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125 Cards in this Set
- Front
- Back
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Who are the founders of the Black-Scholes Equation? |
Black, Scholes and ? Taken from Pricing the Future: Finance, Physics and the 300-Year Journey to the Black-Scholes Equations. |
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Systematic Risk |
The risk inherent to the entire market or an entire market segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular stock or industry. This type of risk is both unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the right asset allocation strategy.
INVESTOPEDIA EXPLAINS 'SYSTEMATIC RISK' For example, putting some assets in bonds and other assets in stocks can mitigate systematic risk because an interest rate shift that makes bonds less valuable will tend to make stocks more valuable, and vice versa, thus limiting the overall change in the portfolio’s value from systematic changes. Interest rate changes, inflation, recessions and wars all represent sources of systematic risk because they affect the entire market. Systematic risk underlies all other investment risks. The Great Recession provides a prime example of systematic risk. Anyone who was invested in the market in 2008 saw the values of their investments change because of this market-wide economic event, regardless of what types of securities they held. The Great Recession affected different asset classes in different ways, however, so investors with broader asset allocations were impacted less than those who held nothing but stocks. If you want to know how much systematic risk a particular security, fund or portfolio has, you can look at its beta, which measures how volatile that investment is compared to the overall market. A beta of greater than 1 means the investment has more systematic risk than the market, less than 1 means less systematic risk than the market, and equal to one means the same systematic risk as the market. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Unsystematic risk can be mitigated through diversification. |
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Financial Ratio Debt Ratio |
A financial ratio that measures the extent of a company’s or consumer’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt.
The higher this ratio, the more leveraged the company and the greater its financial risk. Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries like technology. In the consumer lending and mortgage businesses, debt ratio is defined as the ratio of total debt service obligations to gross annual income.
INVESTOPEDIA EXPLAINS 'DEBT RATIO' A company with total assets of $100 million and total debt of $30 million has a debt ratio of 30%. Is this company in a better financial situation than one with a debt ratio of 40%? It depends on the industry in which the companies operate. A debt ratio of 30% may be too high for a company that operates in a sector where cash flows are volatile and its peers have little debt, since this debt level may reduce its financial flexibility and competitive advantage. Conversely, a debt level of 40% may be easily manageable for a company in a sector such as utilities, where cash flows are stable and higher debt ratios are the norm. A debt ratio of greater than 1 indicates that a company has more debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's risk level. In the consumer lending and mortgages business, two common debt ratios used to assess a borrower’s ability to repay a loan or mortgage are the gross debt service ratio and the total debt service ratio. The gross debt ratio is defined as the ratio of monthly housing costs (including mortgage payments, home insurance and property costs) to monthly income, while the total debt service ratio is the ratio of monthly housing costs plus other debt such as car payments and credit card borrowings to monthly income. Acceptable levels of the total debt service ratio, in percentage terms, range from the mid-30s to the low-40s. Refine Your Financial Vocabulary |
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Financial Ratio Return on Sales and what is it's abbreviation? |
A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". It is calculated using this formula:
INVESTOPEDIA EXPLAINS 'RETURN ON SALES - ROS' This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles. |
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Pro Forma |
A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results in order to emphasize either current or projected figures.
INVESTOPEDIA EXPLAINS 'PRO FORMA' Pro forma financial statements could be designed to reflect a proposed change, such as a merger or acquisition, or to emphasize certain figures when a company issues an earnings announcement to the public. Investors should be careful when reading a company's pro-forma financial statements, as the figures may not comply with generally accepted accounting principles (GAAP). In some cases, the pro-forma figures may differ greatly from the those derived from GAAP. |
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Debt Ratio |
A financial ratio that measures the extent of a company’s or consumer’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt. The higher this ratio, the more leveraged the company and the greater its financial risk. Debt ratios vary widely across industries, with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries like technology. In the consumer lending and mortgage businesses, debt ratio is defined as the ratio of total debt service obligations to gross annual income. |
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Return on Sales ( ROS) |
A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". It is calculated using this formula:
This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles. |
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Return on Equity (ROE) |
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. Also known as "return on net worth" (RONW). |
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An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is:
Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing.
INVESTOPEDIA EXPLAINS 'RETURN ON ASSETS - ROA' ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment. |
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Intrinsic Value |
The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value |
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Gross Margin = (Sales-CGS)/Sales
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Shows the relation between sales price and cost of product sold. Closely watched for any company with significant levels of inventory, such as retailers. It is one of the three main margin numbers. |
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Cost Ratio = CGS/Sales
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Compliment to gross margin, also showing the relation between sales price and cost of product sold.
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EBIT = Sales-CGS-SG&A-R&D-Depreciation
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Also referred to as Operating Income, it is the core income that the firm produces in its main line of business. |
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EBIT Margin = EBIT/Sales
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Also referred to as Operating Margin, it is one of the three main margin numbers.
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Profit Margin = NI/Sales
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This is common sized net income. It is sometimes called "Return on Sales." Shows how many pennies of each dollar of sales made it all the way to net income. It is one of the three main margin numbers.
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Asset Turnover (End) = Sales/Ending Total Assets
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This shows how many dollars of sales are generated for each dollar of assets.
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Asset Turnover (Ave) = Sales/Average Total Assets
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Shows how many dollars of sales are generated for each dollar of assets, but uses the average of total assets from different years, especially in the case that assets change significantly from year to year.
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Accounts Receivable Turnover = Sales/Accounts Receivable
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This measures how many times in the reporting cycle the firm collected its receivables.
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Days Sales Outstanding = 365/Accounts Receivable Turnover
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Measures how many days, on average, it takes for the firm to collect its receivables.
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Inventory Turnover = CGS/Inventory
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This measures the number of times during the year that the firm sold its inventory.
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Days Sales in Inventory = 365/Inventory Turnover
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Measures the number of days, on average, it takes for the firm to sell its inventory.
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Purchases = Ending Inventory+CGS-Beginning Inventory
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Purchases can be found by looking at the journey entry, but can also be calculated using this equation.
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Accounts Payable Turnover = Purchases/Accounts Payable
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Measures the number of times per year the firm pays its vendors (suppliers of inventory).
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Days Payable Outstanding = 365/Accounts Payable Turnover
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The number of days, on average, it takes for a firm to pay its vendors.
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Leverage = Assets/Equity
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This shows how the firm is financed (more debt financed or more equity financed?). Measures how much the firm has in assets for each dollar of equity.
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Return on Equity = ROE = NI/Equity
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Relates the earnings of the firm to owner's equity, and is a very popular performance measure. |
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Return on Equity = ROE = Profit Margin * Asset Turnover * Leverage = (NI/Sales)*(Sales/Assets)*(Assets/Equity)
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DuPont Meathod of breaking down ROE. It is useful to "drill down" into how a firm achieved a certain ROE and how it can improve.
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Current Ratio = Current Assets/Current Liabilities
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This is a liquidity measure. Shows how easily the firm will be able to cover its short term obligations.
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Quick Ratio = Liquid Current Assets (cash, receivables, etc)/Current Liabilities
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Focuses on the most liquid assets' availability to cover the current liabilities.
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Debt to Capital = Debt/(Debt+Capital)
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This shows how the firm is financed. It is another ratio that measure leverage.
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Interest Coverage = EBIT/Interest Expense
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This shows how well the firm can cover its interest charges from core, operating income. Bondholders and bankers want this ratio to be relatively high; the higher the ratio, the great the assurance that they will be paid their interest.
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Dividend Payout = Dividends/NI
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A way for a firm to state their dividend policy in terms of a percentage of earnings that they wish to payout on an ongoing basis.
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Effective Tax Rate = Tax Expense/Pretax Income
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Is often the same, but sometimes differs from the statutory tax rate. |
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NOPAT = Net Operating Profit After Tax = EBIT*(1-Effective Tax Rate) |
This is EBIT, or operating income, after-tax.
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ROIC = Return on Invested Capital = NOPAT/(Ending book values of all interest bearing debt + Owners' Equity)
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Measures the accounting returns to all suppliers of capital, both debt and equity. It is a parallel measure to ROE, however ROE measures the accounting returns attributable only to stockholders.
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Cost of Debt Financing = Effective Interest Rate After Tax = Interest Expense * (1-Effective Tax Rate)/Interest Bearing Debt
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Measures debt financing, which is in essence subsidized by the government because corporations receive a tax shield from interest.
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Debt to Equity = Interest Bearing Debt/Owners' Equity
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This is a measure of the financial leverage or the degree to which the firm using fixed rate debt financing.
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Market Capitalization = Price per Share * Number of Shares Outstanding
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Shows the value of the equity at any given point in time.
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Market to Book Ration = Market Capitalization/Book Value of Equity
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This ratio of market value (which represents a sort of "average" value of the stock across all stockholders) to book value highlights the discrepancy between firm value as determined by market participants and that according to accounting rules.
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Dividends per Share = Dividends Paid/Number of Shares Outstanding
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This figure, measuring the amount of dividends paid per share, is an often cited descriptor of a firm. If lower than last year, it sends strong negative signals to the market. If much higher than last year, the firm is essentially locking themselves into that higher dividend for an extended period of time.
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Total Return to Shareholders = (Current Price per Share - Previous Price per Share + Dividend per Share)/Previous Price per Share
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This shows how the firm as performed in the recent past for its shareholders in terms of increasing the value of their investment.
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Dividend Yield = Dividend per Share/Price per Share
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This measure the amount of cash dividend return on a current investment in the stock.
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Cost of Equity = Risk Free Rate of Interest + (Beta*Risk Premium) |
A guess based on risk. A beta of 3 is not unusual for some high tech firms. A beta of 0.4 is not unusual for a utility firm.
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What does EDGAR stand for and what is it? |
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission (the "SEC"). |
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General Ledger |
A company's main accounting records. A general ledger is a complete record of financial transactions over the life of a company. The ledger holds account information that is needed to prepare financial statements, and includes accounts for assets, liabilities, owners' equity, revenues and expenses. A general ledger is typically used by businesses that employ the double-entry bookkeeping method - where each financial transaction is posted twice, as both a debit and a credit, and where each account has two columns. Because a debit in one account is offset by a credit in a different account, the sum of all debits will be equal to the sum of all credits. INVESTOPEDIA EXPLAINS 'GENERAL LEDGER' A company's general ledger can either be a physical book into which credits and debits are posted, or an accounting computer program where the various credits and debits are entered. The general ledger's double-entry bookkeeping requires that each transaction will be entered on the left side, or debit side, of one account and simultaneously on the right side, or credit side, of another account. A general ledger is used to prepare financial statements directly from the accounts, and as a means to identify errors and/or instances of fraud. |
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Goodwill |
An intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet. Ads
INVESTOPEDIA EXPLAINS 'GOODWILL' The value of goodwill typically arises in an acquisition when one company is purchased by another company. The amount the acquiring company pays for the target company over the target’s book value usually accounts for the value of the target’s goodwill. If the acquiring company pays less than the target’s book value, it gains “negative goodwill,” meaning that it purchased the company at a bargain in a distress sale. Goodwill is difficult to price, but it does make a company more valuable. For example, a company like Coca-Cola (who has been around for decades, makes a wildly popular product based on a secret formula and is generally positively perceived by the public), would have a lot of goodwill. A competitor (a small, regional soda company that has only been in business for five years, has a small customer base, specializes in unusual soda flavors and recently faced a scandal over a contaminated batch of soda), would have far less goodwill, or even negative goodwill. Because the components that make up goodwill have subjective values, there is a substantial risk that a company could overvalue goodwill in an acquisition. This overvaluation would be bad news for shareholders of the acquiring company, since they would likely see their share values drop when the company later has to write down goodwill. In fact, this happened in the AOL-Time Warner merger of 2001. |
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Annual Percentage Rate (APR)
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The annual percentage rate, or APR, is the cost per year of borrowing. By law, all financial institutions must show customers the APR of a loan or credit card, which clearly indicates the real cost of the loan.
APR is not the same as the interest rate on a loan. Loans charge an interest rate, but usually also charge other fees, such as closing costs, origination fees or insurance costs, which are typically wrapped into the loan. If two loans have the same interest rate, but one has much higher fees than the other, simply shopping by interest rates won’t give an accurate comparison of the loans’ true costs. That’s why there is the APR. By factoring in other fees, APR gives a more accurate estimate of the cost per year of a loan. For this reason, the APR is generally higher than the interest rate. For example, a mortgage company may offer a customer an interest rate of 4% on a mortgage loan of $100,000. But after closing costs and other fees are included, the mortgage could have an APR of 4.1%. Unfortunately, not all financial institutions include the same fees in their APR calculation, so APRs are not always a perfect comparison tool. When comparing loan or credit card APRs, ask which fees are included, so your comparison is accurate. |
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Capital Markets
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Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities.
INVESTOPEDIA EXPLAINS 'CAPITAL MARKETS' Capital markets typically involve issuing instruments such as stocks and bonds for the medium-term and long-term. In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year. Capital markets have numerous participants including individual investors, institutional investors such as pension funds and mutual funds, municipalities and governments, companies and organizations and banks and financial institutions. Suppliers of capital generally want the maximum possible return at the lowest possible risk, while users of capital want to raise capital at the lowest possible cost. The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007-09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities |
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The equation to derive a geometric average |
F(V) = P(V) * (1 + r)^n
Solve this equation for r
r = (F(V) / P(V))^1/n - 1 |
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Capital Asset Pricing Model. Is this model accurate? |
Price = R(f) + (R(e) - R(f)) * beta
R(f) - Risk Free Rate R(e) - Expected Rate of Return
The accuracy is this model is disputed due to beta. Beta stocks are assumed to have a higher expected rate of return because of it's volatility which is equated to risk.
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Acid Test Ratio |
A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Calculated by:
INVESTOPEDIA EXPLAINS 'ACID-TEST RATIO' Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when submerged in acid, it was said to have passed the acid test. If a company's financial statements pass the figurative acid test, this indicates its financial integrity. |
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Equity Multiplier
(Source: Investopedia) |
The ratio of a company’s total assets to its stockholder’s equity. The equity multiplier is a measurement of a company’s financial leverage. Companies finance the purchase of assets either through equity or debt, so a high equity multiplier indicates that a larger portion of asset financing is being done through debt. The multiplier is a variation of the debt ratio.
INVESTOPEDIA EXPLAINS 'EQUITY MULTIPLIER' The ratio is calculated fairly simply. For example, a company has assets valued at $3 billion and stockholder equity of $1 billion. The equity multiplier value would be 3.0 ($3 billion / $1 billion), meaning that one third of a company’s assets are financed by equity. The equity multiplier gives investors an insight into what financing methods a company may be able to use to finance the purchase of new assets. It's also an indicator of potential threats a company may face from economic conditions that affect the debt-equity mix. A high equity multiplier is not necessarily better than a low multiplier. In order to develop a better picture of a company’s financial health, investors should take into account other financial ratios and metrics, such as net profit margin or asset turnover. If it is cheaper to borrow than issue new shares, financing asset purchases through debt may be more cost-effective than a secondary issue. |
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Tangible Asset
(Source: Investopedia) |
Assets that have a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. The opposite of a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets.
INVESTOPEDIA EXPLAINS 'TANGIBLE ASSET' Certain types of assets receive special treatment for accounting purposes. For tangible assets with an anticipated useful life of more than one year, a company uses a process called depreciation to allocate part of the asset's expense to each year of its useful life, instead of allocating the entire expense to the year in which the asset is purchased. |
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How does one calculate ROI |
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:
In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Related Topics
INVESTOPEDIA EXPLAINS "RETURN ON INVESTMENT - ROI" Keep in mind that the calculation for return on investment and, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation. For example, a marketer may compare two different products by dividing the gross profit that each product has generated by its respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used. |
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Fixed Asset
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DEFINITION OF 'FIXED ASSET'
A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. Fixed assets are sometimes collectively referred to as "plant". INVESTOPEDIA EXPLAINS 'FIXED ASSET' Buildings, real estate, equipment and furniture are good examples of fixed assets. Generally, intangible long-term assets such as trademarks and patents are not categorized as fixed assets but are more specifically referred to as "fixed intangible assets". |
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Fed Funds Rate
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The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The federal funds rate is generally only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other. The federal funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which in turn have a bearing on key aspects of the broad economy including employment, growth and inflation. The Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body, telegraphs its desired target for the federal funds rate through open market operations. Also known as the “fed funds rate".
INVESTOPEDIA EXPLAINS 'FEDERAL FUNDS RATE' The higher the federal funds rate, the more expensive it is to borrow money. Since it is only applicable to very creditworthy institutions for extremely short-term (overnight) loans, the federal funds rate can be viewed as the base rate that determines the level of all other interest rates in the U.S. economy. |
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Commercial Paper
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An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.
INVESTOPEDIA EXPLAINS 'COMMERCIAL PAPER' Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement. |
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Portfolio Turnover
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A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period. |
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Paid-up Capital
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The amount of a company's capital that has been funded by shareholders. Paid-up capital can be less than a company's total capital because a company may not issue all of the shares that it has been authorized to sell. Paid-up capital can also reflect how a company depends on equity financing. |
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Fair Value
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FAIR VALUE
What Does Fair Value Mean? (1) The estimated value of all assets and liabilities of an acquired company used to consolidate the financial statements of both companies. (2) In the futures market, the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest (and dividends lost because the investor owns the futures contract rather than the physical stocks) over a certain period. Investopedia explains Fair Value The “fair value” quoted on TV refers to the relationship between the futures contract on a market index and the actual value of the index. When futures trade above fair value, this means that traders are betting that the market index will go higher; the opposite is true if futures are trading below fair value. |
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Agency Theory
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A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (for example, company executives). The two problems that agency theory addresses are: 1.) the problems that arise when the desires or goals of the principal and agent are in conflict, and the principal is unable to verify (because it difficult and/or expensive to do so) what the agent is actually doing; and 2.) the problems that arise when the principal and agent have different attitudes towards risk. Because of different risk tolerances, the principal and agent may each be inclined to take different actions.
INVESTOPEDIA EXPLAINS 'AGENCY THEORY' An agency, in general terms, is the relationship between two parties, where one is a principal and the other is an agent who represents the principal in transactions with a third party. Agency relationships occur when the principals hire the agent to perform a service on the principals' behalf. Principals commonly delegate decision-making authority to the agents. Agency problems can arise because of inefficiencies and incomplete information. In finance, two important agency relationships are those between stockholders and managers, and stockholders and creditors. |
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What are the top 4 finance journals?
(Source: my.wpcarey.asu.edu/fin-rankings/rankings/results.cfm) |
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Free Cash Flow (FCF) |
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:
It can also be calculated by taking operating cash flow and subtracting capital expenditures. |
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EPS |
Market Value per Share / Earnings per Share (EPS) For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. Also sometimes known as "price multiple" or "earnings multiple."
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number. Things to Remember
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EBITDA |
An indicator of a company's financial performance which is calculated in the following EBITDA calculation: EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
INVESTOPEDIA EXPLAINS "EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION - EBITDA" This is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next. EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn't warranted. A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA. Understand th EBITDA with practical examples by reading A Clear Look at EBITDA andEBITDA: Challenging the Calculation |
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Love Money |
Seed money or capital given by family or friends to an entrepreneur to start a business. The decision to lend money and the terms of the agreement are usually based on qualitative factors and the relationship between the two parties, rather than on a formulaic risk analysis.
Love money is usually given to entrepreneurs who have proved their responsibility to close family and friends over the years, but who fail to meet the capital requirements that financial institutions look for in borrowers. An angel investor's love money is sometimes the only way a business can get off the ground; this type of financing can allow for growth that would be impossible through traditional financing channels. |
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Master Limited Partnership |
DEFINITION OF 'MASTER LIMITED PARTNERSHIP - MLP' A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture. INVESTOPEDIA EXPLAINS 'MASTER LIMITED PARTNERSHIP - MLP' One of the most crucial criteria that must be met in order for a partnership to be legally classified as an MLP is that the partnership must derive most (~90%) of its cash flows from real estate, natural resources and commodities. The advantage of an MLP is that it combines the tax benefits of a limited partnership (the partnership does not pay taxes from the profit - the money is only taxed when unitholders receive distributions) with the liquidity of a publicly traded company. |
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Capital Budgeting |
DEFINITION OF 'CAPITAL BUDGETING' The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Also known as "investment appraisal." INVESTOPEDIA EXPLAINS 'CAPITAL BUDGETING' Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine which projects will yield the most return over an applicable period of time. Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. |
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Poison Pill |
A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills: 1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. 2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger. INVESTOPEDIA EXPLAINS 'POISON PILL' 1. By purchasing more shares cheaply (flip-in), investors get instant profits and, more importantly, they dilute the shares held by the acquirer. This makes the takeover attempt more difficult and more expensive. 2. An example of a flip-over is when shareholders gain the right to purchase the stock of the acquirer on a two-for-one basis in any subsequent merger. |
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Down Round
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DEFINITION of 'Down Round' A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the company by earlier investors.
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Describe the Gordon Growth Model. What is the formula for calculating the stock value, using its assumptions? |
A model for determining the intrinsic value is a stock, based on a future series dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and bars on the assumption the dividend grows at a constant rate in perpetuity,the model solves for the present value of the infinite series of future dividends. Stock Value (P) = D/n-k where D = Expected dividend per share one year from now k = Required rate of return for investor G = Growth rate of dividends, in perpetuity Because the model simplistically assumes a constant growth rate, it is generally only used for mature companies ( or broad market indices ) with low to moderate growth rates. |
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Sunk Cost |
DEFINITION of 'Sunk Cost'A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future.INVESTOPEDIA EXPLAINS 'Sunk Cost'When making business or investment decisions, individuals and organizations typically look at the future costs that they may incur, by following a certain strategy. A company that has spent $5 million building a factory that is not yet complete, has to consider the $5 million sunk, since it cannot get the money back. It must decide whether continuing construction to complete the project will help the company regain the sunk cost, or whether it should walk away from the incomplete project.Read more: http://www.investopedia.com/terms/s/sunkcost.asp#ixzz3f4EAVnxZ Follow us: @Investopedia on Twitter |
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Subsidy |
DEFINITION of 'Subsidy'A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.Politics play an important part in subsidization. In general, the left is more in favor of having subsidized industries, while the right feels that industry should stand on its own without public funds.INVESTOPEDIA EXPLAINS 'Subsidy'There are many forms of subsidies given out by the government, including welfare payments, housing loans, student loans and farm subsidies. For example, if a domestic industry, like farming, is struggling to survive in a highly competitive international industry with low prices, a government may give cash subsidies to farms so that they can sell at the low market price but still achieve financial gain.If a subsidy is given out, the government is said to subsidize that group/industry.Read more: http://www.investopedia.com/terms/s/subsidy.asp#ixzz3f4EytHoa Follow us: @Investopedia on Twitter |
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Fixed Cost |
DEFINITION of 'Fixed Cost'A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.INVESTOPEDIA EXPLAINS 'Fixed Cost'An example of a fixed cost would be a company's lease on a building. If a company has to pay $10,000 each month to cover the cost of the lease but does not manufacture anything during the month, the lease payment is still due in full.In economics, a business can achieve economies of scale when it produces enough goods to spread fixed costs. For example, the $100,000 lease spread out over 100,000 widgets means that each widget carries with it $1 in fixed costs. If the company produces 200,000 widgets, the fixed cost per unit drops to 50 cents.Read more: http://www.investopedia.com/terms/f/fixedcost.asp#ixzz3f4GjTf9N Follow us: @Investopedia on Twitter |
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Efficiency Ratio |
DEFINITION of 'Efficiency Ratio'Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.INVESTOPEDIA EXPLAINS 'Efficiency Ratio'Some common ratios are accounts receivable turnover, fixed asset turnover, sales to inventory, sales to net working capital, accounts payable to sales and stock turnover ratio. These ratios are meaningful when compared to peers in the same industry and can identify business that are better managed relative to the others. Also, efficiency ratios are important because an improvement in the ratios usually translate to improved profitability.Read more: http://www.investopedia.com/terms/e/efficiencyratio.asp#ixzz3f4HVUMSK Follow us: @Investopedia on Twitter |
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Fixed-charge Coverage Ratio |
DEFINITION of 'Fixed-Charge Coverage Ratio'A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated as the following: Fixed-Charge Coverage RatioINVESTOPEDIA EXPLAINS 'Fixed-Charge Coverage Ratio'For example, since leases are a fixed charge, the calculation determining a company's ability leases would be (EBIT + Lease Expenses) / (Lease Expenses + Interest). Note how lease expenses are added back into EBIT to calculate ratio. Read more: http://www.investopedia.com/terms/f/fixed-chargecoverageratio.asp#ixzz3f4Im8Qzg Follow us: @Investopedia on Twitter |
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Capitalization |
DEFINITION of 'Capitalization'1. In accounting, it is where costs to acquire an asset are included in the price of the asset.2. The sum of a corporation's stock, long-term debt and retained earnings. Also known as "invested capital".3. A company's outstanding shares multiplied by its share price, better known as "market capitalization".INVESTOPEDIA EXPLAINS 'Capitalization'1. For example, if a machine has a price of $1 million this value would be recorded in the assets, if there was also a $20,000 charge for shipping the machine then this cost would be capitalized and included in assets.2. The capitalization of a firm can be overcapitalized and undercapitalized, both of which are potential negatives.3. If a company has 1,000,000 shares and is currently trading at $10 a share, their market capitalization is $10,000,000.Read more: http://www.investopedia.com/terms/c/capitalization.asp#ixzz3f4XKF9PU Follow us: @Investopedia on Twitter |
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Deferred Tax Liability |
DEFINITION of 'Deferred Tax Liability'An account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may or may not be realized during any given year, which makes the deferred status appropriate.INVESTOPEDIA EXPLAINS 'Deferred Tax Liability'Because there are differences between what a company can deduct for tax and accounting purposes, there will be a difference between a company's taxable income and income before tax. A deferred tax liability records the fact that the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable.Read more: http://www.investopedia.com/terms/d/deferredtaxliability.asp#ixzz3f4YMLDM3 Follow us: @Investopedia on Twitter |
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Fair Value |
DEFINITION of 'Fair Value'1. The estimated value of all assets and liabilities of an acquired company used to consolidate the financial statements of both companies.2. In the futures market, fair value is the equilibrium price for a futures contract. This is equal to the spot price after taking into account compounded interest (and dividends lost because the investor owns the futures contract rather than the physical stocks) over a certain period of time.INVESTOPEDIA EXPLAINS 'Fair Value'2. The "fair value" quoted on TV refers to the relationship between the futures contract on a market index and the actual value of the index. If the futures are above fair value then traders are betting the market index will go higher, the opposite is true if futures are below fair value.Read more: http://www.investopedia.com/terms/f/fairvalue.asp#ixzz3f4bmhUfC Follow us: @Investopedia on Twitter |
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What is the full name of the Dodd-Frank Act and what is it? |
Dodd-Frank Wall Street Refoem and Consumer Protection Act A compendium ( a collection of concise but detailed information about a particular subject ) of federal regulations, primarily affecting financial institutions and their customers, that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as simply "Dodd-Frank", is supposed to lower risk in various parts of the U.S. financial system. It is named after U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank because of their significant involvement in the act’s creation and passage.INVESTOPEDIA EXPLAINS 'Dodd-Frank Wall Street Reform and Consumer Protection Act 'Dodd-Frank established new government agencies such as the Financial Stability Oversight Council and Orderly Liquidation Authority, which monitors the performance of companies deemed “too big to fail” in order to prevent a widespread economic collapse. The new Orderly Liquidation Fund provides money to assist with the liquidation of financial companies that have been placed in receivership because of their financial weakness. Additionally, the council can break up large banks that may pose a risk to the financial system because of their size. It can also quickly and neatly liquidate or restructure firms it deems too financially weak. Similarly, the new Federal Insurance Office identifies and monitors insurance companies that may pose a systemic risk. The new Consumer Financial Protection Bureau (CFPB) is tasked with preventing predatory mortgage lending, improving the clarity of mortgage paperwork for consumers and reducing incentives for mortgage brokers to push home buyers into more expensive loans. The CFPB has also changed the way credit card companies and other consumer lenders disclose their terms to consumers. It requires loan terms to be presented in a new, easy-to-read-and-understand format. The Volcker Rule, another key component of Dodd-Frank, restricts the ways banks can invest and regulates trading in derivatives. The goal of the new SEC Office of Credit Ratings is to improve the accuracy of ratings provided by the agencies that evaluate the financial strength of businesses and governments.Read more: http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp#ixzz3f4cx0wXp Follow us: @Investopedia on Twitter |
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What's the difference between NV and IRR? How are they used? |
Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new investment or expansion opportunity is worthwhile. Given an investment opportunity, a firm needs to decide whether undertaking the investment will generate net economic profits or losses for the company.To do this, the firm estimates the future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project's cost of capital and its risk. Next, all of the investment's future positive cash flows are reduced into one present value number. Subtracting this number from the initial cash outlay required for the investment provides the net present value (NPV) of the investment.Let's illustrate with an example: suppose JKL Media Company wants to buy a small publishing company. JKL determines that the future cash flows generated by the publisher, when discounted at a 12% annual rate, yields a present value of $23.5 million. If the publishing company's owner is willing to sell for $20 million, then the NPV of the project would be $3.5 million ($23.5 - $20 = $3.5). The $3.5 million dollar NPV represents the intrinsic value that will be added to JKL Media if it undertakes this acquisition.So, JKL Media's project has a positive NPV, but from a business perspective, the firm should also know what rate of return will be generated by this investment. To do this, the firm would simply recalculate the NPV equation, this time setting the NPV factor to zero, and solve for the now unknown discount rate. The rate that is produced by the solution is the project's internal rate of return (IRR).For this example, the project's IRR could, depending on the timing and proportions of cash flow distributions, be equal to 17.15%. Thus, JKL Media, given its projected cash flows, has a project with a 17.15% return. If there were a project that JKL could undertake with a higher IRR, it would probably pursue the higher-yielding project instead. Thus, you can see that the usefulness of the IRR measurement lies in its ability to represent any investment opportunity's return and to compare it with other possible investments.Read more: http://www.investopedia.com/ask/answers/05/npv-irr.asp#ixzz3f4syYXs8 Follow us: @Investopedia on Twitter |
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What is the formula for calculating IRR? How is it used? |
Computing the internal rate of return (IRR) for a possible investment is time-consuming and inexact. IRR calculations must be performed via guesses, assumptions, and trial and error. Essentially, an IRR calculation begins with two random guesses at possible values and ends with either a validation or rejection. If rejected, new guesses are necessary.Purpose of Internal Rate of ReturnThe IRR is the discount rate at which the net present value (NPV) of future cash flows from an investment is equal to zero. Functionally, the IRR is used by investors and businesses to find out if an investment is a good use of their money. An economist might say that it helps identify investment opportunity costs. A financial statistician would say that it links the present value of money and the future value of money for a given investment.This shouldn't be confused with the return on investment (ROI). Return on investment ignores the time value of money, essentially making it a nominal number rather than a real number. The ROI might tell an investor the actual growth rate from start to finish, but it takes the IRR to show the return necessary to take out all cash flows and receive all of the value back from the investment.Formula for Internal Rate of ReturnOne possible algebraic formula for IRR is: IRR = R1 + ((NPV1 x (R2 - R1)) / (NPV1 - NPV2)); where R1 and R2 are the randomly selected discount rates, and NPV1 and NPV2 are the higher and lower net present values, respectively.There are several important variables in play here: the amount of investment, the timing of the total investment and the associated cash flows taken from the investment. More complicated formulas are necessary to distinguish between net cash inflow periods.The first step is to make guesses at the possible values for R1 and R2 to determine the net present values. Most experienced financial analysts have a feel for what the guesses should be.If the estimated NPV1 is close to zero, then the IRR is equal to R1. The entire equation is set up with the knowledge that, at IRR, NPV is equal to zero. This relationship is critical to understanding the IRR.There are other methods for estimating IRR. The same basic process is followed for each, however: generate guesses about discounted values and, if NPV is too materially distant from zero, take another guess and try again.Possible Uses and LimitationsIRR can be calculated and used for purposes that include mortgage analysis, private equity investments, lending decisions, expected return on stocks or finding yield to maturity on bonds.IRR models do not take cost of capital into consideration. They also assume that all cash inflows earned during the project life are reinvested at the same rate as IRR. These two issues are accounted for in the modified internal rate of return (MIRR).Read more: http://www.investopedia.com/ask/answers/040215/what-formula-calculating-internal-rate-return-irr.asp#ixzz3f4wVMFPv Follow us: @Investopedia on Twitter |
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Cost of Capital |
DEFINITION of 'Cost Of Capital'The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.INVESTOPEDIA EXPLAINS 'Cost Of Capital'The cost of various capital sources varies from company to company, and depends on factors such as its operating history, profitability, credit worthiness, etc. In general, newer enterprises with limited operating histories will have higher costs of capital than established companies with a solid track record, since lenders and investors will demand a higher risk premium for the former.Every company has to chart out its game plan for financing the business at an early stage. The cost of capital thus becomes a critical factor in deciding which financing track to follow – debt, equity or a combination of the two. Early-stage companies seldom have sizable assets to pledge as collateral for debt financing, so equity financing becomes the default mode of funding for most of them.The cost of debt is merely the interest rate paid by the company on such debt. However, since interest expense is tax-deductible, the after-tax cost of debt is calculated as: Yield to maturity of debt x (1 - T) where T is the company’s marginal tax rate.The cost of equity is more complicated, since the rate of return demanded by equity investors is not as clearly defined as it is by lenders. Theoretically, the cost of equity is approximated by the Capital Asset Pricing Model (CAPM) = Risk-free rate + (Company’s Beta x Risk Premium).The firm’s overall cost of capital is based on the weighted average of these costs. For example, consider an enterprise with a capital structure consisting of 70% equity and 30% debt; its cost of equity is 10% and after-tax cost of debt is 7%. Therefore, its WACC would be (0.7 x 10%) + (0.3 x 7%) = 9.1%. This is the cost of capital that would be used to discount future cash flows from potential projects and other opportunities to estimate their Net Present Value (NPV) and ability to generate value.Companies strive to attain the optimal financing mix, based on the cost of capital for various funding sources. Debt financing has the advantage of being more tax-efficient than equity financing, since interest expenses are tax-deductible and dividends on common shares have to be paid with after-tax dollars. However, too much debt can result in dangerously high leverage, resulting in higher interest rates sought by lenders to offset the higher default risk.Read more: http://www.investopedia.com/terms/c/costofcapital.asp#ixzz3f4y4LDu2 Follow us: @Investopedia on Twitter |
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Present Value |
DEFINITION of 'Present Value - PV'The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations.Also referred to as "discounted value".INVESTOPEDIA EXPLAINS 'Present Value - PV'This sounds a bit confusing, but it really isn't. The basis is that receiving $1,000 now is worth more than $1,000 five years from now, because if you got the money now, you could invest it and receive an additional return over the five years.The calculation of discounted or present value is extremely important in many financial calculations. For example, net present value, bond yields, spot rates, and pension obligations all rely on the principle of discounted or present value. Learning how to use a financial calculator to make present value calculations can help you decide whether you should accept a cash rebate, 0% financing on the purchase of a car or to pay points on a mortgage.Read more: http://www.investopedia.com/terms/p/presentvalue.asp#ixzz3f4ym759T Follow us: @Investopedia on Twitter |
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Securitization |
DEFINITION of 'Securitization'The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.INVESTOPEDIA EXPLAINS 'Securitization'Mortgage-backed securities are a perfect example of securitization. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's inherent risk of default and then sell those smaller pieces to investors.The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. Using the mortgage-backed security example, individual retail investors are able to purchase portions of a mortgage as a type of bond. Without the securitization of mortgages, retail investors may not be able to afford to buy into a large pool of mortgages.Read more: http://www.investopedia.com/terms/s/securitization.asp#ixzz3f4zoOPNY Follow us: @Investopedia on Twitter |
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Bank Draft |
DEFINITION of 'Bank Draft'A type of check where the payment is guaranteed to be available by issuing bank. Typically, banks will review the bank draft requester's account to see if sufficient funds are available for the check to clear. Once it has been confirmed that sufficient funds are available, the bank effectively sets aside the funds from the person's account to be given out when the bank draft is used.INVESTOPEDIA EXPLAINS 'Bank Draft'Bank drafts are normally involved in transactions involving large sums of money and/or situations where trust can be an issue.Suppose you are purchasing a new car, showing up with a bank draft allows the dealership the assurance that you have enough money to purchase the vehicle and that your check will not bounce.Read more: http://www.investopedia.com/terms/b/bank_draft.asp#ixzz3f50hb56c Follow us: @Investopedia on Twitter |
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Currency Carry Trade |
DEFINITION of 'Currency Carry Trade'A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.INVESTOPEDIA EXPLAINS 'Currency Carry Trade'Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.Read more: http://www.investopedia.com/terms/c/currencycarrytrade.asp#ixzz3f51aMUeg Follow us: @Investopedia on Twitter |
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Price-To-Sales Ratio. Describe and state other names for. |
DEFINITION of 'Price-To-Sales Ratio - PSR'A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues. It can be calculated either by dividing the company’s market capitalization by its total sales over a 12-month period, or on a per-share basis by dividing the stock price by sales per share for a 12-month period. Like all ratios, the price-to-sales ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation. Abbreviated as the P/S ratio or PSR, this ratio is also known as a “sales multiple” or “revenue multiple.”INVESTOPEDIA EXPLAINS 'Price-To-Sales Ratio - PSR'The 12-month period used for sales in the price-to-sales ratio is generally the past four quarters (also called trailing 12 months or ttm), or the most recent or current fiscal year. A price-to-sales ratio that is based on forecast sales for the current year is called a forward ratio.Consider the quarterly sales for Acme Co. shown in the table below. The sales for fiscal year 1 (FY1) are actual sales, while sales for FY2 are analysts’ average forecasts (assume that we are currently in Q1 of FY2). Acme has 100 million shares outstanding, with the shares presently trading at $10. Acme Co. Quarterly SalesAt the present time, Acme’s P/S ratio on a trailing 12-month basis would be calculated as follows –Sales for past 12 months (ttm) = $455 million (sum of all FY1 values)Sales per share (ttm) = $4.55P/S ratio = $10 / $4.55 = 2.20Acme’s P/S ratio for the current fiscal year would be calculated as follows –Sales for current fiscal year (FY2) = $520 millionSales per share = $5.20P/S ratio = $10 / $5.20 = 1.92If Acme’s peers – which we assume are based in the same sector and are of similar size in terms of market capitalization – are trading at an average P/S ratio (ttm) of 1.5, compared with Acme’s 2.2, it suggests a premium valuation for the company. One reason for this could be the 14.2% revenue growth that Acme is expected to post in the current fiscal year ($520 million vs. $455 million), which may be better than what's expected for its peers.As with any other ratio, the P/S ratio cannot be viewed in isolation, since it only presents a very narrow view of a company or stock. This ratio is particularly useful for comparing the valuation of early-stage companies that have revenues but are not yet profitable.Read more: http://www.investopedia.com/terms/p/price-to-salesratio.asp#ixzz3f52lsR8K Follow us: @Investopedia on Twitter |
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Irrevocable Trust |
The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust's assets from the grantor's taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules will vary between jurisdictions, in most cases, the grantor can't receive these benefits if he or she is the trustee of the trust.The assets held in the trust can include, but are not limited to, a business, investment assets, cash and life insurance policies.Read more: http://www.investopedia.com/terms/i/irrevocabletrust.asp#ixzz3f56ojz2z Follow us: @Investopedia on Twitter |
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Ghosting |
DEFINITION of 'Ghosting'An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. Ghosting is used by corrupt companies to affect stock prices so they can profit from the price movement.INVESTOPEDIA EXPLAINS 'Ghosting'This practice is illegal because market makers are required by law to act in competition with each other. It is known as "ghosting" because, like a spectral image or a ghost, this collusion among market makers is difficult to detect. In developed markets, the consequences of ghosting can be severe.Read more: http://www.investopedia.com/terms/g/ghosting.asp#ixzz3f56z9pyv Follow us: @Investopedia on Twitter |
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Is Liquidity Improved By High Frequency Trading ( HFT )? |
High-frequency trading, also called HFT, typically uses algorithmic trading to execute trades at a high speed. Algorithms spot opportunities where ultra fast trades (measured in seconds or fractions of seconds) in huge volumes can net a profit. While proponents of HFT claim that it has helped to enhance market liquidity and narrow the bid-ask spread, many feel that the improved market liquidity is illusory and HFT really renders markets more fragile. In this article we will discuss whether high-frequency trading really improves market liquidity. (Related reading Strategies And Secrets Of High Frequency Trading (HFT) Firms)Liquidity FactorLiquidity is best described by three measures—size, price, and time. When liquidity is high, investors can successfully trade a large order close to the current price and within a short time period. One popular measures of liquidity is the bid-ask spread.According to a New York Stock Exchange brochure, “liquidity is the depth of market to absorb buy and sell interest of even large orders at prices appropriate to supply and demand. The market must also adapt quickly to new information and incorporate that information into the stock’s price.” Liquidity is an important characteristic of a good market as it inspires confidence among the participants.The trend over the past decade suggests that the use of HFT trading has greatly increased in the market and at the same time, so has liquidity. The big question remains, is correlation a sign of causation? Does HFT enhance market liquidity while reducing transaction costs?Before regulatory changes introduced the alternative trading system (ATS) around 2000, exchanges like the New York Stock Exchange worked on a double auction system where buyers and sellers were matched by traders and specialists. The use of electronic trading systems gave birth to a new system—high-frequency trading for buying and selling securities. Most estimates suggest that HFT now makes up 50-75 percent of the total equity trading volume. HFT traders include both small, less-known trading firms as well as large investment banks and hedge funds.High-Frequency Traders as MarketmakersSome strategies used in HFT do unarguably provide liquidity to the markets. For example, HFT traders can play the role of a formal or informal marketmakers. As a marketmaker, HFT traders post limit orders on both sides of the electronic limit order book simultaneously, thus providing liquidity to market participants looking to trade at that time. Most marketmakers are looking to earn the bid-ask spread by buying at bid and selling at ask.Since marketmarkers undergo the risk of losing money to an informed counterparty, they need to update their quotes frequently to reflect the current information. This changes constantly with price movements in a related financial instruments (like ETFs or futures) or other submissions and cancelations. Thus as a response to the need of continuous updating, HFT marketmakers end up submitting and cancelling many orders for every transaction. The incentive to earn a liquidity rebate in the U.S. equity markets has led many to formally register as liquidity providers while others continue as informal marketmakers. In this sense, HFT enhances market liquidity and reduces trading costs because of narrow bid-ask spreads.Hot Potato VolumeThe opponents of high-frequency trading feel that whatever liquidity HFT creates is superficial because the securities are held for a very brief period (seconds or fractions of a second) before being sold back again into the market. Most of the time, securities are bought and sold very frequently between high-frequency traders until they are bought by an investor. Opponents say there is thus no ultimate creation of liquidity but a mere facilitation for order execution.HFT results in what is called hot potato volume. Positions are being ping-ponged between high-frequency traders and the other marketmakers. Thus there is the creation of great volume and no concurrent depth. For orders to be absorbed, buyers must hold their positions for a longer time than just a few seconds. (Related reading Is High-Frequency Trading A Fancy Term For Cheating?)The Bottom LineWith more than a decade in existence, high-frequency trading is now more or less an accepted part of the stock markets. There is a consensus that, on average, HFT has added liquidity to the markets and reduced trading costs. As HFT firms are slowly brought under the regulatory cover, there is a better chance that any unethical practices will be spotted and discouraged. (Related reading How The Retail Investor Profits From High Frequency Trading)Read more: http://www.investopedia.com/articles/active-trading/050515/liquidity-improved-high-frequency-trading-hft.asp#ixzz3f58hTozs Follow us: @Investopedia on Twitter |
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Funds from Operations FFO |
DEFINITION of 'Funds From Operations - FFO'A figure used by real estate investment trusts (REITs) to define the cash flow from their operations. It is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis.INVESTOPEDIA EXPLAINS 'Funds From Operations - FFO'The FFO-per-share ratio should be used in lieu of EPS when evaluating REITs and other similar investment trusts.Read more: http://www.investopedia.com/terms/f/fundsfromoperation.asp#ixzz3f59016JQ Follow us: @Investopedia on Twitter |
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Notional Value |
Notional - existing only in theory or as an idea or suggestion. (Used to describe the radar screen) DEFINITION of 'Notional Value'The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position (and have a large consequence for the trader).INVESTOPEDIA EXPLAINS 'Notional Value'For example, one S&P 500 Index futures contract obligates the buyer to 250 units of the S&P 500 Index. If the index is trading at $1,000, then the single futures contract is similar to investing $250,000 (250 x $1,000). Therefore, $250,000 is the notional value underlying the futures contract.Read more: http://www.investopedia.com/terms/n/notionalvalue.asp#ixzz3f59iGJSw Follow us: @Investopedia on Twitter |
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Risk Premium |
DEFINITION of 'Risk Premium'The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is a form of compensation for investors who tolerate the extra risk - compared to that of a risk-free asset - in a given investment.INVESTOPEDIA EXPLAINS 'Risk Premium'Think of a risk premium as a form of hazard pay for your investments. Just as employees who work relatively dangerous jobs receive hazard pay as compensation for the risks they undertake, risky investments must provide an investor with the potential for larger returns to warrant the risks of the investment.For example, high-quality corporate bonds issued by established corporations earning large profits have very little risk of default. Therefore, such bonds will pay a lower interest rate (or yield) than bonds issued by less-established companies with uncertain profitability and relatively higher default risk.Read more: http://www.investopedia.com/terms/r/riskpremium.asp#ixzz3f5AwEj7K Follow us: @Investopedia on Twitter |
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Rule of 70 |
DEFINITION of 'Rule Of 70'A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it would take to double your money.INVESTOPEDIA EXPLAINS 'Rule Of 70'Another useful application of the rule of 70 is in the area of estimating how long it would take a country's real GDP to double. Similar to compound interest rates, one can use the GDP growth rate in the divisor of the rule. For example, if the growth rate of the China is 10%, the rule of 70 predicts it would take 7 years (70/10) for China's real GDP to double.Read more: http://www.investopedia.com/terms/r/rule-of-70.asp#ixzz3f5BGhdXv Follow us: @Investopedia on Twitter |
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Federal Funds Rate |
DEFINITION of 'Federal Funds Rate'The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The federal funds rate is generally only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other. The federal funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which in turn have a bearing on key aspects of the broad economy including employment, growth and inflation. The Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body, telegraphs its desired target for the federal funds rate through open market operations. Also known as the “fed funds rate". AdsRefinance For A Reasonwww.mysunwest.com/refiRefinance your vehicle loan & save. Low rates apply today! OAC16.1% 2014 Annuity Returnadvisorworld.com/CompareAnnuitiesTrue Investor Returns with no Risk. Find out how with our Free Report.INVESTOPEDIA EXPLAINS 'Federal Funds Rate'The higher the federal funds rate, the more expensive it is to borrow money. Since it is only applicable to very creditworthy institutions for extremely short-term (overnight) loans, the federal funds rate can be viewed as the base rate that determines the level of all other interest rates in the U.S. economy. Banks and other depository institutions maintain accounts at the Federal Reserve to make payments for themselves or on behalf of their customers. The end-of-the-day balances in these accounts are used to meet the reserve requirements mandated by the Federal Reserve. If a depository institution expects to have a larger end-of-day balance than it needs, it will lend the excess amount to an institution that expects to have a shortfall in its own balance. The federal funds rate thus represents the interest rate charged by the lending institution. The target for the federal funds rate – which as noted earlier is set by the FOMC – has varied widely over the years in response to prevailing economic conditions. While it was as high as 20% in the inflationary early 1980s, the rate has declined steadily since then. The FOMC has maintained the target range for the federal funds rate at a record low of 0% to 0.25%, from December 2008 onward, to combat the Great Recession of 2008-09 and stimulate the U.S. economy.Read more: http://www.investopedia.com/terms/f/federalfundsrate.asp#ixzz3f5CdoDMR Follow us: @Investopedia on Twitter |
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Discount Rate |
DEFINITION of 'Discount Rate'The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.AdsInvest with Keith DeGreenwww.degreen.comAdvisor, Radio Show Host, Author Diversified, Fee-Only PortfoliosTop Dividend Payers Todaywww.moneymorningresearch.comA list of expert dividend stocks for high yields in 2015 and beyond.INVESTOPEDIA EXPLAINS 'Discount Rate'The Fed’s Discount Rate is an administered rate set by the Federal Reserve Banks, rather than a market rate of interest. Use of the Fed’s discount window soared in late 2007 and 2008, as financial conditions deteriorated sharply and the Federal Reserve took steps to provide liquidity to the financial system. Discount window borrowing soared to a record $111 billion at the height of the global financial crisis in October 2008, while the Federal Reserve’s board of governors set the discount rate at a post-WW II low of 0.5% on Dec. 16, 2008.A simple explanation of the discount rate used in DCF analysis is as follows. Let's say you expect $1,000 in one year. To determine the present value of this $1,000 (what it is worth to you today), you would need to discount it by a particular interest rate. Assuming a discount rate of 10%, the $1,000 in a year's time would be equivalent to $909.09 to you today (1,000 / [1.00 + 0.10]). If you expect to receive the $1,000 in two years, its present value would be $826.45.What is the appropriate discount rate to use for a project? Many companies use their weighted average cost of capital (WACC) if the project's risk profile is similar to that of the company. But if the project’s risk profile is substantially different from that of the company, the Capital Asset Pricing Model (CAPM) is often used to calculate a project-specific discount rate that more accurately reflects its risk.Read more: http://www.investopedia.com/terms/d/discountrate.asp#ixzz3f5Cu88bT Follow us: @Investopedia on Twitter |
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How does the Federal Reserve affect Mortgage Rates? |
The rate on a 30-year fixed mortgage has been at historic lows in recent years—hovering around 3.5 to 4 percent. This has come about as the Federal Reserve has taken several unusual steps to revive the U.S. economy following the 2007 financial crisis and subsequent Great Recession. While the Fed does not have the ability to directly set mortgage rates, it does create the monetary policies that indirectly affect these rates. (RelatedHow Much Influence Does The Fed Have?)For example, in response to the financial crisis, the Federal Reserve took the unusual step of embarking on a quantitative easing program in which it bought up mortgage-backed securities and government debt in the form of Treasury bonds. The program, which began in November 2008 and ended in 2014, increased the money supply in the nation’s financial systems. This encouraged banks to lend money more easily. It also drove up the price and drove down the supply of the types of securities that the Fed bought. All these actions had the effect of keeping lending rates, including mortgage rates, low. (Related Quantitative Easing: Does It Work?)Tools of Monetary PolicyThe Federal Reserve aims to influence the economy, inflation, and employment levels through its monetary policy. One of the tools it uses to conduct monetary policy is setting a target for the federal funds rate. This is the short-term interest rate at which U.S financial institutions (such as banks, credit unions, and others in the Federal Reserve system) lend money to each other overnight in order to meet mandated reserve levels. Each borrowing and lending bank negotiates the interest rate individually. Together, the average of all these rates make up the fed funds rate.As with mortgage rates, the Federal Reserve does not directly set the federal funds rate. Instead, it sets a target for the federal funds rate and engages in actions to influence the rate to towards the target. The federal fund rate affects all other rates including short- and long-term interest rates and forex and also has a host of downstream effects. In recent years, the Fed has maintained its target fed funds rate at the lowest it can go—from 0 percent to .25 percent.A major way the Fed can influence the fed funds rate is by wielding another one of its monetary policy tools—open market operations. This is when the Fed buys and sells government securities such as bonds. When the central bank wants to tighten monetary policy and targets a higher fed funds rate, it absorbs money from the system by selling off government bonds. And when it wants an easier monetary policy and targets a lower fed funds rate, the Fed engages in the opposite course of action of buying government securities so as to introduce more money into the system. Where does the money to buy all these government bonds come from? As the central bank, the Fed can simply create the money.In addition to targeting a fed funds rate and using open market operations, the Fed also has other tools to influence monetary policy. These include changing bank reserve requirements by making them higher or lower, changing the terms on which it lends to banks through its discount window, and changing the rate of interest it pays on the bank reserves it has on deposit.Ripple EffectWhen the Federal Reserve makes it more expensive for banks to borrow by targeting a higher federal funds rate, the bank in turn pass on the higher costs to its customers. Interest rates on consumer borrowing, including mortgage rates, tend to go up. And as short-term interest rates go up, long-term interest rates typically also rise. As this happens, and the interest rate on the 10-year Treasury bond which influences the rate on the conventional 30-year mortgage moves up, mortgage rates also tend to rise. (Related The Tangled Web of Interest Rates, Mortgage Rates, And The Economy)Mortgage lenders set interest rates based on their expectations for future inflation and interest rates. The supply of and demand for mortgage-backed securities also influences the rates. Thus, the Federal Reserve’s actions have a ripple effect in terms of impacting mortgage rates.The Bottom LineThe Federal Reserve’s actions as it aims to maintain economic stability impact bank lending rates. When the Fed wants to boost the economy, it typically becomes less expensive to take out a mortgage. And when the Fed wants to clamp down on the economy, it acts to drain money from the system, which means borrowers will likely pay a higher interest rate on mortgages.Read more: http://www.investopedia.com/articles/personal-finance/050715/how-federal-reserve-affects-mortgage-rates.asp#ixzz3f5DAfLWV Follow us: @Investopedia on Twitter |
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Variance |
DEFINITION of 'Variance'A measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean. Variance is calculated by taking the differences between each number in the set and the mean, squaring the differences (to make them positive) and dividing the sum of the squares by the number of values in the set. INVESTOPEDIA EXPLAINS 'Variance'Variance is used in statistics for probability distribution. Since variance measures the variability (volatility) from an average or mean, and volatility is a measure of risk, the variance statistic can help determine the risk an investor might take on when purchasing a specific security. A variance value of zero indicates that all values within a set of numbers are identical; all variances that are non-zero will be positive numbers. A large variance indicates that numbers in the set are far from the mean and each other, while a small variance indicates the opposite. Statisticians use variance to see how individual numbers relate to each other within a data set, rather than using broader mathematical techniques such as arranging numbers into quartiles. A drawback to variance is that it gives added weight to numbers far from the mean (outliers), since squaring these numbers can skew interpretations of the data.Read more: http://www.investopedia.com/terms/v/variance.asp#ixzz3f5DP3OU9 Follow us: @Investopedia on Twitter |
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Yield Curve |
DEFINITION of 'Yield Curve'A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.INVESTOPEDIA EXPLAINS 'Yield Curve'The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.Read more: http://www.investopedia.com/terms/y/yieldcurve.asp#ixzz3f5E9vqHX Follow us: @Investopedia on Twitter |
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Unlevered Beta |
DEFINITION of 'Unlevered Beta'A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the financial effects from leverage.The formula to calculate a company's unlevered beta is:Where:BL is the firm's beta with leverage.Tc is the corporate tax rate.D/E is the company's debt/equity ratio.INVESTOPEDIA EXPLAINS 'Unlevered Beta'This number provides a measure of how much systematic risk a firm's equity has when compared to the market. Unlevering the beta removes any beneficial effects gained by adding debt to the firm's capital structure. Comparing companies' unlevered betas gives an investor a better idea of how much risk they will be taking on when purchasing a firms' stock.Read more: http://www.investopedia.com/terms/u/unleveredbeta.asp#ixzz3f5G1oz4M Follow us: @Investopedia on Twitter |
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Butterfly Spread |
DEFINITION of 'Butterfly Spread'A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. The trader sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.INVESTOPEDIA EXPLAINS 'Butterfly Spread'Butterfly spreads have limited risk, meaning you can only lose your initial investment. Your maximum return is when the price of the underlying asset remains around the middle strike price.Read more: http://www.investopedia.com/terms/b/butterflyspread.asp#ixzz3f5GFbWVw Follow us: @Investopedia on Twitter |
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Share Premium Account |
DEFINITION of 'Share Premium Account'Usually found on the balance sheet, this is the account to which the amount of money paid (or promised to be paid) by a shareholder for a share is credited to, only if the shareholder paid more than the cost of the share.INVESTOPEDIA EXPLAINS 'Share Premium Account'The share premium account may be used to issue bonus shares, write-off equity related expenses like underwriting costs, It is a restricted account because:
Can be used to:
etc.Read more: http://www.investopedia.com/terms/s/sharepremiumaccount.asp#ixzz3f5InT76n Follow us: @Investopedia on Twitter |
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Comprehensive Income |
DEFINITION of 'Comprehensive Income'The change in a company's net assets from nonowner sources over a specified period of time. Comprehensive income is a statement of all income and expenses recognized during that period. The statement includes revenue, finance costs, tax expenses, discontinued operations, profit share and profit/loss.INVESTOPEDIA EXPLAINS 'Comprehensive Income'Companies typically report comprehensive income in a separate statement from income resulting from owner changes in equity, but have the option of providing information in a single statement. Many firms shy away from the single statement approach because it mixes owner and nonowner activity, which can muddle the underlying information. Comprehensive Income = Non-owner changes to owner's equity + Traditional Income There're 4 sources of Non-owner equity
FASB considers it inappropriate to include this type of income in the income statement. It is included in the notes. Read more: http://www.investopedia.com/terms/c/comprehensiveincome.asp#ixzz3f5K0CnG6 Follow us: @Investopedia on Twitter |
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Bagel Land |
DEFINITION of 'Bagel Land'A slang term that represents a stock or other security that is approaching $0 in price. Arriving in bagel land is usually the result of one or more major business problems that may not be resolvable. This term is typically used to describe an asset that has fallen from grace as opposed to a penny stock or other historically cheap security.INVESTOPEDIA EXPLAINS 'Bagel Land'If a stock or other asset is headed toward bagel land or is approaching $0 (resembling the hole in the middle of a bagel), investors generally feel that the security is nearly worthless. In such cases, a company may be nearing bankruptcy or facing major solvency issues. While returning from bagel land is possible, the likelihood that equity investors will lose their entire stakes in the company becomes very high.Read more: http://www.investopedia.com/terms/b/bagel-land.asp#ixzz3f5LQAOOu Follow us: @Investopedia on Twitter |
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Bear Hug |
DEFINITION of 'Bear Hug'An offer made by one company to buy the shares of another for a much higher per-share price than what that company is worth. A bear hug offer is usually made when there is doubt that the target company's management will be willing to sell.INVESTOPEDIA EXPLAINS 'Bear Hug'The name "bear hug" reflects the persuasiveness of the offering company's overly generous offer to the target company. By offering a price far in excess of the target company's current value, the offering party can usually obtain an agreement. The target company's management is essentially forced to accept such a generous offer because it is legally obligated to look out for the best interests of its shareholders.Read more: http://www.investopedia.com/terms/b/bearhug.asp#ixzz3f5LfMBJx Follow us: @Investopedia on Twitter |
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Cockroach Theory |
DEFINITION of 'Cockroach Theory'A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.INVESTOPEDIA EXPLAINS 'Cockroach Theory'For example, in February 2007, subprime lender New Century Financial Corporation faced liquidity concerns as losses arising from bad loans to defaulting subprime borrowers started to emerge. This company was the first of many other subprime lenders that faced financial problems, contributing to the subprime mortgage meltdown. In other words, the fact that one subprime lender (one cockroach) faced financial problems indicated that many other similar businesses were likely to face the same issues.Read more: http://www.investopedia.com/terms/c/cockroach-theory.asp#ixzz3f5Lu9gh0 Follow us: @Investopedia on Twitter |
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Describe Asset Protection for High Net Worth Individuals |
The steel magnate Andrew Carnegie, reputedly the world's richest man in his late 19th-century day, had some advice for anyone who wished to follow his example: “Put all your eggs in one basket,” he said, “and then watch that basket.”Watching those eggs – aka asset protection – may no longer be that simple, if indeed it ever was. But it's no less of a concern for anyone who has managed to amass some wealth. Making money is one thing; keeping it may require an entirely different set of strategies.Deposit and Securities InsuranceOn the most basic level, asset protection can include simple safeguards such as deposit insurance on bank accounts and the equivalent for brokerage accounts.For example, the Federal Deposit Insurance Corporation (FDIC) covers money in member banks for up to $250,000 per depositor, per bank and per “ownership category.” So, for example, you might have $250,000 each in an individual account, a joint account, an IRA and a trust account, and be covered for the full $1 million, all at one bank. There are several other ownership categories besides those four, and, of course, no shortage of banks.The Securities Investor Protection Corporation (SIPC) insures your cash and securities in member brokerage houses against the failure of that firm and, in some instances, theft from your account. The maximum coverage is $500,000, but, as with the FDIC and banks, you can structure your accounts in different ways (the SIPC calls this “separate capacity”) to multiply your total coverage.Personal InsurancePerhaps a greater risk to your personal wealth than the possibility of a bank or brokerage failure is a costly lawsuit. That's where other types of coverage come in.Liability coverage. Making sure that you have sufficient liability coverage for your home, auto, and business, if you own one, is a good place to start. In the case of an car, for example, you might be sued if you or a family member are involved in an accident and someone is seriously hurt. Most states require automobile owners to have a certain minimum level of bodily injury coverage, but it's unlikely to be enough. In many states, the minimum is $25,000 or less, which obviously won't go very far if you're sued. You can raise your coverage to several hundred thousand dollars with many insurance companies. Even that amount may be insufficient, however, especially if you have substantial assets to target. In that case, you'll also want to look into the four types of insurance listed below.Umbrella insurance. An umbrella policy takes up where your home and auto insurance leave off. For example, a $1 million umbrella policy would extend your liability coverage to that amount, for a cost of about $150 to $300 a year, according to the Insurance Information Institute (III). An additional million in coverage might run you $75 a year, the institute says, with each additional million adding another $50 or so. Of course, this is all on top of what you're already paying for your home and auto insurance.Professional liability coverage. Medical malpractice insurance may be the most famous example, but whatever your field, you might need professional liability insurance. Among the most vulnerable professions, according to the III: accountants, architects, engineers, IT consultants, investment advisers, lawyers and real-estate agents. Your professional association is likely to be a good source of information on the kind of insurance you need and where you can buy it.Business liability is another matter, and what you'll need will depend on the size and nature of your business. One option for small and mid-sized companies is what's called a business owner policy (BOP), which includes property, liability and other types of coverage, all rolled into one. For other ideas, see Asset Protection For The Business Owner.Directors and officers insurance. If you serve on a board, even as an unpaid volunteer for a nonprofit, you could face a personal lawsuit as a result. If the organization doesn't already provide directors and officers (D&O) liability insurance for you, it's worth investigating.Trusts and Other Legal OptionsAfter you've consulted with an insurance broker or two, your next stop might be a lawyer's office to discuss other ways to shield your assets from possible risks. Bear in mind that some of your assets may already be off limits to creditors in most circumstances. Those generally include your 401(k) plan and, in some states, your IRA. At least a portion of the equity in your principal residence is also protected under many states' laws.To protect what's left, you might consider transferring assets to a spouse or children. However, both of those moves have significant risks of their own – divorce in the case of a spouse and loss of control of the money in the case of children, to name just two. With children you'll also face possible gift taxes, which currently kick in if you give a child more than $14,000 in any year. (Your spouse can give a like amount.)A properly written trust can help achieve the same asset-protection goals without those issues. But note that you need to set up your trust before anything bad happens that could lead to a claim against you, even if you haven't actually been sued yet. If you attempt to establish a trust after that, it may be considered a fraudulent transfer to avoid paying creditors, creating a whole new set of legal problems for you.A knowledgeable lawyer can walk you through the types of trusts and make recommendations based on your particular circumstances (see Build A Wall Around Your Assets). One option you're likely to hear about is a domestic asset protection trust or DAPT, a relatively new variety. Sometimes referred to as an Alaska trust, for the first state to legalize them, it essentially allows you to put assets into a trust, with yourself as a beneficiary, that's out of the reach of creditors.The Bottom LineAsset protection is not the only, or perhaps even the most important, aspect of wealth management. In fact, "The 2014 U.S. Trust Insights on Wealth and Worth," a 2014 survey of high net-worth investors, found that 61% considered growing their assets a higher priority than preserving them.Still, conserving and shielding assets is a critical consideration in any financial plan, especially for someone with a significant portfolio. You can't take it with you – but you don't want to lose it, either.Read more: http://www.investopedia.com/articles/personal-finance/060515/asset-protection-high-net-worth-individuals.asp#ixzz3f5M5E0B9 Follow us: @Investopedia on Twitter |
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Zombies |
DEFINITION of 'Zombies'Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to the high costs associated with certain operations, such as research and development. Most analysts expect zombie companies to be unable to meet their financial obligations.Also known as the "living dead" or "zombie stocks".INVESTOPEDIA EXPLAINS 'Zombies'Because a zombie's life expectancy tends to be highly unpredictable, zombie stocks are extremely risky and are not suitable for all investors. For example, a small biotech firm may stretch its funds extremely thin by concentrating its efforts in research and development in the hope of creating a blockbuster drug. If the drug fails, the company can go bankrupt within days of the announcement. On the other hand, if the drug is successful, the company could profit and reduce its liabilities. In most cases, however, zombie stocks are unable to overcome the financial burdens of their high burn rates and most eventually go bankrupt.Given the lack of attention paid to this group, there can often be interesting opportunities for investors who have a high risk tolerance and are seeking speculative opportunities.Read more: http://www.investopedia.com/terms/z/zombies.asp#ixzz3f5MRCIGk Follow us: @Investopedia on Twitter |
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Stalking-Horse Bid |
DEFINITION of 'Stalking-Horse Bid'An initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid.INVESTOPEDIA EXPLAINS 'Stalking-Horse Bid'This method allows the distressed company to avoid low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets. In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price.Read more: http://www.investopedia.com/terms/s/stalkinghorsebid.asp#ixzz3f5Ma8Uag Follow us: @Investopedia on Twitter |
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Equity Market |
DEFINITION of 'Equity Market'The market in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance.INVESTOPEDIA EXPLAINS 'Equity Market'This market can be split into two main sectors: the primary and secondary market. The primary market is where new issues are first offered. Any subsequent trading takes place in the secondary market.Read more: http://www.investopedia.com/terms/e/equitymarket.asp#ixzz3f5MpapB9 Follow us: @Investopedia on Twitter |
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Modified Internal Rate of Return |
DEFINITION of 'Modified Internal Rate Of Return - MIRR'While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost. Therefore, MIRR more accurately reflects the cost and profitability of a project.The formula for MIRR is: = (FV(Positive Cost of Capital)/PV(Initial Outlays Financing Cost))^1/n - 1 Note how this looks like the derivation of rate for FV = PV (1+r)^n INVESTOPEDIA EXPLAINS 'Modified Internal Rate Of Return - MIRR'For example, say a two-year project with an initial outlay of $195 and a cost of capital of 12%, will return $121 in the first year and $131 in the second year. To find the IRR of the project so that the net present value (NPV) = 0:NPV = 0 = -195 + 121/(1+ IRR) + 131/(1 + IRR)2 NPV = 0 when IRR = 18.66%To calculate the MIRR of the project, we have to assume that the positive cash flows will be reinvested at the 12% cost of capital. So the future value of the positive cash flows is computed as: $121(1.12) + $131 = $266.52 = Future Value of positive cash flows at t = 2 Now you divide the future value of the cash flows by the present value of the initial outlay, which was $195, and find the geometric return for 2 periods. =sqrt($266.52/195) -1 = 16.91% MIRR You can see here that the 16.91% MIRR is materially lower than the IRR of 18.66%. In this case, the IRR gives a too optimistic picture of the potential of the project, while the MIRR gives a more realistic evaluation of the project.Read more: http://www.investopedia.com/terms/m/mirr.asp#ixzz3f5ODlc1g Follow us: @Investopedia on Twitter |
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Delta-Gamma Hedging |
DEFINITION of 'Delta-Gamma Hedging'An options hedging strategy that combines a delta hedge and a gamma hedge. A delta-gamma hedge is designed to reduce or eliminate the risk created by changes in the underlying asset’s price, as well as variances in how much the price changes.AdsOptions Trading Lessonswealthdaily.com/Options_TradingWith just these 3 Free reports you could be trading by day's end."New Crisis is Coming"www.ronpaulupdate.com22-year Congressman speaks out and reveals #1 step to prepare.INVESTOPEDIA EXPLAINS 'Delta-Gamma Hedging'In options, delta refers to a change in the price of an underlying asset, while gamma refers to the rate of change of delta. They are used to gauge movement in an option’s price relative to how into or out of the money the option is. Investors use a gamma hedge to protect themselves from the remaining exposure created through the use of a delta hedge, which is generated because delta hedges are more effective when the underlying asset has a single price.A delta-gamma hedge requires the purchase of shares and a call option, while selling a call option at another strike price. The goal of the hedge is to eliminate both gamma and delta for the shares. The delta option component involves selling options to produce a negative delta.Using a gamma hedge in conjunction with a delta hedge requires an investor to create new hedges when the underlying asset’s delta changes. The number of shares that are bought or sold under a delta-gamma hedge depends on whether the underlying asset price is increasing or decreasing, and by how much.Because the investor is more actively purchasing the underlying shares, a portfolio using a gamma hedge will be slightly more volatile because of a higher exposure to equities.Large hedges that involve buying or selling significant quantities of shares and options may have the effect of changing the price of the underlying on the market, requiring the investor to constantly and dynamically create hedges for a portfolio to take into account greater fluctuations in prices.Read more: http://www.investopedia.com/terms/d/deltagamma-hedging.asp#ixzz3f5PCqVjb Follow us: @Investopedia on Twitter |
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Risk-Return Tradeoff |
DEFINITION of 'Risk-Return Tradeoff'The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.INVESTOPEDIA EXPLAINS 'Risk-Return Tradeoff'Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.Read more: http://www.investopedia.com/terms/r/riskreturntradeoff.asp#ixzz3f5PQTZz4 Follow us: @Investopedia on Twitter |
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International Monetary Fund (IMF) |
Created at the end of WWII, currently 188 member countries including US DEFINITION OF 'INTERNATIONAL MONETARY FUND - IMF'An international organization created for the purpose of: 1. Promoting global monetary and exchange stability 2. Facilitating the expansion and balanced growth of international trade, reduce poverty 3. Assisting in the establishment of a multilateral system of payments for current transactions. Uses 3 tools to carryout mission
INVESTOPEDIA EXPLAINS 'INTERNATIONAL MONETARY FUND - IMF'The IMF plays three major roles in the global monetary system. The Fund surveys and monitors economic and financial developments, lends funds to countries with balance-of-payment difficulties, and provides technical assistance and training for countries requesting it.Read more: http://www.investopedia.com/terms/i/imf.asp#ixzz3f5Pj90Hc Follow us: @Investopedia on Twitter |
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Current Account Deficit |
DEFINITION of 'Current Account Deficit'A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components tend to make up a smaller percentage of the current account than exports and imports. The current account is a calculation of a country’s foreign transactions, and along with the capital account is a component of a country’s balance of payment.AdsWho Controls The World?outsiderclub.com/Global_EliteOne Group Rules In Secret This New Report Exposes All"New Crisis is Coming"www.ronpaulupdate.com22-year Congressman speaks out and reveals #1 step to prepare.INVESTOPEDIA EXPLAINS 'Current Account Deficit'A current account deficit represents a negative net sales abroad. Developed countries, such as the United States, often run current account deficits, while emerging economies often run current account surpluses. Countries that are very poor tend to run current account deficits.A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution industrialization or policies that improve domestic companies' global competitiveness. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, since this makes a country’s exports less expensive.While a current account deficit can be considered akin to a country living “outside of its means," having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, it may become insolvent.Read more: http://www.investopedia.com/terms/c/currentaccountdeficit.asp#ixzz3f5R0TfGk Follow us: @Investopedia on Twitter |
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Quantitative Easing |
DEFINITION of 'Quantitative Easing'An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.INVESTOPEDIA EXPLAINS 'Quantitative Easing'Typically, central banks target the supply of money by buying or selling government bonds. When the bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is now available in the economy. Additionally, banks may decide to keep funds generated by quantitative easing in reserve rather than lending those funds to individuals and businesses.Read more: http://www.investopedia.com/terms/q/quantitative-easing.asp#ixzz3f5ROqJyT Follow us: @Investopedia on Twitter |
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European Central Bank |
DEFINITION of 'European Central Bank - ECB'The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.INVESTOPEDIA EXPLAINS 'European Central Bank - ECB'The European Central Bank has been responsible for the monetary policy of the European Union since January 1, 1999, when the euro currency was adopted by the EU members. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things.Read more: http://www.investopedia.com/terms/e/europeancentralbank.asp#ixzz3f5RgrPtv Follow us: @Investopedia on Twitter |
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Bund |
DEFINITION of 'Bund'A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury bonds. The German government uses bunds to finance its spending. Long-term bonds are the most widely issued, with billions of euros' worth outstanding, and these come in 10- and 30-year durations.INVESTOPEDIA EXPLAINS 'Bund'Similar to U.S. Treasuries, bunds are auctioned off in the primary market and traded in the secondary market. They can be stripped, meaning their coupon payments can be separated from their principal repayments and traded individually. Bunds pay interest and principal three times a year.Read more: http://www.investopedia.com/terms/b/bund.asp#ixzz3f5uHQiMe Follow us: @Investopedia on Twitter |
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Grexit |
DEFINITION of 'Grexit'Grexit, an abbreviation for "Greek exit," refers to Greece's potential withdrawal from the eurozone, after which it would most likely revert to using the drachma, its currency until 2001. Ads16.1% 2014 Annuity Returnadvisorworld.com/CompareAnnuitiesTrue Investor Returns with no Risk. Find out how with our Free Report.Investing in Gold Coinswww.learcapital.comKnow the Facts Before You Buy. We'll Send You a Free Investor Kit!INVESTOPEDIA EXPLAINS 'Grexit'Following the global financial crisis of 2008-2009 Greece suffered a series of recessions, and the country's debt-to-GDP ratio rose to nearly 150% in 2010. Greek government bonds were downgraded to junk status, and the risk of a government default became untenable for other members of the currency union. Eurozone countries, European Central Bank and the IMF offered a €110 billion bailout in May 2010, which was later expanded to €240 billion. In exchange, Greek officials promised to pursue aggressive austerity measures and structural reforms. The trio has earned the disparaging nickname the "troika" for what many Greeks perceive as callous treatment of ordinary citizens through its insistence on austerity.In November 2011, violent protests over austerity led Prime Minister George Papandreou to resign. An early election was held in 2012, but no government was formed for months as protests continued. Around this time, analysts coined the phrase Grexit to capture investors' worries that Greece would default on its debt and withdraw from the eurozone. In January 2015, the left-wing Syriza party won snap elections on an anti-austerity, anti-troika platform that has renewed worries of a Grexit. Prime Minsiter Alexis Tsipras and Fincance Minister Yanis Varoufakis have not presented a reform package that Greece's lenders find satisfactory; the latter have suspended bailout payments, which may render Greece unable to make its next loan repayment to the IMF. According to German Chancellor Angela Merkel, with whom Greek officials have clashed repeatedly, changes have been made to the currency union since 2012, so that the prospect of a Greek exit does not endanger the single currency as a whole.Read more: http://www.investopedia.com/terms/g/grexit.asp#ixzz3f5uPjbKQ Follow us: @Investopedia on Twitter |
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National Currency |
DEFINITION of 'National Currency'The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is usually the predominant currency used for most financial transactions in that country.INVESTOPEDIA EXPLAINS 'National Currency'A handful of national currencies such as the U.S. dollar and the euro have achieved global status as reserve currencies and are extensively used in international trade transactions. The euro has supplanted the national currencies of a number of nations that comprise the European Union. The national currencies of some countries such as the United Arab Emirates are pegged or fixed to the U.S. dollarRead more: http://www.investopedia.com/terms/n/national-currency.asp#ixzz3f5ujj5e7 Follow us: @Investopedia on Twitter |
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Multicurrency Note Facility |
DEFINITION of 'Multicurrency Note Facility'A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. This type of credit facility allows the borrower to choose which currency to use in each rollover period when the loan is refinanced, but allows the lender to choose the currency the loan is to be repaid in. INVESTOPEDIA EXPLAINS 'Multicurrency Note Facility'Multicurrency note facilities are the riskiest lending avenue for borrowers. This is because the borrower assumes the foreign-currency risk in the transaction, since the lender decides which currency to receive repayment in, typically at a predetermined exchange rate. The loans from these facilities usually reprice about every six months.Read more: http://www.investopedia.com/terms/m/multicurrency-note-facility.asp#ixzz3f5uz5ObC Follow us: @Investopedia on Twitter |
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American Dream |
DEFINITION of 'American Dream'The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American dream is achieved through sacrifice, risk-taking and hard work, not by chance. Both native-born Americans and American immigrants pursue and can achieve the American dream. In contrast to other political and economic systems, such as communist dictatorships, America’s free-enterprise system makes possible the circumstances that allow individuals to go beyond meeting their basic needs to achieve self-actualization and personal fulfillment.Ads16.1% 2014 Annuity Returnadvisorworld.com/CompareAnnuitiesTrue Investor Returns with no Risk. Find out how with our Free Report.Franchises under $10,000franchise.franchisegator.comFranchises for less than $10K. 100's of low cost franchises.INVESTOPEDIA EXPLAINS 'American Dream'The tenets of the American dream can be found in the Declaration of Independence, which states, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” In a society based on these principles, an individual can live life to its fullest as he or she defines it. The American dream requires political and economic freedom as well as rules of law and private property rights. Without them, individuals cannot make the choices that will permit them to attain success, nor can they have confidence that their achievements will not be taken away from them through arbitrary force. The American dream offers the freedom to make both the large and small decisions that affect one’s life; the freedom to aspire to bigger and better things and the possibility of achieving them; the freedom to accumulate wealth; the opportunity to lead a dignified life; and the freedom to live in accordance with one’s values, even if those values are not widely held or accepted. Home ownership is frequently cited as an example of attaining the American dream. It is a symbol of financial success and independence, and it means having the ability to control one’s own piece of property instead of being subjected to the whims of a landlord. Owning one’s own business and being one’s own boss also represent American dream fulfillment.Read more: http://www.investopedia.com/terms/a/american-dream.asp#ixzz3f5vJfHLW Follow us: @Investopedia on Twitter |
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Inbound Cash Flow |
Flow'Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow can include sales revenue generated through business operations, refunds received from suppliers, financing transactions and amounts won through legal proceedings.INVESTOPEDIA EXPLAINS 'Inbound Cash Flow'Any positive cash additions to an entity's bank account. When a salesperson is paid from their employer for their time spent working, this an inbound cash flow for the employee. Conversely, this payment to the employee represents an outbound cash flow for the employer. When the salesperson successfully completes a sale to a customers, this represents and inbound cash flow for the company.As well, consider a company going through a round of debt financing. When a company issues bonds, they are borrowing money, which will need to be repaid in the future (with interest). However, at the time the bond is sold, the company receives the cash, which makes it an inbound cash flow for the company. When the bond is later repaid, this is an outbound cash flow for the company.Read more: http://www.investopedia.com/terms/i/inbound_cash_flow.asp#ixzz3fAhHSUSc Follow us: @Investopedia on Twitter |
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Behavioral Finance |
Attempts to fill the void of where many studies have documented long-term historical phenomena in securities markets that contradict EMT and cannot be captured plausibly in models that are based on perfect investor rationality. |
