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how a senior bank loan works
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loans are often used to provide a business with cash to continue its daily operations or any other capital needs that it may have the loans are generally backed by the company s inventory property equipment or real estate as collateral banks often take the multiple loans they make repackage them into one debt obligation and sell them off to investors as a financial product the investors then receive the interest payments as the return on their investment because senior bank loans are at the top of a company s capital structure if the company files for bankruptcy the secured assets are typically sold and the proceeds are distributed to senior loan holders before any other type of lender is paid back historically the majority of businesses with senior bank loans that ended up filing for bankruptcy have been able to cover the loans entirely meaning the lenders investors have been paid back because senior bank loans take precedence in the repayment structure they are relatively safe though they are still considered non investment grade assets as most of the time the corporate loans in the bundle are made to non investment grade companies senior bank loans typically have floating interest rates that fluctuate according to the london interbank offered rate libor or other common benchmarks for example if a bank s rate is libor 5 and libor is 3 the loan s interest rate will be 8 because loan rates often change monthly or quarterly interest on a senior bank loan may increase or decrease at regular intervals this rate is also the yield that investors will make on their investment the floating rate aspect of a senior bank loan provides investors with protection against rising short term interest rates as a protection against inflation in the repayment structure after senior bank loans which are typically classified as first lien and second lien comes unsecured debt followed by equity special considerationsbusinesses that take out senior bank loans often have lower credit ratings than their peers so the credit risk to the lender is typically greater than it would be with most corporate bonds what s more the valuations of senior bank loans fluctuate often and may be volatile this was especially true during the financial crisis of 2008 because of their inherent risk and volatility senior bank loans typically pay the lender a higher yield than investment grade corporate bonds however because the lenders are assured of getting at least some portion of their money back before the company s other creditors in the event of insolvency the loans yield less than high yield bonds which carry no such promise investing in mutual funds or exchange traded funds etfs that specialize in senior bank loans may make sense for some investors who are seeking regular income and who are willing to assume the additional risk and volatility here s why investors can also take some reassurance from the fact that senior bank loan funds average default rate historically is a relatively modest 3
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what is the sensex
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the sensex is the benchmark index of the bse in india the sensex comprises 30 of the largest and most actively traded stocks on the bse and provides a gauge of india s economy it is float adjusted and market capitalization weighted the sensex is reviewed semiannually each year in june and december created in 1986 the sensex is the oldest stock index reflecting india s markets and is operated by standard poor s s p analysts and investors use it to observe the cycles of india s economy and the development and decline of particular industries 1investopedia julie bangunderstanding the sensexthe sensex was launched on jan 1 1986 it is both a bellwether and an investable index used to track the performance of india s 30 largest and most financially sound companies these companies are listed on the bse previously known as the bombay stock exchange and represent some of the biggest and most important sectors of the indian economy as such it is india s most tracked index 1the sensex is calculated in indian rupees inr and u s dollars as of dec 29 2023 the mean total market cap of the index was 141 7 billion the top five constituents listed on the index as of dec 29 2023 were the evolution of the indian economy has shaped and changed the methodology of the sensex it was calculated based on the market cap when it was first launched but shifted to a free float capitalization method in september 2003 this provided a weighting for the effect of a company on the index the index uses a company s float rather than its outstanding shares which means it doesn t include restricted stocks that can t be readily sold such as those held by company insiders despite all the changes to the methodology the index s objectives haven t changed at all 3its constituents are selected by the s p bse index committee based on several criteria the term sensex is a portmanteau of the words sensitive and index history of the sensexthe index experienced enormous growth since india opened up its economy in 1991 large gains occurred in the 21st century when it rose from around 5 000 in early 2000 to nearly 42 000 in january 2020 this has mainly been the result of india s surging economy which for years has grown at one of the fastest paces in the world 6the outbreak of the global coronavirus pandemic in early 2020 slowed india s economy like it did all economies around the world the sensex fell to below 30 000 in 2020 like most economies however india has bounced back since the coronavirus pandemic this is reflected in the strong gains in the sensex to levels well above pre pandemic times in 2021 the index passed 50 000 and in 2022 it passed 60 000 in 2023 it crossed the 65 000 mark 76india s expanding economy owes much to the rise of the nation s middle class and vice versa according to one study nearly 80 of the nation s households will be middle income by 2030 up from about 50 in 2019 the middle class is an important driver of consumer demand 8
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how does the sensex work
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the s p bse sensex index colloquially known as the sensex or sensex index is a benchmark index of 30 of india s largest and most liquid public companies the companies that make up the sensex are drawn from bse which is one of india s main stock markets many investors throughout the world use the sensex as a barometer of the overall state of the indian economy which has grown substantially in recent decades 3
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how is the sensex calculated
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the sensex is calculated using a free float capitalization method this method is similar to the market capitalization weighting method in which companies are weighted according to their share of the total market capitalization of the index as such the sensex gives more weight to the largest companies within its index but unlike the market capitalization method the free float capitalization method only takes into account shares that are freely available to be traded as opposed to restricted shares or those held by company insiders 94
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how has the sensex performed
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as of dec 29 2023 the 10 year annualized return for the sensex is 14 52 its five year annualized return is 16 28 9the bottom linethe sensex allows investors to gain exposure to the indian stock market which may otherwise prove difficult given the requirements india places on foreign investors for investors looking for diversification and exposure to emerging markets and one of the largest economies in the world investing in the sensex could be a good option
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what is sensitivity analysis
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sensitivity analysis shows how different values of an independent variable affect a dependent variable under a given set of assumptions companies use sensitivity analysis to identify opportunities mitigate risk and communicate decisions to upper management sensitivity analysis is deployed in business and economics by financial analysts and economists and is also known as a what if analysis investopedia lara antal
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how it works
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sensitivity analysis is a financial model that determines how target variables are affected based on changes in input variables by creating a given set of variables an analyst can determine how changes in one variable affect the outcome the independent and dependent variables are fully analyzed when sensitivity analysis is conducted sensitivity analysis allows for forecasting using historical true data by studying all the variables and the possible outcomes important decisions can be made about businesses the economy and making investments sensitivity analysis can be used to
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how businesses use sensitivity analysis
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sensitivity analysis can provide management feedback useful in many different scenarios including because sensitivity analysis answers questions such as what if xyz happens this type of analysis is also called what if analysis examplea sales manager wants to understand the impact of customer traffic on total sales the company determines that sales are a function of price and transaction volume the price of a widget is 1 000 and the company sold 100 last year for a total sales of 100 000 the manager determines that a 10 increase in customer traffic increases transaction volume by 5 this allows the company to build a financial model and sensitivity analysis based on what if statements it can tell the manager what happens to sales if customer traffic increases by 10 50 or 100 based on 100 transactions a 10 50 or 100 increase in customer traffic equates to an increase in transactions by 5 25 or 50 respectively the sensitivity analysis demonstrates that sales are sensitive to changes in customer traffic advantages and disadvantagessensitivity analysis provides several benefits for decision makers it acts as an in depth study of all the variables so the predictions may be more reliable it allows decision makers to identify where they can make improvements in the future however the outcomes are based on assumptions because the variables are based on historical data only complex models may be system intensive and models with too many variables may distort a user s ability to analyze influential variables may help management target specific inputs to achieve more specific resultsmay easily communicate areas to focus on or greatest risks to controlmay identify mistakes in the original benchmarkgenerally reduces the uncertainty and unpredictability of a given undertakingheavily relies on assumptions that may not become true in the futuremay burden computer systems with complex intensive modelsmay become overly complicated which distorts an analysts ability tomay not accurately integrate independent variables as one variable may not accurately the impact of another variable
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what is sensitivity analysis in npv
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sensitivity analysis in npv analysis is a technique to evaluate how the profitability of a specific project will change based on changes to underlying input variables though a company may have calculated the net present value npv it may want to understand how better or worse conditions will impact the return the company receives
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how do businesses calculate sensitivity analysis
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sensitivity analysis is often performed in analysis software and excel has functions to perform the analysis in general sensitivity analysis is calculated using formulas with different input cells for example a company may perform npv analysis using a discount rate of 6 sensitivity analysis can be performed by analyzing scenarios of 5 8 and 10 discount rates and maintaining the formula but referencing the different variable values
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what is the difference between sensitivity analysis and scenario analysis
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a sensitivity analysis is not the same as a scenario analysis assume an equity analyst wants to do a sensitivity analysis and a scenario analysis around the impact of earnings per share eps on a company s relative valuation by using the price to earnings p e multiple the sensitivity analysis is based on the variables that affect valuation which a financial model can depict using the variables price and eps for a scenario analysis an analyst determines a certain scenario such as a stock market crash or change in industry regulation that would affect the company valuation the bottom line
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what is sensitivity analysis
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sensitivity analysis shows how different values of an independent variable affect a dependent variable under a given set of assumptions companies use sensitivity analysis to identify opportunities mitigate risk and communicate decisions to upper management sensitivity analysis is deployed in business and economics by financial analysts and economists and is also known as a what if analysis investopedia lara antal
| |
how it works
|
sensitivity analysis is a financial model that determines how target variables are affected based on changes in input variables by creating a given set of variables an analyst can determine how changes in one variable affect the outcome the independent and dependent variables are fully analyzed when sensitivity analysis is conducted sensitivity analysis allows for forecasting using historical true data by studying all the variables and the possible outcomes important decisions can be made about businesses the economy and making investments sensitivity analysis can be used to
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how businesses use sensitivity analysis
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sensitivity analysis can provide management feedback useful in many different scenarios including because sensitivity analysis answers questions such as what if xyz happens this type of analysis is also called what if analysis examplea sales manager wants to understand the impact of customer traffic on total sales the company determines that sales are a function of price and transaction volume the price of a widget is 1 000 and the company sold 100 last year for a total sales of 100 000 the manager determines that a 10 increase in customer traffic increases transaction volume by 5 this allows the company to build a financial model and sensitivity analysis based on what if statements it can tell the manager what happens to sales if customer traffic increases by 10 50 or 100 based on 100 transactions a 10 50 or 100 increase in customer traffic equates to an increase in transactions by 5 25 or 50 respectively the sensitivity analysis demonstrates that sales are sensitive to changes in customer traffic advantages and disadvantagessensitivity analysis provides several benefits for decision makers it acts as an in depth study of all the variables so the predictions may be more reliable it allows decision makers to identify where they can make improvements in the future however the outcomes are based on assumptions because the variables are based on historical data only complex models may be system intensive and models with too many variables may distort a user s ability to analyze influential variables may help management target specific inputs to achieve more specific resultsmay easily communicate areas to focus on or greatest risks to controlmay identify mistakes in the original benchmarkgenerally reduces the uncertainty and unpredictability of a given undertakingheavily relies on assumptions that may not become true in the futuremay burden computer systems with complex intensive modelsmay become overly complicated which distorts an analysts ability tomay not accurately integrate independent variables as one variable may not accurately the impact of another variable
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what is sensitivity analysis in npv
|
sensitivity analysis in npv analysis is a technique to evaluate how the profitability of a specific project will change based on changes to underlying input variables though a company may have calculated the net present value npv it may want to understand how better or worse conditions will impact the return the company receives
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how do businesses calculate sensitivity analysis
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sensitivity analysis is often performed in analysis software and excel has functions to perform the analysis in general sensitivity analysis is calculated using formulas with different input cells for example a company may perform npv analysis using a discount rate of 6 sensitivity analysis can be performed by analyzing scenarios of 5 8 and 10 discount rates and maintaining the formula but referencing the different variable values
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what is the difference between sensitivity analysis and scenario analysis
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a sensitivity analysis is not the same as a scenario analysis assume an equity analyst wants to do a sensitivity analysis and a scenario analysis around the impact of earnings per share eps on a company s relative valuation by using the price to earnings p e multiple the sensitivity analysis is based on the variables that affect valuation which a financial model can depict using the variables price and eps for a scenario analysis an analyst determines a certain scenario such as a stock market crash or change in industry regulation that would affect the company valuation the bottom line
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what is a series i bond
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series i bonds also known as i bonds are a type of savings bond issued by the u s treasury that offer investors a unique combination of safety and protection against inflation these bonds are considered among the most low risk investments available as they are backed by the full faith and credit of the united states government unlike traditional savings bonds i bonds earn interest through a combination of a fixed rate which remains constant throughout the life of the bond and a variable inflation rate that is adjusted twice a year based on changes in the consumer price index cpi most series i bonds are issued electronically but it is possible to purchase paper certificates with a minimum of 50 using your income tax refund according to treasury direct 1understanding series i bondsseries i bonds are non marketable bonds that are part of the u s treasury savings bond program designed to offer low risk investments their non marketable feature means they cannot be bought or sold in the secondary markets the two types of interest that a series i bond earns are an interest rate that is fixed for the life of the bond and an inflation rate that is adjusted each may and november based on changes in the non seasonally adjusted consumer price index for all urban consumers cpi u 2 i bonds are issued at a fixed interest rate for up to 30 years plus a variable inflation rate that is adjusted each may and november this gives the bondholder some protection from the effects of inflation 3the fixed rate component of the series i bond is determined by the secretary of the treasury and is announced every six months on the first business day in may and the first business day in november that fixed rate is then applied to all series i bonds issued during the next six months is compounded semiannually and does not change throughout the life of the bond 2in addition to the fixed interest rate the variable rate is announced twice a year in may and november and is determined by changes to the consumer price index cpi which is used to gauge inflation in the u s economy the change in the inflation rate is applied to the bond every six months from the bond s issue date 2in effect the interest paid on series i bonds is variable and changes over time making it difficult to forecast the value of the bonds years from today
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how to calculate series i bonds
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the actual rate on the bond known as the composite rate is calculated by combining the fixed and inflation rates the inflation rate impacts the fixed rate set on the bond however the minimum level that the interest rate on a series i bond can fall to is zero which is the floor placed on the bond by the treasury if the inflation rate is so negative that it would take away more than the fixed rate the composite rate will be set at zero the formula for calculating the composite rate is given as composite rate fixed rate 2 x semiannual inflation rate fixed rate x semiannual inflation rate for example if the fixed rate is 0 30 and the semiannual inflation is 2 30 the composite rate on the bond will be however since it is negative in this case the composite ratio will be adjusted to 0 5 27 is the composite interest rate for i bonds issued november 1 2023 to april 30 2024 this includes a fixed rate portion of 1 30 1 inflation adjustments are made 2x each year on may 1 and november 1
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are i bonds good investments
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essentially risk freeinflation protectioninterest is exempt from state and local taxesinterest can be tax free if used for educationcannot be bought and sold on secondary marketlimited dollar cap per person per yearmust be held for at least 1 yearforfeit 3 months interest if redeemed within 5 yearscomparatively low interest rate vs riskier investmentsone of the most significant benefits of series i bonds is the exceptionally low risk associated with them as they are backed by the full faith and credit of the united states government investors can have confidence in the safety and stability of their principal investment another key advantage of i bonds is their ability to protect purchasing power against inflation the variable inflation rate component of the bond s interest rate is adjusted semi annually based on changes in the cpi this means that as inflation rises the interest rate on i bonds also increases helping to preserve the real value of your investment over time in terms of tax benefits i bonds offer several additional advantages the interest earned on these bonds is usually exempt from state and local taxes which can be particularly appealing to investors in high tax states additionally if the proceeds from i bonds are used to pay for qualified higher education expenses the interest may be exempt from federal income taxes as well 4however there are some drawbacks to consider before investing in i bonds with their safety comes a comparatively lower return comparable to a high interest savings account or certificate of deposit cd one main limitation is that these bonds cannot be bought or sold on the secondary market this means that once you purchase an i bond you are committed to holding it until maturity or redeeming it with the treasury subject to certain restrictions liquidity is another factor to consider i bonds must be held for a minimum of one year before they can be redeemed which may not be suitable for investors who require more flexible access to their funds furthermore if i bonds are redeemed within the first five years investors will forfeit the most recent three months of interest as a penalty 5another potential downside is the purchase limit investors are limited to purchasing a maximum of 10 000 in electronic i bonds per year for each social security number the minimum purchase amount is 25 6 an additional 5 000 may be purchased as paper i bonds this cap may be restrictive for investors looking to allocate a larger portion of their portfolio to this type of investment lastly while i bonds offer a relatively attractive interest rate especially during periods of high inflation they may not provide the same long term growth potential as other investment options such as stocks or real estate investors should carefully consider their financial goals and risk tolerance when deciding whether to include i bonds in their portfolio series i bonds and interest incomeinterest income for series i bonds is taxable at the federal level but not at the state and local levels the series i bond is a zero coupon bond meaning that no interest is paid during the life of the bond the interest is instead added back to the value of the bond and earns interest on interest the bondholder has the option of selecting one of two methods of taxation the cash method or the accrual method 7under the cash method tax is only applied when the bonds are redeemed therefore a taxpayer that holds a bond for seven years before selling it will only be taxed at the time the bond is sold using the accrual method on the other hand taxes on the imputed interest earned are applied every year sometimes the series i bond income is tax free at the federal level if it is used to pay for higher education when you sell an i bond and use the proceeds to pay for qualified higher education expenses at an eligible institution in the same calendar year the interest is exempt from federal income tax 7series i bonds vs series ee bonds
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when considering investing in u s savings bonds investors often compare series i bonds and series ee bonds while both bond types are backed by the full faith and credit of the u s government and offer a safe low risk investment option there are several key differences between the two
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one of the most significant differences between i bonds and ee bonds lies in how their interest rates are determined i bonds earn a combination of a fixed rate which remains constant throughout the life of the bond and a variable inflation rate that is adjusted twice a year based on changes in the consumer price index cpi this means that the interest rate on i bonds can fluctuate over time providing investors with protection against inflation on the other hand ee bonds issued after may 2005 earn a fixed interest rate that remains the same for the life of the bond this rate is determined at the time of purchase and is generally lower than the composite rate offered by i bonds however ee bonds come with a unique guarantee if held for 20 years they will double in value effectively providing a 3 5 annual return 8both i bonds and ee bonds have purchase limits but they differ slightly investors can purchase up to 10 000 in electronic i bonds per year for each social security number with an additional 5 000 in paper i bonds if using their tax refund ee bonds have an annual purchase limit of 10 000 in electronic form per social security number but there is no additional purchase limit for paper ee bonds i bonds can be purchased in any denomination starting at 25 with a maximum of 10 000 per transaction ee bonds can be purchased in denominations ranging from 25 to 10 000 both i bonds and ee bonds have a 30 year maturity period composed of an original 20 year maturity followed by a 10 year extended maturity period however there are differences in their redemption rules both ee and i bonds must be held for a minimum of one year before they can be redeemed and if they are redeemed within the first five years investors forfeit the most recent three months of interest both i bonds and ee bonds offer certain tax benefits the interest earned on these bonds is subject to federal income tax but exempt from state and local taxes additionally if the proceeds from either bond type are used to pay for qualified higher education expenses the interest may be tax free at the federal level i bonds are often favored by investors seeking protection against inflation as their variable interest rate helps preserve purchasing power over time they may be particularly attractive during periods of high inflation ee bonds with their fixed interest rate and guaranteed doubling in value after 20 years may appeal to investors with a longer investment horizon who prioritize predictable returns
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where can i buy series i savings bonds
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u s savings bonds including series i bonds can only be purchased online from the u s treasury using the treasurydirect website you can also use your federal tax refund to purchase series i bonds 1
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how much money can i make with an i bond
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suppose an investor purchases 10 000 worth of i bonds when the composite rate is 5 27 this rate includes both the fixed rate and the variable inflation rate if the composite rate remains at 5 27 for the entire year and the interest is compounded semiannually the investor would earn year 1 interest 10 000 1 0 0527 2 2 10 000 10 000 1 02635 2 10 000 10 000 1 0535 10 000 535in this scenario the investor would earn approximately 535 in interest during the first year however it s essential to keep in mind that the composite rate for i bonds is not fixed and can change every six months based on the variable inflation rate if the composite rate fluctuates the actual interest earned may be higher or lower than in this example also note that early redemptions will incur penalties
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what tax form do i need to fill out if i purchase u s series i savings bonds with my tax refund
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if you use your income tax refund to purchase u s savings bonds complete and file irs form 8888 with your tax return 9 the irs will arrange for your u s savings bonds to be mailed to you
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what has been the historical interest rates for series i u s savings bonds
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the composite rate for i bonds will depend on when they were issued and the inflation rates that they have experienced 10 therefore you will need to consult a table showing the historical fixed and variable components depending on the issue date 11
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how long does it take for a series i bond to mature
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these bonds are issued at face value with a 30 year final maturity a 20 year original maturity period immediately followed by a 10 year extended maturity period 1the bottom lineseries i bonds offer a unique investment opportunity for those seeking a low risk inflation protected investment backed by the u s government with a combination of a fixed rate and a variable inflation rate i bonds can help preserve purchasing power over time making them an attractive option for risk averse investors however investors should be aware of the limitations such as the annual purchase limit the one year minimum holding period and the three month interest penalty if redeemed within the first five years additionally while i bonds offer the potential for competitive returns during periods of high inflation they may not provide the same long term growth prospects as other investment vehicles such as stocks corporate bonds or real estate ultimately the decision to invest in i bonds should be based on an individual s financial goals risk tolerance and overall investment strategy
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what is the series 3
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the series 3 is an exam also known as the national commodities futures examination administered by the financial industry regulatory authority finra on behalf of the national futures association nfa candidates who pass the exam are eligible to register with the nfa and sell commodity futures contracts and options on commodity futures contracts the series 3 is one of a number of exams for investment professionals administered by finra including the series 7 general securities representative exam which is required for brokers who wish to sell corporate government or other types of securities
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how the series 3 works
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the series 3 exam covers topics that commodities brokers need to know such as options futures hedging and margin requirements as well as market and regulatory rules the exam consists of 120 multiple choice questions in two parts and candidates have two hours and 30 minutes to complete it unlike the series 7 exam candidates do not need to be sponsored by a firm in order to take the series 3 candidates must achieve a score of around 70 in each part to pass the exam there is no official pass rate but the widely accepted pass rate is around 70 those who fail to pass may take the exam over again although they may be subject to a waiting period the exam costs 130 anyone who wants to sell commodity futures contracts must generally pass the series 3 exam the nfa a self regulatory organization for the u s derivatives market requires anyone who is applying for nfa membership as a futures commission merchant fcm retail foreign exchange dealer rfed introducing broker ib commodity pool operator cpo or commodity trading advisor cta leverage transaction merchant ltm or as an associated person ap of these entities to satisfy proficiency requirements in most cases individuals seeking nfa membership or registration as an associated person must pass the series 3 exam within two years before they apply that s unless to sign up for any futures industry exams an applicant must apply online at the finra website typically finra will notify directly the nfa that an individual has passed one of the futures industry exams in some circumstances however the nfa may request that candidates provide proof that they passed alternatives to the series 3rather than the series 3 individuals may be eligible to take other exams and pursue other registration options based on their registration status and the nature of the business they conduct those include other certification exams related to the series 3 are the series 30 nfa branch manager examination and series 34 retail off exchange forex examination the series 3 is not considered a prerequisite or corequisite for any of these other exams for more information on the series 3 and other futures industry exams visit the nfa s proficiency requirements page and for more details on taking the test visit finra s on the day of your qualification exam resource page
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what is the series 6
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the series 6 is a securities license entitling the holder to register as a company s representative and sell certain types of mutual funds variable securities and insurance holders of the series 6 license are not authorized to sell corporate or municipal securities direct participation programs and options with a series 6 an financial professional can purchase or sell certain types of mutual funds variable life insurance municipal fund securities variable annuities and unit investment trusts uits understanding series 6the series 6 is a license sought by professionals in the financial services industry jobs utilizing the series 6 license include financial advisors retirement plan specialists investment advisors and private bankers in order to obtain the series 6 license candidates must pass the investment company variable contracts products limited representative series 6 exam the securities industry essentials sie exam is a corequisite for the series 6 exam the sie does not require firm sponsorship the financial industry regulatory authority finra administers the series 6 exam it covers topics such as mutual funds variable annuities securities tax regulations retirement plans and insurance products a passing grade is achieved by correctly answering at least 35 of 50 questions within 90 minutes five additional questions are unscored for a total of 55 questions the test costs 40 and it is administered via computer with no reference material allowed candidates used to take the series 6 exam in person at prometric test centers however finra began offering tests including the series 6 exam online in 2020 prometric also administered the online tests however candidates or their employers had to install specialized software on their computers and provide cameras 1 note however that a series 6 expires two years after employment unless under special circumstances such a military deployment
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what does the series 6 allow you to do
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the finra series 6 license allows an individual to act as a registered representative and sell mutual funds variable annuities and unit investment trusts uits these types of investment products are considered to be relatively simple and are often suitable for individual investors who are looking for a way to diversify their portfolios or save for long term financial goals such as retirement holding a series 6 license does not allow an individual to sell other types of securities such as stocks bonds and options if an individual wants to sell these types of securities they would need to obtain a different securities license such as the finra series 7 license individuals who hold a series 6 license may be responsible for providing investment advice and recommendations to clients as well as processing transactions and maintaining accurate records of their activities but limited to the types of securities covered in this license series 6 licensees may work for a brokerage firm bank insurance company or other financial institution and may also be required to adhere to certain ethical and legal standards in the course of their work series 6 vs series 7the series 6 exam is often compared to the series 7 exam the series 6 costs substantially less money and has a shorter test covering less material however a series 6 license is all that some financial advisors investment advisors and retirement planners need such advisors may only need a series 6 license if they just sell insurance annuities and certain types of mutual funds not individual stocks series 6 holders however are not authorized to sell stocks exchange traded funds etfs or bonds this is a significant drawback because etfs generally offer lower fees and are increasingly replacing mutual funds as the preferred investment vehicles among retail investors financial advisors and retirement planners who want to sell etfs must obtain a series 7 license which requires taking a longer and more comprehensive exam that costs more money in comparison to the series 6 the series 7 license is generally considered to be more comprehensive and useful and may open up more job opportunities in the securities industry however the series 6 license may be sufficient for some individuals who are interested in selling mutual funds variable annuities and uits and do not need to sell other types of securities requirements for series 6candidates must be sponsored by a member of finra or a self regulatory organization sro to take the exam there is no prerequisite for the exam but the securities industry essentials sie exam is a corequisite for series 6 before oct 2018 the exam was 100 questions and didn t have the sie corequisite today the series 6 exam contains 50 questions upon receiving a passing grade candidates must then register with finra through their sponsoring firm in order to transact authorized securities holders of the series 6 are considered limited representatives of their sponsoring firm as a limited representative they can sell certain types of mutual funds variable annuities and variable life insurance the exam has a 90 minute time limit and consists of 50 multiple choice questions 2 the passign grade is 70 as outlined by finra the series 6 exam covers four specific sections 3licensees must fulfill continuing education requirements and receive sponsorship from a finra registered company to keep their series 6 licenses 4finra s continuing education program includes two elements a regulatory element and a firm element on the regulatory side finra requires licensees to complete a computer based training session within 120 days of the second anniversary of registration finra also requires a computer based training session every three years after that the firm element requires broker dealers to establish and maintain a continuing education program
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is series 6 or 7 exam harder
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the finra series 7 exam is generally considered to be more difficult than the series 6 exam the series 7 exam covers a broader range of topics and requires a deeper understanding of the securities industry and financial markets
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how much does the series 6 exam cost
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as of 2022 the series 6 exam costs 75 2
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how long is a series 6 good for
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the finra series 6 license is valid for the duration of your employment with a finra member firm as long as you remain registered and in good standing with finra if you leave the firm or your registration lapses your series 6 license will no longer be valid after two years an individual who holds a series 6 license must complete a certain number of continuing education ce credits in order to renew their license the number of ce credits required for renewal depends on the specific requirements of the state in which the individual is licensed in general continuing education is required to ensure that registered representatives stay up to date on the latest developments in the securities industry and maintain their knowledge and skills completing ce credits can also help individuals maintain their professional licenses and stay in compliance with regulatory requirements the bottom linethe finra series 6 is a securities license that allows an individual to act as a registered representative and sell mutual funds variable annuities and unit investment trusts uits to obtain a series 6 license an individual must pass the series 6 examination which is administered by the financial industry regulatory authority finra the series 6 exam covers topics such as types of securities regulatory agencies and investment risks it is typically taken by individuals who are starting careers in the securities industry and who want to sell these types of investment products
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the series 7 exam licenses the holder to sell all types of securities products except commodities and futures known formally as the general securities representative qualification examination the series 7 exam and its licensing is administered by the financial industry regulatory authority finra 1
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stockbrokers in the united states need to pass the series 7 exam to obtain a license to trade the series 7 exam focuses on investment risk taxation equity and debt instruments packaged securities options retirement plans and interactions with clients for prospective securities industry professionals 2 this introductory level exam assesses a candidate s knowledge of basic securities industry information including concepts fundamental to working in the industry 1the purpose of the series 7 license is to set a level of competency for a registered representative or stockbroker to work in the securities industry the series 7 license is an essential requirement for an entry level broker the licensing exam covers an extensive range of financial terms and topics as well as securities regulations 1candidates who pass the series 7 exam can trade many securities such as stocks mutual funds options municipal securities and variable contracts the series 7 license does not cover selling real estate or life insurance products 1 in addition to obtaining the series 7 license many states require that registered representatives pass the series 63 exam also called the uniform securities agent state law exam 34series 7 requirementssince oct 1 2018 series 7 candidates are required to pass the securities industry essentials sie exam as well as the series 7 exam in order to receive the general securities registration 15 according to finra the sie is an introductory level exam that assesses a candidate s knowledge of basic securities industry information including concepts fundamental to working in the industry such as types of products and their risks the structure of the securities industry markets regulatory agencies and their functions and prohibited practices if you need more information on the sie finra s sie exam content outline provides more details 6candidates who want to take the series 7 exam must be sponsored by a finra member firm or other applicable self regulatory organization sro member firm the member firm must file a form u4 uniform application for securities industry registration or transfer form for the candidate to be registered for the licensing exam non finra members should use the test enrollment services system tess in order to register for the exam 7 finra governs the activities of securities firms and registered brokers ensuring that anyone who sells securities products is qualified and tested 1candidates who want to take the series 7 exam must be sponsored by a finra member firm or other applicable self regulatory organization sro member firm 1series 7 exam structurethe series 7 is structured as follows the series 7 exam has 125 multiple choice questions lasts 225 minutes and cost 300 the passing score is 72 1prior to oct 1 2018 the series 7 exam contained 250 questions covering five major job functions 8 the exam duration was six hours had no prerequisites and cost 305 a score of 72 was required to pass finra does not provide candidates with any physical certificate as proof of exam completion current or potential employers who wish to view proof of completion must access this information through finra s central registration depository crd 9completion of the series 7 exam is a prerequisite for many other securities licenses such as the series 24 which permits the candidate to supervise and manage broker activities 10
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what is series 9 10
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series 9 10 refers to a two part securities exam and license entitling the holder to supervise sales activities at a general securities oriented branch office before taking the series 9 10 exams also known as the general securities sales supervisor qualification exams a candidate must have a series 7 license 1the series 9 10 covers topics such as the supervision of options and general securities sales and trading practices in primary and secondary markets the series 9 10 exams are administered by the financial industry regulatory authority finra and were formerly known as the series 8 exam as the name would suggest the exam is broken into two parts the series 9 is the shorter and covers options sales and trading as well as regulation and administration series 10 represents a deeper dive into a similar but broader range of topics and requirements 1series 9 10 permitted activitiesthe series 9 10 is designed to protect the investing public by measuring the competency of general securities sales supervisors and ensuring their expertise in the following areas sale of corporate securities rights warrants closed end funds money market funds reits asset backed securities mortgage backed securities corporate equity options options on corporate backed securities mutual funds variable annuities and variable life insurance government securities repos and certificates of accrual on government securities direct participation programs 2series 9 10 eligibilityseries 9 10 candidates must be registered with a finra member firm or other self regulatory organization and must already have passed the series 7 general securities representative test 1series 9 10 test contentthe series 9 10 exam consists of 215 multiple choice questions in four major content areas 60 questions for the series 9 and 145 questions for the series 10 this total includes 15 unscored questions randomly placed in each part five in the series 9 and 10 in the series 10 candidates are allocated 90 minutes to finish the series 9 and four hours to complete the series 10 there is no penalty for guessing so candidates should endeavor to answer every question the test is administered via computer and a score of 70 is required to pass for more on the exam see finra s content outline for the series 9 10 3questions are frequently changed or updated based on the introduction of new rules and amendments below are the job functions the exam tests for as well as the number of scored questions covering that function series 10 part 1 series 9 part 2 series 9 10 exam sample questionsbelow are samples finra has provided of the questions types formats and the subject matter a series 9 10 test taker is likely to encounter the correct answers are noted with an asterisk example 1 which of the following items is considered retail communication a electronic communication distributed to institutional investors on a daily basis b social media communication with institutional investors on a daily basis c written communication distributed to 10 retail investors within a 30 day period d written communication distributed to more than 25 retail investors within a 30 day period 4example 2 a qualified person must inspect an office of supervisory jurisdiction osj at least a quarterly b annually c every two years d every three years4example 3 listed equity options would not be adjusted for which of the following actions in the underlying security a a 2 for 1 stock split b a 1 for 5 reverse stock split c a stock dividend of 5 d a cash dividend of 0 50 4the difference between series 9 10 and series 24both series 9 10 and 24 are the exams that must be completed by a principal before they can undertake certain sales activities according to the financial industry regulatory authority finra a principal who has completed the series 24 examination is qualified to supervise the following sales activities corporate securities rights warrants closed end funds money market funds reits asset backed securities corporate mortgage backed securities mutual funds variable annuities and variable life insurance direct participation programs securities traders venture capital mergers and acquisitions and corporate financing 1finra indicates that a principal who has completed the series 24 exam is also qualified to supervise in addition to sales the overall investment banking and securities business of a member firm completion of the series 9 10 examination which covers more terrain qualifies a principal excluding securities traders and those involved in venture capital mergers and acquisitions and corporate financing to supervise sales in all of the above as well as the following equity options options on corporate mortgage backed securities government securities repos and certificates of accrual on government securities municipal securities and municipal fund securities 1
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what is the series 24
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the series 24 is an exam and license entitling the holder to supervise and manage branch activities at a broker dealer it is also known as the general securities principal qualification examination and was designed to test the knowledge and competency of candidates aiming to become entry level securities principals supervisory activities allowed after passing the exam include regulatory compliance over trading and market making activities underwriting and advertising 1
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how the series 24 works
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the series 24 exam is administered by the financial industry regulatory authority finra and covers topics such as corporate securities real estate investment trusts reits trading customer accounts and regulatory guidelines in order to be eligible for a principal registration a candidate must pass the series 24 exam the securities industry essentials sie exam and one of the following five representative level qualification exams series 7 57 79 82 or 86 87 candidates can also pass the series 24 and series 16 exams but not the sie and qualify for the research principal registration 1the series 24 examthe examination contains 150 scored questions and 10 questions that are not scored with the non scored questions randomly distributed throughout the exam to pass a candidate must correctly answer at least 105 questions of the 150 scored questions this equates to a score of 70 the test administrator provides electronic calculators and dry erase boards and markers no other calculators references or study materials are permitted in the examination room 1candidates have a maximum time of three hours and 45 minutes to complete the exam a finra member firm or other applicable firms can register a candidate to take the exam by filing a form u4 and paying the 120 examination fee 2special considerationsthe series 24 content is grouped into the five main job functions that a general securities principal engages in regularly at work for a broker dealer those job functions include
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how hard is the series 24 exam
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the series 24 is a very hard exam although there are no official pass rates or figures a quick search will bring up forums of those who have taken and the general consensus is that it is one of the hardest financial exams and requires a serious time commitment to studying and a deep understanding on the knowledge required to achieve the required 70 passing grade 3
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what is the series 24 pass rate
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the pass rate for the series 24 is not published however many who sit for the exam consider it very difficult compared to the prerequisite exams this is why study prep courses and finra itself recommend an extended period of time to prepare for the intense exam
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what are the requirements to get additional time on the series 24 exam
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there is no information on the finra website regarding extra time for the series 24 exam however it is designed and structured in a way that exam takers should have plenty of time to answer all the questions and return to ones that they missed or had reservations about
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do i need a series 79 if i have a series 24
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yes a series 79 exam is one of the prerequisites that must be taken before passing a series 24 exam you could also obtain an sie and a series 7 an sie and a series 57 an sie and a series 82 and an sie and a series 86 and 87 you could also forgo the sie and a complement and sit for the series 16 as a standalone prerequisite if you have only the series 79 and the sie then the principal registration you would be able to acquire would be investment banking principal bp 1the bottom linethe series 24 exam is a difficult exam that requires substantial prerequisites before a candidate can sit for the exam a candidate needs to be sponsored by a finra member or other applicable self regulatory organization those who decide to pursue the exam do so in order to regulate compliance for advertising market making trading and underwriting
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what is series 57
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series 57 also known as the securities trader representative exam is an examination administered by the financial industry regulatory authority finra passing the series 57 exam is a requirement for those who wish to become professional traders of either equities or convertible debt securities
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how series 57 works
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the purpose of the series 57 exam is to protect the public by ensuring that professional traders meet a required standard of professional knowledge and competency in addition to the series 57 exam would be traders must also pass the securities industry essentials sie exam once both are completed entry level traders are certified to conduct trading on the nasdaq exchange or over the counter otc transactions and may also conduct proprietary trading activities 2 the series 57 exam is designed to reflect the current technologies and practices of professional securities traders as such its questions are drawn from interviews with real world practitioners and trading firms active in the field by continuously updating the series 57 exam in light of new developments in the industry finra hopes to ensure that those who pass the exam will be well equipped to work with the public in both a competent and ethical manner in order to take the series 57 exam candidates must be affiliated with and sponsored by a finra member firm or other self regulatory organization sro the candidate must also pass the sie to become registered as a securities trader 2the series 57 exam has received several updates over the year that reflect ongoing changes in the industry the most recent substantial change to the exam occurred in january 2017 when new sections regarding high frequency trading hft were added this was done in the wake of various news stories involving unethical behavior by some hft firms 3 this change only affects new series 57 candidates whereas those who passed the previous versions of the exam are not required to be re tested on the new material example of series 57dorothy is an intern at a financial firm that offers investment management services for their clients accounts during her internship dorothy learns from the firm s authorized traders and develops an interest in trading stocks and convertible debt securities she also becomes interested in algorithmic trading techniques such as hft as an intern dorothy lacks the authorization to engage in these types of trades directly to help further her career she therefore decides to take the series 57 and sie exams to pass the series 57 she must answer 50 multiple choice questions in 105 minutes answering at least 70 of them correctly each question has only one best answer and they range in degree of difficulty among them 82 consist of questions about trading activities while 18 consist of questions regarding administrative activities such as maintaining accurate records and correctly reporting on trades 1 once she has obtained her series 57 and sie certifications dorothy will be free to pursue professional roles as a trader of equity and convertible debt securities for this reason she views the series 57 and sie examinations as an important stepping stone in her future career
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what is the series 63
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the series 63 is a securities exam and license entitling the holder to solicit orders for any type of security in a particular state to obtain a series 63 license the applicant must pass an exam and possess knowledge of ethical practices and fiduciary obligations understanding series 63as of dec 2018 the north american securities administrators association nasaa which creates the series 63 exam had updated its questions in light of recent changes to the tax code questions based on the 2018 tax code were phased out in january 2019 questions for the series 65 and series 66 exams were also updated the series 63 formally known as the uniform securities agent state law examination is a registered exam that is required of all potential registered representatives in most of the u s states however colorado district of columbia florida louisiana maryland ohio and puerto rico do not require the series 63 the exam was developed to qualify candidates who want to work in the securities industry within a state and to sell investment products such as mutual funds variable annuities and unit investment trusts the exam covers the principles of state securities regulations each state has its own securities regulations called blue sky laws which were developed to regulate the sale of securities agents must acquire the series 63 license in addition to a series 7 or series 6 license to sell securities requirements for series 63the financial industry regulatory authority finra administers the series 63 exam there are 60 multiple choice questions on the exam the passing score is 72 or 43 of the 60 questions the candidate must complete the exam within the allotted time of 75 minutes as of march 2020 it costs 135 to take the exam the north american securities administrators association nasaa developed the exam along with representatives of the securities industry candidates for the exam need to be familiar with the uniform securities act of 1956 and the nasaa statement of policy and model rules the series 63 is an entry level exam there are no prerequisites for the exam after completing the form u 10 the series 63 exam covers the principles of state securities regulations and rules prohibiting dishonest or unethical practices some 45 of the questions pertain to regulations 10 to administrative provisions 20 to customer communication and 25 to ethical practices and business obligations the topics on the exam include registration of various persons and securities and fiduciary responsibility with client funds and securities for more see nassa s test specifications successfully completing the securities industry essentials exam sie is required to be eligible to take the series 7 and series 6 license exams but not the 63 to sell securities broker dealers must obtain the series 63 license as well as the series 7 or series 6
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what is the series 65 exam
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designed by the north american securities administrators association nasaa and administered by the financial industry regulatory authority finra the series 65 is an exam and securities license required for individuals to act as investment advisers in the us the series 65 exam known formally as the uniform investment adviser law examination covers laws regulations ethics and various topics important to the role of a financial adviser understanding the series 65 examsuccessful completion of the series 65 exam is designed to qualify candidates as investment adviser representatives iars in their home states as an iar advisors must act in a fiduciary capacity offering investment advice to clients for a fee passing the series 65 exam formally known as the uniform investment advisor law exam is the only requirement for becoming an iar there are no prerequisites and candidates do not need to be sponsored by an investment firm to sit for the exam but they need to file a form u10 form u4 for brokers and pay the 187 exam fee 1the series 65 exam includes 130 questions that cover topics determined to be necessary to understand in order to provide investment advice to clients these include questions on the subjects of economics financial markets investment vehicles investment strategies analysis and ethics 1if you are not charging a fee and you do not regularly provide advice on securities then you most likely do not need to get your series 65 license other finra administered qualification examinations include the series 3 national commodities futures ncfe series 7 general securities representative gs and series 63 uniform securities agent state law financial professionals who have successfully passed the series 65 exam may not act as investment advisers until licensed and registered in their state series 65 exam structurethe series 65 examination contains 130 multiple choice questions candidates have 180 minutes to complete the exam candidates must get 92 of the 130 questions correct to pass a score of 70 1test takers must schedule an exam at a qualified testing center where they are provided with a basic four function electronic calculator only this calculator may be used during the exam dry erase boards and markers are also provided for candidates no reference materials of any kind are permitted in the exam room and there are severe penalties for those who are caught cheating or attempting to cheat an individual s firm can schedule a candidate to take the exam by filing form u4 and paying the 187 examination fee if an individual is not firm registered the candidate uses form u10 to request and pay for the exam if you only have a series 65 license you can give financial advice but you cannot sell securities execute trades on behalf of clients or manage portfolios to do so you will also need to pass the finra series 7 exam which is more intensive series 65 exam contentnasaa provides updated information on the exam s content on its website the exam is structured as follows 2there are several resources in book form or online to help study and prepare for the series 65 exam candidates are encouraged to devote between 50 to 70 hours to studying for the exam unlike many other securities exams preparing for the series 65 exam primarily involves memorizing rules and laws people with good recall might require less preparation time than those who struggle with recall regardless some exam sections are more challenging than others especially for people with no background in securities in addition investopedia has reviewed several of the best series 65 test prep courses which you can find here series 65 vs series 63 vs series 66the nasaa offers three exams series 65 series 63 and series 66 the series 65 was the first exam created by nasaa back in 1989 used to evaluate the competency of individuals who wanted to engage in commission or fee based investment advisory services such as being a financial advisor or ria at the time it was launched it focused primarily on the uniform securities act nasaa rules and ethical practices in the securities industry the series 63 was developed to qualify candidates who wished to work in a state s securities industry and sell investment products such as stocks mutual funds variable annuities and unit investment trusts in other words to execute trades rather than give out financial advice 3the exam covers the principles of state securities regulations and laws and is formally known as the uniform securities agent state law examination 3the series 66 is a newer nasaa exam that combines subject matter from both the series 63 and the series 65 and is fittingly known as the combined state law exam test takers of the series 66 must also take the finra series 7 licensing exam which is not a co requisite of the series 63 or 65 although many individuals will still need the series 7 to operate legally 314
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does the series 65 license expire
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no the series 65 license does not expire as long as you are actively working in the financial services industry if you leave the industry for more than two years your new employer may require you to pass the series 65 exam again
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do i need a sponsor to take the series 65
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no to sit for the series 65 exam a candidate does not require sponsorship by a member firm
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how much does the series 65 exam cost
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the cost of taking the series 65 exam is 187 you ll need a passing score of 70 but if you fail you can pay the exam fee again and retake the test after 30 days 15can i become an iar without taking the series 65 yes but you will instead need to take the series 7 and series 66 exams
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is the series 65 a hard exam
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the nasaa does not release official pass rates however test preparation programs estimate that the pass rate is around 65 to 70 of test takers 6the bottom linethe series 65 officially known as the uniform investment adviser law exam is designed to test an individual s knowledge and ability to advise clients in the area of investing and to discuss general financial concepts the series 65 exam tests candidates comprehension of financial concepts and qualifies them to give investment advice and charge a fee for doing so most state securities regulators have set the series 65 as the minimum requirement to become an investment advisor representative iar
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what is series 66
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series 66 the nasaa uniform combined state law examination is an exam and license that is meant to qualify individuals as investment advisor representatives iars or securities agents the series 66 covers topics relevant to providing investment advice and effecting securities transactions for clients once licensed iars can legally conduct financial advising and wealth management duties the series 66 exam is developed by the north american securities administrators association nasaa along with the series 63 and series 65 exams it is administered by the financial industry regulatory authority finra 1understanding the series 66the series 66 certification was developed by the nasaa based on requests from the industry the exam is administered by the financial industry regulatory authority finra which is also responsible for processing and disseminating test results finra s series 7 exam is a co requisite of the series 66 which means it needs to be successfully completed along with the series 66 before a candidate may apply to register in a state the series 7 must be successfully completed before taking the series 66 individuals who have passed the series 7 may take the series 66 to avoid having to take the longer and possibly more difficult series 65 exam series 66 exam and structurethe series 66 examination contents include 100 multiple choice questions that are scored and 10 pretest questions that are not scored candidates have a maximum time of 150 minutes 2 hours to complete the examination to obtain a passing score a candidate must correctly answer 73 of the 100 questions that are scored 73 the exam administrator provides electronic calculators for candidates to use and these are the only calculators allowed in the exam room a dry erase marker and a whiteboard are provided no study or reference materials of any kind are permitted in the examination room and there are harsh penalties for anyone caught cheating or attempting to cheat an individual s employer can register a candidate for the exam by filing either a form u4 or form u10 and paying the 177 examination fee finra s series 66 informational web page has additional details as of oct 21 2022 you must take the series 66 in person at a qualified testing center the series 66 qualification exam is available online only for candidates who provide medical proof that they cannot take exams in testing centers due to a disability or other qualifying issue 23harsh penalties are imposed on anyone caught cheating or attempting to cheat on the series 66 exam series 66 exam contentthe nasaa updates information on the exam s content and posts it online as of october 2022 the exam questions are allocated as follows 4
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what does the series 66 allow you to do
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passing the series 66 exam licenses financial professionals to carry out work as an investment advisor representative iar or securities agent with state level authority with the series 66 license financial professionals can legally act in the capacity of investment advisors or wealth asset managers
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is the series 65 harder than the series 66
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the series 65 is another iar licensing credential offered by the north american securities administrators association nasaa the series 66 exam is relatively new it was created by nasaa in response to requests from broker dealers and other financial services firms it is essentially a combination of series 63 and series 65 but since a co requisite for taking the exam is successful completion of the series 7 exam it does not include the product analysis and strategy questions that are a large part of the series 65 while the pass fail rates for these exams are not publicly available many consider the series 66 exam less difficult than the series 65 because it has 30 fewer questions and does not include topics from the series 7
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how difficult is the series 66 exam
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the series 66 is difficult since it covers a wide breadth of detailed material the official pass rates for the series 66 exam are not officially published however test prep programs estimate the pass rate to be around 65 to 70 of test takers 5 if you fail the exam you must wait at least 30 days before attempting it again
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how much does the series 66 cost
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taking the series 66 exam costs 177 as of 2022 6 if you work for a financial firm they may cover the exam cost on your behalf the bottom linethose who want to become professional investment advisors or money managers need to pass both the finra series 7 and nasaa series 66 exams although you can also take both the series 63 and series 65 in lieu of the 66 the series 66 combines material from both the series 63 and series 65 exams in a 100 question multiple choice format test takers have 150 minutes and must score 73 or better to pass once you pass you can legally transact in securities and give securities related advice in all states
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what is series b financing
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series b financing is the second round of funding for a business through investment including private equity investors and venture capitalists successive rounds of financing a business are consecutively termed series a series b and series c financing the series b round generally takes place when the company has accomplished certain milestones in developing its business and is past the initial startup stage investopedia michela buttignol
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how series b financing works
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in a series b financing round companies have advanced their business resulting in a higher valuation by this time companies can seek various ways to raise funds in a series b financing round series b investors usually pay a higher share price for investing in the company than the earlier investors through the series a financing round series a financing involves capital raising for startups with a solid business model series a funds are usually from private equity firms and are used to expand operations by buying equipment and inventory as well as hiring staff series a funding is considered seed capital since it s designed to help new companies grow like series a rounds the capital for series b rounds usually comes from venture capital or private equity funds in many cases the same investors that provided the series a funding may offer additional contributions during the series b round while newer investors may choose to invest now that the company is more established series b financing is the next stage of funding after the company has had time to generate revenue from sales investors have a chance to see how the management team has performed and whether the investment is worth it or not as a result series b financing tends to have less risk associated with it versus series a financing however series a financiers get in at a lower share price to help compensate for that risk series b equitypublicly traded companies can raise capital or money by increasing the number of equity shares issued on the open market however one of the drawbacks of raising funds via the issuance of new shares can be share dilution dilution occurs when the existing shareholders see their percentage of ownership decrease as a result of new shares being issued dilution can lead to a lower stock price and valuation which can be disconcerting for early investors to help mitigate the risks of dilution series b equity investors typically prefer to receive convertible preferred stock versus common stock the preference stems from the various anti dilution features that are available for preferred stock investors also preferred stockholders are paid dividends before common stockholders dividends are cash payments from the company to its shareholders series b financing resourcesin addition to the public markets businesses have an increasing number of fundraising resources for which they can obtain capital in series b funding companies often utilize their previously pursued fundraising channels due to familiarity and reporting convenience in some cases the early investors from the series a financing may want to up their stake in the company by lending them more money for startups and small businesses series b financing funding can come from private equity investors venture capitalists and credit investments direct capital raising from private equity investors and venture capitalists may require some specific investment constraints such as a percentage of capital limit from each investor overall small businesses have a growing number of options from which to choose when raising capital at all stages of financing in series b financing companies can select new financing methods that better fit their current situation or repeat similar funding methods as used in series a financing series b financing via crowdfundingas companies grow and produce revenue they can also attract new sources of funding through crowdfunded equity in the crowdfunded market businesses can offer their company for investment to an unconstrained market of retail private equity venture capital and institutional investors businesses can also receive loans from crowdfunded investors including the general public these investing activities transact through an internet finance platform operated by a crowdfunded internet finance provider the provider connects companies with investors at low costs to both parties due to the minimized cost structures achieved through internet finance operations crowdfunded investments have become popular in the small business sector thanks to federal government support and the jumpstart our business startups jobs act 1 these investments also have limitations on fundraising levels and capital allowances per investor however crowdfunded investments provide a wider market from which businesses can receive money real world examples of series b fundingalthough there are many examples of companies receiving private funding two key sectors continue to be technology and healthcare below are three examples of series b financing in february 2019 mountain view california based robotics company nuro raised 940 million in a series b round from the softbank vision fund giving it a valuation of 2 7 billion the company founded in 2016 previously raised 92 million in series a funding co led by gaorong capital and greylock partners 2zoox a self driving technology development company founded in 2014 raised 500 million through series b funding in july 2018 the series b funding round was led by mike cannon brookes of grok ventures and gave the company a 3 2 billion valuation in total zoox has raised 800 million 3founded in 2017 devoted health raised 300 million through series b funding in october 2018 the waltham massachusetts based insurance startup secured the funds from lead investor andreessen horowitz premji invest and uprising devoted health serves seniors and offers various medicare advantage plans 4
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when does a series b financing round happen
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for the average company it takes from 10 to 18 months to get from the series a round to the series b round according to data from arc ventures however only 66 of companies that complete a series a round will make it to series b the rest either fail or do not raise further capital 5
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how much equity does a typical company offer during series b financing
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during the series b and c rounds most companies sell about 15 of their total equity according to figures from equidam 6
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how much do most companies raise in series b
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in 2021 the average series b financing round raised 45 million in the united states according to data from crunchbase that s up nearly 50 from the prior year 7the bottom lineseries b financing is the third round of equity financing for new companies most startups are already well established by the time they look for series b funding with reliable cash flows and a viable product investments in a series b round tend to be less risky than series a financing
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what is a series ee bond
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the series ee bond often referred to as a patriot bond is a non marketable interest bearing u s government savings bond these bonds are guaranteed to at least double in value over the typical 20 year initial term some series ee bonds have total interest paying lives that extend beyond the original maturity date up to 30 years from issuance coupon rates for series ee bonds are determined at the time of issuance and are based on the percentage of the long term treasury rates
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how a series ee bond works
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along with the series i bond the series ee bond is one of the two types of savings bonds issued by the us treasury series ee bonds cannot be bought or sold in the open market and are hence classified as non marketable securities series ee bonds issued after may 2005 are assigned semi annual fixed coupon rates on may 1 and november 1 the rates apply to all issuances for the ensuing six months bonds issued after each date increase in value monthly but interest payments are handed out semiannually series ee bonds are considered ultra safe low risk investments whose interest is typically exempt from state and local taxes however they are subject to federal taxes but only in the year in which the bond matures or is redeemed ee bonds may be purchased by u s citizens official u s residents minors and all u s government employees regardless of their citizenship status special considerationspaper ee bonds were re issued as patriot bonds after the sept 11 2001 terrorist attacks they are identical in every way to the paper series ee bonds except that any paper bonds purchased through a financial institution after dec 10 2001 have the words patriot bond printed on the top half of the bond certificate situated between the social security number ssn and the issue date financial institutions no longer issue series ee bonds in paper form but the paper patriot bonds can still be cashed or converted into electronic bonds series ee bonds don t need to be reissued to correct small typographical errors in names addresses or social security numbers requirements for a series ee bondthere is a 25 minimum investment requirement for ee bonds and each investor may purchase up to 10 000 in these bonds each calendar year furthermore bondholders must hold onto these investments for at least twelve months before they can redeem the bonds those who redeem bonds within five years will be docked three months of accrued interest payments since ee bonds earn interest for up to 30 years the longer they re held the more they re worth paper bonds were issued at a 50 discount to par while bonds electronically sourced through treasurydirect are purchased at face value the latter is still guaranteed to be worth twice their original value at first maturity date after 20 years while paying interest the same way as paper ee bonds
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what is a service charge
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a service charge is a fee collected to pay for services related to the primary product or service being purchased the charge is usually added at the time of the transaction many industries collect service charges including restaurants banking and travel and tourism when collected these charges may cover services rendered to the consumer or they may cover administrative or processing costs service charges are paid directly to the company they are different from tips which are paid to the employee who renders the service paying a tip and the amount is wholly up to the customer understanding service chargesservice charges are additional charges related to the purchase of a product or service they are generally collected at the time the transaction takes place between the consumer and the company for example a concert venue may charge a service fee in addition to the initial price of a ticket at the time of purchase in order to cover the cost of security or for providing the convenience of electronic purchases service charges are also called service fees they go by a number of different names depending on the industry including booking fees hotels security fees travel maintenance fees banking and customer service fees types of service chargesmost hotels and restaurants in the u s charge a service fee that s a percentage of the total bill often in lieu of tipping the delivery fee charged for ordering room service at a hotel or a gratuity applied to the bill for a large group dining at a restaurant are examples of service charges if the total bill on an order is 250 and gratuity is stated to be 18 then the total bill to be paid is 250 18 x 250 295 the banking industry charges a number of different services charges which are typically set at a flat standard rate when you open a checking or savings account with a bank the bank charges a monthly maintenance fee this fee is debited from the account at the end of the month banks also charge service charges for using the atm of a competing bank or when initiating a wire transfer airlines collect a number of service charges some of which include checked or oversized baggage fees change or cancellation fees early seat selection fees and inflight experience charges such as wifi food beverage and entertainment an airport improvement fee or embarkation fee is a service charge applicable to departing and connecting passengers at an airport it is levied by the government or an airport management corporation and the proceeds are usually intended for funding of major airport improvements or expansion of airport services depending on the location the airport improvement fee is included in the cost of a traveler s airline ticket in which case the airline will forward the fee to the proper agency however in some locations the fee must be paid at the point of embarkation renting or leasing certain types of residential properties may have a service charge affixed to the monthly rent for example the tenant of a condo unit may be required to pay a condo fee on top of the rent the condo fee is a service charge for general cleaning and maintenance of the building online rental platforms that link renters to property owners such as airbnb have service charges to cover the payment fees associated with the reservation the service charge is usually calculated as a percentage of the subtotal and applies to renters and owners service charges versus tipsaccording to the internal revenue service irs there is a big difference between service charges and tips an amount imposed on the customer including automatic gratuities added to the bill is considered a service charge the irs classifies the following as service charges banquet event fees automatic gratuities added for large parties at restaurants and other dining facilities hotel room charges bottle charges and cruise trip package fees employers are required to report service charges to the irs in the same fashion as other wages tips on the other hand are discretionary if a consumer wishes to give a tip that s their own choice tips can come in the form of cash or through an electronic payment system they may also be made in kind like tickets and other valuable items a merchant or business cannot compel a consumer to make a tip and the consumer must be able to determine the amount furthermore the customer has the right to determine who gets the tip
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what is the service sector
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the service sector produces intangible goods more precisely services instead of goods and according to the u s census bureau it comprises various service industries including warehousing and transportation services information services securities and other investment services professional services waste management health care and social assistance and arts entertainment and recreation 1 countries with economies centered around the service sector are considered more advanced than industrial or agricultural economies understanding service sectorthe service sector also known as the tertiary sector is the third tier in the three sector economy instead of product production this sector produces services maintenance and repairs training or consulting examples of service sector jobs include housekeeping tours nursing and teaching by contrast individuals employed in the industrial or manufacturing sectors produce tangible goods such as cars clothes or equipment among the countries that place heavy emphasis on the service sector the united states the united kingdom australia and china rank among the top in the united states the institute for supply management ism produces a monthly index that details the general state of business activity in the service sector this index is regarded as a metric for the overall economic health of the country because approximately two thirds of u s economic activity occurs in the service sector 2the service sector in the three part economythe service or tertiary sector is the third piece of a three part economy the first economic sector the primary sector covers the farming mining and agricultural business activities in the economy the secondary sector covers manufacturing and business activities that facilitate the production of tangible goods from the raw materials produced by the primary sector the service sector though classified as the third economic sector is responsible for the largest portion of the global economy s business activity technology in the service industrytechnology specifically information technology systems is shaping the way businesses in the service sector operate businesses in this sector are rapidly placing more focus on what is becoming known as the knowledge economy or the ability to surpass competitors by understanding what target customers want and need and operate in a way that meets those wants and needs quickly with minimal cost in nearly all industries within the sector businesses adopt new technology to bolster production increase speed and efficiency and cut down on the number of employees required for operation this cuts down on costs and improves incoming revenue streams
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what is severance pay
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severance pay is the compensation and or benefits an employer provides to an employee after employment is over severance packages may include extended benefits such as health insurance and outplacement assistance to help an employee secure a new position employers offer packages to employees who are laid off whose jobs are eliminated because of downsizing or who retire some employees who resign or are fired may also receive a severance package severance pay can be a goodwill gesture on the part of the employer and can provide the employee with a buffer between working and unemployment investopedia theresa chiechiunderstanding severance payseverance pay is offered to employees in certain circumstances after their employment ends the amount an employee receives often depends on how long they were with the employer most employers have policies in their employee handbooks that outline how they handle severance pay packages offered by employers usually come in a lump sum and are taxable they generally include an employee s regular pay along with some or all of the following severance and unemployment benefitsseverance pay can affect unemployment compensation in two ways if the employer pays the employee severance fee in a lump sum the employee can apply for unemployment insurance right away as they are no longer on the company s payroll 1however in some cases companies issue severance pay over several months through that process the employee is still technically on the payroll even if they do not go to work this means they cannot apply for unemployment similarly if an employee has unused vacation time they are on the payroll as they use it 1the laws concerning unemployment and severance pay vary by state so it s important to check with your local employment office about when to apply for unemployment benefits in other cases severance pay affects unemployment compensation because of the contracts many people sign when they accept severance pay in exchange for offering severance packages some companies make their employees sign statements saying they voluntarily resigned from their posts these agreements prohibit the employee from claiming unemployment insurance which is reserved for people who are dismissed from their jobs involuntarily it is wise to read any documents carefully before signing them legal advice may also be in order as it is sometimes possible to improve the initial severance package that was offered example of severance paycompany a is a large technology company based on the east coast that is seeking to expand its footprint on the west coast in its efforts to expand it decides to purchase small company b based in california which has a footing in the same business company a wants to keep the bulk of the employees at small company b as they have experience in the local market however one division at company b is similar in operations to an existing division at company a which is larger and has more experience company a decides that this division at small company b is redundant and both companies would be better served by completely replacing the division with members from company a s existing team as such the 10 person division at small company b is notified that they will be laid off all 10 employees will be offered severance pay which will be equal to one month s salary for every year that they have worked there so if an individual has worked at the company for five years they will receive five months severance pay
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why offer severance pay
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businesses are not required to pay severance although most offer packages on a case by case basis and as dictated by employment contracts when businesses fail to offer severance packages it can upset staff and create negative public relations the main goals are to soften the impact of an abrupt termination as well as to avoid any future lawsuits as an employee has to sign a legal release in exchange for the severance
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do businesses have to offer severance pay
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according to the u s department of labor no law requires employers to provide severance pay however if an employee s contract stipulates that they receive severance pay upon dismissal or if the employee handbook promises severance pay the company is legally obligated to follow through with those pledges additionally if the company makes a verbal promise to provide an employee with severance pay it must uphold that agreement 2regardless of whether a company offers severance pay the fair labor standards act flsa mandates an employer must pay terminated employees through their last day of work and the employer must also pay any accrued vacation time to employees 3
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what is severance pay taxed at
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severance pay is taxed at the same tax bracket as when you were fully employed and earning the same salary this is the case if the severance payment is equal to what your salary was if it is less then you will be taxed at the appropriate tax bracket the bottom lineseverance pay is offered to employees of a company who have been laid off employees are laid off for a variety of reasons usually due to downsizing or redundancy but other reasons may be included employees who are laid off are done so due to corporate decisions as opposed to the quality of their work there are exceptions to these situations and severance may be offered for other reasons as well severance is offered to employees to help soften the blow of losing their jobs and to give them a cushion while they look for another job most severance pay also comes with the stipulation that the employee cannot sue the company or speak badly of it
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what is the shadow banking system
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the shadow banking system describes financial intermediaries that participate in creating credit but are not subject to regulatory oversight banks play a key role in the economy underpinning the credit system by taking money from depositors and creating new credit to make loans banks usually have to operate with plenty of scrutiny from financial regulators in their home countries and around the world shadow banks often known as nonbank financial companies nbfcs can usually operate with little to no oversight from regulators examples of shadow banks or financial intermediaries not subject to regulation include hedge funds private equity funds mortgage lenders and even large investment banks the shadow banking system can also refer to unregulated activities by regulated institutions which include financial instruments like credit default swaps understanding shadow banking systemsmost of the shadow banking sector is made up of nbfcs which fall under the oversight of the dodd frank wall street reform and consumer protection act nbfcs existed long before the dodd frank act in 2007 they were given the moniker shadow banks by economist paul mcculley at the time the managing director of pacific investment management company llc pimco to describe the expanding matrix of institutions contributing to the then current easy money lending environment which in turn led to the subprime mortgage meltdown and the subsequent 2008 financial crisis 1although the term shadow banking sounds somewhat sinister many well known brokerages and investment firms engage in shadow banking activity investment bankers lehman brothers and bear stearns were two of the more famed nbfcs at the center of the 2008 financial crisis 2as a result of that crisis traditional banks found themselves under closer regulatory scrutiny which led to a prolonged contraction in their lending activities as the authorities tightened up on the banks the banks in turn tightened up on loan or credit applicants the more stringent requirements gave rise to more people needing other funding sources and hence the growth of nonbank shadow institutions that were able to operate outside the constraints of banking regulations the shadow banking system has escaped regulation primarily because unlike traditional banks and credit unions these institutions are not allowed to take traditional demand deposits readily available funds such as those in checking or savings accounts from the public this limitation keeps them outside the scope of conventional oversight from federal and state financial regulators rather than taking deposits these entities engage in other types of financial transactions the financial stability board fsb a body of international financial authorities defines shadow banking by outlining different credit intermediation activities carried out by institutions outside the regulatory framework these include maturity transformation converting short term funds into longer term investments liquidity transformation converting cash or similar assets into investments that are harder to sell credit risk transfer relocating the risk of default on a loan from the lender to another party and leverage using borrowed money to increase potential returns 34history and breadth of shadow banking systemshadow banking institutions arose as innovators in financial markets they were able to finance lending for real estate and other purposes but did not face the normal regulatory oversight and rules regarding capital reserves and liquidity these rules are required of traditional lenders in order to help prevent bank failures runs on banks and financial crises as a result of the ability of many of these institutions to avoid scrutiny from regulators they were able to create financial instruments aimed at pursuing higher market credit and liquidity risks in their lending while avoiding the requirement to maintain the capital requirements regulators require of banks in the decade following the financial crisis of 2007 08 the shadow banking sector expanded playing a key role in meeting the credit demand unmet by traditional banks this growth came with a higher level of scrutiny from regulators because of the fallout from the financial crisis but despite this increased scrutiny the sector has continued to expand significantly 5according to the financial stability board the shadow banking system which the fsb calls the nonbank financial intermediary nbfi sector grew 8 9 in 2021 well above its five year average of 6 6 annual growth at 293 3 trillion the nbfi sector s share of total global financial assets reached 49 2 in 2021 much of this growth stemmed from investment funds with money pouring in and valuations rising as the economy recovered from its pandemic lows 6the shadow banking system s relative share of total global financial assets at the end of 2021 according to the financial stability board fsb 6with the sector holding such a large percentage of financial assets around the world it may come as no surprise that the two largest economies have high shadow banking concentrations the u s is the top holder of shadow banking assets followed by china 7 chinese financial regulators reported that as of 2019 shadow banking accounted for assets worth 12 9 trillion equal to 86 of the country s gdp or 29 of its total banking assets 8shadow banking risks and regulationsthe shadow banking industry plays a role in meeting rising credit demand in the united states although it s been argued that shadow banking s disintermediation can increase economic efficiency its operation outside of traditional banking regulations raises concerns over the systemic risk it may pose to the financial system the unregulated nature of shadow banking activities means that unlike bank deposits that are insured by the federal deposit insurance corporation fdic there is no similar level of protection for assets held by nbfcs shadow banking entities are also unable to access emergency loans from the federal reserve which is available to banks that are facing a liquidity crunch 3the reforms enacted through the 2010 dodd frank wall street reform and consumer protection act focused primarily on the banking industry leaving the shadow banking sector largely intact while dodd frank imposed greater liability on financial companies selling exotic financial products most of the non banking activities are still unregulated one area that regulators are aiming to reduce the risks posed by shadow banking is by scrutinizing the exposure of regular banks to unregulated entities and products while this stops short of regulating nbfcs reining in their connection with traditional banking entities could help limit the risk to the overall economy posed by shadow banking 3the federal reserve board has also proposed that nonbanks such as broker dealers operate under similar margin requirements as banks meanwhile outside the u s china began issuing directives in 2016 directly targeting risky financial practices such as excessive borrowing and speculation in equities 9
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what are examples of shadow banks
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plenty of well known companies are counted as shadow banks these include
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what are the benefits of shadow banking
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its supporters argue that an advantage of shadow banking is that it reduces the dependency on traditional banks as a source of credit this is a positive benefit for the economy because it acts as an additional source of lending and provides diversification in the financial system
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should shadow banks be regulated
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many institutions including the european commission argue that they should they argue that the shadow banking sector requires regulation because of its size its close links to the regulated financial sector and the systemic risks that it poses there is also a need they claim to prevent the shadow banking system from being used for regulatory arbitrage or the process of taking advantage of loopholes to avoid potential regulatory restrictions 10the bottom linethe shadow banking system consists of lenders brokers and other credit intermediaries who fall outside the realm of traditional regulated banking although the term shadow banking sounds somewhat sinister many well known brokerages and investment firms engage in shadow banking activity proponents of these firms argue that they provide necessary credit that is not available through traditional banking channels opponents say that the shadow banking sector is an unregulated risk to consumers and to the financial security of the u s and global economy
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what is shadow pricing
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the term shadow pricing is used to refer to either one of two things the latter instance is more common and involves a shadow price that is assigned to goods that are not generally bought and sold as separate assets in a marketplace such as production costs or intangible assets
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how shadow pricing works
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shadow pricing as it relates to money market funds refers to the practice of accounting the price of securities based on amortized costs rather than on their assigned market value money market fund shares are always assigned a nominal net asset value nav of 1 even though the actual nav falls slightly above or below this figure such funds are required by law to disclose the actual nav the shadow share price to show the fund s performance to investors more accurately however the use of the term shadow price in relation to money market funds is the less common usage of the phrase it is more frequently applied in the process of cost benefit analysis in business decision making in its most common usage a shadow price is an artificial price assigned to a non priced asset or accounting entry shadow pricing is frequently guided by certain assumptions about costs or value it is generally a subjective and inexact or imprecise endeavor to make a decision regarding the undertaking of a project or investment businesses often perform a comparative analysis of the project or investment cost against the projected benefits in performing a cost benefit analysis a business must often account for the costs or benefits of intangible assets that are difficult to assign a dollar value to but that must nonetheless be monetarily quantified for the purpose of performing the analysis economists will often assign a shadow price to estimate the cost of negative externalities such as the pollution emitted by a firm advantages and disadvantages of shadow pricingusing shadow pricing helps a business obtain a fuller understanding of its project s real value it is a necessary part of running a cost benefit analysis and can assist management in their decisions about various aspects of a project s strategy and scope shadow pricing encourages responsible ethical behavior and is a vital tool in accurately evaluating a project that being said there are a number of limitations to shadow pricing most notably shadow pricing is inherently subjective because the assets it attempts to value are intangible the shadow price is proofless furthermore because analysts must employ a fair amount of guesswork there is significant room for bias this means there is also a good chance the shadow price is not accurate if the methodology used to create the shadow price is flawed the business may direct its actions in a way that won t benefit and could discredit the company finally some critics believe shadow pricing puts too much emphasis on short term social opportunity cost while ignoring the long term priorities of the business encourages financially pragmatic business actionsvital tool to running cost benefit analysishelps companies be more proactiveoften inaccurateleaves room for bias in shadow pricing methodologymay be too rigid
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when is shadow pricing used
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shadow pricing is an incredibly useful tool when evaluating a project even though shadow pricing only provides a rough estimate it helps management assess the value of certain operations and attempts to place a monetary value on the different tasks associated with the project furthermore when a company wants to run a cost benefit analysis it must use shadow pricing to assign values to intangible items shadow pricing is also frequently used in public policy in order to designate the value of various public infrastructure projects such as public transportation parks and bike lanes economists seeking the societal value of projects like public parks will use shadow pricing to demonstrate the benefits of certain infrastructure projects that are not typically assigned a monetary value example of shadow pricingan example of shadow pricing as applied to a proposed business plan to renovate a company s office facilities might be the assignment of a dollar value to the expected benefits of doing the renovation while the cost of the renovation can easily be assigned a dollar value there are elements of the project s expected benefit that must be assigned a shadow price because they are not as easy to quantify the possible benefits of the project include the following since it is impossible to assign a precise dollar value to such potential benefits an estimated shadow price is assigned to set a dollar figure to compare with the cost figure shadow pricing faqsshadow pricing is used by analysts and economists to assign a monetary value to non marketed goods such as production costs and intangible assets shadow prices are essential to running an accurate cost benefit analysis of a project shadow pricing provides management with a fuller understanding of the costs and benefits associated with a project in the world of public policy shadow prices help determine whether or not a public project is worth pursuing shadow pricing can save money by demonstrating the appropriate path of action to take
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when faced with a tough business decision using a cost benefit analysis that employs shadow pricing to determine the monetary value of production costs and intangible assets should give you a clearer picture of which course of action will make the most financial sense
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shadow pricing quantifies production actions and abstract commodities that aren t normally assigned a numerical value one common example of an abstract commodity is a public park shadow pricing assigns a monetary value to the benefit of a park in order to decide how or if to pursue the project
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what is a share certificate
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a share certificate is a written document signed on behalf of a corporation that serves as legal proof of ownership of the indicated number of shares it is also referred to as a stock certificate understanding share certificates
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when companies issue shares in the market shareholders who buy in are issued a share certificate the share certificate basically acts as a receipt for the purchase and ownership of shares in the company the document certifies registered ownership of shares from a particular date
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key information on a share certificate includes in the u k the companies act 2006 directs that a company must issue a share certificate when any shares are allotted issued the company must issue a share certificate within two months of the issue or transfer of any shares companies may issue just one certificate for all the shares issued or transferred at a particular time except if a shareholder requests separate certificates 1sometimes a shareholder with a stock certificate can give a proxy to another person to vote the shares in question similarly a shareholder without a share certificate may give a proxy to another person to allow them to vote for the shares in question voting rights are defined by the corporation s charter and corporate law a share certificate that is damaged lost or stolen can be reissued with a replacement certificate in respect of the same number of shares the shareholder in such a case must return the damaged document to the company before a replacement can be issued at this time the shareholder may also exercise the right to be issued a single certificate or separate certificates historically share certificates were required for proof of entitlement to dividends each time a certificate was presented the receipt for the payment of dividends was endorsed on the back this way all records of dividend payments were attached to the document in the digital age investors rarely use physical share certificates and instead rely on electronic proof of ownership disadvantages of issuing a share certificatethere are several disadvantages of issuing a share certificate from the company s perspective the primary drawback comes down to time and money issuing paper stock certificates is labor intensive and represents a big expense in fact businesses usually need an entire team dedicated strictly to managing the share certificate system there is a tremendous amount of tedious clerical work involved in maintaining a stock certificate system for example all transactions such as a merger or spinoff can only proceed when the paper certificates are signed and mailed to the company also compliance becomes much more difficult to address moreover ownership is very difficult to keep up with as shareholders can pass the certificates to someone else without notifying the company it all adds up to a significant amount of back office work to verify identities in order to sign off on the transfer of ownership in other words the company has to keep track of the shares at all times this is typically done through a computer system finally if a shareholder has their paper certificate lost or stolen it means a lot of work for the company specifically the business has to find the old shares verify ownership put a stop on the paper certificates and then issue new paper certificates obviously this process is also a headache for the shareholder the bottom line is that documenting tracking and verifying transactions with paper stocks is very challenging the dutch east india company issued the first stock certificate in 1606 it was worth 150 dutch guilder 2special considerationstoday in modern financial markets individual investors rarely take physical possession of their share certificates in fact some countries have completely abolished the issue of share certificates as proof of share ownership in a company and have streamlined the process of registering owners via electronic registration in the united states the depository trust company dtc is responsible for electronically holding shares either in certificated or uncertificated dematerialized form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates 3a share certificate can be in either a registered form or bearer form a registered share certificate is only evidence of title ownership while a bearer share certificate now uncommon entitles the holder to exercise all legal rights associated with the stock many share certificates especially older and rarer specimens have become extremely collectible for their historical context and the beauty and intricacy of their design scripophily is the collection and study of share certificates and other similar financial documents similar to stamp collecting or banknote collecting a share certificate s value is dependent on its condition and age
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what are share certificates faqs
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never just throw away your old share certificates they can still be worth something here are a few steps you can do to help determine their value even without the physical share certificate you are still the rightful owner of the stock and have a claim to all of the rights of being a shareholder if your share certificate is lost accidentally destroyed or stolen you should immediately contact the transfer agent and request a stop transfer this prevents ownership of the stock certificate from being transferred to another person your stockbroker might also be able to help you with this process you will be able to get a new replacement certificate but typically companies will first require you to do the following whether someone is transferring a stock certificate on death or electronic shares the tax implications are the same that is you are not liable for taxes on the shares you inherit when someone dies but you might be liable for the taxes if you sell them 4
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what is a share class
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a share class is a designation applied to a specified type of security such as common stock or mutual fund unit companies that have more than one class of common stock usually identify a given class with alphabetic markers such as class a shares and class b shares these carry different rights and privileges mutual funds also have share classes which carry different sales charges expense ratios and minimum initial investment requirements as an investor it s important to know what class of shares you are buying be it common stock in a public company or units of a mutual fund the basics of company share classesdifferent share classes within the same entity typically confer different rights to the stockholder for example a public company may offer two classes of common stock outstanding class a common stock and class b common stock this dual class structure is typically decided on when a company first goes public and issues stock in the primary market for example a private company that is undertaking an initial public offering ipo may choose to issue class a shares to its new investors while giving the firm s existing stakeholders class b shares such a dual class structure might be instituted if the original owners of the company wanted to sell the majority of their stake in the firm but still maintain control and make key decisions in this case the class b shares would typically have enhanced voting rights google instituted a dual share class structure during its corporate transformation into alphabet inc in 2015 the company issued an a class share with the ticker symbol googl and a c class share with the ticker symbol goog both trades for around the same price level but the c class shares do not have voting rights the company also issued a b class share reserved for management and other controlling parties the basics of mutual fund share classesmutual funds often offer several share classes to investors each class invests in the same portfolio of securities and has the same investment objectives and policies however their fees and expenses differ which impact their performance other parameters such as initial investment amounts may differ as well the most common share class is the a share which carries a front end load payable upon purchase or upfront these funds may seem costly in the beginning but may be less expensive if held over the long term these upfront sales charges range from 2 to 5 75 depending on the type of fund and the volume purchased the b share class is the opposite of the a share it carries a back end load a commission paid when the investor sells it this fee gradually declines the longer you own the mutual fund eventually reaching zero b shares often carry the right to be converted into a shares after seven years or so the c share class charges an annual fee for the life of the fund of around 1 called a level load however c shares do often have a contingent deferred sales charge that may be triggered if they are sold within one year both b and c shares tend to pay higher expense ratios the annual management and maintenance fee charged by the fund than a shares do institutional share classesthere are several other mutual fund share classes with designations like i r n x and y these are what are known as institutional shares mutual funds usually make these classes available only to those with high net worth typically more than 1 million or to institutional investors who can make seven figure deposits however 401 k plans and other employer sponsored retirement plans count as such institutional investors by pooling the employees contributions the plan administrator is able to qualify for this class of shares this is highly desirable institutional shares usually carry the lowest fees and expenses of mutual fund share classes because of the low expense ratios institutional class shares invariably garner the best returns for example investment company vanguard offers three share classes investor shares demand 1 000 to 3 000 initial deposits and carry an average expense ratio of 18 admiral shares have 3 000 50 000 or 100 000 minimums but the expense ratio averages 11 finally the institutional shares begin at 5 million and their average expense ratio is 05
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what is share of wallet sow
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share of wallet sow is the dollar amount an average customer regularly devotes to a particular brand rather than to competing brands in the same product category companies try to maximize an existing customer s share of wallet by introducing multiple products and services to generate as much revenue as possible from each customer a marketing campaign for example may have a stated goal of increasing the brand s wallet share for specific customers at the expense of its competitors understanding share of walletalthough companies actively engage in sales activities to generate new clients maximizing the amount of revenue from every existing client is equally as important share of wallet focuses on a brand s own customers and seeks to maximize the dollars they spend regularly on that brand rather than on a competing one companies might identify their most loyal customers ranking them by the number of products they use or the amount of revenue they generate offering additional services to up sell a client could prove fruitful since multi product customers are likely to have a favorable view of the company also new products could be offered to loyal customers before the public which would add to revenue and enhance brand loyalty the benefits of increasing a customer s share of wallet go far beyond boosting revenue and include improving client retention customer satisfaction and creating a loyal built in market from which to offer new products in the future share of wallet vs market shareincreasing wallet share can be a less expensive more efficient and therefore a more profitable strategy for boosting revenue than attempting to expand overall market share it s important to note that wallet share and market share are two different concepts market share refers to a company s percentage of total sales in its category or a specific geographic region for example if bank executives wanted to add new business clients they would analyze the existing market to determine how many businesses were located in that region from there the management could determine what percentage of the total customers in the region bank with them so if the bank had 1 000 customers and there were 10 000 businesses in that region the bank s market share would be 10 for that region calculating market share helps companies to determine the size of the opportunity in a region the same analysis could be applied to a specific product or service both market share and wallet share focus on growing revenue from customers however the growing market share focuses on attracting new clients from the competition on the other hand share of wallet focuses on growing revenue from existing clients by expanding the number of products being used which might also be taken from the competition target marketing to grow share of walleta campaign to increase a brand s share of wallet focuses on competing more effectively to take away some of a competitor s business such a campaign might begin with an attempt to identify exactly what a customer finds at a competitor it may be a broad issue of quality price or convenience but it may be very specific a competing grocer might have more vegan selections or superior fresh produce it may have faster checkout or free delivery increasing the share of wallet can mean adopting a competitor s best ideas it also might mean identifying goods or services that are a logical extension of the business but can increase its share of wallet by supplanting rivals the wegmans supermarket chain carries all of the usual grocery items but its vast ready to eat section might be its true share of wallet extender its selections compete against every takeout restaurant between its store and the customer s home increasing market share is an increase in a brand s total sales within its category while increasing share of wallet is additional revenue from existing customers examples of share of walletlet s say as an example when mcdonald s added a breakfast menu some customers may have switched their morning routine and started going to mcdonald s restaurants rather than to dunkin donuts mcdonald s had captured a few more of their existing customers dollars spent on fast food as well as some new clients as a result dunkin donuts might respond by expanding its breakfast menu to include egg sandwiches possibly in order to lure back some of those breakfast customers another example where share of wallet is in practice today is in the banking industry a bank s executive management might step up its cross selling efforts which is selling complementary products and services to existing clients a wealth management client might get referred to an in house mortgage representative when the customer is in the market for a new home a checking account customer might be encouraged to apply for a car loan at the bank the bank is not gaining new customers through this practice but is increasing its share of wallet among current customers in both examples an increase in spending and revenue from each existing customer base occurred as opposed to money being spent at a competitor
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what is a share repurchase
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a share repurchase is a transaction whereby a company buys back its own shares from the marketplace a company might buy back its shares because management considers them undervalued the company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price repurchases reduce the number of outstanding shares which is something that investors often feel will drive up share prices this assumes demand for the shares will not be diminished by the action investopedia julie bang
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how share repurchases work
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share repurchases take place when companies decide to buy back their stock companies that repurchase their stock from the open market or directly from investors also known as a share buyback it is commonly done to achieve 1because a share repurchase reduces the number of shares outstanding it increases earnings per share eps a higher eps elevates the market value of the remaining shares 2 after repurchase the shares are canceled or held as treasury shares so they are no longer held publicly and are not outstanding a share repurchase impacts a company s financial statements in various ways a share repurchase reduces a company s available cash which is then reflected on the balance sheet as a reduction by the amount the company spent on the buyback at the same time the share repurchase reduces shareholders equity by the same amount on the liabilities side of the balance sheet investors interested in finding out how much a company has spent on share repurchases can find the information in their quarterly earnings reports reasons for share repurchasesa share repurchase reduces the total assets of the business so that its return on assets return on equity and other metrics improve when compared to not repurchasing shares reducing the number of shares means earnings per share eps can grow more quickly as revenue and cash flow increase if the business pays out the same amount of total money to shareholders annually in dividends and the total number of shares decreases each shareholder receives a larger annual dividend if the corporation grows its earnings and its total dividend payout decreasing the total number of shares further increases the dividend growth shareholders expect a corporation paying regular dividends to continue doing so in some cases a buyback can hide a slightly declining net income if the share repurchase reduces the shares outstanding to a greater extent than the fall in net income the eps will rise irrespective of the financial state of the business share repurchases fill the gap between excess capital and dividends so that the business returns more to shareholders without locking into a pattern for example assume the corporation wants to return 75 of its earnings to shareholders and keep its dividend payout ratio at 50 the company returns the other 25 in the form of share repurchases to complement the dividend new provisions were put into place to prevent companies from trying to boost their stock price to benefit corporate executives the inflation reduction act of 2022 which was signed by president joe biden on aug 16 2022 includes an excise tax of 1 on share buybacks of 1 million or more made after dec 31 2022 any new public or employee stock issues will not count 3advantages and disadvantages of share repurchasesa share repurchase shows the corporation believes its shares are undervalued and is an efficient method of putting money back in shareholders pockets 4the share repurchase reduces the number of existing shares making each worth a greater percentage of the corporation the stock s eps increases which means the price to earnings ratio p e will decrease assuming the stock price remains the same mathematically the value of the shares hasn t changed but the lower p e ratio could make it appear that the share price represents a better value thus making the stock more attractive to potential investors a criticism of buybacks is that they are often ill timed a company will buy back shares when it has plenty of cash or during a period of financial health for the company and the stock market the stock price of a company is likely to be high at such times and the price might drop after a buyback a drop in the stock price can imply that the company is not so healthy after all a share repurchase can also give investors the impression that the corporation does not have other profitable opportunities for growth which is an issue for growth investors looking for revenue and profit increases a corporation is not obligated to repurchase shares due to changes in the marketplace or economy repurchasing shares puts a business in a precarious situation if the economy takes a downturn or the corporation faces financial obligations that it cannot meet shows the company believes its shares are undervaluedincreases share value because it reduces number of sharesmakes stock more attractive to potential investorscan be ill timedmay lead to drop in price which means company isn t healthymarket may believe the company doesn t have growth opportunitiescan create challenges during economic downturnreal world example of a share repurchasethere are many examples of share repurchases or buybacks in the marketplace let s take a look at apple aapl according to a cnbc report the company spent more than 467 billion in share buybacks since 2012 in fact it was reportedly the biggest repurchaser of its own stock among all of the companies in the s p 500 and spent the most among some of its peers the company spent 85 5 billion to buy back its stock during the 2021 fiscal year this was in addition to the 14 5 billion it spent on dividends during the same period 5
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is there a tax on stock buybacks
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the inflation reduction act ira of 2022 introduced a 1 excise tax on share repurchases of over 1 million of any us corporation trading on an established exchange the tax applies if more than 1 million of stock is purchased over the course of the tax year 3
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which us corporation had the largest buyback of 2022
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apple aapl at 83 9 billion in stock buybacks in 2023 6
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do i have to sell my shares during a buyback
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no you are not required to sell your share back to the company the bottom linecorporations often buyback their shares there are many reasons they will do this there is debate about whether stock buybacks are the best use of a corporations excess capital like most other practices there are pros and cons as this article has shown
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what is a shareholder
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a shareholder is a person company or institution that owns at least one share of a company s stock or a share of a mutual fund shareholders essentially own the company which comes with the right to share in the profits if a company is successful shareholders benefit from increased stock valuations or profits distributed as dividends shareholders also have the right to participate in corporate elections conversely when a company loses money the share price drops which can cause shareholders to lose money if the company fails shareholders can claim any remaining assets after the company s debts are paid yurle villegas investopediaunderstanding shareholdersas noted above a shareholder is an entity that owns one or more shares in a company s stock or mutual fund being a shareholder or a stockholder as they re also often called comes with certain rights and responsibilities along with sharing in the overall financial success a shareholder is also allowed to vote on certain issues that affect the company or fund in which they hold shares a single shareholder who owns and controls more than 50 of a company s outstanding shares is called a majority shareholder in comparison those who hold less than 50 of a company s stock are classified as minority shareholders most majority shareholders are company founders in older more established companies majority shareholders are frequently related to company founders in either case these shareholders wield considerable power to influence critical operational decisions including replacing board members and c level executives like chief executive officers ceos and other senior personnel when they control more than half of the voting interest that s why many companies often avoid having majority shareholders among their ranks unlike the owners of sole proprietorships or partnerships corporate shareholders are not personally liable for the company s debts and other financial obligations therefore if a company becomes insolvent its creditors cannot target a shareholder s personal assets shareholders are entitled to collect proceeds left over after a company liquidates its assets however creditors bondholders and preferred stockholders have precedence over common stockholders who may be left with nothing after all the debts are paid special considerationsthere are a few things that people need to consider when it comes to being a shareholder this includes the rights and responsibilities involved with being a shareholder and the tax implications according to a corporation s charter and bylaws shareholders traditionally enjoy the following rights it is important to note that if you are a shareholder any gains or losses you make when selling shares need to be reported on your personal income tax return gains would contribute to your taxable income and losses will be deducted from your taxable income 2 any dividends paid to shareholders are also taxable income 3another type of corporation with different tax treatment is an s corporation these are typically small size to midsize businesses that have fewer than 100 shareholders the s corporation differs from a regular corporation in that it has pass through taxation rather than double taxation of a regular corporation when selling shares shareholders incur taxable capital gains or loses just like with shares of a regular corporation according to the internal revenue service irs shareholders of s corporations report the flow through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates this allows s corporations to avoid double taxation on the corporate income s corporations are responsible for tax on certain built in gains and passive income at the entity level 4this is opposed to shareholders of c corporations who are subject to double taxation profits within this business structure are taxed at the corporate level and at the personal level for shareholders 5it is a common myth that corporations are required to maximize shareholder value this may be the goal of a firm s management or directors but it is not a legal duty types of shareholdersmany companies issue two types of stock common and preferred common stock is more prevalent than preferred stock and is what ordinary investors typically buy in the stock market generally common stockholders enjoy voting rights but preferred stockholders do not however preferred stockholders have a priority claim to dividends furthermore the dividends paid to preferred stockholders are fixed even if profits decline common stock dividends may decline or not be paid at all during periods of poor corporate performance some companies further divide their share issues into separate classes with different voting rights for example a share in a company s class a stock might come with ten votes while class b shares might have only one vote although there are no hard rules class a shares tend to have the highest voting power
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what are the main types of shareholders
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a majority shareholder owns and controls more than 50 of a company s outstanding shares this type of shareholder is often company founders or their descendants minority shareholders hold less than 50 of a company s stock even as little as one share
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what are some key shareholder rights
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shareholders have the right to inspect the company s books and records the power to sue the corporation for the misdeeds of its directors and or officers and the right to vote on critical corporate matters such as naming board directors in addition they have the right to decide whether or not to green light potential mergers the right to receive dividends the right to attend annual meetings the right to vote on crucial matters by proxy and the right to claim a proportionate allocation of proceeds if a company liquidates its assets
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what is the difference between preferred and common shareholders
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the main difference between preferred and common shareholders is that the former typically has no voting rights while the latter does however preferred shareholders have a priority claim to income meaning that they are paid dividends before common shareholders common shareholders are last in line regarding company assets which means that they will be paid out after creditors bondholders and preferred shareholders the bottom lineshareholders or stockholders are the owners of a corporation shareholders can receive profits in the share of dividends or sell their shares in the market for a profit they can also participate in corporate elections anyone can become a shareholder by buying stock in that company in many countries corporations may also offer employee stock options as a benefit for workers shareholders assume a level of risk if a company goes bankrupt common shareholders are last in line for repayment in some cases this means that shareholders can lose their entire investment
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what is a shareholder activist
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a shareholder activist is a person who attempts to use their rights as a shareholder of a publicly traded corporation to bring about change within or for the corporation understanding a shareholder activistshareholder activism is a way that shareholders can influence a corporation s behavior by exercising their rights as partial owners classes of shares allow for distinct voting privileges in addition to dividend entitlements while minority shareholders don t run the day to day operations several ways exist for them to influence a company s board of directors and executive management actions these methods can range from dialogue with managers to formal proposals which are voted on by all shareholders at a company s annual meeting shareholder activists also employ a variety of offensive tactics to force changes for example they might make strategic use of media channels in order to publicize their demands and prompt greater pressure from other shareholders they may also threaten companies with lawsuits if they are not allowed to have their say some of the issues addressed by shareholder activists are for social change requiring divestment from politically sensitive parts of the world for example greater support of workers rights sweatshops and or more accountability for environmental degradation but the term can also refer to investors who believe that a company s management is doing a poor job this class of activist investors often attempts to gain control of the company and replace management or force a major corporate change use of shareholder activismover the years shareholder activism has increased in total capital deployed as well as the number of campaigns mounted according to the harvard law school forum on corporate governance 2018 was a record year for shareholder activists approximately 65 billion in capital was deployed throughout the year with an increase in initiated campaigns to 250 and an increase in the number of investors from 110 in 2017 to 130 in 2018 1 these figures represent a modest increase in figures from the previous year another one for the record books shareholder activists are also reaching out across borders to conduct campaigns the same report noted that 60 of campaigns were aimed at u s companies while 25 aimed at european companies and 10 targeted asian pacific companies 1 examples of shareholder activistscarl icahn is one of the financial industry s most notable activist shareholders along with his work as a businessman traditional investor and philanthropist in the 1980s mr icahn developed a strong reputation as a corporate raider this stemmed from his hostile takeover of twa airline in 1985 among other milestones along with texaco and american airlines twa was one of the nation s largest airlines at the time mr icahn successfully took over the company steering it away from the brink of bankruptcy over a multi year period similarly bill ackman considers himself an activist investor although some would deem him primarily a contrarian investor one of ackman s most high profile positions was his short position and issuance of an enormous public relations campaign against the company herbalife in 2012 in contrast with mr icahn and mr ackman many hedge funds have been recently pushing for change related to their partners environmental social and governance esg concerns trian partners blue harbour group red mountain capital partners and valueact capital are among the top funds that have prioritized esg in various forms some of these funds are being pushed by their own investors who seek to own firms that demonstrate a commitment to corporate social responsibility this responsibility can take the form of environmental concerns such as climate change or governance concerns such as boardroom diversity for example the nyc pension fund began a boardroom accountability project about board diversity that requires companies to disclose the race gender and skills of their directors
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what is shareholder equity se
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shareholder equity se is a company s net worth and it is equal to the total dollar amount that would be returned to the shareholders if the company must be liquidated and all its debts are paid off thus shareholder equity is equal to a company s total assets minus its total liabilities se is a number that stock investors and analysts look at when they re evaluating a company s overall financial health it helps them to judge the quality of the company s financial ratios providing them with the tools to make better investment decisions retained earnings are part of shareholder equity as is any capital invested in the company investopedia jake shiunderstanding shareholder equity se shareholder equity represents the total amount of capital in a company that is directly linked to its owners that is it is the dollar value of the company to its owners if the company ever needs to be liquidated se is the amount of money that would be returned to these owners after all other debts are satisfied all the information needed to compute a company s shareholder equity is available on its balance sheet you can figure out the total se of a company using the following formula s h a r e h o l d e r e q u i t y t o t a l a s s e t s t o t a l l i a b i l i t i e s shareholder equity total assets total liabilities shareholderequity totalassets totalliabilitiesthis formula is also known as the accounting equation or the balance sheet equation the balance sheet holds the data needed for the accounting equation so the steps to calculate shareholder equity are as follows current and long term assetstotal assets include current and noncurrent assets current assets include cash and anything that can be converted to cash within a year such as accounts receivable and inventory long term assets are possessions that cannot reliably be converted to cash or consumed within a year they include investments property plant and equipment ppe and intangibles such as patents current and long term liabilitiestotal liabilities consist of current and long term liabilities current liabilities are debts typically due for repayment within one year this includes accounts payable ap and any outstanding taxes long term liabilities are obligations that are due for repayment over periods longer than one year companies may have bonds payable leases and pension obligations under this category positive vs negative shareholder equityse can be either negative or positive negative se means a company s liabilities exceed its assets if it s positive the company has enough assets to cover its liabilities if a company s shareholder equity remains negative it is considered to be balance sheet insolvency retained earnings are part of shareholder equity this is the percentage of net earnings that is not paid to shareholders as dividends retained earnings should not be confused with cash or other liquid assets the retained earnings are used primarily for the expenses of doing business and for the expansion of the business moreover liquidation value is not the same as shareholder equity during a liquidation process the value of physical assets is reduced and there are other extraordinary conditions that make the two numbers incompatible many investors view companies with negative shareholder equity as risky or unsafe investments but shareholder equity alone is not a definitive indicator of a company s financial health if used in conjunction with other tools and metrics the investor can accurately analyze the health of an organization the number of shares issued and outstanding is a more relevant measure than shareholder equity for certain purposes such as dividends and earnings per share eps this measure excludes treasury shares which are stock shares owned by the company itself examples of shareholder equityhere s a hypothetical example to show how shareholder equity works let s assume that abc company has total assets of 2 6 million and total liabilities of 920 000 in this case abc company s shareholder equity is 1 68 million now let s take a look at a few real world examples notably the world s two largest soft drink companies
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what can shareholder equity tell you
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savvy investors look beyond today s market prices when they consider buying or selling stock shareholder equity helps them determine the real return that a company is generating for its investors versus the total amount that those investors have paid for its stock for example a ratio like return on equity roe which is a company s net income divided by its shareholder equity is used to measure how well a company s management is using its equity from investors to generate profits positive shareholder equity means the company has enough assets to cover its liabilities negative shareholder equity means that the company s liabilities exceed its assets
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what are the components of shareholder equity
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aside from stock common preferred and treasury components the se statement includes retained earnings unrealized gains and losses and contributed additional paid up capital the retained earnings portion reflects the percentage of net earnings that were not paid to shareholders as dividends and should not be confused with cash or other liquid assets all of these numbers should be listed on the company s earnings reports
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how is shareholder equity calculated
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shareholder equity is the difference between a firm s total assets and total liabilities this equation is known as a balance sheet equation because all of the relevant information can be gleaned from the balance sheet take the equity at the onset of the accounting period add or subtract any equity infusions such as adding cash from shares issued or subtracting cash used for treasury purchases add net income subtract all cash dividends paid out and any net losses and what you have left is the shareholder equity for that period the bottom linethere s a cautionary line that appears in every financial prospectus past returns are no guarantee of future performance successful investors look well beyond today s stock price or this year s price movement when they consider whether to buy or sell shareholder equity is one of the important numbers embedded in the financial reports of public companies that can help investors come to a sound conclusion about the real value of a company
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what is the shareholder equity ratio
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the shareholder equity ratio indicates how much of a company s assets have been generated by issuing equity shares rather than by taking on debt the lower the ratio result the more debt a company has used to pay for its assets it also shows how much shareholders might receive in the event that the company is forced into liquidation the shareholder equity ratio is expressed as a percentage and calculated by dividing total shareholders equity by the total assets of the company the result represents the amount of the assets on which shareholders have a residual claim the figures used to calculate the ratio are recorded on the company balance sheet investopedia nez riazthe formula for the shareholder equity ratio is shareholder equity ratio total shareholder equity total assets text shareholder equity ratio dfrac text total shareholder equity text total assets shareholder equity ratio total assetstotal shareholder equity total shareholders equity comes from the balance sheet following the accounting equation se a l where s e shareholders equity a assets l liabilities begin aligned text se text a text l textbf where se text shareholders equity a text assets l text liabilities end aligned se a lwhere se shareholders equitya assetsl liabilities
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what does the shareholder equity ratio tell you
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if a company sold all of its assets for cash and paid off all of its liabilities any remaining cash equals the firm s equity a company s shareholders equity is the sum of its common stock value additional paid in capital and retained earnings the sum of these parts is considered to be the true value of a business
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when a company s shareholder equity ratio approaches 100 it means that the company has financed almost all of its assets with equity capital instead of taking on debt equity capital however has some drawbacks in comparison with debt financing it tends to be more expensive than debt and it requires some dilution of ownership and giving voting rights to new shareholders
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the shareholder equity ratio is most meaningful in comparison with the company s peers or competitors in the same sector each industry has its own standard or normal level of shareholders equity to assets example of the shareholder equity ratiosay that you re considering investing in abc widgets inc and want to understand its financial strength and overall debt situation you start by calculating its shareholder equity ratio a year end number is arrived at by using return on equity roe calculation you can use also get a snapshot idea of profitability using return on average equity roae from the company s balance sheet you see that it has total assets of 3 0 million total liabilities of 750 000 and total shareholders equity of 2 25 million calculate the ratio as follows this tells you that abc widgets has financed 75 of its assets with shareholder equity meaning that only 25 is funded by debt in other words if abc widgets liquidated all of its assets to pay off its debt the shareholders would retain 75 of the company s financial resources
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when a company liquidates
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if a business chooses to liquidate all of the company assets are sold and its creditors and shareholders have claims on its assets secured creditors have the first priority because their debts were collateralized with assets that can now be sold in order to repay them other creditors including suppliers bondholders and preferred shareholders are repaid before common shareholders a low level of debt means that shareholders are more likely to receive some repayment during a liquidation however there have been many cases in which the assets were exhausted before shareholders got a penny
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what is shareholder value
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shareholder value is the value delivered to the equity owners of a corporation thanks to management s ability to increase sales earnings and free cash flow which leads to an increase in dividends and capital gains for shareholders a company s shareholder value depends on strategic decisions that its board of directors and senior management make including the ability to make wise investments and generate a healthy return on invested capital if this value is created particularly over the long term then the share price increases and the company can pay larger cash dividends to shareholders mergers in particular tend to cause a large increase in shareholder value shareholder value can become a hot button issue for corporations as the creation of wealth for shareholders does not always or equally translate to value for the corporation s employees or customers understanding shareholder valueincreasing shareholder value also increases the total amount in the stockholders equity section of the balance sheet the balance sheet formula is
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how asset use drives value
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companies raise capital to buy assets and use those assets to generate sales or invest in new projects while expecting a positive return a well managed company maximizes the use of its assets so that the firm can operate with a smaller investment in assets assume for example that a plumbing company uses a truck and equipment to complete residential work and the total cost of these assets is 50 000 the more sales the plumbing firm can generate using the truck and the equipment the more shareholder value the business creates valuable companies are those that can increase earnings with the same dollar amount of assets instances when cash flow raises valuegenerating sufficient cash inflows to operate the business is also an important indicator of shareholder value because the company can operate and increase sales without the need to borrow money or issue more stock firms can increase cash flow by quickly converting inventory and accounts receivable into cash collections the rate of cash collection is measured by turnover ratios companies attempt to increase sales without the need to carry more inventory or increase the average dollar amount of receivables a high rate of both inventory turnover and accounts receivable turnover increases shareholder value factoring in earnings per shareif management makes decisions that increase net income each year the company can either pay a larger cash dividend or retain earnings for use in the business a company s earnings per share eps is defined as earnings available to common shareholders divided by common stock shares outstanding the ratio is a key indicator of a firm s shareholder value when a company can increase earnings the ratio increases and investors view the company as more valuable
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