to get into financial trouble.
Many consumers have very little understanding of finances, how credit works, and the potential impact on their financial well-being for many, many years. In fact, the lack of financial understanding has been signaled as one of the main reasons many Americans face problems with saving and investing.
Every few years, the Financial Industry Regulatory Authority (FINRA) issues a five-question test as part of its National Financial Capability Study, which measures consumers' knowledge about interest, compounding, inflation, diversification, and bond prices. On its most recent test, only 34% of those who took the test got four out of five questions correct, which suggests that the basic economic and financial principles that underpin these problems are widespread, touching every state in the country in different ways.
Key Takeaways Financial literacy is the education and understanding of various financial areas including topics related to managing personal finance, money, borrowing, and investing.Trends in the United States show that financial literacy among individuals is declining, with only 34% of respondents correctly answering four out of five questions posed by FINRA on the topic.At the same time, financial literacy is more important than ever as people manage their own retirement accounts, trade personal assets online, and carry student, medical, credit card, and mortgage debt.
What Is Financial Literacy?
Financial literacy is the confluence of financial, credit, and debt management knowledge that is necessary to make financially responsible decisions—decisions that are integral to our everyday lives. Financial literacy includes understanding how a checking account works, what using a credit card really means, and how to avoid debt. In sum, financial literacy has an impact on families as they try to balance their budget, buy a home, fund their children’s education, and ensure an income at retirement.
A lack of financial literacy is a problem not only in emerging or developing economies. Consumers in developed or advanced economies also fail to demonstrate a strong grasp of financial principles in order to understand and negotiate the financial landscape, manage financial risks effectively, and avoid financial pitfalls. Nations globally, from Korea to Australia to Germany, are faced with populations that do not understand financial basics.
The level of financial literacy may vary with education and income levels, but evidence shows that highly educated consumers with high incomes can be just as ignorant about financial issues as less-educated, lower-income consumers (though, in general, the latter do tend to be less financially literate). And it seems consumers are hesitant to learn. The Organization for Economic Co-operation and Development (OECD) cited a survey conducted in Canada in which people reported that they found choosing the right investment for a retirement savings plan was more stressful than a visit to the dentist.
Trends Making Financial Literacy More Important
Compounding the problems associated with financial illiteracy, it appears financial decision-making is also getting more onerous for consumers. Five trends are converging that demonstrate the importance of making thoughtful and informed decisions about finances:
1) Consumers are shouldering more of the financial decisions
Retirement planning is one example of this shift. Past generations depended on company pension plans to fund the bulk of their retirement. Pension funds, managed by professionals, put the financial burden on the companies or governments that sponsored them. Consumers were not involved with the decision-making, typically did not even contribute to their own funds, and they were rarely made aware of the funding status or investments held by the pension. Today, pensions are more a rarity than the norm, especially for new workers. Instead, employees are being offered the ability to participate in 401(k) plans, in which they need to decide how much to contribute and what to invest in.
2) Savings and investment options are more complex
Consumers are also being asked to choose among various investment and savings products. These products are more sophisticated than in the past, requiring consumers to choose among different options that offer varying interest rates and maturities, decisions they are not adequately educated to make. The choices made from among complex financial instruments with a large range of options can impact a consumer’s ability to buy a home, finance an education, or save for retirement, adding to the decision-making pressure.
3) Government aid is lacking
A major source of retirement income for past generations was Social Security. But the amount paid by Social Security is not enough, and it may not be available at all in the future. The Social Security Board of Trustees reported that by 2034 the Social Security trust fund may be depleted, a scary prospect for many. So now, Social Security acts more like a safety net that barely provides enough for basic survival.
Longer lifespans mean we need more money for retirement than earlier generations did.
4) The financial environment is changing
The financial landscape is very dynamic. Now a global marketplace, there are many more participants in the market and many more factors that can influence it. The quickly changing environment created by technological advances such as electronic trading makes the financial markets even swifter and more volatile. Taken together, these factors can cause conflicting views and difficulty in creating, implementing, and following a financial roadmap.
5) We are inundated with choices
Banks, credit unions, brokerage firms, insurance firms, credit card companies, mortgage companies, financial planners, and other financial service companies are all vying for assets, creating confusion for the consumer.
Why Financial Literacy Matters
Financial literacy is crucial to help consumers manage these factors and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures. Yet in its Report on the Economic Well-Being of U.S. Households in 2019, the Board of Governors of the Federal Reserve System found that many Americans are unprepared for retirement. One-fourth indicated that they have no retirement savings, and fewer than 4 in 10 non-retirees felt that their retirement savings are on track. Among those who have self-directed retirement savings, nearly 60% admitted to feeling low levels of confidence in making retirement decisions.
Low financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis like the coronavirus pandemic, according to research by the TIAA Institute. Even among those who report having high knowledge about personal finance, only 19% answered questions about fundamental financial concepts correctly. Forty-three percent report using expensive alternative financial services such as payday loans and pawnshops, more than half lack an emergency fund to cover three months' expenses, and 37% are financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency). Millennials also carry large amounts of student loan and mortgage debt—in fact, 44% say they have too much debt.
While these may seem like individual problems, they have a broader effect on the entire population than previously believed. All one needs to do is look at the financial crisis of 2008 to see the financial impact on the entire economy that arose from a lack of understanding of mortgage products (and therefore a vulnerability to predatory lending) or the lack of financial preparedness that threatens a rise in mortgage foreclosures due to job loss during the COVID-19 crisis. Financial literacy is an issue with broad implications for economic health and an improvement can help lead the way to a global economy that is competitive and strong.
The Bottom Line
Any improvement in financial literacy will have a profound impact on consumers and their ability to provide for their future. Recent trends are making it all the more imperative that consumers understand basic finances because they are being asked to shoulder more of the burden of investment decisions in their retirement accounts—all while having to decipher more complex financial products and options.
Becoming financially literate is not easy, but once mastered, it can ease life's burdens tremendously.
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acf3896be58096f8d0e5925be75e17e2 | https://www.investopedia.com/articles/investing/100714/introduction-government-loans.asp | An Introduction to Government Loans | An Introduction to Government Loans
What Is a Government Loan?
The U.S. government offers loan programs through different departments to support the needs of individuals, businesses, and communities. These loans provide capital for those who may not qualify for a loan from a private lender. Government loan programs can help:
Improve the overall national economy and quality of life of its citizens Encourage innovation and entrepreneurship Provide protection against—and relief from—disasters Improve on the country’s human capital Reward veterans and their dependents for past contributions and help with present needs
Individuals and small businesses with little or no seed capital or collateral may find the terms for a private loan unaffordable. Low-cost government loans attempt to bridge this capital gap and enable long-term benefits for the recipients and the nation.
Key Takeaways The government doesn't always lend money directly. In some cases, it guarantees loans made by banks and finance companies. The most common government loans are student loans, housing loans, and business loans. Other loans include those for veterans and disaster relief. The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided special funding for small businesses impacted by COVID-19 in 2020.
How Government Loans Work
Loans provide benefits to both borrowers and to the U.S government as a lender. They make capital available to borrowers who need it, and the government's initial capital is returned with interest.
Government loans may or may not be funded by the government, but all government loans are secured—or guaranteed—by the government. When the government funds a loan, it provides the loan capital. This money originates from taxpayers.
When the government only secures a loan, it effectively cosigns with the borrower on funds provided by designated lenders like private banks or government-sponsored enterprises (GSEs). This means if the end-borrower defaults on loan repayment, the government has to repay the lender.
Federal vs. Private Loans
The obvious difference between federal and private loans is that federal loans are offered by the U.S. government and private loans are offered by private lenders. The two types of loans have different benefits, interest rates, and repayment options.
In general, government loans tend to have lower interest rates, and they may have other perks such as no credit history checks, deferred payment options, flexible income-based repayment plans, no pre-payment penalties, and partial loan forgiveness if the borrower chooses public service as a career path. For example, student loans in the U.S. may be forgiven after a period of years if the graduate works in the public or nonprofit sector, and certain conditions are met.
Because government loans often have more attractive terms than private loans, demand for them can be high and selection criteria can be tough. The application process can also be time-consuming.
1:33 What are Government Loans?
Subsidized and Unsubsidized Loans
Subsidized loans are loans for which a third party, or someone other than the borrower, pays the interest on a loan for a set period of time. With a subsidized federal student loan, for example, the bank or the government (for Federal Direct Subsidized Loans), pays the interest while the borrower is in school, during a grace period following graduation, and if the borrower needs a loan deferment.
Unsubsidized loans, on the other hand, require the borrower to pay all interest costs, right from day one. In the case of federal student loans, borrowers do not need to demonstrate financial need for an unsubsidized loan, and in many cases may be able to borrow more.
Types of Government Loans in the U.S.
The U.S. government offers loans in the following areas. Other countries may have variants, but these categories generally apply broadly across the world.
Housing and Urban Development Loans
The largest part of the government loan pie is for financing home loans. This category has the largest number of loan programs, including loans for buying homes, making homes energy efficient, interest rate reduction, and paying for home repair and improvements. Common loan programs include:
First-Time Homebuyer Loans FHA Loans Refinancing Loans VA Loans FHA 203(k) Loans
These loans are considered to be the safest from the point of view of the lender (and sponsor), as they are secured by physical property as collateral in case of default.
Student Loans
Education loans are intended to fund undergraduate and graduate college education or specific research-related courses. Research in some areas of healthcare, such as AIDS, contraception, infertility, nursing, and pediatrics, have dedicated loan programs. Common education loan programs include:
Federal Direct Loans PLUS Loans Direct Consolidation Loans
The government can also fund the education of aspiring students for unique research or courses available only at foreign locations. Additional conditions, like working in public service upon graduation, may be attached to loans for foreign programs.
Education loans are considered to be the riskiest category for lenders and sponsors, as such loans are heavily dependent on individuals and may not be backed by physical collateral (such as property, in the case of home loans).
Business and Industrial Loans
No country or community can flourish with a stagnant marketplace. Innovation, entrepreneurship, employment, and healthy competition are important to the overall development of a nation's economy. The loan programs offered in the business and industrial loan category aim to encourage these aspects of development. Business loans are available for small, mid-sized, and large businesses and industries for various periods of time.
On March 27, 2020, President Trump signed into law a $2 trillion coronavirus emergency stimulus package called the CARES (Coronavirus Aid, Relief, and Economic Security) Act. As part of the new legislation, the Small Business Administration (SBA) established the Paycheck Protection Program, a $350 billion loan program. It's available to businesses with 500 or fewer employees to help cover healthcare costs, payroll, rent, utilities, and other costs. The SBA also expanded some of its existing programs, including the Economic Injury Disaster Loan Program. The funding was later augmented by the Paycheck Protection Program and Health Care Enhancement Act, signed on April 24, 2020.
Funding can be used to buy land, facilities, equipment, machinery, and repairs for any business-specific needs. Other unique variants in these government loan programs include offering management assistance to qualifying small start-ups with high growth potential, among others.
Agriculture, Rural, and Farm Service Loans
These loans provide funding to encourage farming, which can lead to food security and rural development. Several loan programs are available for agriculture and farm service. Capital allows the purchase of livestock, feed, farm machinery, equipment, and even farmland within the eligibility criteria.
Loans are also available for constructing on-farm storage, cold-storage, and processing and handling facilities for selected commodities. Other available loans cover fisheries, financing for aquaculture, mariculture, and commercial fishing industries. The dedicated Rural Housing Farm Labor Housing Loans and Grants program offers capital for the development and maintenance of housing for domestic farm laborers.
Loans for Veterans
The U.S. federal government provides benefits to eligible service members, including veterans, reservists, those in the National Guard, and some surviving spouses. The loans can be used to obtain, retain, and adapt a home, and to refinance loans. Financial benefits may include other expenses as offered by various programs.
Disaster Relief Loans
Disaster relief loans offer coverage for damages arising from natural and man-made disasters for farming, housing, and commercial businesses. Businesses may also be covered for the absence of key employees who serve in the military and have been called for service.
If a business, farm, house, or other property is hit by a disaster and the location is declared a disaster area, such disaster relief loans come to the rescue of owners and workers, who can obtain relief to re-establish themselves as well as their businesses and properties destroyed by the calamity.
As part of the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act, the SBA expanded funding for its Economic Injury Disaster Loan program for businesses affected by the COVID-19 pandemic.
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09549e65cb100917d797cef463b4fdcb | https://www.investopedia.com/articles/investing/100714/nordic-model-pros-and-cons.asp | The Nordic Model: Pros and Cons | The Nordic Model: Pros and Cons
Sweden, Norway, Finland, and Denmark (collectively the Nordic countries) have a combination of high living standards and low income disparity that has captured the world’s attention. At a time when the growing gap between the rich and poor has become a political hot button in developed nations, the region known as Scandinavia has been cited by many scholars as a role model for economic opportunity and equality.
Key Takeaways The Nordic Model involves the standards followed in Sweden, Norway, Finland, and Denmark.These nations are known for high living standards and low income disparity.The Nordic Model includes social benefits such as free education, free healthcare, and guaranteed pension payments.
The Nordic Model
The Nordic model is a term coined to capture the unique combination of free market capitalism and social benefits that have given rise to a society that enjoys a host of top-quality services, including free education and free healthcare, as well as generous, guaranteed pension payments for retirees.
These benefits are funded by taxpayers and administered by the government for the benefit of all citizens. The citizens have a high degree of trust in their government and a history of working together to reach compromises and address societal challenges through democratic processes. Their policymakers have chosen a mixed economic system that reduces the gap between the rich and the poor through redistributive taxation and a robust public sector while preserving the benefits of capitalism.
The model is underpinned by a capitalist economy that encourages creative destruction. While the laws make it is easy for companies to shed workers and implement transformative business models, employees are supported by generous social welfare programs.
The result is a system that treats all citizens equally and encourages workforce participation. Gender equality is a hallmark trait of the culture that not only results in a high degree of workplace participation by women but also a high level of parental engagement by men.
History Helps
What makes the Nordic model work? A combination of shared history and societal development is credited with much of its success. Unlike areas that developed around the formation of large corporate-owned farms, the history of Scandinavia is largely one of family-driven agriculture.
The result is a nation of small entrepreneurial enterprises directed by citizens facing the same set of challenges. Solutions that benefit one member of the society are likely to benefit all members. This collective mentality results in a citizenry that trusts its government because the government is led by citizens seeking to create programs that benefit everyone.
Accordingly, the citizens willingly chose to pay higher taxes in exchange for benefits that they and their family members will get to enjoy. The result is publicly funded services, such as healthcare and education that are of such high quality that private enterprise has no reason to offer these services or room to improve them. This mindset remained intact as capitalist enterprises developed.
Challenges of the Nordic Model include an aging population and an increase in immigrants.
Challenges
The Nordic model faces some notable pressures to its sustainability. Two of the largest concerns are an aging population and an influx of immigrants. In terms of an aging population, a large base of young taxpayers and a smaller population of older residents receiving services is the ideal scenario. As the population balance shifts the other way, benefit reductions are a likely outcome.
Fortunately for their citizens, the Nordic nations have willingly chosen a path of greater equality for all citizens and have demonstrated an ability to work through their political differences for the greater good of all.
In terms of immigration, Scandinavia attracts a notable influx of newcomers seeking to enjoy generous public benefits. These new arrivals often come from nations that do not have a long, shared history of making decisions on behalf of the common good. While native Scandinavians tend to have a high degree of participation in the workforce as part of their collective decision to support the amenities their society offers, immigrants do not always share this vision. These new arrivals present a significant burden to the system and could, ultimately, result in its demise.
Other Concerns
Two other concerns include native citizens taking advantage of the generous benefits system and the impact of poor global economic conditions. Again, the culture of cooperation and a shared interest in a strong social safety net has enabled these countries to adjust their benefit programs and continue to deliver a wide range of services even in the aftermath of the Great Recession.
A Model for Other Nations?
The Nordic model has attracted a significant amount of attention from other nations. Many people wonder if it provides a template for smaller countries where citizens are more homogeneous in terms of their opinions and experiences yet live in poverty or repression as a result of Marxist government policies.
Others believe that this provides a template for reforming the unchecked capitalism that has created notable income inequality and dramatic differences between the quality of life between the rich and the poor in prosperous nations. Sitting between the controlled economy of Marxist regimes and unchecked capitalism at the other end of the spectrum, the Nordic model is sometimes referred to as “the third way.”
Politics and Controversy
The Nordic model has created quite a bit of controversy outside of Scandinavia. Many people in countries operating under what is often referred to as “the American model” of capitalistic enterprise see the Nordic model as an attractive alternative to the winner-take-all brand of capitalism that has resulted in poverty, a lack of affordable quality health care and education, a deteriorating social safety net, a lack of retirement security, massive scandals in the financial markets, and tremendous income disparity.
These critics of the American model point out that public services, such as education and government-run programs in America, are of poor quality, and that the rich have access to far better resources than the poor and that implementation of the Nordic model could solve these issues.
Critics
Opponents of the Nordic model criticize the high taxes, high degree of government intervention, and relatively low gross domestic product and productivity, noting that these all limit economic growth. They point out that the Nordic Model redistributes assets, limits the amount of money available for personal spending and consumption and encourages reliance on government-subsidized programs.
The Bottom Line
The unwillingness of Marxists governments to make changes is likely to mean that philosophical discussions about the implementation of the Nordic model will remain just that: discussions. The inability of developed nations to move beyond vitriolic political rhetoric coupled with their lack of shared culture due to geographically and ethnically diverse populations that lack shared experiences will similarly serve as barriers to implementation of the Nordic model in those countries.
In any event, while outsiders argue vigorously in favor of social democracy or against so-called welfare states, the Scandinavians themselves make no effort at all to induce or coerce other nations into adopting the Nordic model. Rather, they seem content to work through their problems together in a collective manner that consistently results in placing them at the pinnacle of global surveys of the happiest people in the world.
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151f6c4da83d95dbe51b371c34e7feed | https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-and-exports.asp | How Importing and Exporting Impacts the Economy | How Importing and Exporting Impacts the Economy
In today’s global economy, consumers are used to seeing products from every corner of the world in their local grocery stores and retail shops. These overseas products—or imports—provide more choices to consumers. And because they are usually manufactured more cheaply than any domestically-produced equivalent, imports help consumers manage their strained household budgets.
Key Takeaways A country's importing and exporting activity can influence its GDP, its exchange rate, and its level of inflation and interest rates. A rising level of imports and a growing trade deficit can have a negative effect on a country's exchange rate. A weaker domestic currency stimulates exports and makes imports more expensive; conversely, a strong domestic currency hampers exports and makes imports cheaper. Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor.
When there are too many imports coming into a country in relation to its exports—which are products shipped from that country to a foreign destination—it can distort a nation’s balance of trade and devalue its currency. The devaluation of a country's currency can have a huge impact on the everyday life of a country's citizens because the value of a currency is one of the biggest determinants of a nation’s economic performance and its gross domestic product (GDP). Maintaining the appropriate balance of imports and exports is crucial for a country. The importing and exporting activity of a country can influence a country's GDP, its exchange rate, and its level of inflation and interest rates.
Effect on Gross Domestic Product
Gross domestic product (GDP) is a broad measurement of a nation's overall economic activity. Imports and exports are important components of the expenditures method of calculating GDP. The formula for GDP is as follows:
GDP = C + I + G + ( X − M ) where: C = Consumer spending on goods and services I = Investment spending on business capital goods G = Government spending on public goods and services X = Exports M = Imports \begin{aligned} &\text{GDP} = C + I + G + ( X - M ) \\ &\textbf{where:} \\ &C = \text{Consumer spending on goods and services} \\ &I = \text{Investment spending on business capital goods} \\ &G = \text{Government spending on public goods and services} \\ &X = \text{Exports} \\ &M = \text{Imports} \\ \end{aligned} GDP=C+I+G+(X−M)where:C=Consumer spending on goods and servicesI=Investment spending on business capital goodsG=Government spending on public goods and servicesX=ExportsM=Imports
In this equation, exports minus imports (X – M) equals net exports. When exports exceed imports, the net exports figure is positive. This indicates that a country has a trade surplus. When exports are less than imports, the net exports figure is negative. This indicates that the nation has a trade deficit.
A trade surplus contributes to economic growth in a country. When there are more exports, it means that there is a high level of output from a country's factories and industrial facilities, as well as a greater number of people that are being employed in order to keep these factories in operation. When a company is exporting a high level of goods, this also equates to a flow of funds into the country, which stimulates consumer spending and contributes to economic growth.
1:54 How Imports And Exports Affect You
When a country is importing goods, this represents an outflow of funds from that country. Local companies are the importers and they make payments to overseas entities, or the exporters. A high level of imports indicates robust domestic demand and a growing economy. If these imports are mainly productive assets, such as machinery and equipment, this is even more favorable for a country since productive assets will improve the economy's productivity over the long run.
A healthy economy is one where both exports and imports are experiencing growth. This typically indicates economic strength and a sustainable trade surplus or deficit. If exports are growing, but imports have declined significantly, it may indicate that foreign economies are in better shape than the domestic economy. Conversely, if exports fall sharply but imports surge, this may indicate that the domestic economy is faring better than overseas markets.
For example, the U.S. trade deficit tends to worsen when the economy is growing strongly. This is the level at which U.S. imports exceed U.S. exports. However, the U.S.’s chronic trade deficit has not impeded it from continuing to have one of the most productive economies in the world.
However, in general, a rising level of imports and a growing trade deficit can have a negative effect on one key economic variable, which is a country's exchange rate, the level at which their domestic currency is valued versus foreign currencies.
Impact on Exchange Rates
The relationship between a nation’s imports and exports and its exchange rate is complicated because there is a constant feedback loop between international trade and the way a country's currency is valued. The exchange rate has an effect on the trade surplus or deficit, which in turn affects the exchange rate, and so on. In general, however, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.
For example, consider an electronic component priced at $10 in the U.S. that will be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar. Neglecting shipping and other transaction costs such as importing duties for now, the $10 electronic component would cost the Indian importer 500 rupees.
If the dollar were to strengthen against the Indian rupee to a level of 55 rupees (to one U.S. dollar), and assuming that the U.S. exporter does not increase the price of the component, its price would increase to 550 rupees ($10 x 55) for the Indian importer. This may force the Indian importer to look for cheaper components from other locations. The 10% appreciation in the dollar versus the rupee has thus diminished the U.S. exporter’s competitiveness in the Indian market.
At the same time, assuming again an exchange rate of 50 rupees to one U.S. dollar, consider a garment exporter in India whose primary market is in the U.S. A shirt that the exporter sells for $10 in the U.S. market would result in them receiving 500 rupees when the export proceeds are received (neglecting shipping and other costs).
If the rupee weakens to 55 rupees to one U.S. dollar, the exporter can now sell the shirt for $9.09 to receive the same amount of rupees (500). The 10% depreciation in the rupee versus the dollar has therefore improved the Indian exporter’s competitiveness in the U.S. market.
The result of the 10% appreciation of the dollar versus the rupee has rendered U.S. exports of electronic components uncompetitive, but it has made imported Indian shirts cheaper for U.S. consumers. The flip side is that a 10% depreciation of the rupee has improved the competitiveness of Indian garment exports, but has made imports of electronic components more expensive for Indian buyers.
When this scenario is multiplied by millions of transactions, currency moves can have a drastic impact on a country's imports and exports.
Impact on Inflation and Interest Rates
Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates. Whether or not this results in a stronger currency or a weaker currency is not clear.
Traditional currency theory holds that a currency with a higher inflation rate (and consequently a higher interest rate) will depreciate against a currency with lower inflation and a lower interest rate. According to the theory of uncovered interest rate parity, the difference in interest rates between two countries equals the expected change in their exchange rate. So if the interest rate differential between two different countries is two percent, then the currency of the higher-interest-rate nation would be expected to depreciate two percent against the currency of the lower-interest-rate nation.
However, the low-interest-rate environment that has been the norm around most of the world since the 2008-09 global credit crisis has resulted in investors and speculators chasing the better yields offered by currencies with higher interest rates. This has had the effect of strengthening currencies that offer higher interest rates.
Of course, since these investors have to be confident that currency depreciation will not offset higher yields, this strategy is generally restricted to the stable currencies of nations with strong economic fundamentals.
A stronger domestic currency can have an adverse effect on exports and on the trade balance. Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor. These higher costs can have a substantial impact on the competitiveness of exports in the international trade environment.
Economic Reports
A nation’s merchandise trade balance report is the best source of information to track its imports and exports. This report is released monthly by most major nations.
The U.S. and Canada trade balance reports are generally released within the first ten days of the month, with a one-month lag, by the U.S. Department of Commerce and Statistics Canada, respectively.
These reports contain a wealth of information, including details on the biggest trading partners, the largest product categories for imports and exports, and trends over time.
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7b33b476df1179ada5d08b4e4013b6c7 | https://www.investopedia.com/articles/investing/100814/charging-bullthe-brass-icon-wall-street.asp | Charging Bull: The Bronze Icon of Wall Street | Charging Bull: The Bronze Icon of Wall Street
The Charging Bull, sometimes referred to as the Wall Street Bull, is a three-and-a-half-ton bronze sculpture from artist Arturo Di Modica that sits proudly in New York City's financial district. The bull symbolizes "the power of the American people" and represents the spirit of New York, where anyone can come, work hard and succeed. The sculpture was neither commissioned or approved. Di Modica sculpted this now-famous piece between 1987 and 1989, then enlisted friends to covertly place his gift in front of the New York Stock Exchange in the early morning hours of December 15, 1989.
The choice of a charging bull is no accident. The bull is a symbol of a strong stock market in which participants are optimistic and confident. The theory is that euphoric investor psychology causes investors to buy more and more, driving the market higher.
Although the sculpture's arrival on that December day was a surprise, one that was apparently well-liked by many who passed by it, the NYSE was not as enamored by its appearance and had it removed at the end of the day. However, then-New York City Parks Commissioner Henry Stern, Mayor Ed Koch, and leaders of the Bowling Green Association arranged for a permanent home for the sculpture near the north end of triangle-shaped Bowling Green, close to the intersection of Broadway and Morris Street.
A Charging Bull, a Girl and a Pug
This icon is not only an amazing sight to behold. Many onlookers—from tourists to brokers to traders—believe that the 16-foot-long sculpture brings luck, prosperity and a good financial day, but on one condition: you have to rub the bull in the rear on his testicles, famously known as the "Bulls Balls."
In 2017, the bull was again involved in a controversy when State Street Global Advisors installed a bronze statue of its own to commemorate International Women's Day, a life-size young girl staring down the bull. Created by artist Kristen Visbal, Fearless Girl is meant to promote women. An inscription that had accompanied the statue read, "Know the power of women in leadership. SHE makes a difference," which many saw as an advertisement for State Street's Gender Diversity Index ETF, which goes by the ticker (SHE).
Not to be outdone, a few months later, New York artist Alex Gardega added his own element to the bronze composition—a small bronze pug urinating on the leg of the Fearless Girl. Known as the Pissing Pug, the sculpture was widely panned on social media and the artist removed it just a few hours after he placed it. Fearless Girl was meant to be a temporary installation, but in 2018 New York City Mayor Bill de Blasio gave the statue a new home in front of the NYSE.
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8d927b15bb808d643a3ca84b8840f8e5 | https://www.investopedia.com/articles/investing/100814/wall-streets-enduring-impact-economy.asp | Why Wall Street Is a Key Player in the World's Economy | Why Wall Street Is a Key Player in the World's Economy
The most important financial center in the world? A fabled place of silver spoons and golden parachutes? A hub of cut-throat capitalism? Or all of the above. Wall Street is many things to many people, and the perception of what it really is depends on who you ask. Although people’s views of Wall Street may differ widely, what is beyond dispute is its enduring impact not just on the American economy, but on the global one.
What Is Wall Street Anyway?
Wall Street physically takes up only a few blocks that amount to less than a mile in the borough of Manhattan in New York City; however, its clout extends worldwide. The term “Wall Street” was initially used to refer to the select group of large independent brokerage firms that dominated the U.S. investment industry. But with the lines between investment banks and commercial banks having been blurred since 2008, Wall Street in current financial parlance is the collective term for the numerous parties involved in the U.S. investment and financial industry. This includes the biggest investment banks, commercial banks, hedge funds, mutual funds, asset management firms, insurance companies, broker-dealers, currency and commodity traders, financial institutions, and so on.
Although many of these entities may have their headquarters in other cities such as Chicago, Boston, and San Francisco, the media still refers to the U.S. investment and financial industry as Wall Street or simply “The Street.” Interestingly, the popularity of the term “Wall Street” as a proxy for the U.S. investment industry has led to similar “Streets” in certain cities where the investment industry is clustered being used to refer to that nation’s financial sector, such as Bay Street in Canada and Dalal Street in India.
Why Wall Street Has Such an Impact
The U.S. is the world’s biggest economy, with 2019 gross domestic product (GDP) of $21.4 trillion, comprising 24.8% of global economic output. It is one and a half times the size of the second-biggest economy, China (2019 GDP = $14.14 trillion). In terms of market capitalization, the U.S. is the world’s biggest by some distance, comprising 40% of global market capitalization (as of August 2018). Japan’s market is a distant second, with just over 7.5% of the global market cap.
Wall Street has such a significant impact on the global economy because it is the trading hub of the biggest financial markets in the world’s richest nation. Wall Street is home to the venerable New York Stock Exchange, which is the undisputed leader worldwide in terms of average daily share trading volume and total market capitalization of its listed companies. The Nasdaq Stock Exchange, the second-largest exchange globally, also has its headquarters on Wall Street.
How Does Wall Street Have Such an Impact?
Wall Street affects the U.S. economy in a number of ways, the most important of which are as follows:
Wealth Effect: Buoyant stock markets induce a “wealth effect” in consumers, although some prominent economists assert that this is more pronounced during a real estate boom than it is during an equity bull market. But it does seem logical that consumers may be more inclined to splurge on big-ticket items when stock markets are hot and their portfolios have racked up sizable gains. Consumer Confidence: Bull markets generally exist when economic conditions are conducive to growth and consumers and businesses are confident about the outlook for the future. When their confidence is riding high, consumers tend to spend more, which boosts the U.S. economy since consumer spending accounts for an estimated 70% of it. Business Investment: During bull markets, companies can use their pricey stock to raise capital, which can then be deployed to acquire assets or competitors. Increased business investment leads to higher economic output and generates more employment.
Global Bellwether
The stock market and the economy have a symbiotic relationship, and during good times, one drives the other in a positive feedback loop. But during uncertain times, the interdependence of the stock market and the broad economy can have a severely negative effect. A substantial downturn in the stock market is regarded as a harbinger of a recession, but this is by no means an infallible indicator.
For example, the Wall Street crash of 1929 led to the Great Depression of the 1930s, but the crash of 1987 did not trigger a recession. This inconsistency led Nobel laureate, Paul Samuelson, to famously remark that the stock market had predicted nine of the last five recessions.
Wall Street drives the U.S. equity market, which in turn is a bellwether for the global economy. The 2000-02 and 2008-09 global recessions both had their genesis in the U.S., with the bursting of the technology bubble and housing collapse, respectively. But Wall Street can also be the catalyst for global expansion, as is evident from two examples in the current millennium. The 2003-07 global economic expansion commenced with a huge rally on Wall Street in March 2003. Six years later, amid the biggest recession since the 1930s depression, the climb back from the economic abyss started with a massive Wall Street rally in March 2009.
Why Wall Street Reacts to Economic Indicators
Prices of stocks and other financial assets are based on current information, which is used to make certain assumptions about the future that in turn form the basis for estimating an asset’s fair value. When an economic indicator is released, it would usually have little impact on Wall Street if it comes in as per expectations (or what’s called the “consensus forecast” or “analysts’ average estimate”). But if it comes in much better than expected, it could have a positive impact on Wall Street; conversely, if it is worse than expected, it would have a negative impact on Wall Street. This positive or negative impact can be measured by changes in equity indices like the Dow Jones Industrial Average or S&P 500, for instance.
For example, let’s say that the U.S. economy is coasting along and payroll numbers that are to be released on the first Friday of next month are expected to show that the economy created 250,000 jobs. But when the payroll report is released, it shows that the economy only created 100,000 jobs. Although one data point does not make a trend, the weak payroll numbers may lead some economists and market-watchers on Wall Street to rethink their assumptions about U.S. economic growth going forward. Some Street firms may lower their forecasts for U.S. growth, and strategists at these firms may also reduce their targets for the S&P 500. Large institutional investors who are clients of these Street firms may choose to exit some long positions upon receiving their lowered forecasts. This cascade of selling on Wall Street may result in equity indices closing significantly lower on the day.
Why Wall Street Reacts to Company Results
Most medium to large-sized companies are covered by several research analysts who are employed by Wall Street firms. These analysts have in-depth knowledge of the companies they cover and are sought after by institutional “buy-side” investors (pension funds, mutual funds, etc.) for their analysis and insights. Part of analysts’ research efforts are devoted to developing financial models of the companies they cover and using these models to generate quarterly (and annual) revenue and earnings per share forecasts for each company. The average of analysts’ quarterly revenue and earnings per share (EPS) forecasts for a specific company is called the “Street estimate” or “Street expectations.”
Thus, when a company reports its quarterly results, if its reported revenue and EPS numbers match the Street estimate, the company is said to have met Street estimates or expectations. But if the company exceeds or misses Street expectations, the reaction in its stock price can be substantial. A company that exceeds Street expectations will generally see its stock price rise, and one that disappoints may see its stock price plunge.
Wall Street Criticisms
Some criticisms of Wall Street include:
It is a rigged market: Although Wall Street operates fairly and on a level playing field most of the time, the convictions of Galleon Group co-founder, Raj Rajaratnam, and several SAC Capital Advisors on insider trading charges, reinforce the perception held in some areas that the market is rigged. It encourages skewed risk-taking: The Wall Street model of business encourages skewed risk-taking since traders can make windfall profits if their leveraged bets are right, but do not have to bear the huge losses that would result if they are wrong. Excessive risk-taking is believed to have contributed to the meltdown in mortgage-backed securities in 2008-09. Wall Street derivatives are WMDs: Warren Buffett warned in 2002 that the derivatives developed by Wall Street were financial weapons of mass destruction, and this proved to be the case during the U.S. housing collapse when mortgage-backed securities went into free-fall. Wall Street can bring the economy to its knees: As discussed earlier, and as seen in the Great Recession of 2008-09. Too Big To Fail rescues need taxpayer funds: Giant Wall Street banks and firms that are deemed “Too Big to Fail” would need taxpayer funds if they are in need of a rescue. Disconnect from Main Street: Many see Wall Street as a place where unnecessary middlemen abound, who are very well paid despite not generating value for the real economy like Main Street does. Wall Street arouses envy in some and anger in many: Million-dollar payouts that are quite common on Wall Street arouse envy in some and anger in many, especially in the aftermath of the 2008-09 recession. For example, “Occupy Wall Street” claimed in its manifesto that it “is fighting back against the corrosive power of major banks and multinational corporations over the democratic process, and the role of Wall Street in creating an economic collapse that has caused the greatest recession in generations.”
The Bottom Line
Wall Street consists of the largest stock exchanges, the largest financial firms, and employs thousands of people. As the trading hub of the world’s biggest economy, Wall Street has an enduring impact not just on the American economy, but also on the global one.
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07b2d92b8c354330d62d757248a2fe43 | https://www.investopedia.com/articles/investing/100815/4-mutual-funds-warren-buffet-would-buy.asp | 4 Mutual Funds Warren Buffet Would Buy | 4 Mutual Funds Warren Buffet Would Buy
Warren Buffett, also known as the Oracle of Omaha, is an iconic American investor who has amassed over $60 billion through his investments. Buffet is known for his value investing approach and his holding company, Berkshire Hathaway, has consistently made him one of the world's wealthiest people. As of 2020, he had a reported net worth of $68.9 billion. When it comes to value investing, here are examples of mutual funds that Warren Buffett would buy.
Vanguard 500 Index Fund Investor Shares (VFINX)
The Vanguard 500 Index Fund Investor Shares is one of the most cost-effective mutual funds that offers exposure to U.S. large-capitalization stocks. Issued on Aug. 31, 1976, it seeks to track the performance of the Standard & Poor's 500 Index, its benchmark index. The fund seeks to achieve its investment goal by investing all, or a substantial portion, of its total net assets in stocks comprising its benchmark index. The fund implements a passive indexing strategy, which minimizes its turnover ratio and expense ratio. As of March 22, 2020, it has a turnover rate of 3.9% and charges an expense ratio of 0.14%.
The Vanguard 500 Index Fund Investor Shares also currently has total net assets of $500.9 billion. Its top holdings include blue-chip stocks, such as Apple, Inc., Microsoft Corp., Exxon Mobil Corp., Johnson & Johnson, and Buffett's holding company, Berkshire Hathaway, Inc.
Since it offers a low expense ratio and is tied to the S&P 500 Index, the Oracle of Omaha would probably recommend investing in the Vanguard 500 Index Fund Investor Shares.
Key Takeaways Warren Buffett's investment philosophy focuses on value investing, which means picking stocks and bonds that are "good value" for its perceived worth. Mutual funds Warren Buffett would buy typically have low expense ratios and robust growth over the long-term.
Vanguard Value Index Fund Investor Shares (VIVAX)
Launched on Nov. 2, 1992, with the sponsorship of Vanguard, the Vanguard Value Index Fund Investor Shares seeks to provide investment results corresponding to the performance of the CRSP U.S. Large-Cap Value Index, its benchmark index. As of March 22, 2020, the fund has generated an average annual return of 9.10% since its inception.
The Vanguard Value Index Fund Investor Shares' benchmark index is broadly diversified and includes primarily U.S. large-cap value stocks. To achieve its investment goal, the fund employs an index strategy and seeks to invest all of its net assets in stocks comprising its benchmark index. The fund is managed by the Vanguard Equity Investment Group and charges an expense ratio of 0.17%.
The Vanguard Value Index Fund Investor Shares holds 329 stocks in its portfolio, which has total net assets of $80.6 billion. As of February 29, 2020, it offers an attractive 30-day SEC yield of 2.88%. The fund replicates its benchmark index's sector weights and allocates its portfolio as follows: 21.43% to financial services, 20.19% to healthcare, 12.04% to consumer defensive, 10.62% to industrials, and 7.01% to utilities.
In terms of modern portfolio theory, this fund has a nearly perfect degree of correlation to the S&P 500 Index and outperformed the index by 1.19%. Since it is passively managed and has a high correlation to the S&P 500 Index, Buffett would consider an investment in the Vanguard Value Index Fund Investor Shares.
Fidelity Spartan 500 Index Investor Shares (FXAIX)
The Fidelity Spartan 500 Index Investor Shares is another mutual fund that provides low-cost exposure to the S&P 500 Index, its benchmark index. Issued on Feb. 17, 1988, by Fidelity, this fund seeks to achieve its investment objective by investing at least 80% of its total net assets in common stocks comprising the S&P 500 Index. The fund's investment advisor, Geode Capital Management, employs a passive strategy, which helps to minimize its costs. Consequently, the fund has a turnover ratio of 4% and charges a low net expense ratio of 0.015%. The Fidelity Spartan 500 Index Investor Shares holds 505 stocks in its portfolio, which has total net assets of approximately $219.3 billion.
In terms of modern portfolio theory, the fund is perfectly correlated to and experiences the same degree of volatility as the S&P 500 Index. Although the Oracle of Omaha recommends Vanguard funds, the Fidelity Spartan 500 Index Investor Shares' low expense ratio and indexing approach would probably be a suitable investment for Buffett.
Vanguard Short-Term Treasury Fund Investor Shares (VFISX)
In addition to recommending low-cost funds tied to the S&P 500 Index, Buffett recommends investing a small portion of cash in short-term government bonds. Issued in October 1991 by Vanguard, the Vanguard Short-Term Treasury Fund Investor Shares provides low-cost exposure to the U.S. short-term government bond market. The fund is managed by the Vanguard Fixed Income Group and charges a low net expense ratio of 0.2%.
The Vanguard Short-Term Treasury Fund Investor Shares aims to provide its investors with income with a limited degree of volatility. To achieve its investment goal, the fund invests 97.6% of its total net assets in U.S. short-term Treasury securities. The fund holds 124 bonds in its portfolio, which has total net assets of $8.2 billion. On average, this mutual fund's portfolio of bonds has an average effective duration of 2.2 years, which indicates it carries a low degree of interest rate risk. Since the Vanguard Short-Term Treasury Fund Investor Shares is considered a low-risk investment and has a low average effective duration, it offers a moderate 30-day SEC yield of 0.83%, as of March 22, 2020.
As of March 22, 2020, the Vanguard Short-Term Treasury Fund Investor Shares has generated an average annual return of 3.90% since its inception. Based on trailing 10-year data, this fund experiences a low degree of volatility and provides satisfactory returns on a risk-adjusted basis. In terms of modern portfolio theory, the Vanguard Short-Term Treasury Fund Investor Shares is best suited for conservative fixed-income investors with a short-term investment horizon seeking to gain exposure to the U.S. Treasury market. Since Buffett recommends his estate trustee invest 10% of his wife's portfolio to short-term government bonds, the Oracle of Omaha would probably be comfortable with an investment in the Vanguard Short-Term Treasury Fund Investor Shares.
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953fc80028004c90ebca8e67515b2a52 | https://www.investopedia.com/articles/investing/100913/basics-short-selling.asp | Short Selling Basics | Short Selling Basics
Short selling (also known as “shorting,” “selling short” or “going short”) refers to the sale of a security or financial instrument that the seller has borrowed to make the short sale. The short seller believes that the borrowed security's price will decline, enabling it to be bought back at a lower price for a profit. The difference between the price at which the security was sold short and the price at which it was purchased represents the short seller’s profit (or loss, as the case may be).
Key Takeaways Short selling entails taking a bearish position in the market, hoping to profit from a security whose price loses value.To sell short, the security must first be borrowed on margin and then sold in the market, to be bought back at a later date.While some critics have argues that selling short is unethical because it is a bet against growth, most economists now recognize it as an important piece of a liquid and efficient market.
Is Short Selling Ethical?
Short selling is perhaps one of the most misunderstood topics in the realm of investing. In fact, short sellers are often reviled as callous individuals who are only out for financial gain at any cost, without regard for the companies and livelihoods destroyed in the short-selling process. Worse, short sellers have been labeled by some critics as being unethical because they are betting against the economy.
The reality, however, is quite different. Far from being cynics who try to impede people from achieving financial success—or in the U.S., attaining the “American Dream”—short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
Excessive optimism often drives stocks up to lofty levels, especially at market peaks (case in point—dotcoms and technology stocks in the late 1990s, and on a lesser scale, commodity and energy stocks from 2003 to 2007). Short selling acts as a reality check that prevents stocks from being bid up to ridiculous heights during such times.
While “shorting” is fundamentally a risky activity since it goes against the long-term upward trend of the markets, it is especially perilous when markets are surging. Short sellers confronted with escalating losses in a relentless bull market are painfully reminded of John Maynard Keynes’ famous adage: "The market can stay irrational longer than you can stay solvent."
Although short selling attracts its share of unscrupulous operators who may resort to unethical tactics—which have colorful names such as “short and distort” or "bear raid"—to drive down the price of a stock, this is not very different from stock touts who use rumors and hype in "pump-and-dump" schemes to drive up a stock. Short selling has arguably gained more respectability in recent years with the involvement of hedge funds, quant funds and other institutional investors on the short side. The eruption of two savage global bear markets within the first decade of this millennium has also increased the willingness of investors to learn about short selling as a tool for hedging portfolio risk.
Short selling can provide some defense against financial fraud by exposing companies that have fraudulently attempted to inflate their performances. Short sellers generally do their homework very well, thoroughly researching before adopting a short position. Such research often brings to light information not readily available elsewhere, and certainly not commonly available from brokerage houses that prefer to issue buy rather than sell recommendations.
Overall, short selling is simply another way for stock investors to seek profits honestly.
The Mechanics of Selling Short
Let’s use a basic example to demonstrate the short-selling process.
For starters, you would need a margin account at a brokerage firm to short a stock. You would then have to fund this account with a certain amount of margin. The standard margin requirement is 150%, which means that you have to come up with 50% of the proceeds that would accrue to you from shorting a stock. So if you want to short sell 100 shares of a stock trading at $10, you have to put in $500 as margin in your account.
Let’s say you have opened a margin account and are now looking for a suitable short-selling candidate. You decide that Conundrum Co. (a fictional company) is poised for a substantial decline, and decide to short 100 shares at $50 per share.
Here is how the short sale process works:
You place the short sale order through your online brokerage account or financial advisor. Note that you have to declare the short sale as such, since an undeclared short sale amounts to a violation of securities laws.Your broker will attempt to borrow the shares from a number of sources, including the brokerage's inventory, from the margin accounts of one of its clients or from another broker-dealer. Regulation SHO from the Securities and Exchange Commission (SEC) requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed (so that it can be delivered to the buyer on the date that delivery is due) before effecting a short sale in any security; this is known as the “locate” requirement.Once the shares have been borrowed or “located” by the broker-dealer, they will be sold in the market and the proceeds deposited in your margin account.
Your margin account now has $7,500 in it; $5,000 from the short sale of 100 shares of Conundrum at $50, plus $2,500 (50% of $5,000) as your margin deposit.
Let’s say that after a month, Conundrum is trading at $40. You therefore buy back the 100 Conundrum shares that were sold short at $40, for an outlay of $4,000. Your gross profit (ignoring costs and commissions for simplicity) is therefore $1,000 ($5,000 - $4,000).
On the other hand, suppose Conundrum does not decline as you had expected but instead surges to $70. Your loss in this case is $2,000 ($5,000 - $7,000).
A short sale can be regarded as the mirror image of "going long," or buying a stock. In the above example, the other side of your short sale transaction would have been taken by a buyer of Conundrum Co. Your short position of 100 shares in the company is offset by the buyer’s long position of 100 shares. The stock buyer, of course, has a risk-reward payoff that is the polar opposite of the short seller’s payoff. In the first scenario, while the short seller has a profit of $1,000 from a decline in the stock, the stock buyer has a loss of the same amount. In the second scenario where the stock advances, the short seller has a loss of $2,000, which is equal to the gain recorded by the buyer.
Who Are Typical Short Sellers?
Hedge Funds
Hedge funds are one of the most active entities involved in shorting activity. Most hedge funds try to hedge market risk by selling short stocks or sectors that they consider overvalued.
Hedgers
Not to be confused with hedge funds, hedging involves taking an offsetting position in a security similar to another in order to limit the risk exposure in the initial position. Therefore, if somebody is long the market using options or futures contracts, they will naturally sell short the underlying security as a delta hedge.
Individuals
Sophisticated investors are also involved in short selling, either to hedge market risk or simply for speculation. Speculators indeed account for a significant share of short activity.
Day traders are another key segment of the short side. Short selling is ideal for very short-term traders who have the wherewithal to keep a close eye on their trading positions, as well as the trading experience to make quick trading decisions.
Regulations on Short Selling
Short selling was synonymous with the "uptick rule" for almost 70 years in the United States. Implemented by the SEC in 1938, the rule required every short sale transaction to be entered into at a price that was higher than the previous traded price, or on an uptick. The rule was designed to prevent short sellers from exacerbating the downward momentum in a stock when it is already declining.
The uptick rule was repealed by the SEC in July 2007; a number of market experts believe this repeal contributed to the ferocious bear market and market volatility of 2008-09. In 2010, the SEC adopted an "alternative uptick rule" that restricts short selling when a stock has dropped at least 10% in one day.
In 2004 and 2005, the SEC implemented Regulation SHO, which updated short-sale regulations that had been essentially unchanged since 1938. Regulation SHO specifically sought to curb "naked" short selling (in which the seller does not borrow or arrange to borrow the shorted security), which had been rampant in the 2000-02 bear market, by imposing "locate" and "close-out" requirements for short sales.
Risks and Rewards
Short selling involves a number of risks, including the following:
Skewed risk-reward payoff
Unlike a long position in a security, where the loss is limited to the amount invested in the security and the potential profit is boundless (in theory at least), a short sale carries the theoretical risk of infinite loss, while the maximum gain—which would occur if the stock drops to zero—is limited.
Shorting is expensive
Short selling involves a number of costs over and above trading commissions. A significant cost is associated with borrowing shares to short, in addition to interest that is normally payable on a margin account. The short seller is also on the hook for dividend payments made by the stock that has been shorted.
Going against the grain
As noted earlier, short selling goes against the entrenched upward trend of the markets. Most investors and other market participants are long-only, creating natural momentum in one direction.
Timing is everything
The timing of the short sale is critical, since initiating a short sale at the wrong time can be a recipe for disaster. Because short sales are conducted on margin, if the price goes up instead of down, you can quickly see losses as brokers require the sales to be repurchased at ever higher prices, creating a so-called short squeeze.
Regulatory and other risks
Regulators occasionally impose bans on short sales because of market conditions; this may trigger a spike in the markets, forcing the short seller to cover positions at a big loss. Stocks that are heavily shorted also have a risk of "buy in," which refers to the closing out of a short position by a broker-dealer if the stock is very hard to borrow and its lenders are demanding it back.
Strict trading discipline require
The plethora of risks associated with short selling means that it is only suitable for traders and investors who have the trading discipline required to cut their losses when required. Holding on to an unprofitable short position in the hope that it will come back is not a viable strategy. Short selling requires constant position monitoring and adherence to tight stop losses.
The Bottom Line
Given these risks, why bother to short? Because stocks and markets often decline much faster than they rise and some over-valued securities can be profit opportunities.
For example, the S&P 500 doubled over a five-year period from 2002 to 2007, but then plunged 55% in less than 18 months, from October 2007 to March 2009. Astute investors who were short the market during this plunge made windfall profits from their short positions.
Short selling is, nonetheless, a relatively advanced strategy best suited for sophisticated investors or traders who are familiar with the risks of shorting and the regulations involved. The average investor may be better served by using put options to hedge downside risk or to speculate on a decline because of the limited risk involved. But for those who know how to use it effectively, short selling can be a potent weapon in one’s investing arsenal.
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fe84bfa25594e1f08adba232fe3893d3 | https://www.investopedia.com/articles/investing/100915/effect-fed-fund-rate-hikes-gold.asp | The Effect of Fed Funds Rate Hikes on Gold | The Effect of Fed Funds Rate Hikes on Gold
While popular opinion is that interest rate hikes are bearish for gold, the effect that an interest rate increase has on the precious metal, if any, is unknown since there is little solid correlation between interest rates and gold prices. Rising interest rates may even have a bullish effect on gold.
Many investors and market analysts believe that, since rising interest rates make bonds and other fixed-income investments more attractive, money will flow into higher-yielding investments (such as bonds and money market funds) and out of gold when rates move higher. Therefore, when the Federal Reserve raises its benchmark federal funds rate, weakness in gold should follow.
Key Takeaways Some market watchers believe that higher interest rates send gold lower because of increased competition from higher-yielding investments.However, a long-term look through historical data reveals that no relationship exists between rates and gold.Throughout much of the 1970s, gold prices rose sharply, just as interest rates moved higher.The 1980s saw declining interest rates and a bear market in gold.Other factors beyond rates—such as the supply and demand dynamics seen in most commodities markets—are likely to have a greater impact on the long-term performance of gold.
An Historical Look
Even though the widespread popular belief is that there exists a strong negative correlation between interest rates and the price of gold, a long-term review of the respective paths and trends of interest rates and gold prices reveals that no such relationship exists. The correlation between interest rates and the price of gold over the past half-century, since 1970, has only been about 28%, and is not considered significant.
A study of the massive bull market in gold that occurred during the 1970s reveals that gold's run-up to its all-time high price of the 20th century happened right when interest rates were high and rapidly rising. Short-term interest rates, as reflected by one-year Treasury bills (T-bills), bottomed out at 3.5% in 1971. By 1980, that same interest rate had more than quadrupled, rising as high as 16%. In that same period, the price of gold mushroomed from under $50 an ounce to a previously unimaginable price of nearly $850 an ounce. Gold prices had a strong positive correlation with interest rates, rising in concert with them.
A more detailed examination only supports at least a temporary positive correlation during that time period. Gold made the initial part of its steep move up in 1973 and 1974, a time when the fed funds rate was rising quickly. Gold prices fell off a bit in 1975 and 1976, right along with falling interest rates, only to begin soaring higher again in 1978 when interest rates began another sharp climb upward.
The protracted bear market in gold that followed, beginning in the 1980s, occurred during a period when interest rates were steadily declining.
During the bull market in gold in the 2000s, interest rates declined significantly overall as gold prices rose. However, there is still little evidence of a direct, sustained correlation between rising rates and falling gold prices or declining rates and rising gold prices, because gold prices peaked well in advance of the most severe decline in interest rates.
When interest rates have been kept pressed to nearly zero, the price of gold has corrected downward. By the conventional market theory on gold and interest rates, gold prices should have continued to soar since the 2008 financial crisis. Also, even when the federal funds rate climbed from 1% to 5% between 2004 and 2006, gold continued to advance, increasing in value an impressive 49%.
What Drives Gold Prices
The price of gold is ultimately not a function of interest rates. Like most basic commodities, it is a function of supply and demand in the long run. While surges in supply can cause the price of gold to plummet, demand is ultimately the stronger component between the two. The level of gold supply only changes slowly, since it takes 10 years or more for a discovered gold deposit to be converted into a producing mine. Rising and higher interest rates may be bullish for gold prices, simply because they are typically bearish for stocks.
It is the stock market rather than the gold market that typically suffers the largest outflow of investment capital when rising interest rates make fixed-income investments more attractive. Rising interest rates nearly always lead investors to rebalance their investment portfolios more in favor of bonds and less in favor of stocks.
Higher bond yields also tend to make investors less willing to buy into stocks that may have high multiples or valuations. Higher interest rates mean increased financing expenses for companies, an expense that usually has a direct negative impact on net profit margins. That fact only makes it more likely that rising rates will result in lower stock prices.
The U.S. dollar is viewed by some investors as an important driver for gold prices because the metal is dollar-denominated. When the greenback falls, consumers can buy more gold with the same amount of dollars, which results in increased buying interest (demand) and higher gold prices.
When stock indexes reach new highs, they are susceptible to downside corrections. Whenever the stock market declines significantly, one of the first alternative investments that investors consider transferring money into is gold. For example, gold prices increased by more than 60% during 1973 and 1974, at a time when interest rates were rising, and the S&P 500 Index dropped by more than 20%.
The Bottom Line
Given the historical tendencies of the actual reactions of stock market prices and gold prices to interest rate increases, the likelihood is greater that stock prices will be negatively impacted by rising interest rates and that gold may benefit as an alternative investment to equities.
So while rising interest rates may increase the U.S. dollar, pushing gold prices lower (because gold is denominated in U.S. dollars), factors such as equity prices and volatility coupled with general supply and demand are the real drivers of the price of gold.
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47654c894afcee2a5ecae7c83c0a2b78 | https://www.investopedia.com/articles/investing/100915/learn-how-trade-gold-4-steps.asp | How to Trade Gold in Just 4 Steps | How to Trade Gold in Just 4 Steps
Whether it's behaving like a bull or a bear, the gold market offers high liquidity and excellent opportunities to profit in nearly all environments due to its unique position within the world’s economic and political systems. While many folks choose to own the metal outright, speculating through the futures, equity and options markets offer incredible leverage with measured risk.
Market participants often fail to take full advantage of gold price fluctuations because they haven’t learned the unique characteristics of world gold markets or the hidden pitfalls that can rob profits. In addition, not all investment vehicles are created equally: Some gold instruments are more likely to produce consistent bottom-line results than others.
Trading the yellow metal isn’t hard to learn, but the activity requires skill sets unique to this commodity. Novices should tread lightly, but seasoned investors will benefit by incorporating these four strategic steps into their daily trading routines. Meanwhile, experimenting until the intricacies of these complex markets become second-hand.
Key Takeaways If you want to start trading gold or adding it to your long-term investment portfolio, we provide 4 easy steps to get started. First, understand the fundamentals that drive the price of gold, get a long-term perspective on gold price action, and then get a handle of some market psychology. Once all that is done, choose the best way to acquire gold, either directly in physical form or indirectly through futures or a gold ETF or mutual fund.
1. What Moves Gold
As one of the oldest currencies on the planet, gold has embedded itself deeply into the psyche of the financial world. Nearly everyone has an opinion about the yellow metal, but gold itself reacts only to a limited number of price catalysts. Each of these forces splits down the middle in a polarity that impacts sentiment, volume and trend intensity:
Inflation and deflation Greed and fear Supply and demand
Market players face elevated risk when they trade gold in reaction to one of these polarities, when in fact it's another one controlling price action. For example, say a selloff hits world financial markets, and gold takes off in a strong rally. Many traders assume that fear is moving the yellow metal and jump in, believing the emotional crowd will blindly carry price higher. However, inflation may have actually triggered the stock's decline, attracting a more technical crowd that will sell against the gold rally aggressively.
Combinations of these forces are always in play in world markets, establishing long-term themes that track equally long uptrends and downtrends. For example, the Federal Reserve (FOMC) economic stimulus begun in 2008, initially had little effect on gold because market players were focused on high fear levels coming out of the 2008 economic collapse. However, this quantitative easing encouraged deflation, setting up the gold market and other commodity groups for a major reversal.
That turnaround didn’t happen immediately because a reflation bid was underway, with depressed financial and commodity-based assets spiraling back toward historical means. Gold finally topped out and turned lower in 2011 after reflation was completed and central banks intensified their quantitative easing policies. VIX eased to lower levels at the same time, signaling that fear was no longer a significant market mover.
2. Understand the Crowd
Gold attracts numerous crowds with diverse and often opposing interests. Gold bugs stand at the top of the heap, collecting physical bullion and allocating an outsized portion of family assets to gold equities, options, and futures. These are long-term players, rarely dissuaded by downtrends, who eventually shake out less ideological players. In addition, retail participants comprise nearly the entire population of gold bugs, with few funds devoted entirely to the long side of the precious metal.
Gold bugs add enormous liquidity while keeping a floor under futures and gold stocks because they provide a continuous supply of buying interest at lower prices. They also serve the contrary purpose of providing efficient entry for short sellers, especially in emotional markets when one of the three primary forces polarizes in favor of strong buying pressure.
In addition, gold attracts enormous hedging activity by institutional investors who buy and sell in combination with currencies and bonds in bilateral strategies known as “risk-on” and risk-off.” Funds create baskets of instruments matching growth (risk-on) and safety (risk-off), trading these combinations through lightning-fast algorithms. They are especially popular in highly conflicted markets in which public participation is lower than normal.
3. Read the Long-Term Chart
Image by Sabrina Jiang © Investopedia 2020
Take time to learn the gold chart inside and out, starting with a long-term history that goes back at least 100 years. In addition to carving out trends that persisted for decades, the metal has also trickled lower for incredibly long periods, denying profits to gold bugs. From a strategic standpoint, this analysis identifies price levels that need to be watched if and when the yellow metal returns to test them.
Gold’s recent history shows little movement until the 1970s, when following the removal of the gold standard for the dollar, it took off in a long uptrend, underpinned by rising inflation due to skyrocketing crude oil prices. After topping out at $2,076 an ounce in February 1980, it turned lower near $700 in the mid-1980s, in reaction to restrictive Federal Reserve monetary policy.
The subsequent downtrend lasted into the late 1990s when gold entered the historic uptrend that culminated in the February 2012 top of $1,916 an ounce. A steady decline since that time has relinquished around 700 points in four years; although in the first quarter of 2016 it surged 17% for its biggest quarterly gain in three decades, as of March 2020, it's trading at $1,618 per ounce.
4. Choose Your Venue
Liquidity follows gold trends, increasing when it’s moving sharply higher or lower and decreasing during relatively quiet periods. This oscillation impacts the futures markets to a greater degree than it does equity markets, due to much lower average participation rates. New products offered by Chicago’s CME Group in recent years haven’t improved this equation substantially.
CME offers three primary gold futures, the 100-oz. a contract, a 50-oz. mini contract and a 10-oz. a micro contract, added in October 2010. While the largest contract's volume was over 67.6 million in 2017, the smaller contracts were not as widely traded; 87,450 for the mini and .05 million for the micro. This thin participation doesn’t impact long-dated futures held for months, but strongly impacts trade execution in short-term positions, forcing higher costs through slippage.
The SPDR Gold Trust Shares (GLD) shows the greatest participation in all types of market environments, with exceptionally tight spreads that can drop to one penny. Average daily volume stood at 14.54 million shares per day in March 2020 2020, offering easy access at any time of day. CBOE options on GLD offer another liquid alternative, with active participation keeping spreads at low levels.
The VanEck Vectors Gold Miners ETF (GDX) grinds through greater daily percentage movement than GLD but carries a higher risk because correlation with the yellow metal can vary greatly from day to day. Large mining companies hedge aggressively against price fluctuations, lowering the impact of spot and futures prices, while operations may hold significant assets in other natural resources, including silver and iron.
Bottom Line
Trade the gold market profitably in four steps. First, learn how three polarities impact the majority of gold buying and selling decisions. Second, familiarize yourself with the diverse crowds that focus on gold trading, hedging, and ownership. Third, take time to analyze the long and short-term gold charts, with an eye on key price levels that may come into play. Finally, choose your venue for risk-taking, focused on high liquidity and easy trade execution.
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331cee7ef5c7351622e72f8b442d9fb8 | https://www.investopedia.com/articles/investing/101215/7-iconic-brands-no-longer-exist.asp | 6 Iconic Brands That No Longer Exist | 6 Iconic Brands That No Longer Exist
Branding is a good quality for any business to have, but a recognizable brand does not always equal success. Many household brand names no longer exist, falling prey to bankruptcy or acquisition.
When a brand ceases to exist, mismanagement coupled with industry pressure may be the culprit. Take for instance Blockbuster Video, which succumbed to excessive debt and Tower Records, which was hit by the creation of online music stores, like iTunes.
Pan Am
Pan Am was founded in 1927 and used to be the largest international air carrier in the United States. The company was known as an industry innovator and was the first airline to offer computerized reservation systems and jumbo jets.
In 1998, the business was negatively affected by the Lockerbie bombing. Pan Am Flight 103 exploded just 38 minutes after take off over Lockerbie, Scotland, killing 747 people in the air and 11 more on the ground. Prior to that, there were problems. After the Persian Gulf War in 1991, Pan Am was never able to recover as a serviceable airline company. Soon after the war began, the airline imposed a ban on Iraqi passengers around the world due to the threat of terrorism.
It has been over 20 years since the company has flown a plane, but its logo continues to be printed on purses and T-shirts. It was even the subject of a TV show on ABC, named Pan Am, starring Christina Ricci.
Tower Records
Tower Records pioneered the concept of the big-box music retail store. What started out as an off-shoot of a family drugstore in Sacramento, Calif., in 1960, Tower Records, at its peak, had about 200 stores in 15 countries. The company has one of the most iconic brands in the music industry, but it fell prey to bankruptcy as a result of excessive debt, music piracy, and the inception of iTunes.
The company filed for bankruptcy in 2004, but its brand legacy lives on as the inspiration for the movie "Empire Records." The movie was written by a former Tower Records employee.
Circuit City
Circuit City was founded in 1949 and was once the number two electronics retailer behind Best Buy. However, while the world was increasing its expenditures on electronics, the company was facing financial troubles. Circuit City went bankrupt in 2008.
Borders
Borders was a big-box bookstore with locations throughout the U.S. and overseas. Unlike its competitors, the company was unable to find traction in the changing digital environment, and it filed for bankruptcy in 2011.
Borders, which was created in Ann Arbor, Mich., in 1971, closed all of its retail locations and sold off its customer loyalty list, comprising millions of names, to competitor Barnes & Noble for $13.9 million. Borders' locations have been purchased and repurposed by other large retailers.
Blockbuster Video
Blockbuster Video was founded in 1985 and was at one time the most recognizable brand in the video rental space. The company saddled itself with over $1 billion in debt and was unable to make the transition to digital. Blockbuster filed for bankruptcy in 2010 and has been replaced by Netflix and other digital services.
Pets.com
Pets.com was one of the largest online pet supply companies and was also one of the most famous dot-com companies to fold during the 2000 tech crisis. The company went from initial public offering (IPO) to liquidation in less than 300 days.
The company was best known for its sock puppet mascot. Today, the Pets.com URL redirects users to PetSmart's website.
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628d89813bec5c7f31387098603262fd | https://www.investopedia.com/articles/investing/101215/how-fed-fund-rate-hikes-affect-us-dollar.asp | How Moves in the Fed Funds Rate Affect the US Dollar | How Moves in the Fed Funds Rate Affect the US Dollar
Changes in the federal funds rate can impact the U.S. dollar. When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.
Global investors sell their investments denominated in their local currencies in exchange for U.S. dollar-denominated investments. The result is a stronger exchange rate in favor of the U.S. dollar.
Key Takeaways When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy, which tends to make the dollar stronger.The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.Increases or decreases in the fed funds rate have correlated fairly well with moves in the U.S. dollar exchange rate versus other currencies.
Understanding the Fed Funds Rate
The federal funds rate is the rate banks charge each other for lending their excess reserves or cash. Some banks have excess cash, while other banks might have short-term liquidity needs. The fed funds rate is a target rate set by the Federal Reserve Bank and is usually the basis for the rate that commercial banks lend to each other.
However, the fed funds rate has a far more sweeping impact on the economy as a whole. The fed funds rate is a key tenet of interest rate markets and is used to set the prime rate, which is the rate banks charge their clients for loans. Also, mortgage and loan rates, as well as deposit rates for savings, are impacted by any changes in the fed funds rate.
The Fed, through the FOMC or Federal Open Market Committee, adjusts rates depending on the economy's needs. If the FOMC believes the economy is growing too quickly, and it's likely that inflation or rising prices might occur, the FOMC will increase the fed funds rate.
Conversely, if the FOMC believes that the economy is struggling or might dip into a recession, the FOMC would lower the fed funds rate. Higher rates tend to slow lending and the economy, while lower rates tend to spur lending and economic growth.
The Fed's mandate is to use monetary policy to help achieve maximum employment and stable prices. During the financial crisis of 2008 and the Great Recession, the Fed held the federal funds rate at or near 0% to 0.25%. In the following years, the Fed increased rates as the economy improved.
Inflation, the Fed Funds, and the Dollar
One of the ways the Fed achieves full employment and stable prices is by setting its inflation target rate at 2%. In 2011, the Fed officially adopted a 2% annual increase in the price index for personal consumption expenditures as its target.
In other words, as the inflation component of the index rises, it signals that the prices of goods are rising in the economy. If prices are rising, but wages aren't growing, people's purchasing power is declining. Inflation also impacts investors. For example, if an investor is holding a fixed-rate bond paying 3% and inflation rises to 2%, the investor is only earning 1% in real terms.
When the economy is weak, inflation falls since there's less demand for goods to push up prices. Conversely, when the economy is strong, rising wages increase spending, which can spur higher prices. Keeping inflation at a growth rate of 2% helps the economy grow at a steady pace and allow wages to naturally rise.
Adjustments to the federal funds rate can also affect inflation in the United States. When the Fed increases interest rates, it encourages people to save more and spend less, reducing inflationary pressures. Conversely, when the economy is in a recession or growing too slowly, and the Fed reduces interest rates, it stimulates spending spurring inflation.
How the Dollar Helps the Fed with Inflation
Of course, many other factors impact inflation besides the Fed and have resulted in the inflation rate to remain below the Fed's 2% target for years. The U.S. dollar exchange rate plays a role in inflation.
For example, as U.S. exports are sold to Europe, buyers need to convert euros to dollars to make the purchases. If the dollar is strengthening, the higher exchange rate causes Europeans to pay more for U.S. goods, based solely on the exchange rate. As a result, U.S. export sales may decline if the dollar is too strong.
Also, a strong dollar makes foreign imports cheaper. If U.S. companies are buying goods from Europe in euros and the euro is weak, or the dollar is strong, those imports are cheaper. The result is cheaper products at U.S. stores, and those lower prices translate to low inflation.
Cheap imports help keep inflation low since U.S. companies that produce goods domestically have to keep their prices low to compete with cheap foreign imports. A stronger dollar aids in making foreign imports cheaper and acts as a natural hedge for reducing inflation risk in the economy.
As you can imagine, the Fed monitors inflation closely along with the level of strength of the dollar before making any decisions regarding the fed funds rate.
Example of the Fed Funds and the U.S. Dollar
Below we can see the fed funds rate since the mid-1990s; the gray areas denote recessions:
In the mid-1990s, the fed funds rate rose from 3% to eventually over 6%.The fed funds rate was lowered in 2001 to 1% from over 6% a year earlier.In the mid-2000s, the fed funds rate was hiked with an improving economy.In 2008, the fed funds rate was lowered again from over 5% to nearly zero and stayed at zero for several years.
The Effective Fed Funds Rate from the Federal Reserve Bank of St. Louis. Investopedia
The Federal Funds Rates above were retrieved from FRED or the Federal Reserve Bank of St. Louis.
As the fed funds rate increases, overall rates in the economy rise. If global capital flows are moving into dollar-denominated assets, chasing higher rates of return, the dollar strengthens.
In the chart below, we can see the moves in the U.S. dollar over the same period as the rate hikes in the earlier graph.
In the mid-1990s, when the fed hiked rates, the dollar rose as measured by the dollar index, which measures the exchange rates of a basket of currencies.In 2002 when the Fed cut rates, the dollar weakened dramatically.The dollar correlation to the fed funds broke down somewhat in the mid-2000s. As the economy grew and rates rose, the dollar didn't follow suit.The dollar began to rebound only to fall again in 2008 and 2009.As the economy emerged from the Great Recession, the dollar fluctuated for years.Against the backdrop of a stronger economy and eventual Fed hikes, the dollar began to rise again from 2014 to 2018.
The U.S. dollar index example. Investopedia
The Bottom Line
In general, and under normal economic conditions, increases in the federal funds rate lead to higher rates for interest-rate products throughout the U.S. The result is usually an appreciation of the U.S. dollar.
Of course, the correlation between the fed funds rate and the dollar can break down. Also, there are other ways that the dollar can weaken or strengthen. For example, demand for U.S. bonds as a safe-haven investment in times of turmoil can strengthen the dollar independently of where interest rates are set.
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1234e7d046d1f74795198eab590c291d | https://www.investopedia.com/articles/investing/101215/top-5-corporate-bond-mutual-funds.asp | 5 Top Corporate Bond Mutual Funds | 5 Top Corporate Bond Mutual Funds
Corporate bond mutual funds invest in bonds issued by private sector companies. Corporate bonds are fixed-income securities that make interest payments throughout the term of a bond, then pay principals upon their maturities. These bonds can be investment grade or non-investment grade, creating a range of returns due to the differences in default risk.
Key Takeaways Corporate bond mutual funds expose investors to corporate bonds issued by private companies, without the transaction fees involved in directly investing in the underlying bonds.Corporate bond funds have differing default risk profiles, based on whether the majority of bonds they invest in are investment grade or non-investment grade.Top corporate bond mutual funds include Delaware Extended Duration Bond Fund Class C (DEECX), Fidelity Corporate Bond Fund (FCBFX), Calvert Long-Term Income Fund Class A (CLDAX), and Lord Abbett Income A (LAGVX).
Corporate bond mutual funds let investors conveniently access fixed income securities without investing the time and paying the transaction costs of buying individual bonds.
As of late 2018, investment-grade corporate bonds offered an average yield of 4.25%, according to Moody's Seasoned AAA Corporate Bond Yield figures. This represents a substantial increase from the 3.51% average yield in 2017.
The five corporate bond mutual funds below are worth exploring.
The Delaware Extended Duration Bond Fund Class C (DEECX)
Created on September 15, 1998, Delaware Extended Duration Bond Fund Class C (DEECX) is managed by Delaware Investments, a division of the Macquarie Group. DEECX invests at least 80% of its net assets in investment-grade, long-duration corporate bonds. Government and municipal bonds respectively claim 3.4% and 3.28% of the fund’s allocation.
The fund’s bond holdings are rated BBB- and above by Standard & Poor's, or Baa3 and above by Moody's credit agency. DEECX holds 182 securities that include corporate bonds issued by JPMorgan Chase, Pepsico, and Duke Energy.
Because of the fund’s longer-than-average duration of 13.4 years, it is sensitive to changes in market interest rates.
As of April 30, 2020, DEECX held a two-star rating by Morningstar, with a 1.57% expense ratio, and a 2019 21.76% YTD return.
This fund is favored by those seeking exposure to highly-rated corporate bonds, who are comfortable tolerating interest rate risk and volatility.
The Fidelity Corporate Bond Fund (FCBFX)
The Fidelity Corporate Bond Fund invests more than 80% of its assets in investment-grade foreign and domestic corporate bonds with interest rate risks similar to the Barclays U.S. Credit Bond Index. The remaining assets are spread out between government bonds and cash. FCBFX's top holdings include issuances by Morgan Stanley, Verizon, and Bank of America.
Unlike DEECX, this fund holds corporate bonds with shorter maturities, averaging 6.9-year durations. For this reason, the fund's returns are less sensitive to changes in interest rates and are less volatile, which comes at the expense of slightly-lower returns.
On May 31, 2020, FCBFX had a four-star rating from Morningstar, a 0.45% expense ratio, and a 2019 14.46% YTD return.
This fund is most suitable for investors who want exposure to investment-grade corporate bonds with shorter durations and less interest rate risk sensitivity.
The Calvert Long-Term Income Fund Class A (CLDAX)
Calvert Long-Term Income Fund Class A seeks to maximize returns by investing in U.S. dollar-denominated corporate, government, and municipal bonds with investment-grade credit quality.
Compared to other funds, CLDAX has a somewhat higher concentration of corporate bonds, with an approximate 81% allocation. The rest of its assets are spread among U.S. government bonds (8.3%), securitized obligations 4%), and some cash and municipal bonds holdings. Nearly 16% of the fund's assets invest in a single U.S. government bond, that’s due to mature in 2045.
On April 30, 2020, CLDAX had a two-star rating from Morningstar, a 0.92% expense ratio, and a 2019 20.76% YTD return.
The fund is most appropriate for investors who seek to hold U.S. government bonds to mitigate their default risk.
The Federated Bond Fund Class F Shares (ISHIX)
Federated Bond Fund Class F Shares invests in investment grade and non-investment grade corporate bonds. Corporate bonds account for 75% of the fund’s assets, while government obligations account for less than 5% of the fund's holdings.
ISHIX allocates 24% of its portfolio to high-yield bonds and 75% to investment-grade bonds. Due to the fund’s exposure to speculative-grade bonds, its returns are subject to greater default risk, yet under favorable market conditions, the fund can outperform its peers.
On May 5, 2020, ISHIX had a three-star rating from Morningstar, a 0.86% expense ratio, and a 13.85% YTD return.
ISHIX suits investors seeking exposure to investment-grade and speculative bonds that are likely to generate high returns under favorable bond market conditions.
When unsure about the default risk, investors should remember that generally speaking, the longer a bond’s maturity is, the greater its degree of price volatility will be.
The Lord Abbett Income A (LAGVX)
The Lord Abbett Income A mutual fund invests in both investment-grade and high-yield corporate bonds, but with a greater emphasis on bonds on a lower range of the investment-grade spectrum.
The fund allocates approximately 68% of its holdings to corporate bonds and about 15% to securitized fixed income instruments.
On May 31, 2020, LAGVX had a three-star rating from Morningstar, a 0.77% expense ratio, and a 2019 12.92% YTD return.
LAGVX is most appropriate for investors looking to diversify their portfolios with high-yield bonds that focus on investment-grade issues, with BBB credit quality ratings.
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9552f8ea6c0806abe4942db7ac96230f | https://www.investopedia.com/articles/investing/101315/10-best-tech-jobs.asp | The 10 Best Tech Jobs | The 10 Best Tech Jobs
It’s hard to go wrong with a technology degree. According to the National Association of Colleges and Employers, computer science is the STEM major with the highest job offer and job acceptance rate. Perhaps that’s why a recent CareerBuilder survey revealed that from in the 2010s, the number of students completing science technology degrees grew by nearly 50%, and the number of computer and information science students rose by almost one-third, making these two degrees among the fastest growth rates in the U.S.
A degree in a computer-related field can lead to a variety of well-paying and high-demand jobs. The best tech jobs pay significantly more than the average median wage of $34,750 and have projected growth rates that are faster than the 11% overall rate anticipated for the average U.S. job.
By sorting through data from several sources, including the U.S. Bureau of Labor Statistics (BLS) and jobs website GlassDoor, we compiled the following list of the ten best tech jobs.
Key Takeaways Technology remains a hot sector for the job market heading into the 2020s. STEM majors are at an advantage when applying for jobs in software development, engineering, IT, or research. Here, we look at some of the best tech jobs through 2020, according to U.S. government statistics.
1. Data Scientist
Job outlook through 2020: not available Number of new jobs through 2020: not available Median annual wage: $118,709
While specific job outlook and new job numbers are not available from the BLS, the Harvard Business Review (HBR) calls data scientists “the sexiest job of the 21st century." There is a high demand for individuals who can evaluate data to help companies make business decisions; however, there is a relatively low supply of qualified candidates.
According to a Burtch Works report, salaries for level three data scientist managers are as high as $250,000. Burtch Works also notes that most data scientists have either a Master’s degree or a Ph.D. in mathematics/statistics, computer science, or engineering.
2. Software Developer
Job outlook through 2020: 22% Number of new jobs through 2020: 222,600 Median annual wage: $102,880
By far, the largest number of job openings on the list is for software developers. This growth is fueled by the demand for mobile apps and other products that are driven by technology. While some software developers design applications, systems software developers design operating systems and interfaces. A bachelor’s degree in computer science, software engineering, or mathematics is usually a requirement.
3. Information Security Analyst
Job outlook through 2020: 37% Number of new jobs through 2020: 27,400 Median annual wage: $88,890
More than one billion records were breached in 2014, according to Gemalto, an international security company. These breaches illustrate the urgent need for information security analysts. A bachelor’s degree in computer science or programming is the typical requirement, although some employers prefer an MBA in information systems.
4. Computer Systems Analyst
Job outlook through 2020: 25% Number of new jobs through 2020: 127,700 Median annual wage: $82,710
Computer systems analysts are needed to design and install new computer systems, and IT consulting firms hire most of them. Growth has occurred primarily in the following areas: cloud computing, mobile technology, and healthcare records. Candidates usually need a bachelor’s degree in a computer-related field, although the Bureau of Labor Statistics (BLS) reports that sometimes a liberal arts degree is sufficient.
5. Web Developer
Job outlook through 2020: 20% Number of new jobs through 2020: 28,500 Median annual wage: $63,490
This is one of the few jobs on the list that you can get without a bachelor’s degree. There are three types of web developers; web designers, who create the layout and feel of the website, need an associate degree in web design.
Webmasters, who maintain the website, may have a webmaster certificate, an associate degree in web development, or a bachelor’s degree, depending on the employer. Web architects, who handle the technical construction of the site, usually need a bachelor’s degree in programming or computer science.
6. Sales Engineer
Job outlook through 2020: 35% Number of new jobs through 2020: 5,900 total (specific numbers for technology not available) Median annual wage: $96,340
The demand for sales engineers in other industries is only projected to increase by 9%; however, the growth rate is four times as fast for professionals selling computer software and hardware. Most sales engineers have a degree in business, science, or a technology field. They must also be well-versed in technology to present proposals, explain products, and answer questions.
7. Information Technology Manager
Job outlook through 2020: 15% Number of new jobs through 2020: 50,900 Median annual wage: $127,640
Information technology managers go by a variety of other names; for example, computer and information systems managers, chief information officers (CIOs), chief technology officers (CTOs), IT directors, or IT security managers. While duties may vary, they usually oversee an IT team and handle the organization's technology needs. A bachelor’s degree in a computer or information science-related major is required, though some employers prefer an MBA.
8. Computer Research Scientist
Job outlook through 2020: 15% Number of new jobs through 2020: 4,100 Median annual wage: $108,360
This position has the least number of new jobs, but that’s because it is a difficult field to enter. Computer and Information Research Scientists typically require a Ph.D., and so the candidate pool is small, which keeps the demand for this role high. Among other duties, computer and information research scientists write algorithms to help businesses analyze data.
9. Network and Systems Administrator
Job outlook through 2020: 12% Number of new jobs through 2020: 42,900 Median annual wage: $75,790
This job has the lowest growth rate on the list, but don’t let that fool you. Companies need network and computer systems administrators to handle their day-to-day technology operations, which include installing and maintaining local and wide area networks, intranets, etc.
The largest area of growth for network administrators will be in computer systems design, which is projected to increase by 35%. Typically, candidates for this role hold a degree in information science, computer science, computer engineering, or electrical engineering.
10. Computer Support Specialists
Job outlook through 2020: 17% Number of new jobs through 2020: 123,000 Median annual wage: $47,610
It’s the lowest paying job on the list, but it also requires the least amount of time in school; most employers will hire candidates with a postsecondary certificate or an associate degree. There are two types of computer support specialists: computer network support specialists and computer user support specialists.
Computer network support specialists usually work with IT staff to troubleshoot problems. Computer user support specialists, also known as help desk techs, assist customers and non-technical employees.
The Bottom Line
Technology is one of the fastest-growing and most in-demand industries. Use this list as a guide to evaluating the job outlook, salary, and education requirements for your dream tech job.
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a12c4d30d262fcf388416795da89761e | https://www.investopedia.com/articles/investing/101515/3-biggest-hedge-fund-scandals.asp | The 10 Biggest Hedge Fund Failures | The 10 Biggest Hedge Fund Failures
There have been a number of scandals involving hedge funds over the years. A few of these scandals include the Bernie Madoff investment scandal and the Galleon Group and SAC Capital insider trading scandals. Despite these hedge fund scandals rocking the investment community, the number of assets under management in hedge funds continues to grow.
Hedge funds use pooled funds from large institutional investors or high-net-worth individuals (HNWIs) to employ various strategies that seek to create alpha for their investors. Many hedge funds have lower correlations to stock indexes and other common investments. This makes hedge funds a good way to diversify a portfolio. Most hedge funds are well run and do not engage in unethical or illegal behavior. However, with intense competition and large amounts of capital at stake, there are less than scrupulous hedge funds out there.
Key Takeaways Hedge funds have been attractive to ultra-high-net-worth individuals and organizations seeking to boost returns with esoteric and complex trading strategies. While most hedge funds are both well-capitalized and opaque, most of them operate ethically and without too many systemic issues. Some, on the other hand, have defrauded investors of billions of dollars and even nearly brought down the global financial system.
1. Madoff Investment Scandal
The Bernie Madoff scandal is truly the worst-case scenario for a hedge fund. Madoff was essentially running a Ponzi scheme with Bernard L. Madoff Investment Securities, LLC. Madoff was a well-respected investment professional throughout his career, although some observers questioned his legitimacy. He even served as Chairman of the National Association of Securities Dealers (NASD), a self-regulatory organization for the securities industry, and helped to launch the NASDAQ exchange.
Madoff admitted to his sons who worked at the firm that the asset management business was fraudulent and a big lie in 2008. It is estimated the fraud was around $65 billion. Madoff pleaded guilty to multiple federal crimes of fraud, money laundering, perjury, and theft. He was sentenced to 150 years in prison and a restitution amount of $170 billion. While many investors lost their money, some have been able to recover a portion of their assets.
Madoff operated his fund by promising high consistent returns he was not able to achieve. He used money from new investors to pay off the promised returns to prior investors. A number of investment professionals questioned Madoff and his alleged performance. Harry Markopolos, an options trader and portfolio manager, did substantial research and determined Madoff’s results were fraudulent. He reached out to the SEC numerous times over the years, providing evidence of the fraud. However, the SEC brushed off the allegations after minimal investigation. In February 2020, Madoff petitioned for an early release from prison on the basis that he only had 18 months to live. As of January 2021, Madoff is serving his prison term.
2. SAC Capital
SAC Capital, run by Steven Cohen, was one of the leading hedge funds on Wall Street with $50 billion in assets under management (AUM) at its peak. The SEC had been investigating the hedge fund for a number of years before conducting raids at offices of investment companies run by former SAC traders in 2010. A number of traders at the fund were charged with insider trading from 2011 to 2014. Former portfolio manager Mathew Martoma was convicted of conspiracy and securities fraud in 2014. In total, eight former employees of SAC Capital have been convicted.
The SEC never brought charges against Cohen personally, although it did file a civil suit against SAC Capital in 2013. SAC Capital ultimately agreed to pay a $1.2 billion fine and to stop managing outside money to settle the suit. As of January 2021, Cohen runs Point72 Asset Management, which manages his personal wealth of around $10 billion.
3. The Galleon Group
Galleon was a very large hedge fund management group with over $7 billion in AUM before closing down in 2009. The fund was founded and run by Raj Rajaratnam. Rajaratnam was arrested along with five others for fraud and insider trading in 2009. He was found guilty on 14 charges and sentenced to 11 years in prison in 2011. Over 50 people have been convicted or pleaded guilty in connection with the insider trading scheme.
Rajaratnam was tipped off to an investment Warren Buffet was making in Goldman Sachs by Rajat Gupta, a former director at the investment firm. Rajaratnam bought shares in Goldman before the close of the market that day. The deal was announced that evening. Rajaratnam then sold the shares the next morning making around $900,000 in profit. Rajaratnam had a similar pattern of trading with other stocks with a ring of insiders who supplied him with material information from which he was able to profit.
4. Long-Term Capital Management
Long-Term Capital Management (LTCM) was a large hedge fund led by Nobel Prize-winning economists and renowned Wall Street traders. The firm was wildly successful from 1994 to 1998, attracting more than $1 billion of investor capital with the promise of an arbitrage strategy that could take advantage of temporary changes in market behavior and, theoretically, reduce the risk level to zero.
But the fund nearly collapsed the global financial system in 1998. This was due to LTCM’s highly leveraged trading strategies that failed to pan out. Ultimately, LTCM had to be bailed out by a consortium of Wall Street banks in order to prevent systemic contagion. If LTCM had gone into default, it would have triggered a global financial crisis due to the massive write-offs its creditors would have had to make. In September 1998, the fund, which continued to sustain losses, was bailed out with the help of the Federal Reserve. Then its creditors took over, and a systematic meltdown of the market was prevented.
5. Pequot Capital
Founded in 1998 by Art Samberg, Pequot Capital wowed investors with annualized returns of more than 16% a year, growing to more than $15 billion under management by the early 2000s. However, it turns out that this impressive track record was the result of insider trading. The SEC brought charges against the fund in 2010 and fined Pequot and Samberg $28 million.
6. Amaranth Advisors
Not all hedge funds blow up due to fraud or insider trading. Sometimes hedge funds simply have a period of spectacular bad performance. Amaranth Advisors was launched in the year 2000 by Nicholas Maounis and grew to over $9 billion by 2006 after boasting annualized returns over those five years of a whopping 86% utilizing a proprietary convertible bond arbitrage strategy. But streaks of good luck like this often turn and revert to the mean. Later that year, the fund folded after some derivative bets failed to pay off and instead led to losses of more than $6.5 billion.
7. Tiger Funds
In 2000, Julian Robertson's Tiger Management failed despite raising $6 billion in assets. A value investor, Robertson placed big bets on stocks through a strategy that involved buying what he believed to be the most promising stocks in the markets and short selling what he viewed as the worst stocks.
This strategy hit a brick wall during the bull market in technology. While Robertson shorted overpriced tech stocks that offered nothing but inflated price-to-earnings ratios and no sign of profits on the horizon, the greater fool theory prevailed and tech stocks continued to soar. Tiger Management suffered massive losses and a man once viewed as hedge fund royalty was unceremoniously dethroned.
8. Aman Capital
Aman Capital was set up in 2003 by top derivatives traders at UBS, one of the largest banks in Europe. It was intended to become Singapore's "flagship" in the hedge fund business, but leveraged trades in credit derivatives resulted in an estimated loss of hundreds of millions of dollars. The fund had only $242 million in assets remaining by March 2005. Investors continued to redeem assets, and the fund closed its doors in June 2005, issuing a statement published by London's Financial Times that "the fund is no longer trading." It also stated that whatever capital was left would be distributed to investors.
9. Marin Capital
This high-flying California-based hedge fund attracted $1.7 billion in capital and put it to work using credit arbitrage and convertible arbitrage to make a large bet on General Motors. Credit arbitrage managers invest in debt. When a company is concerned that one of its customers may not be able to repay a loan, the company can protect itself against loss by transferring the credit risk to another party. In many cases, the other party is a hedge fund.
With convertible arbitrage, the fund manager purchases convertible bonds, which can be redeemed for shares of common stock, and shorts the underlying stock in the hope of making a profit on the price difference between the securities. Since the two securities normally trade at similar prices, convertible arbitrage is generally considered a relatively low-risk strategy. The exception occurs when the share price goes down substantially, which is exactly what happened at Marin Capital. When General Motors' bonds were downgraded to junk status, the fund was crushed. On June 14, 2005, the fund's management sent a letter to shareholders informing them that the fund would close due to a "lack of suitable investment opportunities."
10. Bailey Coates Cromwell Fund
Bailey Coates Cromwell is an event-driven, multi-strategy fund based in London. In 2005, the fund was laid low by a series of bad bets on the movements of U.S. stocks, supposedly involving the shares of Morgan Stanley, Cablevision Systems, Gateway Computers, and LaBranche. Poor decision-making involving leveraged trades chopped 20% off of a $1.3-billion portfolio in a matter of months. Investors bolted for the doors and in June 2005, the fund dissolved.
The Bottom Line
Despite these well-publicized failures, global hedge fund assets continue to grow as total international assets under management amount to approximately $3 trillion. These funds continue to lure investors with the prospect of steady returns, even in bear markets. Some of them deliver as promised. Others at least provide diversification by offering an investment that doesn't move in lockstep with the traditional financial markets. And, of course, there are some hedge funds that fail.
Hedge funds may have a unique allure and offer a variety of strategies, but wise investors treat hedge funds the same way they treat any other investment—they look before they leap. Careful investors don't put all of their money into a single investment, and they pay attention to risk. If you are considering a hedge fund for your portfolio, conduct some research before you write a check, and don't invest in something you don't understand. Most of all, be wary of the hype: When an investment promises to deliver something that sounds too good to be true, let common sense prevail and avoid it. If the opportunity looks good and sounds reasonable, don't let greed get the best of you. And finally, never put more into a speculative investment than you can comfortably afford to lose.
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af52f94623a638f3a4826b790291a109 | https://www.investopedia.com/articles/investing/101515/top-5-natural-resources-mutual-funds.asp | Top 5 Natural Resources Mutual Funds (FSCHX) | Top 5 Natural Resources Mutual Funds (FSCHX)
The natural resources sector includes securities of companies engaged in extractive practices of commodities, including mining for coal, metallic ore, sand, gravel and oil shale. It may include logging of naturally occurring trees and drilling for oil and gas. As the world becomes more developed, the need for the extraction and processing of natural resources increases, resulting in investment opportunities from a myriad of sources.
Due to the continuous demand from developing countries and new global infrastructure, plus repairs that require the use of raw materials, natural resource investing has long been included as a staple in strategic asset allocation. Investors benefit from natural resources being a store of value, especially during times of rising inflation or currency depreciation. Natural resource investments have a low correlation with other broad sectors, making them a hedge against market downturns in certain instances.
Although natural resources have their place in investor portfolios, the industry carries a degree of risk. Adverse economic, political and regulatory developments take a toll on natural resource securities over time, and volatility in these securities is a daily occurrence. A geological risk is also a factor that can directly impact the value of securities in the sector. Due to these potential pitfalls, investors are best suited to utilize natural resources when other equity and bond securities are included in their portfolio as part of a well-balanced asset allocation. Investing in mutual funds focused on providing exposure to the natural resources sector is a smart way for investors to gain access to the industry while diversifying holdings.
Fidelity Select Chemicals Portfolio
The Fidelity Select Chemicals Portfolio is a mutual fund offered to investors by Fidelity Investments and managed by Rick Malnight. Since its inception in 1985, FSCHX has sought capital appreciation by investing the majority of investor assets in the common stock of companies principally engaged in the research, development, manufacture or marketing of products and services directly related to the chemical process industry. Fund managers can disperse the fund's $1.4 billion assets among domestic and foreign issuers, all of which are analyzed for industry position and overall financial condition.
FSCHX has generated a 10-year annualized return of 13.65%, the highest in the natural resources category for mutual funds. It has an expense ratio of 0.77%. Investors are not hit with an upfront or deferred sales load and without a minimum investment amount required. Top holdings within FSCHX include DowDuPont at 25.1%, LyondellBasell Industries NV at 9.3% and The Chemours Co. at 7%.
AllianzGI Global Water Fund
The AllianzGI Global Water Fund is supported by the Allianz Funds group and was established in 2008. The fund manager, Andreas Fruschki, and the investment team seek long-term capital appreciation by investing a minimum of 80% of fund assets in common stock and other equity securities of companies represented in at least one of the following indices: the S&P Global Water Index, the NASDAQ OMX US Water Index or the S-Network Global Water Index. Companies engaged primarily in water-related activities not listed on the aforementioned indices may also be included at the fund manager's discretion. As of Oct. 2018, AWTAX manages $663 million in assets.
AWTAX has generated a five-year annualized return of 4.8%, with an expense ratio of 1.22%. Investors are charged an upfront sales load of 5.5%, but no deferred sales charge is imposed at the time shares are redeemed. A minimum investment of $1,000 is required for both nonqualified accounts and IRAs. Top holdings within AWTAX include American Water Works Company at 10.3%, Xylem at 9.1%, Danaher Corporation at 6.6% IDEX Corporation at 6.6% and Veolia Environnement SA at 6%.
ICON Natural Resources Fund
The ICON Natural Resources Fund is made available to investors and supported by the ICON funds group. It has an inception date of 1997. Fund manager Rob Young, along with the portfolio management team, seeks long-term capital appreciation by investing a minimum of 80% of fund assets in equity securities of companies related to natural resources. Both common stock and preferred stock may be included in the fund's investment mix, and there are no restrictions as it relates to market capitalization. As of Oct. 2018, this non-diversified fund manages $74.3 million in investor assets.
ICBMX has generated a 10-year annualized return of 3.53%, with an expense ratio of 1.51%. A minimum initial investment of $1,000 is necessary for both qualified and nonqualified accounts. Top holdings within ICBAX include Rosneft Oil Co GDR at 5.4%, Mondi PLC at 5.2% and PJSC Lukoil ADR at 5.2%.
Dreyfus Natural Resources Fund
The Dreyfus Natural Resources Fund is made available to investors by the Dreyfus Investment group and was established in 2003. Robin Wehbe, the fund's portfolio manager since 2009, along with the investment management team, seeks long-term capital appreciation by investing the majority of fund assets in stocks of companies engaged in natural resource extraction. Both growth and value stocks are included in the investment mix, and there are no restrictions as to market capitalization. Fund managers must invest at least 80% of the fund's $444 million assets in natural resource or natural resource-related companies.
As of Oct. 2018, DNLAX has generated a 10-year annualized return of 3.31%, with an expense ratio of 1.36%. An initial investment cannot be smaller than $1,000 for nonqualified accounts as well as IRAs, and investors are charged an upfront sales load of 5.75% for each new investment. Top holdings within DNLAX include Total SA 6.6%, Nutrien Ltd at 5.9% and Vale S.A. at 5.8%.
T. Rowe Price New Era Fund
The T. Rowe Price New Era Fund is one of the oldest natural resources mutual funds, with an inception date of 1969. Fund manager Shawn Driscoll, along with the portfolio management team, seeks to provide investors with long-term capital growth by investing a minimum of 66% of the fund's $3.8 billion assets in common stock of natural resource companies. PRNEX may also invest in growth-tilted companies not affiliated with the natural resources industry at the fund manager's discretion.
As of Oct. 2018, PRNEX has generated a 10-year annualized return of 2.62% and has an expense ratio of 0.69%. Investors have the ability to purchase and redeem shares of PRNEX without a sales charge assessed, but a minimum initial investment of $2,500 is required for both IRAs and nonqualified accounts. Top holdings within PRNEX include Total SA at 4.8%, EOG Resources at 3.1% and Occidental Petroleum Corp at 2.95%.
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ac3376e5fc57676165a7d924d0f06ef6 | https://www.investopedia.com/articles/investing/101613/analyzing-investments-solvency-ratios.asp | Analyzing Investments With Solvency Ratios | Analyzing Investments With Solvency Ratios
Solvency ratios are primarily used to measure a company's ability to meet its long-term obligations. In general, a solvency ratio measures the size of a company's profitability and compares it to its obligations. By interpreting a solvency ratio, an analyst or investor can gain insight into how likely a company will be to continue meeting its debt obligations. A stronger or higher ratio indicates financial strength. In stark contrast, a lower ratio, or one on the weak side, could indicate financial struggles in the future.
A primary solvency ratio is usually calculated as follows and measures a firm's cash-based profitability as a percentage of its total long-term obligations:
After Tax Net Profit + Depreciation Long-Term Liabilities
2:06 Solvency Ratio
Commonly Used Solvency Ratios
Solvency ratios indicate a company's financial health in the context of its debt obligations. As you might imagine, there are a number of different ways to measure financial health.
Debt to equity is a fundamental indicator of the amount of leverage a firm is using. Debt generally refers to long-term debt, though cash not needed to run a firm’s operations could be netted out of total long-term debt to give a net debt figure. Equity refers to shareholders’ equity, or book value, which can be found on the balance sheet. Book value is a historical figure that would ideally be written up (or down) to its fair market value. But using what the company reports presents a quick and readily available figure to use for measurement.
Debt to assets is a closely related measure that also helps an analyst or investor measure leverage on the balance sheet. Since assets minus liabilities equals book value, using two or three of these items will provide a great level of insight into financial health.
More complicated solvency ratios include times interest earned, which is used to measure a company's ability to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest expense from long-term debt. It specifically measures how many times a company can cover its interest charges on a pretax basis. Interest coverage is another more general term used for this ratio.
Solvency Versus Liquidity Ratios
The solvency ratio measures a company's ability to meet its long-term obligations as the formula above indicates. Liquidity ratios measure short-term financial health. The current ratio and quick ratio measure a company's ability to cover short-term liabilities with liquid (maturities of a year or less) assets. These include cash and cash equivalents, marketable securities and accounts receivable. The short-term debt figures include payables or inventories that need to be paid for. Basically, solvency ratios look at long-term debt obligations while liquidity ratios look at working capital items on a firm’s balance sheet. In liquidity ratios, assets are part of the numerator and liabilities are in the denominator.
What Do These Ratios Tell an Investor?
Solvency ratios are different for different firms in different industries. For instance, food and beverage firms, as well as other consumer staples, can generally sustain higher debt loads given their profit levels are less susceptible to economic fluctuations. In stark contrast, cyclical firms must be more conservative because a recession can hamper their profitability and leave less cushion to cover debt repayments and related interest expenses during a downturn. Financial firms are subject to varying state and national regulations that stipulate solvency ratios. Falling below certain thresholds could bring the wrath of regulators and untimely requests to raise capital and shore up low ratios.
Acceptable solvency ratios vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. The lower a company's solvency ratio, the greater the probability that the company will default on its debt obligations. Looking at some of the ratios mentioned above, a debt-to-assets ratio above 50% could be cause for concern. A debt-to-equity ratio above 66% is cause for further investigation, especially for a firm that operates in a cyclical industry. A lower ratio is better when debt is in the numerator, and a higher ratio is better when assets are part of the numerator. Overall, a higher level of assets, or of profitability compared to debt, is a good thing.
Industry-Specific Examples
A July 2011 analysis of European insurance firms by consulting firm Bain highlights how solvency ratios affect firms and their ability to survive, how they put investors and customers at ease about their financial health and how the regulatory environment comes into play. The report details that the European Union is implementing more stringent solvency standards for insurance firms since the Great Recession. The rules are known as Solvency II and stipulate higher standards for property and casualty insurers, and life and health insurers. Bain concluded that Solvency II “exposes considerable weaknesses in the solvency ratios and risk-adjusted profitability of European insurers.” The key solvency ratio is assets to equity, which measures how well an insurer’s assets, including its cash and investments, are covered by solvency capital, which is a specialized book value measure that consists of capital readily available to be used in a downturn. For instance it might include assets, such as stocks and bonds, that can be sold quickly if financial conditions deteriorate rapidly as they did during the credit crisis.
A Brief Company Example
MetLife (NYSE:MET) is one of the largest life insurance firms in the world. A recent analysis as of October 2013 details MetLife's debt-to-equity ratio at 102%, or reported debt slightly above its shareholders’ equity, or book value, on the balance sheet. This is an average debt level compared to other firms in the industry, meaning roughly half of rivals have a higher ratio and the other half have a lower ratio. The ratio of total liabilities to total assets stands at 92.6%, which doesn’t compare as well to its debt-to-equity ratio because approximately two-thirds of the industry has a lower ratio. MetLife’s liquidity ratios are even worse and at the bottom of the industry when looking at its current ratio (1.5 times) and quick ratio (1.3 times). But this isn’t much of a concern given the firm has one of the largest balance sheets in the insurance industry and is generally able to fund its near-term obligations. Overall, from a solvency perspective, MetLife should easily be able to fund its long-term and short-term debts, as well as the interest payments on its debt.
Advantages and Disadvantages of Relying Solely on These Ratios
Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its long-term obligations; but like most financial ratios, they must be used in the context of an overall company analysis. Investors need to look at overall investment appeal and decide whether a security is under or overvalued. Debt holders and regulators might be more interested in solvency analysis, but they still need to look at a firm’s overall financial profile, how fast it is growing and whether the firm is well-run overall.
Bottom Line
Credit analysts and regulators have a great interest in analyzing a firm’s solvency ratios. Other investors should use them as part of an overall toolkit to investigate a company and its investment prospects.
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ca1b9bdfae54e4c3e612f87bf470548c | https://www.investopedia.com/articles/investing/101615/how-shark-tanks-robert-herjavec-made-his-money.asp | How Robert Herjavec of 'Shark Tank' Made His Money | How Robert Herjavec of 'Shark Tank' Made His Money
At the age of eight, Robert Herjavec and his family fled to Canada from the communist regime in Yugoslavia. They left their native country with just one suitcase and $20 in their pockets. In an effort to make the most out of his opportunity to create a better life for himself, Herjavec developed a strong passion for working hard and it totally paid off. Today, he is one of the most recognizable businessmen in North America. His company, Herjavec Group, is a Toronto-based IT security firm that reportedly realizes $150 million in annual sales.
With an estimated fortune of $200 million, Herjavec has committed to personally invest more than $16 million across 54 deals that were pitched on ABC's popular reality television show Shark Tank. He also starred on Canada's version of Shark Tank, Dragon's Den, for the first six seasons of the show. Below is an overview of how Robert Herjavec became a self-made multimillionaire.
Early Life and Schooling
Born in 1962, Herjavec grew up on his uncle's farm in Varazdin, in what is now Croatia. Although he was born into poverty, Herjavec doesn't speak badly of his childhood, saying that ‘‘it never seemed bad...you never know the situation you grow up in until you compare it to something else."
During a CBC documentary of his life, Herjavec said, ‘‘I was lucky to grow up like that. We were poor financially but we were never devoid of spirit, or love, or support, or encouragement. In that little village, I was the most important guy to my uncle. What a great way to grow up!’’
Herjavec's father was often arrested for speaking out against the communist system in Yugoslavia. In order to avoid future incarcerations, Herjavec's father decided to move the family to another country in 1970. Herjavec was eight at the time. The family migrated to Halifax, Canada, by way of a port in Italy. In the end, they settled in a small suburb in Toronto.
For the first eighteen months after they left Yugoslavia, Herjavec and his family stayed in the basement of a friend. His father managed to get a job at a factory in Mississauga, Ontario. There he earned roughly $76 a week.
When Herjavec arrived in Canada he had no understanding of English. However, in 1984 he graduated with a degree in English Literature and Political Science from the University of Toronto. In a promotional video for the University of Toronto, Herjavec explained that he made the right choice when he decided to study English Literature: “The ability to communicate is fundamental to what I do.”
In the same video, Herjavec revealed that he did not have much of a social life at university. According to him, he “just wanted to get in, get my degree and get a job.”
Beginning of His Career
Herjavec began a career in the film business after graduating from college at age twenty-two. During that time he took on a role under Billy Jack creator Tom Laughlin. He also worked as a field producer for the 1984 Winter Olympic Games in Sarajevo (back in Yugoslavia).
Herjavec later left the film industry to work at a technology company. As he once explained, ‘‘One day, my best friend at the time complained that he didn’t get this job with a tech company that was going to pay $30,000 a year. In 1985, that was a lot of money, so I decided to interview for it.”
Herjavec applied for a position at a technology company that sold computer software. Although he was not qualified for the role, Herjavec managed to get the job because he had offered to work for free for the first six months of his post. During that time, Herjavec learned as much as he could about the technology industry. To pay for his expenses, he waited tables at night until he received a permanent salary.
As time passed, Herjavec was promoted to different roles in the company. He ultimately became the president before being fired in 1990.
Robert the Mogul
Following the termination of his employment at Logiquest, Herjavec started a business with Warren Avis, the founder of Avis Rent a Car. His reason for becoming an entrepreneur was that he “needed to pay his mortgage.”
In a 2012 interview with Inc. Magazine, Herjavec explained, “I got fired! I was one of those guys who never wanted to start their own business. I never saw myself as a leader. I saw myself as a great No. 2. I just wanted to do a good job and make a little more money every year.”
Herjavec later sold his interest in that business for $60,000. Herjavec then started a technology business, BRAK Systems, on his own from his basement. The company quickly became the largest Internet security firm in Canada. It was acquired by AT&T, Inc. (T) in 2000 for $30.2 million. After the acquisition, Herjavec took on the role of Vice President of Sales at another computer business called Ramp Network. The company was shortly sold to Nokia for $225 million.
In an effort to spend more time with his wife and children, Herjavec took a break from his career for a few years. In 2003, he started a new venture called the Herjavec Group. The company provides information security services to other companies and has grown its annual sales to $150 million in an eleven-year period.
When asked if he had an exit strategy from the Herjavec Group, Herjavec responded, "No, I'm not selling this one. Not for a long, long time. I'm really inspired to build a billion-dollar company."
Robert the Investor
In 2006, Robert Herjavec became a household name in Canada after he starred on the hit reality television series, Dragon's Den. On the show, businesses would pitch an investment opportunity to a panel of investors with the hope of making a deal with at least one investor. Herjavec starred on the show for six seasons.
Later, Herjavec later became an investor on the American version of the show, Shark Tank. Over the seven seasons that he has been on "Shark Tank," Herjavec has committed to invest more than $16 million in a number of small businesses.
The Bottom Line
Robert Herjavec made his fortune in the technology industry. After being fired from his job in the 1990s, Herjavec started a couple of businesses on his own out of desperation.
He eventually sold his stakes in those businesses for a combined total of $30.2 million. Herjavec has since become a television personality and has invested several million dollars in small businesses in the United States and Canada. Today, the name Robert Herjavec is synonymous with entrepreneurial success throughout North America.
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7c8ad675ff702c712642018301d76242 | https://www.investopedia.com/articles/investing/101915/how-gordon-ramsay-built-his-restaurant-empire.asp | How Gordon Ramsay Built His Restaurant Empire | How Gordon Ramsay Built His Restaurant Empire
British chef Gordon Ramsay is well-known to TV audiences as a prolific and successful media personality.
But the 48-year-old is an equally adept businessman. In a relatively short span of 17 years, Ramsay has opened 49 restaurants across locations as diverse as Dubai in UAE to Ennis Kerry in Ireland. Twenty-three out of that total number are now closed, providing Ramsay with a success rate of 47 percent. (See also: Celebrity Chef Empires).
But mere numbers do not provide the full story behind Ramsay's colorful ascent.
The Rise to Success
Ramsay grew up in a hardscrabble neighborhood in Scotland. His father was an alcoholic womanizer who was never present, and the family moved around quite a bit before settling in Stratford-Upon-Avon. He had aspirations to become a soccer player, but a severe accident on the field during his teenage years put that ambition to rest.
Instead, Ramsay focused his energies on cooking. After graduation from a local polytechnic, Ramsay worked at several restaurants in London before landing at Harvey's, an upscale establishment, where the head chef was Marco Pierre White, Britain's superstar chef at the time. After a couple years of working, White introduced Ramsay to two Italian businessmen, who became Ramsay's partners in his first restaurant venture. In this enterprise, Ramsay took a 25 percent stake.
Founded in 1993, Aubergine served middle-of-the-road French cuisine. It spawned another venture by the same trio, L'Oranger at St. James Road. Together, both restaurants earned a total of three Michelin stars. However, Ramsay did not earn much during this stint and received a dividend of approximately £15,000 only once. His main source of income was working as a food consultant to a supermarket chain.
After a series of disagreements with his business partners over the restaurants' future, Ramsay instigated a mutiny by walking out with his colleagues in 1998. Two weeks later, he started his his first restaurant – Gordon Ramsay at Royal Hospital Road – with the help of a £1.5 million bank loan. He also started kickstarted a television career by allowing BBC cameras into his kitchen for “Boiling Point,” a show that charted his daily fortunes in the kitchen.
Besides providing much-needed free publicity to his restaurant, the show helped cultivate Ramsay's polarizing but popular image of an abrasive personality. In his autobiography, Ramsay writes that the restaurant's phones were “smoking” after the show was aired. Half of callers were disgusted with his foul-mouthed and boorish behavior, while the other half were impressed by his passion for perfection and sought reservations at the new place.
Soon after, John Ceriale from Blackstone, a private equity group that owned a slew of restaurants around the world, contacted him to manage a restaurant at Claridge's, the historic London hotel. Ramsay calculated that “a successful breakfast operation would pay for the rent, leaving income from lunch and dinner to us” and agreed. Before opening, he refashioned the interiors and menu.The results went down well with the public, and the restaurant boasted over 500 calls and 300 faxes in the first week. The number of guests had risen to1,500 by the second week.
Ramsay's subsequent ascent in the restaurant business was rapid. He rode the economic boom during the early part of the 2000s by opening a series of restaurants across geographies in partnership with hotels and Blackstone. Simultaneously, he capitalized on his growing television fame to garner clientele for his restaurants. For example, the Ramsay team's move into the historic Connaught hotel was filmed by the BBC in their documentary series Trouble at the Top.
Change in Fortunes
There was, indeed, trouble but not at the top. Ramsay's business model of both owning and operating restaurants hemorrhaged cash. For example, his restaurant in Paris lost $245,000 monthly. Amaryllis in Scotland was the first to fail, losing £480,000 in three years of operations. Others followed suit. At one point, the losses became so great that an auditor even recommended that Gordon Ramsay Holdings – the parent operation – file for bankruptcy. (See Also: Celebrity Business Busts).
But Ramsay took corrective steps. First, he changed his business model from one based on ownership to that of licensing. Second, he sold off unprofitable operations. Third, he cut costs by paring back staff and expensive menu items.
Even as his fortunes declined in the restaurant business, they soared in the media industry where he perfected the persona of a bullying chef on numerous TV programs on both sides of the Atlantic. According to reports, Ramsay receives $225,000 per episode. In 2013, he made $22.6 million from his media deals alone.
The Bottom Line
Despite his public failures, Ramsay has an enviable track record in the restaurant business. He owes his success to hard work, rolling with the punches, and an ability to change with the times.
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1a174d2d9d3c7001bb492490097368d4 | https://www.investopedia.com/articles/investing/101915/investing-collectible-cars-top-tips-and-risks.asp | Investing in Collectible Cars: Top Tips and Risks | Investing in Collectible Cars: Top Tips and Risks
Millions of Americans are involved in car collecting. The old muscle car or British roadster you bought in college may still have a place of honor in your garage and see use as a weekend cruiser. A restored vintage Volkswagen Beetle or suicide-door Lincoln Continental can be purchased for less than $20,000, driven lightly for years, and then sold for a (probably modest) profit.
But what about high-end collectibles that cost seven or eight figures? They aren't for everyone, but high-net-worth individuals can use them to diversify their holdings, make money, and maybe even drive on occasion.
Key Takeaways For the automotive enthusiast, one way to diversify an investment portfolio is to start collecting classic cars. Most cars lose value immediately after they are driven off of the dealer lot, but classic cars gain in value over time, due to rarity, performance, or special attributes. Classic cars, in general, gain in value more than other types of collectibles, although cars are more high-maintenance and more complicated to store than stamps or comic books. The right classic cars can be valued into the several millions of dollars.
The Market for Classic Cars
The market for classic cars has done better than collectibles like coins and stamps over the past decade and has also beaten the broad stock index. The Historic Automobile Group International (HAGI) tracks the collector's car market with a number of indexes. Its broadest is the HAGI Top Index, which tracks vintage collectible cars from Porsche, Ferrari, Bugatti, Alfa Romeo, and other brands. The Top Index was up 33.78% for the year 2019, and more than 500% over the preceding 10 years thanks to increasing global wealth chasing a limited number of super-collectible cars. The S&P 500 was up 30.5% over the same period. Another classic car index is run by the insurance company Hagerty.
At the high end of the classic car market — those selling for more than $1 million — you'll find relatively obscure older brands such as Hispano-Suiza and Delahaye, as well as names that are still well-known today, such as Rolls-Royce and Jaguar. Even brands not known for high-end exotics may become collectible: Toyota's (TM) beautiful 2000GT, built from 1967 to 1970, can command more than a million dollars at auction. A 1934 Packard Twelve 1108 Dietrich sold for $3.6 million earlier this year, and a 1998 McLaren F1 sold for $13.75 million.
What Makes a Car Collectible
Cars with historical importance—ones that pioneered new technology or raised the bar for consumer expectations—can become collectible, especially if they are rare and beautiful. (Being good-looking is an advantage.) A racing history adds to a car's allure, as can association with a respected designer, racer, or builder such as the likes of Raymond Loewy or Carroll Shelby. Prior celebrity ownership can also help, especially if the individual is associated with cars, such as Steve McQueen, Paul Newman, or James Garner. The most expensive collectible cars combine these attributes.
As a basic rule of thumb, if teenaged boys have its picture taped to the wall, you're looking in the right direction. When those boys grow up, they want to buy the things that made them happy in their youth.
The car market mirrors the market for art. It's an investment you enjoy aesthetically and it can also provide a currency hedge since vehicles can be transported to countries with favorable exchange rates.
Car Investing Risks
Just as most investments carry fees, so too does owning classic cars. This is tangible personal property, and you'll owe capital gains tax if you sell at a profit. Is your collectible in bad shape? Restoring a seven-figure car to concours condition—generally considered bringing an older car to showroom-new condition using original or exact recreations of parts, paint, and bodywork — can cost another seven figures. Then there's ongoing maintenance costs, storage expenses, and insurance. Profits from the eventual sale of the car will also likely incur commissions/consignment fees, transaction fees, and transportation costs, because chances are you aren't going to tow a Bugatti behind a U-Haul.
Buying a new or newish car because you think it will be collectible some day is risky. Sure, you could get lucky, but chances are you aren't going to be able to buy a cheaper car and expect it to be worth millions in a relatively short period.
When the Dodge Viper was unleashed in the early 90s, some collectors squirreled them away as investments, believing that the aggressively styled sports car with a then-ludicrously-potent 400 horsepower would certainly appreciate in value. But you can currently pick up a 1993 Viper (the first full year of production) for less than $40,000. They cost more than $50,000 new. These investors may have enjoyed showing off their cars and occasionally blasting down an open road, but with inflation, upkeep, insurance, storage, and opportunity costs, they most certainly did not make any money.
The same thing happened a couple of decades earlier, when Cadillac announced in ads that the 1976 Eldorado would be the last convertible the brand offered. It wasn't. You can now find well-cared-for Eldorado convertibles from that vintage for less than $25,000. They cost $11,000 new, which is $47,000 adjusted for inflation.
Affordable Options? Not Really
One could argue that the American Viper and Eldorado are at the affordable end of the collectible spectrum; not the high-end stuff that tends to come from Europe. But the same uncertainty applies to the high-end market. In 1974, Ferrari sold the Dino 246 GT for $14,500 and the 308 GT4 Dino at a significantly higher $22,000. Currently, Hagerty lists the average price of a 1974 Ferrari 308 GT4 at $49,000 and a same-year Ferrari Dino 246 GTS at a whopping $417,000.
So, what are the ultimate collectible cars? It's hard to say definitively. Tastes change over time, private sales are difficult to track, and the high end of the collectors market focuses on exceedingly rare cars with differing histories. The list of sales that are confirmed to exceed $30 million in inflation-adjusted dollars is extremely short though.
The British auction house Bonhams sold a 1962 Ferrari 250 GTO for $38.1 million in 2014, which is the highest confirmed and published price ever paid for a car. The race car had been driven by legendary driver Stirling Moss at the height of his career. (Another 250 GTO reportedly exceeded $50 million in a private sale.) In 2010, the Mullin Automotive Museum purchased one of the four achingly beautiful Bugatti 57SC Atlantic ever built for what an insider described as between $30 million and $40 million. In 2013, a 1954 Mercedes-Benz W196 Silver Arrow — the only car of its kind not in a museum — sold at an auction in the U.K. for $29.7 million.
The Bottom Line
Becoming a collector of high-end cars can take a pretty significant investment and comes with not-insignificant carrying costs. As tastes and economics change, what was once worth a king's ransom could depreciate to a mere princely sum, so choose carefully. Red and Italian tend to be good bets, but be aware of over-frothy markets.
For example, wealthy Japanese buyers couldn't buy enough Ferraris in the second half of the 1980s and prices saw an unbelievable spike and then a bubble. When the Japanese stopped buying those prices dropped by a big percentage. Buy quality (a prime example will always be marketable and command a premium), know your demographic and market factors, and make sure you're not buying while in bubble territory.
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c1c2f66ed37046df0f352d3f66438a53 | https://www.investopedia.com/articles/investing/101915/top-10-best-ted-talks-business-leaders.asp | The Top 10 Best TED Talks for Business Leaders | The Top 10 Best TED Talks for Business Leaders
Is your management style effective in leveraging creativity, productivity, and change? TED Conferences, LLC is a nonprofit media organization dedicated to sharing "ideas worth spreading." Watch the following ten talks to sharpen your management skills.
Key Takeaways Nonprofit media organization TED Conferences, LLC presents motivational videos about business and leadership from experts.One of 10 notable speakers mentioned, British-American author Simon Sinek delivered a powerful presentation about how leaders inspire action.Jacqueline Novogratz, head of the Acumen Fund, posits that leaders should act nobly and avoid being manipulated by power.Life coach Tony Robbins believes that emotions are the driving force of life and that people should produce emotions that inspire action.
1. Simon Sinek: “How Great Leaders Inspire Action”
“People don’t buy what you do, they buy why you do it,” Sinek repeats over and over again in this revolutionary TED Talk. He demonstrates through powerful examples how successful leaders inspire their employees to work purposefully: “If you hire people just because they can do a job, they’ll work for your money. But if you hire people who believe what you believe, they’ll work for you with blood and sweat and tears.”
2. Tim Harford: “Trial, Error, and the God Complex”
Tim Harford urges leaders to abandon the God complex—which leads them to believe that they are always right—and to opt for humility and systematic problem-solving. Often trial and error produce variants that work, and we have no idea why. Harford argues that working to solve issues systematically is optimal. He also recommends leaders abstain from “laying down the law” and encourages them to admit when they're wrong.
3. Jacqueline Novogratz: “Inspiring a Life of Immersion”
“Extraordinary leaders must dare to live a life of immersion,” says Novogratz. Novogratz heads the Acumen Fund, which invests globally in innovations that focus on change. Great leaders take resources and convert them to change the world in positive ways. The most important things that businesses do and spend time on are often immeasurable, argues Novogratz. She advises leaders to take the noble path and to be wary of being manipulated by power.
4. Roselinde Torres: “What It Takes to Be a Great Leader”
Roselinde Torres spent 25 years cultivating leadership pipelines and observing what makes great leaders. She argues that the widening leadership gap derives from outdated leadership development programs that stunt growth, based on the world that was rather than what is and what’s coming. In the 21st century, businesses must be global, transparent, and possess a complex matrix to get things done. Great leaders dare to be different. They don’t just talk about it; they do it according to Torres.
6. David Logan: “Tribal Leadership”
The tribe is a naturally occurring group of 20 to 150 people, wherein societies develop. Tribes exist in five unique stages. Most people (48% of working tribes) sit in stage three, the “I’m great, and you’re not,” stage.
Unfortunately, because of this attitude, groups aren't as productive as they could be. David Logan argues that the biggest challenge for leaders is moving teams from stage three to stage four, the "we're great," stage.
Stage four is where workers come together to unite values of creativity and become “a little bit weird.” Lastly, Logan says leaders must push forward to stage five, the “life is great,” stage.
7. Steve Jobs: “How to Live Before You Die”
Steve Job’s famous Stanford University commencement speech addresses his unique background, his adoption, and the events that led him to start one of the 21st century’s most revolutionary companies. Jobs urges leaders to have faith in their path, to take a leap of faith, and act individually. Jobs championed taking risks, stating: “Death is very likely the single best invention of life. It is life’s change agent.”
8. Tony Robbins: “Why We Do What We Do”
Life coach Tony Robbins says emotion, not self-interest is the driving force of life. When leaders understand human needs, they appreciate workers and what shapes their ability to contribute. The science of achievement is understood, but the art of fulfillment lacks understanding.
Robbins suggests that excuses for failing are futile, and the defining factor of success is resourcefulness. Make decisions based on a focus, give it meaning, and produce an emotion that inspires action.
9. Jason Fried: “Why Work Doesn’t Happen at Work”
Jason Fried compares work to sleep, which both suffer from interruption. Why do we expect people to work well if they are interrupted all day at the office? By deeming social media the modern-day smoke break, he denies technology as the culprit behind productivity lags. Managers and meetings can be toxic disrupters. Companies should to cut back on unnecessary interruption and consider allotted quiet time.
10. Shawn Achor: “The Happy Secret to Better Work”
If we study the average, we remain average. We should instead study the outliers in pursuit of moving the average up in companies worldwide. Shawn Achor urges leaders to change the lenses through which they see the world, in turn changing business outcomes. We need to reverse the formula for happiness and success since 75% of job successes rely on outlook.
As a manager, are you focused on struggles and complaints or opportunity? Achor’s humorous talk offers insight on how leaders can leverage the “happiness advantage,” where creativity and productivity levels thrive.
The Bottom Line
These ten TED Talks inspire leaders to take leaps, not steps, in impacting change, taking responsibility and the road less traveled. From life coaches to scientists and artists, TED offers valuable insight from experts in the field.
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146d869a0c184ed37128f94f00179b40 | https://www.investopedia.com/articles/investing/102014/guide-six-sigma-black-belt.asp | Should I Get a Six Sigma Black Belt? | Should I Get a Six Sigma Black Belt?
Six Sigma is a technical, data-driven and statistical quality improvement program primarily for the manufacturing sector, though in recent years it has been applied elsewhere, including the service sector.
Six Sigma advocates for quantitative measurements of success over qualitative markers. Those who are most engaged with Six Sigma are the employees who use statistics, financial analysis, and project management to achieve improved business functionality.
Key Takeaways Six Sigma is a program that focuses on quantitative measurements over qualitative ones, where employees use statistics or financial analysis to improve business functionality. There are four Six Sigma levels: Yellow, Green, Black, and Master Black Belt. Six Sigma Black Belts are paid an average $127,000—nearly 34% more than Green Belts.
What Are the Different Six Sigma Levels?
The various Six Sigma certifications are:
Yellow Belt Green Belt Black Belt Master Black Belt
Black Belts tend to be senior managers and usually mentor Green Belts. Six Sigma Black Belts are expected to have sound working knowledge of Six Sigma methodologies. Besides the technical knowledge, Six Sigma Black Belts are expected to lead a change within an organization and play a strong leadership role.
If the admittedly-biased Go Lean Six Sigma training program is to be believed, Six Sigma belts can significantly increase your salary. The average Black Belt makes $127,000 a year, while those with a Green Belt make $95,000—a near 34% jump.
Six Sigma Training
At the Black Belt level, students are expected to already have a Green Belt certificate or at least three years of work experience in the field or they must have completed two Six Sigma projects, according to the American Society for Quality. Experience must be full-time paid work. Co-ops, internships, and part-time jobs don’t apply.
Depending on the organization, the format of the exam and training might differ. Training could be on-site, online, or in a formal classroom setting along with mentoring and workshop sessions. The certification mandates the completion of two successful Six Sigma Black Belt projects. A project is considered financially successful once approved by a company's accounting department and the sponsor.
Black Belt certificate courses build on the Green Belt certificate and tend to have an organization-wide perspective.
On top of DMAIC (define, measure, analyze, improve, and control), it adds the following (based on ASQ’s Black Belt certificate):
Enterprise-wide deployment Integration of Lean and Six Sigma Enterprise leadership responsibilities and team management Six Sigma projects and Kaizen events Critical to X requirements (i.e. critical to quality, cost, process, safety, delivery) Benchmarking Business performance measures Customer feedback Financial measures (e.g., return on investment (ROI), profit margins, etc.)
Differences Between Black and Green Belt Certifications
The Exam
The Green Belt certificate has an exam of four hours with 100 questions. The Black Belt certificate has an exam with a duration of four hours and 150 questions.
The Project
The Black Belt requires completion of one Six Sigma project. The project is should be related to process changes that produce statistically significant improvements. Examples of a Six Sigma Black Belt project might include reducing accounts payable invoice processing costs or decreasing human resources recruitment cycle time.
The Bottom Line
A Black Belt certificate is appropriate for more senior technical roles, such as project managers, quality managers, operations managers, and new product engineers or managers. For junior roles in technical industries, a Green Belt certificate will probably suffice.
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c522d01d88217eef271f858d06a8f1fa | https://www.investopedia.com/articles/investing/102015/how-bloomberg-makes-billions-hint-not-just-news.asp | How Bloomberg Makes Money: Terminals, News, Business | How Bloomberg Makes Money: Terminals, News, Business
One of the most successful limited partnerships in existence, Bloomberg L.P. bills itself as “the global business and financial information and news leader.” Bloomberg’s founder and former mayor of New York, Michael Bloomberg, owns 88% of the company’s stock, making him one of the dozen or so richest men on the planet. The privately-held company is believed to generate over $10 billion in annual revenue, the large majority of that courtesy of its Professional Services division, which began with the inescapable Bloomberg terminals. Obligatory for almost anyone with an occupation in finance, the terminals and their software-as-a-service successors offer comprehensive and vital information to 320,000 paying customers around the world.
While the bulk of Bloomberg's money comes from Professional Services, the company has several other subsidiaries, the most notable of which are its news-gathering operations via Bloomberg News. Investopedia readers are probably also familiar with Bloomberg Television. The 24-hour network is an anomaly in that it runs more live programming than competitors CNBC and Fox Business Network. Bloomberg Television also offers a deeper analysis and less light entertainment than the other financial broadcasters, which often air infomercials, paid programming, and repeat broadcasts throughout much of the day. Bloomberg Television also offers regional channels of international interest in the Philippines, India, Turkey, Canada, and other destinations.
Key Takeaways Bloomberg LP is a global media and financial data and analytics conglomerate.The company generates revenue from subscriptions and fees associated with Bloomberg terminals as well as a variety of other services including Bloomberg News and Bloomberg Business, focused on venture capital, brokerage, and more.Bloomberg terminals are essentially unrivaled within the finance world and have contributed to the company's massive growth in its 39-year history.
History of Bloomberg
Bloomberg was founded in 1981 as Innovative Market Systems and has since grown into a major international operation employing more than 20,000 individuals. The central component of the company—the Bloomberg terminal, which provides real-time market data and analytics—was already in place at the founding. Over the years, Bloomberg has acquired a variety of competitors across different industries, including media (New York radio station WNEW and BusinessWeek magazine), data companies (New Energy Finance), and even government and legal entities (Bureau of National Affairs).
As a privately-held company, details of Bloomberg's financials can be difficult to come by. However, a report by Business Insider indicated that the company generated more than $10 billion in revenue in 2018.
Fast Fact Bloomberg founder and former mayor of New York City Michael Bloomberg launched the company in 1981 after receiving a settlement when his former firm, Salomon Brothers, was acquired.
Bloomberg's Business Model
Bloomberg has parlayed its tremendous brand recognition into a widely-diverse array of product offerings. Central to the company is the Professional Services wing, which at some points in Bloomberg's history has accounted for close to 90% of its yearly revenue. This product, also known as the Bloomberg terminal, is the computer system that analyzes and generates real-time market and financial information for finance professionals.
One of the company's fastest-growing areas is data analytics. This includes a wide variety of products, including Portfolio Management & Analytics products, Real-Time & Trading Data products, and more.
Bloomberg News is the company's news service branch, responsible for delivering news content to Bloomberg terminal users and across a variety of the company's subsidiary media channels, including Bloomberg Television, Bloomberg BusinessWeek, and Bloomberg Radio.
Bloomberg Law is another of the most significant branches of the company. Launched in 2010, Bloomberg Law is a subscription service providing access to real-time legal data for research purposes. Bloomberg Government provides a similar service for government professionals.
Throughout its history, Bloomberg has also launched a venture capital wing (Bloomberg Beta), an agency brokerage (Bloomberg Tradebook), and many other arms as well.
Bloomberg's Professional Services Business
Being a Bloomberg Professional Services customer isn’t for the penurious, not at an annual cost between $20,000 and $24,000. That isn’t the company’s only subscription service, nor is it the most expensive. Bloomberg Law and Bloomberg Government sell specialized information for, you guessed it, lawyers and those who work in politics, respectively. The former service costs approximately $475 per subscriber per month, the latter $5,700.
Bloomberg's terminal revenues for 2018 accounted for approximately 76.6% of all company revenues, according to a report by analyst Jennifer Milton.
Bloomberg's Law Business
Bloomberg Law opened for business in 2010, and its model is unusual in comparison to its established competitors such as LexisNexis. The former charges a flat monthly fee, rather than per use. Bloomberg Law subscribers can learn about breaking decisions, which judge owns how many shares of which publicly-traded company, the implications of the latest sections added to the existing ones of the Internal Revenue Code, and more. Yes, that information might be available to anyone willing to dig for it, but Bloomberg knows digging can be labor-intensive and daunting for its customers.
Bloomberg's Government Business
For $5,700 a month, Bloomberg Government will tell you which bills are passing through which houses at what level at what time, and even when non-legislative regulations change. Care to know what happened during the Senate Appropriations Committee’s last meeting? Probably not, but if you do, Bloomberg Government will gladly give you access to a full transcript, from opening to adjournment. Rely on the Senate’s own devices to tell you which Senator stuck which foot in his or her mouth, and you could literally be waiting years. Bloomberg Government will tell you almost instantly. The inefficiency and sclerosis of the legislative process might be tiresome for ordinary voters, but it offers a market opportunity for Bloomberg.
Bloomberg's Venture Capital Business
Finally, there’s Bloomberg Beta, the limited partnership’s venture capital firm. Appropriately ensconced in Silicon Valley, the $75-million fund has put its money into some startups that have become famous, such as Codeacademy, the online programming tutorial warehouse that claims 24 million users. Other Bloomberg Beta investments, such as Newsle (a news service that delivers stories about one’s favorite personal contacts) don’t appear to have quite as broad an appeal, but Newsle did sell to LinkedIn Corp. for an undisclosed amount in 2014.
According to Bloomberg Beta’s own manual, made available to the general public, venture capital operations offer a relatively inexpensive way for Bloomberg to detect startup trends before they become too well-publicized or expensive. Bloomberg Beta was created to stand on its own merits and turn a profit rather than be bankrolled by the existing Bloomberg businesses.
Fast Fact Bloomberg's fastest-growing revenue stream for 2018 was research products.
Bloomberg's Other Businesses
Bloomberg also operates a handful of other, smaller concerns, such as its enterprise data management division, PolarLake, which manages and interprets complex data sets for clients both large and small, saving them money and time. There’s also Bloomberg View, the editorial counterpart to the Bloomberg News service. Bloomberg View has a roster of renowned columnists whose work is syndicated in various print publications and online. Again, all this is minor compared to the billions upon billions brought in by Bloomberg Professional Services. Bloomberg is under no obligation to disclose which of its departments make how much money, but any observer can calculate just how much the company’s biggest division earns relative to the other divisions.
Future Plans
Throughout its history, Bloomberg has been in the position of either brash new competitor or individual player with a market unto itself. Rarely has it been the legacy company facing off against young and nimble competitors, at least not until the advent of Symphony, the Alphabet Inc. backed company that threatened to eat into Bloomberg’s large profits.
But Bloomberg is still the go-to service for hundreds of thousands of financial professionals who swear by its ease of use and reliability. This is enough to justify Bloomberg’s high price tags. Even the infamous 2013 privacy breach, which inadvertently or otherwise allowed company reporters access to customers’ personal information, was but a temporary blip. Somehow Bloomberg came out of the scandal without sustaining any long-term damage.
In 2018, Bloomberg continued a long-term process of diversifying its revenue streams. While Bloomberg terminals still enjoy what is essentially a monopoly, that may not be the case forever. With non-terminal revenues totaling about 23% for 2018, an increase of about 9% over the previous year, it's possible that the company will continue to search for other ways to generate revenue into the future.
Key Challenges
Bloomberg has enjoyed being the dominant player in what has essentially been an industry of one for most of its existence. That being said, the company has not taken that for granted, and in nearly four decades has grown its list of offerings tremendously. With greater diversification—outside of the Bloomberg terminal product, or even outside of the world of finance altogether—comes the increased likelihood that the company will weather future storms.
Bloomberg has faced legal troubles in its past, including a 2007 class action suit regarding female employees and maternity leave, and it has also faced challenges related to data breaches, as indicated above. Newcomers in the finance data analytics field have come and gone, but that's no guarantee of Bloomberg's dominance in the future. Still, though, it seems unlikely that this dominant company is going anywhere anytime soon.
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96fe59531e14bf711ee6a05ca62c3c26 | https://www.investopedia.com/articles/investing/102015/invest-through-equity-crowdfunding-risks-and-rewards.asp | Invest Through Equity Crowdfunding: Risks and Rewards | Invest Through Equity Crowdfunding: Risks and Rewards
Crowdfunding refers to raising money from the public (i.e., the "crowd"), primarily through online forums, social media, and crowdfunding websites to finance a new project or venture. Equity crowdfunding takes this one step further. In exchange for relatively small amounts of cash, public investors get a proportionate slice of equity in the business venture.
Previously, business owners raised such funds by borrowing from friends and family, applying for a bank loan, appealing to angel investors, or by going to a private equity or venture capital firm. Now, with crowdfunding, they have an additional option.
Equity crowdfunding is rapidly gaining in popularity. According to research by Valuates Reports, the global crowdfunding market was valued at $10.2 billion in 2018 and is expected to reach $28.8 billion by 2025. But as with any mode of investment, investing through equity crowdfunding has its own risks and rewards.
Risks of Equity Crowdfunding
Greater Risk of Failure
A business that has been capitalized through equity crowdfunding arguably runs a greater risk of failure than one that has been funded through venture capital or other traditional means that offer seasoned professionals to help steer a start-up through early development challenges. The success of a business cannot be assured merely by funding. Without an adequate business plan and support structure, even promising ventures can fail.
Fraud
Online forums and social media are ideally suited for equity crowdfunding because they offer wide reach, scalability, convenience, and ease of recordkeeping. But these very features also make it easy for scammers to set up dubious ventures to attract equity crowdfunding from naive or first-time investors. Never skip the step of doing due diligence on any investment you're considering.
Years to Materialize
Every investor expects some future return. However, returns on equity crowdfunded ventures may take many years to materialize if at all. For example, management may deviate from the business plan or have difficulty scaling the business. Over time, this may lead to capital erosion rather than wealth creation. There may be an opportunity cost attached to your investment that you should consider since it ties up capital that could be used elsewhere.
Security of the Crowdfunding Portal or Platform
In recent years, hackers have displayed an alarming ability to break into seemingly impenetrable data repositories of leading companies and financial institutions and steal credit card details and other valuable client information.
A similar risk exists for crowdfunding portals and platforms, which are vulnerable to attacks from hackers and cyber-criminals. So in addition to researching the investment itself, make sure to look closely at the platform, too. Kickstarter, Indiegogo, Crowdfunder, and GoFundMe are a few worth checking out.
Lower-Quality Investments the Norm
For skeptics, the question arises whether a company would only use equity crowdfunding as a last resort. For example, if a company is unable to attract funding from conventional start-up funding sources like angel investors and venture capitalists, perhaps then it would turn to equity crowdfunding. If that is indeed the case, then equity crowdfunded businesses are likely to be more mediocre investment opportunities with limited growth potential.
Rewards of Equity Crowdfunding
Potential for Outsize Returns
Since the risks are high, the potential for huge returns on equity crowdfunding is high, too. The story of Facebook's $2-billion acquisition of crowdfunded virtual reality headset maker Oculus Rift in 2014 is now the stuff of legend. Oculus Rift raised $2.4 million on donation-based crowdfunding portal Kickstarter from 9,500 people.
However, since these backers were donors rather than investors, they did not receive any payout from Facebook's acquisition. Had Oculus Rift raised its initial capital through equity crowdfunding, the Facebook buyout would have generated an estimated return of between 145 and 200 times of an individual's investment, according to Chance Barnett, CEO of Crowdfunder, and others. That means that a mere $250 investment would have resulted in proceeds of $36,000 to $50,000.
If you plan to participate in equity crowdfunding, always make sure you do so as an investor, not a donor.
Opportunity to Invest Like Accredited Investors
Before the advent of crowdfunding, only accredited investors—high net-worth individuals who have certain defined levels of income or assets—could participate in early-stage, speculative ventures that held the promise of high reward and equally high risk.
The minimum amount threshold for such investments was quite high. Equity crowdfunding, however, makes it possible for the average investor to invest a much smaller amount in such ventures. In that sense, it has leveled the playing field between accredited and non-accredited investors.
Greater Degree of Satisfaction
Investing through equity crowdfunding can give the investor a greater degree of personal satisfaction than investing in a blue-chip or large-cap company. This is because the investor can choose to focus on businesses or ideas that resonate with them, or that are involved with causes in which the investor has a deep belief. For example, an environmentally conscious investor may choose to invest in a company that is developing a more effective method of measuring air pollution.
Equity crowdfunding may offer more avenues for such targeted investments than publicly traded companies.
Greater Business and Job Creation
Small and medium-sized businesses (SMEs), the linchpin of the North American economy, are the biggest beneficiaries of the equity crowdfunding megatrend. By enabling easier access to investor capital for businesses that would otherwise have had a hard time obtaining it, equity crowdfunding should stimulate the local and national economies through new business formation and more job creation. Investors can feel good about their contributions.
Equity Crowdfunding Investor Protection
In 2015, the U.S. Securities and Exchange Commission adopted final rules that facilitate access to capital for smaller companies while providing investors with more investment choices. These rules, referred to as Regulation A+ and mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act, are designed to promote equity crowdfunding.
While purists may complain that increased regulation will deter the free-wheeling spirit and honor system of crowdfunding, the reality is that by deterring defrauders, these regulations may serve to significantly expand the equity crowdfunding arena.
The Bottom Line
Investing through equity crowdfunding carries risks such as the greater risk of failure, fraud, doubtful returns, vulnerability to hacker attacks, and mediocre investments. But it also offers rewards like the potential for huge returns, a greater degree of personal satisfaction, the opportunity to invest like accredited investors, and the prospect of stimulating the economy through business and job creation.
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30bcc04bff900c646cffb69fdf67e131 | https://www.investopedia.com/articles/investing/102114/six-things-bad-financial-advisors-do.asp | 6 Things Bad Financial Advisors Do | 6 Things Bad Financial Advisors Do
A good financial advisor can add tons of value to your financial well-being and can enhance your quality of life. "Good" can be a subjective term; in this case, "good" denotes someone who is qualified to help you, and whose personality gives you the confidence to follow their advice. In evaluating the latter, here is a list of six things financial advisors do that might mean that they're not the right advisor for you or possibly anyone.
Key Takeaways Not all financial advisors have your best interest in mind, and some may be more concerned with their ego or income than your well-being. Referrals from trusted individuals go a long way to choosing a financial advisor. If a financial advisor you previously trusted exhibits any of these behaviors, it is worth having a conversation with them or even consider changing advisors altogether.
They Ignore Your Spouse
While this can occur with both male and female advisers, and the ignored spouse can be either the husband or the wife, most accounts of this type of behavior tend to be with male advisers all but ignoring the female part of the client duo. There have been several accounts of widows leaving the adviser who served their family when the husband was alive—and leaving for just this reason.
If you are working with an advisor who ignores you, insist to your spouse that you switch advisors. Any advisor worth their salt should understand that they serve the interests of both spouses equally.
They Talk Down to You
Not all clients are financially sophisticated or, for that matter, even take an interest in their financial affairs. Still, it's the duty of the advisor to explain to you why they suggest a certain course of action or a particular financial product—and to do so in a fashion that makes sense to you. If this isn’t the case, be assertive or switch advisors, and never let anyone you are paying talk down to you or make you feel less intelligent.
They Put Their Interests Before Yours
This is perhaps most common in dealing with financial advisors who are compensated wholly or in part via commissions from the sale of financial products. Are they recommending mutual funds, annuities, or insurance products that pad their bottom line while possibly not being the best product for you? You need to ask questions, to understand how your advisor is compensated, and be clear on whether this results in conflicts of interest.
1:28 Six Things Bad Financial Advisors Do
They Won’t Return Your Calls or Emails
A good financial advisor is probably busy, but if you are not important enough to warrant a response within a reasonable time frame, the situation isn't healthy. While most advisors can tell a story about a client who calls every day, my experience is that most clients make reasonable requests and deserve a prompt reply to their questions. If someone you are paying for financial advice won’t reply to your calls, then why keep paying them?
They Suggest That You Don’t Need a Third-Party Custodian
Can you say 'Madoff'? If you ever find yourself in a meeting with a financial advisor who suggests that you shouldn’t have your account with a third-party custodian such as Fidelity Investments, Charles Schwab Corp. (SCHW), a bank, a brokerage firm, or some similar entity, your best move is to end the meeting, get up, and run— not walk—away.
Madoff had his own custodian, and this was the centerpiece of his fraud against his clients. A third-party custodian will send statements to you independent of the advisor, and usually offer online access to your account as well. Ponzi schemes and similar frauds thrive on situations in which the client lacks ready access to their account information.
They Don’t Speak Their Mind
An important aspect of a healthy client-advisor relationship is honest and open communication that goes in both directions. Clients might express a desire to make a particular financial move or to invest in a particular stock or mutual fund. A good advisor will tell the client whether or not they disagree with this suggestion and, if so, the reasons for the opinion. Not doing this is doing the client a huge disservice.
At the end of the day, it’s the client’s money, and they can do with it as they wish. A good financial advisor will never tell a client what the latter wants to hear just to keep earning fees or commissions from them.
The Bottom Line
The six no-no scenarios outlined above are, naturally, not evinced by all financial advisors. Rather, they are likely the six worst characteristics an advisor can show in dealing with a client. If your advisor exhibits any of these traits on a consistent basis, this might be a sign that it's time to find a new financial advisor.
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9e93b5e8157c92a0abffaca998aa1bb0 | https://www.investopedia.com/articles/investing/102115/5-iconic-airlines-no-longer-exist.asp | 5 Iconic Airlines That No Longer Exist | 5 Iconic Airlines That No Longer Exist
Several airlines that were once very popular with air travelers have disappeared from the landscape of operational air carriers. Financial problems have been the demise of many major airlines, while labor problems, increased competition, and plane crashes doomed others.
Key Takeaways As deregulation and accidents occur once-thriving airlines find themselves struggling for market share culminating in acquisition by rivals or closure. United Airlines, American Airlines, and Delta Air Lines capitalized on favorable changes in the market that allowed them to grow, thrive, and survive. Pan American World Airways (Pan Am) and Trans World Airlines (TWA) struggled to survive in the rapidly expanding market while finding airplane crashes in 1988 and 1996 respectively too much to overcome. The debt incurred by Eastern Air Lines' decision to differentiate themselves from other airlines through the purchase of Boeing 757 jets coupled with labor issues and the competition was too much for the airline to survive. While mergers and acquisitions grounded once-prominent air carriers, the advances made and risks taken by these defunct airlines are reflected in today's leading carriers.
Pan American World Airways
Pan American World Airways was once one of the most recognized airlines in the world. Pan Am was a founding member of the International Air Transport Association (IATA) and the main international air carrier in the United States for more than half a century, from 1930 to 1990. Pan Am was considered one of the most luxurious airlines to fly during the 1950s and 1960s.
The airline's fortunes started declining in the 1970s when deregulation led to increased competition from other carriers, accompanied by a marked increase in fuel prices and declining international travel. Whether Pan Am could have weathered the financial storm will never be known; the airline was permanently grounded by the infamous 1988 Lockerbie crash of Pan Am Flight 103, the result of a terrorist bombing that killed 259 passengers and crew and 11 members of the ground crew. The airline struggled along for three more years, mostly by selling off assets, but it was financially defunct by the end of 1991.
Key Takeaways Despite the closure of Pan Am airline, the brand lives on in pop culture and fashion—ABC aired Pan Am, a fictionalized drama featuring the airline, in 2011 and a pop-up bar featuring the brand was open in downtown Cincinnati in October 2019.
Trans World Airlines
Pan Am's major U.S. competitor in international flights, Trans World Airlines, or TWA, has not survived either. Originally founded in 1925 as a different airline company with the same initials—Transcontinental and Western Air—TWA became a major international air carrier after its acquisition by billionaire Howard Hughes in 1939. TWA was, like Pan Am, known as a luxury carrier and considered to be at the cutting edge of technological innovation in air travel.
However, the airline had difficulty borrowing money with Hughes at the head of the company, and it nearly went bankrupt in the early 1960s. TWA seemed to recover after Hughes relinquished control, but it was then hit by the deregulation and fuel cost crises of the 1970s. Additionally, the company's management attempted to diversify by acquiring Hilton International and Century 21 properties.
During the 1980s, TWA experienced increasing financial problems that eventually resulted in the airline declaring bankruptcy in 1992 and then again in 1995. Then, like Pan Am, TWA suffered from a major crash resulting in the death of 230 passengers and crew, that of Flight 800 in 1996. The airline continued to struggle until it was once again forced into bankruptcy in 2001, when it was acquired by American Airlines.
Eastern Airlines Air Lines
Eastern Airlines Air Lines was once the predominant eastern Eastern U.S. airline, although it was eventually hurt by increasing competition from United, Delta and some smaller regional carriers. Founded in 1926, Eastern was one of the earliest major U.S. air carriers. carriers, founded in 1926, headquartered Headquartered in Miami, and for a time headed by famous WWI flying ace Eddie Rickenbacker. From 1930 through 1950, it enjoyed a near monopoly on passenger air travel along the Florida to New York corridor. Eastern notably pioneered air shuttle service, established between New York and Washington, D.C. and New York and Boston.
In the 1960s, competition with United and other airlines began heating up and negatively impacting Eastern's revenues. Once known for its Douglas DC-8 aircraft, Eastern was the first airline to obtain the Boeing 757 jets. Unfortunately, the massive debt created by the purchase of 757s added to already existing financial problems for Eastern. The 1980s saw Eastern also burdened by labor problems, including strikes, and increased competition. Eastern filed for bankruptcy in 1989 and from there stumbled its way to extinction when it ceased operating in 1991.
Northwest Airlines
Northwest Airlines has also disappeared from the air travel landscape, but it suffered a less ugly end than Pan Am, TWA and Eastern, disappearing through a friendly merger with a larger carrier.
Northwest began operations as a Minneapolis-based air mail carrier in 1926, adding passenger operations in 1927. The airline eventually expanded to operating nationwide in the U.S., and then internationally, providing flights to the Asia Pacific region under the name Northwest Orient. The company further expanded its international operations through a strategic joint venture partnership established in 1993 with major European carrier KLM. Northwest merged with Delta Air Lines in 2008.
Continental Airlines
Continental Airlines was originally founded in 1932 as Varney Speed Lines, transporting mail and passengers in the Southwest. The airline soon began offering flights to Mexico as well. Continental expanded operations significantly in the 1950s following its acquisition of Pioneer Airlines, establishing a Los Angeles hub in the 1960s and pioneering economy fares between Chicago and Los Angeles.
Like many other airlines, Continental was hurt by deregulation and labor troubles and eventually had to declare bankruptcy in 1983. Continental emerged from bankruptcy with increased profit margins from reduced labor costs, and it established a Newark hub for flights to Europe. After adding service to other international destinations in the 1990s and 2000s, Continental merged with United Airlines by means of a stock swap in 2010, a deal that at the time made United the largest passenger airline in terms of revenue passenger miles.
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e95f8a78f41da1138d5e06b58e1548bd | https://www.investopedia.com/articles/investing/102115/how-morningstar-rates-and-ranks-mutual-funds.asp | How Morningstar Rates and Ranks Mutual Funds | How Morningstar Rates and Ranks Mutual Funds
Morningstar, Inc. (NASDAQ: MORN) first introduced its rating system in 1985. The simple, easy-to-understand Morningstar platform quickly became a favorite of analysts, advisors and individual investors in the mutual fund world. Today, Morningstar is one of the most influential and prominent investment resources in the world, and it's a company that every interested person should take time to understand better.
Morningstar ranks mutual funds on a scale of one to five stars. These rankings are based on how the fund has performed – with adjustments for risks and costs – compared to funds in the same category. Each fund receives separate ratings for three-, five- and 10-year periods, which it combines into an overall rating.
The company claims that its mutual fund rankings are "objective, based entirely on a mathematical evaluation of past performance." While this is superficially true – all Morningstar rankings are math-based – it undersells how sensitive the ranking process is to two subjective factors: the weighting of the mathematical formula and the classification of a fund into a particular category.
The Star Rating System
Morningstar is best known for its star rating system, which assigns a one- to five-star ranking to each fund based on past performance relative to peer funds. Star ratings are graded on a curve; the top 10% of funds receive five stars, the next 22.5% receive four stars, the middle 35% receive three stars, the next 22.5% receive two stars and the bottom 10% get one star.
Morningstar doesn't offer an abstract rating for any fund; everything is relative and risk-adjusted. All funds are compared to their peers, and all returns are measured against the level of risk that portfolio managers had to assume in order to generate those returns.
Even risk and return ratings are made on a relative scale. The top 10% of funds with the lowest measured risk receive a Low Risk designation, the next 22.5% are Below Average and so on. Similarly, the top 10% highest returning funds receive a Highest Morningstar Return designation.
Sectors and Categories
Morningstar organizes all equity research by market sector, allowing investors and analysts to compare equities with similar focuses. Some of Morningstar's equity sectors include cyclicals, basic materials, financial services, defensive, utilities, communication services, energy and technology.
In October 2010, Morningstar reworked its sector classification system, suggesting the new system was "more logical" and made it "easier to understand the decisions being made by portfolio managers." All stocks, funds and portfolios were split into three broad sectors: Cyclical, Defensive and Sensitive. Each such supersector contains three or four subgroups.
Within each subgroup, there are multiple industries. Each stock belongs to one of nearly 150 industries based on how Morningstar best identifies the underlying business model for the company. According to Morningstar, these equities are classified by a review of "annual reports, Form 10-Ks and Morningstar Equity Analyst input."
Each Morningstar fund can be quickly compared for exposure among the three supersectors, but a more thorough review is possible at the subgroup level.
How Morningstar Measures Volatility
Morningstar is steeped in modern portfolio theory (MPT), the investment philosophy centered around minimizing risks and maximizing expected returns by strategically diversifying assets. Morningstar's primary volatility measurements come straight out of MPT: standard deviation, mean and the Sharpe ratio.
Standard deviation is a basic statistical concept that determines how wide a fund's range of performance has been. A fund with less consistent returns over time – the numbers are more spread out – has a higher standard deviation. Calculate the standard deviation by taking the square root of the fund return variance, which is just the squared differences from the mean return. This is a reasonable and uncontroversial indicator of volatility.
The mean is just the average return of the fund. Morningstar calculates the mean based on an annualized average monthly return; if a fund gained 80% over the course of a year, its average annualized monthly return was 6.67% (80% divided by 12 months). The primary function of the mean is to serve as a base unit for the standard deviation.
The last of Morningstar's MPT volatility metrics is the Sharpe ratio, which determines how much extra return an investor receives for a given amount of extra assumed risk. Nobel laureate William F. Sharpe created the concept behind the Sharpe ratio in 1966, and it has been a favorite in the finance industry since. Calculate an investment's Sharpe ratio with the following formula:
Sharpe (Investment) = Average Return − Risk Free Rate of Return Standard Deviation of Investment \text{Sharpe (Investment)} = \frac{\text{Average Return}\ -\ \text{Risk Free Rate of Return}}{\text{Standard Deviation of Investment}} Sharpe (Investment)=Standard Deviation of InvestmentAverage Return − Risk Free Rate of Return
Through the Sharpe ratio, Morningstar can compare the performance of one portfolio with another on a risk-adjusted basis.
Bear Market Decile Rank
The bear market decile rank is a non-MPT volatility and risk measurement in the Morningstar toolbox. Essentially, Morningstar compares every equity fund against the S&P 500 Index and every bond or fixed-income fund against the Lehman Brothers Aggregate Index. All equity funds and all bond funds are measured against each other and assigned decile rankings according to their performances during bear markets. It's a more sophisticated way to look at downside capture.
Morningstar Analyst Rating for Funds
The standard Morningstar star rating is backwards-looking; it tells an investor which funds have performed best over a three-, five- or 10-year period. One common misconception is that Morningstar awards higher star ratings to funds it expects to perform better in the future, which isn't the case. There are no predictive or prescriptive elements in the star rating system.
Morningstar does have a forward-looking metric: the analyst rating for funds. The analyst rating is a summary of Morningstar's "conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis."
Analyst ratings are graded on a five-tier system, with three positive ratings of Gold, Silver and Bronze, plus a Neutral rating and a Negative rating. Morningstar determines analyst ratings based on how a fund scores across five pillars: process, performance, people, parent and price. Gold funds are the best, and are those in which Morningstar analysts have the highest confidence. Silver funds have advantages across all of the five pillars. Bronze funds show "notable advantages across several," though not all, pillars. Neutral funds don't receive analyst confidence for overperformance or underperformance. Negative funds show flaws that analysts believe will hamper future performance.
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3ccfe142848a0682f9f806eef8f2d705 | https://www.investopedia.com/articles/investing/102115/what-beta-and-how-calculate-beta-excel.asp | How to Calculate Beta in Excel | How to Calculate Beta in Excel
What Is Beta?
Peering through Yahoo (YHOO) Finance, Google (GOOG) Finance, or other financial data feeders, one may see a variable called beta amid other financial data, such as stock price or market value.
In finance, the beta of a firm refers to the sensitivity of its share price with respect to an index or benchmark. For example, consider the hypothetical firm US CORP (USCS). Google Finance provides a beta for this company of 5.48, which means that with respect to the historical variations of the stock compared to the Standard & Poor's 500, US CORP increased on average by 5.48% if the S&P 500 rose by 1%. Conversely, when the S&P 500 is down 1%, US CORP Stock would tend to average a decline of 5.48%.
Generally, the index of one is selected for the market index, and if the stock behaved with more volatility than the market, its beta value will be greater than one. If the opposite is the case, its beta will be a value less than one. A company with a beta of greater than one will tend to amplify market movements (for instance the case for the banking sector), and a business with a beta of less than one will tend to ease market movements.
Beta can be seen as a measure of risk: the higher the beta of a company, the higher the expected return should be to compensate for the excess risk caused by volatility.
Therefore, from a portfolio management or investment perspective, one wants to analyze any measures of risk associated with a company to gain a better estimation of its expected return.
Key Takeaways Beta is a measure of how sensitive a firm's stock price is to an index or benchmark.A beta greater than 1 indicates that the firm's stock price is more volatile than the market, and a beta less than 1 indicates that the firm's stock price is less volatile than the market.A beta may produce different results because of the variations in estimating it, such as different time spans used to calculate data.Microsoft Excel serves as a tool to quickly organize data and calculate beta.Low beta stocks are less volatile than high beta stocks and offer more protection during turbulent times.
1:23 How Do You Calculate Beta In Excel?
Different Results for the Same Beta
Incidentally, it is important to differentiate the reasons why the beta value that is provided on Google Finance may be different from the beta on Yahoo Finance or Reuters.
This is because there are several ways to estimate beta. Multiple factors, such as the duration of the period taken into account, are included in the computation of the beta, which creates various results that could portray a different picture. For example, some calculations base their data on a three-year span, while others may use a five-year time horizon. Those two extra years may be the cause of two vastly different results. Therefore, the idea is to select the same beta methodology when comparing different stocks.
Calculation of Beta Using Excel
It's simple to calculate the beta coefficient. The beta coefficient needs a historical series of share prices for the company that you are analyzing. In our example, we will use Apple (AAPL) as the stock under analysis and the S&P 500 as our historical index. To get this data, go to:
Yahoo! Finance –> Historical prices, and download the time series "Adj Close" for the S&P 500 and the firm Apple.
We only provide a small snippet of the data over 750 rows as it is extensive:
Once we have the Excel table, we can reduce the table data to three columns: the first is the date, the second is the Apple stock, and the third is the price of the S&P 500.
There are then two ways to determine beta. The first is to use the formula for beta, which is calculated as the covariance between the return (ra) of the stock and the return (rb) of the index divided by the variance of the index (over a period of three years).
βa=Cov(ra,rb)Var(rb)\begin{aligned} &\beta_a = \frac { \text{Cov} ( r_a, r_b ) }{ \text{Var} ( r_b ) } \\ \end{aligned}βa=Var(rb)Cov(ra,rb)
To do so, we first add two columns to our spreadsheet; one with the index return r (daily in our case), (column D in Excel), and with the performance of Apple stock (column E in Excel).
At first, we only consider the values of the last three years (about 750 days of trading) and a formula in Excel, to calculate beta.
BETA FORMULA = COVAR (D1: D749; E1: E749) / VAR (E1: E749)
The second method is to perform a linear regression, with the dependent variable performance of Apple stock over the last three years as an explanatory variable and the performance of the index over the same period.
Now that we have the results of our regression, the coefficient of the explanatory variable is our beta (the covariance divided by variance).
With Excel, we can pick a cell and enter the formula: "SLOPE" which represents the linear regression applied between the two variables; the first for the series of daily returns of Apple (here: 750 periods), and the second for the daily performance series of the index, which follows the formula:
BETA FORMULA = SLOPE (E1: E749; D1:D749)
Here, we have just computed a beta value for Apple's stock (0.77 in our example, taking daily data and an estimated period of three years, from April 9, 2012, to April 9, 2015).
Low Beta/High Beta
Many investors found themselves with heavy losing positions as part of the Global Financial Crisis, which began in 2007. As part of those collapses, low beta stocks dove down much less than higher beta stocks during periods of market turbulence. This is because their market correlation was much lower, and thus the swings orchestrated through the index were not felt as acutely for those low beta stocks.
However, there are always exceptions given the industry or sectors of low beta stocks, and so, they might have a low beta with the index but a high beta within their sector or industry.
Therefore, incorporating low beta stocks versus higher beta stocks could serve as a form of downside protection in times of adverse market conditions. Low beta stocks are much less volatile; however, another analysis must be done with intra-industry factors in mind.
On the other hand, higher beta stocks are selected by investors who are keen and focused on short-term market swings. They wish to turn this volatility into profit, albeit with higher risks. Such investors would select stocks with a higher beta, which offer more ups and downs and entry points for trades than stocks with lower beta and lower volatility.
The Bottom Line
It is important to follow strict trading strategies and rules and apply a long-term money management discipline in all beta cases. Employing beta strategies can be useful as part of a broader investment plan to limit downside risk or realize short-term gains, but it's important to remember that it is also subject to the same levels of market volatility as any other trading strategy.
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7330383b4e6221e7897dcaf79ccd34b3 | https://www.investopedia.com/articles/investing/102314/understanding-benchmark-oils-brent-blend-wti-and-dubai.asp | Benchmark Oils: Brent Crude, WTI and Dubai | Benchmark Oils: Brent Crude, WTI and Dubai
Open a newspaper and there’s a good chance you’ll find a news story about the price of oil going in one direction or the other. To the average consumer, it’s easy to get the impression that there’s a singular, worldwide market for this crucial energy source.
In reality, there are different types of crude oil – the thick, unprocessed liquid that drillers extract below the earth – and some are more desirable than others. For instance, it’s easier for refiners to make gasoline and diesel fuel out of low-sulfur or “sweet” crude than oil with high-sulfur concentrations. Low-density, or “light” crude is generally favorable to the high-density variety for the same reason.
Where the oil comes from also makes a difference if you’re a buyer. The less expensive it is to deliver the product, the cheaper it is for the consumer. From a transportation standpoint, oil extracted at sea has certain advantages over land-based supplies, which depend on the capacity of pipelines.
Because of these factors, buyers of crude oil – along with speculators – need an easy way to value the commodity based on its quality and location. Benchmarks such as Brent, WTI and Dubai/Oman serve this important purpose. When refiners purchase a Brent contract, they have a strong idea of how good the oil will be and where it will come from. Today, much of the global trading takes place on the futures market, with each contract tied to a certain category of oil.
Because of the dynamic nature of supply and demand, the value of each benchmark is continually changing. Over the long-term, a marker that sold at a premium to another index may suddenly become available at a discount.
1:44 Understanding Benchmark Oils
The Main Benchmarks
There are dozens of different oil benchmarks, with each one representing crude oil from a particular part of the globe. However, the price of most of them are pegged to one of the following three primary benchmarks:
Brent Crude
Roughly two-thirds of all crude contracts around the world reference Brent Crude, making it the most widely used marker of all. These days, “Brent” actually refers to oil from four different fields in the North Sea: Brent, Forties, Oseberg, and Ekofisk. Crude from this region is light and sweet, making them ideal for the refining of diesel fuel, gasoline, and other high-demand products. And because the supply is waterborne, it’s easy to transport to distant locations.
West Texas Intermediate (WTI)
WTI refers to oil extracted from wells in the U.S. and sent via pipeline to Cushing, Oklahoma. The fact that supplies are land-locked is one of the drawbacks to West Texas crude as it’s relatively expensive to ship to certain parts of the globe. The product itself is very light and very sweet, making it ideal for gasoline refining, in particular. WTI continues to be the main benchmark for oil consumed in the United States.
Dubai/Oman
This Middle Eastern crude is a useful reference for oil of a slightly lower grade than WTI or Brent. A “basket” product consisting of crude from Dubai, Oman or Abu Dhabi, it’s somewhat heavier and has higher sulfur content, putting it in the “sour” category. Dubai/Oman is the main reference for Persian Gulf oil delivered to the Asian market.
Figure 1
Brent is the reference for about two-thirds of the oil traded around the world, with WTI the dominant benchmark in the U.S. and Dubai/Oman influential in the Asian market.
Source: IntercontinentalExchange (ICE)
Importance of the Derivatives Market
Crude Futures
There was once a time when buyers would primarily purchase crude oil on the “spot market” – that is, they’d pay the current price and accept delivery within a few weeks. But after the oil crisis of the late 1970s, refiners and government buyers began looking for a way to minimize the risk of sudden price increases.
The solution came in the form of crude oil futures, which are tied to a specific benchmark crude. With futures, buyers can lock in the price of a commodity several months, or even years, in advance. If the price of the reference crude rises significantly, the purchaser is better off with the futures contract. Many futures are settled in cash, although some allow for physical delivery of the commodity.
Different crude contracts trade on different exchanges. Brent futures are available on ICE Futures Europe, while WTI contracts are sold chiefly on the New York Mercantile Exchange, or NYMEX. The influential Oman Crude Oil Futures Contract (DME Oman) has been marketed on the Dubai Mercantile Exchange since 2007. These contracts stipulate not only where the oil is drilled, but also its quality.
Crude Options
In addition to futures, market participants can also invest in options that are linked to a particular crude benchmark. These derivatives are another important way to help mitigate price risk. Should the value of a certain crude marker skyrocket, the owner of a call option would have the right – though not the obligation – to buy a specific number of barrels at a pre-determined price.
Speculative Trading
However, not all futures or options tied to a crude benchmark are used for hedging purposes. Speculators are also major players in the market, betting that changes to supply or demand will drive the price of certain crude products higher or lower.
Investors can also gamble on what will happen to the difference, or spread, between two benchmarks. Participants typically analyze the fundamentals of a specific oil source and guess whether the gap between two markers will widen or close. Like traditional oil options, these “spread options” are available on major exchanges.
Trading tends to be particularly heavy when one of the two benchmarks undergoes unusual volatility. For example, WTI-Brent spread options on NYMEX experienced record trading volume from 2011 to 2013 after a glut in U.S. crude sent WTI prices in a tailspin relative to Brent.
The Bottom Line
The market for crude is incredibly diverse, with the quality and original location of the oil making a major impact on price. Because they’re relatively stable, most crude oil prices worldwide are pegged to the Brent, WTI or Dubai/Oman benchmarks.
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639ae1bf09a906aafe272f3800a30971 | https://www.investopedia.com/articles/investing/102413/cash-flow-statement-reviewing-cash-flow-operations.asp | Cash Flow Statements: Reviewing Cash Flow From Operations | Cash Flow Statements: Reviewing Cash Flow From Operations
Operating cash flow is cash that is generated from the normal operating processes of a business. A company's ability to consistently generate positive cash flows from its daily business operations is highly valued by investors. In particular, operating cash flow can uncover a company's true profitability. It’s one of the purest measures of cash sources and uses.
The purpose of drawing up a cash flow statement is to see a company's sources of cash and uses of cash over a specified time period. The cash flow statement is traditionally considered to be less important than the income statement and the balance sheet, but it can be used to understand the trends of a company's performance that can't be understood through the other two financial statements.
While the cash flow statement is considered the least important of the three financial statements, investors find the cash flow statement to be the most transparent; so, they rely on it more than the other financial statements when making investment decisions.
The Cash Flow Statement
Operating cash flow, or cash flow from operations (CFO), can be found in the cash flow statement, which reports the changes in cash versus its static counterparts: the income statement, balance sheet, and shareholders’ equity statement. Specifically, the cash flow statement reports where cash is used and generated over specific time periods and ties the static statements together.
By taking net income on the income statement and making adjustments to reflect changes in the working capital accounts on the balance sheet (receivables, payables, inventories), the operating cash flow section shows how cash was generated during the period. It is this translation process from accrual accounting to cash accounting that makes the operating cash flow statement so important.
The cash flow statement is broken down into three categories: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. In some cases, there is a supplemental activities category as well. These are segregated so that analysts develop a clear idea of all the cash flows generated by a company’s various activities.
Operating activities: records a company's operating cash movement, the net of which is where operating cash flow (OCF) is derived. Investing activities: records changes in cash from the purchase or sale of property, plants, equipment, or generally long-term investments. Financing activities: reports cash level changes from the purchase of a company’s own stock or issue of bonds and payments of interest and dividends to shareholders. Supplemental information: basically everything that does not relate to the major categories.
Breakdown of Activities
Operating activities are normal and core activities within a business that generate cash inflows and outflows. They include:
Total sales of goods and services collected during a period Payments made to suppliers of goods and services used in production settled during a period Payments to employees or other expenses made during a period
Cash flow from operating activities excludes money that is spent on capital expenditures, cash directed to long-term investments and any cash received from the sale of long-term assets. Also excluded are the amounts paid out as dividends to stockholders, amounts received through the issuance of bonds and stock and money used to redeem bonds.
Investing activities consist of payments made to purchase long-term assets, as well as cash received from the sale of long-term assets. Examples of investing activities are the purchase or sale of a fixed asset or property, plant, and equipment and the purchase or sale of a security issued by another entity.
Financing activities consist of activities that will alter the equity or borrowings of a company. Examples of financing activities include the sale of a company's shares or the repurchase of its shares.
Calculating Cash Flow
To see the importance of changes in operating cash flows, it’s important to understand how cash flow is calculated. Two methods are used to calculate cash flow from operating activities: indirect and direct, which both produce the same result.
Direct Method: This method draws data from the income statement using cash receipts and cash disbursements from operating activities. The net of the two values is the operating cash flow (OCF). Indirect Method: This method starts with net income and converts it to OCF by adjusting for items that were used to calculate net income but did not affect cash.
Image by Sabrina Jiang © Investopedia 2020
Direct Versus Indirect Method
The direct method adds up all the various types of cash payments and receipts, including cash paid to suppliers, cash receipts from customers and cash paid out in salaries. These figures are calculated by using the beginning and ending balances of a variety of business accounts and examining the net decrease or increase of the account.
The exact formula used to calculate the inflows and outflows of the various accounts differs based on the type of account. In the most commonly used formulas, accounts receivable are used only for credit sales and all sales are done on credit. If cash sales have also occurred, receipts from cash sales must also be included to develop an accurate figure of cash flow from operating activities. Since the direct method does not include net income, it must also provide a reconciliation of net income to the net cash provided by operations.
In contrast, under the indirect method, cash flow from operating activities is calculated by first taking the net income from a company's income statement. Because a company’s income statement is prepared on an accrual basis, revenue is only recognized when it is earned and not when it is received. Net income is not a perfectly accurate representation of net cash flow from operating activities; so, it becomes necessary to adjust earnings before interest and taxes (EBIT) for items that affect net income even though no actual cash has yet been received or paid against them. The indirect method also makes adjustments to add back non-operating activities that do not affect a company's operating cash flow.
The direct method for calculating a company's cash flow from operating activities is a more straightforward approach in that it reveals a company's operating cash receipts and payments, but it is more challenging to prepare since the information is difficult to assemble. Still, whether you use the direct or indirect method for calculating cash from operations, the same result will be produced.
Operating Cash Flows (OCF)
OCF is a prized measurement tool as it helps investors gauge what’s going on behind the scenes. For many investors and analysts, OCF is considered the cash version of net income, since it cleans the income statement of non-cash items and non-cash expenditures (depreciation, amortization, non-cash working capital and changes in current assets and liabilities).
OCF is a more important gauge of profitability than net income as there is less opportunity to manipulate OCF to appear more or less profitable. With the passing of strict rules and regulations on how overly creative a company can be with its accounting practices, chronic earnings manipulation can easily be spotted, especially with the use of OCF. It is also a good proxy of a company’s net income; for example, a reported OCF higher than NI is considered positive as income is actually understated due to the reduction of non-cash items.
Image by Sabrina Jiang © Investopedia 2020
Above are the reported cash flow activities for AT&T (T) for its fiscal year 2012 (in millions). Using the indirect method, each non-cash item is added back to net income to produce cash from operations. In this case, cash from operations is over five times as much as reported net income, making it a valuable tool for investors in evaluating AT&T's financial strength.
The Bottom Line
Operating cash flow is just one component of a company’s cash flow story, but it is also one of the most valuable measures of strength, profitability, and the long-term future outlook. It is derived either directly or indirectly and measures money flow in and out of a company over specific periods.
Unlike net income, OCF excludes non-cash items like depreciation and amortization, which can misrepresent a company's actual financial position. It is a good sign when a company has strong operating cash flows with more cash coming in than going out. Companies with strong growth in OCF most likely have a more stable net income, better abilities to pay and increase dividends and more opportunities to expand and weather downturns in the general economy or their industry.
If you think “cash is king,” strong cash flow from operations is what you should watch for when analyzing a company.
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fc3f285b2deaf408b0a955ec940bd3d1 | https://www.investopedia.com/articles/investing/102413/why-and-when-do-countries-default.asp | Why and When Do Countries Default? | Why and When Do Countries Default?
Though not common, countries can, and periodically do, default on their sovereign debt. This happens when the government is either unable or unwilling to make good on its fiscal promises to repay its bondholders. Argentina, Russia, and Lebanon are just a few of the governments that have defaulted over the past decades.
Of course, not all defaults are the same. In some cases, the government misses an interest or principal payment. Other times, it merely delays a disbursement. The government can also exchange the original notes for new ones with less favorable terms. Here, the holder either accepts lower returns or takes a “haircut” on the loan – that is, accepts a bond with a much smaller par value.
Key Takeaways Sovereign default is a failure of a government to honor some or all of its debt obligations. While uncommon, countries do default when their national economies weaken, when they issue bond denominated in a foreign currency, or a political unwillingness to service debts. Countries are often hesitant to default on their debts, since doing so will make borrowing funds in the future difficult and expensive.
Factors Affecting Default Risk
Historically, failure to make good on loans is a bigger problem for countries that borrow in a foreign currency instead of using their own. Many developing countries issue bonds in an alternate currency in order to attract investors – often denominated U.S. dollars – but borrowing in another currency plays a significant role in default risk. The reason is that when a country that borrows foreign currency faces a budgetary shortfall, it does not have the option to print more money.
The nature of a country’s government also plays a major role in credit risk. Research suggests that the presence of checks and balances leads to fiscal policies that maximize social welfare – and honoring debt carried by domestic as well as foreign investors is a component of maximizing social welfare. Conversely, governments that are composed of certain political groups with a disproportionate power level can lead to reckless spending and, eventually, default.
With the ability to print their own money, countries like the United States, Great Britain, and Japan appear immune to a sovereign default, but this is not necessarily the case. Despite a stellar record overall, the United States has technically defaulted a few times throughout its history. In 1979, for instance, the Treasury temporarily missed interest payments on $122 million of debt because of a clerical error. Even if the government can pay its debts, legislators may not be willing to do so, as periodic clashes over the debt limit remind us.
Investors can thus experience a loss on government debt, even if the nation has not officially defaulted. Whenever a country's Treasury must print more money to meet its obligations, the country’s total money supply increases, creating inflationary pressure.
Mitigating Risks
When a country defaults on its debt, the impact on bondholders can be severe. In addition to punishing individual investors, defaulting impacts pension funds and other large investors with substantial holdings. One way that institutional investors can protect themselves against catastrophic losses is through a hedging strategy known as a credit default swap (CDS). With a CDS, the contract seller agrees to pay any remaining principal and interest on a debt should the nation go into default. In exchange, the buyer pays a period protection fee, which is similar to an insurance premium. The protected party agrees to transfer the original bond, which may have some residual value, to its counterpart should a negative credit event occur.
While originally intended as a form of protection or insurance, swaps have also become a common way to speculate on a country's credit risk. Many of those trading CDS, in other words, do not have positions on the underlying bonds that they reference. For example, an investor who thinks the market has overestimated Greece's credit problems could sell a contract and collect premiums and be confident that there is no one to reimburse.
Because credit default swaps are relatively sophisticated instruments and trade over-the-counter (OTC), getting up-to-date market prices is difficult for typical investors. This is one of the reasons only institutional investors use them, as they come with more extensive market knowledge and access to special computer programs that capture transaction data.
Economic Impact
Just as an individual who misses payments has a harder time finding affordable loans, countries that default – or risk default, for that matter – experience substantially higher borrowing costs. Ratings agencies such as Moody’s, Standard & Poor’s, and Fitch are responsible for evaluating the credit quality of countries worldwide based on their financial and political outlook. In general, nations with a higher credit rating enjoy lower interest rates and thus cheaper borrowing costs.
When a country does default, it can take years to recover. Argentina, which missed bond payments beginning in 2001, is a perfect example. By 2012, the interest rate on its bonds was still more than 12 percentage points higher than that of U.S. Treasuries. If a country has defaulted even once, it becomes harder to borrow in the future, and so low-income countries are particularly at risk. According to Masood Ahmed, a former senior executive at the IMF and now president of the Center for Global Development, as of Oct. 2018, of the 59 of the countries that the IMF classifies as low-income developing countries, 24 were in a debt crisis or at the edge of one, which is almost 40% and double the number in 2013.
Perhaps the biggest concern about a default, however, is the impact on the broader economy. In the United States, for instance, many mortgages and student loans are pegged to Treasury rates. If borrowers were to experience dramatically higher payments as the result of a debt default, the result would be substantially less disposable income to spend on goods and services.
Because of fear of contagion can spread to other economies, countries with close ties – particularly those that own much of the country's debt – will sometimes step in to avert an outright default. This happened in the mid-1990s when the United States helped to bail out Mexican bonds. Another example in the wake of the 2008 global financial crisis occurred as the International Monetary Fund (IMF), European Union (EU), and European Central Bank (ECB), came together to provide Greece with much-needed liquidity and credit stabilization.
After Default: The Perfect Time to Invest?
Whereas some investors look at a financial crisis and see chaos and losses, others recognize a crisis as a potential opportunity. These investors believe that sovereign default represents a bottoming out point – or something close to it – for government bonds. For the optimistic investor, the only logical direction for these bonds is up.
A number of so-called “vulture funds” specialize in precisely this type of bond buying activity. Much like a debt collection agency buys personal credit accounts at a low cost, these funds purchase defaulted government bonds for a fraction of their original worth. Because of the broader economic fallout that follows a sovereign default, investors frequently seek to pick up undervalued stocks in that country as well.
Investing in defaulting countries comes with its fair share of risk, of course, because there is no guarantee that a rebound will ever take place, and the larger issues that caused the default in the first place may still persist or are yet to be fully worked out. Those seeking security in their portfolio above all else should probably invest elsewhere. However, recent historical examples are encouraging for the growth-oriented investor. For instance, within the past few decades, equity markets in Russia, Brazil, and Mexico increased substantially in the wake of a bond crisis. The key is to look for companies with competitive advantages and a low price-to-earnings ratio that reflects their elevated risk level.
The Bottom Line
There have been numerous government defaults over the past few decades, particularly by countries that borrow in a foreign currency. When default occurs, the government’s bond yields rise precipitously creating a ripple effect throughout the domestic, and often the world, economy.
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f9ae93042efb8ef823154cc3c929c730 | https://www.investopedia.com/articles/investing/102615/story-instagram-rise-1-photo0sharing-app.asp | The Story of Instagram: The Rise of the #1 Photo-Sharing Application | The Story of Instagram: The Rise of the #1 Photo-Sharing Application
The story of Instagram’s explosive rise reads like a Silicon Valley fairy tale, with the company gaining staggering momentum within just a few short months. The photo and video-sharing social media application took only eight weeks for software engineers to develop before it was launched on Apple’s mobile operating system in October 2010. In less than two years, Facebook (FB) had acquired the company for $1 billion in cash and stock. But like all good tales, the process involved many twists and turns, failures and successes, conflicts and synergies, and a dose of fortuitous happenstance.
Key Takeaways Instagram is a photo and video-sharing social media application that was launched in 2010 by Kevin Systrom.The first prototype of Instagram was a web app called Burbn, which was inspired by Systrom's love of fine whiskeys and bourbons.The Instagram app was launched on Oct. 6, 2010, and racked up 25,000 users in one day.From the beginning, the primary focus of the app was to feature photographs, specifically those taken on mobile devices.Just prior to Instagram's initial public offering (IPO) in 2012, Facebook acquired the company for $1 billion in cash and stock.
History of Instagram
In 2009, Kevin Systrom, a 27-year-old Stanford University graduate, was working at Nextstop, a travel recommendations startup. Systrom had previously worked at Google (GOOG) as a corporate development associate and interned at Odeo (a company that would later evolve into Twitter (TWTR).
While Systrom had no formal training in computer science, he learned to code on the nights and the weekends while working at Nextstop. He eventually built a prototype of a web app called Burbn, which was inspired by his taste for fine whiskeys and bourbons. The Burbn app allowed users to check-in, post their plans, and share photos. Although at the time, location-based check-in apps were very popular, the photo-sharing feature of Burbn was very unique.
Venture Capital Funding
A crucial turning point came in March 2010 when Systrom attended a party for Hunch, a startup based in Silicon Valley. At the party, Systrom met two venture capitalists from Baseline Ventures and Andreessen Horowitz. After showing them the prototype of his app, they decided to meet for coffee to discuss it further. After their first meeting, Systrom decided to quit his job and focus on Burbn. Within two weeks, he had raised $500,000 in seed funding from both Baseline Ventures and Andreessen Horowitz to further develop his entrepreneurial venture.
This seed funding allowed Systrom to start building a team of people to support his venture; the first to join him was 25-year-old Mike Krieger. Also a Stanford graduate, Krieger had previously worked as an engineer and user-experience designer at the social media platform Meebo. The two knew each other from their time as students at Stanford.
Pivot to a Photo-Sharing Application
After Krieger joined, the two reassessed Burbn and decided to focus primarily on one thing: photographs specifically taken on mobile devices. They carefully studied leading apps in the photography category at that time. For Krieger and Systrom, the Hipstamatic app stood out to them because it was popular and had interesting features that you could apply to photographs, such as filters. However, it lacked social media-sharing capabilities; Systrom and Krieger saw potential in building an app that bridged Hipstamatic and a social media platform like Facebook.
They took a step backward and stripped Burbn down to its photo, commenting, and "liking" functions. It was at that time that they renamed their app Instagram, combining the words instant and telegram. They also began focusing on improving the photo-sharing experience. Their intention for the app was that it would be minimalist and require as few actions as possible from the user. After eight weeks of fine-tuning the app, they gave it to friends to beta test and evaluate its performance. After resolving some errors in the software, they brought it to launch.
Launch of the iOS App
The Instagram app was launched on Oct. 6, 2010, and racked up 25,000 users in one day. At the end of the first week, Instagram had been downloaded 100,000 times, and by mid-December, the number of users had reached one million. The timing of the app’s release ended up being fortuitous because the iPhone 4– featuring an improved camera–had launched just a few months earlier, in June 2010.
Series A Funding
After the rapid rise in Instagram's user base, more investors became interested in the company. In February 2011, Instagram raised $7 million in a Series A funding round. One of their investors was Benchmark Capital, which valued the company at around $25 million. In addition to institutional investors, the company attracted the attention of other leading companies in the social media technology industry, including Twitter and Facebook.
Although this new round of financing gave Systrom and Krieger the opportunity to hire more people, the founders decided to keep the company really small, with barely a dozen employees.
Systrom knew Jack Dorsey, the co-founder of Twitter, from his time as an intern at Odeo. Dorsey expressed a strong interest in the company and pursued the idea of acquiring Instagram. Twitter reportedly made a formal offer of around $500 million in stock, but Systrom declined the offer.
Facebook Acquires Instagram
By March 2012, the app’s user base had grown to approximately 27 million users. In April 2012, Instagram was released for Android phones and was downloaded more than one million times in less than one day. At the time, the company was also close to receiving a new round of funding at a valuation of $500 million. Systrom and Facebook founder Mark Zuckerberg had become acquainted through events held at Stanford, and the two had been in communication in the beginning of Instagram's rapid rise in popularity.
In April 2012, Facebook made an offer to purchase Instagram for about $1 billion in cash and stock; a key provision was that the company would remain independently managed. Shortly thereafter and just prior to its initial public offering (IPO), Facebook moved forward and acquired the company for $1 billion in cash and stock.
Instagram made a limited-feature website interface available in November 2012. In June 2014, the company introduced an app for the Amazon Fire device, and finally, in 2016, it created an app that made it compatible with Microsoft Windows tablets and computers.
Terms of Service Controversy
Instagram hit a bump in the road in December 2012 after updating its terms of service. This update effectively granting Instagram the right to sell users' photos to third parties without notification or compensation. The move drew immediate criticism from privacy advocates and many of the app's users; some users responded by deleting their accounts. Instagram eventually retracted the controversial terms.
New Features Added to the App
Although Instagram has a variety of features, in general, the app's interface allows individuals who have created a free account to upload media–both photos and videos. Users can then edit the media they upload with filters and organize them with location information and hashtags (a word or phrase preceded by a hash sign that is used primarily on social media platforms to identify posts about a specific topic). Users can make their profiles public or private; the difference is that with a public profile, a user's photos/videos are viewable by every other Instagram user, whereas with a private profile, users can approve who they want to be able to view their posts. Instagram users can browse other users' photos and videos by searching for hashtags and locations. They can also scroll through an aggregation of trending content and interact with other user's photos and videos by clicking on buttons that allow them to "like" a post or add a text comment to a post. When a user "follows" another user, it means that they are adding that user's photos and videos to their feed.
The first version of the Instagram app only allowed users to display their media in a square aspect ratio (an aspect ratio is a proportional relationship between an image's width and height). For a square aspect ratio, an image's height and width are the same. This meant that Instagram users could only post media that matched the 640-pixel width of the iPhone 4 at that time (in 2010). In 2015, this feature changed and users could upload media that was larger (up to 1080 pixels).
Since Instagram was first launched, the service has also added a messaging feature and the capability for users to include multiple images or videos within the same post. Currently, one of the app's most popular features is called "Instagram Stories." With this feature, users can post photos and videos to a separate feed of content within the app. These types of posts are viewable by other users for 24 hours after the time of the original posting. According to Instagram, 500 million people used Instagram Stories every day in 2020.
The Bottom Line
While user growth has continued to increase since the Facebook acquisition, Instagram has made a relatively small number of changes to the app, sticking to its simple and intuitive user experience and core focus on photo- and video-sharing capabilities. Despite the high price tag of its acquisition, the company appears to have been a savvy investment on the part of Facebook. In 2019, the market research company eMarketer predicted that Instagram would reach 117.2 million users by 2021. In 2018, Instagram was the second-most downloaded free app on the Apple app store (second only to Youtube's free mobile-device app. In 2019, there were 1 billion people that used Instagram every month.
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cc3dc3b64ce8cd8fa8c530f5ba2bc822 | https://www.investopedia.com/articles/investing/102715/calculating-internal-rate-return-using-excel.asp | Calculating the Internal Rate of Return with Excel | Calculating the Internal Rate of Return with Excel
The internal rate of return (IRR) is the discount rate providing a net value of zero for a future series of cash flows. The IRR and net present value (NPV) are used when selecting investments based on the returns.
How IRR and NPV Differ
The main difference between the IRR and NPV is that NPV is an actual amount while the IRR is the interest yield as a percentage expected from an investment.
Investors typically select projects with an IRR that is greater than the cost of capital. However, selecting projects based on maximizing the IRR as opposed to the NPV could increase the risk of realizing a return on investment greater than the weighted average cost of capital (WACC) but less than the present return on existing assets.
IRR represents the actual annual return on investment only when the project generates zero interim cash flows—or if those investments can be invested at the current IRR. Therefore, the goal should not be to maximize NPV.
4:20 How to Calculate IRR in Excel
What Is Net Present Value?
NPV is the difference between the present value of cash inflows and the present value of cash outflows over time.
The net present value of a project depends on the discount rate used. So when comparing two investment opportunities, the choice of discount rate, which is often based on a degree of uncertainty, will have a considerable impact.
In the example below, using a 20% discount rate, investment #2 shows higher profitability than investment #1. When opting instead for a discount rate of 1%, investment #1 shows a return bigger than investment #2. Profitability often depends on the sequence and importance of the project's cash flow and the discount rate applied to those cash flows.
What Is the Internal Rate of Return?
The IRR is the discount rate that can bring an investment's NPV to zero. When the IRR has only one value, this criterion becomes more interesting when comparing the profitability of different investments.
In our example, the IRR of investment #1 is 48% and, for investment #2, the IRR is 80%. This means that in the case of investment #1, with an investment of $2,000 in 2013, the investment will yield an annual return of 48%. In the case of investment #2, with an investment of $1,000 in 2013, the yield will bring an annual return of 80%.
If no parameters are entered, Excel starts testing IRR values differently for the entered series of cash flows and stops as soon as a rate is selected that brings the NPV to zero. If Excel does not find any rate reducing the NPV to zero, it shows the error "#NUM."
If the second parameter is not used and the investment has multiple IRR values, we will not notice because Excel will only display the first rate it finds that brings the NPV to zero.
In the image below, for investment #1, Excel does not find the NPV rate reduced to zero, so we have no IRR.
The image below also shows investment #2. If the second parameter is not used in the function, Excel will find an IRR of 10%. On the other hand, if the second parameter is used (i.e., = IRR ($ C $ 6: $ F $ 6, C12)), there are two IRRs rendered for this investment, which are 10% and 216%.
If the cash flow sequence has only a single cash component with one sign change (from + to - or - to +), the investment will have a unique IRR. However, most investments begin with a negative flow and a series of positive flows as first investments come in. Profits then, hopefully, subside, as was the case in our first example.
Calculating IRR in Excel
In the image below, we calculate the IRR.
To do this, we simply use the Excel IRR function:
Modified Internal Rate of Return (MIRR)
When a company uses different borrowing rates of reinvestment, the modified internal rate of return (MIRR) applies.
In the image below, we calculate the IRR of the investment as in the previous example but taking into account that the company will borrow money to plow back into the investment (negative cash flows) at a rate different from the rate at which it will reinvest the money earned (positive cash flow). The range C5 to E5 represents the investment's cash flow range, and cells E10 and E11 represent the rate on corporate bonds and the rate on investments.
The image below shows the formula behind the Excel MIRR. We calculate the MIRR found in the previous example with the MIRR as its actual definition. This yields the same result: 56.98%.
(−NPV(rrate, values[positive])×(1+rrate)nNPV(frate, values[negative])×(1+frate))1n−1−1\begin{aligned}\left(\frac{-\text{NPV}(\textit{rrate, values}[\textit{positive}])\times(1+\textit{rrate})^n}{\text{NPV}(\textit{frate, values}[\textit{negative}])\times(1+\textit{frate})}\right)^{\frac{1}{n-1}}-1\end{aligned}(NPV(frate, values[negative])×(1+frate)−NPV(rrate, values[positive])×(1+rrate)n)n−11−1
Internal Rate of Return at Different Points in Time (XIRR)
In the example below, the cash flows are not disbursed at the same time each year – as is the case in the above examples. Rather, they are happening at different time periods. We use the XIRR function below to solve this calculation. We first select the cash flow range (C5 to E5) and then select the range of dates on which the cash flows are realized (C32 to E32).
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For investments with cash flows received or cashed at different moments in time for a firm that has different borrowing rates and reinvestments, Excel does not provide functions that can be applied to these situations although they are probably more likely to occur.
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f9d0e5f27098fcf72b3b171895d984c0 | https://www.investopedia.com/articles/investing/102715/simulating-stock-prices-using-excel.asp | How to Use Excel to Simulate Stock Prices | How to Use Excel to Simulate Stock Prices
Some active investors model variations of a stock or other asset to simulate its price and that of the instruments that are based on it, such as derivatives. Simulating the value of an asset on an Excel spreadsheet can provide a more intuitive representation of its valuation for a portfolio.
Key Takeaways Traders looking to back-test a model or strategy can use simulated prices to validate its effectiveness. Excel can help with your back-testing using a monte carlo simulation to generate random price movements. Excel can also be used to compute historical volatility to plug into your models for greater accuracy.
Building a Pricing Model Simulation
Whether we are considering buying or selling a financial instrument, the decision can be aided by studying it both numerically and graphically. This data can help us judge the next likely move that the asset might make and the moves that are less likely.
First of all, the model requires some prior hypotheses. We assume, for example, that the daily returns, or "r(t)," of these assets are normally distributed with the mean, "(μ)," and standard deviation sigma, "(σ)." These are the standard assumptions that we will use here, though there are many others that could be used to improve the accuracy of the model.
r ( t ) = S ( t ) − S ( t − 1 ) S ( t − 1 ) ∼ N ( μ , σ ) where: S ( t ) = close t S ( t − 1 ) = close t − 1 \begin{aligned} &r ( t ) = \frac { S ( t ) - S ( t - 1 ) }{ S ( t - 1 ) } \sim N ( \mu, \sigma ) \\ &\textbf{where:} \\ &S ( t ) = \text{close}_t \\ &S ( t - 1 ) = \text{close}_{t - 1} \\ \end{aligned} r(t)=S(t−1)S(t)−S(t−1)∼N(μ,σ)where:S(t)=closetS(t−1)=closet−1
Which gives:
r ( t ) = S ( t ) − S ( t − 1 ) S ( t − 1 ) = μ δ t + σ ϕ δ t where: δ t = 1 day = 1 3 6 5 of a year μ = mean ϕ ≅ N ( 0 , 1 ) σ = annualized volatility \begin{aligned} &r ( t ) = \frac { S ( t ) - S ( t - 1 ) }{ S ( t - 1 ) } = \mu \delta t + \sigma \phi \sqrt { \delta t } \\ &\textbf{where:} \\ &\delta t = 1 \ \text{day} = \frac { 1 }{ 365 } \ \text{of a year} \\ &\mu = \text{mean} \\ &\phi \cong N ( 0, 1 ) \\ &\sigma = \text{annualized volatility} \\ \end{aligned} r(t)=S(t−1)S(t)−S(t−1)=μδt+σϕδtwhere:δt=1 day=3651 of a yearμ=meanϕ≅N(0,1)σ=annualized volatility
Which results in:
S ( t ) − S ( t − 1 ) S ( t − 1 ) = μ δ t + σ ϕ δ t \begin{aligned} &\frac { S ( t ) - S ( t - 1 ) }{ S ( t - 1 ) } = \mu \delta t + \sigma \phi \sqrt { \delta t } \\ \end{aligned} S(t−1)S(t)−S(t−1)=μδt+σϕδt
Finally:
S ( t ) − S ( t − 1 ) = S ( t − 1 ) μ δ t + S ( t − 1 ) σ ϕ δ t S ( t ) = S ( t − 1 ) + S ( t − 1 ) μ δ t + S ( t − 1 ) σ ϕ δ t S ( t ) = S ( t − 1 ) ( 1 + μ δ t + σ ϕ δ t ) \begin{aligned} S ( t ) - S ( t - 1 ) = & \ S ( t - 1 ) \mu \delta t + S ( t - 1 ) \sigma \phi \sqrt { \delta t } \\ S ( t ) = & \ S ( t - 1 ) + S ( t - 1 ) \mu \delta t \ + \\ & \ S ( t - 1 ) \sigma \phi \sqrt { \delta t } \\ S ( t ) = & \ S ( t - 1 ) ( 1 + \mu \delta t + \sigma \phi \sqrt { \delta t } ) \\ \end{aligned} S(t)−S(t−1)=S(t)=S(t)= S(t−1)μδt+S(t−1)σϕδt S(t−1)+S(t−1)μδt + S(t−1)σϕδt S(t−1)(1+μδt+σϕδt)
And now we can express the value of today’s closing price using the prior day close.
Computation of μ:
To compute μ, which is the mean of the daily returns, we take the n successive past close prices and apply, which is the average of the sum of the n past prices:
μ = 1 n ∑ t = 1 n r ( t ) \begin{aligned} &\mu = \frac { 1 }{ n } \sum_{ t = 1 } ^ { n } r ( t ) \\ \end{aligned} μ=n1t=1∑nr(t)
The computation of the volatility σ - volatility
φ is a volatility with an average of random variable zero and standard deviation one.
Computing Historical Volatility in Excel
For this example, we will use the Excel function "= NORMSINV (RAND ())." With a basis from the normal distribution, this function computes a random number with a mean of zero and a standard deviation of one. To compute μ, simply average the yields using the function Ln (.): the log-normal distribution.
In cell F4, enter "Ln (P (t) / P (t-1)"
In the F19 cell search "= AVERAGE (F3:F17)"
In cell H20, enter “=AVERAGE(G4:G17)
In cell H22, enter "= 365*H20" to compute the annualized variance
In cell H22, enter "= SQRT(H21) " to compute the annualized standard deviation
So we now have the "trend" of past daily returns and the standard deviation (the volatility). We can apply our formula found above:
S ( t ) − S ( t − 1 ) = S ( t − 1 ) μ δ t + S ( t − 1 ) σ ϕ δ t S ( t ) = S ( t − 1 ) + S ( t − 1 ) μ δ t + S ( t − 1 ) σ ϕ δ t S ( t ) = S ( t − 1 ) ( 1 + μ δ t + σ ϕ δ t ) \begin{aligned} S ( t ) - S ( t - 1 ) = & \ S ( t - 1 ) \mu \delta t + S ( t - 1 ) \sigma \phi \sqrt { \delta t } \\ S ( t ) = & \ S ( t - 1 ) + S ( t - 1 ) \mu \delta t \ + \\ & \ S ( t - 1 ) \sigma \phi \sqrt { \delta t } \\ S ( t ) = & \ S ( t - 1 ) ( 1 + \mu \delta t + \sigma \phi \sqrt { \delta t } ) \\ \end{aligned} S(t)−S(t−1)=S(t)=S(t)= S(t−1)μδt+S(t−1)σϕδt S(t−1)+S(t−1)μδt + S(t−1)σϕδt S(t−1)(1+μδt+σϕδt)
We will do a simulation over 29 days, therefore dt = 1/29. Our starting point is the last close price: 95.
In the cell K2, enter "0." In the cell L2, enter "95." In the cell K3, enter "1." In the cell L3, enter "= L2 * (1 + $F$19 * (1/29) + $H$22 *SQRT(1/29)*NORMSINV (RAND ()))."
Next, we drag the formula down the column to complete the entire series of simulated prices.
This model allows us to find a simulation of the assets down to 29 dates given, with the same volatility as the former 15 prices we selected and with a similar trend.
Lastly, we can click on "F9" to start another simulation since we have the rand function as part of the model.
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84f36c3b37469c4a0d1ecea5f755f091 | https://www.investopedia.com/articles/investing/102715/what-consumers-want-mcdonalds.asp | What Consumers Want From McDonald's | What Consumers Want From McDonald's
Once a pioneer in the fast-food industry, McDonald’s Corp. (MCD) is widely considered to be too comfortable with its success. As a result, the company appears to be losing touch with customers and franchise owners, even internationally. In the second quarter of 2015, McDonald’s saw its sales and earnings per share (EPS) fall. CEO Steve Easterbrook, who was appointed in 2015, turned the stock price around considerably but has yet to bring innovation to the stalling fast-food giant, leading to deficiencies in operations that are frequently noted by consumers and franchise owners as areas that need improvement.
Key Takeaways With lots of competition in the fast food market, even heavyweight McDonald's cannot take customers for granted and must constantly keep ahead. In doing so, the company has sought to identify weaknesses in its businesses or customer concerns. While perhaps obvious, the focus has been on simplicity of the ordering experience, low-cost but tasty food, and response customer service.
Simplified Menu
Eating at McDonald’s can be quite an experience, as the menus flip over at high speed, which makes for a cycle of ever-changing options, which can seem overwhelming. By getting back to its roots – hamburgers, cheeseburgers, and French fries – the McDonald’s brand can strengthen and continue to identify itself with its core consumer. Quick and simple ordering means happy customers, and revolving customers are the core of every restaurant business.
Fast Food
McDonald’s failed experiment with pizza in the 1990s should have taught the company that consumers don’t visit fast-food restaurants to sit around and wait for food. Franchisees complained about the expensive pizza ovens and long cooking time, but it took until 2000 for McDonald’s to close its pizza chapter.
Another example is when both consumers and franchise owners were complaining about the McWraps. The tricky menu item took a longer-than-expected amount of time to prepare and led to frustrated, impatient consumers. McDonald's has since phased out the McWrap, admitting that the menu had become "overcomplicated." The issue with trying and failing is that consumers grow attached to a product and lose loyalty when it is discontinued for operational purposes.
By listening to its franchisees and by extension, its consumers, McDonald’s can restore its image as a restaurant at which to get fast and cheap food.
Tasty Burgers
McDonald’s once made the tastiest hamburgers in America, but today the best hamburger award goes increasingly to fast-casual restaurants like Shake Shack Inc. (SHAK) and Five Guys. McDonald’s, in a bizarre move, abandoned its core brand of being fast and cheap and attempted to copy the upscale hamburger places to woo back consumers.
McDonald’s should be focusing on improving the quality of its core products. Locally sourced ingredients, organic food, and a high standard of quality are not necessarily the first thing consumers want from McDonald’s.
Customer Service
At the management level, there appears to be a general lack of initiative that goes into providing a pleasurable experience inside McDonald’s to match the service levels of its competitors. The best and easiest solution for improving the time spent in a McDonald’s is self-service kiosks, which are growing in popularity and widespread in Europe and Canada. These popular machines allow fast and precise ordering, secure payment options, and free up the workers to perform other tasks and improve customer service, which in a rather automated restaurant like McDonald's, does not necessarily need to be human-to-human interaction.
Lower Prices
McDonald’s raison d’être is to serve cheap food quickly, and consumers who are willing to spend more than $5 on a hamburger will go to a fast-casual hamburger restaurant instead. With its fancy Angus burgers and wraps, McDonald’s is failing its investors and the consumers who frequent the establishment for inexpensive calories.
By simplifying the menu and implementing self-serve ordering, McDonald’s can lower its prices from the labor deficit and ingredient cross-utilization. Smaller, uncomplicated menus not only translate into lower staffing costs, but they also don’t force franchisees to purchase expensive specialized equipment or keep as much inventory on hand to sell a wide variety of menu items.
The Bottom Line
McDonald’s needs to stop trying to please every type of consumer. Fast-casual restaurants are not their competition. McDonald’s will never be a place where people go to eat artisan loaves of bread and exotic meat hamburgers stuffed with imported cheese; it’s a place to buy cheap, decent-tasting hamburgers that are ready within minutes of entering the building.
As long as McDonald’s continues to compete against the wrong companies, it opens the doors for its real competition – The Wendy’s Co. (WEN) and Restaurant Brands International Inc. (QSR) subsidiary Burger King – to take over the lion's share of the fast-food market.
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d82ba3213362915c0a03c9fbb37fcdd8 | https://www.investopedia.com/articles/investing/102715/why-gold-counter-cyclical-asset.asp | Why Is Gold a Counter Cyclical Asset? | Why Is Gold a Counter Cyclical Asset?
Worldwide, gold is seen as a valuable commodity with intrinsic value. Until 1934, the U.S. dollar was backed by gold, with notes redeemable in exchange for the precious metal. Today gold remains valuable for its rarity and ability to create jewelry and other beautiful objects. It's also an investment vehicle in the commodities market. Like any commodity, gold has its ticker symbols, contract value and margin requirements. The investment is valued by supply and demand — mainly speculative demand.
However, unlike other commodities, the value of gold is less affected by consumption and largely influenced by the status of the economy. It's generally accepted that its price is tied to movements in U.S. interest rates. Over the course of history, gold's value has displayed tendencies counter-cyclical to the strength of the economy.
Influences on Gold Prices
In the world economy, gold remains one of the most complicated assets to price. Unlike stocks, currencies and other commodities, its value isn't determined by fundaments or physical supply and demand.
However, in many cases the value of gold moves indirectly with the strength of the economy. When the economy is doing well and growing, gold prices tend to fall and vice versa when the economy contracts. That said, many macroeconomic variables exhibited in growing and contracting economies play a greater role in influencing the price of gold. These factors include interest rates, oil prices, inflation and the foreign exchange market.
Macroeconomic Relationships
As a commodity, gold is typically viewed as an alternative investment. Alternative investments typically help investors hedge against market volatility. Interest rates are the primary factor in determining their attractiveness. When economies experience recessions, the central bank will manipulate interest rates to stimulate growth. As recently as the 2008 financial crisis, central banks around the world implemented quantitative easing, effectively lowering interest rates to near zero. At the same time, gold prices rose to highs of $1,900 per ounce. As interest rates fall, alternative investments such as gold become more attractive. The relationship between gold and interest rates often exhibit a negative correlation.
As an investment, gold is held to hedge against inflation. By definition, when inflation is high, the value of paper money falls in terms of the goods and services sold in the marketplace. In cases such as these, investors flock to investments that don't lose value. Fundamentally, gold is a precious and rare resource that holds high value. As a result, it usually has a direct relationship with inflation, with demand for gold increasing during inflation and decreasing during deflation. In the years leading to the financial crisis, inflation in the United States hovered around 3 percent. To put this in perspective, advanced economies target 2 percent inflation benchmarks annually. As a result of inflation, gold prices reached peaks during economic crises.
In the commodities market, assets are typically quoted in U.S. dollars. As a result, changes in the foreign exchange market can influence changes in gold. When the U.S. dollar is weak, gold becomes cheaper for other nations to purchase. As a result, the demand for gold increases as investors seek an investment that maintains value. After the 2008 recession, the U.S. dollar exhibited signs of weakness and rising gold prices. By contrast, the strong dollar of the late 1990s was tied to relatively low gold prices. Needless to say, this relationship does not always hold, as we saw earlier in 2015.
Oil Prices
Along with gold, crude oil is a commonly traded asset in the commodities market. The price of oil is determined by supply and demand and futures contracts. Theoretically, cheaper oil means lower inflation; as a result, gold is negatively affected since it's considered a hedge against inflation. Besides lower inflation, cheaper oil is a crucial indicator of economic growth. Decreasing oil prices increase spending and consumption in the economy. Likewise, better economic prospects positively affect equities and negatively affect non-income-generating assets such as gold. (See also What Determines Oil Prices?)
Safe Haven
Given its relationship with numerous economic indicators, gold is widely considered counter cyclical to economic growth. By definition, assets that negatively correlate to the overall state of the economy are said to be counter cyclical. Throughout history, gold has reacted positively when interest rates are low, inflation and unemployment high, and currencies weak. These macroeconomic indicators point to slowing and contracting economies. In this scenario, gold is considered a haven because it retains or increases value during market turbulence. Gold is often sought after by investors through economic woes in order to limit their exposure to losses.
Essentially, it's an asset that can't be manipulated by interest rate policies and is often used as a hedge against inflation. While those variables may have a stronger influence on gold prices, an expanding trade deficit is said to positively affect the long-term outlook for gold prices and exchange-traded funds. That said, as interest rates rise and the economy shows signs of growth, gold will lose favor for equities and income-generating assets.
The Bottom Line
Although the gold standard is no longer the monetary system used throughout the world, it's still considered highly valuable. Besides of its use in jewelry, gold is an extremely desirable investment vehicle. Gold investments can come in the form of stocks, exchange-traded funds or future contracts. Typically, gold reacts positively during market turbulence and negatively during economic growth. Since it maintains its intrinsic value, gold is often referred to as a haven. When fears about the security of other investments such as equities and bonds rise, many flock to gold because of its highly liquid nature. However, since the U.S. economy has continued to show signs of growth and the Federal Reserve is speculating forthcoming monetary changes, the value of gold will surely fluctuate. (For more, see The Effect of Fed Fund Rate Hikes on Gold.)
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988a59963f2266f30c6775439ec669c3 | https://www.investopedia.com/articles/investing/102815/5-signs-youre-being-overworked-your-job.asp | 5 Signs You're Being Overworked at Your Job | 5 Signs You're Being Overworked at Your Job
Most of us assume that being overworked at our job is a routine part of employment in the 21st century. And while it's true that we are all expected to do more than in the past, it's important to recognize the signs of when being overworked is reaching a dangerous level. Below are five signs you’re overworking.
1. Difficulty Relaxing
Difficulty relaxing is a sure sign of being overworked, and maybe even of total job burnout. It comes largely from always needing to be "on," as in being locked into a perpetually high state of readiness to be able to deal with whatever may come up.
Trouble relaxing can be especially acute when you hold a job that is exceptionally high stress, such as one in which you're dealing with a constant flow of emergency situations. But it can also happen when you're in a job that requires very long hours, and the dividing line between work and personal life is blurred. The situation can be aggravated if you are also required to be on call even during your off-hours.
You may have difficulty relaxing simply because there's never any time for it. That is often an underestimated problem. To function at peak efficiency in your work, you need regular periods of relaxation in order to recharge your battery. Those periods of rest and recreation help you to refresh both your body and your mind and are necessary for you to do your job well.
Key Takeaways Becoming overworked at some point in your career is becoming commonplace, and in some cases become chronic. Major signs of overworking include having trouble relaxing and feeling like there’s not enough time in the day to get everything done. Other telltale signs include never being able to complete a to-do list and seeing our health deteriorate, such as gaining or losing weight.
2. Feeling There's Not Enough Hours in the Day
Many jobs require that you do the work of two or three people, often as a result of downsizing. When co-workers are laid off, their work still needs to be done, and so it’s off-loaded to the remaining employees.
A sure sign that you feel like you’re working all the time is when working overtime becomes a regular part of your job. You can't possibly complete all of your assignments within a regular eight-hour day, and you are forced to either work extra hours in the office or bring work home.
3. Your To-Do List Keeps Growing
Your attempts at better organization help, but they never come close to making your job completely manageable. You start the day with seven items on your to-do list, but during the course of the workday, the list expands to 12 items. By the end of the day, you might have completed five things that needed to get done, but your list just continues to grow.
4. Feeling Like You'll Never Catch Up
No matter how fast or efficiently you work, you're never able to keep up with the constant flow of additional work. This is especially true with employees who function as the "go-to person" in the office, who troubleshoots more complicated problems and is routinely expected to back up less productive co-workers.
Having to carry the weight of others means you seldom experience the feeling of actually being done with any assignment or project, either at the end of the day, the week, or the month. And you come to dread meetings, either because they are so frequent (a chronic problem in some organizations), or because they do little more than reducing the time available for more productive work.
5. Your Health Is Visibly Deteriorating
This can happen in a number of ways, including:
You're losing weight—you're so stressed that you don't feel like eating. You're gaining weight—from lack of time to exercise or stress eating. You routinely function with a variety of aches and pains that have no identifiable cause. Your doctor is reporting dangerous increases in your blood pressure. You're taking multiple medications—prescription and over-the-counter—just to get through the day. You're tired, even on the days when you don't work. Your interest in everything—family, friends, recreation and hobbies—is close to nonexistent, because you simply don't feel "up to it."
The Bottom Line
Any or all of these can happen when your work becomes so all-encompassing that there's no time for anything else. When it reaches the point where being overworked is resulting in physical symptoms, it's time to call a halt.
Everyone has periods of being overworked in just about any job, but no one can live happily in a state of being permanently overworked. At that point, it's time for a serious heart-to-heart with your superiors, or at the extreme, to look for a new job.
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173dcd829c2321f5b0e8fd3952274441 | https://www.investopedia.com/articles/investing/102914/7-factors-affect-your-life-insurance-quote.asp | 7 Factors That Affect Your Life Insurance Quote | 7 Factors That Affect Your Life Insurance Quote
Life insurance is a great way to protect your loved ones financially, but it’s also a major investment. Over a period of years, even a slightly lower premium can yield major savings. The following are some of the biggest factors that insurers consider when pricing out their policies. Some of these criteria are outside your control, while others are things you can remedy with simple lifestyle choices. (For related insight, read about how you can get life insurance.)
Key Takeaways Life insurance can be financial help for your loved ones once you're gone, but it's a big investment. Many factors contribute to how high your premium payment is and whether you qualify for discounts. Age is the most important factor in determining the cost, as a younger person will make payments for many years before cashing out; therefore the younger you are, the lower your payments tend to be. Gender is also a crucial factor since women statistically live five years longer than men; as a result, insurance carriers typically offer women slightly lower premiums. Smoking, health, lifestyle, family medical history and your driving record are the other key determinents of how much you might expect to pay for life insurance.
Age
Not surprisingly, the number one factor behind life insurance premiums is the age of the policyholder. If you’re young, the chances are that you’ll be paying the insurer for years before they ever have to worry about writing your family a check. Consequently, you’re better off taking out a policy before it’s too late. But that doesn’t mean you need insurance right after college if you don’t have any financial dependents.
Gender
Next to age, gender is the biggest determinant of pricing. Insurance carriers use statistical models to approximate how long someone with a specific profile will be around. The fact is that women, on average, live nearly five years longer than men. And because they’re usually paying premiums for a longer period of time than males, they enjoy slightly lower rates. Sorry, guys.
Life insurance quotes are based on several factors, some of which may be beyond your control; when researching policies, consider the seven factors here and choose an insurer less likely to penalize those in your particular position.
Smoking
Smoking puts you at a higher risk for all sorts of health ailments. So if you like to light up, it’s a red flag for insurance companies. In fact, it’s not uncommon for smokers to pay more than twice as much as non-smokers for comparable coverage. The effect on your pocketbook is another great reason to try and kick the habit.
Health
The underwriting process for most carriers includes a medical exam in which the company records height and weight, blood pressure, cholesterol, and other key metrics. They may also require an electrocardiogram (ECG or EKG) to check your heart in some cases. It’s important to get any serious conditions like high cholesterol and diabetes managed before searching for coverage to ensure a competitive rate. Some companies do offer “no exam” policies, but you can expect to pay more.
Lifestyle
Is your favorite pastime racing cars or climbing treacherous mountains? If so, you’ll probably have to shell out substantially more for insurance. Any time you engage in high-risk activities, there’s an increased likelihood that you’ll meet an early end – a big concern for carriers. Some companies also charge more if you have a relatively dangerous profession, such as mining, fishing or transportation.
Family Medical History
There’s not much you can do about your gene pool. However, a family history of stroke, cancer or other serious medical conditions may predispose you to these ailments and lead to higher rates. Carriers are usually interested in any conditions your parents or siblings have experienced, particularly if they contributed to a premature death. Some carriers put more emphasis on your family’s health than others, but it’s likely to have some impact on your premium.
Driving Record
It may come as a surprise, but many life insurance companies look at your driving record during the underwriting process. Whether or not they ask about violations on the application, they can access Department of Motor Vehicles records to find out if you’ve run afoul of the traffic laws. Keep in mind that the last 3 to 5 years carry the most weight, so if you’ve improved your driving habits, you may benefit with a more favorable price.
Related: The Best Life Insurance Companies
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1456ba0719371d3f636a9ee3e057b6ff | https://www.investopedia.com/articles/investing/102915/5-free-ways-learn-new-skills-online.asp | 5 Free Ways to Learn New Skills Online | 5 Free Ways to Learn New Skills Online
Learning a new skill is an invaluable experience that can also have monetary benefits. If you're looking to pick up a new skill, you do not have to enroll in a costly program. In fact, many completely free opportunities exist online. In addition to being easy on your wallet, these platforms allow you to manage your time and learn at your own pace, from anywhere in the world.
1. ALISON
Founded in Galway, Ireland in 2007 by social entrepreneur and Ashoka Fellow, Mike Feerick, ALISON claims to be the first MOOC provider (Massive Open Online Course). All of ALISON’s courses are standards-based and 100 percent free. The company's mission is to enhance the careers of the platform’s users, and the communities in which they live in. Over 12 million people around the world have taken ALISON’s certified courses. The more than 1,000 courses on the platform range in topic from customer service to psychology.
2. Codecademy
Codecademy was launched in 2011 as an interactive, online educational platform that teaches students how to code. Today, more freelancers discover the attractive option to sell their unique skills over the web. (For related content, see: The Rise of the Gig Economy.) Many of the most in-demand skills require coding knowledge, including web design and app development. The interactive platform seeks to transform our education system from the bottom up. The company states that they “take more cues from Facebook and Zynga in creating engaging educational experience than we do from the classroom.”
3. YouTube
Although most people use YouTube as a site for music videos, funny clips, and TV shows, YouTube is a great platform to learn new skills. YouTube EDU has a selection of high-quality educational videos, from channels such as YaleCourses, Stanford Business School, and Gresham College. YouTube even has a platform for those looking to learn how to manage a YouTube channel, called Creator Academy. Popular videos include “Why Branding Matters” and “Earn Money with YouTube.”
4. Duolingo
By leveraging the power of computer language and algorithms, Duolingo has enabled over 200 million users worldwide to learn languages for free. In an increasingly globalized world, the ability to speak a foreign language is advantageous for any job candidate. Duolingo advertises that it will be free forever, and claims to be more effective than a university course. A study done by the City University of New York and the University of South Carolina concluded that 34 hours on Duolingo equates to a full semester language course at a university. The success comes from the fact that the learning is undoubtedly more engaging and fun than anything of its kind. Additionally, some learners generate revenue for Duolingo by translating material for the company’s clients, such as CNN.
5. Investopedia
Our site delivers quality content to a large segment of the population, empowering them to better their lives and their knowledge base. At Investopedia, we aim to educate the world, not just Wall Street analysts and wealth advisors, about personal finance and investing. From the basics to advanced stock analysis, Investopedia reaches readers of all ages. Investopedia’s interactive stock simulator serves as a stepping-stone to the real markets, wherein investors-in-training join a growing community of more than 700,000 investors and can trade over $100,000 in virtual cash, risk-free.
The Bottom Line
Besides the obvious benefit of costing you nothing, these online platforms are attractive to those looking for a flexible way to learn. Learning online allows you to learn at your own speed, stay in the comfort of your own space, and allocate your time in the most efficient manner for you. To differentiate yourself as an employee, freelancer or manager, you must continually improve your existing talents. By just making a few clicks, you’ll find the opportunity to stay sharp and up to speed on today’s valuable skills.
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1bf510269ae0039eab6efaf23c44d503 | https://www.investopedia.com/articles/investing/102915/how-sam-zell-made-his-fortune.asp | How Sam Zell Made His Fortune | How Sam Zell Made His Fortune
Samuel Zell is an iconic figure in American real estate. In 1968, he created a company, Equity Group Investments, to invest in properties. Since its founding, Equity Group Investments, now known as Equity International, has expanded beyond real estate. The privately held firm controls a billion-dollar investment portfolio with interests spread across multiple continents and several industries, including finance, transportation, energy, and media.
Key Takeaways Zell made his fortune investing in undervalued real estate properties and holding them for the long term.He is a pioneer in the real estate investment trust and created two of them.Zell has described his strategy as "dancing on the skeletons of other people's mistakes."
Zell is considered the creator of the contemporary real estate investment trust (REIT), and he and his team created some of the world's largest publicly-traded REITS. They include Equity Residential (EQR), an apartment REIT with a market capitalization of nearly $20.5 billion, and Equity Commonwealth (EQC), an office REIT with properties across the U.S. and a market cap of nearly $3.32 billion as of October 2020.
According to Forbes, Zell's net worth is $4.7 billion. Here is an overview of how he made his fortune.
Early Life and Schooling
Born in 1941, Zell was raised in a Jewish household in Chicago. His parents had migrated to the United States in 1939 shortly before Germany invaded Poland, and his father was a jewelry wholesaler.
From a very early age, Zell had an interest in the world of business. In 1953, when he was 12, he would buy copies of Playboy in bulk quantities for two quarters each and resell them for $1.50 to $3. "For the rest of that year, I became an importer—of Playboy magazines to the suburbs," Zell recalled at a 2013 Urban Land Institute meeting, calling the experience his "first lesson in supply and demand."
Zell's entrepreneurial journey continued throughout his college years. While at the University of Michigan, he and a friend, Robert Lurie, managed student apartment units for landlords. Their first gig involved 15 homes. But they actually spent a lot of time purchasing and improving distressed properties with the goal of either flipping them or renting them to students.
By the time he graduated in 1966, Zell had managed a total of 4,000 apartments and had personally owned somewhere between 100 and 200 of them. He sold his share of the property management business to Lurie before moving back to Chicago.
Early Real Estate Career
Shortly after graduating from law school and passing the bar, Zell joined a firm of attorneys, which he quit after his first week. He eventually decided to make a full-time career out of investing in real estate.
In 1968, Zell founded what was to become Equity Group Investments and in the following year convinced Lurie to work with him.
A rash of overbuilding during the late 1960s and early 1970s helped to precipitate a market crash in 1973. Multifamily residential real estate was affected first, with other property types soon following suit. Many loans on commercial properties entered into default and many developers abandoned their projects. That presented Zell and Lurie with the perfect opportunity to acquire high-quality properties at inexpensive prices.
At the end of the crisis, the two possessed a valuable portfolio of apartment, office, and retail buildings.
They held the portfolio for many years and, as a result, saw the worth of the buildings regain and eventually exceed their previous valuation levels. In the meantime, Zell and Lurie serviced their debt payments from the monthly rental income the properties produced.
This approach to real estate investing was fairly new at the time; most property investors made their money by flipping buildings rather than accumulating rental income.
Beyond Real Estate
Following his success with turning distressed properties into valuable ones, Zell decided to diversify his investments. By the 1980s, he began to purchase companies.
Notably, his investment strategy remained the same. As he described it in an interview with LEADERS magazine, "I made my fortune by turning right when everyone else was going left. In the late '80s and early '90s, I was buying office buildings at 50 cents on the dollar. I kept looking over my shoulder to see who my competition was, but there was no one. I could not help but question whether I was wrong. Fear and courage are very closely related."
Zell focused on taking over failing businesses with the goal of turning them around. Since expanding Equity Group's investment portfolio, Zell has invested in companies that operate in various sectors including rail, container leasing, passenger cruise, plastics packaging, agricultural chemicals, and industrial manufacturing.
At one time, it owned a controlling interest in the Tribune Company, owner of the Chicago Tribune and the Los Angeles Times. The purchase was widely criticized purchase, as in taking the company private, Zell loaded it with so much debt it went bankrupt.
Zell made news in 2007 after he sold his portfolio of 573 office properties, the Equity Office REIT, to The Blackstone Group (BX), the world's largest alternative investment manager, for $39 billion. At the time, the transaction was the largest leveraged buyout deal in history.
It was also considered a shrewd move in retrospect since it happened just before the subprime mortgage crisis and subsequent real estate slump.
The Grave Dancer
In an article for the New York University Review, Sam Zell described his real estate strategy as "dancing on the skeletons of other people's mistakes." The line earned him the nickname "Grave Dancer."
While his operations have made him a controversial figure, he is undisputedly one of the wealthiest entrepreneurs in the world.
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cbd5daed6eba510ba1fa06903e87f46e | https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp | Why Are ETF Fees Lower Than Mutual Funds? | Why Are ETF Fees Lower Than Mutual Funds?
There are a number of reasons why the fees associated with investing in exchange-traded funds (ETFs) are typically lower than for mutual funds. In addition to their efficient trading and redemption processes and passive management, ETFs do not carry 12b-1 fees or load fees. Though they carry operational fees, like mutual funds, and commission charges, ETFs tend to have lower total expenses than comparable investment products.
No Load Fees
One of the biggest fees associated with mutual funds is the load fee, which is typically between 3 and 8.5%. Many mutual funds highlight the fact that they do not charge a commission for trades. However, load fees essentially accomplish the same thing by charging a shareholder a percentage of her total investment to compensate the broker who sold her the investment. Load fees can be front-end or back-end; they are paid at the time of purchase or redemption, respectively.
ETFs do not charge load fees. Instead, investors pay broker commissions when they buy and sell shares. Like trading stocks, these fees are fixed at certain dollar amounts, usually around $8 to $10. If you trade ETFs frequently, the commissions can add up. If you purchase a large stake and hold onto it, however, ETF investments are much cheaper than mutual funds. Investing $10,000 in a mutual fund may require up to $850 in load fees, depending on the fund. Investing that same amount in an ETF, if done all at once, is infinitely cheaper.
No 12b-1 Fees
Unlike mutual funds, ETFs do not charge annual 12b-1 fees. Despite the technical name, these fees are simply advertising, marketing and distribution fees that a mutual fund passes along to its shareholders. These fees cover the expenses incurred by marketing the fund to brokers and investors. In essence, each existing shareholder pays for the mutual fund to acquire new shareholders by footing a portion of its advertising bill each year.
Passive Management
Though it is not universally true, most ETFs are designed to be passively managed. The majority of ETFs on the market simply track a given index and seek to mimic or exceed the returns generated by the index. Rebalancing of assets, therefore, only takes place when the underlying index adds or removes a given security.
An ETF that tracks the S&P 500, for example, includes any stock listed on that index. Even if the stock begins to lose value, the fund does not sell unless the stock is removed from the index. This management style vastly reduces the number of trades an ETF executes each year, so its operating expenses are extremely low.
Though passively managed mutual funds, such as index funds, typically also have much lower expense ratios than their actively managed counterparts, the extra fees associated with mutual funds make ETFs the cheaper choice.
Market-Based Trading
Another way ETFs keep their administrative and operational expenses down is through the use of market-based trading. Because ETFs can be bought and sold on the open market like stocks or bonds, the sale of shares from one investor to another has no effect on the fund itself. Conversely, when a mutual fund shareholder wants to sell her shares, she must redeem them with the fund directly, which often requires the fund sell some assets to cover the redemption. When the fund sells off part of its portfolio, it generates a capital gains distribution to all shareholders. Not only does this mean mutual fund shareholders end up paying income taxes on those distributions, but it also requires a lot of work and documentation on the part of the fund, increasing its operating expenses. Since the sale of ETF shares does not require the fund to liquidate its holdings, its expenses are lower.
In-Kind Creation and Redemption
Though typically only available to large-scale institutional investors and brokerage firms, in-kind creation and redemption practices used by ETFs also keep costs down. Using this process, investors can trade a collection, or basket, of stock shares that match the fund's portfolio for an equivalent number of ETF shares. In-kind redemption simply means an investor who wants to redeem shares with the fund, rather than selling on the secondary market, can be paid with an equivalent basket of stocks. The fund does not have to buy or sell securities to create or redeem shares, further reducing the paperwork and operational expenses incurred by the fund.
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9928a46477f70f1bd7ef9833a6663236 | https://www.investopedia.com/articles/investing/103015/financial-regulations-glasssteagall-doddfrank.asp | Financial Regulations: Glass-Steagall to Dodd-Frank | Financial Regulations: Glass-Steagall to Dodd-Frank
There is a variety of ideas on regulating the market. Many say the market should regulate itself while others argue the government should regulate the financial markets. A few claim that self-regulation is the best option.
Over the years, there have been many financial regulations. These are used to help mitigate stock market crashes, ensure that the customer is being treated fairly and deter those bent on scamming the system. Here are the significant financial regulations from the past century or so, and how they help the market, and the individuals.
The Banking Act of 1933: The Glass-Steagall Act
October 29, 1929, is infamously known as Black Tuesday. The Great Crash that occurred on that date acted as a catalyst for the Great Depression that affected millions of lives across the U.S. As the country fought to get the economy back on track, many regulations were passed to curb another depression. One of those was the Banking Act of 1933, more commonly known as the Glass-Steagall Act (GSA).
Many people agreed that the stock market collapse, which took the Dow from a high of 381.17 on September 3, 1929, to a low of 41.22 on July 8, 1932, was the result of banks being overzealous with their investments. The idea was that commercial banks were taking on too much risk with their money, and their clients’ money.
The GSA made it harder for commercial banks, which were in the business of lending money, to invest speculatively. Banks were limited to making just 10% of their income from investments (except government bonds). The goal was to put limitations on these banks to prevent another collapse. The regulation was met with a lot of backlash, but it held firm until repeal in 1999.
The Banking Act of 1935
Part of the GSA was to set up the Federal Deposit Insurance Corporation (FDIC). The FDIC was made a permanent structure in The Banking Act of 1935. This significant regulation did more than that, though. It helped to establish the Federal Open Market Committee (FOMC), the key player in monetary policymaking, and restructured the board members of the reserve bank and how those committees were run.
The effects of this are so entrenched in our current money and financial policy that it’s hard to see the system functioning without this act. By establishing these boards, the money making decisions are removed from politics. This means if Republicans, Democrats, Independents, or another party end up controlling the White House, they can’t control the nation's money policies.
The Federal Deposit Insurance Act of 1950
Although the FDIC was established in 1933/1935, the insurance that we know our deposits get today was not fully developed until 1950. The Federal Deposit Insurance Act of 1950 made it so that deposit insurance is backed by the full faith and credit of the United States government.
This is not to say that deposits were not insured back in 1933. Rather, they were insured differently. Over time, the insurance amount has changed to keep up with inflation. In 1934, when the original insurance went into effect, people were covered for $2,500. Today, that amount has been raised to $250,000.
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
During the 1980s, the U.S. went through a savings and loan crisis. This crisis is one of the largest financial scandals in U.S. history and is an enormous contributing factor to the high-interest rates of the 1980s. During this decade, people were moving their money from savings and loan institutions, and moving it into money market funds to escape Regulation Q (a regulation that capped the amount of interest a depositor could earn at a savings and loan institute). To try to win back depositors, the savings and loans started investing in riskier investments all the while being backed by the Federal Savings and Loan Insurance Corporation (the FDIC for savings and loans institutions). The result was a financial crisis.
The reaction was to enact the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This act helped to establish the Resolution Trust Corporation to close thrifts that were no longer solvent. It also helped to repay depositors that lost money during the process.
In all, it streamlined the savings and loans process and helped shape how our money is deposited and earns interest today.
Federal Deposit Insurance Corporation Improvement Act of 1991
Part of the FIRREA was to have savings and loans backed by the FDIC. This act in 1991 helped to strengthen the power of the FDIC by allowing them to guarantee deposits in savings and loans institutions. It also allowed the FDIC to borrow from the Treasury if they had a large claim.
Dodd-Frank Act of 2010
The Great Recession is a financial crisis many of us are very familiar with. It is the most recent crisis that has resulted in many regulations, a significant amount of backlash, and a push for more power for the consumer. The Great Recession was spurred by the mortgage crisis and was wrapped up relatively quickly despite its size.
One result of the crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act encompasses a wide variety of different regulations and laws, all of which strive for one goal:“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”
The establishment of the Consumer Financial Protection Bureau (CFPB) has a significant impact on consumers. This department is the advocate for the consumer. They are the watchdogs to help prevent abuse of the laws, and to make sure that the consumer is not taken advantage of.
The Bottom Line
These are a few of the major regulations that have gone into effect throughout the past century. They are some of the biggest regulations that have helped shape our monetary policy, economic policy, investment policy, and how money works overall in the United States. As a consumer, we can trust our financial advisors, bankers, Federal Reserve, and CFPB because of the oversight these regulations have provided.
Even if some don’t work out as intended, they can be repealed, adjusted, or modified. In the end, the aim of these regulations is to make the economy more stable and to make sure the consumer is the driving force. (Read more on the topic, here: What Was The Glass-Steagall Act?).
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6d10b36a1662d3647d3ece06e7ddc57c | https://www.investopedia.com/articles/investing/103015/how-does-paribus-work-and-make-money.asp | How Paribus Makes Money | How Paribus Makes Money
Generating revenue through targeted advertisements on its user interfaces, Paribus has revolutionized the concept of consumer saving by helping users get automatic refunds—after prices drop their purchases.
Paribus collects your refunds from stores for you, in part by scanning your emails for receipts from your purchases. In today's digital world, most purchases require email verification and many in-person retailers will email you a receipt instead of, or in addition to, printing it out for you.
Instead of acting as a search engine through which users can find the best prices or obtain coupons, Paribus tracks all of its users’ purchases, helping them to secure rebates through the more than 25 online retailers that it monitors. The company has been free to use for consumers since 2016, when it was purchased by Capital One Financial Corp. (COF).
Key Takeaways Paribus tracks online receipts in a customer's email inbox and completes refund applications for select stores on behalf of customers.To date, Paribus has earned its users more than $29 million in rebates. However, Paribus is free to use for consumers and generates revenue through advertisements.Paribus is one of the leaders in the online coupon and rebate industry, competing with other rebate services that typically occur before a purchase such as Rakuten and Honey.
Paribus' Industry
When Paribus founders Eric Glyman and Karim Atiyeh founded Paribus in 2014, the two Harvard grads observed that most retailers have policies in place to refund consumers if the price of their purchase subsequently drops. They also noticed that the odds are stacked against the average consumer, who lacks the advanced technology in an age where complex data systems and algorithms dictate what you see online.
The core issue is that consumers rarely have the time, resources, and the memory to go back and check for price drops. They also lack the incentive to spend their scarce free time in calling or emailing the retailer to get refunded, especially on time.
For those users still skeptical of Paribus' model, an alternative option some consumers use is through their credit-card providers. In some of these cases, providers advertise that they will refund you for a price change. Typically, consumers are required to send in documentation of the price change and a claim to their credit card issuer.
Paribus currently tracks price rebate offers at more than 25 leading retailers, including companies like Target (TGT), Amazon (AMZN), and Walmart (WMT).
Fast Fact Paribus currently monitors more than 25 retailers for rebate possibilities.
Fundraising and Financials
Paribus fills that need by scanning your email inbox to track online purchases you made. It identifies your receipt, evaluates the data, and imports it into its database. The key piece of data is the price at which you bought the item. Your refund period generally lasts for about two weeks, during which Paribus will monitor the cost of the product and submit a refund request on your behalf if the price indeed drops.
Paribus raised $2.2 million in seed funding from investors including General Catalyst, Y Combinator, and Greylock before being acquired by Capital One for an undisclosed sum on Oct. 6, 2016. At the time, Paribus revealed that the financial services company would absorb both the technology and the team at Paribus. Since that time, financial figures regarding Paribus' performance have been hard to come by for the general public.
Prior to its acquisition by Capital One in 2016, Paribus would retain 25% of the amount of any rebate. Since 2016, though, Paribus has made its service entirely free for customers; they no longer retain any portion of rebates they secure and instead pass along 100% of returned funds to the user. In the case of totally free services, users are often skeptical of how companies earn revenue.
For Paribus, the company makes money through the targeted advertisements displayed on its user interfaces. According to its privacy statement, Paribus is committed to securing its users' data and does not sell user information for marketing purposes.
Fast Fact At the time of its acquisition by Capital One in 2016, Paribus had more than 700,000 users.
History and Leadership
Paribus was founded by Harvard graduates Eric Glyman and Karim Atiyeh in 2014. It officially launched in 2015 at TechCrunch Disrupt New York. When the company was acquired, it had a team of 12 who all joined Capital One. The two founders joined the new parent company with the title "Senior Directors in U.S. Card."
The trade-off for some consumers is the number of personal details that the startup will request from you. Paribus needs access to your email account and, in some cases, credit card information in order to ensure delivery of their portion of your refund through commission fees. Before writing off the service, users hesitant to share this information should do a thorough cost-benefit analysis on what type of person they are in regards to their spending habits and then determine whether sharing some personal information with Paribus is worth the potential amount of savings that they could receive.
Recent Developments
Since Paribus has been absorbed into Capital One, any developments to the service are hard to track. When it was acquired, the bank was focused on merging Paribus into the company's broader set of financial tools, alongside CreditWise and Second Look. It was also speculated that as Capital One was already working on a new product focused on credit card price protection, that Paribus would have a potential play in this money-saving area.
Paribus’ service is more important now than ever as retail sales shift online. With the rise of digital marketing, price manipulations for online purchases are a seemingly everyday occurrence. At times, consumers are being essentially duped into buying items at a higher price, as some sites have the ability to raise prices after a consumer has viewed the site more than once. Advanced algorithms are used for dynamic pricing, which takes into consideration many factors beyond traditional supply and demand. For example, e-commerce leader Amazon.com is known for its frequent price fluctuations. Few people have the time and patience to keep track of this activity, which is exactly why many e-retailers utilize dynamic pricing.
To get Paribus, visit the Paribus site. sign in with your Gmail, Yahoo or Microsoft email account, and allow Paribus to monitor purchases in your inbox. No downloads or installs are necessary.
Paribus Pros and Cons
Paribus has positioned itself as the advocate of the individual consumer, serving as the champion of the "little guy" by taking back from large corporations. It uses the same approach as those retailers whose software automatically generates price changes. Instead of using data analysis to change prices, Paribus' software regularly checks for such fluctuations and automatically sends a refund request to the retailer when it discovers a change.
In the future, Paribus is likely to continue to focus on developing its technical capacity to track price changes and complete rebate applications on behalf of customers, while it simultaneously aims to continue growing its user base. Since the company moved to a 100% free model in 2016, it has shown no signs of further adjusting its approach.
Paribus differentiates itself from other players that aim to save consumers money on their purchases. They do this by backtracking your purchases instead of looking to help you save on future buys. The ingenious part about Paribus is that it uses the very same advanced data structures and algorithms that retailers use to distort prices.
Paribus presents itself as a champion of the average consumer who lacks the time and incentive to find (and follow through on) price-drop refunds. However, there may be some challenges to this model in the future. While Paribus currently enjoys a favored position as a niche service provider, the tech sector is one of the most rapidly-changing fields. It is likely that new startups will challenge some aspect of Paribus' model at some point in the future.
Paribus must also address changes to retailer policies and pricing algorithms as well, in order to best keep track of rebate possibilities for its users. A failure to do so could result in erosion of user trust and reputation.
Pros Seamlessly scans Gmail, Yahoo and Microsoft inboxes for any price drops on past purchases Monitors price drops with large retailers such as Amazon, Target, and Walmart Automatically files a refund request with retailers, usually repaid to your original form of payment Cons Users must allow Paribus access to their email inbox Only monitors 25 retailers, a relatively short list in a large online retail environment Constantly changing retailer policies and pricing algorithms pose challenges to Paribus to keep up
Paribus FAQs
Is Paribus Legit? Is It Safe?
Paribus is a legitimate price-tracking service owned by Capital One. According to the company, Paribus only looks at email related to online purchases, and doesn't store your email password.
Does Paribus Work With Amazon?
Yes. Paribus watches for price drops for Amazon purchases.
What Companies Work With Paribus?
Paribus tracks more than 25 online retailers, including Amazon, Target, Walmart, Best Buy, Bloomingdale's, Costco, Home Depot, Old Navy, Gap, Banana Republic, and more. A full list can be found on Capital One's website.
Does Paribus Charge a Fee?
No. Paribus is free to use.
How Do You Use Paribus?
To use Paribus, customers must sign up on Paribus' website, sign in with their Gmail, Yahoo, or Microsoft email account, and give Paribus permission to monitor purchases in their inbox.
Is Paribus Owned by Capital One?
Yes. Paribus was acquired by Capital One in 2016.
The Bottom Line
Paribus is a unique, automated price tracking service that helps shoppers get automatic refunds when prices drop on their latest purchases. Unlike many other online rebate competitors or budgeting apps such as Rakuten and Honey, Paribus uniquely operates in the post-purchase space. By automatically requesting a refund from the online retailer, Paribus saves shoppers time and effort so they can manage their money and know they are getting the best price.
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0619178ded3fd710ce78a517115d60db | https://www.investopedia.com/articles/investing/103114/chinas-gdp-examined-servicesector-surge.asp | China's GDP Examined: A Service-Sector Surge | China's GDP Examined: A Service-Sector Surge
The Chinese economy has witnessed tremendous transition and growth since 1978 when Deng Xiaoping introduced China to capitalist market reforms and moved away from a centrally planned economy. The resulting growth has persisted for the last 35 years; its gross domestic product (GDP) has seen an average annual growth rate of 10.12% between 1983 and 2013, making China's economy the second-largest in the world.
China's transformation from a sleeping rural, agricultural giant to manufacturing and service sector kingpin had brought rapid infrastructure development, urbanization, rising per capita income and a big shift in the composition of its GDP.
Key Takeaways China's GDP is floated by its enormous agricultural sector, which makes up about 10% of its total GDP. The service sector of the nation is almost 50% of its GDP. This sector includes trades, retail, post, and many other industries. The service sector in other world-class economies tends to be higher, around 70%. This is no doubt a result of China's focus on agriculture.
China’s GDP is broadly contributed by three broader sectors or industries—primary industry (agriculture), secondary industry (construction and manufacturing) and tertiary industry (the service sector). As per the 2013 data, primary industry accounted for 10% of GDP, while secondary industry accounted for 44%, and tertiary industry 46%.
Massive Agricultural Sector
China is the world’s largest agricultural economy with farming, forestry, animal husbandry and fisheries accounting for approximately 10% of its GDP. This percentage is much higher than in developed countries, such as the United States, the United Kingdom, and Japan, where agriculture makes up about 1% of GDP.
The chart below shows the trend in the share of agriculture in GDP (1983-2013). Though the percentage has gradually decreased over the years, it still accounts for approximately 34% of the total employed population. Over the last seven years, the share of agriculture as part of GDP has held more or less constant at 10%.
The economic reforms of 1978 changed the face of agriculture in China. Prior to these reforms, four out of five Chinese worked in agriculture. But this changed as property rights in the countryside took hold and led to the growth of small nonagricultural businesses in rural areas.
De-collectivization, coupled with better prices for agricultural products, led to more productivity and more efficient use of labor. The other major change took place in 2004 when the farm sector started to receive increased support under a major shift in economic policy wherein the government came up with policies to support the agriculture sector rather than overtax it, which was the previous policy.
China is a global producer of rice, cotton, pork, fish, wheat, tea, potatoes, corn, peanuts, millet, barley, apples, cotton, oilseed, pork, fish and more. Government support and low labor costs help its agricultural products stay profitable, though a fragmented transportation network and a lack of sufficient cold-storage infrastructure act as a dampener.
Construction and Industry
Construction and industry (including mining, manufacturing, electricity, water, and gas) accounted for 44% of China's GDP in 2013. Industry is the bigger contributor (84% of the secondary industry), while construction accounts for just 7% of overall GDP. The chart below shows the percentage of secondary industry in China’s GDP from 1983 to 2013. Overall, this sector has held its dominance and seen minimal change in its percentage composition in the overall GDP over the years. Approximately 30% of China's employed population works in these secondary industries.
The share of secondary industries as part of GDP in China is more than in countries such as India (25%), Japan (26%), the U.S. (20%) and Brazil (25%). China is a world leader in industrial output, including mining and ore processing, processed metals, petroleum, cement, coal, chemicals and fertilizer. It's also a leader in machinery manufacturing, armaments, textiles, and apparel.
Add to that, China is a top manufacturer of consumer products, a leader in food processing, and a major maker of telecommunications equipment. It's a growing manufacturer of automobiles, train equipment, ships, aircraft and even space vehicles, including satellites.
The Service Sector
China's service sector has doubled in size over the last two decades to account for about 46% of GDP. In 2013, it surpassed China's secondary industries for the first time. Within the service sector are transport, storage and post (5% of GDP), wholesale and retail trades (10%), hotel and catering services (2%), financial services (6%), real estate (6%) and mishmash of services categorized as 'other' (18%).
China’s focus on manufacturing left the service sector to its own devices for many years, with both substantial barriers to trade and investment and every reason to circumvent them. The service sector paid no heed; its growth has gotten the attention of the government, which instituted a five-year plan in 2011 to prioritize the development of service economy along with trade in services (TIS). Still, the services sector’s share of GDP in China is much lower than countries like the U.S. (79%), Japan (73%), Brazil (69%) and India (57%).
The Bottom Line
China's economy has grown by leaps and bounds over the last several decades but still has a ways to go to modernize and reach parity with more-developed countries. Its service economy is now the largest contributor to its GDP, but its size still lags that of other developed nations. China's leadership is focused on changing this, however, with its 12th Five Year Plan, which addresses its dependence on exports. Its construction and industrial sector it still outsized, as befitting a still-developing nation, and its agricultural sector contributes 10% to GDP, way above the 1% of more developed nations.
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7f030d5491d954436a068b67681aa381 | https://www.investopedia.com/articles/investing/103114/how-carlos-slim-built-his-fortune.asp | How Carlos Slim Built His Fortune | How Carlos Slim Built His Fortune
Imagine if the grocery store, the cell phone provider, and the biggest national construction outfit were all owned by the same company. You could buy just about anything and never have to enrich any competitors. That's essentially the situation in Mexico, where one of the world's richest people, Carlos Slim Helú, resides.
How he amassed his wealth–$65 billion in 2017, according to Forbes—is a study in both business acumen and political connections.
(See also: "Carlos Slim's Net Worth.")
1:36 How Carlos Slim Built His Fortune
Early Life
Carlos Slim was born Jan. 28, 1940, in Mexico City, Mexico. His parents, Julián Slim Haddad and Linda Helú Atta were both Maronite Catholics of Lebanese descent. Carlos’ father, born Khalil Salim Haddad Aglamaz, was sent to Mexico in 1902 to avoid being drafted into the Ottoman Army. After arriving in Mexico, Carlos’s father changed his name to Julián Slim Haddad.
The family was part of a small but commercially prosperous community of Lebanese Christians who poured into Mexico in the late 1800s and early 1900s.
In a community devoted to commerce, Julian Slim was a natural, opening a dry goods store in 1911, which grew to offer more than $100,000 worth of merchandise just 10 years later. With proceeds from the store, he would go on to buy prime real estate in Mexico City for a pittance during the 1910-1917 Mexican Revolution.
His savvy investments in real estate, along with his continued success as both a retailer and a wholesaler made Julián a rich man, with a net worth of more than 1 million pesos.
From a young age, Carlos took an interest in his father’s business. And his father happily obliged with business lessons about management, reading financial statements and keeping accurate financial records.
In 1953, when Carlos was only 13 years old, his father died. After his father’s death, the young man continued to work for his late father's company, which would ultimately be passed on to him. When Slim graduated high school, he went on to the National Autonomous University of Mexico, where he studied civil engineering while teaching algebra and linear programming.
While studying civil engineering, Slim also took an interest in economics, taking a series of courses on the subject in Chile after he graduated in 1961. He went into finance shortly afterward, working long, grueling days as a stock trader in Mexico City.
By 1965, at the age of 25, his trading had netted him roughly $400,000, more than $3 million in present dollars. He used the money to open his own brokerage firm, called Inversora Bursátil.
One of his biggest opportunities was the peso crisis in the early 1980s, coupled with a steep decline in oil prices. The capital was fleeing the country, and Slim bought a number of companies at depressed valuations. Some examples are Cigatam (the country's second-largest cigarette maker), Reynolds Aluminum, General Tire and the Sanborns chain of stores.
A Wide Reach
Slim has a hand in literally hundreds of other companies, largely through Grupo Carso SAB, Slim’s global conglomerate. Grupo Carso has or has had stakes in enterprises as diverse as Elementia, one of the largest cement companies in Mexico, retail including Sears and Saks Fifth Avenue, energy and construction (via CICSA) and automotive (via Grupo Condumex). He even has a stake in The New York Times.
Perhaps the biggest piece of Slim's wealth comes from telecommunications. Slim is the owner of América Movil, formerly Teléfonos de Mexico, or Telmex. Telmex was the old telephone monopoly in the country, akin to America’s AT&T Inc. (T). In the 1990s, the government privatized the company, and Slim was one of the initial investors, via Grupo Carso (the other members of the consortium were France Télécom and Southwestern Bell Corporation). The price: $1.8 billion, half of which was put up by Grupo Carso, for a 20% stake. Carlos Slim was at the helm of Grupo Carso and, as such, took over at Telmex.
By 2012, América Movil, Slim's mobile telephony company, had taken over Telmex and made it into a privately held subsidiary. América Movil, via the subsidiary Telcel, has a market share approaching 70% of the mobile phone line market, and 80% of the landlines in Mexico. Now the company is poised to sell assets to bring its market share below 50%, in the wake of new anti-monopoly regulations in Mexico. But Slim is probably not upset that the various assets, such as cell phone towers, could easily bring in $8 billion or more—quite a profit on the original investment.
Not Just Mexico
América Movil, through various subsidiaries, isn't just in Mexico. In the U.S., the most visible brand is TracFone, a low-cost cellular phone operator. In Austria, the company owns a majority stake in Telekom Austria. Slim's telecom empire reaches almost every country in Latin America.
Yet it wasn't necessarily a deep knowledge of technology or telecommunications that made the company what it is today. Slim has often said that his strategy is to reinvest the profits into the business itself and fuel growth. Telmex, for example, invested billions over several years to install an updated fiber network in the 1990s, and that left the company in a position to offer high-speed internet service.
The pattern is typical of Slim's business deals over the course of his life – buy an asset, reinvest and sell at a profit. Telecommunications is only the most visible piece of that strategy.
(For more, see: "6 Rules From the World's Top Investors.")
Turnaround Specialist
Slim's strategy has been to buy up sometimes troubled companies and try to turn them around. The advantage of that model is that it doesn't necessarily require specific knowledge of any given sector—just a keen sense of what is undervalued and what isn't.
(For more, see "Value Investing")
Also, the conglomerate structure allows him to have stakes in such a diverse range of industries that his wealth is well prepared to maneuver global financial turbulence. His stocks might lose value in a general market downturn that affects the whole economy, but a problem in the telecommunications industry won't hurt his numbers much because some other sector will likely be doing reasonably well.
Slim is also less interested in the fine details of the businesses he buys. Any transaction is just that—the goal is to sell his stake at a profit later. For instance, his purchase of a stake in The New York Times is less about editorial policy and more about the idea that the paper can gain value as an asset, as Eduardo Garcia, editor of Sentido Común, a financial news site, told the American Journalism Review in 2009.
Carlos Slim Corners the Market
Another issue is monopolistic practices. One of the assets Slim picked up with Telmex was one of the largest Mexican makers of copper wire. He then stopped Telmex from buying wire from the company's competitor. For years, the Mexican government has fought to curb Slim’s dominance in the telecommunications sphere.
However, when the Mexican government attempted to increase competition in the phone business, it didn't account for the fact that new companies had to pay Telmex an interconnection fee. Telmex simply set such fees very high, making it tougher for any other provider to undercut prices, especially for long distance calls. Eventually, the practice stopped, after much negotiation between the government, Slim and the upstarts.
(For more, see "How Monopoly Antitrust Laws Affect Consumers.")
Even when anti-monopoly laws force Slim's companies to sell assets, there's a sense that it might just be an end-run around the law. For example, in January 2014, a Mexican court ordered Telmex to stop selling a division that holds fiber-optic lines and telephone poles. The aim was to sell the division, since once the division was no longer part of Telmex, the company likely wouldn't fall under certain antitrust rules anymore, giving Slim a freer hand.
Critics have noted that with Slim's companies owning such large market shares, and driving out competitors, the Mexican economy has suffered. A lack of an even playing field means that new entrants have a tougher time mounting a challenge to an incumbent player.
Slim’s Monopoly and Its Challenges
In 2015, Slim was the second-richest man in the world according to Forbes, but the Mexican tycoon fell to fourth place and was the biggest dollar loser on the 2016 Forbes Billionaires List. In 2017, he slipped to sixth.
The weak peso and new Mexican regulations have hurt Slim’s businesses tremendously recently. Over the years, the Mexican government has ramped up its efforts to curtail Slim’s near-monopolies. In 2014, Mexican President Enrique Pena Nieto signed a law aimed at increasing competition in the telecommunications arena.
Essentially, the law forced Slim’s primary enterprise América Móvil to submit to special rules since it is the main competitor in the telecom field. América Móvil could not charge fees to its smaller competitors if they used the company’s network and the firm must share its infrastructure, such as its cellphone towers, with its competitors. Slim said these regulations essentially forced América Móvil to subsidize its competitors, and in August 2017, Mexico’s Supreme Court ruled that allowing competitors to use América Móvil's network free of charge was unconstitutional, although it did not require competitors to pay retroactive fees to the company.
América Móvil held 72% of the Mexican wireless market in 2016, according to the Organisation for Economic Co-operation and Development (OECD). However, AT&T is spending billions to compete with América Móvil. New challenges lie ahead for the telecom giant in upcoming years.
Notable Real Estate
Not an area that Slim focused on in his early years, real estate has become a major part of his portfolio in the past two decades. Part of this was a natural undertaking as part of the expanding conglomerate, such as the 20 shopping centers throughout Mexico, 10 of those in Mexico City. However, in 2010, Slim purchased the Duke Semans mansion for $44 million, considered one of the last great private residences on Fifth Avenue in New York City. In 2015, it was put up for sale for $80 million but taken off the market in 2016 when he could not find a buyer.
Slim also purchased two commercial buildings in the United States in 2015, including the PepsiCo Inc. (PEP) Americas Beverages’ headquarters just north of New York City and the Marquette Building in Detroit. Grupo Carso’s main complex headquarters in Mexico City, named Plaza Carso, includes the Museo Soumaya, Museo Jumex, the Plaza Carso Shopping center, three residential towers and three commercial office buildings completed at an estimated cost of $1.4 billion.
Finally, Slim's late wife was an avid art collector, and he built the Museo Soumaya in her honor. It houses almost 70,000 works of art, including the largest collection of Rodin art outside of France, as well as a host of masterpieces by Matisse, Van Gogh, Monet, and Dali, just to name a few.
Slim's Fortune: The Bottom Line
Slim's fortune is more like that of the old Rockefeller family than that of Bill Gates. Instead of building an empire on a few great innovations in a particular field, he did so through acquisitions and building a nearly unassailable market share.
(See also "J.D. Rockefeller: From Oil Baron to Billionaire.")
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aef98ea30c2beacda73e46d4cb9239c1 | https://www.investopedia.com/articles/investing/110314/key-differences-between-etfs-and-mutual-funds.asp | ETF vs. Mutual Fund: What's the Difference? | ETF vs. Mutual Fund: What's the Difference?
ETFs vs. Mutual Fund: An Overview
Investors face a bewildering array of choices: stocks or bonds, domestic or international, different sectors and industries, value or growth, etc. Deciding whether to buy a mutual fund or exchange-traded fund (ETF) may seem like a trivial consideration next to all the others, but there are key differences between the two types of funds that can affect how much money you make and how you make it.
Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. They must adhere to the same regulations concerning what they can own, how much can be concentrated in one or a few holdings, how much money they can borrow in relation to the portfolio size, and more.
Beyond those elements, the paths diverge. Some of the differences may seem obscure, but they can make one type of fund or the other a better fit for your needs.
Key Takeaways Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities.Both can track indexes as well, however ETFs tend to be more cost effective and more liquid as they trade on exchanges like shares of stock.Mutual funds can provide some benefits such as active management and greater regulatory oversight, but only allow transactions once per day and tend to have higher costs.
1:40 Mutual Funds Vs ETFs
Exchange-Traded Funds (ETFs)
As the name suggests, exchange-traded funds trade on exchanges, just as common stocks do; at the other side of the trade is some other investor like you, not the fund manager. You can buy and sell at any point during a trading session—at whatever the price is at the moment based on market conditions—not just at the end of the day. And there’s no minimum holding period. This is especially relevant in the case of ETFs tracking international assets, where the price of the asset hasn’t yet updated to reflect new information, but the U.S. market’s valuation of it has. As a result, ETFs can reflect the new market reality faster than mutual funds can.
Another key difference is that most ETFs are index-tracking, meaning that they try to match the returns and price movements of an index, such as the S&P 500, by assembling a portfolio that matches the index constituents as closely as possible. Passive management isn’t the only reason that ETFs are typically cheaper. Index-tracking ETFs have lower expenses than index-tracking mutual funds, and the handful of actively-managed ETFs out there are cheaper than actively-managed mutual funds. Clearly, something else is going on. It relates to the mechanics of running the two kinds of funds and the relationships between funds and their shareholders.
With an ETF, because buyers and sellers are doing business with one another, the managers have far less to do. The ETF providers, however, want the price of the ETF (set by trades within the day) to align as closely as possible to the net asset value of the index. To do this, they adjust the supply of shares by creating new shares or redeeming old shares. Price too high? ETF providers will create more supply to bring it back down. All of this can be executed with a computer program, untouched by human hands.
The ETF structure results in more tax efficiency, too. Investors in ETFs and mutual funds are taxed each year based on the gains and losses incurred within the portfolios. But ETFs engage in less internal trading, and less trading creates fewer taxable events (the creation and redemption mechanism of an ETF reduces the need for selling). So unless you invest through a 401(k) or other tax-favored vehicles, your mutual funds will distribute taxable gains to you, even if you simply held the shares. Meanwhile, with an all-ETF portfolio, the tax will generally be an issue only if and when you sell the shares.
ETFs are still relatively new while mutual funds have been around for ages, so investors who aren’t just starting out are likely to hold mutual funds with built-in taxable gains. Selling those funds may trigger capital gains taxes, so it’s important to include this tax cost in the decision to move to an ETF. The decision boils down to comparing the long-term benefit of switching to a better investment and paying more upfront tax, versus staying put in a portfolio of less optimal investments with higher expenses (that might also be a drain on your time, which is worth something).
Keep in mind that, unless you gift or bequeath your ETF portfolio, you will one day pay tax on these built-in gains. So you are often just deferring taxes, not avoiding them.
Mutual Funds
When you put money into a mutual fund, the transaction is with the company that manages it—the Vanguards, T. Rowe Prices, and BlackRocks of the world—either directly or through a brokerage firm. The purchase of a mutual fund is executed at the net asset value of the fund based on its price when the market closes that day or the next if you place your order after the close of the markets.
When you sell your shares, the same process occurs, but in reverse. However, don’t be in too great of a hurry. Some mutual funds assess a penalty, sometimes at 1% of the shares’ value for selling early (typically sooner than 90 days after you bought in).
Mutual funds can track indexes, but most are actively managed. In that case, the people who run them pick a variety of holdings to try to beat the index that they judge their performance against. This can get pricey: Actively managed funds must spend money on analysts, economic and industry research, company visits, and so on. That typically makes mutual funds more expensive to run—and for investors to own—than ETFs.
Mutual funds and ETFs are both open-ended. That means that the number of outstanding shares can be adjusted up or down in response to supply and demand. When more money comes into and then goes out of a mutual fund on a given day, the managers have to alleviate the imbalance by putting the extra money to work in the markets. If there’s a net outflow, they have to sell some holdings if there’s insufficient spare cash in the portfolio.
The Bottom Line
Given the distinctions between the two kinds of funds, which one is better for you? It depends. Each can fill certain needs. Mutual funds often make sense for investing in obscure niches, including stocks of smaller foreign companies and complex yet potentially rewarding areas like market-neutral or long/short equity funds that feature esoteric risk/reward profiles.
But in most situations and for most investors who want to keep things simple, ETFs, with their combination of low costs, ease of access, and emphasis on index tracking, may hold the edge. Their ability to provide exposure to various market segments in a straightforward way makes them useful tools if your priority is to accumulate long-term wealth with a balanced, broadly diversified portfolio.
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86e8efdf9d0c71323d1793cf62ce860e | https://www.investopedia.com/articles/investing/110315/3-best-vanguard-target-retirement-funds.asp | 3 Best Vanguard Target Retirement Funds | 3 Best Vanguard Target Retirement Funds
Deciding which mutual funds are appropriate for a retirement portfolio requires a good understanding of investment strategies. Vanguard target-date funds do the work of rebalancing over time so investors don't have to. They start with an allocation favoring stocks in the early years of an investor's life cycle, typically 90% stocks and 10% bonds.
As an investor approaches his retirement age, Vanguard gradually rebalances its asset allocation in favor of less risky securities, such as bonds and short-term reserves. Vanguard target-date funds come with an average expense ratio of 0.10%. The industry average expense ratio for comparable target-date funds is 0.60%. Beginning in February 2015, Vanguard increased the international equity and fixed income allocations for its target-date funds to provide investors with improved global diversification.
The Vanguard Target Retirement 2025 Fund
The Vanguard Target Retirement 2025 Fund has a target date that ranges from 2021 to 2025. Because the fund is very close to its target date, its portfolio has a large number of bond holdings, which tend to be less risky when compared to stocks.
In particular, the fund invests in various Vanguard equity and bond funds, resulting in a 36.30% allocation to domestic stocks, a 24.20% allocation to international stocks, a 27.70% allocation to U.S. corporate and Treasury bonds, and an 11.80% allocation to international bonds. Domestic equity holdings of this fund are broadly diversified across the entire U.S. equity market.
Over the years, the Vanguard Target Retirement 2025 Fund, and Vanguard target-date funds, in general, tend to focus more on higher-quality bonds and Treasury inflation-protected securities (TIPS) compared to other fund families. This approach provides better protection of capital against volatility and real value erosion.
The Vanguard Target Retirement 2025 Fund has a four-star rating from Morningstar and an expense ratio of 0.13%. As the fund gets close to 2025, it plans to have higher asset allocation to bonds, in the realm of 50%. This fund is most appropriate for investors who are highly cost-conscious and plan to retire between 2023 and 2027.
The Vanguard Target Retirement 2040 Fund
The Vanguard Target Retirement 2040 Fund offers a one-stop broadly diversified portfolio with a target date between 2038 and 2042. Like other Vanguard target-date funds, this fund invests in four Vanguard index funds with asset allocations of about 85% in equities and 15% in corporate and sovereign bonds.
About 50.20% of the fund's assets are allocated to domestic equities, while 33% are dedicated to international equities. There is a 12% allocation in U.S. corporate and Treasury bonds and a 4.80% allocation of international bonds. As the fund is nearly 20 years away from its target date, it will continue allocating more assets to risky securities in the next five to 10 years.
The Vanguard Target Retirement 2040 Fund has an expense ratio of 0.14% and it has a four-star rating from Morningstar. Due to Vanguard's larger emphasis on international bonds and international equities, the fund provides broader diversification and better return prospects in the long run, as overseas markets—especially emerging markets—tend to grow faster compared to developed markets.
The Vanguard Target Retirement 2040 Fund is most appropriate for investors whose target retirement is between 2038 and 2042 and would like to invest in one fund and not have to worry about rebalancing until their retirement.
The Vanguard Target Retirement 2055 Fund
The Vanguard Target Retirement 2055 Fund offers lifecycle asset allocation for investors with specific retirement dates. This fund is most attractive for investors who just started their careers and have over 40 years before retirement. As the fund is very far from its target date, 90% of its assets are allocated to domestic and international stocks. The remaining 10% of its assets are split between U.S. and international bonds. The fund is likely to stick to such aggressive allocation until 2030-2035; after that, it will start smoothly adjusting its allocation every year toward bonds.
The Vanguard Target Retirement 2055 Fund has an expense ratio of 0.15% and a four-star rating from Morningstar. This fund is most appropriate for investors who desire automatic asset rebalancing at a low cost and who are not planning to retire until between 2053 and 2057.
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4558e43d98378e4ff205d4bd07f5dd0e | https://www.investopedia.com/articles/investing/110315/investment-value-vs-fair-market-value-how-they-differ.asp | Fair Market Value vs. Investment Value: What’s the Difference? | Fair Market Value vs. Investment Value: What’s the Difference?
Fair Market Value vs. Investment Value: An Overview
Investment value and fair market value are two terms that can be used when evaluating the value of an asset or entity. Both terms are used regularly in financial analysis and may have different meanings depending on the scenarios in which they are used.
Investment value usually refers to a broader range of values resulting from a variety of different valuation methodologies. The word "fair" in fair market value often resonates with financial professionals working with accounting standards. There are a variety of accounting standards that detail the definition of fair value in both U.S. Financial Accounting Standards Board (FASB) principles and International Financial Reporting Standards (IFRS). Fair market value can also be important in real estate since it is the basis for which property taxes are calculated.
Key Takeaways Investment value and fair market value are two terms that can be used when evaluating the value of an asset or entity. Investment value usually refers to a broader range of values resulting from a variety of different valuation methodologies. Fair market value is based on the market value of an asset or entity with latitude for adjustments depending on the analysis of market transaction circumstances. Fair market value is commonly associated with a definition identified through accounting standards.
Fair Market Value
In some cases, there can be a discrepancy between fair market value and market value but generally, they can be closely the same. FASB, IFRS, and other accounting standards generally define fair market value as the value a company can expect to receive for an asset in the open market given an individual assessment of the buyers and price ranges they would typically have access to. Fair market value is closely related to market value but it does not necessarily reflect the daily market value since fair market value is usually measured at various points in time and not daily.
Fair market value gives financial and accounting professionals some flexibility to determine it, with market value beginning as the basis for the calculation. This is what makes fair market value unique. Analysts have the freedom, where applicable, to adjust market value based on their expectations for their own individual market circumstances. Generally, an analyst identifies the fair market value based on the market of highly educated buyers and sellers it expects to be working with. Keep in mind, fair market value usually also takes into consideration standard selling terms rather than an immediate need for liquidation of an asset which can negatively affect fair market value for the seller.
Uses of Fair Market Value
The use of fair market value can vary for businesses depending on their accounting. Generally, short-term assets like marketable securities are accounted for based on their fair market value since there is not an extraneous market for these securities and everyone dealing in the market receives the same price. Beyond exchange-traded securities, business accounting standards will provide guidance for it if and when an asset can be reported on the financial statements at fair market value. Most types of assets are accounted for by book value until they are fully depreciated.
Individually, asset owners may account for assets based on a projected fair market value. When calculating personal net worth, assets are usually identified at their fair market value.
Real estate assets can offer another prominent example. The fair market value of real estate is often determined by an appraiser. Standards for appraisers can be established by several organizations including The American Society of Appraisers and the Internal Revenue Service. In a property appraisal, a property’s value will be calculated at a base level relative to other properties within close proximity, so the neighborhood where a property is located can have a big impact on the property’s fair market value. Appraisers identify fair market value for all kinds of reasons, including taxation. The annual taxes paid on a piece of real estate will be based on the appraiser’s fair market value.
Investment Value
Investment value looks at the value of an asset based on an independent valuation methodology. It is much more hypothetical in nature and generally will depend on the investment a buyer or seller is seeking to make. Investment value will usually depend on a variety of assumptions including cash flow estimates, tax rates, financing capabilities, business strengths, value of intangibles, expected return, synergies, and more.
There are a range of methodologies that can be used to identify an investment value. Two of the most common methodologies used in determining investment value are net present value and discounted cash flow. Using these methodologies and others, investment value can range broadly depending on the analysis. Investment value may also range broadly depending on the parties calculating it. All parties using investment value will seek to obtain the highest rate of return.
Uses of Investment Value
Investment value analysis can vary broadly depending on the underlying assets being analyzed and the markets for trading them. Stock analysis commonly uses discounted cash flow methodology to identify the intrinsic value of a stock. The intrinsic value of a stock forms the basis for buy and sell recommendations in the stock market. The intrinsic value is often a form of fundamental analysis and will vary from the market value.
Companies may look at investment value with a different perspective. Companies use investment value for a broad range of situations. On one end of the spectrum, they may be seeking to sell vehicles or machinery. Alternatively, investment value may be used when analyzing a merger or acquisition. The investment value of single assets not traded on an open exchange will usually involve the analysis of a company’s existing investment, the book value of the asset, and any potential profit the company may be seeking to obtain. In comparison, the investment value of an acquisition will encompass a broad range of variables and assumptions.
Special Considerations: Other Types of Value
In managing or analyzing various assets, there can be several values to be aware of.
Book value: Book value can also be known as carrying value. Book value is the value of an asset after accounting for depreciation.
Market value: Pure market value is the value an asset holds on any given day in the open market. Securities trading on open market exchanges have a daily market value that is easy to identify. Market value can usually be attained by an actively quoted market which is influenced by the daily trading of buyers and sellers. The market value price is commonly the same for anyone who may choose to buy and sell a specified asset. In markets with a standardized exchange or format for valuation, the market value and fair market value will usually be the same.
Enterprise value: The comprehensive value of debt, equity, and cash.
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cbebcb0f004e8cd46edc4347d9de6ae2 | https://www.investopedia.com/articles/investing/110315/top-7-etfs-day-trading.asp | The Top 7 ETFs For Day Trading | The Top 7 ETFs For Day Trading
Day traders attempt to make profits by opening and closing trade positions several times during a day. They usually close all of their open positions at the end of the day and don’t carry them over to the next day. In addition to stocks, the exchange traded funds (ETFs ) have emerged as another instrument of choice for day trading. They offer the diversification of a mutual fund, the high liquidity and real-time trading of a stock, and low transaction costs. A few ETFs may also qualify for tax benefits, depending upon the eligibility criteria and financial regulations. (For more, see: The Benefits Of ETF Investing and Should You Buy Stock Or An ETF?)
This article explores the top ETFs, which are suitable for day trading.
Criteria for Selection
Day trading involves buying and selling positions quickly, with attempts to make small profits by trading large volume from the multiple trades. The ETFs suitable for day trading should have high levels of liquidity enabling easy execution of the trades at fair prices. The transaction costs associated with ETF trading should be low, as frequent trading leads to high transaction costs that eat into the available profit potential. Additionally, one should also consider the bid-ask spread on the price quotes. The bid-ask spread is the difference between the buy and sell price demanded by the market participants trading a particular security. A tighter bid-ask spread indicates fair price discovery and higher liquidity.
Most ETFs that fit these three criteria are based on broader markets (like those based on popular indexes like the Standard & Poor's 500 Index or overall broader markets).
Day traders may also get high liquidity in specialized theme based ETFs, like gold or oil-based ETFs. However, such ETFs may be costly regarding transaction costs making them unsuitable for day trading. (For more, see Day-Trading Gold ETFs: Top Tips and Top Oil ETFs (XLE, AMLP, VDE, USO)).
Similarly, others like leveraged ETFs may offer high exposure (two times or three times the underlying), but they usually lack high liquidity and may come at high expense ratios. Such ETFs may not fit the day trading criteria, and are not considered for inclusion in the list of day trading.
The Top ETFs for Day Trading
1. Vanguard S&P 500 ETF (VOO): VOO tracks the popular S&P 500 Index, which represents the top 500 companies in the U.S. from diverse sectors.This ETF invests in the stocks included in the S&P 500 Index in the similar proportion to the index. It has successfully mirrored the performance of the index with a minimal tracking error. With an average daily traded volume of more than 2.6 million shares, VOO has one of the lowest expense ratios of only 0.05%, making it the favorite for day traders.
2. iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 ETF Trust (SPY): IVV and SPY work exactly the same way as the above-mentioned VOO ETF. The only difference is that IVV and SPY have slightly higher expense ratios of 0.07% and 0.09%, respectively. However, IVV and SPY offers much higher levels of liquidity with average daily traded volume exceeding 5.5 million and 147 million shares, respectively.
3. Vanguard Total Stock Market ETF (VTI): VTI tracks and attempts to replicate the performance of CRSP U.S. Total Market Index. This index includes large cap, mid cap, small cap, and micro cap stocks that are regularly traded on the NYSE and the NASDAQ. This ETF allows a trader to bet on a larger total market covering a broader spectrum of stocks across multiple market cap sectors. With only 0.05% expense ratio and average daily trading volume exceeding 3.6 million shares, VTI makes an excellent choice for day traders.
4. Schwab US Broad Market ETF (SCHB): Another broad level market-based ETF that tracks the Dow Jones Broad Stock Market Index. The index includes the top 2,500 largest publicly traded companies in the USA. This ETF has an average daily trading volume of around a million shares and comes at the low expense ratio of 0.04% only.
5. iShares Treasury Floating Rate Bond ETF (TFLO): Day traders interested in a bond ETF will find TFLO a good and cost-effective option. This fund attempts to replicate the performance of the performance of the Barclays US Treasury Floating Rate Index.This ETF has been successful in replicating the performance of the benchmark index accurately with very low tracking error. It has an expense ratio of 0.15% but offers fee waiver of the same amount that makes the effective expense ratio as nil.
6. iShares 20+ Year Treasury Bond ETF (TLT): TLT is another bond based ETF, which provides exposure to long-term U.S. treasury security by tracking the performance of Barclays U.S. 20 Year Plus Treasury Bond Index. It offers high liquidity with more than 8 million ETF shares exchanging hands daily. It has mirrored the performance of benchmark index accurately. However, it has a comparatively higher expense ratio of 0.15%.
7. Schwab US TIPS ETF (SCHP): Worried about inflation or looking to benefit from trading on inflation-protected securities? SCHP offer a perfect fit. It tracks the performance of Barclays U.S. Treasury Inflation Protected Securities (Series-L) Index, which is a market-value weighted index of US Treasury inflation-protected securities with at least one year remaining in maturity. With around 80,000 shares trading daily and with only 0.07% expense ratio, SCHP offers a good fit for day traders.
The Bottom Line
Day trading involves high risk, as most day traders take margin based leveraged positions. Margin based leverage allows one to take a higher exposure with low trading capital. It hence becomes critical to keep the associated transaction costs low to accommodate for the occasional losses and keep the realistic profits high. Selecting the right ETFs listed as above on the above-mentioned criteria can enable a day trader higher profit potential.
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8a69659fb6344839b1918543ac722893 | https://www.investopedia.com/articles/investing/110513/utilizing-prisoners-dilemma-business-and-economy.asp | The Prisoner’s Dilemma in Business and the Economy | The Prisoner’s Dilemma in Business and the Economy
The prisoner’s dilemma, one of the most famous game theories, was conceptualized by Merrill Flood and Melvin Dresher at the Rand Corporation in 1950. It was later formalized and named by Princeton mathematician, Albert William Tucker.
The prisoner’s dilemma basically provides a framework for understanding how to strike a balance between cooperation and competition and is a useful tool for strategic decision-making.
As a result, it finds application in diverse areas ranging from business, finance, economics, and political science to philosophy, psychology, biology, and sociology.
Key Takeaways A prisoner's dilemma describes a situation where, according to game theory, two players acting strategically will ultimately result in a suboptimal choice for both. In business, understanding the structure of certain decisions as prisoner's dilemmas can result in more favorable outcomes. This set-up allows one to balance both competition and cooperation for mutual benefit.
Prisoner’s Dilemma Basics
The prisoner’s dilemma scenario works as follows: Two suspects have been apprehended for a crime and are now in separate rooms in a police station, with no means of communicating with each other. The prosecutor has separately told them the following:
If you confess and agree to testify against the other suspect, who does not confess, the charges against you will be dropped and you will go scot-free. If you do not confess but the other suspect does, you will be convicted and the prosecution will seek the maximum sentence of three years. If both of you confess, you will both be sentenced to two years in prison. If neither of you confesses, you will both be charged with misdemeanors and will be sentenced to one year in prison.
What should the suspects do? This is the essence of the prisoner’s dilemma.
Evaluating Best Course of Action
Let’s begin by constructing a payoff matrix as shown in the table below. The “payoff” here is shown in terms of the length of a prison sentence (as symbolized by the negative sign; the higher the number the better). The terms “cooperate” and “defect” refer to the suspects cooperating with each other (as for example, if neither of them confesses) or defecting (i.e., not cooperating with the other player, which is the case where one suspect confesses, but the other does not). The first numeral in cells (a) through (d) shows the payoff for Suspect A, while the second numeral shows it for Suspect B.
Prisoner’s Dilemma – Payoff Matrix Suspect B Cooperate Defect Suspect A Cooperate (a) -1, -1 (c) -3, 0 Defect (b) 0, -3 (d) -2, -2
The dominant strategy for a player is one that produces the best payoff for that player regardless of the strategies employed by other players. The dominant strategy here is for each player to defect (i.e., confess) since confessing would minimize the average length of time spent in prison. Here are the possible outcomes:
If A and B cooperate and stay mum, both get one year in prison—as shown in the cell (a). If A confesses but B does not, A goes free and B gets three years—represented in the cell (b). If A does not confess but B confesses, A gets three years and B goes free—see cell (c). If A and B both confess, both get two years in prison—as the cell (d) shows.
So if A confesses, they either go free or get two years in prison. But if they do not confess, they either get one year or three years in prison. B faces exactly the same dilemma. Clearly, the best strategy is to confess, regardless of what the other suspect does.
Implications of Prisoner’s Dilemma
The prisoner’s dilemma elegantly shows when each individual pursues their own self-interest, the outcome is worse than if they had both cooperated. In the above example, cooperation—wherein A and B both stay silent and do not confess—would get the two suspects a total prison sentence of two years. All other outcomes would result in a combined sentence for the two of either three years or four years.
In reality, a rational person who is only interested in getting the maximum benefit for themselves would generally prefer to defect, rather than cooperate. If both choose to defect assuming the other won't, instead of ending up in the cell (b) or (c) option—like each of them hoped for—they would end up in the cell (d) position and each earn two years in prison.
In the prisoner’s example, cooperating with the other suspect fetches an unavoidable sentence of one year, whereas confessing would in the best case result in being set free, or at worst fetch a sentence of two years. However, not confessing carries the risk of incurring the maximum sentence of three years, if say A’s confidence that B will also stay mum proves to be misplaced and B actually confesses (and vice versa).
This dilemma, where the incentive to defect (not cooperate) is so strong even though cooperation may yield the best results, plays out in numerous ways in business and the economy, as discussed below.
Applications to Business
A classic example of the prisoner’s dilemma in the real world is encountered when two competitors are battling it out in the marketplace. Often, many sectors of the economy have two main rivals. In the U.S., for example, there is a fierce rivalry between Coca-Cola (KO) and PepsiCo (PEP) in soft drinks and Home Depot (HD) versus Lowe’s (LOW) in building supplies. This competition has given rise to numerous case studies in business schools. Other fierce rivalries include Starbucks (SBUX) versus Tim Horton’s (THI) in Canada and Apple (AAPL) versus Samsung in the global mobile phone sector.
Consider the case of Coca-Cola versus PepsiCo, and assume the former is thinking of cutting the price of its iconic soda. If it does so, Pepsi may have no choice but to follow suit for its cola to retain its market share. This may result in a significant drop in profits for both companies.
A price drop by either company may thus be construed as defecting since it breaks an implicit agreement to keep prices high and maximize profits. Thus, if Coca-Cola drops its price but Pepsi continues to keep prices high, the former is defecting, while the latter is cooperating (by sticking to the spirit of the implicit agreement). In this scenario, Coca-Cola may win market share and earn incremental profits by selling more colas.
Payoff Matrix
Let’s assume that the incremental profits that accrue to Coca-Cola and Pepsi are as follows:
If both keep prices high, profits for each company increase by $500 million (because of normal growth in demand). If one drops prices (i.e., defects) but the other does not (cooperates), profits increase by $750 million for the former because of greater market share and are unchanged for the latter. If both companies reduce prices, the increase in soft drink consumption offsets the lower price, and profits for each company increase by $250 million.
The payoff matrix looks like this (the numbers represent incremental dollar profits in hundreds of millions):
Coca-Cola vs. PepsiCo – Payoff Matrix PepsiCo Cooperate Defect Coca-Cola Cooperate 500, 500 0, 750 Defect 750, 0 250, 250
Other oft-cited prisoner’s dilemma examples are in areas such as new product or technology development or advertising and marketing expenditures by companies.
For example, if two firms have an implicit agreement to leave advertising budgets unchanged in a given year, their net income may stay at relatively high levels. But if one defects and raises its advertising budget, it may earn greater profits at the expense of the other company, as higher sales offset the increased advertising expenses. However, if both companies boost their advertising budgets, the increased advertising efforts may offset each other and prove ineffective, resulting in lower profits—due to the higher advertising expenses—than would have been the case if the ad budgets were left unchanged.
Applications to the Economy
The U.S. debt deadlock between the Democrats and Republicans that springs up from time to time is a classic example of a prisoner’s dilemma.
Let’s say the utility or benefit of resolving the U.S. debt issue would be electoral gains for the parties in the next election. Cooperation in this instance refers to the willingness of both parties to work to maintain the status quo with regard to the spiraling U.S. budget deficit. Defecting implies backing away from this implicit agreement and taking the steps required to bring the deficit under control.
If both parties cooperate and keep the economy running smoothly, some electoral gains are assured. But if Party A tries to resolve the debt issue in a proactive manner, while Party B does not cooperate, this recalcitrance may cost B votes in the next election, which may go to A.
However, if both parties back away from cooperation and play hardball in an attempt to resolve the debt issue, the consequent economic turmoil (sliding markets, a possible credit downgrade, and government shutdown) may result in lower electoral gains for both parties.
How Can You Use It?
The prisoner’s dilemma can be used to aid decision-making in a number of areas in one’s personal life, such as buying a car, salary negotiations and so on.
For example, assume you are in the market for a new car and you walk into a car dealership. The utility or payoff, in this case, is a non-numerical attribute (i.e., satisfaction with the deal). You want to get the best possible deal in terms of price, car features, etc., while the car salesman wants to get the highest possible price to maximize his commission.
Cooperation in this context means no haggling; you walk in, pay the sticker price (much to the salesman’s delight), and leave with a new car. On the other hand, defecting means bargaining. You want a lower price, while the salesman wants a higher price. Assigning numerical values to the levels of satisfaction, where 10 means fully satisfied with the deal and 0 implies no satisfaction, the payoff matrix is as shown below:
Car Buyer vs. Salesman – Payoff Matrix Salesman Cooperate Defect Buyer Cooperate (a) 7, 7 (c) 0,10 Defect (b) 10, 0 (d) 3, 3
What does this matrix tell us? If you drive a hard bargain and get a substantial reduction in the car price, you are likely to be fully satisfied with the deal, but the salesman is likely to be unsatisfied because of the loss of commission (as can be seen in cell b).
Conversely, if the salesman sticks to his guns and does not budge on price, you are likely to be unsatisfied with the deal while the salesman would be fully satisfied (cell c).
Your satisfaction level may be less if you simply walked in and paid full sticker price (cell a). The salesman in this situation is also likely to be less than fully satisfied, since your willingness to pay full price may leave him wondering if he could have “steered” you to a more expensive model, or added some more bells and whistles to gain more commission.
Cell (d) shows a much lower degree of satisfaction for both buyer and seller, since prolonged haggling may have eventually led to a reluctant compromise on the price paid for the car.
Likewise, with salary negotiations, you may be ill-advised to take the first offer that a potential employer makes to you (assuming you know that you’re worth more).
Cooperating by taking the first offer may seem like an easy solution in a difficult job market, but it may result in you leaving some money on the table. Defecting (i.e., negotiating) for a higher salary may indeed fetch you a fatter pay package. Conversely, if the employer is not willing to pay more, you may be dissatisfied with the final offer.
Hopefully, the salary negotiations do not turn acrimonious, since that may result in a lower level of satisfaction for you and the employer. The buyer-salesman payoff matrix shown earlier can be easily extended to show the satisfaction level for the job seeker versus the employer.
The Bottom Line
The prisoner’s dilemma shows us that mere cooperation is not always in one’s best interests. In fact, when shopping for a big-ticket item such as a car, bargaining is the preferred course of action from the consumers' point of view. Otherwise, the car dealership may adopt a policy of inflexibility in price negotiations, maximizing its profits but resulting in consumers overpaying for their vehicles.
Understanding the relative payoffs of cooperating versus defecting may stimulate you to engage in significant price negotiations before you make a big purchase.
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19a8006969de05db6a7dbad76349c4c7 | https://www.investopedia.com/articles/investing/110515/how-make-money-selling-kids-items-consignment-sales.asp | How to Make Money Selling Kids’ Items at Consignment Sales | How to Make Money Selling Kids’ Items at Consignment Sales
No matter how many kids you have, whether it be one or 10, most parents face a common problem—too much stuff piling up. At the end of each season, you might find yourself with piles of clothes, shoes, used toys, and other odds and ends that your children have grown out of and are taking up space. Garage sales are great for selling junk and inexpensive items quickly, but selling your kid's stuff at a consignment sale will make you more money.
Most people think a consignment sale is a shop that you drop things off for consignment. That is one type of consignment place. However, the best place to sell your children's items is through a bi-annual, local consignment sale. The sales are usually four days long and allow you to set your own prices. The person running the consignment sale will then take 30% to 40% of your sales.
Key Takeaways Consignment sales can be a quick and easy way for parents to sell the piles of clothes, shoes, and toys their children have outgrown.A consignment sale is a local, organized shopping event usually held over three or four days.Sellers drop off items they'd like to sell with event organizers, who are responsible for promoting and running the sale in exchange for 30% to 40% of total sales.To sell your items fast and for the best price, be sure to present your items nicely, price your items correctly, group similar items together, and discount heavily on the last day of the sale.
Why Sell at a Consignment Sale?
All you have to do for a consignment sale is price your stuff and drop it off. The consignment workers will do the rest of the merchandising. They organize all the items, they advertise throughout the whole community, and they keep track of your sales. Since there will be a lot of shoppers, you can charge a better price for nicer items. For example, your Baby Gap sweater may have only earned you a dollar at a yard sale, but at a consignment sale, you can sell it for five to eight dollars.
How to Find a Consignment Sale in Your Area
You can search online for the most popular city near you plus the phrase “consignment sale” to see if anything comes up. You can also go to the Just Between Friends website and search for local consignment sales.
Presentation Is Everything
Consignment sales can be picky about what they will accept. They do not want any clothing item that is torn or stained. They will also not take broken items or recalled objects. The best thing to do is to give all of your clothes a quick wash and spot treat any questionable items. Make sure clothing hangs nicely from the hanger and is not wrinkled. Wipe down any toys and replace the batteries.
Pricing Matters
Generally, it is best to price your items 50% to 70% less than the retail price. For example, if you bought a $20 toy for your child, then it should be priced at $6 to $10. Clothes are usually priced $2 to $3 for everyday styles and brands from Cherokee, Faded Glory, and Carters. You can charge more for brand-name clothing, such as Baby Gap, Guess, and Gymboree. You still want to keep the prices affordable though, so don’t price an item higher than $5, unless it is a special jacket, dress, or full outfit.
Remember, you are pricing to sell, so don’t think about how much you originally paid for an item. Consignment shoppers are looking for great finds at rock bottom prices.
What Will and Won’t Sell
You can sell almost anything at a consignment sale, given that it is the right price and a desirable item. The hardest things to sell are baby items and maternity clothing. These sales are overcrowded with baby clothes and items, so don’t expect to get as much for your newborn clothing or basic baby items, like bathtubs.
If the sale falls right before Christmas, then toys will sell quickly. Most shoppers are buying their Christmas gifts in advance and are willing to pay a little more for nice and gently used toys.
Discount to Make Even More
Consignment sales will offer a half-off day the last day of the sale. This is your last chance to make money and get rid of stuff. It is a good idea to mark your items half off if you want them to sell. Parents working with a tight budget often wait until the last day of the sale, knowing this is the best time to bargain hunt.
Group Items Together
To sell your items at a higher price and at a faster pace, group like items together. For example, not many shoppers will want to buy a onesie for $2. However, shoppers will want to buy a set of five onesies for $5. You can also group similar books together or similar small toys together.
Flip Used Goods to Make Even More
One way to maximize your profit at this sale is to shop yard sales several weeks before the consignment sale, looking for items you can easily flip. You are looking for clothing, books, and toys that you can sell for a profit at the sale. For example, you can purchase toys for about a dollar each at yard sales and then sell them for $5 to $7 each, depending on their retail value. This method will not make you a lot of money, but it can potentially earn you about $3 per item.
The Bottom Line
If you need to get rid of your baby and children’s items quickly, a weekend consignment sale is the way to go. Typically, you can earn more for bigger items, such as strollers or baby furniture, through Craigslist ads or through one of the popular alternatives to Craigslist. However, utilizing a consignment sale to sell these bigger items is quicker and allows you to avoid dealing with troublesome buyers directly.
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3457b1795148674bf8d0399c85e9a171 | https://www.investopedia.com/articles/investing/110515/who-are-owners-vanguard-group.asp | Who Are the Owners of Vanguard Group? | Who Are the Owners of Vanguard Group?
Vanguard has a fairly unique structure in terms of investment management companies. The company is owned by its funds. The company’s different funds are then owned by the shareholders. Thus, the shareholders are the true owners of Vanguard. The company has no outside investors other than its shareholders. Most of the major investment firms are publicly traded.
Vanguard's structure allows the company to charge very low expenses for its funds. Due to its scope of size, the company has been able to reduce its expenses over the years. The average expense ratio for Vanguard funds was 0.89% in 1975. That number stands at 0.10 in 2020.
Some experts believe Vanguard’s structure allows it to avoid conflicts of interest that are present at other investment management firms. Publicly traded investment management firms must cater to their shareholders and the investors in their funds.
Key Takeaways Vanguard Group is the second-largest investment firm in the world, after BlackRock.It is the biggest issuer of mutual funds worldwide and the second-biggest issuer of ETFs.The company is unusual in the fund world in that it is owned by its different funds, which are in turn owned by the company's shareholders.The company has no other owners than its shareholders, which sets it apart from most publicly-traded investment firms.
About Vanguard
As of 2020, Vanguard has more than $6.2 trillion in assets under management (AUM), second to BlackRock, Inc ($6.47 trillion AUM). The company is headquartered in Pennsylvania. Vanguard is the largest issuer of mutual funds in the world and the second-largest issuer of exchange-traded funds (ETFs). It has 190 U.S. funds. It has the second-largest bond fund in the world, as of 2020, the Vanguard Total Bond Market Index, second only to PIMCO's Total Return Fund. Vanguard prides itself on its stability, transparency, low costs, and risk management. It is a leader in the area of offering passively managed mutual funds and ETFs.
4:07 John Bogle on Starting World's First Index Fund
Origins of Vanguard
Vanguard was founded by John C. Bogle as part of the Wellington Management Company. Bogle earned his degree from Princeton University. The fund grew out of a bad decision Bogle made on a merger. Bogle was removed as the head of the group, but he was still allowed to start a new fund. The main stipulation of allowing Bogle to start the new fund was that it could not be actively managed. Due to this limitation, Bogle decided to start a passive fund that tracked the S&P 500. Bogle named the fund "Vanguard" after a British ship. The first new fund launched in 1975.
Although the growth of the fund was initially slow, the fund eventually took off. By the 1980s, other mutual funds began copying his index investing style. The market for passive and indexed products has grown substantially since that time.
The average expanse ratio of Vanguard's funds is 0.10%, versus the mutual fund industry average of 0.63%.
Benefits of Index Investing
Bogle is a big proponent of index investing compared to investing in actively managed mutual funds. Vanguard has some of the largest index funds in the business. He states that it is generally impossible for actively managed funds to beat passively managed funds. Actively managed funds charge higher fees that eat into profits over the long haul. Further, many active fund managers fail to even beat their benchmark indexes most of the time. It is estimated that 50% to 80% of mutual funds fail to beat their benchmark indexes in most years.
This calls into question the real added benefit of most actively managed mutual funds. Active fund managers must beat their benchmarks by an amount at least equal to the higher fees that they charge, in order to make them worthwhile. This is a difficult task. Even if a fund manager is successful in the short term, it is difficult to know whether this is a function of luck or actual long-term skill. Investors should note that Vanguard still does have actively managed mutual funds. Even these actively managed funds strive to keep costs low versus industry averages making them a better bet for investors.
Index funds make a lot of sense for many investors. Mutual funds and ETFs that track indexes have very low costs. They must ensure that their holdings generally reflect and track the performance of the index. This results in lower fees for investors. Even with broad indexes such as the S&P 500, the components of that index are chosen by skilled investment professionals. If a company is in financial difficulty, it can be dropped from the index. Investors still benefit from professional investment advice even when they are passively tracking indexes.
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ef1b7edfbd360e7d34144b2983b7f57e | https://www.investopedia.com/articles/investing/110614/most-important-factors-investing-real-estate.asp | The Most Important Factors for Real Estate Investing | The Most Important Factors for Real Estate Investing
What's the most important thing to look for in real estate? While location is always a key consideration, there are numerous other factors that help determine if an investment is right for you. Here's a look at some of the most important things to consider if you plan to invest in the real estate market.
1. Property Location
Why It's Important
The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighborhood's status factor prominently into residential property valuations. Closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.
What to Look For
A key when considering property location is the mid-to-long-term view regarding how the area is expected to evolve over the investment period. For example, today’s peaceful open land at the back of a residential building could someday become a noisy manufacturing facility, diminishing its value. Thoroughly review the ownership and intended usage of the immediate areas where you plan to invest.
One way to collect information about what are the prospects of the vicinity of the property you are considering is to contact town hall or other public agencies in charge of zoning and urban planning. This will give you access to the long-term area planning and make a determination how favorable or unfavorable to your own plan for the property.
2. Valuation of the Property
Why It's Important
Property valuation is important for financing during the purchase, listing price, investment analysis, insurance, and taxation—they all depend on real estate valuation.
What to Look For
Commonly used real estate valuation methods include:
Sales comparison approach: recent comparable sales of properties with similar characteristics—most common and suitable for both new and old propertiesCost approach: the cost of the land and construction, minus depreciation— suitable for new constructionIncome approach: based on expected cash inflows—suitable for rentals
3. Investment Purpose and Investment Horizon
Why It's Important
Given the low liquidity and high-value investment in real estate, a lack of clarity on purpose may lead to unexpected results, including financial distress—especially if the investment is mortgaged.
What to Look For
Identify which of the following broad categories suits your purpose, and then plan accordingly:
Buy and self-use. Here you will save on rent and have the benefit of self-utilization, while also getting value appreciation.Buy and lease. This offers regular income and long-term value appreciation. However, the temperament to be a landlord is needed to handle possible disputes and legal issues, manage tenants, repair work, etc.Buy and sell (short-term). This is generally for quick, small to medium profit—the typical property is under construction and sold at a profit on completion.Buy and sell (long-term). This is generally focused on large intrinsic value appreciation over a long period. This offers alternatives to compliment long-term goals, such as retirement.
4. Expected Cash Flows and Profit Opportunities
Why It's Important
Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property.
What to Look For
Develop projections for the following modes of profit and expenses:
Expected cash flow from rental income (inflation favors landlords for rental income)Expected increase in intrinsic value due to long-term price appreciation.Benefits of depreciation (and available tax benefits)Cost-benefit analysis of renovation before sale to get a better priceCost-benefit analysis of mortgaged loans vs. value appreciation
5. Be Careful with Leverage
Why It's Important
Loans are convenient, but they may come at a big cost. You commit your future income to get utility today at the cost of interest spread across many years. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. Even experts in real estate are challenged by over-leverage in times of adverse market conditions and the liquidity shortages with high debt obligations can break real estate projects.
What to Look For
Depending upon your current and expected future earnings, consider the following:
Decide on the type of mortgage that best fits your situation—fixed-rate, adjustable-rate mortgage (ARM), interest-only, zero down payment, etc. Note that each type of mortgage has its own risk profile and you need to study each carefully. For instance, ARM includes mortgage rates that can change at any time driven by capital market forces and the borrower must accept any rate changes during the loan term.Be aware of the terms, conditions, and other charges levied by the mortgage lender.Shop around to find lower interest rates and better terms.
6. New Construction vs. Existing Property
Why It's Important
New construction usually offers attractive pricing, the option to customize, and modern amenities. Risks include delays, increased costs, and the unknowns of a newly developed neighborhood.
Existing properties offer convenience, faster access, established improvements (utilities, landscaping, etc.), and in many cases, lower costs.
What to Look For
Here are some key things to look for when deciding between new a construction or an existing property:
Review past projects and research the construction company's reputation for new investments.Review property deeds, recent surveys, and appraisal reports for existing properties.Consider monthly maintenance costs, outstanding dues, and taxes. Costs such as these can severely impact your cash flow.When investing in leased property, find out if the property is rent-controlled, rent-stabilized, or free market. Is the lease about to expire? Are renewal options favorable to the tenant? Who owns the furnishings?Quality-check items (furniture, fixtures, and equipment) if these are to be included in the sale.
7. Indirect Investments in Real Estate
Why It's Important
Managing physical properties over a long-term horizon is not for everyone. Alternatives exist that allow you to invest in the real estate sector indirectly.
What to Look For
Consider other ways to invest in real estate:
Real estate investment trusts (REITs)Real estate company stocksReal estate sector-focused mutual funds and ETFsMortgage bondsMortgage-backed securities (MBS)
8. Your Credit Score
Why It's Important
Your credit score affects your ability to qualify for a mortgage, and it impacts the terms your lender offers. If you have a higher credit score, you may get better terms—which can add up to substantial savings over time.
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).
What to Look For
Scores greater than 800 are considered excellent and will help you qualify for the best mortgage. If necessary, work on improving your credit score:
Pay bills on time—set up automatic payments or remindersPay down debtAim for no more than 30% credit utilizationDon't close unused credit cards—as long as you're not paying annual feesLimit requests for new credit and "hard" inquiriesReview your credit report and dispute inaccuracies
9. Overall Real Estate Market
Why It's Important
As with other types of investments, it's good to buy low and sell high. Real estate markets fluctuate, and it pays to be aware of trends. It's also important to pay attention to mortgage rates so you can lower your financing costs, if possible.
What to Look For
Stay up-to-date with trends and statistics for:
Home prices and home sales (overall and in your desired market)New constructionProperty inventoryMortgage ratesFlipping activityForeclosures
The Bottom Line
Real estate can help diversify your portfolio. In general, real estate has a low correlation with other major asset classes—so when stocks are down, real estate is often up. A real estate investment can also provide steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns, making it a sound investment.
Of course, just like any investment, it's important to consider certain factors, like the ones listed here, before you invest in real estate—whether you opt for physical property, REITs, or something else.
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86d34ab2931d968a2a0abecc9b0bdb4e | https://www.investopedia.com/articles/investing/110614/taxi-industry-pros-cons-uber-and-other-ehail-apps.asp | Uber: Advantages and Disadvantages | Uber: Advantages and Disadvantages
Uber: An Overview
Uber and its competitors such as Lyft have dramatically changed the personal transportation industry, with a mix of both benefits and drawbacks for customers and drivers.
The ride-sharing business revolutionized a business model that had been functioning in the same way for generations: On a busy city street, a person in need of a ride stood on a street corner and waved down a taxi. On quieter streets, the person would phone a local car service and request a pickup.
Now, there's an app for that.
Bright-yellow taxicabs once dominated the streets of Manhattan. By 2020, there were four times as many ride-sharing vehicles on the streets as taxis. Those vehicles were summoned by apps offered not only by Uber and Lyft but by Via, Juno, and Gett.
Key Takeaways Ride-sharing services disrupted the taxi and limo industry, replacing steady jobs with gig work. Ride-sharing services offer door-to-door convenience, safety, and reliable quality. They are not necessarily cheaper than a taxi, and a short trip may be more expensive.
Advantages of Uber
E-hail services like Uber made it fast and easy to hire a driver using a smartphone from almost any location at any time. ("Almost" because drivers are in short supply in outer suburbs and rural areas.) Proprietary software locates drivers circling nearby and generally offers a selection of options, from the cheapest carpooling choice to luxury wheels. The price is set and paid in advance.
Uber's famous "surge pricing" revises the cost of its services from hour to hour based on local demand. As more calls are made, prices tick up, drawing more drivers out to score customers. As demand subsides, prices tick down.
Uber and its competitors have several distinct advantages over traditional taxis:
Convenient and Cashless
Instead of chasing down a taxi on a street, or calling and waiting for a car service, e-hail app users can hail a car from any location and have it arrive in minutes. Uber doesn't even need to ask you for an address. It knows where you are.
Because the passenger's credit card is linked to the e-hail account, no cash changes hands. At the destination, the driver stops the car and the passenger gets out and walks away. A receipt is sent via email, with links to options for rating and tipping the driver.
Professional Service
Drivers for Uber and its competitors use their own cars, and they seem incentivized to keep them clean and well-maintained. The cheapest options are late-model compacts, not junkers.
The riders input their destinations into the app, and the drivers use navigational software to get there. Wrong turns are unlikely.
The drivers are generally polite and well-spoken.
They never refuse to take you to any particular destination. They don't even know your destination before they accept your call.
Does this sound like a case of damning with faint praise? That depends on what city or cities you were accustomed to catching taxis in.
Unprofessional drivers are weeded out because passengers get to rate the driver’s performance. A consistently low rating will force a driver out of Uber or its competitors.
All of the above and more foster a positive experience for ride-sharing customers.
Competitive Pricing
Uber can be less expensive than a taxi or car service, but not consistently.
According to Consumer Reports, longer trips are generally cheaper by Uber but short trips can be more expensive. And the vast majority of trips by Uber are short. So, an Uber ride from the airport to a suburb should save you money but a mile-long trip across a neighborhood could well be cheaper in a cab and would definitely be cheaper by bus or subway.
Consumer Reports also warns that the surge pricing model for both Uber and Lyft can mean much higher prices at busy times of the day.
It is impossible to come up with a definitive or average price for an Uber. Its pricing scheme varies with every city, and that surge pricing model changes the prices constantly based on demand.
One point in its favor: Uber tells you exactly what the prices will be for the options available at that time before you confirm the trip.
Safer and More Flexible for Drivers
Safety is an important advantage for drivers working with Uber and other e-hail services. The riders using the service have registered their identities and their credit card numbers on the app. They are not random strangers on the street.
Because the transaction is cashless, a driver doesn't risk unpaid fares or need to carry cash for change.
Rude, aggressive, and disruptive passengers are weeded out because drivers rate their customers. Consistently low ratings or reports of unsafe behavior toward drivers can cause the deactivation of an account.
Unlike yellow cab taxi drivers who work 12-hour shifts or black car drivers who are scheduled by dispatchers, Uber drivers enjoy considerable freedom and flexibility. Drivers log in and out of the system anytime they choose and pick their own hours (within limits set by the company to avoid sleepy driving).
Drivers avoid expensive taxi rental leases by using their own vehicles. They also pay their own fuel and maintenance costs. All else being equal, this may mean more profit for drivers.
Drivers are also spared any office politics because the app renders dispatchers irrelevant.
With cheap prices and readily available cars, customers get into the habit of taking a car for very short distances. The costs can add up quickly.
Disadvantages of Uber
Uber has become a prime example of the gig economy at work. Its workers are not guaranteed a minimum wage, supply and maintain their own vehicles, and have few if any benefits.
That is becoming controversial in some cities where Uber operates. New York City mandated a $17.22 minimum wage for drivers. California legislators passed a law classifying ride-sharing drivers as employees, not independent contractors, but the state's voters later reversed that by voting the opposite in November 2020.
Surge Pricing
"Surge pricing" for Uber, or "prime time pricing" as it is called by Lyft, is controversial among customers. It's a classic use of the free market principle of raising or lowering prices according to supply and demand. For Uber customers, this means how many cars are available (supply) and how many passengers want to ride in them (demand).
Compared to a straightforward surcharge, this automated system can lead to quite dramatic differences in pricing between any two points. At super peak times, a price could double or triple. That can mean a hefty expense during rush hour or during a snowstorm.
Safety concerns have emerged in some cities and states where the transportation industry regulations are lax and it's easy for enter the e-hail network as service providers. Although this has a positive effect by increasing the supply of drivers, these drivers might not be as motivated to reach high standards of professionalism and safety.
Low Fares Hurt Drivers
Some Uber drivers say they struggle to earn even a minimum wage once Uber takes its cut. They als bear most of the costs associated with the service, such as fuel, maintenance, and repairs.
With competition from other ride-sharing services and the continuous hiring of new drivers, average earnings are being pushed downward. This means that drivers have to work longer hours to earn an income comparable to what they would have earned a year or two ago.
Negative Impact of Price Competition
Price competition can be destructive for any industry. Increasingly, Uber, Lyft and other e-hail services are engaged in an intense battle to provide the cheapest service. They are directly competing with existing traditional taxi and car services for both customers and drivers.
This has led to a precipitous drop in earnings for taxi drivers. Prices for New York City taxi medallions, essentially a metal permit to drive a cab, plummeted from about $1.3 million to $160,000 over a few years, leaving drivers scrounging for rides and drowning in debt.
Disclosure: The author of this article has an affiliation with Uber, Lyft and HailO.
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cf682da3976f33d357ca1ee2120105a7 | https://www.investopedia.com/articles/investing/110615/5-reasons-invest-municipal-bonds-when-fed-hikes-rates.asp | Invest in Municipal Bonds During Rate Hikes | Invest in Municipal Bonds During Rate Hikes
Bonds and interest rates have an inverse correlation: as interest rates increase, bond prices fall. However, the more the Federal Reserve hikes interest rates, the better news potentially for municipal bond investors.
Municipal bonds (or "munis"), long touted as among the safest, most tax-efficient debt investments available, were hit hard in the wake of the 2008 financial crisis as interest rates fell close to zero, and they were considered a low-yielding investment for many years. Let's see why munis can be more attractive to investors after interest rates have risen.
Key Takeaways Bond prices and interest rates are inversely correlated, and municipal bonds (i.e. debt securities issued by state and local gov'ts) are no different.Munis, however, have some unique advantages for investors to take advantage of after an interest hike.Investors should keep in mind the 5 points explained below to see if a muni bond investment is right when interest rates increase.
How Interest Rates Affect Bond Prices
One of the most important concepts to understand when investing in bonds of any type is the effect of interest rate changes on bond prices. Because bonds are issued with interest rates, called coupon rates, based on the current federal funds rate, changes to interest rates initiated by the Federal Reserve can cause the values of existing bonds to increase or decrease.
For example, if a current bond is issued with a coupon rate of 4%, the value of the bond automatically decreases if interest rates rise and a new bond with identical terms is issued with a 6% coupon. This reduction in market value occurs to compensate investors for purchasing a bond with lower interest payments than newly issued bonds. Conversely, if interest rates decline and new bonds were issued with 2% rates, the market value of the original bond increases.
Typically, longer-term bonds carry higher coupon rates than short-term bonds because the default and interest rate risk inherent in all bond investments increases with time. This simply means the longer you hold a bond, the more risk there is of interest rate changes rendering your bond less valuable or the issuing entity defaulting on its obligations, leaving the bond unpaid. However, if you invest in highly rated municipal bonds and do not need to access your investment funds for several years, long-term bonds can be a very lucrative investment when purchased at the right time.
1. Higher Coupon Rates
The most obvious benefit of investing in municipal bonds after the rate hike is coupon rates on newly issued bonds are substantially higher than current bonds. New bonds issued after rates rise generate more interest income each month relative to previously issued securities, making them lucrative investments for those looking to supplement their annual income.
As always, longer-term bonds still carry higher rates than short-term securities because of the increased inflation and credit risk. However, long-term municipal bonds, especially general obligation bonds, can be extremely safe if issued by a highly rated municipality.
2. Greater Variety of Bonds
Another benefit of purchasing municipal bonds after the Fed hikes interest rates is the number of bonds on the market is likely to increase. When interest rates are low, the cost of borrowing money from banks, through loans and lines of credit, is often cheaper than the cost of issuing bonds. However, once interest rates rise and the cost of borrowing increases, bonds become the more attractive financing option.
When a municipality issues bonds, its only responsibility is to repay investors according to the terms of bond. Conversely, there can be numerous strings attached to money borrowed from banks.
3. Potential for Appreciation if Rates Decline
In addition to their healthy coupon rates, bonds issued after a rate hike are likely to increase in value down the road. If the Fed increases rates rapidly, the next substantial interest rate change is likely to be a reduction, since interest rates change in cycles.
If interest rates decline a few years into the future, the value of bonds issued when rates were at their peak is higher, giving investors the option to sell their bonds on the open market for a tidy profit rather than waiting for them to mature.
4. Lower Prices on Existing Bonds
Though municipal bonds issued after a rate hike carry higher interest rates than current bonds, this means older bonds become extremely affordable. Given that until 2018, interest rates have been at historic lows for several years, existing bonds are likely to be purchasable at bargain-basement prices to compensate investors for the opportunity cost of investing in lower-yield bonds.
This could provide an opportunity for investors to purchase highly rated municipal bonds cheaply.
5. Greater Tax Savings
The chief benefit of investing in municipal bonds at any time is they earn interest that is not subject to federal income taxes. In addition, if you purchase bonds issued in your state or city of residence, your earnings may also be exempt from state or local taxes. If you purchase municipal bonds after interest rates rise, the amount you save on income taxes is even greater.
Even long-term gains earned on investments held longer than one year are subject to capital gains rates of up to 20%. Ordinary income tax rates go up to 39.6%, so earning investment income that is not subject to federal taxes can mean a significant boost in after-tax returns.
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df4ea6ab0ef9fda12e9613f883670809 | https://www.investopedia.com/articles/investing/110713/basics-mechanics-behind-electronic-trading.asp | Basics of the Mechanics Behind Electronic Trading | Basics of the Mechanics Behind Electronic Trading
Electronic trading is easy: Log in to your account. Select the security you wish to buy or sell. Click the mouse or tap your screen, and the transaction takes place. From an investor’s perspective, it’s simple and easy. But behind the scenes, it is a complex process backed by an impressive array of technology. What was once associated with shouting traders and wild hand gestures has now become more closely associated with statisticians and computer programmers.
Key Takeaways Electronic trading involves setting up an account with a brokerage of your choice, including providing your contact and financial information—to facilitate electronic transfers between your bank and the brokerage. When you place an order, the complex technology enables the brokerage to interact with all the securities exchanges looking to execute trades, while those exchanges simultaneously interact with all the brokerages. A computerized matching engine performs a high volume of trades each minute, and all work is backed up and accessible to be reviewed by investors, market makers and government regulators. All information is protected and stored by the Depository Trust Company, a recordkeeper of all financial transactions made by U.S. shareholders, therefore guaranteeing that no information is lost.
First Step: Open an Account
The first step is to open an account with a brokerage firm. This can be done electronically or by completing and mailing the appropriate forms. You will need to provide personal information, such as your name and address, that enables the firm to identify you, along with a bit of information about your investing experience level. Then the brokerage firm can evaluate whether the account you are seeking is appropriate. For example, if you have no experience trading stocks but wish to open an account that lets you trade using borrowed money (a margin account), your application may be denied.
The account-opening process also enables you to designate electronic pathways between your bank account and brokerage account so that money can move in either direction. Should you wish to add more money to your investable pool, you can move it from your bank account to your brokerage account simply by logging in to your account. Similarly, if your investments have generated gains and you need that money to pay bills, you can move from your brokerage account to your bank without making any phone calls. If you don’t have a bank account, you can set up a money market account with the brokerage firm and use it in a manner similar to a bank account.
These electronic conveniences require computer equipment, such as servers, and human oversight to make sure everything is set up properly and works as planned. The technological requirements become even more complex when you are ready to trade.
Electronic trading provides a secure marketplace for investors and industrywide systems for protecting the information, but it is not without risks: even a small glitch can have huge reverberations.
Research Before Trading
Before you place an order, you will likely want to learn about the security you are considering for purchase. Most brokerage websites offer access to research reports that will help you make your decision and real-time quotes that tell how much the security is trading for at any given time. The research reports are updated periodically and loaded to the website when you access them. The quotes are a far more complex issue, as the technology must keep track of thousands of data points relating to stock prices and deliver that data to you instantly upon request.
How It Works
When you actually place an order, the infrastructure level required to support the process increases. Programming and technology must facilitate order entry and the variety of choices that it entails.
First, you have the option to select your choice of order types. Market orders execute immediately. Limit orders can be set to execute only at a certain price, within a certain time limit ranging from immediately to anytime within a period of months. These choices are available simultaneously to all investors using the system and must work in real-time.
The purchase price and share quantity requested must be conveyed to the marketplace, which requires the computer system at the brokerage firm where the order was placed to interact with computer systems on the securities exchange where the shares will be purchased. The systems at the exchange must instantly and simultaneously interact with the systems at all of the brokerage firms, either offering shares for sale or seeking to purchase shares.
To complicate matters further, the electronic interface must include all exchanges (Nasdaq, NYSE, etc.) from which an investor may choose to purchase a security. The interaction between systems must execute transactions and deliver the best price for the trade. To prove to regulators like the Securities and Exchange Commission (SEC) that the trade was executed in a timely and cost-effective fashion, the systems must maintain a record of the transaction.
The computerized matching engine must perform a high volume of transactions every minute the market is open for business and do so instantly and flawlessly. Backup systems are necessary to make sure investors have access to their accounts and can trade every minute the markets are open. Security industry regulators, such as the SEC, also need access to the information contained in investors' accounts.
How Information Is Protected
That data is held at the Depository Trust Company, which is a recordkeeper responsible for maintaining details for all shareholders in the United States. The DTCC is a holding company consisting of five clearing corporations and one depository, making it the world's largest financial services corporation dealing in post-trade transactions. This central repository serves as a backstop, enabling investors to recover account information in the event the brokerage firm responsible for facilitating the investor’s trades goes out of business.
Once the trade has been made, the transaction must be confirmed with both buyer and seller. The data must be sent back out to the systems that collect and display pricing to other market participants to facilitate trading in the broader marketplace.
Fidelity Investments, Interactive Brokers, Charles Schwab, TradeStation and TD Ameritrade have been rated the best online brokers of 2019, according to the latest report from Investopedia.
Trading Records Kept
A record of the transaction must be stored, so that data is available for client statements and for clients to access online when they log into their brokerage accounts. On an ongoing basis, the system must capture data for corporate actions like dividends and capital gains, not only to keep the investor’s account balance up to date and accurate but also to facilitate tax reporting. Enormous volumes of data must continually be tracked, captured and transmitted.
The system must also be able to facilitate both periodic and regularly scheduled recurring transactions. Everything from transfers to and from the investor’s personal bank account to ongoing transfers between accounts for account funding, bill payment, estate settlement and a variety of other transactions must be supported.
Risks
Electronic trading is integral to the financial markets. Everything from technological glitches to outright fraud can impair the smooth and efficient functioning of those markets, costing brokerage firms money and calling into question the credibility of the financial system. Even minor glitches, such as the “flash crash” of May 6, 2010, can wreak havoc. The flash crash was a brief trading glitch that caused the Dow Jones Industrial Average to plunge 998.5 points in just 20 minutes. More than $1 trillion in market value disappeared. To rectify the situation and make investors whole, 21,000 trades were canceled—all because of a single glitch, triggered by an order placed in the futures market on a brokerage firm's computer system, which caused panic trading to spill over to the equity markets.
The Bottom Line
Electronic trading is amazingly complex and extraordinarily fast. It offers instant access to an impressive array of securities and markets. The data support includes all the reporting functions an investor needs and all the data that regulators require. It includes a secure environment for personal account details and an industrywide repository designed to ensure no data is lost. Despite the high trading volume, the system is incredibly reliable. It’s a modern technological marvel, and it's available to you to use for just a few dollars per trade.
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408969dfe2303f5443543ee3fd8b9e52 | https://www.investopedia.com/articles/investing/110714/getting-market-leverage-cfd-versus-spread-betting.asp | Getting Market Leverage: CFD versus Spread Betting | Getting Market Leverage: CFD versus Spread Betting
Brief Overview
Investments in financial markets can reap large rewards. However, traders cannot always access the capital necessary to get significant returns. Leveraged products offer investors the opportunity to get significant market exposure with a small initial deposit. Popular in the United Kingdom, contracts for difference (CFDs) and spread betting are leveraged products fundamental to the equity, forex and index markets.
Key Takeaways Contracts for difference, or CFDs, are short-term leveraged derivative contracts that track the value of some underlying instrument and pay off accordingly. Spread betting involves placing a speculative bet on the price movements of an underlying instrument without actually owning it. Although similar on the surface, there are several fundamental nuances that differentiate CFDs from spread betting.
CFDs
Contracts for difference, or CFDs, are derivative contracts between investors and financial institutions in which investors take a position on the future value of an asset. Similarly, spread betting allows investors to place money on whether the market will rise or fall. Differences in the settlement between the open and closing trade prices are cash-settled. There is no delivery of physical goods or securities with CFDs, but the contract itself has transferrable value while it is in force.The CFD is thus a tradable security established between a client and the broker, who are exchanging the difference in the initial price of the trade and its value when the trade is unwound or reversed.
Although CFDs allow investors to trade the price movements of futures, they are not futures contracts by themselves. CFDs do not have expiration dates containing preset prices but trade like other securities with buy and sell prices.
CFDs trade over-the-counter (OTC) through a network of brokers that organize the market demand and supply for CFDs and make prices accordingly.
(For related reading, see: Risks With Contracts for Differences and An Introduction To CFDs.)
For the most part, CFD trading is not allowed by law for American residents.
Spread Betting
Spread betting allows investors to speculate on the price movement of a wide variety of financial instruments, such as stocks, forex, commodities and fixed income securities. In other words, an investor makes a bet based on whether they think the market will rise or fall from the time their bet is accepted. They also get to choose how much they want to risk on their bet. It is promoted as a tax free, commission free activity that allows investors to speculate in both bull and bear markets. The bet itself is not transferrable to anybody else.
Spread-betting companies provide buy and sell prices to potential investors who position their investments with the buy price if they believe the market is going up or sell price if they believe the market is due to tumble. Spread Betting, unlike traditional investing, is actually a form of betting. Unlike fixed-odds betting, it does not require a specific event to happen. You can actually close in the bet at any time and take home the profits or limit the losses. FSB is a margined derivative product that allows you to bet on the price movements of all kinds of financial markets and products, such as stocks, bonds, indices and currencies, etc. An investor can get into long (similar to buying a share) or short (like selling a share) bets depending on the prediction or direction the market moves.
(For an in-depth discussion, see Understanding Financial Spread Betting and Top Spread-Betting Strategies.)
Similarities
CDFs and spread bets are leveraged derivative products whose values derive from an underlying asset. In these trades, the investor has no ownership of assets in the underlying market. When trading contract for differences, you are betting on whether the value of an underlying asset is going to rise or fall in the future. CFD providers negotiate contracts with choice of both long and short positions based on the underlying asset prices. Investors take a long position expecting the underlying asset will increase, while short selling refers to an expectation that the asset will decrease in value. In both scenarios, the investor expects to gain the difference between the closing value and the opening value.
Similarly, a spread is defined as the difference between the buy price and sell price quoted by the spread betting company. The underlying movement of the asset is measured in basis points with the option to purchase long or short positions.
Margin and Mitigating Risks
In both CFD trading and spread betting, initial margins are required as a preliminary deposit. Margin generally varies from .5 to 10% of the value of the open positions. For more volatile assets, investors can expect greater margin rates and for less risky assets, less margin. Even though the investors in both CFD trading and spread betting only contribute a small percent of the asset’s value, they are entitled to the same gains or losses as if they paid 100% of the value. However in both investment strategies, CFD providers or spread betting companies can call the investor at a later date for a second margin payment. (For more, see the tutorial: Margin Trading.)
Risk in investing can never be avoided. However it is the investor’s responsibility to make strategic decisions to avoid severe losses. In both CFD trading and spread betting the potential profits may be 100% equivalent to the underlying market, but so can potential losses. In both CFDs and spread bets, a stop loss order can be placed prior to contract initiation. A stop loss is a predetermined price that automatically close the contract when the price is met. To ensure providers close contracts, some CFD providers and spread betting companies offer guaranteed stop loss orders at a premium price. (For more, see: Narrow Your Range With Stop-Limit Orders.)
Main Differences
Spread bet, have fixed expiration dates when the bet is placed while CFD contracts have none. Likewise, spread betting is done over the counter (OTC) through a broker, while CFD trades can be completed directly within the market. Direct market access avoids some market pitfalls by allowing for transparency and simplicity of completing electronic trades.
Aside from margins, CFD trading requires the investor to pay commission charges and transaction fees to the provider; in contrast, spread betting companies do not take fees or commissions. When the contract is closed and profits or losses are realized, the investor is either owed money or owes money to the trading company. If profits are realized, the CFD trader will net profit of the closing position, less opening position and fees. Profits for spread bets will be the change in basis points multiplied by the dollar amount negotiated in the initial bet. Both CFDs and spread bets are subject to dividend payouts assuming a long position contract. While there is no direct ownership of the asset, a provider and spread betting company will pay dividends if the underlying asset does as well. When profits are realized for CFD trades, the investor is subject to capital gains tax while spread betting profits are tax free. (For more, see: Don't Let Brokerage Fees Undermine Your Returns.)
The Bottom Line
With similar fundamentals on the surface, the nuanced difference between CFDs and spread bets may not be apparent to the new investor. Spread betting, unlike CFDs, is free of commission fees and profits are not subject to capital gains tax. Conversely, CFD losses are tax deductible and trades can be done through direct market access. With both strategies, real risks are apparent, and deciding which investment will maximize returns is up to the educated investor.
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d45191c8ddd68de9d4c1b914d322fbe4 | https://www.investopedia.com/articles/investing/110915/review-bernie-sanders-economic-policies.asp | Bernie Sanders's Economic Plan: A Second Bill of Rights | Bernie Sanders's Economic Plan: A Second Bill of Rights
Bernie Sanders has come a long way from the underdog position he held in 2016, eventually suspending his 2020 campaign for president on April 8, 2020. The Vermont senator was the frontrunner in the Democratic 2020 primary polls, but he eventually lost that lead and the delegate count to former Vice President Joe Biden in early 2020.
Sanders espoused many liberal economic policies in his candidacy, including Universal Healthcare and higher taxes on the wealthy and the financial sector. Modern Monetary Theory, the controversial economic theory espoused by his senior economic adviser Stephanie Kelton, has also gained supporters since the last time Sanders ran.
Even though Sanders did not win the Democratic primaries this time either, the 78-year-old's name has become synonymous in the U.S. with a movement on the left that has energized scores of progressive young people and dramatically altered how many Americans see their lives and government policy interacting.
Which is why Sanders' economic agenda deserves attention. Critics who don't "feel the bern" can no longer dismiss him as an angry "communist" with no understanding of American values. His platform has already made ideas like Medicare-for-All mainstream and will no doubt be used by future leaders hoping to take it forward.
21st Century Economic Bill of Rights
Sanders says every person in the U.S. is entitled to a decent job and a living wage, quality healthcare, a complete education, affordable housing, a clean environment, and a secure retirement. "This is the richest country on Earth and we have 40 million in poverty, 34 million with no health insurance, and half our people living paycheck to paycheck," he wrote on Twitter. "I refuse to accept that as normal."
He has called for a 21st Century Economic Bill of Rights, referencing the first 10 amendments to the U.S. Constitution guaranteeing civil rights and liberties. Interestingly, President Franklin D. Roosevelt proposed a second Bill of Rights focused on economic security after his 1944 State of the Union speech. Sanders called it “one of the most important speeches ever made by a president" in 2015 and added that "it has not gotten the attention that it deserves."
Here we break down the key elements of his plan to deliver these rights to the American people.
Healthcare a Right, Not a Privilege
At the center of Sanders' campaign was his proposal to give every American health insurance under a government single-payer system. Sanders also wants to lower the price of prescription drugs with three different bills that would allow the government to negotiate prices with Big Pharma, allow patients to import drugs from overseas, and peg prices to the median drug price in Canada, the U.K., France, Germany, and Japan, respectively.
About 30 million Americans are currently uninsured, and as Sanders correctly points out, the U.S. spends a much higher amount each year on healthcare than most major countries, as demonstrated in the chart below.
He has not provided details on how much this would cost or how it would be paid for. His office had previously released a list of options including introducing a 7.5% income-based premium paid by employers and a 4% income-based premium paid by households.
Cancel Student and Medical Debt
Sanders wants to cancel the $1.6 trillion in student debt held by 45 million people. He says this would give graduates the freedom to pursue careers of their choice, narrow the racial wealth divide, and boost the economy by $1 trillion over the next 10 years. The $1 trillion figure comes from a paper written by a group of academics, including Kelton.
He also wants to cancel all medical debt. His proposal would eliminate an estimated $81 billion in past-due medical debt and reform debt collection practices. The Internal Revenue Service (IRS) would also be instructed to monitor non-profit hospitals, who have special tax-exempt status, to make sure they are using the appropriate billing and collection practices.
Sanders, not known for his subtlety, also wants to guarantee higher education as a right for all and would pay for this and cancel student debt by taxing "Wall Street gambling." (See "Taxes" section)
Workers' Rights
Besides raising the federal minimum wage to at least $15 an hour and doubling union membership, Sanders wants to enact a federal jobs guarantee and work toward a full-employment economy. A job guarantee is actually a proposal borrowed from Modern Monetary Theory.
At the time of his running, Sanders said he would be an "Organizer in Chief," so it's worth mentioning that his Workplace Democracy Plan to reform labor laws and strengthen unions is perhaps one of his most detailed and includes multiple measures.
If the concerned bill is passed, the National Labor Relations Board (NLRB) would certify unions that receive the consent of the majority of eligible workers. Employers would be required to begin negotiating a first union contract within 10 days of the request and those that refuse would face penalties. Sanders wants to also ban mandatory arbitration, non-compete and unilateral modification clauses in employment contracts, and establish a sectoral collective bargaining system that is prevalent in Europe.
Giving workers ownership stakes in their companies and an equal say in company boards is also part of his agenda. Under his Corporate Accountability and Democracy Plan, private companies with at least $100 million in annual revenue or at least $100 million in balance sheet total and all publicly traded companies would have to be at least 20% owned by employees.
The employee-owned shares would be placed in a fund controlled by a Board of Trustees directly elected by the workforce. The fund would have voting rights and workers would receive dividends from it.
Forty-five percent of the board of directors at these large corporations would also be elected by the workers. Sanders also promises that workers would have the right of first refusal if their company goes on sale or plans to move overseas and will be provided with financial and technical assistance from the U.S. Employee Ownership Bank he would have created.
While companies are increasingly opting for outsourcing or automation, if Sanders' plan went through, their owners would have to donate shares to U.S. workers laid off due to such transitions. Sanders also wants to stop corporations from sending jobs overseas by eliminating tax deductions, including labor, environmental, and human rights standards, rules against currency cheating in every U.S. trade agreement, and expanding “Buy American” government policies.
Taxes
Wealth Tax
Sanders has proposed a federal "tax on extreme wealth." The progressive wealth tax, which would apply to a net worth of over $32 million, is expected to raise an estimated $4.35 trillion over the next 10 years and cut the wealth of billionaires in half over 15 years.
The tax brackets for married couples are as follows and rates are halved for singles:
Net worth of $32 million and above: 1% Net worth of $50 million to $250 million: 2% Net worth of $250 million to $500 million: 3% Net worth of $500 million to $1 billion: 4% Net worth of $1 billion to $2.5 billion: 5% Net worth of $2.5 billion to $5 billion: 6% Net worth of $5 to $10 billion: 7% Net worth of Above $10 billion: 8%
"One of the biggest sources of wealth for middle-income families is owner-occupied homes, which are taxed in most states at rates that can be as high as, or even higher than, 1%," said the Sanders campaign website. "Meanwhile, the vast majority of the wealth owned by the top 0.1% of Americans is not housing or real property and is not subject to any sort of property tax. This proposal would ensure that assets owned by the top 0.1% are taxed the same way as much of the wealth owned by the middle-class is already taxed."
While still in the running for president, he said he would also pass legislation that establishes a progressive estate tax on the wealth of the top 0.2% and scrap the income limit on Social Security payroll taxes. His administration would also "end special tax breaks on capital gains and dividends for the top 1% and substantially increase the top marginal tax rate on income above $10 million."
Corporate Tax
Sanders, who successfully pressured Amazon.com Inc. (AMZN) to raise its minimum wage to $15, is also proposing progressively higher corporate tax rates for private and public companies whose top executives take home "exorbitantly" higher amounts each year than their typical workers. More specifically, the Income Inequality Tax Plan would penalize companies whose highest-paid executives make over 50 times their median worker pay. It would only apply to corporations that generate annual revenue of over $100 million.
The increase in corporate tax rates based on compensation ratios would be as follows:
Between 50 and 100: +0.5% Between 100 and 200: +1% Between 200 and 300: +2% Between 300 and 400: +3% Between 400 and 500: +4% More than 500: +5%
Sanders' campaign website said the plan would raise around $150 billion over 10 years if corporations continue to maintain the current level of pay gaps, and the revenue would be used to eliminate medical debt.
In addition to this, Sanders says up to $3 trillion in revenue can be collected in 10 years by raising the corporate tax rate back to 35% from 21%, closing corporate tax loopholes, taxing the money corporations earn overseas at the full corporate tax rate, forcing companies with over $25 million to disclose country by country financial information, and removing the 20% tax break for pass-through business income that went into effect in 2018.
Large pass-through businesses would also be subject to corporate taxes under his plan. The campaign noted that if this plan had been in effect in 2019, some companies that paid no U.S. federal income taxes, like Amazon, Delta Air Lines Inc. (DAL), Chevron Corp. (CVX), and General Motors Co. (GM), would have owed over $1 billion.
Wall Street Tax
The financial transaction tax (FTT) Sanders proposed is a 0.5% tax on stock trades, a 0.1% fee on bond trades, and a 0.005% fee on derivatives trades. This is expected to raise $2.4 trillion over 10 years, according to research by left economist Robert Pollin cited by Sanders. Currently, 40 countries have FTTs and the concept goes as far back as the Great Depression. British economist John Maynard Keynes was one of its earliest proponents and suggested in "The General Theory of Employment, Interest, and Money" that the U.S. should introduce "a substantial government transfer tax on all transactions" on Wall Street in order to curb "the predominance of speculation over enterprise."
Wall Street Reforms
Sanders' campaign didn't have a plan for reforming Wall Street as detailed as Sen. Elizabeth Warren's, but he does want to reinstate the Glass-Steagall Act, cap credit card and consumer loans interest rates at 15%, expand basic and affordable banking services offered by post offices, audit the Federal Reserve, reform credit rating agencies, and curb speculation with the tax mentioned earlier.
Wall Street asset managers would have to follow investors' instructions or lose their right to vote on shareholder money. He also plans to organize sectoral pension plans that would wield more bargaining power and "ditch Wall Street asset managers by taking voting in-house."
Corporate Reforms
Determined to curb corporate greed and corruption, Sanders wanted to establish a Bureau of Corporate Governance at the Department of Commerce if he had been elected. Large corporations would need to obtain a federal charter forcing their boards to consider the interests of all of the stakeholders, not just shareholders. (He called the August 2019 Business Roundtable commitment to this "empty words.")
Besides giving workers more rights (as discussed above), he would also ban large-scale stock buybacks by repealing the SEC's Rule 10B-18, force corporate boards to include individuals from historically underrepresented groups, protect the rights of farmers and consumers to repair the equipment and technology they purchase, develop guidelines for anti-competitive exclusivity agreements, develop stricter antitrust rules, and allow the Federal Trade Commission to approve, deny, or undo Trump-era mergers.
Free Child Care and Pre-K for All
Sanders wants to spend $1.5 trillion over a decade to guarantee every child in America below the age of three free full-day, full-week, high-quality childcare, and children above three, free universal pre-kindergarten.
Sanders also promised to double the funding for The Maternal, Infant, and Early Childhood Home Visiting Program, give childcare workers a living wage, pass a bill to ensure free meals to every child in childcare and pre-k, construct, renovate, or rehabilitate childcare facilities and pre-schools, and make more investments in the public education system.
This is the biggest proposal yet for an issue that most of the Democratic candidates during the primaries considered important not just for individual families but for the U.S. economy as a whole. Sanders said he would pay for it with the taxes on extreme wealth.
Green New Deal
Sanders has his own version of a Green New Deal. The goal of the plan is to reach 100% renewable energy for electricity and transportation by 2030 and complete decarbonization by 2050 at the latest.
It involves a $16.3 trillion public investment and the creation of 20 million "good paying, union jobs with strong benefits and safety standards" in steel and auto manufacturing, construction, energy efficiency retrofitting, coding and server farms, renewable power plants, and sustainable agriculture.
Sanders also promised to ban fracking and mountaintop removal coal mining. He said he would promote electric vehicles with $2.09 trillion in grants for families and $85.6 billion on a national electric vehicle charging infrastructure.
Of the $3 trillion raised from corporate taxes in 10 years, $2 trillion would be devoted to the Green New Deal. The campaign website also added the plan would basically pay for itself. Sanders would target the fossil fuel industry with litigation, fees, taxes, and eliminating federal fossil fuel subsidies. He also says there will be cuts in military spending since the U.S. would not be fighting expensive wars to protect its access to oil abroad, and an increase in tax revenue and decrease in safety net spending due to the new jobs created.
Marijuana Reform
In 2015, Sen. Bernie Sanders introduced the first standalone bill to remove marijuana from the Controlled Substances Act and make it legal. Sanders, who believes the current law disproportionately targets African Americans, was also the first high-profile 2016 presidential candidate to call for marijuana legalization on the federal level.
If he had been elected, he had promised to issue an executive order to declassify marijuana as a controlled substance and introduce legislation to make it permanent. His plan has two parts: (1) undo the damage of the war on marijuana and (2) regulate the legal marijuana industry with strict laws to prevent it from becoming like Big Tobacco.
His administration would have reviewed and expunged all current and past marijuana-related convictions and devoted funding and manpower to make sure no one slips through the cracks. Tax revenue collected from the marijuana industry would go toward helping communities impacted by marijuana convictions.
According to his plan, market share and franchise caps would be introduced to "prevent consolidation and profiteering" in the industry. Businesses would be incentivized to be structured like cooperatives and collective nonprofits. Tobacco companies would be prevented from participating in the industry. This would spell trouble for giants hoping to diversify their businesses, like Marlboro-maker Altria Group Inc. (MO), which bought almost half of Canada-based Cronos Group Inc. (CRON) in 2018.
Safety measures proposed include a ban on marketing products to young people and barring companies that run misleading advertisements or create products that cause cancer from the industry.
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a85bb8c7fd79f813527cd9095a779efb | https://www.investopedia.com/articles/investing/111014/basics-value-chain-analysis.asp | Value Chain Analysis | Value Chain Analysis
Why do some companies’ profit margins exceed their competitors? How does one company garner a competitive advantage against its peers? The answers to these questions may be found in value chain analysis.
Value chain analysis is the process of looking at the activities that go into changing the inputs for a product or service into an output that is valued by the customer. Companies conduct value-chain analysis by looking at every production step required to create a product and identifying ways to increase the efficiency of the chain.
Porter's Value Chain Analysis
Back in 1985, Michael Porter, a Harvard Business School professor, introduced a basic value chain model in his book The Competitive Advantage: Creating and Sustaining Superior Performance. He identified several key steps common among all value chain analyses and determined that there are primary and supporting activities that when performed at the most optimal levels will create value for their customers, such that the value offered to the customer exceeds the cost of creating that value, resulting in higher profit. Porter’s framework groups activities into primary and support categories.
The primary activities focus on taking the inputs, converting them into outputs, and delivering the output to the customer. The support activities play an auxiliary role in primary activities. When a company is efficient in combining these activities to provide a superior product or service, then the customer is willing to pay more for the product than the cost to make and deliver the product which results in a higher profit margin.
Let’s work through an example of an asset management firm. The goal of the client is to achieve the highest possible return on investment within the guidelines and restrictions set forth by the client.
The firm’s primary activities include:
Investment team (portfolio managers, analysts) – tasked with making the investment decisions.Operations and traders – tasked with ensuring the investments are in line with the guidelines set forth by the client, and the trades are at the best execution price.Marketing and sales – responsible for procuring clients.Service (client relationship management) – responsible for providing all the touch points to the client.
Support activities include:
Technology – designs a trading and client module that is efficient and effectively allows the team to provide the highest level of service and make the best investment decisions.Human Resources – finds and retains the highest level of talent at the firm.Infrastructure – includes the lawyers and risk managers whose oversight is crucial to ensuring the client’s guidelines are followed, the investment risk is controlled, and the firm is operating within the regulations established by the SEC.
How to Improve the Value Chain
When a firm takes into account its value chain, it needs to consider its value proposition, or what sets it apart from its competitors. Value chain analysis is designed to improve profits by creating a product or service that is so superior that customers are willing to pay more than the cost to develop it.
But improving a value chain for the sake of improvement should not be the end goal. Instead, a company should decide why it wants to improve its value chain in the context of its competitive advantage to differentiate itself among its peers.
Two common competitive advantage strategies include low cost provider or specialization/differentiation of product or service.
Low-cost provider – value chain analysis focuses on costs and how a company can reduce those costs. Specialization – value chain analysis focuses on the activities that create a unique product or differentiation in service.
Let’s go back to our asset management example. After the value chain is identified, then the asset manager should determine its competitive advantage and pursue activities that go towards reaching those goals. In this case, the asset manager wants to pursue a strategy of differentiation by delivering a product that has steady, top quartile returns over three years.
Based on the drivers of uniqueness Porter identified, the firm needs to focus on its policies and decisions and learn to differentiate itself in terms of performance. By focusing on these drivers, the two primary activities of the investment team, operations, and the traders, along with all the identified support activities, can manage a product that achieves its differentiated competitive advantage.
The Bottom Line
Value chain analysis is a handy management tool which identifies the activities that go into creating a superior product or service that is highly valued by customers. The outcome of creating this highly valued product is that customers are willing to pay a premium, which exceeds its costs, thereby delivering higher profit.
The usefulness of this model created by Michael Porter is mostly seen in its ability to breakdown work product into various activity groups to strategically focus the management on what are beneficial activities, and what creates value. It also concentrates a company to determine a vision utilizing a competitive advantage strategy which will drive future products and services. Supporting activities are further validated in the process, creating an understanding that these sometimes overlooked activities are integral to the value chain and value proposition for a company.
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66e8ca0ca01f2d741df26db21b118404 | https://www.investopedia.com/articles/investing/111014/patents-trademarks-and-copyrights-basics.asp | Patents, Trademarks, and Copyrights: The Basics | Patents, Trademarks, and Copyrights: The Basics
Have a brilliant new concept that you’re sure will make you a fortune? There’s a crucial step any inventor or artist should take before taking it to market: protecting it with a patent, trademark, or copyright from the government.
All three provide a legal shield against copycats trying to make a buck off your idea. However, each designation applies to a specific type of intellectual property, so it’s important to know the differences.
Key Takeaways A patent is a property right issued by a government authority allowing the holder exclusive rights to the invention for a certain period of time. There are three types of patents: utility patents, plant patents, and design patents. A trademark is a word, symbol, design, or phrase that denotes a specific product and differentiates it from similar products. Copyrights protect “original works of authorship,” such as writings, art, architecture, and music.
What Is a Patent?
A patent safeguards an original invention for a certain period of time and is granted by the United States Patent and Trademark Office (USPTO). By granting the right to produce a product without fear of competition for the duration of the patent, an incentive is provided for companies or individuals to continue developing innovative new products or services.
There are three types of patents: utility patents, plant patents, and design patents.
Utility Patent
A utility patent covers the creation of a new or improved product, process, or machine. Also known as a “patent for invention,” it bars other individuals or companies from making, using, or selling the creation without consent. Utility patents are good for up to 20 years after the patent application is filed, but require the holder to pay regularly scheduled maintenance fees.
While most people associate patents with machines and appliances, they can also apply to software, business processes, and chemical formulations such as in pharmaceutical products.
Plant Patent
A plant patent protects a new and unique plant’s key characteristics from being copied, sold, or used by others. It is also good for 20 years after the application is filed. The plant must be asexually reproducible with reproduction being genetically identical to the original and performed through methods such as root cuttings, bulbs, division, or grafting and budding.
Design Patent
A design patent, on the other hand, applies to the unique look of a manufactured item. Take, for example, an automobile with a distinctive hood or headlight shape. These visual elements are part of the car’s identity and may add to its value. However, without protecting these components with a patent, competitors could potentially copy them without legal consequences.
From 2000 to 2020, there have been 399,055 patents issued in the United States.
Design patents issued since May 2015 last for 15 years from the date the patent is granted and do not require maintenance fees. Patents issued prior to that last for 14 years.
What Is a Trademark?
Unlike patents, a trademark protects words and design elements that identify the source of a product. Brand names and corporate logos are primary examples. A service mark is similar, except that it safeguards the provider of a service instead of a tangible good. The term “trademark” is often used in reference to both designations.
Some examples of trademark infringement are fairly straightforward. You’ll probably run into trouble if you try to bottle a beverage and call it Coca-Cola or even use the famous wave from its logo since both have been protected for decades.
However, a trademark actually goes a bit further, prohibiting any marks that have a “likelihood of confusion” with an existing one. Therefore, a business can’t use a symbol or brand name if it looks similar, sounds similar, or has a similar meaning to one that’s already on the books, at least if the products or services are related. If the trademark holder believes there’s a violation of these rights, it may decide to sue.
What Is a Copyright?
Copyrights protect “original works of authorship,” such as writings, art, architecture, and music. For as long as the copyright is in effect, the copyright owner has the sole right to display, share, perform, or license the material.
One notable exception is the “fair use” doctrine, which allows some degree of distribution of copyrighted material for scholarly, educational, or news-reporting purposes.
Technically, you don’t have to file for a copyright to have the piece of work protected. It’s considered yours once your ideas are translated into a tangible form, such as a book, music, or published research. However, officially registering with the U.S. Copyright Office before—or within five years of—publishing your work makes it a lot easier to establish that you were the original author if you ever have to go to court.
The duration of a copyright depends on the year it was created, as the laws have changed over the years. Since 1978, most compositions have been copyright-protected for 70 years after the author’s death. After that time, individual works enter the public domain and can be reproduced by anyone without permission.
As a general rule, the author retains ownership of copyright privileges, even if the material is published by another company. There is an important exception to this rule, though.
Materials you create for your employer as part of your job requirements, for example, contributions to a podcast the company publishes, are usually considered "works for hire." The employer, not you, retains the copyright. If there’s a gray area, you can try to negotiate with the publisher over copyright ownership prior to creating the piece; just be sure to get it in writing.
The Bottom Line
The decision to pursue a patent, trademark, or copyright depends on the type of intellectual property you’re trying to shield. Whether it’s a new product, logo, or creative work, registering your idea with the appropriate body can help ensure you enjoy the fruits of your labor.
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1e1a60df89429e7dc15be131a680a896 | https://www.investopedia.com/articles/investing/111015/analyzing-porters-five-forces-apple.asp | Analyzing Porter's 5 Forces on Apple (AAPL) | Analyzing Porter's 5 Forces on Apple (AAPL)
Investors and market analysts often seek different perspectives for market analyses of companies to gain a better picture of companies' positions and strengths within their particular industries. One tool for fundamental analysis that goes beyond just examining financial metrics such as the price-to-book ratio (P/B) is Michael Porter's Five Forces Model.
Key Takeaways Apple, Inc. has grown to become one of the world's most valuable companies and respected brands.Porter's Five Forces Model can be applied to Apple to understand its position within its industry and how it compares to the competition.This type of analysis reveals that Apple is still in a strong market position, but faces several threats to its dominance.
The Porter 5 Forces Model
Michael Porter developed the Five Forces method of analysis in 1979. The Five Forces model aims to examine five key forces of competition within a given industry. The main force examined by Porter's model is the level of competition within an industry. A person could even argue that Porter's model is essentially an analysis of the competitiveness or non-competitiveness of an industry.
The other four forces considered in Porter's model all impact the level of competition. They include the threat of new entrants to the marketplace, the threat of consumers opting for substitute products, the bargaining power of suppliers within the industry, and the bargaining power of buyers or consumers within the industry's marketplace.
Industry competition and the bargaining power of buyers are the most substantial marketplace factors that impact Apple in terms of profitability.
Apple in the Marketplace From a 5 Forces Perspective
Through its Macintosh computers and operating system, the iPad, iPhone, and other products, Apple, Inc. (NASDAQ: AAPL) has achieved massive success as a company despite going through a number of up and down cycles since its founding in 1976. In 2018, Apple achieved the notable distinction of being the first U.S. company to ever attain a market capitalization greater than $1 trillion.
Apple's success is attributed largely to its ability to innovate and bring unique products to market that have engendered substantial brand loyalty. Its product development and marketing strategies reveal an awareness of the need to deal with the major marketplace forces that can impact Apple's market share and profitability.
A Five Forces analysis of Apple's position in the technology sector shows industry competition and the bargaining power of buyers as the two strongest marketplace forces that can impact Apple's profitability. The bargaining power of suppliers, the threat of buyers opting for substitute products, and the threat of new entrants to the marketplace are all weaker elements among the key industry forces.
Apple's dominance in the industry has been largely unchallenged, but a strong challenger could come in the future and the company must continue innovating and building brand loyalty so as to keep any potential competitor at bay.
Industry Competition
The level of competition among the major companies that compete directly with Apple in the technology sector is high. Apple is in direct competition with companies such as Google, Inc., the Hewlett-Packard Company, Samsung Electronics Co., Ltd., and Amazon, Inc. All of these companies expend significant capital on research and development (R&D) and marketing, just like Apple. Thus, the competitive force within the industry is strong.
One thing that makes the industry so highly competitive is the relatively low switching cost. It does not require a substantial investment for a consumer to ditch Apple's iPad for an Amazon Kindle or other tablet computers. The threat of marketplace competition is a key consideration for Apple, which it has dealt with primarily through continually developing new and unique products to increase and strengthen its market share position.
Bargaining Power of Buyers
The element of low switching cost referred to above strengthens the bargaining power of buyers as a key force for Apple to consider. There are essentially two points of further analysis within this force: the individual bargaining power of buyers and their collective bargaining power. For Apple, individual bargaining power is a weak force, since the loss of any one customer represents a negligible amount of revenue for Apple.
However, the collective marketplace bargaining power of customers, the possibility of mass customer defections to a competitor is a strong force.
Apple counters this strong force by continuing to make substantial capital expenditures in R&D, enabling it to keep developing new and unique products such as the Airpods and the Apple Watch, and by building significant brand loyalty. Apple has been very successful in this area of competition, establishing a large customer base that, basically, would not consider abandoning its iPhones in favor of another smartphone competitor.
The Threat of New Entrants to the Marketplace
The threat of a new entrant to the marketplace that could seriously threaten Apple's market share is relatively low. This is primarily due to two factors: the extremely high cost of establishing a company within the industry and the additional high cost of establishing brand name recognition.
Any new entrant to the marketplace of personal computing or smartphones needs to have a massive amount of capital just to spend on R&D and manufacturing to develop and produce its own product portfolio prior to ever bringing its products to market and beginning to generate revenue. Such an entrant faces the already identified strong competition within the industry that exists between Apple and its major competitors, all of which are large, well-established firms.
The secondary challenge is establishing brand name recognition within an industry that already has several companies, such as Apple, Google, and Amazon, with very strong brand recognition.
Although it is possible some new company (perhaps a Chinese firm with financial backing from the government), might eventually challenge Apple's position within the industry, for the immediate future, the likelihood of such a challenger arising is remote.
Nonetheless, it is important for Apple to continue strengthening its competitive position through new product development and building brand loyalty to place any potential new entrants to the industry at a larger competitive disadvantage.
Bargaining Power of Suppliers
The bargaining power of suppliers is a relatively weak force in the marketplace for Apple's products. The bargaining position of suppliers is weakened by the high number of potential suppliers for Apple and the ample amount of supply. Apple is free to choose from among a large number of potential suppliers for component parts for its products. The industries of its parts suppliers, such as the manufacturers of computer processors, are themselves highly competitive.
The switching cost for Apple to exchange one supplier for another is relatively low and not a significant obstacle. Plus, Apple is a major customer for most of its parts suppliers, and, therefore, its suppliers are very reluctant to risk losing the company's business. This strengthens Apple's position in negotiating with suppliers, while conversely weakening their positions. The bargaining power of component parts suppliers is not a major consideration for either Apple or its major competitors.
The Threat of Buyers Opting for Substitute Products
Substitute products, within the framework of Porter's Five Forces Model, are not products that directly compete with a company's products but possible substitutes for them. In the case of Apple, an example of a substitute product is a landline telephone that might be a substitute for owning an iPhone.
This market force is relatively low for Apple due to the fact that most potential substitute products have limited capabilities compared to Apple's products, as in the example of a landline telephone compared to an iPhone that has the capability to do much more than just make telephone calls.
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49a602030253a3a1e23a5b3cc679ce58 | https://www.investopedia.com/articles/investing/111113/advanced-game-theory-strategies-decisionmaking.asp | How Game Theory Strategy Improves Decision Making | How Game Theory Strategy Improves Decision Making
Game theory, the study of strategic decision-making, brings together disparate disciplines such as mathematics, psychology, and philosophy. Game theory was invented by John von Neumann and Oskar Morgenstern in 1944 and has come a long way since then. The importance of game theory to modern analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize in Economic Sciences for their contributions to game theory.
Game theory is applied in a number of fields, including business, finance, economics, political science, and psychology. Understanding game theory strategies—both the popular ones and some of the relatively lesser-known stratagems—is important to enhance one’s reasoning and decision-making skills in a complex world.
Prisoner’s Dilemma
One of the most popular and basic game theory strategies is the prisoner's dilemma. This concept explores the decision-making strategy taken by two individuals who, by acting in their own individual best interest, end up with worse outcomes than if they had cooperated with each other in the first place.
In the prisoner’s dilemma, two suspects apprehended for a crime are held in separate rooms and cannot communicate with each other. The prosecutor informs both Suspect 1 and Suspect 2 individually that if he confesses and testifies against the other, he can go free, but if he does not cooperate and the other suspect does, he will be sentenced to three years in prison. If both confess, they will get a two-year sentence, and if neither confesses, they will be sentenced to one year in prison.
While cooperation is the best strategy for the two suspects, when confronted with such a dilemma, research shows most rational people prefer to confess and testify against the other person than stay silent and take the chance the other party confesses.
(For related reading, see: The Prisoner's Dilemma in Business and the Economy.)
Game Theory Strategies
The prisoner's dilemma lays the foundation for advanced game theory strategies, of which the popular ones include:
Matching Pennies
This is a zero-sum game that involves two players (call them Player A and Player B) simultaneously placing a penny on the table, with the payoff depending on whether the pennies match. If both pennies are heads or tails, Player A wins and keeps Player B’s penny. If they do not match, Player B wins and keeps Player A’s penny.
Deadlock
This is a social dilemma scenario like the prisoner’s dilemma in that two players can either cooperate or defect (i.e. not cooperate). In a deadlock, if Player A and Player B both cooperate, they each get a payoff of 1, and if they both defect, they each get a payoff of 2. But if Player A cooperates and Player B defects, then A gets a payoff of 0 and B gets a payoff of 3. In the payoff diagram below, the first numeral in the cells (a) through (d) represents Player A’s payoff, and the second numeral is that of Player B:
Deadlock Payoff Matrix Player B Player B Cooperate Defect Player A Cooperate (a) 1, 1 (b) 0, 3 Defect (c) 3, 0 (d) 2, 2
Deadlock differs from prisoner’s dilemma in that the action of greatest mutual benefit (i.e. both defect) is also the dominant strategy. A dominant strategy for a player is defined as one that produces the highest payoff of any available strategy, regardless of the strategies employed by the other players.
A commonly cited example of deadlock is that of two nuclear powers trying to reach an agreement to eliminate their arsenals of nuclear bombs. In this case, cooperation implies adhering to the agreement, while defection means secretly reneging on the agreement and retaining the nuclear arsenal. The best outcome for either nation, unfortunately, is to renege on the agreement and retain the nuclear option while the other nation eliminates its arsenal since this will give the former a tremendous hidden advantage over the latter if war ever breaks out between the two. The second-best option is for both to defect or not cooperate since this retains their status as nuclear powers.
Cournot Competition
This model is also conceptually similar to prisoner’s dilemma and is named after French mathematician Augustin Cournot, who introduced it in 1838. The most common application of the Cournot model is in describing a duopoly or two main producers in a market.
For example, assume companies A and B produce an identical product and can produce high or low quantities. If they both cooperate and agree to produce at low levels, then limited supply will translate into a high price for the product on the market and substantial profits for both companies. On the other hand, if they defect and produce at high levels, the market will be swamped and result in a low price for the product and consequently lower profits for both. But if one cooperates (i.e. produces at low levels) and the other defects (i.e. surreptitiously produces at high levels), then the former just break even while the latter earns a higher profit than if they both cooperate.
The payoff matrix for companies A and B is shown (figures represent profit in millions of dollars). Thus, if A cooperates and produces at low levels while B defects and produces at high levels, the payoff is as shown in the cell (b)—break-even for company A and $7 million in profits for company B.
Cournot Payoff Matrix Company B Company B Cooperate Defect Company A Cooperate (a) 4, 4 (b) 0, 7 Defect (c) 7, 0 (d) 2, 2
Coordination
In coordination, players earn higher payoffs when they select the same course of action.
As an example, consider two technology giants who are deciding between introducing a radical new technology in memory chips that could earn them hundreds of millions in profits, or a revised version of an older technology that would earn them much less. If only one company decides to go ahead with the new technology, rate of adoption by consumers would be significantly lower, and as a result, it would earn less than if both companies decide on the same course of action. The payoff matrix is shown below (figures represent profit in millions of dollars).
Thus, if both companies decide to introduce the new technology, they would earn $600 million apiece, while introducing a revised version of the older technology would earn them $300 million each, as shown in the cell (d). But if Company A decides alone to introduce the new technology, it would only earn $150 million, even though Company B would earn $0 (presumably because consumers may not be willing to pay for its now-obsolete technology). In this case, it makes sense for both companies to work together rather than on their own.
Coordination Playoff Matrix Company B Company B New Technology Old Technology Company A New Technology (a) 600, 600 (b) 0, 150 Old Technology (c) 150, 0 (d) 300, 300
Centipede Game
This is an extensive-form game in which two players alternately get a chance to take the larger share of a slowly increasing money stash. The centipede game is sequential since the players make their moves one after another rather than simultaneously; each player also knows the strategies chosen by the players who played before them. The game concludes as soon as a player takes the stash, with that player getting the larger portion and the other player getting the smaller portion.
As an example, assume Player A goes first and has to decide if he should “take” or “pass” the stash, which currently amounts to $2. If he takes, then A and B get $1 each, but if A passes, the decision to take or pass now has to be made by Player B. If B takes, she gets $3 (i.e. the previous stash of $2 + $1) and A gets $0. But if B passes, A now gets to decide whether to take or pass, and so on. If both players always choose to pass, they each receive a payoff of $100 at the end of the game.
The point of the game is if A and B both cooperate and continue to pass until the end of the game, they get the maximum payout of $100 each. But if they distrust the other player and expect them to “take” at the first opportunity, Nash equilibrium predicts the players will take the lowest possible claim ($1 in this case). Experimental studies have shown, however, this “rational” behavior (as predicted by game theory) is seldom exhibited in real life. This is not intuitively surprising given the tiny size of the initial payout in relation to the final one. Similar behavior by experimental subjects has also been exhibited in the traveler’s dilemma.
Traveler’s Dilemma
This non-zero sum game, in which both players attempt to maximize their own payout without regard to the other, was devised by economist Kaushik Basu in 1994. For example, in the traveler’s dilemma, an airline agrees to pay two travelers compensation for damages to identical items. However, the two travelers are separately required to estimate the value of the item, with a minimum of $2 and a maximum of $100. If both write down the same value, the airline will reimburse each of them that amount. But if the values differ, the airline will pay them the lower value, with a bonus of $2 for the traveler who wrote down this lower value and a penalty of $2 for the traveler who wrote down the higher value.
The Nash equilibrium level, based on backward induction, is $2 in this scenario. But as in the centipede game, laboratory experiments consistently demonstrate most participants, naively or otherwise, pick a number much higher than $2.
Traveler’s dilemma can be applied to analyze a variety of real-life situations. The process of backward induction, for example, can help explain how two companies engaged in a cutthroat competition can steadily ratchet product prices lower in a bid to gain market share, which may result in them incurring increasingly greater losses in the process.
Battle of the Sexes
This is another form of the coordination game described earlier, but with some payoff asymmetries. It essentially involves a couple trying to coordinate their evening out. While they had agreed to meet at either the ball game (the man’s preference) or at a play (the woman’s preference), they have forgotten what they decided, and to compound, the problem, cannot communicate with one another. Where should they go? The payoff matrix is shown below with the numerals in the cells representing the relative degree of enjoyment of the event for the woman and man, respectively. For example, cell (a) represents the payoff (in terms of enjoyment levels) for the woman and man at the play (she enjoys it much more than he does). Cell (d) is the payoff if both make it to the ball game (he enjoys it more than she does). Cell (c) represents the dissatisfaction if both go not only to the wrong location but also to the event they enjoy least—the woman to the ball game and the man to the play.
Battle of the Sexes Payoff Matrix Man Man Play Ball Game Woman Play (a) 6, 3 (b) 2, 2 Ball Game (c) 0, 0 (d) 3, 6
Dictator Game
This is a simple game in which Player A must decide how to split a cash prize with Player B, who has no input into Player A’s decision. While this is not a game theory strategy per se, it does provide some interesting insights into people’s behavior. Experiments reveal about 50% keep all the money to themselves, 5% split it equally and the other 45% give the other participant a smaller share. The dictator game is closely related to the ultimatum game, in which Player A is given a set amount of money, part of which has to be given to Player B, who can accept or reject the amount given. The catch is if the second player rejects the amount offered, both A and B get nothing. The dictator and ultimatum games hold important lessons for issues such as charitable giving and philanthropy.
Peace-War
This is a variation of the prisoner’s dilemma in which the “cooperate or defect” decisions are replaced by “peace or war.” An analogy could be two companies engaged in a price war. If both refrain from price cutting, they enjoy relative prosperity (cell a), but a price war would reduce payoffs dramatically (cell d). However, if A engages in price cutting (war) but B does not, A would have a higher payoff of 4 since it may be able to capture substantial market share, and this higher volume would offset lower product prices.
Peace-War Payoff Matrix Company B Company B Peace War Company A Peace (a) 3, 3 (b) 0, 4 War (c) 4, 0 (d) 1, 1
Volunteer’s Dilemma
In a volunteer’s dilemma, someone has to undertake a chore or job for the common good. The worst possible outcome is realized if nobody volunteers. For example, consider a company where accounting fraud is rampant but top management is unaware of it. Some junior employees in the accounting department are aware of the fraud but hesitate to tell top management because it would result in the employees involved in the fraud being fired and most likely prosecuted.
Being labeled as a whistleblower may also have some repercussions down the line. But if nobody volunteers, the large-scale fraud may result in the company’s eventual bankruptcy and the loss of everyone’s jobs.
The Bottom Line
Game theory can be used very effectively as a tool for decision-making whether in an economical, business or personal setting.
(For related reading, see: Game Theory: Beyond the Basics.)
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852a75a874f14402027cb35da9f98992 | https://www.investopedia.com/articles/investing/111114/top-five-alibaba-shareholders.asp | The Top 5 Alibaba Shareholders | The Top 5 Alibaba Shareholders
Alibaba (BABA), the global leader by volume in the e-commerce sector, issued a record-shattering $25 billion IPO in September 2014. The company's IPO in New York set a record as the world's biggest public stock offering. The company is likened to Amazon, eBay, PayPal, and Google all rolled into one.
The company announced its fiscal second-quarter 2021 earnings in November 2020. The global e-commerce company reported $22.83 billion in revenues for the quarter, an increase of 30% year-over-year.
Alibaba has grown to be one of China's largest companies, with extensive influence in the world. It first gained control over the Chinese e-commerce market, with a reported 80% of online retail sales in China going through the company. It offers a suite of products for storefronts that want to compete in the e-commerce market. The company's key business segments include mobile media and entertainment, cloud computing, and core commerce, along with other developing initiatives.
Key Takeaways Alibaba, one of China's largest companies, IPO'd in September 2014 with a record-breaking $25 billion.Jack Ma, co-founder of Alibaba, is no longer the company’s largest shareholder, having retired from the company last year.Joseph Tsai, Ma’s co-founder at Alibaba, is the second-largest shareholder behind Softbank. Altaba, Blackrock, and T. Rowe Price round out the top five shareholders.
As of Jan. 12, 2021, those business segments have earned the company a market capitalization of $612.04 billion. The company's shares stood at $225.60, well beyond its post-IPO market price of $115.
Alibaba co-founder and chairman Jack Ma was the largest individual shareholder of the company for many years. In 2019, Ma relished his ownership stake in Alibaba. In the early 1990s, Ma realized China lacked technology in the business world. He founded China Pages, one of China's first internet companies, which created a website for businesses, and then went on to work for an Internet company that was backed by the Chinese government. It wasn't until 1999, though, that he decided to branch out on his own and co-founded Alibaba.
The company first developed its name in China before going global. In 2005, the company attracted the attention of Yahoo!, which took out a majority stake in the company. According to Forbes, Ma has a net worth of $57.9 billion and is one of the wealthiest people in the world. He also owns a stake in Chinese media and entertainment company Huayi Brothers.
Here are Alibaba's five largest individual and institutional shareholders as of January 2021, unless otherwise indicated.
1. Softbank Group
Softbank's stake in Alibaba is equivalent to approximately 25% of the company; it is Alibaba's largest shareholder. Softbank invested $20 million in Alibaba back in 2000 when it was a young startup. In fact, Softbank founder and CEO Masayoshi Son was the one that bought into Alibaba.
Softbank’s Alibaba stake is now worth nearly $143 billion. Softbank sold part of its stake in 2019, booking over $11 billion in pre-tax profits. Then in July 2020, the company is said to have sold an additional $2.2 billion of its stake in Alibaba. However, the deal is not expected to be settled until June 2024.
2. Jack Ma
Jack Ma is Alibaba's co-founder and former executive chairman. In 2020, Ma retired as the company's executive chairman. It was reported that his decision to step down from his formal business role with the company was so that he could focus more on his philanthropic endeavors.
In 2020, Ma reduced his stake in Alibaba from 6.2% to 4.8%. Alibaba did not disclose the average selling price of Ma's investment, although the company's share price has risen significantly since in the last several years, and especially in the last year as more people have been forced to shop online for their essential items in order to prevent the spread of the novel Covid-19 virus.
3. T. Rowe Price Associates, Inc.
T. Rowe Price is a global asset management firm that was founded in 1937. It offers a range of services including funds, account management, retirement plans, and advisory services for individuals, corporations, and other institutions. T. Rowe Price owns 2.31% of Alibaba, as of January 2021.
The firm is headquartered in Baltimore, Md., and has offices in almost 50 countries. The firm has over $1 trillion in assets under management. According to its website, the average investment experience of its advisers is 22 years.
4. BlackRock Fund Advisors
The fourth-largest shareholder in Alibaba is Blackrock. The investment firm owns 2.07% of shares outstanding. The global investment management firm is based in New York City and has 70 offices in more than 30 different countries. It was founded as a risk management and fixed-income institutional asset manager in 1988. The firm has over $7 trillion in assets under management.
The company provides a range of financial services. But its largest division is iShares, with more than 800 exchange traded funds (ETFs)—the largest ETF provider in the world.
3. Joseph Tsai
Alibaba co-founder and vice-chairman Joseph Tsai is the second-largest shareholder in the company, with 11.9% of the outstanding stock. Tsai is a Taiwanese-Canadian businessman who met Ma while working for the Hong Kong branch of an investment company.
Tsai quit his high-paying job so the two could work together to create the online import-export marketplace that would eventually become Alibaba. According to Forbes, Tsai's net worth is $12.1 billion. He owns a 49% stake in the Brooklyn Nets National Basketball Association team and has two degrees from Yale.
4. Blackrock Inc.
The fourth-largest shareholder in Alibaba is Blackrock. The investment firm owns 3% of shares outstanding. The global investment management firm is based in New York City and has 70 offices in more than 30 different countries. It was founded as a risk management and fixed-income institutional asset manager in 1988. The firm has some $7 trillion in assets under management.
The company provides a range of financial services. But its largest division is iShares, with more than 800 exchange traded funds (ETFs)—the largest ETF provider in the world.
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494ef843e4a4e3dee9922d25239ba0a7 | https://www.investopedia.com/articles/investing/111114/whats-role-investment-bank.asp | What Is the Role of an Investment Bank? | What Is the Role of an Investment Bank?
Issuing stocks and bonds is one of the primary ways for a company to raise capital. But executing these transactions requires special expertise, from pricing financial instruments in a way that will maximize revenues to navigating regulatory requirements. That’s where an investment bank usually comes into the picture.
In essence, investment banks are a bridge between large enterprises and the investor. Their primary roles are to advise businesses and governments on how to meet their financial challenges and to help them procure financing, whether it be from stock offerings, bond issues, or derivative products.
Role as an Advisor
Deciding how to raise capital is a major decision for any company or government. In most cases, they lean on an investment bank – either a large Wall Street firm or a “boutique” banker – for guidance.
Taking into account the current investing climate, the bank will recommend the best way to raise funds. This could entail selling an ownership stake in the company through a stock offer or borrowing from the public through a bond issue. The investment firm can also help determine how to price these instruments by utilizing sophisticated financial models.
In the case of a stock offering, its financial analysts will look at a variety of different factors – such as earnings potential and the strength of the management team – to estimate how much a share of the company is worth. If the client is offering bonds, the bank will look at prevailing interest rates for similarly rated businesses to figure out how much it will have to compensate borrowers.
Investment banks also offer advice in a merger or acquisition scenario. For example, if a business is looking to purchase a competitor, the bank can advise its management team on how much the company is worth and how to structure the deal in a way that’s favorable to the buyer.
Underwriting Stocks and Bonds
If an entity decides to raise funds through an equity or debt offering, one or more investment banks will also underwrite the securities. This means the institution buys a certain number of shares – or bonds – at a predetermined price and re-sells them through an exchange.
Suppose Acme Water Filter Company hopes to obtain $1 million in an initial public offering. Based on a variety of factors, including the firm’s expected earnings over the next few years, Federici Investment Bankers determines that investors will be willing to pay $11 each for 100,000 shares of the company’s stock. As the sole underwriter of the issue, Federici buys all the shares at $10 apiece from Acme. If it manages to sell all 100,000 at $11, the bank makes a nice $100,000 profit (100,000 shares x $1 spread).
However, depending on its arrangement with the issuer, Federici may be on the hook if the public’s appetite is weaker than expected. If it has to lower the price to an average of $9 a share to liquidate its holdings, it’s lost $100,000. Therefore, pricing securities can be tricky. Investment banks generally have to outbid other institutions who also want to handle the transaction on behalf of the issuer. But if their spread isn’t big enough, they won’t be able to squeeze a healthy return out of the sale.
In reality, the task of underwriting securities often falls on more than one bank. If it’s a larger offering, the managing underwriter will often form a syndicate of other banks that sell a portion of the shares. This way, the firms can market the stocks and bonds to a more significant segment of the public and lower their risk. (L9) The manager makes part of the profit, even if another syndicate member sells the security.
Investment banks perform a less glamorous role in stock offerings as well. It’s their job to create the documentation that must go to the Securities and Exchange Commission before the company can sell shares. This means compiling financial statements, information about the company’s management and current ownership, and a statement of how the firm plans to use the proceeds.
Other Activities
While advising companies and helping them raise money is an important part of what Wall Street firms do, most perform several other functions as well. Most major banks are highly diversified in terms of the services they offer. Some of their other income sources include:
Research. Larger investment banks have large teams that gather information about companies and offer recommendations on whether to buy or sell their stock. They may use these reports internally but can also generate revenue by selling them to hedge funds and mutual fund managers.Trading and Sales. Most major firms have a trading department that can execute stock and bond transactions on behalf of their clients. In the past, some banks have also engaged in proprietary trading, where they essentially gamble their own money on securities; however, a recent regulation known as the Volcker Rule has clamped down on these activities. Asset Management. The likes of J.P. Morgan and Goldman Sachs manage enormous portfolios for pension funds, foundations, and insurance companies through their asset management department. Their experts help select the right mix of stocks, debt instruments, real estate trusts, and other investment vehicles to achieve their clients’ unique goals.Wealth Management. Some of the same banks that perform investment banking functions for Fortune 500 businesses also cater to retail investors. Through a team of financial advisors, they help individuals and families save for retirement and other long-term needs. Securitized Products. These days, companies often pool financial assets – from mortgages to credit card receivables – and sell them off to investors as fixed-income products. An investment bank will recommend opportunities to “securitize” income streams, assemble the assets, and market them to institutional investors.
The term “investment bank” is something of a misnomer. In many cases, helping companies raise capital is just one part of a much bigger operation.
The Bottom Line
While some of their more sophisticated products have given investment banks a bad name, these firms play an important role by helping companies, and government entities make educated financial decisions and raise needed capital.
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aaf78fc39ad2d6dddd3374b248c0c103 | https://www.investopedia.com/articles/investing/111214/top-5-forex-risks-traders-should-consider.asp | Top 5 Forex Risks Traders Should Consider | Top 5 Forex Risks Traders Should Consider
The foreign exchange market, also known as the forex market, facilitates the buying and selling of currencies around the world. Like stocks, the end goal of forex trading is to yield a net profit by buying low and selling high. Forex traders have the advantage of choosing a handful of currencies over stock traders who must parse thousands of companies and sectors. In terms of trading volume, forex markets are the largest in the world. Due to high trading volume, forex assets are classified as highly liquid assets. The majority of foreign exchange trades consist of spot transactions, forwards, foreign exchange swaps, currency swaps and options. However as a leveraged product there is plenty of risk associated with forex trades that can result in substantial losses. (For more, see: Forex Broker Summary: Easy Forex.)
Leverage Risks
In forex trading, leverage requires a small initial investment, called a margin, to gain access to substantial trades in foreign currencies. Small price fluctuations can result in margin calls where the investor is required to pay an additional margin. During volatile market conditions, aggressive use of leverage will result in substantial losses in excess of initial investments. (For more, see: Forex Leverage: A Double-Edged Sword.)
Interest Rate Risks
In basic macroeconomics courses you learn that interest rates have an effect on countries' exchange rates. If a country’s interest rates rise, its currency will strengthen due to an influx of investments in that country’s assets putatively because a stronger currency provides higher returns. Conversely, if interest rates fall, its currency will weaken as investors begin to withdraw their investments. Due to the nature of the interest rate and its circuitous effect on exchange rates, the differential between currency values can cause forex prices to dramatically change. (For more, see: Why Interest Rates Matter For Forex Traders.)
Transaction Risks
Transaction risks are an exchange rate risk associated with time differences between the beginning of a contract and when it settles. Forex trading occurs on a 24 hour basis which can result in exchange rates changing before trades have settled. Consequently, currencies may be traded at different prices at different times during trading hours. The greater the time differential between entering and settling a contract increases the transaction risk. Any time differences allow exchange risks to fluctuate, individuals and corporation dealing in currencies face increased, and perhaps onerous, transaction costs. (For more, see: Corporate Currency Risks Explained.)
Counterparty Risk
The counterparty in a financial transaction is the company which provides the asset to the investor. Thus counterparty risk refers to the risk of default from the dealer or broker in a particular transaction. In forex trades, spot and forward contracts on currencies are not guaranteed by an exchange or clearing house. In spot currency trading, the counterparty risk comes from the solvency of the market maker. During volatile market conditions, the counterparty may be unable or refuse to adhere to contracts. (For more, see: Cross-Currency Settlement Risk.)
Country Risk
When weighing the options to invest in currencies, one must assess the structure and stability of their issuing country. In many developing and third world countries, exchange rates are fixed to a world leader such as the US dollar. In this circumstance, central banks must sustain adequate reserves to maintain a fixed exchange rate. A currency crisis can occur due to frequent balance of payment deficits and result in devaluation of the currency. This can have substantial effects on forex trading and prices. (For more, see: Top Ten Reasons Not to Invest In The Iraqi Dinar.)
Due to the speculative nature of investing, if an investor believes a currency will decrease in value, they may begin to withdraw their assets, further devaluing the currency. Those investors who continue trading the currency will find their assets to be illiquid or incur insolvency from dealers. With respect to forex trading, currency crises exacerbate liquidity dangers and credit risks aside from decreasing the attractiveness of a country's currency. This was particularly relevant in the Asian Financial Crisis and the Argentine Crisis where each country's home currency ultimately collapsed. (For more, see: Examining Credit Crunches Around The World.)
The Bottom Line
With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Due to the nature of leveraged trades, a small initial fee can result in substantial losses and illiquid assets. Furthermore time differences and political issues can have far reaching ramifications on financial markets and countries’ currencies. While forex assets have the highest trading volume, the risks are apparent and can lead to severe losses.
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109567f1c48496bfc1b05c94929137f0 | https://www.investopedia.com/articles/investing/111216/should-you-add-senior-housing-reits-your-portfolio-hcp-snh.asp | Senior Living REITs: Good for Your Portfolio? | Senior Living REITs: Good for Your Portfolio?
Should senior living REITs be a part of your portfolio? Before exploring an answer to that question, it’s important to know exactly what a REIT, or real estate investment trust, is.
“A REIT is a company that owns or finances income-producing real estate,” according to the National Association of Real Estate Investment Trusts, or NAREIT. “Modeled after mutual funds, REITs provide investors of all types with regular income streams, diversification, and long-term capital appreciation. REITs typically pay out all their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.” (For more, see Investing in REITs and How to Analyze Real Estate Investment Trusts.)
REITs can invest in very specific niches within the real estate sector. One such niche is senior housing. That brings us back to the question: Are senior living REITs a smart addition to your portfolio?
Senior Living REIT Demographics
There is no denying that many of us are getting older. Some 10,000 baby boomers are turning 65 every day. As many of these boomers age, they will want or need to move into more suitable housing for their situations. Many of these options fall under the umbrella of senior housing, which range from senior-oriented facilities offering independent living options to those offering assisted care in many forms.
The need for all types of senior-living facilities will continue to grow. A study by NAREIT economists yielded some interesting observations:
Seniors are moving into senior housing with more frequency than in the past, and those moves are occurring at younger ages than in the past. Part of this is driven by a great range of senior-living options, including those where there is no immediate need for assisted-living care.While senior living is more common with older retirees, the most rapid growth is among those in the 70-to-79 age group.Wealthier seniors have greater options in terms of senior living.
These and other demographic trends are favorable to senior housing REITs. The question remains: Are these a good investment? Like most investing options, the answer is that it depends.
Consider These Factors
Investing in publicly traded REITs is like investing in any other company. For starters, you should know who manages the company. What is the business/investing strategy? What is the company’s track record? In others words, you should have many of the same questions that you would ask and research before investing in Apple, IBM or any other individual stock.
Senior living REITs are largely in the healthcare REIT sector. The percentage of healthcare and specifically senior living REITs will vary from REIT to REIT.
Beyond the questions above, you should first find out how the REIT makes its money. Within this broad category, there are REITs that invest in senior-oriented apartments and communities, assisted living facilities and related properties, such as medical buildings.
Large healthcare REIT Ventas (VTR) has made a major bet on senior housing. Morningstar’s recent comments on the REIT echo some concerns about the future of senior housing: “The strong growth initially enjoyed at Ventas’ senior housing operating assets has slowed as levels of new competitive supply and uncertainty grows. Performance could continue to be tested if the supply/demand dynamic weakens.”
Like many trends we see across the business world when companies spot the potential for profit, they tend to jump into a business segment. Senior housing is no exception. While the demographics are favorable to senior-living facilities of all types, an oversupply could cut into their profitability and thus the profitability and cash flow of REITs investing in these properties.
Dividends and Income
One of the features of most REITs is that they throw off significant dividend income. The Vanguard REIT ETF (VNQ), for example – an index fund tracking the MSCI U.S. REIT index – has a yield of 3.72% per Morningstar. Some of the major healthcare REITs, with significant senior housing holdings, according to Morningstar data, carry very solid yields in today’s low-interest rate environment:
HCP, Inc. (HCP) – 7.76%Senior Housing Properties Trust (SNH) – 8.15%Ventas (VTR) – 4.60%
The Bottom Line
Demographic trends certainly favor senior housing REITs and healthcare REITs with significant holdings in this sector. Before investing in them, however, it pays to consider several points.
First, while the dividend income of many of these REITs is very tempting in today’s low interest rate environment when yields are this high on some of these REITs, you need to ask whether they are sustainable and what additional risks are being taken to offer these yields. Second, higher interest rates are the enemy of all REITs, and investors need to ask themselves how an interest rate hike will impact any REIT they are considering. Lastly, while the demographic trends are favorable, it is important to stay on top of the supply of senior housing in relation to the potential demand.
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ad57be53486a3add2e1a0db037e1591a | https://www.investopedia.com/articles/investing/111314/what-department-housing-and-urban-development-does.asp | What the Department of Housing and Urban Development Does | What the Department of Housing and Urban Development Does
The purpose of the U.S. Department of Housing and Urban Development (HUD) is to provide housing and community development assistance and to make sure everyone has access to “fair and equal” housing. To achieve these goals, it runs or participates in many programs intended to support homeownership, increase safe and affordable rental housing, reduce homelessness and fight housing discrimination. This article provides a general overview of what HUD does and how it has succeeded and failed in achieving its goals over the years.
Key Takeaways The U.S. Department of Housing and Urban Development, or HUD, is a cabinet-level government agency. The agency is run by a secretary, who is appointed by the president, approved by the Senate and then typically holds the position until a new administration comes into power. HUD's purpose is to make sure communities have enough housing and any other development assistance that they might need. HUD runs or helps run programs that encourage homeownership and rentals, as well as reducing homelessness and diminishing housing discrimination.
Who Runs HUD?
HUD was established in 1965. It is a cabinet-level government agency, meaning that the agency’s head, called the secretary, is appointed by the president and approved by a simple majority vote in the Senate, then holds that position until a new president takes office. In the event of a major catastrophe, the HUD secretary is 11th in line to succeed the president, after higher-level cabinet executives such as the secretary of state and secretary of the treasury. The POTUS is the HUD secretary’s boss.
HUD’s predecessor was the Housing and Home Finance Agency, formed in 1947. The federal government’s involvement in housing stretches back much further than the creation of either agency, however. In 1918, for example, the government financed the building of homes for workers in industries contributing to World War I efforts.
What Does the Agency Do?
HUD’s mandate is to oversee various federal housing programs in the name of promoting fair and equal housing. Under HUD’s fiscal year 2018–2022 strategic plan, the department’s mission is “to create strong, sustainable, inclusive communities and quality affordable homes for all. The agency further states its goal "to provide safe, decent, affordable housing for the American people while being good stewards of taxpayer dollars.” HUD's first overarching goal is to "advance economic opportunities for HUD-assisted residents, by creating an environment where they can access affordable housing and achieve self-sufficiency and financial stability."
HUD works to strengthen the U.S. housing market, make sure there is enough quality, affordable rental housing, improve people’s quality of life by improving their housing, and strengthen communities.
HUD also oversees the Federal Housing Administration (FHA), which Congress created in 1934. The FHA is primarily known for its mortgage insurance program, which enables homebuyers to get an FHA home loan when they might not qualify for a conventional mortgage because of a low credit score, low down payment or history of bankruptcy or foreclosure. (L14)
HUD oversees several programs and rules that you might have heard of. The Fair Housing Act, passed in 1968, governs most of the housing market and prohibits discrimination based on race, color, national origin, religion, sex, familial status or handicap when housing is rented or sold or when a homebuyer applies for a mortgage. (L10) The Community Development Block Grant program provides grants to neighborhoods that agree to use the funds in ways that will primarily benefit low- and moderate-income residents, that will prevent or eliminate slums or blight, or that will address urgent community problems, such as natural disaster recovery, that threaten residents’ health and welfare. (L15)
There’s also the Housing Choice Voucher Program, commonly called Section 8, which helps very low-income families, the elderly and the disabled pay for rental housing that meets or exceeds minimum health and safety standards. (L9) Rentals do not have to be located in subsidized housing projects, and local public housing agencies are responsible for distributing the vouchers. (L9)
$44.1 billion The 2020 budget for the Department of Housing and Urban Development (HUD). The proposed budget for 2021 is $47.9 billion.
How HUD Helps Communities
HUD says it has reduced veteran homelessness by 24% since 2010, helped 3.9 million families buy homes in the last five years and helped more than 450,000 families avoid foreclosure in 2013. In 2019, HUD says it served over 990,000 single-family homebuyers through the FHA-insured mortgage programs, oversaw the production or preservation of more than 2.6 million multifamily rental units and provided over $4.3 billion in insurance for hospitals and residential care facilities.
HUD has also developed a number of case studies to highlight programs it considers successes.
In Portland, Oregon, HUD contributed $3.3 million toward financing Bud Clark Commons, an eight-story, LEED Platinum-certified development that provides both transitional and permanent housing for the homeless. The complex also houses case-management services to help the homeless overcome problems like mental illness, chemical addictions, and unemployment. Since its opening in 2011, the commons has served more than 7,000 homeless people, connected 3,600 with social services and placed 350 in permanent housing. Most of the development’s funding came from tax-increment financing and low-income tax credits from the city of Portland, but HUD’s financing filled in the gaps.
HUD also helped finance an Anchorage, Alaska, revitalization program started in 2004 in an older neighborhood called Mountain View. HUD provided $1.7 million in loan guarantees and $1.5 million in economic development grants for the Mountain View Service Center, part of a commercial corridor restoration project. The neighborhood’s population has increased and resident turnover has decreased in the 10 years since the project’s inception. Median household income has increased by about 33%, and high school graduation rates have improved.
A third success story comes from El Paso, Texas, where about $11 million of the $14 million used to create a 73-unit affordable housing development for very low-income seniors came from HUD. The Paisano Green Community boasts zero net energy consumption, LEED Platinum certification, and average monthly energy costs of $18.30 per apartment unit and $21.11 per townhouse unit despite El Paso’s desert climate, where summer highs are in the mid-90s and winter lows are in the 30s.
Criticisms of HUD
A primary criticism of HUD comes from organizations and individuals that support limited government. They say government programs often don’t work as intended (L5) and that HUD’s activities are best left to local governments and the private sector. They also criticize the number of taxpayer resources HUD uses, including a recent report from the Cato Institute, a free market and limited-government oriented public policy research organization based in Washington, D.C.
In addition to broad criticisms of the agency, there are also criticisms of individual HUD programs. In some locations, Section 8 vouchers are in such high demand that there are long waiting lists; waiting lists can even be closed in areas of very high demand. And while the program allows participants to rent any available housing, in practice their choices are often severely restricted and the options are undesirable. Critics add that Section 8 vouchers tend to concentrate low-income families in impoverished neighborhoods. Also, because HUD sometimes sets the value of its vouchers too low for local housing market conditions, few landlords are willing to accept the vouchers. Some of those that do abuse the system. The program also imposes annual housing safety inspections on landlords who rent to Section 8 tenants and has a reputation for paying landlords several months late.
According to the Cato Institute, HUD has also provided grant funds that have been abused, has given unneeded subsidies to developers at taxpayer’s expense and has experienced a number of incidents involving mismanagement, political manipulation, corruption, and fraud. The Cato Institute also says that pressure by HUD on Fannie Mae and Freddie Mac to facilitate lending to risky borrowers contributed to the recent housing crisis.
The Bottom Line
As with all government departments, HUD has supporters who think that its resources are being well spent and its programs are effective, and it has detractors who think its resources are misallocated and its programs are unnecessary at best and harmful at worst. There are real-life examples of people who have been helped and people who have been harmed by its rules and programs. Ultimately, it is difficult to assign blame or praise to just one entity when so many factors affect housing in the United States.
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46cc71ade282b29ba0738df44a5a502d | https://www.investopedia.com/articles/investing/111413/commonsize-analysis-financial-statements.asp | The Common Size Analysis of Financial Statements | The Common Size Analysis of Financial Statements
A common size financial statement displays line items as a percentage of one selected or common figure. Creating common size financial statements makes it easier to analyze a company over time and compare it with its peers. Using common size financial statements helps investors spot trends that a raw financial statement may not uncover.
All three of the primary financial statements can be put into a common size format. Financial statements in dollar amounts can easily be converted to common size statements using a spreadsheet, or they can be obtained from online resources like Mergent Online. Below is an overview of each financial statement and a more detailed summary of the benefits, as well as drawbacks, that such an analysis can provide investors.
Key Takeaways A common size financial statement displays items on a financial statement as a percentage of a common base figure. For example, if total sales revenue is used as the common base figure, then other financial statement items—such as operating expenses and cost of goods—will be compared as a percentage of total sales revenue. Investors use common size financial statements to make it easier to compare a company to its competitors and to identify significant changes in a company's financials.
Balance Sheet Analysis
The common figure for a common size balance sheet analysis is total assets. Based on the accounting equation, this also equals total liabilities and shareholders’ equity, making either term interchangeable in the analysis. It is also possible to use total liabilities to indicate where a company’s obligations lie and whether it is being conservative or risky in managing its debts.
The common size strategy from a balance sheet perspective lends insight into a firm’s capital structure and how it compares to its rivals. An investor can also look to determine an optimal capital structure for a given industry and compare it to the firm being analyzed. Then the investor can conclude whether the debt level is too high, excess cash is being retained on the balance sheet, or inventories are growing too high. The goodwill level on a balance sheet also helps indicate the extent to which a company has relied on acquisitions for growth.
Below is an example of a common size balance sheet for technology giant International Business Machines (IBM). Running through some of the examples touched on above, we can see that long-term debt averages around 20% of total assets over the three-year period, which is a reasonable level. It is even more reasonable when observing that cash represents around 10% of total assets, and short-term debt accounts for 6% to 7% of total assets over the past three years.
It is important to add short-term and long-term debt together and compare this amount to total cash on hand in the current assets section. This lets the investor know how much of a cash cushion is available or if a firm is dependent on the markets to refinance debt when it comes due.
Analyzing the Income Statement
The common figure for an income statement is total top-line sales. This is actually the same analysis as calculating a company's margins. For instance, a net profit margin is simply net income divided by sales, which also happens to be a common size analysis.
The same goes for calculating gross and operating margins. The common size method is appealing for research-intensive companies, for example, because they tend to focus on research and development (R&D) and what it represents as a percent of total sales.
Below is a common size income statement for IBM. We will cover it in more detail below, but notice the R&D expense that averages close to 6% of revenues. Looking at the peer group and companies overall, according to a Booz & Co. analysis, this puts IBM in the top five among tech giants and the top 20 firms in the world (2013) in terms of total R&D spending as a percent of total sales.
Common Size and Cash Flow
In a similar fashion to an income statement analysis, many items in the cash flow statement can be stated as a percent of total sales. This can give insight on a number of cash flow items, including capital expenditures (CapEx) as a percent of revenue.
Share repurchase activity can also be put into context as a percent of the total top line. Debt issuance is another important figure in proportion to the amount of annual sales it helps generate. Because these items are calculated as a percent of sales, they help indicate the extent to which they are being utilized to generate overall revenue.
Below is IBM’s cash flow statement in terms of total sales. It generated an impressive level of operating cash flow that averaged 19% of sales over the three-year period. Share repurchase activity was also impressive at more than 11% of total sales in each of the three years. You may also notice the first row, which is net income as a percent of total sales, which matches exactly with the common size analysis from an income statement perspective. This represents the net profit margin.
How This Differs From Regular Financial Statements
The key benefit of a common size analysis is it allows for a vertical analysis by line item over a single time period, such as a quarterly or annual period, and also from a horizontal perspective over a time period such as the three years we analyzed for IBM above.
Just looking at a raw financial statement makes this more difficult. But looking up and down a financial statement using a vertical analysis allows an investor to catch significant changes at a company. A common size analysis helps put an analysis in context (on a percentage basis). It is the same as a ratio analysis when looking at the profit and loss statement.
What the Common Size Reveals
The biggest benefit of a common size analysis is that it can let an investor identify large or drastic changes in a firm’s financials. Rapid increases or decreases will be readily observable, such as a rapid drop in reported profits during one quarter or year.
In IBM's case, its results overall during the time period examined were relatively steady. One item of note is the Treasury stock in the balance sheet, which had grown to more than a negative 100% of total assets. But rather than alarm investors, it indicates the company had been hugely successful in generating cash to buy back shares, which far exceeds what it had retained on its balance sheet.
A common size analysis can also give insight into the different strategies that companies pursue. For instance, one company may be willing to sacrifice margins for market share, which would tend to make overall sales larger at the expense of gross, operating, or net profit margins. Ideally, the company that pursues lower margins will grow faster. While we looked at IBM on a stand-alone basis, like the R&D analysis, IBM should also be analyzed by comparing it to key rivals.
The Bottom Line
As the above scenario highlights, a common size analysis on its own is unlikely to provide a comprehensive and clear conclusion on a company. It must be done in the context of an overall financial statement analysis, as detailed above.
Investors also need to be aware of temporary versus permanent differences. A short-term drop in profitability could only indicate a short-term blip, rather than a permanent loss in profit margins.
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f7fc6d70b1421f63ec2331ddd9fe83f3 | https://www.investopedia.com/articles/investing/111715/how-vanguard-index-funds-work.asp | How Vanguard Index Funds Work | How Vanguard Index Funds Work
Vanguard index funds use a passively managed index-sampling strategy to track a benchmark index. The type of benchmark depends on the asset type for the fund. Vanguard then charges expense ratios for the management of the index fund. Vanguard funds are known for having the lowest expense ratios in the industry. This allows investors to save money on fees and help their returns over the long run.
Vanguard is the largest issuer of mutual funds in the world and the second-largest issuer of exchange-traded funds (ETFs). John Bogle, Vanguard's founder, began the first index fund, which tracked the S&P 500 in 1975. Index funds with low fees are appropriate investments for the majority of investors. Index funds allow investors to gain exposure to the market in a single, simple, and easy-to-trade investment vehicle.
Key Takeaways Vanguard is well-known for its pioneering work in creating and marketing index mutual funds and ETFs to investors.Indexing is a passive investment strategy that seeks to replicate, rather than beat, the performance of some benchmark index such as the S&P 500 or Nasdaq 100.To keep costs low, Vanguard often uses a sampling strategy to construct its index funds using less than the total number of assets in an index.Vanguard offers funds that track a wide variety of market indices, large and small.
Passive Management
Passive management means the fund or ETF merely tracks the benchmark index. This is different from active management where a fund manager attempts to beat the performance of an index. For most active equity mutual funds, the benchmark index is the S&P 500.
Fees for active management are generally higher than for passively managed funds. Actively managed funds have higher trading costs since there is a greater turnover in fund holdings. These funds also have the additional costs of compensation for fund management. These factors lead to increased fees compared to passive funds.
Many actively managed funds fail to beat their benchmark indexes on a consistent basis. Higher fees combined with subpar performance leads to inferior results. Academic studies have shown higher fees alone lead to subpar performance for most active funds. Even if a fund manager is successful for a period of time, future success is not guaranteed. The risk of subpar performance is a major reason why passively managed index funds are a better option for most investors.
Index Sampling
Vanguard uses index sampling to track a benchmark index without necessarily having to replicate the holdings in the entire index. This allows the company to keep the fund expenses low. It is more expensive to hold every stock or bond in an index. Further, indexes do not have to allow for the inflow and outflow of funds like ETFs and mutual funds. Vanguard uses the index sampling technique to deal with the natural movement of capital for its funds while still replicating the performance of the benchmark index. Vanguard does not divulge its specific sampling technique.
Other common sampling techniques divide the index into cells that represent the different characteristics of the benchmark index. For a large stock index, the manager may divide the stocks in the index by different categories. These categories could include industry sector, market cap, price to earnings (P/E) ratio, country or region, volatility, or any number of other individual characteristics. The fund manager buys stocks or assets that mimic the performance of the components of the index.
The index sampling technique has the risk of a tracking error. A tracking error is the difference between the net asset value (NAV) of the fund’s holdings and the performance of the benchmark index over time. The greater the tracking error, the larger the discrepancy between the fund and the index. An index built using all stocks in the benchmark will have zero tracking error, but also be more costly to construct and maintain.
Expense Ratios
Vanguard funds charge expense ratios as their compensation for the management and issuance of the fund. The expense ratio is calculated by taking the fund’s operating costs and dividing them by the assets under management (AUM). Vanguard’s expense ratios are some of the lowest in the industry. The expense ratios for its mutual funds are generally 82% less than the industry average.
Expense ratios can have a significant impact on returns over time. Vanguard notes that for a hypothetical investment of $50,000 over 20 years, and investors could save around $24,000 in expenses, assuming a 6% annual rate of return. This is a substantial amount. Investors should, therefore, seek to invest in funds with low expenses.
Example: Vanguard Total Stock Market Index Fund (VTSAX)
As an example, let us look more closely at one of Vanguard's broad stock market index mutual funds. The Vanguard Total Stock Market Index Fund (VTSAX) provides diversified exposure to small-, mid-, and large-cap growth and value stocks traded on the Nasdaq and New York Stock Exchange (NYSE).
Created on April 27, 1992, the mutual fund has achieved an average annual return of 8.87% since its inception (as of March 31, 2020). The fund's Admiral Shares—the only ones currently available to new investors—have returned an average of 5.79% annually since their inception on Nov. 13, 2000. This return is almost identical to that of the fund's benchmark, the CRSP U.S. Total Market Index. The fund employs a representative sampling approach to approximate the entire index and its key characteristics.
As of Feb. 29, 2020, the fund held 3,551 stocks and controlled net assets of $840.9 billion. Technology, financial, industrial, health care, and consumer service companies make up its largest holdings. VTSAX charges an extremely low expense ratio of 0.04% and requires a minimum investment of $3,000.
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03f1c903ffa9dfcf2254c71e92ef984c | https://www.investopedia.com/articles/investing/111715/return-investment-roi-vs-internal-rate-return-irr.asp | Return on Investment vs. Internal Rate of Return: What's the Difference? | Return on Investment vs. Internal Rate of Return: What's the Difference?
Return on Investment (ROI) vs. Internal Rate of Return (IRR): An Overview
While there are many ways to measure investment performance, few metrics are more popular and meaningful than return on investment (ROI) and internal rate of return (IRR). Across all types of investments, ROI is more common than IRR, largely because IRR is more confusing and difficult to calculate.
Companies use both metrics when budgeting for capital, and the decision on whether to undertake a new project often comes down to the projected ROI or IRR. Software makes calculating IRR much easier, so deciding which metric to use boils down to which additional costs need to be considered.
Another important difference between IRR and ROI is that ROI indicates total growth, start to finish, of the investment. IRR identifies the annual growth rate. The two numbers should normally be the same over the course of one year (with some exceptions), but they will not be the same for longer periods.
Key Takeaways Return on investment (ROI) and internal rate of return (IRR) are performance measurements for investments or projects.ROI is more common than IRR, as IRR tends to be more difficult to calculate—although software has made calculating IRR easier.ROI indicates total growth, start to finish, of an investment, while IRR identifies the annual growth rate.While the two numbers will be roughly the same over the course of one year, they will not be the same for longer periods.
Return on Investment (ROI)
Return on investment—sometimes called the rate of return (ROR)—is the percentage increase or decrease in an investment over a set period. It is calculated by taking the difference between the current or expected value and the original value divided by the original value and multiplied by 100.
For example, suppose an investment was initially made at $200 and is now worth $300. The ROI for this investment is 50% [((300 - 200) / 200) * 100].
This calculation works for any period, but there is a risk in evaluating long-term investment returns with ROI—an ROI of 80% sounds impressive for a five-year investment but less impressive for a 35-year investment.
While ROI figures can be calculated for nearly any activity into which an investment has been made and an outcome can be measured, the outcome of an ROI calculation will vary depending on which figures are included as earnings and costs. The longer an investment horizon, the more challenging it may be to accurately project or determine earnings, costs, and other factors, such as the rate of inflation or the tax rate.
It can also be difficult to make accurate estimates when measuring the monetary value of the results and costs for project-based programs or processes. An example would be calculating the ROI for a Human Resource department within an organization. These costs may be difficult to quantify in the near-term and especially so in the long-term as the activity or program evolves and factors change. Due to these challenges, ROI may be less meaningful for long-term investments.
Internal Rate of Return (IRR)
Before computers, few people took the time to calculate IRR. The formula for IRR is the following:
IRR=NPV=∑t=1TCt(1+r)t=C0=0where:IRR=Internal rate of return\begin{aligned} &IRR=NPV=\sum^T_{t=1}\frac{C_t}{(1+r)^t}=C_0=0\\ &\textbf{where:}\\ &IRR=\text{Internal rate of return}\\ &NPV=\text{Net present value} \end{aligned}IRR=NPV=t=1∑T(1+r)tCt=C0=0where:IRR=Internal rate of return
To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate (r), which is the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically and must be calculated either through trial-and-error or using software programmed to calculate IRR.
1:12 Internal Rate of Return Rule
The ultimate goal of IRR is to identify the rate of discount, which makes the present value of the sum of annual nominal cash inflows equal to the initial net cash outlay for the investment.
Before calculating IRR, the investor should understand the concepts of discount rate and net present value (NPV). Consider the following problem—a man offers an investor $10,000, but that investor must wait one year to receive it. How much money would the investor optimally pay today to receive that $10,000 in a year?
In other words, the investor must calculate the present value equivalent of a guaranteed $10,000 in one year. This calculation is done by estimating a reverse interest rate (discount rate) that works like a backward time value of money calculation. For example, using a 10% discount rate, $10,000 in one year would be worth $9,090.90 today (10,000 / 1.1).
The IRR equals the discount rate that makes the NPV of future cash flows equal to zero. The IRR indicates the annualized rate of return for a given investment—no matter how far into the future—and a given expected future cash flow.
For example, suppose an investor needs $100,000 for a project, and the project is estimated to generate $35,000 in cash flows each year for three years. The IRR is the rate at which those future cash flows can be discounted to equal $100,000.
IRR assumes that dividends and cash flows are reinvested at the discount rate, which is not always the case. If the reinvestment rate is not as robust, IRR will make a project look more attractive than it actually is. That is why there may be an advantage in using the modified internal rate of return (MIRR) instead.
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41dadd59c6ac1064d4cde8c000f61177 | https://www.investopedia.com/articles/investing/111816/how-esg-sri-and-impact-funds-differ.asp | How ESG, SRI, and Impact Funds Differ | How ESG, SRI, and Impact Funds Differ
A growing number of investors are demanding investment choices from their advisors that do more than provide them with a simple rate of return. Younger investors, in particular, are seeking out options that will not only help their assets to grow, but that will also benefit society at large in some respect.
A recent survey of investors by TIAA revealed that about a third of those polled responded that they already own some form of socially responsible investment (SRI), and about half of those who didn’t say that they plan to move in this direction soon. There are several different categories of investments that do this, and advisors and investors need to be able to recognize their differences to allocate funds appropriately.
Important The U.S. Department of Labor released a new regulation in late October 2020 that may limit or eliminate socially responsible investing in retirement plans. While the rule was revised to remove explicit references to environmental, social, and governance (ESG) factors, it mandates that fiduciaries of retirement plans choose investment strategies based entirely on how those strategies affect financial performance. This ruling may have a significant impact on funds and investments classified under ESG and socially responsible investing.
Similarities and Differences
Investments that fall into the broad category of offerings that provide more than a mere rate of return can be classified according to the emphasis that is placed upon the investment’s financial performance. Patrick Drum, a portfolio manager at Saturna Capital, has led an effort by his firm to help advisors understand these investments, ThinkAdvisor reports. He has created a spectrum of socially-dimensioned investments called the Sustainability Smile that categorizes these offerings in the manner just described. On one end of the spectrum are purely traditional investments that are purchased solely for their profit potential, irrelevant of their impact on society at large.
The next category is integrated investing, which takes environmental, social, and governance (ESG) impact into account but still makes a point of generating investment returns. “ESG is about financial performance but takes into consideration a broader set of due diligence questions on how environmental, social and governance facts drive or inhibit performance,” Drum told ThinkAdvisor. In this category, financial performance is still considered, but the ultimate goal is to produce optimal results with the money that is invested.
The next step away from a pure profit motive is labeled as ethical/advocacy investing. This approach attempts to balance the profit motive with the investor’s beliefs by excluding certain segments such as “sin” stocks like alcohol, tobacco, or firearms. Drum gave ThinkAdvisor an example of this type of investment, citing a company named The Carbon Divestment Campaign, which challenges and encourages companies that deal in carbons, such as oil companies to move further into the realm of renewable energy. The return on capital does still matter here, but Drum says that there is “a level of forgiveness” on this factor present as well.
Drum labels the next rung up the ladder as thematic/impact investing, where financial performance is secondary to the investment’s social theme or impact. The main objective here is to accomplish the goals of the companies in which the client invests. The investor may still seek to generate an investment return, but this is unconditionally subordinate to the social aspect of the investment. The final category of investment is purely philanthropic, where no thought is given to the rate of return that is earned if any.
The Bottom Line
The CFA Institute surveyed over 1,300 financial advisors and research analysts that revealed that ESG integration was a major priority for them, and was more important than either thematic or impact investing. Over half of those polled were incorporating ESG investing into their investment analysis, while less than a quarter were using thematic or impact strategies. Morningstar Inc. now also assigns a globe rating to many investments that measures the investment’s social impact. Advisors and investors who are interested in socially impactful investing can use this ranking to help determine whether a given investment choice satisfies their social criteria.
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e5405e2b99525ca7844fa00356fe58ba | https://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp | The Impact of Share Repurchases on Financial Accounting | The Impact of Share Repurchases on Financial Accounting
A share repurchase or buyback is when a publicly traded company purchases its own shares in the marketplace. Along with dividends, share repurchases are a way that a company may return cash to its shareholders. When a company buys back shares, it's generally a positive sign because it means that the company believes its stock is undervalued and is confident about its future earnings.
Many of the best companies strive to reward their shareholders through consistent dividend increases and regular share buybacks. A share repurchase is also known as a float shrink because it reduces the number of a company’s freely trading shares or float.
Key Takeaways A share repurchase, or buyback, refers to a company purchasing its own shares in the marketplace.When a company buys back its shares, it usually means that a firm is confident about its future earnings growth.Profitability measures like earnings per share (EPS) usually experience a huge impact from a share repurchase.Share repurchases can have a significant positive impact on an investor’s portfolio.Because share repurchases' value depends on the stock's future price, buybacks come with more uncertainty than dividends.
The Impact on Earnings Per Share (EPS)
Because a share repurchase reduces a company’s outstanding shares, we may see its biggest impact in per-share measures of profitability and cash flow such as earnings per share (EPS) and cash flow per share (CFPS). Assuming that the price-earnings (P/E) multiple at which the stock trades is unchanged, the buyback should eventually result in a higher share price.
As an example, consider the hypothetical company, Birdbaths and Beyond (BB), which had 100 million shares outstanding at the beginning of a given year. The stock was trading at $10, giving BB a market capitalization (market cap) of $1 billion. The company had net income of $50 million or EPS of $0.50 ($50 million ÷ 100 million shares outstanding) in the preceding 12 months, which means that the stock was trading at a P/E multiple of 20x (i.e., $10 ÷ $0.50).
Assume that BB also had excess cash of $100 million at the start of the year, which the company deployed in a share-repurchase program over the next 12 months. So, at the end of the year, BB would have 90 million shares outstanding. For simplicity, we have assumed here that all the shares were repurchased at an average cost of $10 each, which means that the company repurchased and canceled a total of 10 million shares.
Suppose BB earned $50 million in this year as well; its EPS would then be about $0.56 ($50 million ÷ 90 million shares). If the stock continues to trade at a P/E multiple of 20x, the share price would now be $11.20. The 12% stock appreciation has been entirely driven by the EPS increase, thanks to the reduction in BB’s outstanding shares.
1:44 The Impact Of Share Repurchases
Stock Repurchases Drive Value for Shareholders
We've used a couple of simplifications here. First, EPS calculations use a weighted average of the shares outstanding over a period of time, rather than just the number of shares outstanding at a particular point. Second, the average price at which the shares are repurchased may vary significantly from the shares' actual market price. In the example above, buying back 10% of BB’s outstanding shares would quite possibly have driven up its stock price, which means that the company would end up buying back less than the 10 million shares we have assumed for its $100 million outlay.
Companies that consistently buy back their shares can grow EPS at a substantially faster rate than would be possible through operational improvements alone.
These simplifications understate the magnified effect that consistent repurchases have on shareholder value. This rapid EPS growth is often recognized by investors, who may be willing to pay a premium for such stocks—which in turn results in their P/E multiple expanding over time. Further, companies that generate the free cash flow (FCF) required to steadily buy back their shares often have the dominant market share and pricing power required to boost the bottom line.
Going back to the BB example, assume that the company's P/E multiple rose to 21x (from 20x), while net income grew to $53 million (from $50 million). After the buyback, BB’s stock would be trading at about $12.40 (i.e., 21 x EPS of $0.59, based on 90 million shares outstanding) at year-end, an increase of 24% from its price at the beginning of the year.
How a Share Repurchase Affects Financial Statements
A share repurchase has an obvious effect on a company’s income statement, as it reduces outstanding shares, but share repurchases can also affect other financial statements.
On the balance sheet, a share repurchase would reduce the company’s cash holdings—and consequently its total asset base—by the amount of cash expended in the buyback. The buyback will simultaneously shrink shareholders' equity on the liabilities side by the same amount. As a result, performance metrics such as return on assets (ROA) and return on equity (ROE) typically improve subsequent to a share buyback.
Companies generally specify the amount spent on share repurchases in their quarterly earnings reports. You also may get the amount spent on share buybacks from the statement of cash flows in the financing activities section, and from the statement of changes in equity or statement of retained earnings.
A Share Buyback's Impact on Portfolios
Share repurchases can have a significant positive impact on an investor’s portfolio. For proof, one only has to look at the S&P 500 Buyback Index, which measures the performance of the 100 companies in the index with the highest buyback ratio—calculated as the amount spent on buybacks in the past 12 months as a percentage of the company’s market cap. Since its inception in January 1994, the S&P 500 Buyback Index returned 13.29% annually, compared with gains of 10.31% and 8.96% from the S&P 500 High Dividend Index and S&P 500, respectively.
What accounts for this degree of outperformance? As with a dividend increase, a share repurchase indicates that a company is confident in its future prospects. Unlike a dividend hike, a buyback signals that the company believes its stock is undervalued and represents the best use of its cash at that time. In most cases, the company’s optimism about its future pays off handsomely over time.
Share Repurchases Versus Dividends
While dividend payments and share repurchases are both ways for a company to return cash to its shareholders, dividends represent a current payoff to an investor, while share buybacks represent a future payoff. This is one reason why investor reaction to a stock that has announced a dividend increase will generally be more positive than to one announcing an increase in a buyback program.
Another difference has to do with taxation, especially in jurisdictions where dividends are taxed less favorably than long-term capital gains. Assume you acquired 100,000 shares of BB at $10 each, and you live in a jurisdiction where dividends are taxed at 20% and capital gains are taxed at 15%. Suppose BB was debating between using its $100 million in excess cash for buying back its shares or paying it out to shareholders as a special dividend of $1 per share.
Though the buyback would have no immediate impact on your taxes, if your BB shares were held in a taxable account, your tax bill in the event of a special dividend payout would be quite hefty at $20,000. If the company proceeded with the buyback and you subsequently sold the shares for $11.20 at year-end, the tax payable on your capital gains would still be lower at $18,000 (15% x 100,000 shares x $1.20). The $1.20 represents your capital gain of $11.20 minus $10 at year-end.
Although share repurchases may be better for building one’s net worth over time, they do carry more uncertainty than dividend payments, as the buybacks' value depends on the stock's future price. If a company’s float has contracted by 20% over time but the stock subsequently plummets 50%, an investor would, in retrospect, have preferred to receive that 20% in the form of actual dividend payments.
Share repurchases are a great way to build investors' wealth over time, although they come with more uncertainty than dividends.
Capitalizing on Share Repurchases
For companies that raise dividends year after year, one needs to look no further than the S&P 500 Dividend Aristocrats, which includes companies in the index that have boosted dividends annually for at least 25 consecutive years. For share repurchases, the S&P 500 Buyback Index is a good starting point to identify companies that have been aggressively buying back their shares.
Though most blue chips buy back shares on a regular basis—primarily to offset dilution caused by holders exercising their employee stock options—investors should watch for companies that announce special or expanded buybacks. Float shrink exchange-traded funds (ETFs) have also attracted a great deal of attention recently. The Invesco Buyback Achievers Portfolio (PKW) is the biggest ETF in this category. This ETF invests in U.S. companies that have repurchased at least 5% of their outstanding shares over the previous 12 months.
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6e4834f8f7b0bcc4db765279744b2c03 | https://www.investopedia.com/articles/investing/112015/review-vanguard-529-college-savings-plan.asp | The Vanguard 529 College Savings Plan: A Review | The Vanguard 529 College Savings Plan: A Review
The Vanguard Group is well-known across the mutual fund industry for its low-cost approach to investing. It has extended its positive reputation with the offering of its 529 savings plans. Investors searching for 529 savings plans want a convenient way to save for education with minimal cost and the ease of opening an account online. The Vanguard 529 College Savings Plan offers 20 individual portfolios and three age-based portfolio models that can accommodate a variety of investment styles. As with other Vanguard mutual funds, this is a direct-sold product. Read on to find out more about these plans and what Vanguard has to offer.
Key Takeaways A 529 savings plan is a low-cost way for someone to save for the education of a child or grandchild. The plan was originally designed to allow people to save for higher education. Plan rules were expanded under the Tax Cuts and Jobs Act and the SECURE Act. The Vanguard 529 College Savings Plan is sponsored by the state of Nevada, and offers savers three age-based models. Vanguard's is among the cheapest plans available on the market and offers a stellar lineup in its portfolio.
What Are 529 Plans?
A 529 plan is a savings tool designed to help investors save for the educational expenses of their children or grandchildren. All 529 plans, also known as qualified tuition plans, are tax-advantaged savings plans—just like individual retirement accounts (IRAs)—and are sponsored by various entities including schools, states, and state agencies.
Every 529 plan covered the cost of post-secondary education in the past, but the Tax Cuts and Jobs Act (TCJA) expanded the usage of plans to include all forms of education including K to 12. Another bill, the Setting Every Community Up for Retirement Enhancement Act (SECURE)—signed into law on Dec. 20, 2019—further expanded the rules surrounding 529 plans. According to Section 302 of the Act, plan holders can also use funds to pay for qualified expenses relating to a beneficiary's apprenticeship program including tuition, other fees paid to the institution, and course material. Programs must be approved by the Department of Labor. Another change includes the ability to withdraw a maximum lifetime amount of $10,000 per student to pay down qualified education debt.
There are two different kinds of 529 plans: Prepaid tuition plans and education savings plans.
Prepaid Tuition Plans
Through this plan, account holders buy credits that can be applied to tuition and other fees at public or in-state colleges or universities. These are purchased at the current price. The costs for housing, and elementary and secondary school tuition are not included in this plan. These plans are not guaranteed by the federal government but are sponsored by certain state governments and agencies.
Education Savings Plans
Account holders who open this kind of 529 plan can use the funds for any type of educational expense including tuition, mandatory fees, as well as housing costs. The beneficiary of the plan may also be able to use the plan toward fees at any school including those outside the United States. Savers can also use up to a maximum of $10,000 to pay for tuition at public, private, or religious elementary or secondary schools.
How 529 Plans Work
Investment options in all 529 plans vary based on the goals of the saver. The portfolio may be comprised of different vehicles including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
The owner of a 529 savings plan creates an account for a beneficiary or student. The account earnings are free from federal tax as long as the funds are used for qualified education expenses such as college tuition, books, and room and board. The owner of the account determines when the funds are distributed for higher education.
The plan is tax-deferred. This means earnings are deferred from both federal and state taxes. Most states also allow the saver to deduct 529 savings plans contributions on their state tax returns. Withdrawals for qualified educational expenses are tax-free.
529 Plans Are State-Sponsored
As mentioned above, 529 savings plans are generally sponsored by each state including the Vanguard 529 College Savings Plan. This plan is sponsored by the state of Nevada, and is administered by the Board of Trustees of the College Savings Plans of Nevada and chaired by the Nevada State Treasurer. Investors do not have to be residents of Nevada, nor does the beneficiary have to attend a Nevada school.
Vanguard also offers its mutual fund selection within the College Savings Iowa 529 Plan, which allows for a minimum investment of $25.
Vanguard's 529 Plans
Age-based portfolio models are popular within 529 plans. There are three age-based portfolio models offered in the Vanguard lineup:
Conservative age-based Moderate age-based Aggressive age-based
Vanguard offers three age-based models that are automatically shifted as the child ages and gets closer to college.
Within each of these three categories, there are several age brackets for the child starting from 0 to 5 years, 6 to 10 years, 11 to 15 years, 16 to 18 years, and over 19 years. The portfolio management automatically adjusts the models as the child ages, moving to the less risky portfolio—comprised of stocks, bonds, and short-term reserves—as the child nears college age.
The individual portfolios range from a conservative money market to stock portfolios that can be used to customize the investor's own strategy.
Features and Benefits
The Vanguard 529 plan is a low-cost, direct-sold investment with a wide selection of well-managed portfolios. The convenience of opening and maintaining an account online without paying a sales commission keeps a simple process for do-it-yourself investors. The Vanguard 529 plan is highly rated among its competitors.
Cost
Lower cost-plans appeal to investors and Vanguard makes use of its index mutual fund offerings to keep expenses down. There is no enrollment fee for opening a Vanguard 529 College Savings Plan, and there are no commissions or transfer fees. According to Morningstar, Vanguard's 529 plan is a top-rated choice, especially because of its low cost. It is, in fact, the cheapest among Morningstar's choices.
The expense ratios for the Vanguard Plan are among the lowest in the industry. The age-based portfolio models have an expense ratio of 0.15%, and the individual portfolios range from 0.15 to 0.44%.
Vanguard vs. Other 529 Plans
The Vanguard 529 plan has consistently ranked among the top plans as rated by Morningstar and did receive gold rankings every year since 2012. The group did drop the plan to silver ranking. The reason? Morningstar noted that the plan's fees are still fairly cheap—below average, in fact—but it hasn't been able to keep up to date with the industry and its competitors, which has consistently tried to keep investment fees low.
The fund's saving grace is its lineup. Morningstar highly recommends the plan for its investment strategy, which is made up of underlying Vanguard index funds. It also recognizes the fund's ability to transition holdings from stocks to bonds through its age-based construction.
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f23832a6b91cfd97ecf87db830d97142 | https://www.investopedia.com/articles/investing/112015/stock-picking-wont-make-you-billionaire.asp | Stock Picking Won’t Make You a Billionaire | Stock Picking Won’t Make You a Billionaire
You are not going to become a billionaire by playing the stock market. It doesn't matter if you're really good and get really lucky. It doesn't even matter if you start out with a relatively sizable fortune. The stock market is good for a lot of things, and investing has a role to play in nearly everyone's financial future, but it's not a vehicle for making billionaires.
Key Takeaways You are not going to become a billionaire by playing the stock market even if you start out with a sizable fortune. Most billionaires are entrepreneurs, family members or heirs to fortunes from entrepreneurs, or they own businesses. Even with $1 million in stocks and a 17.7% annual return for 30 years, a portfolio would be worth $300 million, far short of $1 billion.
Understanding How Stock Picking Won’t Make You Billions
Although stock picking won't likely make you a billionaire, it's not impossible to make it to billionaire status. Forbes identified nearly 2,100 billionaires in its annual Billionaire List in 2020. The world's super-rich come from an enormous range of backgrounds, and plenty started with little or no money.
A few of the top billionaires include:
Jeff Bezos, the founder of Amazon.com Inc. (AMZN), with more than $150 billion in net worth Bill Gates, co-founder of Microsoft (MSFT), with $111 billion Bernard Arnault and family, Mr. Arnault is the chairman and CEO of the luxury goods company LVMH with more than $110 billion in net worth Larry Ellison co-founder of the software company, Oracle Inc. (ORCL) with a net worth of more than $68 billion
We can see that the top billionaires listed have something in common; they created a company and didn't earn their billions from stock picking.
However, Warren Buffett, chairman of Berkshire Hathaway and acclaimed investor is in the top five of the Forbes list with a net worth of more than $79 billion. Mr. Buffett is probably the best-known investor of all time. The Oracle of Omaha bought his first stock, six shares of Cities Service when he was just 11 years old. He stuck with the markets his entire life, trained under the great value investor Benjamin Graham, teamed up with Charlie Munger. It's a fantastic story, but one that's easy to misinterpret, nearly impossible to emulate, and requires much more than just portfolio management.
How the Super-Wealthy Made Their Fortunes
Most people get the Buffett story wrong. On the surface, the story's protagonist looks like a diligent, wise investor who studied business fundamentals, made good stock picks and rode a wave of above-average market returns to massive windfalls.
Buffett isn't the only example. Carl Icahn (a venture capitalist) and George Soros (who started his own fund) each built billionaire stock portfolios since the 1960s, drawing legions of imitators in the process. Each one appeals to a different subset of investors: Icahn to contrarians, Buffett to fundamentalists, and Soros to the psychology-based investor reflexivity advocates.
You can't follow in their investing footsteps to billionaire status because Buffett, Icahn, and Soros aren't just investors. They are also shrewd entrepreneurs and businessmen with a keen ability to meet shareholder and consumer demands at the right time.
Consider Buffett, whose genius lay in personally evaluating business operations and discovering undervalued opportunities. By the time he was 31, Buffett actively ran seven different partnerships. He personally met with Walt Disney in 1965 before investing $4 million in Disney's company. By 1970, when Buffett was 40, the millionaire dissolved his (now amalgamated) partnership and divested its assets. He became chairman and chief executive officer (CEO) of Berkshire Hathaway, actively flying all over the country to perform valuations and meet with fellow entrepreneurs.
Buffett didn't just study financial statements and submit trade orders. He created a brand, advised up-and-coming companies on their operations, and set up an entire national business network.
Berkshire Hathaway makes money in ways that no individual investor can. This is partially due to the company's incredible cash flow, which lets Buffett cut deals that aren't available to the general public (called "sweeteners" in the trade). In other words, these companies want Mr. Buffett involved as a major shareholder, and they're willing to offer sweet deals to get him aboard as an investor. Those opportunities are just not available for the retail investor.
However, Mr. Buffet didn't simply buy the stocks in these companies; he helped reshape them using the value-investing strategies that he learned from Benjamin Graham. The average investor won't get access to companies the way Warren Buffet has access, nor will an investor purchase a stock at a share price lower or discounted from the market price.
Look down the Forbes list of the 400 wealthiest people, and you'll see that the vast majority of them didn't earn their fortunes by making stock picks alone. None of them were employees their entire careers. Many of them are entrepreneurs or family members and heirs to fortunes from entrepreneurs. Also, most of them own businesses or are partners in multi-billion dollar ventures.
Exploring the Returns of Stock Picking
The S&P 500 returned at an average annualized rate of approximately 10% from 1957 to 2019. It would take an investor more than 24 years of compounding growth to become a billionaire—if they started out with $100 million in equities. Most people (even some billionaires) don't have $100 million to invest in stocks. As a result, you're likely to need a lot more than 10% average annual growth to jump into the billionaire class.
Suppose you perform extremely well and save up $1 million worth of investable assets by age 30, which is no small feat. You then apply all $1 million to the markets and somehow realize the same incredible 17.7% annual return as Warren Buffett's company, Berkshire Hathaway has done. In the end, your portfolio would grow to approximately $300 million by age 65. It's a lot of money, but it's still $700 million short of billionaire status.
If you're a 35-year-old with just $6,000 to invest, you'll need to average about 40% returns each year until you're 70 to become a billionaire. Even if you build an incredibly profitable portfolio, it's unlikely to happen.
The numbers don't add up. Take a realistic, practical look at your stock market expectations. Otherwise, it's too easy to become disenchanted with performance and either stop too soon or get too aggressive.
A Practical Look at Investing and Wealth-Building
Martin Fridson, author of "How to Be a Billionaire: Proven Strategies From the Titans of Wealth" hit the nail on the head when he pointed out, "If you beat stock indexes by 1% consistently for over 20 years, you're a massive superstar."
The numbers have already shown that it's impossible to become a billionaire on this "massive superstar" level performance, at least without a massive head start. Wall Street supplements wealth, and while the few real winners may find a few million on the exchanges, they're largely a tool to beat out inflation or rising prices. Real fortunes—at least, at the billionaire level—are built by entrepreneurs who find ways to put products or services in front of hundreds of thousands, if not millions, of consumers.
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9b4ca8b790478310664ddad3d0bef2a9 | https://www.investopedia.com/articles/investing/112116/10-cities-where-rent-rising-fastest.asp | 10 Cities Where Rent Is Rising Fastest | 10 Cities Where Rent Is Rising Fastest
Although COVID-19 significantly disrupted the peak summer renting season, the rental market is beginning to display its more typical behavior as fewer moves take place as autumn moves toward winter, causing a decline in rent prices. However, the effects of the ongoing pandemic still linger, with prices falling in several expensive coastal cities, while rents in major midsize cities have grown over the course of the lockdown. Nationwide, rents for all homes have risen 1.4% year-over-year (YOY), according to the latest information from the Zillow Observed Rent Index.
Overall, Zillow reports that rent prices have risen in 98 of the 105 largest metros in the United States, although 11 of those markets reported slower growth than the national average (1.4%), and six have seen a slowdown in rents compared to last year. Rent prices in Austin, Texas, have remained static year-over-year.
10 Cities Where Rents Are Rising the Fastest
Rents have risen the most in Memphis and Syracuse, where prices have increased by 7.2% and 6.7%, respectively. Other cities that experienced the most substantial rent price increases were also midsized, with the notable exception of Phoenix, Ariz., which has a population of more than 1.68 million people. Below are the 10 cities where rents have risen the most YOY, according to Zillow, along with each city's current median monthly rent:
Conversely, rent prices in San Francisco and New York City fell the furthest YOY, albeit by a more modest 2.7% each. Half of the cities that experienced rents decreasing have notably large populations, ranging from San Jose's approximately 1.02 million people to New York City's more than 8.34 million. Additionally, the top four cities with the highest rent price drops are located in expensive coastal states.
Affordability
Under ordinary circumstances, millennials might be drawn to tech centers like Seattle and Portland for the jobs and high salaries, though the resultant high demand for a limited number of rental units would inevitably drive up prices. The ongoing pandemic, however, has caused significant priorities shifts as residents of major cities, such as New York, have fled to less densely populated areas in order to minimize their risk of infection and because they can work remotely. The fact that rent prices are often cheaper in these midsized areas, as can be seen in the above tables, is certainly a plus. The long-term effects of these urban exoduses, however, likely won't become clear until the current health crisis is resolved.
Prior to the lockdown, many renters were spending well above the recommended 25% to 30% of gross monthly income on rent (the U.S. Department of Housing and Urban Development considers a household to be burdened if it spends 30% or more of its income on rent). A study from Apartment List found that the majority of renters in San Diego (57.8%), Los Angeles (56.9%), and Sacramento (54.7%) spent more than 30% of their incomes on rent each month in 2018.
Rising Rents and Homeownership
When rent prices rise, renters naturally have less money to spend each month, which means they have less money to save too. Consequently, homeownership has become out of reach for many. With less leeway to save for a down payment, even those earning a solid income may have trouble getting a mortgage. At 67.4%, the current rate of homeownership is 5.5% higher than it was during the same quarter in 1965, which is the year when the U.S. Census Bureau first began tracking this data.
Of course, there could be nonfinancial reasons behind the drop in homeownership, such as delaying significant decisions like marriage or having children, but high rent prices aren't helping. According to Zumper's 2019 State of the American Renter Report, the majority of participants (62%) stated that their financial situation was the primary reason behind their decision to rent over buying a home.
The Bottom Line
High rent prices make it difficult to save to buy a home, which can affect not only individuals and families but also entire communities. According to a report from the National Association of Realtors, homeownership fosters a sense of community, reduces crime rates, and brings stability to neighborhoods. Now that the coronavirus has driven so many out of the U.S.'s biggest cities, it remains to be seen how affordable (or pricey) renting will become in both the country's largest and smallest metros in the future.
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857195279804eb5ceaa7017b8e96be94 | https://www.investopedia.com/articles/investing/112315/best-3-vanguard-mutual-funds-retirement.asp | 3 Vanguard Target-Date Retirement Funds | 3 Vanguard Target-Date Retirement Funds
Vanguard offers target-date retirement funds to suit the needs of investors of various ages. A target-date fund is a mutual fund that automatically adjusts the asset mix and allocation over a time period that's based on your age and when you want to retire.
Vanguard's target-date retirement funds typically invest in other Vanguard index funds and provide investors with instant diversification. The company offers mutual funds for target retirement dates for every five years from 2020 to 2065.
Below, we'll take a look at the company's funds for people who aim to retire in 2030, 2040 and 2050. Each of the funds invests the majority of its assets in Vanguard index funds, and each portfolio includes Vanguard Total Stock Market Index Fund Investor Shares, Vanguard Total International Stock Index Fund Investor Shares, Vanguard Total Bond Market II Index Fund Investor Shares, and Vanguard Total International Bond Index Fund Investor Shares.
The information in this article was current as of May 1, 2020.
Key Takeaways Vanguard is well-known for its variety of low-cost index mutual funds and ETFs.Vanguard also offers a suite of similarly competitive target-date retirement funds.Target-date funds are meant to be diversified, low-maintenance investments that start out riskier and automatically shift to more conservative allocations as retirement approaches.
Vanguard Target Retirement 2030 Fund
The Vanguard Target Retirement 2030 Fund (VTHRX) is designed for investors who wish to retire between 2028 and 2032, and its minimum initial investment is $1,000.
The fund was issued on June 7, 2006, and has achieved an average annual return of 6.11% since its inception. Its expense ratio is 0.14%, which is 69% lower than the average expense ratio of similar funds, according to Vanguard. At the end of the first quarter of 2020, the net assets of the fund were $35.3 billion, of which about 70% was held in stocks and 30% in bonds. The fund had a 8% annual turnover ratio in the 2019 fiscal year.
The Vanguard Target Retirement 2030 Fund is considered a moderate to aggressive fund. However, the allocation of assets in the fund will change as the target date approaches, and it will become more conservative over time. This makes the fund most suitable for people who want to invest in it for 10 years or longer.
Vanguard Target Retirement 2040 Fund
The Vanguard Target Retirement 2040 Fund (VFORX) is best suited for investors planning to retire between 2038 and 2042, and its minimum initial investment is $1,000.
The fund was issued on June 7, 2006, and has generated an average annual return of 6.32% since its inception. According to Vanguard, the fund also has an annual expense ratio of just 0.14%. The fund has $26 billion in net assets, of which of about 83% are held in stocks and 17% are held in bonds.
The Vanguard Target Retirement 2040 Fund is also considered a moderate to aggressive fund. However, as with the 2030 fund, the Vanguard Target Retirement 2040 Fund will become more conservative over time as the allocation of assets in the fund change. Similarly, this fund is also best for people who want to invest for 10 years or more.
Vanguard Target Retirement 2050 Fund
The Vanguard Target Retirement 2050 Fund (VFIFX) is for investors who will retire between 2048 and 2052, and its minimum initial investment is $1,000.
The fund has had an average annual return of 6.33% since its inception on June 6, 2006. Its expense ratio is 0.15%, which is 67% lower than that of funds with similar holdings, according to Vanguard. The fund's net assets total $17.7 billion, and about 90% of them are held in stocks, and 10% are held in bonds.
Since the Vanguard Target Retirement 2050 Fund primarily invests in equities or stocks, it carries a high degree of volatility and is considered aggressive. Therefore, it's best suited for investors who can tolerate the potentially high volatility of the stock market, as well as long-term investors. Like the other Vanguard target-date funds, this one will also become more conservative over time as the allocation of its assets change.
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9cc11a3aa3319c60354c0dad8f74fa44 | https://www.investopedia.com/articles/investing/112415/5-states-highest-gdp-capita.asp | 5 States With the Highest Real GDP per Capita | 5 States With the Highest Real GDP per Capita
Although the U.S. is not the largest country in the world (either by landmass or population), it is the world's largest economy by gross domestic product (GDP), a position it has maintained since 1871. GDP measures the total value of goods and services a state or country produces over a given time period. After the second quarter of 2020, according to the U.S. Bureau of Economic Analysis (BEA), the top five states by real gross domestic product (GDP) in the United States were California, Texas, New York, Florida, and Illinois.
However, GDP per capita by state is a different story. Dividing GDP by the state's population, five different states and districts emerge: District of Columbia, New York, Massachusetts, Alaska, and Washington. GDP powerhouse California, while contributing 14.8% to the U.S.' overall GDP in the second quarter of 2020, ranked sixth in highest state GDP per capita, due to its large population. Let's take a closer look at the top five states with the highest GDP per capita, based on the latest 2019 data from the BEA and the U.S. Census Bureau.
GDP per Capita by State State/Area Population (2019) GDP (by state, millions) GDP (per capita) District of Columbia 705,749 123,929.3 $175,599.68 New York 19,453,561 1,490,678.5 $76,627.54 Massachusetts 6,892,503 519,961.6 $75,438.72 Alaska 731,545 53,255.2 $72,298.26 Washington 7,614,893 548,686.7 $72,054.42
District of Columbia
At the top of the list, the District of Columbia and the capital of the United States had a whopping GDP per capita of $175,599.68 in 2019, which is more than double the country's median income of $68,703 that year. What's the deal?
Though the city is densely populated with 705,749 residents, D.C. itself only occupies 68.34 square miles of land. Still, Washington is diversified, with an increasing percentage of professional and business service jobs. Approximately 15% of federal government employees work in Washington, D.C., not to mention all the workers for international and foreign non-governmental organizations or embassies.
In addition, Amazon announced in 2018 that it would build its second headquarters nearby in DC, right across the river in Arlington, Virginia. The move follows after many technology companies that wish to foster warmer relationships with the U.S. government as it relates to security, surveillance, or lobbying have also set up hubs in the nation's capital. After government employment, tourism is D.C.'s second-largest industry bringing in millions of visitors every year.
New York
The state of New York, where just short of 6% of Americans live, had a GDP per capita of $76,627 in 2019. The financial services sector is the most important area of the state. Professional and business services such as legal advice, administrative services, and management consulting have produced an output worth more than $175 billion.
In addition to Wall Street, New York is steadily growing its technology and entrepreneurship presence. New York's GDP greatly suffered as a result of the financial crisis of 2008-2009, as its financial services sector declined, but it has subsequently rebounded.
$76,627.54 New York's GDP per capita in 2019.
Massachusetts
Massachusetts takes third place in terms of real GDP per capita of $75,438.72 in 2019. Education and health services offer the most job opportunities in Massachusetts, though this is not a surprise: Boston is home to 35 universities, including Harvard University, MIT, and Boston University among multiple others.
In addition, manufacturing makes up about 9.5% of the state's GDP and 282,582 jobs in computer and electronic product manufacturing, chemical manufacturing, and food processing.
Alaska
Alaska had a real GDP per capita of $72,798.26 due to its small population, which was less than 1 million people, and its high production output of oil and gas. A large majority of Alaska's current-dollar GDP comes from petroleum, natural gas, coal, gold, zinc, and other precious metals. Other prominent export goods from Alaska include seafood products, such as salmon and cod. Employment in Alaska is concentrated in the government sector and the energy industry.
Because of the oil and natural gas discovery and subsequent energy boom in the 1980s, Alaska built the Trans-Alaska Pipeline System. The Alaskan state legislature created the Permanent Fund, which must set aside a certain portion of oil revenues and invest it for the future of Alaskan residents. Every year, the Permanent Fund pays an annual dividend to all eligible residents who lived in Alaska for the full calendar year and intended to stay in Alaska indefinitely.
Washington
According to BEA, retail trade was the leading contributor to the increase in real GDP in Washington, the fastest-growing state in the fourth quarter of 2019. The state housing Fortune 500 companies including Microsoft, Starbucks, and Boeing (as well as the home of billionaires Jeff Bezos and Bill Gates) is quickly crawling up the list. Washington's GDP per capita in 2019 came in just a hair below Alaska's at $72,054.42.
Washington also boasts the largest concentration of science, technology, engineering, and math workers in the entire United States. Trade, transportation and utilities; government; and education and health services make up the largest sectors in Washington.
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