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is the after tax real rate of return better than the nominal rate of return | your after tax real rate of return will give you the actual benefit of the investment and whether it is sufficient to sustain your standard of living in the future because it takes into account your fees tax rate and inflation both figures are useful tools to analyze an investment s performance if you are comparing two investments it would be important to use the same figure for both my nominal rate of return is 12 inflation is 8 5 and my applicable tax rate is 15 what is my after tax real rate of return your after tax real rate of return is calculated by first figuring your after tax pre inflation rate of return which is calculated as nominal return 1 tax rate that would be 0 12 1 0 15 0 102 10 2 to calculate the after tax real rate of return divide 1 plus the figure above by 1 plus the inflation rate that would be 1 0 102 1 0 085 1 1 0157 1 0 0157 1 57 after tax real rate of return as you can see the high inflation rate has a substantial impact on the after tax real rate of return for your investment the bottom line | |
what is after hours trading | the term after hours trading refers to trading activity that starts at 4 p m u s eastern time after the major u s stock exchanges close the after hours trading session can run as late as 8 p m though volume typically thins out much earlier in the session after hours trading is conducted through electronic communication networks ecns although there are some key advantages of trading when the market closes traders should be mindful of all the risks associated with this period understanding after hours tradingafter hours trading generally refers to trading that takes place after normal market hours and up until about 8 pm premarket trading refers to trading that takes place before the start of normal market hours generally from 7 a m until 9 25 a m together after hours trading and premarket trading are referred to as extended hours trading the precise times of extended hours trading can depend on the ecn an investor uses or the financial institution where they place their orders for instance wells fargo allows after hours trading from 4 05 p m et until just 5 p m 1traders and investors engage in after hours trading for a variety of reasons they may prefer trading with fewer market participants or their schedules may require it they may want to take positions as a result of news that breaks after the close of the stock exchange or they may want to close out a position before they leave on vacation electronic markets used in after hours trading automatically attempt to match up buy and sell orders if they can do so trades are completed if they can t trades remain unfilled quotes provided are limited to those available through the electronic market used investors may have access to other participating ecns but it isn t guaranteed after hours trading scheduleafter hours trading may occur during two periods after hours after market close but on the same calendar day or pre market after market close but on the subsequent calendar day before the next opening pre market trading often occurs between 4 00 a m et and 9 30 a m et after hours trading often occurs between 4 00 p m et and 8 00 p m et note that different exchanges may have varying hours and varying trade data posting times for example nasdaq pre trade data will be posted from 4 15 a m et to 7 30 a m et of the following day while after hours trades will be posted from 4 15 p m et to 3 30 p m et of the following day 2 | |
how to trade after hours | to trade stocks after hours you need to have an account with a brokerage firm that offers after hours trading not all brokerage firms offer this service check with your broker to see if they provide after hours trading in addition each brokerage firm that offers after hours trading may have varying hours so ensure you understand when after hours trading is allowed the process for placing an order in after hours trading is similar to placing an order during regular trading hours however there are some important differences assuming your brokerage firm offers after hours trading you can place orders through their online trading platform most importantly not all order types are usually available during after hours trading for example limit orders may not be available and market orders may only be partially filled due to the order book s lack of liquidity for example charles schwab does not allow stop stop limit fill or kill immediate or cancel or all or nothing orders there are several things to consider when you trade in an after hours session including volume price and participation in after hours trading the trading volume for a stock may spike on the initial release of news but most of the time thins out as the session progresses the growth of volume generally slows significantly by 6 p m so there is a substantial risk that investors will be trading illiquid stocks after hours not only does volume sometimes come at a premium in the after hours trading sessions so does price it is not unusual for the spreads to be wide in the after hours the spread is the difference between the bid and the ask prices due to fewer shares trading the spread may be significantly wider than during the normal trading session if liquidity and prices weren t enough to make after hours trading risky the lack of participants may do the trick that s why certain investors and institutions may choose not to participate in after hours trading regardless of news or events it s quite possible for a stock to fall sharply in the after hours only to rise once the regular trading session resumes the next day at 9 30 a m many big institutional investors have a certain view of price action during after hours trading sessions and express that view with their trades once the regular market re opens since volume is thin and spreads are wide in after hours trading it is much easier to push prices higher or lower fewer shares and trades are needed to make a substantial impact on a stock s price that s why after hours orders usually are restricted to limit orders if your brokerage doesn t restrict them consider them anyway as a means to protect yourself from unexpected price swings and order fills advantages and disadvantages of after hours tradingthe ability to place trades and have them filled in trading sessions that occur after normal stock exchange business hours can be important to some traders and investors after hours trading offers certain advantages if the electronic communication network you use for after hours trading suddenly becomes unavailable for technical reasons your broker may try to direct orders to other participating ecns so that they can continue to be filled if this isn t possible a broker may find it necessary to cancel all orders entered for the after hours session make sure you understand the risks associated with after hours trading before you start bear in mind that these drawbacks are on top of the inherent risks of stock trading some brokerages require that investors accept the ecn user agreement and speak with their brokerage representative before they re allowed to trade so that they fully grasp and accept those risks 3may allow investors to take advantage of being early to an opportunityoffers greater convenience to traders instead of restricting trades to select hoursmay present greater profit opportunities due to higher volatilityallows investors to move when new market information is presentedoften results in low liquidity of an security making it more difficult to transact withoften results in greater price volatility due to greater bid ask spreadsmay result in greater competition due to limited availability of sharesmay result in restrictions due to your broker | |
how after hours trading affects the stock price | after hours trading often has an impact on the opening price for a stock at the beginning of the next normal trading session this is especially true if select events have occurred such as earnings release or extremely low liquidity as discussed above because after hours trading is usually done with a low amount of available shares after hours trading may result in stock movements that do not resolve until the subsequent day this price volatility may be temporary as the market may capture spikes in price to resolve liquidity shortages of securities once regular trading hours have opened after hours trading may also affect a stock price if the company has also released important news or earnings after the market has closed not only may this information positively or negatively impact the valuation of the security but traders may attempt to capitalize on this new information in some situations large enough news may invoke larger activity of after hours traders further increasing or decreasing the opening price on the subsequent day finally after hours traders may attempt to price discover the process where buyers and sellers negotiate a price based on available supply and demand this process may move the existing price of a stock after hours as each side sees what sentiments of a stock may be befoe its opening the following trading period after hours trading vs standard tradingthe table below highlights some of the key differences between trading after hours and during the normal trading session example of after hours tradinglet s take a real world example with nvidia nvda to show how after hours trading works though a historical example this situation adequately defines the opportunity traders may find in after hours trading and how early movement on news may yield benefits that are saturated by the time markets have opened to the general public nvidia s stock was greeted by a big jump in price after it reported its fourth quarter and annual results in 2019 market reaction led to a rise in the company s stock price to nearly 169 from 154 50 in the 10 minutes following the news 4the chart below shows that the stock s trading volume was steady in the first 10 minutes and dropped quickly after 4 30 p m during the first five minutes of trading around 700 000 shares were traded and the stock jumped nearly 6 however volume slowed materially with just 350 000 shares trading between 4 25 and 4 30 by 5 p m volume measured only 100 000 shares while the stock was still trading around 165 image by sabrina jiang investopedia 2020but when the market opened for normal trading the next morning traders and investors had a chance to weigh in on nvidia s results from 9 30 a m to 9 35 a m nearly 2 3 million shares were traded more than three times the volume in the initial minutes of the previous day s after hours trading the price dropped from 164 to 161 the stock proceeded to trade lower throughout the rest of the day closing at 157 20 that was just 3 higher than the previous day s close moreover it was a plummet from the nearly 15 increase made in the after hours session sadly nearly all of the after hours gains made by investors during that session had evaporated | |
does after hours trading affect opening price | it certainly can since a great deal of trading may be taking place after hours prices of securities can change from their levels when the regular market previously closed can you actually trade after hours yes provided your brokerage authorizes you to do so you ll first want to make sure you clearly understand how after hours trading works and the risks involved in it your brokerage may ask that you meet with a investment representative to make sure you know the difficulties posed by after hours and premarket trading | |
why can stocks be so volatile in after hours trading | lower trading volume and less liquidity results when fewer traders and investors are in the market this causes wider bid ask spreads and in turn greater stock price volatility this is the challenging trading environment that can exist in after hours trading the bottom lineafter hours trading of securities occurs after the regular trading session closes at 4 p m et and can last until about 8 p m et while it offers investors certain advantages it also can be quite risky so in addition to understanding those risks be sure to consider your investing goals your risk tolerance and your trading style before getting involved most investors may want to stick with the familiar buy and hold strategy that can be executed during normal trading sessions however for those prepared for it after hours trading may be a useful investment tool and worth trying out | |
what is an after tax contribution | an after tax contribution is money paid into a retirement or investment account after income taxes on those earnings have already been deducted when opening a tax advantaged retirement account an individual may choose to defer the income taxes owed until after retiring if it is a traditional retirement account or pay the income taxes in the year in which the payment is made if it is a roth retirement account some savers mostly those with higher incomes may contribute after tax income to a traditional account in addition to the maximum allowable pre tax amount they don t get any immediate tax benefit this commingling of pre tax and post tax money takes some careful accounting for tax purposes 1understanding after tax contributionsin order to encourage americans to save toward their retirement years the government offers several tax advantaged retirement plans such as the 401 k plan offered by many companies to their employees and the ira which anyone with earned income can open through a bank or a brokerage most but not all people who open a retirement account can choose either of the two main options the post tax roth option offers the attraction of a retirement nest egg that is not subject to further taxes it makes the most sense for those who believe they may be paying a higher tax rate in the future either because of their expected retirement income or because they think taxes will go up in addition money contributed post tax can be withdrawn at any time without a fat irs penalty being imposed the profits in the account are untouchable until the account holder is 59 5on the downside the post tax option means a smaller paycheck with every contribution into the account the pre tax or traditional option reduces the saver s taxes owed for the year the contributions are made and it is a smaller hit to current income the downside is that withdrawals from this type of retirement fund will be taxable income whether it s money that was paid in or profits from the money earned a roth ira by definition is a retirement account in which the earnings grow tax free as long as the money is held in the roth ira for at least five years contributions to a roth are made with after tax dollars and as a result they are not tax deductible however you can withdraw the contributions in retirement tax free 6both post tax and pre tax retirement accounts have limits on how much can be contributed each year if you have a pre tax or traditional account you will have to pay taxes on money withdrawn before age 59 and the funds are subject to a hefty early withdrawal penalty 8as noted the money deposited in a post tax or roth account but not any profits it earns can be withdrawn at any time without penalty the taxes have already been paid and the irs doesn t care but if it s a pre tax or traditional account any money withdrawn before age 59 is fully taxable and subject to a hefty early withdrawal penalty 5an account holder who changes jobs can roll over the money into a similar account available at the new job without paying any taxes the term rollover is meaningful it means that the money goes straight from account to account and never gets paid into your hands otherwise it can count as taxable income for that year 9special considerationsas noted above there are limits to the amount of money that a saver can contribute each year to a retirement account actually you can have more than one account or a post tax and a pre tax account but the total contribution limits are the same 10withdrawals of after tax contributions to a traditional ira should not be taxed however the only way to make sure this does not happen is to file irs form 8606 form 8606 must be filed for every year you make after tax non deductible contributions to a traditional ira and for every subsequent year until you have used up all of your after tax balance 11since the funds in the account are separated into taxable and non taxable components figuring the tax due on the required distributions is more complicated than if the account holder had made only pre tax contributions | |
what are the ira limits | the ira contribution limits for 2023 are 6 500 7 000 in 2024 if you are aged 50 and over you may contribute an additional 1 000 in both 2023 and 2024 these limits are for both traditional iras and roth iras 3can i contribute to both a traditional ira and a roth ira yes you can contribute to both a traditional ira and a roth ira there are no restrictions on contributing to both however the total amount you contribute to both cannot be over the overall limit for iras set by the irs which is 6 500 in 2023 and 7 000 in 2024 with an additional 1 000 allowed in both years if you re 50 and over 3 | |
is it better to do pre tax or after tax contributions | whether it is better to do pre tax or after tax contributions will depend on the individual and their financial circumstances generally it is recommended that pre tax contributions are better for higher earners while after tax contributions are better for lower earners particularly those who expect to be in a higher tax bracket when they retire the bottom lineafter tax contributions into retirement accounts can be beneficial if you expect to be in a higher income tax bracket when you are retired this may not always be the case and everyone s situation is difficult generally it s good to have a mix of retirement accounts that allow for tax advantages in the present and when you are retired | |
what is after tax income | after tax income is the net income after deducting all federal state and withholding taxes after tax income also called income after taxes and the net of tax amount represents the amount of disposable income that a consumer or firm has available to spend understanding after tax incomemost individual tax filers use some version of the irs form 1040 to calculate their taxable income income tax due and after tax income 1 to calculate after tax income the deductions are subtracted from gross income the difference is the taxable income on which income taxes are due after tax income is the difference between gross income and the income tax due consider the following example abi sample earns 30 000 and claims 10 000 in deductions resulting in a taxable income of 20 000 their federal income tax rate is 15 making the income tax due 3 000 the after tax income is 27 000 or the difference between gross earnings and income tax 30 000 3 000 27 000 individuals can also account for state and local taxes when calculating after tax income when doing this sales tax and property taxes are also excluded from gross income continuing with the above example abi sample pays 1 000 in state income tax and 500 in municipal income tax resulting in an after tax income of 25 500 27 000 1500 25 500 | |
when analyzing or forecasting personal or corporate cash flows it is essential to use an estimated after tax net cash projection this estimate is a more appropriate measure than pretax income or gross income because after tax cash flows are what the entity has available for consumption | calculating after tax income for businessescomputing after tax income for businesses is relatively the same as for individuals however instead of determining gross income enterprises begin by defining total revenues business expenses as recorded on the income statement are subtracted from total revenues producing the firm s income finally any other relevant deductions are subtracted to arrive at taxable income the difference between the total revenues and the business expenses and deductions is the taxable income on which taxes will be due the difference between the business s income and the income tax due is the after tax income after tax and pretax retirement contributionsthe terms after tax and pretax income often refer to retirement contributions or other benefits for example if someone makes pretax contributions to a retirement account those contributions are subtracted from their gross pay 2 after deductions are made to the gross salary amount the employer will calculate payroll taxes medicare contributions and social security payments are calculated on the difference after these deductions are taken from the gross salary amount however if the employee makes after tax contributions to a retirement account the employer applies taxes to the employee s gross pay and then subtracts the retirement contributions from that amount 2 | |
what is an agency bond | an agency bond is a security issued by a government sponsored enterprise or by a federal government department other than the u s treasury some are not fully guaranteed in the same way that u s treasury and municipal bonds are an agency bond is also known as agency debt | |
how agency bonds work | most agency bonds pay a semi annual fixed coupon they are sold in a variety of increments generally with a minimum investment level of 10 000 for the first increment and 5 000 for additional increments gnma securities however come in 25 000 increments some agency bonds have fixed coupon rates while others have floating rates the interest rates on floating rate agency bonds are periodically adjusted according to the movement of a benchmark rate such as libor like all bonds agency bonds have interest rate risks that is a bond investor may buy bonds only to find that interest rates rise the real spending power of the bond is less than it was the investor could have made more money by waiting for a higher interest rate to kick in naturally this risk is greater for long term bond prices types of agency bondsthere are two types of agency bonds including federal government agency bonds and government sponsored enterprise gse bonds federal government agency bonds are issued by the federal housing administration fha small business administration sba and the government national mortgage association gnma gnmas are commonly issued as mortgage pass through securities like treasury securities federal government agency bonds are backed by the full faith and credit of the u s government an investor receives regular interest payments while holding this agency bond at its maturity date the full face value of the agency bond is returned to the bondholder federal agency bonds offer a slightly higher interest rate than treasury bonds because they are less liquid in addition agency bonds may be callable which means that the agency that issued them may decide to redeem them before their scheduled maturity date a gse is issued by entities such as the federal national mortgage association fannie mae federal home loan mortgage freddie mac federal farm credit banks funding corporation and the federal home loan bank these are not government agencies they are private companies that serve a public purpose and thus may be supported by the government and subject to government oversight gse agency bonds do not have the same degree of backing by the u s government as treasury bonds and government agency bonds therefore there is some credit risk and default risk and the yield offered on them typically higher to meet short term financing needs some agencies issue no coupon discount notes or discos at a discount to par discos have maturities ranging from a day to a year and if sold before maturity may result in a loss for the agency bond investor government sponsored enterprise bonds do not have the same degree of backing by the u s government as treasury bonds and other agency bonds tax considerationsthe interest from most but not all agency bonds is exempt from local and state taxes farmer mac freddie mac and fannie mae agency bonds are fully taxable agency bonds when bought at a discount may subject investors to capital gains taxes when they are sold or redeemed capital gains or losses when selling agency bonds are taxed at the same rates as stocks tennessee valley authority tva federal home loan banks and federal farm credit banks agency bonds are exempt from local and state taxes | |
what is agency by necessity | agency by necessity is a type of legal relationship in which one party can make essential decisions for another party until legally recognized agents like someone with power of attorney or guardianship are put in place the courts recognize agency by necessity during an emergency or urgent situation under which the beneficiary is unable to provide explicit authorization under such circumstances those granted agency must act for the sole benefit of the beneficiary in finance agency by necessity often takes the form of replacing an individual s investment or retirement decisions understanding agency by necessityemergency situations often lead to agency by necessity in the eyes of the court for example if an individual is sick and unable to make a critical investment or retirement decision agency of necessity would allow an attorney parent or spouse to make decisions on behalf of the incapacitated party agency by necessity becomes important in wealth management for example many wealth managers are involved in the creation of wills trusts and overseeing inheritances of wealth from one generation to the next if a family member in possession of or who is an agent of the family s wealth becomes incapacitated in an accident or is ill another close family member of similar capabilities and understanding of the family finances may take over as an agent of necessity at times this can become fraught however particularly in cases of high net worth individuals or wealthy families that have to make decisions about wealth distribution for future generations family members and additional stakeholders may take issue with decisions that the agent by necessity makes agency by necessity and estate planningalthough many conduct their estate planning before becoming incapacitated at times these tasks may be given to an agent by necessity estate planning entails a variety of critical tasks such as the bequest of assets to heirs and the settlement of estate taxes most estate plans require the help of an attorney estate planning can also take into account the management of an individual s properties and financial obligations if the individual owes debts and is not of sound mind to pay them an agent by necessity may step in to figure out a plan for repayment the assets that could comprise an individual s estate include houses cars stocks bonds and other financial assets paintings and other collectibles life insurance and pensions these must be distributed as the individual has chosen after passing in addition to preserving family wealth and providing for surviving spouses and children many individuals will undertake serious estate planning to fund children or grandchildren s education or leave their legacy to a charitable cause specific estate planning tasks could include but are not limited to | |
what are agency costs | an agency cost is a type of internal company expense which comes from the actions of an agent acting on behalf of a principal agency costs typically arise in the wake of core inefficiencies dissatisfactions and disruptions such as conflicts of interest between shareholders and management the payment of the agency cost is to the acting agent investopedia xiaojie liuunderstanding agency costagency costs can occur when the interests of the executive management of a corporation conflict with its shareholders shareholders may want management to run the company in a certain manner which increases shareholder value conversely the management may look to grow the company in other ways which may conceivably run counter to the shareholders best interests as a result the shareholders would experience agency costs as early as 1932 american economists gardiner coit means and adolf augustus berle discussed corporate governance in terms of an agent and a principal in applying these principals towards the development of large corporations where the interests of the directors and managers differed from those of owners principal agent relationshipthe opposing party dynamic is called the principal agent relationship which primarily refers to the relationships between shareholders and management personnel in this scenario the shareholders are principals and the management operatives act as agents however the principal agent relationship may also refer to other pairs of connected parties with similar power characteristics for example the relationship between politicians the agents and the voters the principals can result in agency costs if the politicians promise to take certain legislative actions while running for election and once elected don t fulfill those promises the voters experience agency costs in an extension of the principal agent dynamic known as the multiple principal problems describes a scenario where a person acts on behalf of a group of other individuals a closer look at agency costsagency costs include any fees associated with managing the needs of conflicting parties in the process of evaluating and resolving disputes this cost is also known as agency risk agency costs are necessary expenses within any organization where the principals do not yield complete autonomous power due to their failure to operate in a way that benefits the agents working underneath them it can ultimately negatively impact their profitability these costs also refer to economic incentives such as performance bonuses stock options and other carrots which would stimulate agents to execute their duties properly the agent s purpose is to help a company thrive thereby aligning the interests of all stakeholders dissatisfied shareholdersshareholders who disagree with the direction management takes may be less inclined to hold on to the company s stock over the long term also if a specific action triggers enough shareholders to sell their shares a mass sell off could happen resulting in a decline in the stock price as a result companies have a financial interest in benefitting shareholders and improving the company s financial position as failing to do so could result in stock prices dropping additionally a significant purge of shares could potentially spook potential new investors from taking positions thus causing a chain reaction which could depress stock prices even further in cases where the shareholders become particularly distressed with the actions of a company s top brass an attempt to elect different members to the board of directors may occur the ouster of the existing management can happen if shareholders vote to appoint new members to the board not only can this jarring action result in significant financial costs but it can also result in the expenditure of time and mental resources such upheavals also cause unpleasant and exorbitant red tape problems inherent in top chain recalibration of power real world example of agency costssome of the most notorious examples of agency risks come during financial scandals such as the enron debacle in 2001 as reported in this article on smallbusiness chron com the company s board of directors and senior officers sold off their stock shares at higher prices due to fraudulent accounting information which artificially inflated the stock s value as a result shareholders lost significant money when enron share price consequently nosedived broken down to its simplest terms according to the journal of accountancy the enron debacle happened because of individual and collective greed born in an atmosphere of market euphoria and corporate arrogance | |
what is an agency problem | an agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another s best interests in corporate finance an agency problem usually refers to a conflict of interest between a company s management and the company s stockholders the manager acting as the agent for the shareholders or principals is supposed to make decisions that will maximize shareholder wealth even though it is in the manager s best interest to maximize their own wealth investopedia lara antalunderstanding agency problemsthe agency problem does not exist without a relationship between a principal and an agent in this situation the agent performs a task on behalf of the principal agents are commonly engaged by principals due to different skill levels different employment positions or restrictions on time and access for example a principal will hire a plumber the agent to fix plumbing issues although the plumber s best interest is to collect as much income as possible they are given the responsibility to perform in whatever situation results in the most benefit to the principal the agency problem arises due to an issue with incentives and the presence of discretion in task completion an agent may be motivated to act in a manner that is not favorable for the principal if the agent is presented with an incentive to act in this way for example in the plumbing example the plumber may make three times as much money by recommending a service the agent does not need an incentive three times the pay is present causing the agency problem to arise agency problems are common in fiduciary relationships such as between trustees and beneficiaries board members and shareholders and lawyers and clients a fiduciary is an agent that acts in the principal s or client s best interest these relationships can be stringent in a legal sense as is the case in the relationship between lawyers and their clients due to the u s supreme court s assertion that an attorney must act in complete fairness loyalty and fidelity to their clients 1minimizing risks associated with the agency problemagency costs are a type of internal cost that a principal may incur as a result of the agency problem they include the costs of any inefficiencies that may arise from employing an agent to take on a task along with the costs associated with managing the principal agent relationship and resolving differing priorities while it is not possible to eliminate the agency problem principals can take steps to minimize the risk of agency costs principal agent relationships can be regulated and often are by contracts or laws in the case of fiduciary settings the fiduciary rule is an example of an attempt to regulate the arising agency problem in the relationship between financial advisors and their clients the term fiduciary in the investment advisory world means that financial and retirement advisors are to act in the best interests of their clients 2 in other words advisors are to put their clients interests above their own the goal is to protect investors from advisors who are concealing potential conflicts of interest for example an advisor might have several investment funds that are available to offer a client but instead only offers the ones that pay the advisor a commission for the sale the conflict of interest is an agency problem whereby the financial incentive offered by the investment fund prevents the advisor from working on behalf of the client s best interest the agency problem may also be minimized by incentivizing an agent to act in better accordance with the principal s best interests for example a manager can be motivated to act in the shareholders best interests through incentives such as performance based compensation direct influence by shareholders the threat of firing or the threat of takeovers principals who are shareholders can also tie ceo compensation directly to stock price performance if a ceo was worried that a potential takeover would result in being fired the ceo might try to prevent the takeover which would be an agency problem however if the ceo was compensated based on stock price performance the ceo would be incentivized to complete the takeover stock prices of the target companies typically rise as a result of an acquisition through proper incentives both the shareholders and the ceo s interests would be aligned and benefit from the rise in stock price principals can also alter the structure of an agent s compensation if for example an agent is paid not on an hourly basis but by the completion of a project there is less incentive to not act in the principal s best interest in addition performance feedback and independent evaluations hold the agent accountable for their decisions real world example of an agency problemin 2001 energy giant enron filed for bankruptcy 3 accounting reports had been fabricated to make the company appear to have more money than what was actually earned the company s executives used fraudulent accounting methods to hide debt in enron s subsidiaries and overstate revenue these falsifications allowed the company s stock price to increase during a time when executives were selling portions of their stock holdings 4in the four years leading up to enron s bankruptcy filing shareholders lost an estimated 74 billion in value 5 enron became the largest u s bankruptcy at that time with its 63 billion in assets 6 although enron s management had the responsibility to care for the shareholder s best interests the agency problem resulted in management acting in their own best interest | |
what causes an agency problem | agency problems arise during a relationship between a principal and an agent agents are commonly engaged by principals due to different skill levels different employment positions or restrictions on time and access the agency problem arises due to an issue with incentives and the presence of discretion in task completion an agent may be motivated to act in a manner that is not favorable for the principal if the agent is presented with an incentive to act in this way | |
what is an example of agency problem | in 2001 energy giant enron filed for bankruptcy accounting reports had been fabricated to make the company appear to have more money than what was actually earned these falsifications allowed the company s stock price to increase during a time when executives were selling portions of their stock holdings when enron declared bankruptcy it was the largest u s bankruptcy at that time although enron s management had the responsibility to care for the shareholder s best interests the agency problem resulted in management acting in their own best interest | |
how to mitigate agency problems | while it is not possible to eliminate the agency problem principals can take steps to minimize the risk known as agency cost associated with it principal agent relationships can be regulated and often are by contracts or laws in the case of fiduciary settings another method is to incentivize an agent to act in better accordance with the principal s best interests for example if an agent is paid not on an hourly basis but by the completion of a project there is less incentive to not act in the principal s best interest | |
what is agency theory | agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents most commonly that relationship is the one between shareholders as principals and company executives as agents understanding agency theoryan agency in broad terms is any relationship between two parties in which one the agent represents the other the principal in day to day transactions the principal or principals have hired the agent to perform a service on their behalf principals delegate decision making authority to agents because many decisions that affect the principal financially are made by the agent differences of opinion and even differences in priorities and interests can arise agency theory assumes that the interests of a principal and an agent are not always in alignment this is sometimes referred to as the principal agent problem by definition an agent is using the resources of a principal the principal has entrusted money but has little or no day to day input the agent is the decision maker but is incurring little or no risk because any losses will be borne by the principal financial planners and portfolio managers are agents on behalf of their principals and are given responsibility for the principals assets a lessee may be in charge of protecting and safeguarding assets that do not belong to them even though the lessee is tasked with the job of taking care of the assets the lessee has less interest in protecting the goods than the actual owners areas of dispute in agency theoryagency theory addresses disputes that arise primarily in two key areas a difference in goals or a difference in risk aversion for example company executives with an eye toward short term profitability and elevated compensation may desire to expand a business into new high risk markets however this could pose an unjustified risk to shareholders who are most concerned with the long term growth of earnings and share price appreciation another central issue often addressed by agency theory involves incompatible levels of risk tolerance between a principal and an agent for example shareholders in a bank may object that management has set the bar too low on loan approvals thus taking on too great a risk of defaults reducing agency lossvarious proponents of agency theory have proposed ways to resolve disputes between agents and principals this is termed reducing agency loss agency loss is the amount that the principal contends was lost due to the agent acting contrary to the principal s interests chief among these strategies is the offering of incentives to corporate managers to maximize the profits of their principals the stock options awarded to company executives have their origin in agency theory these incentives seek a way to optimize the relationship between principals and agents other practices include tying executive compensation in part to shareholder returns these are examples of how agency theory is used in corporate governance these practices have led to concerns that management will endanger long term company growth in order to boost short term profits and their own pay this can often be seen in budget planning where management reduces estimates in annual budgets so that they are guaranteed to meet performance goals these concerns have led to yet another compensation scheme in which executive pay is partially deferred and to be determined according to long term goals these solutions have their parallels in other agency relationships performance based compensation is one example another is requiring that a bond is posted to guarantee delivery of the desired result and then there is the last resort which is simply firing the agent | |
what disputes does agency theory address | agency theory addresses disputes that arise primarily in two key areas a difference in goals or a difference in risk aversion management may desire to expand a business into new markets focusing on the prospect of short term profitability and elevated compensation however this may not sit well with a more risk averse group of shareholders who are most concerned with long term growth of earnings and share price appreciation | |
what is an agent | an agent in legal terminology is a person who has been legally empowered to act on behalf of another person or an entity an agent may be employed to represent a client in negotiations and other dealings with third parties the agent may be given decision making authority two common types of agents are attorneys who represent their clients in legal matters and stockbrokers who are hired by investors to make investment decisions for them the person represented by the agent in these scenarios is called the principal in finance it refers to a fiduciary relationship in which an agent is authorized to perform transactions on behalf of the client and in their best interest understanding an agentan agent is someone that is given permission either explicitly or assumed to act on an individual s behalf and may do so in a variety of capacities this could include selling a home executing a will managing a sports career managing an acting career being a business representative and so on agents often have expertise in a specific industry and are more knowledgeable about that industry s ins and outs than the average person for example if you started gaining attention as a musician you would hire a music agent to help guide you through getting a record deal signing record contracts and arranging your touring schedule as you would not have any experience with the record industry you would need an agent to look out for your best interests and take care of a lot of the work that you would otherwise most likely not be able to complete on your own this would also free up your time so that you can concentrate on making music types of agentsagents come in all types depending on their function and the industry in which they operate in general there are three types of agents universal agents general agents and special agents universal agents have a broad mandate to act on behalf of their clients often these agents have been given power of attorney for a client which gives them considerable authority to represent a client in legal proceedings they may also be authorized to make financial transactions on behalf of their clients general agents are contracted to represent their clients in specific types of transactions or proceedings over a set period they have broad authority to act but in a limited sphere a talent agent for an actor would fall under this category special agents are authorized to make a single transaction or a series of transactions within a limited period this is the type of agent most people use from time to time a real estate agent securities agent insurance agent and travel agent are all special agents practicing as an agent in a specific industry without the proper license or registration can lead to fines or being prohibited from acting as an agent in that industry in the future before working as an agent ensure that you have obtained the right license certification and registration uses of agentspeople hire agents to perform tasks that they lack the time or expertise to do for themselves investors hire stockbrokers to act as middlemen between them and the stock market athletes and actors hire agents to negotiate contracts on their behalf because the agents are typically more familiar with industry norms and have a better idea of how to position their clients more commonly prospective homeowners use agents as middlemen relying on the professional s greater skills at negotiation businesses often hire agents to represent them in a particular venture or negotiation relying on the agents superior skills contacts or background information to complete deals loyalty responsibilities of an agentduring the course of business an agent may benefit this is especially true when an agent is paid to perform a task on behalf of the principal for example a real estate agent commonly receives a commission for their work in selling a house | |
when an agent acts on behalf of a principal the agent may receive information it would be able to personally capitalize on for personal benefit for example an agent may receive information relating to a potential investment opportunity the agent owes the principal the duty to not steal or supplant the principal s ability to transact in this example the principal retains the right to decide whether or not to invest the agent must not take the place of the principal without the principal explicitly declining an opportunity to invest | on a similar note an agent may not enter into transactions or business that compete with a principal this conflict of interest puts the principal at a disadvantage as the agent may obtain trade or business secrets during the course of the business relationship for example imagine if an agent was tasked with shipping specific goods to an agent s manufacturing warehouse the agent could obtain information related to the principal s operations that the agent could then use for its personal benefit formalized agent principal arrangements often include verbiage that the agent must disclose if it has any other principals in which it is acting as an agent for this includes disclosing a sworn statement that the agent will act in good faith across all principals and will incur fair dealing with each principal during the course of an agent s relationship with the principal the agent may not disclose confidential information to unrelated parties this may defined through confidentiality agreements or may not be explicitly called out in either case the agent must take care to evaluate the sensitivity of information and the necessity for other parties to obtain that information this includes not using confidential information for the personal benefit of the agent i e exchanging the information for personal benefit to an independent third party an agent may have express authority via a written contract or implied authority entered into agreement based on actions performance responsibilities of an agentall terms of any written agreement between an agent and a principal define the relationship between the two for many agent and principal relationships the contract is not explicitly defined upfront however custom or deliberate agreements may call for very specific terms that define what is and isn t allowed an agent is always tasked with acting with care and competence when handling affairs of the principal the standard is often held that the agent must act as the principal would using discretion as if it would incurring the personal gain or loss though the level of care may not be explicitly defined the level of care should be equal to what is reasonably expected by local standards the duty of care may be complicated when considering the agent s personal benefit potential for example consider a broker that receives a commission for the sale of certain investment products for some clients it may not be in their best interest to buy those investments therefore the broker has the duty of care to not sell such products to those individuals sacrificing personal gain to uphold the sanctity of the relationship an agent must comply with reasonable instruction though there may be situations where acting on one s behalf and following their guidance is not reasonable or legal the agent may have recourse to not follow instruction otherwise the agent is bound to perform tasks as expected by the agreement this includes situations where the principal may be disadvantaged but has instructed the agent to act in a specific manner as the agent gains sensitive information that may influence the decision making process of a principal the agent has the duty to disclose that information in an accurate timely manner consider the example of los angeles dodgers player freddie freeman freeman s agent reportedly did not disclose to freeman that his former team the atlanta braves wanted to re sign him by withholding such information freeman reluctantly signed with a different team 1an agent also has the responsibility to keep the agent s and the principal s affairs separate this includes ensuring that any transactions entered into on behalf of the principal are still legal property of the principal this also ensures that any resources or capital used to transact are maintained in separate bank accounts and that separate reporting ledgers are maintained | |
when acting as an agent you are often protected from liability as long as you act with care reasonableness and transparency | agent liabilityan agent is often liable to their principal if they violate their duty or deviate from a reasonable expected action performed on behalf of the other party this may be the result of exceeding the authority they ve been given acting in misconduct being unreasonably negligent or any other situation where the principal may incur a loss that could have potentially been avoided in some situations when the agent performs a task for another without disclosing they are an agent they may be considered liable because the agent was presumed to be a principal an agent is also commonly liable when the agent expressly incurs a personal liability by entering into an associated agreement agency by necessitythere is also agency by necessity in which an agent is appointed to act on behalf of a client who is physically or mentally incapable of making a decision this is not always a case of incapacitation business owners for example might designate agents to handle unexpected issues that occur in their absence for example if a ceo was on a flight and unreachable yet an emergency business decision needed to be made agency by necessity could be used agency by necessity is most often executed in times of emergency or urgency when the primary party is not available to make a decision in these situations courts would recognize a third party making the decision if that party was given power by the primary party to do so the third party would be responsible for acting in the primary party s best interest estate planning often sees agency by necessity though an individual may have created a will outlining how an estate should be disbursed at their time of death there could be situations where the person became incapacitated before needed adjustments to the will were made here agency by necessity could be used by a trusted party | |
what is an enrolled agent | an enrolled agent is one that represents taxpayers in front of the internal revenue service irs to become an enrolled agent one needs to pass an irs test that covers individual and business tax returns or through experience by being a former irs employee enrolled agents can represent any type of taxpayer over any tax matter in front of any tax department in the irs 2 | |
what is a registered agent | a registered agent is an individual that is authorized to accept legal documents on behalf of a limited liability company llc all llcs require a registered agent and they are legally allowed to accept tax documents legal documents government documents compliance documents and any other documents pertaining to the llc a registered agent for an llc is known to be an agent for service of processes if an llc does not have a registered agent it may be fined by the state not allowed to file a lawsuit be denied financing and not allowed to expand out of state | |
how do you become a real estate agent | to become a real estate agent you need to obtain a real estate agent license there are a few qualifications for this and they can vary from state to state in general a person needs to be 18 years of age be a legal resident of the u s complete the required relicense education and pass the real estate exam individuals can enroll in relicensing courses before taking the real estate exam | |
how do you become an insurance agent | the first step in becoming an insurance agent is deciding what kind of insurance agent you want to be as the type depends on the path to becoming one you can choose to be either a captive insurance agent or an independent insurance agent from there you will need to decide what insurance products you would like to sell to clients the next step is becoming licensed in your state the products that you decide you would like to sell will depend on the type of license you will need you will take your licensing exam and from there you will have to submit a background check and license application to your state s licensing department once this is complete you will need to find an insurance company to work with | |
how do you become a sports agent | to become a sports agent you will need to obtain a sports license and register with the state not all states require this the sport or league that you will want to join will require certification as well typically a bachelor s degree is required before becoming a sport s agent and advanced degrees such as law help in becoming one so that you can understand the legal language of the contracts of the clients you manage once you have been certified and received your license you will need to join a sports agency and from there start building a client base the bottom linean agent is anyone that has been entrusted to act on behalf of another individual people usually call upon an agent when they need someone with more expertise or when they don t have the time to complete a task agents are commonly used in the finance law real estate insurance acting and music industries yet they can be found in almost any situation when advanced knowledge on a topic is needed agents can save people a lot of time money and headaches in getting important tasks done | |
what is aggregate demand | aggregate demand is a measurement of the total amount of demand for all finished goods and services produced in an economy aggregate demand is commonly expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time investopedia ellen lindnerunderstanding aggregate demandaggregate demand is a macroeconomic term and can be compared with the gross domestic product gdp gdp represents the total amount of goods and services produced in an economy while aggregate demand is the demand or desire for those goods aggregate demand and gdp commonly increase or decrease together aggregate demand equals gdp only in the long run after adjusting for the price level short run aggregate demand measures total output for a single nominal price level without adjusting for inflation other variations in calculations can occur depending on the methodologies used and the various components aggregate demand consists of all consumer goods capital goods exports imports and government spending programs all variables are considered equal if they trade at the same market value individual or simple demand is not aggregated or combined but describes the desire for a single producer s product or service while aggregate demand helps determine the overall strength of consumers and businesses in an economy it does have limits since aggregate demand is measured by market values it only represents total output at a given price level and does not necessarily represent the quality of life or standard of living in a society aggregate demand componentsaggregate demand is determined by the overall collective spending on products and services by all economic sectors on the procurement of goods and services by four components consumer spending represents the demand by individuals and households within the economy while there are several factors in determining consumer demand the most important is consumer incomes and the level of taxation investment spending represents businesses investment to support current output and increase production capability it may include spending on new capital assets such as equipment facilities and raw materials government spending represents the demand produced by government programs such as infrastructure spending and public goods this does not include services such as medicare or social security because these programs simply transfer demand from one group to another net exports represent the demand for foreign goods as well as the foreign demand for domestic goods it is calculated by subtracting the total value of a country s exports from the total value of all imports aggregate demand formulathe equation for aggregate demand adds the amount of consumer spending investment spending government spending and the net of exports and imports the formula is shown as follows aggregate demand c i g nx where c consumer spending on goods and services i private investment and corporate spending on non final capital goods factories equipment etc g government spending on public goods and social services infrastructure medicare etc nx net exports exports minus imports begin aligned text aggregate demand text c text i text g text nx textbf where text c text consumer spending on goods and services text i text private investment and corporate spending on text non final capital goods factories equipment etc text g text government spending on public goods and social text services infrastructure medicare etc text nx text net exports exports minus imports end aligned aggregate demand c i g nxwhere c consumer spending on goods and servicesi private investment and corporate spending onnon final capital goods factories equipment etc g government spending on public goods and socialservices infrastructure medicare etc nx net exports exports minus imports the aggregate demand formula above is also used by the bureau of economic analysis to measure gdp in the u s 1like most typical demand curves it slopes downward from left to right with goods and services on the horizontal x axis and the overall price level of the basket of goods and services on the vertical y axis demand increases or decreases along the curve as prices for goods and services either increase or decrease | |
what affects aggregate demand | interest rates affect decisions made by consumers and businesses lower interest rates will lower the borrowing costs for big ticket items such as appliances vehicles and homes and companies will be able to borrow at lower rates often leading to capital spending increases higher interest rates increase the cost of borrowing for consumers and companies and spending tends to decline or grow at a slower pace as household wealth increases aggregate demand typically increases conversely a decline in wealth usually leads to lower aggregate demand when consumers are feeling good about the economy they tend to spend more and save less consumers who anticipate that inflation will increase or prices will rise tend to make immediate purchases leading to rises in aggregate demand but if consumers believe prices will fall in the future aggregate demand typically falls | |
when the value of the u s dollar falls foreign goods will become more expensive meanwhile goods manufactured in the u s will become cheaper for foreign markets aggregate demand will therefore increase when the value of the dollar increases foreign goods are cheaper and u s goods become more expensive to foreign markets and aggregate demand decreases | economic conditions and aggregate demandeconomic conditions can impact aggregate demand whether those conditions originated domestically or internationally the financial crisis of 2007 08 sparked by massive amounts of mortgage loan defaults and the ensuing great recession offer a good example of a decline in aggregate demand due to economic conditions with businesses suffering from less access to capital and fewer sales they began to lay off workers and gdp growth contracted in 2008 and 2009 resulting in a total production contraction in the economy during that period a poor performing economy and rising unemployment led to a decline in personal consumption or consumer spending personal savings also surged as consumers held onto cash due to an uncertain future and instability in the banking system in 2020 the covid 19 pandemic caused reductions in both aggregate supply or production and aggregate demand or spending social distancing measures and concerns about the spread of the virus caused a significant decrease in consumer spending particularly in services as many businesses closed these dynamics lowered aggregate demand in the economy as aggregate demand fell businesses either laid off part of their workforces or otherwise slowed production as employees contracted covid 19 at high rates 2aggregate demand vs aggregate supplyin times of economic crises economists often debate as to whether aggregate demand slowed leading to lower growth or gdp contracted leading to less aggregate demand whether demand leads to growth or vice versa is economists version of the age old question of what came first the chicken or the egg boosting aggregate demand also boosts the size of the economy regarding measured gdp however this does not prove that an increase in aggregate demand creates economic growth since gdp and aggregate demand share the same calculation it only indicates that they increase concurrently the equation does not show which is the cause and which is the effect early economic theories hypothesized that production is the source of demand the 18th century french classical liberal economist jean baptiste say stated that consumption is limited to productive capacity and that social demands are essentially limitless a theory referred to as say s law of markets 3say s law the basis of supply side economics ruled until the 1930s and the advent of the theories of british economist john maynard keynes by arguing that demand drives supply keynes placed total demand in the driver s seat keynesian macroeconomists have since believed that stimulating aggregate demand will increase real future output and the total level of output in the economy is driven by the demand for goods and services and propelled by money spent on those goods and services keynes considered unemployment to be a byproduct of insufficient aggregate demand because wage levels would not adjust downward fast enough to compensate for reduced spending he believed the government could spend money and increase aggregate demand until idle economic resources including laborers were redeployed other schools of thought notably the austrian school and real business cycle theorists stress consumption is only possible after production this means an increase in output drives an increase in consumption not the other way around any attempt to increase spending rather than sustainable production only causes maldistribution of wealth or higher prices or both as a demand side economist keynes further argued that individuals could end up damaging production by limiting current expenditures by hoarding money for example other economists argue that hoarding can impact prices but does not necessarily change capital accumulation production or future output in other words the effect of an individual s saving money more capital available for business does not disappear on account of a lack of spending | |
what factors affect aggregate demand | aggregate demand can be impacted by a few key economic factors rising or falling interest rates will affect decisions made by consumers and businesses rising household wealth increases aggregate demand while a decline usually leads to lower aggregate demand consumers expectations of future inflation will also have a positive correlation with aggregate demand finally a decrease or increase in the value of the domestic currency will make foreign goods costlier or cheaper while goods manufactured in the domestic country will become cheaper or costlier leading to an increase or decrease in aggregate demand | |
what are some limitations of aggregate demand | while aggregate demand helps determine the overall strength of consumers and businesses in an economy it does pose some limitations since aggregate demand is measured by market values it only represents total output at a given price level and does not necessarily represent quality or standard of living also aggregate demand measures many different economic transactions between millions of individuals and for different purposes as a result it can become challenging when trying to determine the causes of demand for analytical purposes | |
what s the relationship between gdp and aggregate demand | gdp gross domestic product measures the size of an economy based on the monetary value of all finished goods and services made within a country during a specified period as such gdp is the aggregate supply aggregate demand represents the total demand for these goods and services at any given price level during the specified period aggregate demand eventually equals gross domestic product gdp because the two metrics are calculated in the same way as a result aggregate demand and gdp increase or decrease together the bottom lineaggregate demand is a concept of macroeconomics that represents the total demand within an economy for all kinds of goods and services at a certain price point in the long term aggregate demand is indistinguishable from gdp however aggregate demand is not a perfect metric and it is the subject of debate among economists | |
what is aggregate stop loss insurance | aggregate stop loss insurance is a policy designed to limit claim coverage losses to a specific amount this coverage ensures that a catastrophic claim specific stop loss or numerous claims aggregate stop loss do not drain the financial reserves of a self funded plan aggregate stop loss protects the employer against claims that are higher than expected if total claims exceed the aggregate limit the stop loss insurer covers the claims or reimburses the employer understanding aggregate stop loss insuranceaggregate stop loss insurance is held for self funded insurance plans for which an employer assumes the financial risk of providing healthcare benefits to its employees in practical terms self funded employers pay for each claim as it is presented instead of paying a fixed premium to an insurance carrier for a fully insured plan stop loss insurance is similar to purchasing high deductible insurance the employer remains responsible for claim expenses under the deductible amount stop loss insurance differs from conventional employee benefit insurance stop loss only covers the employer and provides no direct coverage to employees and health plan participants aggregate stop loss insurance is used by employers as coverage for risk against a high value of claims aggregate stop loss insurance comes with a maximum level for claims when a maximum threshold is exceeded the employer no longer needs to make payments and may receive some reimbursements aggregate stop loss insurance can either be added to an existing insurance plan or purchased independently the threshold is calculated based on a certain percentage of projected costs called attachment points usually 125 of anticipated claims for the year an aggregate stop loss threshold is usually variable and not fixed this is because the threshold fluctuates as a percentage of an employer s enrolled employees the variable threshold is based on an aggregate attachment factor which is an important component in the calculation of a stop loss level as is the case with high deductible plans most stop loss plans will have relatively low premiums this is because the employer is expected to cover over 100 of the value of claims they receive according to the henry j kaiser family foundation 2018 employer health benefits survey insurers now offer health plans with a self funded option for small or medium sized employers these health plans incorporate stop loss insurance with low attachment points 1 aggregate stop loss insurance calculationsthe aggregate attachment associated with a stop loss plan is calculated as follows the employer and stop loss insurance provider estimate the average dollar value of claims expected by employee per month this value will depend on the employer s estimate but often ranges from 200 to 500 per month assume the stop loss plan uses a value of 200 this value would then be multiplied by the stop loss attachment multiplier which usually ranges from 125 to 175 using a claims estimate of 200 and a stop loss attachment multiplier of 1 25 the monthly deductible would be 250 per month per employee 200 x 1 25 250 this deductible must then be multiplied by the employer s plan enrollment for the month assuming that an employer has 100 employees in the first month of coverage their total deductible would be 25 000 for the month 250 x 100 enrollment can potentially vary per month due to enrollment variance aggregate stop loss coverage may have either a monthly deductible or an annual deductible with a monthly deductible the amount an employer must pay could change every month with an annual deductible the amount the employer must pay would be summed for the year and usually based on estimates from the initial month of coverage many stop loss plans will offer an annual deductible that is slightly lower than the summation of deductibles over 12 months | |
what is aggregate supply | the term aggregate supply refers to the supply of products that companies produce and plan to sell at a certain price in a given period put simply it refers to the finished goods that consumers purchase during a specified time aggregate supply is represented by the aggregate supply curve there is typically a positive relationship between aggregate supply and the price level investopedia michela buttignolunderstanding aggregate supplyaggregate supply refers to the total supply of final goods and services produced by companies that they plan to sell at a certain price within a specific time it can be contrasted by simple supply which is the product or service available from a single or individual producerput simply aggregate supply is the economy s gross domestic product gdp aggregate supply is normally measured and reported over a year it is also referred to by economists and analysts as total output aggregate supply is commonly affected by prices rising prices generally indicate that businesses should expand production to meet a higher level of aggregate demand when demand increases amid constant supply consumers compete for available goods and pay higher prices this dynamic induces firms to increase output to sell more goods the resulting supply increase causes prices to normalize and output to remain elevated a shift in aggregate supply can be attributed to many variables they include some of these factors lead to positive changes in aggregate supply while others cause a decline in aggregate supply for example increased labor efficiency perhaps through outsourcing or automation raises supply output by decreasing the labor cost per unit of supply by contrast wage increases place downward pressure on aggregate supply by increasing production costs 1aggregate supply is usually calculated over a year because changes in supply tend to lag changes in demand aggregate supply over timeaggregate supply responds to higher demand and prices in the short run by increasing the use of current inputs in the production process the level of capital is fixed over shorter periods this means that a company cannot do certain things such as erecting a new factory or introducing a new technology to increase production efficiency instead the company ramps up supply by getting more out of its existing factors of production such as assigning workers more hours or increasing the use of existing technology over the long run aggregate supply is not affected by the price level and is driven only by improvements in productivity and efficiency such improvements include increases in the level of skill and education among workers technological advancements and increases in capital certain economic viewpoints such as the keynesian theory assert that long run aggregate supply is still price elastic up to a certain point once this point is reached supply becomes insensitive to changes in price 2aggregate supply is represented by the aggregate supply curve which describes the relationship between price levels and the quantity of output that firms are willing to provide to consumers in the market aggregate supply vs aggregate demandaggregate supply is the opposite of aggregate demand while aggregate supply is the total amount of goods and services that producers are willing to sell to consumers aggregate demand refers to the total amount of demand for finished goods and services in the economy over a specified time it is expressed as a dollar value of how much consumers spend on these products aggregate demand includes a variety of products including you can calculate aggregate demand by adding together the total amount of consumer goods private investment government spending and net exports exports less imports several factors affect the aggregate demand in the economy they include interest rates foreign exchange rates inflation and income levels example of aggregate supplyhere s a hypothetical example to show how aggregate supply works let s assume that xyz corporation produces 100 000 widgets per quarter at a total expense of 1 million but the cost of a critical component that accounts for 10 of that expense doubles in price because of a shortage of materials or other external factors in that event xyz corporation could produce only 90 909 widgets if it still spends 1 million on production this reduction would represent a decrease in aggregate supply in this example the lower aggregate supply could lead to demand exceeding output that coupled with the increase in production costs is likely to lead to a rise in price | |
what is aggregate demand | aggregate demand is the term used to describe the total demand for all finished goods and services in the market during a certain time this figure is commonly expressed as a dollar figure notably the prices at which consumers pay for finished products aggregate demand is calculated by adding together consumption spending government spending investment spending and a country s net exports | |
what is the law of supply and demand | the law of supply and demand is an economic theory that describes the relationship between sellers and buyers of goods and services according to the law of supply supplies of goods and services are propelled by higher prices while lower prices cause supplies to drop the law of demand on the other hand suggests that higher prices cause demand for goods and services to drop while lower prices lead to an increase in demand | |
what factors affect supply in the economy | there are a number of factors that affect supply in the economy these things include prices production costs the number of producers production technology and the labor market the bottom lineaggregate supply is defined as the total number of goods and services that producers make and are willing to sell at a certain price within a certain time changes in supplies can affect demand and how the economy functions aggregate supply allows businesses and other entities to make key decisions about their financial situations budgets and plans for the future | |
what is aggregation | aggregation in the futures markets is a process that combines of all futures positions owned or controlled by a single trader or group of traders into one aggregate position aggregation in a financial planning sense however is a time saving accounting method that consolidates an individual s financial data from various institutions aggregation is increasingly popular with advisors when servicing clients accounts as they are able to discuss the accounts with the client in a cleaner more easily understood way before they break down the account into its respective categories | |
how aggregation works | financial advisors use account aggregation technology to gather position and transaction information from investors retail accounts held at other financial institutions aggregators provide investors and their advisors with a centralized view of the investor s complete financial situation including daily updates financial planners handle both managed and non managed accounts managed accounts contain assets under the advisor s control that are held by the advisor s custodian the planners utilize portfolio management and reporting software to capture a client s data through a direct link from the custodian it is important for the planner to have all the accounts because aggregating them without the complete collection would paint an inaccurate picture of that client s finances additionally non managed accounts contain assets that are not under the advisor s management but are nevertheless important to the client s financial plan examples include 401 k accounts personal checking or savings accounts pensions and credit card accounts the advisor s concern with managed accounts is lack of accessibility when the client does not provide log in information advisors cannot offer an all encompassing approach to financial planning and asset management without daily updates on non managed accounts importance of account aggregationaccount aggregation services solve the issue by providing a convenient method for obtaining current position and transaction information about accounts held at most retail banks or brokerages because investors privacy is protected disclosing their personal access information for each non managed account is unnecessary financial planners use aggregate account software for analyzing a client s total assets liabilities and net worth income and expenses and trends in assets liability net worth and transaction values the advisor also assesses various risks in a client s portfolio before making investment decisions effects of account aggregationmany aggregation services offer direct data connections between brokerage firms and financial institutions rather than using banks consumer facing websites clients give financial institutions their consent by providing personal information for the aggregate services | |
what is an aggressive investment strategy | an aggressive investment strategy typically refers to a style of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk strategies for achieving higher than average returns typically emphasize capital appreciation as a primary investment objective rather than income or safety of principal such a strategy would therefore have an asset allocation with a substantial weighting in stocks and possibly little or no allocation to bonds or cash aggressive investment strategies are typically thought to be suitable for young adults with smaller portfolio sizes because a lengthy investment horizon enables them to ride out market fluctuations and losses early in one s career have less impact than later investment advisors do not consider this strategy suitable for anyone else but young adults unless such a strategy is applied to only a small portion of one s nest egg savings regardless of the investor s age however a high tolerance for risk is an absolute prerequisite for an aggressive investment strategy understanding aggressive investment strategythe aggressiveness of an investment strategy depends on the relative weight of high reward high risk asset classes such as equities and commodities within the portfolio for example portfolio a which has an asset allocation of 75 equities 15 fixed income and 10 commodities would be considered quite aggressive since 85 of the portfolio is weighted to equities and commodities however it would still be less aggressive than portfolio b which has an asset allocation of 85 equities and 15 commodities even within the equity component of an aggressive portfolio the composition of stocks can have a significant bearing on its risk profile for instance if the equity component only consists of blue chip stocks it would be considered less risky than if the portfolio only held small capitalization stocks if this is the case in the earlier example portfolio b could arguably be considered less aggressive than portfolio a even though it has 100 of its weight in aggressive assets yet another aspect of an aggressive investment strategy has to do with allocation a strategy that simply divided all available money equally into 20 different stocks could be a very aggressive strategy but dividing all money equally into just 5 different stocks would be more aggressive still aggressive investment strategies may also include a high turnover strategy seeking to chase stocks that show high relative performance in a short time period the high turnover may create higher returns but could also drive higher transaction costs thus increasing the risk of poor performance aggressive investment strategy and active managementan aggressive strategy needs more active management than a conservative buy and hold strategy since it is likely to be much more volatile and could require frequent adjustments depending on market conditions more rebalancing would also be required to bring portfolio allocations back to their target levels volatility of the assets could lead allocations to deviate significantly from their original weights this extra work also drives higher fees as the portfolio manager may require more staff to manage all such positions recent years have seen significant pushback against active investing strategies many investors have pulled their assets out of hedge funds for example due to those managers underperformance instead some have chosen to place their money with passive managers these managers adhere to investing styles that often employ managing index funds for strategic rotation in these cases portfolios often mirror a market index such as the s p 500 | |
agribusiness encompasses the economic sectors for farming and farming related commerce it involves all the steps for getting agricultural goods to the market including production processing and distribution the industry is a traditional part of any economy especially for countries with arable land and excess agricultural products for export | agribusiness treats the different aspects of raising agricultural products as an integrated system trading farm goods is among the oldest human undertakings but advances in the last century have made it a high tech industry 1 farmers raise animals and harvest fruits and vegetables with the help of sophisticated harvesting techniques including using gps to manage their operations manufacturers have developed increasingly automated machines that require very little labor processing plants are constantly renewing how they clean and package livestock to make production cleaner and more efficient while consumers don t see each part of this industry we rely on the sector s efforts to remain sustainable while aiming for lower food prices investopedia sydney burnsunderstanding agribusinessmarket forces considerably impact the agribusiness sector as do natural forces such as changes in the earth s climate 2changes in consumer taste alter what products are grown and raised for example shifting away from red meat might cause demand and therefore prices for beef to fall changing how thousands of acres of farmland are used increased demand for produce may shift the mix of fruits and vegetables that farmers raise requiring investments in irrigation systems and other ways of boosting production businesses unable to rapidly change with domestic demand often first look to export their products if there s no market they may be unable to compete and remain in business without pivoting to other crops climate change has increased the pressure on the need for sustainable practices in the industry just as it s already adjusting to vast differences in worldwide weather patterns but even short term changes in weather patterns can have dramatic effects an early frost in a citrus growing region could cause a severe drop in that year s crop while less snowfall in a mountain region could mean a spring drought in surrounding valleys that depend upon the melted water for crop growth agribusiness challengescountries with a large farming sector face constant pressure from global competition products such as wheat corn and soybeans are commodities that are similar wherever they are grown making one s area s product easily replaceable by another s if it can get to market at a lower price remaining competitive requires agribusinesses to operate more efficiently often involving investments in new technologies new ways of fertilizing and watering crops and new ways of bringing goods into the global market global prices of agricultural products can change rapidly making crop planning complicated farmers may also have less arable land to work with as suburban and urban areas expand into the farm regions climate change is perhaps the greatest common challenge for agribusinesses worldwide it is one of the industries most affected by and also involved in propelling climate change 3 estimates vary widely but nevertheless show the depth of the challenge agribusiness worldwide accounts for about 17 of the world s greenhouse gas emissions helping to drive the rise in global temperatures 2at the same time agribusiness is also heavily impacted by the volatility in average temperatures and rainfall as well as extreme weather heat waves droughts extreme storms and wildfires all exacerbated by climate change can cause damage to crops and threaten livestock rising temperatures can threaten growing conditions for crops and could limit production in many regions while the growing global population is increasing the demand for food 4all this represents a major challenge for agribusinesses which face pressure to adopt more sustainable production methods finding ways to reduce emissions and adapt to a changing climate will be key to future success the use of new technology is vital to remain competitive in the global agribusiness sector farmers need to reduce crop costs and increase yield per square acre to stay competitive some farmers have adopted bee vectoring technology this involves raising bees and using them as a delivery method for biocontrol agents which can help protect plants from pests fungi and diseases 5bees are key to agriculture but populations have dropped in recent years almost half the honeybee colonies in the united states died between april 2022 and april 2023 6 this new technology can encourage more beekeeping and promote the growth of more colonies while improving crop yields and fighting disease electronic drones have also played a greater role in agribusiness in recent years farmers have used drones for tasks like scouting for pests and diseases monitoring water stress screening plants locating stray livestock and gathering data for flood risk modeling 7robotics gps technology and moisture sensors also help farmers improve worker safety and apply pesticides and fertilizers more easily across closely targeted areas and reduce wasted water 8agribusiness examplesagribusiness is a broad industry with a vast range of companies and operations agribusinesses include small family farms and multinational conglomerates in food production on a global scale some examples of agribusinesses include farm machine manufacturers such as deere company de seed and agrochemical manufacturers such as bayer food processing companies such as archer daniels midland company adm farmer s cooperatives agritourism companies and makers of biofuels animal feeds and other related products | |
what is agriculture | agriculture is the practice of raising crops livestock fish trees and other living organisms for food or other products agriculture has a long history with humans beginning to farm plants about 11 000 years ago | |
what are the three main categories of agribusiness | agribusiness can be split into three major categories agriculture livestock and forestry 1 | |
what is an air waybill awb | an air waybill awb is a document that accompanies goods shipped by an international air courier to provide detailed information about the shipment and allow it to be tracked the bill has multiple copies so that each party involved in the shipment can document it an air waybill awb also known as an air consignment note is a type of bill of lading 1 however an awb serves a similar function to ocean bills of lading but an awb is issued in non negotiable form meaning there s less protection with an awb versus bills of lading understanding an air waybill awb an air waybill awb serves as a receipt of goods by an airline the carrier as well as a contract of carriage between the shipper and the carrier it s a legal agreement that s enforceable by law the awb becomes an enforceable contract when the shipper or shipper s agent and carrier or carrier s agent both sign the document an air waybill is a standard form distributed by the international air transport association iata the air waybill also contains the shipper s name and address consignee s name and address three letter origin airport code three letter destination airport code declared shipment value for customs number of pieces gross weight a description of the goods and any special instructions e g perishable an awb also contains the conditions of the contract that describe the carrier s terms and conditions such as its liability limits and claims procedures a description of the goods and applicable charges air waybill vs bill of ladingawbs are unlike other bills of lading in that they are non negotiable instruments meaning that it does not specify on which flight the shipment will be sent or when it will reach its destination bills of lading are legal documents between the shipper of goods and the carrier detailing the type quantity and destination of the goods being carried bills of lading also act as a receipt of shipment when the goods are delivered at a predetermined destination this document accompanies the goods and is signed by authorized representatives of the shipper the carrier and the recipient 1 however unlike a bill of landing an air waybill awb is non negotiable being non negotiable the awb is a contract just for transportation and does not cover the merchandise value requirements for an air waybillthe international air transport association iata designs and distributes air waybills there are two types of awbs an airline specific one and a neutral one each airline awb must include the carrier s name head office address logo and air waybill number 2 neutral air waybills have the same layout and format as airline awbs they just aren t prepopulated some airlines no longer produce paper air waybills only allowing access to electronic air waybills an air waybill has 11 numbers and comes with eight copies of varying colors with the multilateral electronic air waybill resolution 672 paper air waybills are no longer required 3 dubbed the e awb it s been in use since 2010 and became the default contract for all air cargo shipments on enabled trade lines as of 2019 4who provides the air waybill air waybills are iata documents signed by both the shipper and the carrier the iata is a trade association that represents more than 80 of all air traffic including many major airlines and major parcel services such as fedex and ups 5 | |
what is required in the air waybill | an air waybill contains the names and addresses of the shipper and the recipient the value of the cargo three letter codes for the origin and destination airports the number of pieces gross weight description special instructions and other conditions of the contract 3 | |
where do i get an air waybill | iata provides a standard agreement on its website for e awbs 3 most carriers such as fedex also provide access to e awbs for convenience 6the bottom lineif shipping goods internationally an air waybill serves as contract between you and the carrier that defines the contents of the shipment its origin its destination and other pertinent details the default form has been electronic since 2019 it is a non negotiable form that defines the details of the shipment and is signed by both parties it is enforceable by law | |
what is aktiengesellschaft ag | ag is an abbreviation of aktiengesellschaft which is a german term for a public limited company this type of company shares are offered to the general public and traded on a public stock exchange shareholders liability is limited to their investment the shareholders are not responsible for the company s debts and their assets are protected in case the company becomes insolvent understanding aktiengesellschaftaktiengesellschaft is a german term made up of words meaning share and corporation an ag is a business owned by shareholders which may be traded on a stock marketplace shareholders exercise power over controlling policies at regularly scheduled general meetings the managing board decides on all operational matters and the supervisory board carries them out german companies that are publicly traded are designated as such by the letters ag after the company name ag is an abbreviation for the german word aktiengesellschaft which literally translates to stock corporation or shares corporation in english ag companies trade publicly on stock exchanges with the majority of companies trading on the dax some of the largest german ag corporations include its automotive manufacturers establishing an agsetting up an ag requires five or more members an aktiengesellschaft ag is subject to the stock corporation act this act involves share capital of approximately 50 000 euros with at least one quarter paid at registration the business owner will enlist the services of an attorney or bank in preparing documentation for registration 1the aktiengesellschaft s name will come from the enterprise s purpose and contains the word aktiengesellschaft in its title the articles of association include the corporation s name registered office share capital each shareholder s contribution and details regarding the shares a court or notary will authenticate the articles of association 2the required capital is deposited into a banking account and the notarized documents and signed application are submitted to the commercial registry office the ag will become a legal entity within seven days if all materials are in order the office will issue a certificate of registration and publish news of the establishment in the official gazette 3ag oversightan ag has a managing board of one or more members appointed by and reporting to the supervisory board of three or more members an aktiengesellschaft ag with a share capital of 3 million euros or more has two or more managing board members 4 an ag employing over 500 workers will have employee representatives occupying one third of the supervisory board if the employee number exceeds 2 000 employee representatives will fill half of the board also the articles of association may limit the number of members auditors check the corporation s financial documents meeting three or more of the following conditions for two or more years in a row requires an ordinary company audit the company has more than 50 full time employees revenues exceed 2 million or the balance sheet exceeds 100 000 gmbh vs aggmbh is another common business extension primarily known for its use in germany like most countries germany has two distinct classifications for companies publicly traded and privately held while ag refers to public companies the acronym gmbh is used to designate certain private entities and is written after a company s name the letters stand for gesellschaft mit beschr nkter haftung which translated literally means a company with limited liability 5 | |
who is alan greenspan | alan greenspan is an american economist who was the chair of the board of governors of the federal reserve fed the united states central bank from 1987 until 2006 in that role he also served as the chair of the federal open market committee fomc which is the fed s principal monetary policymaking committee that makes decisions on interest rates and managing the u s money supply 1greenspan is best known for largely presiding over the great moderation a period of relatively stable inflation and macroeconomic growth that lasted from the mid 1980s to the financial crisis in 2007 early life and educationalan greenspan was born in new york city on march 6 1926 he received his bachelor s master s and doctoral degrees in economics all from new york university as well as studying economics at columbia university in the early 1950s under arthur burns who would later serve two consecutive terms as chair of the board of governors of the fed greenspan s first job in 1948 was not in government but for a non profit analyzing demand for steel aluminum and copper after this greenspan ran an economic consulting firm in new york city townsend greenspan co inc from 1954 to 1974 and 1977 to 1987 greenspan began his career in the public sector in 1974 when he served as chair of the president s council of economic advisers cea under president gerald ford in 1987 greenspan became the 13th chair of the fed replacing paul volcker president ronald reagan was the first to appoint greenspan to the office but three other presidents george h w bush bill clinton and george w bush named him to four additional terms his tenure as chair lasted for more than 18 years before he retired in 2006 to be replaced by ben bernanke after leaving he published his memoir the age of turbulence and began his own washington dc based consulting firm greenspan associates llc alan greenspan was known as being adept at gaining consensus among fed board members on policy issues and for serving during one of the most severe economic crises of the late 20th century the aftermath of the stock market crash of 1987 after that crash he advocated for sharply slashing interest rates to prevent the economy from sinking into a deep depression 1alan greenspan was awarded the presidential medal of freedom by george w bush making him the only fed chair to receive the award alan greenspan s policies and actionsgreenspan presided over one of the most prosperous periods in american history thanks in no small part supporters feel to his helming of the fed still some of his policies and actions were controversial either at the time or in retrospect early in his career greenspan developed a reputation for being hawkish on inflation in part due to his advocacy for a return to the gold standard in monetary policy in the 1967 essay gold and economic freedom 2his allegedly hawkish stance was portrayed by early critics as a preference for sacrificing economic growth in exchange for preventing inflation greenspan eventually reversed those views as fed chief in a 1998 speech he conceded that the new economy might not be as susceptible to inflation as he had first thought 3in practice greenspan s supposedly hawkish approach was flexible to say the least he was clearly willing to risk inflation under conditions that could create a severe depression and certainly pursued a generally easy money policy relative to his predecessor paul volcker in particular in the early 2000s greenspan presided over cutting interest rates to levels not seen in many decades 4in 2000 greenspan advocated reducing interest rates after the dot com bubble burst he did so again in 2001 after 9 11 the world trade center attack following 9 11 greenspan led the fomc to immediately reduce the fed funds rate from 3 5 to 3 and in the following months he worked toward lowering that rate to a record at the time low of almost 1 00 and holding it there for a full year 4some criticized those rate cuts as having the potential to inflate asset price bubbles in the u s greenspan s pro inflationary policies particularly during this period are today generally understood to have contributed to the u s housing bubble subsequent subprime mortgage financial crisis and the great recession though this is of course disputed by greenspan and his allies 5in a 2004 speech greenspan suggested more homeowners should consider taking out adjustable rate mortgages arms where the interest rate adjusts itself to prevailing market interest rates 6 under greenspan s tenure interest rates subsequently rose as inflation accelerated 4 this increase reset many of those mortgages to much higher payments creating even more distress for many homeowners and exacerbating the impact of that crisis the greenspan put was a monetary policy strategy popular during the 1990s and 2000s under greenspan throughout his reign he attempted to help support the u s economy by actively using the federal funds rate to aggressively lower interest rates to fight the deflation of asset price bubbles the greenspan put created a substantial moral hazard in financial markets informed investors could expect the fed to take predictable actions that would bailout investor s losses which distort the incentives of market participants 7 this created an environment where investors were encouraged to take excessive risk because fed monetary policy tended to inherently limit their potential losses in the event of a market downturn in an analogous way to buying put options on the open market 8 | |
how long was alan greenspan federal reserve chair | alan greenspan served as chair of the fed from 1987 to 2006 for a total of five terms who appointed alan greenspan president ronald reagan appointed alan greenspan as chair of the fed in 1987 who replaced alan greenspan ben bernanke replaced alan greenspan as chair of the fed when he was appointed in 2006 bernanke served until 2014 | |
how old is alan greenspan | alan greenspan was born on march 6 1926 making him 97 years old as of october 2023 who is alan greenspan s wife alan greenspan married journalist andrea mitchell in 1997 | |
what is alan greenspan doing now | after his time at the fed greenspan has worked as an advisor through his company greenspan associates llc the bottom linelike many other government officials the success of alan greenspan s five terms as chair of the fed will depend on who you ask however it is certainly true that greenspan faced some massive challenges during his tenure such as the 1987 stock market crash and the attacks on the world trade center overall greenspan helped usher in a strong u s economy in the 1990s opinion on how much his actions caused the economic recession that began shortly after his term ended varies | |
what is an aleatory contract | an aleatory contract is an agreement whereby the parties involved do not have to perform a particular action until a specific triggering event occurs events are those that cannot be controlled by either party such as natural disasters and death aleatory contracts are commonly used in insurance policies for example the insurer does not have to pay the insured until an event such as a fire that results in property loss aleatory contracts also called aleatory insurance are helpful because they typically help the purchaser reduce financial risk 1understanding an aleatory contractaleatory contracts are historically related to gambling and appeared in roman law as contracts related to chance events in insurance an aleatory contract refers to an insurance arrangement in which the payouts to the insured are unbalanced until the insurance policy results in a payout the insured pays premiums without receiving anything in return besides coverage when the payouts do occur they can far outweigh the sum of premiums paid to the insurer if the event does not occur the promise outlined in the contract will not be performed | |
how aleatory contracts work | risk assessment is an important factor to the party taking a higher risk when considering entering into an aleatory contract life insurance policies are considered aleatory contracts as they do not benefit the policyholder until the event itself death comes to pass only then will the policy allow the agreed amount of money or services stipulated in the aleatory contract the death of someone is an uncertain event as no one can predict in advance with certainty that when the insured will die however the amount which the insured s beneficiary will receive is certainly much more than what the insured has paid as a premium in certain cases if the insured has not paid the regular premiums to keep the policy in force the insurer is not obliged to pay the policy benefit even though an insured has made some premium payments for the policy in other types of insurance contracts if the insured doesn t die during the policy term then nothing will be payable on maturity such as with term life insurance annuities and aleatory contractsanother type of aleatory contract where each party takes on a defined level of risk exposure is an annuity an annuity contract is an agreement between an individual investor and an insurance company whereby the investor pays a lump sum or a series of premiums to the annuity provider in return the contract legally binds the insurance company to pay periodic payments to the annuity holder called the annuitant once the annuitant reaches a certain milestone such as retirement however the investor might risk losing the premiums paid into the annuity if they withdraw the money too early on the other hand the person might live a long life and receive payments that far exceed the original amount that was paid for the annuity annuity contracts can be very helpful to investors but they can also be extremely complex there are various types of annuities each with its own rules that include how and when payouts are structured fee schedules and surrender charges if money is withdrawn too soon special considerationsfor investors who plan on leaving their retirement funds to a beneficiary it s important to note that the u s congress passed the secure act in 2019 which made rule changes to beneficiaries of retirement plans as of 2020 non spousal beneficiaries of retirement accounts must withdraw all of the funds in the inherited account within ten years of the owner s death in the past beneficiaries could stretch out the distributions or withdrawals over their lifetime the new ruling eliminates the stretch provision which means all of the funds including annuity contracts within the retirement account must be withdrawn within the 10 year rule 2also the new law reduces the legal risks for insurance companies by limiting their liability if they fail to make annuity payments in other words the act reduces the ability for the account holder to sue the annuity provider for breach of contract it s important that investors seek help from a financial professional to review the fine print of any aleatory contract as well as how the secure act might impact their financial plan 3 | |
algorithmic trading involves three broad areas of algorithms execution algorithms profit seeking or black box algorithms and high frequency trading hft algorithms while not wholly separated in real world applications these are all automated processes for financial trades and decision making that use price timing volume and more along with sets of rules to tackle trading problems that might once have required a team of financial specialists | algorithmic trading uses complex mathematical models with human oversight to make decisions to trade securities and hft algorithmic trading enables firms to make tens of thousands of trades per second algorithmic trading can be used for among other things order execution arbitrage and trend trading strategies 1understanding algorithmic tradingthe use of algorithms in trading increased after computerized trading systems were introduced in american financial markets during the 1970s in 1976 the new york stock exchange introduced its designated order turnaround system for routing orders from traders to specialists on the exchange floor 2 in the following decades exchanges enhanced their abilities to accept electronic trading and by 2009 upward of 60 of all trades in the u s were executed by computers 3michael lewis the author of bestselling books on underdogs in finance baseball and other sectors brought hft algorithmic trading to the public s attention with flash boys which documented the lives of wall street traders and entrepreneurs who helped build the companies that came to define the structure of electronic trading in the u s 4 his book showed that these companies were engaged in an arms race to build ever faster computers which could communicate with exchanges ever more quickly to gain an advantage over competitors with speed using order types that benefited them to the detriment of average investors the algorithms used in financial trading are rules or instructions designed to make trading decisions automatically they range from simple single stock to more complex black box algorithms that analyze market conditions price moves and other financial data to execute trades at optimal times for the least cost to maximum profit ratio the crossover of computer engineering and finance is notorious for its leaden jargon so we won t weigh you down with too many terms here while some phrases might change slightly from one trading firm to the next the following should give you an idea of the wide uses for algorithmic trading5 let s walk through a straightforward algorithmic trading example suppose you ve programmed an algorithm to buy 100 shares of a particular stock of company xyz whenever the 75 day moving average goes above the 200 day moving average this is known as a bullish crossover in technical analysis and often indicates an upward price trend the execution algorithm monitors these averages and automatically executes the trade when this condition is met eliminating the need for you to watch the market continuously this allows for precise emotion free trading based on specific predetermined rules which is the essence of algorithmic trading we ve separated these algorithms since they function differently than those above and are at the heart of debates over using artificial intelligence ai in finance black box algorithms are not just preset executable rules for certain strategies the name is for a family of algorithms in trading and a host of other fields 1 the term black box refers to an algorithm with obscure and undisclosable internal mechanisms 7unlike other algorithms that follow predefined execution rules such as trading at a certain volume or price black box algorithms are characterized by their goal oriented approach as complicated as the algorithms above can be designers determine the goal and choose specific rules and algorithms to get there trading at certain prices at certain times with a certain volume black box systems are different since while designers set objectives the algorithms autonomously determine the best way to achieve them based on market conditions outside events etc often those using the term in the public sphere confuse two issues there are quantified strategies that firms and others regard as trade secrets which users know but don t share competitors and regulators may not understand the strategies for example a high frequency trading firm might be using however that s because those who do within the firm aren t sharing proprietary technology then there are black box systems a hallmark of black box algorithms especially those employing artificial intelligence and machine learning is another issue namely that the decision making processes of these systems are opaque even to their designers 8 while we can measure and evaluate these algorithms outcomes understanding the exact processes undertaken to arrive at these outcomes has been a challenge 1 this lack of transparency can be a strength since it allows for sophisticated adaptive strategies to process vast amounts of data and variables but this can also be a weakness because the rationale behind specific decisions or trades is not always clear since we generally define responsibility in terms of why something was decided this is not a minor issue regarding legal and ethical responsibility within these systems thus this obscurity raises questions about accountability and risk management within the financial world as traders and investors might not fully grasp the basis of the algorithmic systems being used 9 despite this black box algorithms are popular in high frequency trading and other advanced investment strategies because they can outperform more transparent and rule based sometimes called linear approaches such systems are at the leading edge of financial technology research as fintech firms look to take the major advances in machine learning and artificial intelligence in recent years and apply them to financial trading 710just as smartphone apps and advanced ai systems have enabled non specialists to create tailored applications and application programming interfaces popularly known as apis the world of algorithmic trading has allowed outsiders to have a hand in expanding upon their proprietary work this open source approach permits individual traders and amateur programmers to participate in what was once the domain of specialized professionals hedge funds and investment firms such as two sigma and panagora have at times leveraged this shift by crowdsourcing algorithms and trumpeting their efforts to pay back the community of programmers by going the other way and releasing improvements to open source applications for all to use 11 they also host competitions where amateur programmers can propose their trading algorithms with the most profitable applications earning commissions or recognition but just as tech companies have leveraged open access applications and programming for problem solving and community engagement fintech firms are increasingly going beyond just using open access cloud computing and similar apps common all over the business world the fintech open source finos foundation said in a november 2023 report that about a quarter of financial service professionals were involved in open source data science and artificial intelligence machine learning platforms 12 nevertheless there may be limits to how far this can go in the financial sector about two thirds of those finos surveyed said that they or their firms worried about using open access systems given the need to safeguard proprietary knowledge advantages and disadvantages of algorithmic tradingspeed executes trades faster than humans accuracy reduces chances of manual errors efficiency can trade 24 7 without fatigue emotionless avoids emotional trading decisions backtesting traders and researchers can test diverse scenarios outside real world trading system failure technical glitches can cause losses over optimization can lead to unrealistic results potential liquidity issues market manipulation may be used for nefarious purposes complacency not adapting algorithmic system to market and regulatory changes using algorithmic trading can offer quicker and more efficient responses to market changes and events they can also automate and ensure a closer alignment between investment decisions and trading instructions leading to lower market impact costs and timing risks as well as a higher rate of order completion here are additional advantages 1algorithmic trading has its limits both for individual traders and concerning the externalities for other traders and the market as a whole 1 | |
how do i get started in algorithmic trading | to start algorithmic trading you need to learn programming c java and python are commonly used understand financial markets and create or choose a trading strategy then backtest your strategy using historical data once satisfied implement it via a brokerage that supports algorithmic trading there are also open source platforms where traders and programmers share software and have discussions and advice for novices | |
how much money do i need for algorithmic trading | the amount of money needed for algorithmic trading can vary substantially depending on the strategy used the brokerage chosen and the markets traded | |
how is high frequency trading different from algorithmic trading | hft is actually a form of algorithmic trading and it s characterized by extremely high speed and a large number of transactions it uses high speed networking and computing along with black box algorithms to trade securities at very fast speeds trades can take place in a millionth of a second the bottom lineno doubt algorithmic trading can offer several different advantages such as speed efficiency and objectivity in trading decisions it can automate entry and exit points reduce the risk of human error and prevent information leakage however it also carries significant risks it s reliant on complex technology that can malfunction or be hacked and high frequency trading can amplify systemic risk market volatility execution errors and technical glitches are also potential hazards | |
what is all risks | all risks refers to a type of insurance coverage that automatically covers any risk that the contract does not explicitly omit for example if an all risk homeowner s policy does not expressly exclude flood coverage then the house will be covered in the event of flood damage this type of policy is found only in the property casualty market understanding all risksinsurance providers generally offer two types of property coverage for homeowners and businesses named perils and all risks a named perils insurance contract only covers the perils stipulated explicitly in the policy for example an insurance contract might specify that any home loss caused by fire or vandalism will be covered therefore an insured who experiences a loss or damage caused by a flood cannot file a claim to his or her insurance provider as a flood is not named as a peril under the insurance coverage under a named perils policy the burden of proof is on the insured an all risks insurance contract covers the insured from all perils except the ones specifically excluded from the list contrary to a named perils contract an all risks policy does not name the risks covered but instead names the risks not covered in so doing any peril not named in the exclusions list is automatically covered the most common types of perils excluded from all risks include earthquake war government seizure or destruction wear and tear infestation pollution nuclear hazard and market loss an individual or business who requires coverage for any excluded event under all risks may have the option to pay an additional premium known as a rider or floater to have the peril included in the contract all risks are also called open perils all perils or comprehensive insurance the trigger for coverage under an all risks policy is physical loss or damage to property an insured must prove physical damage or loss has occurred before the burden of proof shifts to the insurer who then has to prove that an exclusion applies to the coverage for example a small business that experienced a power outage may file a claim citing physical loss the insurance company on the other hand might reject the claim stating that the company experienced a loss of income from a mere loss of property use which is not the same thing as a physical loss of property special considerationsbecause all risks is the most comprehensive type of coverage available and protects the insured from a greater number of possible loss events it is priced proportionately higher than other types of policies the cost of this type of insurance should therefore be measured against the probability of a claim it is possible to have named perils and all risks in the same policy for example an insured may have a property insurance policy that has all risks coverage on the building and named perils on his personal property everyone should read the fine print of any insurance agreement to ensure that they understand what is excluded in the policy also just because an insurance policy is termed all risks does not mean that it covers all risks since the exclusions reduce the level of coverage that is offered make sure you look for the exclusions in any prospective policy | |
what is the meaning of all risk | all risk is a type of insurance product that requires a risk to be explicitly stated for it to not be covered for example if the contract does not state tree damage as an omitting risk then if a tree were to fall on the insured property under an all risk policy since the tree was not explicitly mentioned the damage would be covered | |
what are the 4 major types of insurance | there are insurance products for almost everything but for most people there are four types of insurance products that are seen more than any other life insurance auto insurance health insurance and long term disability insurance are those that cover most of an individual s risk factors once someone owns significant property like a house or something high value like jewelry or other collector items they will need additional policies tailored to these individual items however most people who rent will own the four major types listed above | |
what are all risk perils | all risk perils is another name for all risk insurance as it relates to individual risks named perils is an insurance product that names what is insured in case of an accident all risks assuming there are no perils mentioned could be considered all risk perils since all perils are assumed as risk under the policy however these are rare as they put undue risk acceptance on the insurer and it is much more common to see many perils listed even on an all risks policy the bottom lineall risk insurance also called all risk coverage is an insurance product that covers any incident that isn t explicitly mentioned these policies assume a good deal of risk for the insurer and are less common than named risk coverage which states exactly what is covered versus stating only what is to be omitted which is the case with all risk | |
what are allocated loss adjustment expenses alae | allocated loss adjustment expenses alae are costs attributed to the processing of a specific insurance claim alae is part of an insurer s expense reserves it is one of the largest expenses for which an insurer has to set aside funds along with contingent commissions understanding allocated loss adjustment expenses alae allocated loss adjustment expenses along with unallocated loss adjustment expenses ulae represent an insurer s estimate of the money it will pay out in claims and expenses insurers set aside reserves for these expenses to ensure claims aren t made fraudulently and to process legitimate claims quickly alaes link directly to the processing of a specific claim these costs may include payments to third parties for activities like investigating claims acting as loss adjusters or as legal counsel for the insurer expenses associated with ulae are more general and may include overhead investigations and salaries 1life insurance companies that use in house employees for field adjustments would report that expense as an unallocated loss adjustment expense special considerationssome commercial liability policies contain endorsements which require the policyholder to reimburse its insurance company for loss adjustment expenses alae or ulae 2 adjusting a loss is the process of ascertaining the value of a loss or negotiating a settlement therefore loss adjustment expenses are most often those costs incurred by an insurance company in defending or settling a liability claim brought against its policyholder these expenses can include fees charged by attorneys investigators experts arbitrators mediators and other fees or expenses incidental to adjusting a claim it is important to carefully read the endorsement language which may say that a loss adjustment expense is not intended to include the policyholder s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer in this situation where the insurance company has done no actual adjusting of the claim it should not be entitled to apply its deductible to the expenses incurred by the policyholder in defending the claim abandoned by the insurance company alae vs unallocated loss adjustment expenses ulae insurers have gradually shifted from categorizing expenses as ulae to categorizing them as alae this is primarily because insurers are more sophisticated in how they treat claims and have more tools at their disposal to manage the costs associated with claims small straightforward claims are the easiest for an insurance company to settle and often require less alae when compared to claims that may take years to settle claims that could result in substantial losses are the most likely to receive extra scrutiny by insurers and may involve in depth investigations settlement offers and litigation with greater scrutiny comes greater cost analysts can tell how accurate an insurance company has been at estimating its reserves by examining its loss reserve development loss reserve development involves an insurer adjusting estimates to its loss and loss adjustment expense reserves over a period of time | |
what are the differences between alae and ulae | allocated loss adjustment expenses alae are costs attributed to the processing of a specific insurance claim alae is part of an insurer s expense reserves expenses associated with unallocated loss adjustment are more general and may include overhead investigations and salaries 1 | |
what should policyholders know about endorsements | endorsements require the policyholder to reimburse the insurance company for loss adjustment expenses read the endorsement language which may say that a loss adjustment expense is not intended to include the policyholder s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer | |
what is allocational efficiency | allocational efficiency also known as allocative efficiency is a characteristic of an efficient market where the optimal distribution of goods in an economy meets the needs and wants of society the goal of allocative efficiency is to ensure that resources are used so that their marginal benefit to society is equal to their marginal cost understanding allocational efficiencyallocational efficiency occurs when organizations in the public and private sectors spend their resources on projects that will be the most profitable and do the most good for the population thereby promoting economic growth | |
when all of the data for a market is accessible companies can make accurate decisions about what projects might be most profitable and manufacturers can concentrate on producing products most desired by the general population | in economics allocative efficiency materializes at the intersection of the supply and demand curves at this equilibrium point allocative efficiency exists for a firm producing the output for which the price is equal to the marginal cost of production allocative efficiency measures how an economy uses resources to produce the goods and services people value the most requirements for allocational efficiencyan efficient market is one in which all pertinent data regarding the market and its activities is readily available to all market participants and is always reflected in market prices for the market to be efficient it must be both informationally efficient and transactionally or operationally efficient when a market is informationally efficient all necessary and pertinent information about the market is readily available to all parties involved in other words no parties have an informational advantage over any other image by sabrina jiang investopedia 2021meanwhile all transaction costs are reasonable and fair when a market is transactionally efficient this ensures that all transactions are equally executable by all parties and not prohibitively expensive to anyone if these conditions of fairness are met and the market is efficient capital flows will go to where they will be the most effective and provide an optimal risk reward scenario for investors | |
what is the difference between allocational efficiency and distributive efficiency | allocational efficiency is the optimal distribution of goods in an economy that meets the needs and wants of society distributive efficiency occurs when goods and services are consumed by those who need them most and focuses on the equitable distribution of resources | |
what is allocative efficiency important | allocative efficiency is important because it ensures that resources are used to satisfy the highest number of wants | |
when does allocative efficiency happen | the state of allocative efficiency happens when a firm produces the output for which the price is equal to the marginal cost of production the bottom lineallocational efficiency is the efficient allocation of resources that leads to maximum overall satisfaction in the economy allocative efficiency ensures that resources are used so that their marginal benefit to society is equal to their marginal cost for a firm or producer allocative efficiency happens when the price of the output is equal to the marginal cost of production correction july 31 2023 a previous version of this article inaccurately compared allocational efficiency to distributive efficiency the equitable distribution of resources the article was edited to clarify that allocation efficiency is the optimal distribution of goods in an economy to meet the needs and wants of society where marginal social cost is equal to the marginal social benefit | |
what is allocational efficiency | allocational efficiency also known as allocative efficiency is a characteristic of an efficient market where the optimal distribution of goods in an economy meets the needs and wants of society the goal of allocative efficiency is to ensure that resources are used so that their marginal benefit to society is equal to their marginal cost understanding allocational efficiencyallocational efficiency occurs when organizations in the public and private sectors spend their resources on projects that will be the most profitable and do the most good for the population thereby promoting economic growth | |
when all of the data for a market is accessible companies can make accurate decisions about what projects might be most profitable and manufacturers can concentrate on producing products most desired by the general population | in economics allocative efficiency materializes at the intersection of the supply and demand curves at this equilibrium point allocative efficiency exists for a firm producing the output for which the price is equal to the marginal cost of production allocative efficiency measures how an economy uses resources to produce the goods and services people value the most requirements for allocational efficiencyan efficient market is one in which all pertinent data regarding the market and its activities is readily available to all market participants and is always reflected in market prices for the market to be efficient it must be both informationally efficient and transactionally or operationally efficient when a market is informationally efficient all necessary and pertinent information about the market is readily available to all parties involved in other words no parties have an informational advantage over any other image by sabrina jiang investopedia 2021meanwhile all transaction costs are reasonable and fair when a market is transactionally efficient this ensures that all transactions are equally executable by all parties and not prohibitively expensive to anyone if these conditions of fairness are met and the market is efficient capital flows will go to where they will be the most effective and provide an optimal risk reward scenario for investors | |
what is the difference between allocational efficiency and distributive efficiency | allocational efficiency is the optimal distribution of goods in an economy that meets the needs and wants of society distributive efficiency occurs when goods and services are consumed by those who need them most and focuses on the equitable distribution of resources | |
what is allocative efficiency important | allocative efficiency is important because it ensures that resources are used to satisfy the highest number of wants | |
when does allocative efficiency happen | the state of allocative efficiency happens when a firm produces the output for which the price is equal to the marginal cost of production the bottom lineallocational efficiency is the efficient allocation of resources that leads to maximum overall satisfaction in the economy allocative efficiency ensures that resources are used so that their marginal benefit to society is equal to their marginal cost for a firm or producer allocative efficiency happens when the price of the output is equal to the marginal cost of production correction july 31 2023 a previous version of this article inaccurately compared allocational efficiency to distributive efficiency the equitable distribution of resources the article was edited to clarify that allocation efficiency is the optimal distribution of goods in an economy to meet the needs and wants of society where marginal social cost is equal to the marginal social benefit | |
what is an allowance for bad debt | an allowance for bad debt is a valuation account used to estimate the amount of a firm s receivables that may ultimately be uncollectible it is also known as an allowance for doubtful accounts when a borrower defaults on a loan the allowance for bad debt account and the loan receivable balance are both reduced for the book value of the loan | |
how an allowance for bad debt works | lenders use an allowance for bad debt because the face value of a firm s total accounts receivable is not the actual balance that is ultimately collected ultimately a portion of the receivables will not be paid when a customer never pays the principal or interest amount due on a receivable the business must eventually write it off entirely methods of estimating an allowance for bad debtthere are two primary ways to calculate the allowance for bad debt one method is based on sales while the other is based on accounts receivable the sales method estimates the bad debt allowance as a percentage of credit sales as they occur suppose that a firm makes 1 000 000 in credit sales but knows from experience that 1 5 never pay then the sales method estimate of the allowance for bad debt would be 15 000 the accounts receivable method is considerably more sophisticated and takes advantage of the aging of receivables to provide better estimates of the allowance for bad debts the basic idea is that the longer a debt goes unpaid the more likely it is that the debt will never pay in this case perhaps only 1 of initial sales would be added to the allowance for bad debt however 10 of receivables that had not paid after 30 days might be added to the allowance for bad debt after 90 days it could rise to 50 finally the debts might be written off after one year requirements for an allowance for bad debtaccording to generally accepted accounting principles gaap the main requirement for an allowance for bad debt is that it accurately reflects the firm s collections history if 2 100 out of 100 000 in credit sales did not pay last year then 2 1 is a suitable sales method estimate of the allowance for bad debt this year this estimation process is easy when the firm has been operating for a few years new businesses must use industry averages rules of thumb or numbers from another business an accurate estimate of the allowance for bad debt is necessary to determine the actual value of accounts receivable default considerations | |
when a lender confirms that a specific loan balance is in default the company reduces the allowance for doubtful accounts balance it also reduces the loan receivable balance because the loan default is no longer simply part of a bad debt estimate | adjustment considerationsthe allowance for bad debt always reflects the current balance of loans that are expected to default and the balance is adjusted over time to show that balance suppose that a lender estimates 2 million of the loan balance is at risk of default and the allowance account already has a 1 million balance then the adjusting entry to bad debt expense and the increase to the allowance account is an additional 1 million | |
what is allowance for credit losses | allowance for credit losses is an estimate of the debt that a company is unlikely to recover it is taken from the perspective of the selling company that extends credit to its buyers | |
how allowance for credit losses works | most businesses conduct transactions with each other on credit meaning they do not have to pay cash at the time purchases from another entity is made the credit results in an accounts receivable on the balance sheet of the selling company accounts receivable is recorded as a current asset and describes the amount that is due for providing services or goods one of the main risks of selling goods on credit is that not all payments are guaranteed to be collected to factor in this possibility companies create an allowance for credit losses entry since current assets by definition are expected to turn to cash within one year a company s balance sheet could overstate its accounts receivable and therefore its working capital and shareholders equity if any part of its accounts receivable is not collectible the allowance for credit losses is an accounting technique that enables companies to take these anticipated losses into consideration in its financial statements to limit overstatement of potential income to avoid an account overstatement a company will estimate how much of its receivables it expects will be delinquent recording allowance for credit lossessince a certain amount of credit losses can be anticipated these expected losses are included in a balance sheet contra asset account the line item can be called allowance for credit losses allowance for uncollectible accounts allowance for doubtful accounts allowance for losses on customer financing receivables or provision for doubtful accounts any increase to allowance for credit losses is also recorded in the income statement as bad debt expenses companies may have a bad debt reserve to offset credit losses allowance for credit losses methoda company can use statistical modeling such as default probability to determine its expected losses to delinquent and bad debt the statistical calculations can utilize historical data from the business as well as from the industry as a whole companies regularly make changes to the allowance for credit losses entry to correlate with the current statistical modeling allowances when accounting for allowance for credit losses a company does not need to know specifically which customer will not pay nor does it need to know the exact amount an approximate amount that is uncollectible can be used in its 10 k filing covering the 2018 fiscal year boeing co ba explained how it calculates its allowance for credit losses the manufacturer of airplanes rotorcraft rockets satellites and missiles said it reviews customer credit ratings published historical credit default rates for different rating categories and multiple third party aircraft value publications every quarter to determine which customers might not pay up what they owe the company also disclosed that there are no guarantees that its estimates will be correct adding that actual losses on receivables could easily be higher or lower than forecast in 2018 boeing s allowance as a percentage of gross customer financing was 0 31 example of allowance for credit lossessay a company has 40 000 worth of accounts receivable on september 30 it estimates 10 of its accounts receivable will be uncollected and proceeds to create a credit entry of 10 x 40 000 4 000 in allowance for credit losses in order to adjust this balance a debit entry will be made in the bad debts expense for 4 000 even though the accounts receivable is not due in september the company still has to report credit losses of 4 000 as bad debts expense in its income statement for the month if accounts receivable is 40 000 and allowance for credit losses is 4 000 the net amount reported on the balance sheet will be 36 000 this same process is used by banks to report uncollectible payments from borrowers who default on their loan payments | |
what is an allowance for doubtful accounts | an allowance for doubtful accounts is a contra account that nets against the total receivables presented on the balance sheet to reflect only the amounts expected to be paid the allowance for doubtful accounts estimates the percentage of accounts receivable that are expected to be uncollectible however the actual payment behavior of customers may differ substantially from the estimate investopedia candra huffunderstanding the allowance for doubtful accountsregardless of company policies and procedures for credit collections the risk of the failure to receive payment is always present in a transaction utilizing credit thus a company is required to realize this risk through the establishment of the allowance for doubtful accounts and offsetting bad debt expense in accordance with the matching principle of accounting this ensures that expenses related to the sale are recorded in the same accounting period as the revenue is earned the allowance for doubtful accounts also helps companies more accurately estimate the actual value of their account receivables because the allowance for doubtful accounts is established in the same accounting period as the original sale an entity does not know for certain which exact receivables will be paid and which will default therefore generally accepted accounting principles gaap dictate that the allowance must be established in the same accounting period as the sale but can be based on an anticipated or estimated figure the allowance can accumulate across accounting periods and may be adjusted based on the balance in the account companies technically don t need to have an allowance for doubtful account if it does not issue credit sales requires collateral or only uses the highest credit customers the company may not need to estimate uncollectability | |
how to estimate the allowance for doubtful accounts | two primary methods exist for estimating the dollar amount of accounts receivables not expected to be collected the sales method applies a flat percentage to the total dollar amount of sales for the period for example based on previous experience a company may expect that 3 of net sales are not collectible if the total net sales for the period is 100 000 the company establishes an allowance for doubtful accounts for 3 000 while simultaneously reporting 3 000 in bad debt expense if the following accounting period results in net sales of 80 000 an additional 2 400 is reported in the allowance for doubtful accounts and 2 400 is recorded in the second period in bad debt expense the aggregate balance in the allowance for doubtful accounts after these two periods is 5 400 the second method of estimating the allowance for doubtful accounts is the aging method all outstanding accounts receivable are grouped by age and specific percentages are applied to each group the aggregate of all group results is the estimated uncollectible amount for example a company has 70 000 of accounts receivable less than 30 days outstanding and 30 000 of accounts receivable more than 30 days outstanding based on previous experience 1 of accounts receivable less than 30 days old will be uncollectible and 4 of those accounts receivable at least 30 days old will be uncollectible therefore the company will report an allowance of 1 900 70 000 1 30 000 4 if the next accounting period results in an estimated allowance of 2 500 based on outstanding accounts receivable only 600 2 500 1 900 will be the adjusting entry amount some companies may classify different types of debt or different types of vendors using risk classifications for example a start up customer may be considered a high risk while an established long tenured customer may be a low risk in this example the company often assigns a percentage to each classification of debt then it aggregates all receivables in each grouping calculates each group by the percentage and records an allowance equal to the aggregate of all products if a company has a history of recording or tracking bad debt it can use the historical percentage of bad debt if it feels that historical measurement relates to its current debt for example a company may know that its 10 year average of bad debt is 2 4 therefore it can assign this fixed percentage to its total accounts receivable balance since more often than not it will approximately be close to this amount the company must be aware of outliers or special circumstances that may have unfairly impacted that 2 4 calculation a pareto analysis is a risk measurement approach that states that a majority of activity is often concentrated among a small amount of accounts in many different aspects of business a rough estimation is that 80 of account receivable balances are made up of a small concentration i e 20 of vendors this 80 20 ratio is used throughout business though the pareto analysis can not be used on its own it can be used to weigh accounts receivable estimates differently for example a company may assign a heavier weight to the clients that make up a larger balance of accounts receivable due to conservatism assume a company has 100 clients and believes there are 11 accounts that may go uncollected instead of applying percentages or weights it may simply aggregate the account balance for all 11 customers and use that figure as the allowance amount companies often have a specific method of identifying the companies that it wants to include and the companies it wants to exclude management may disclose its method of estimating the allowance for doubtful accounts in its notes to the financial statements | |
how to account for the allowance for doubtful accounts | the first step in accounting for the allowance for doubtful accounts is to establish the allowance this is done by using one of the estimation methods above to predict what proportion of accounts receivable will go uncollected for this example let s say a company predicts it will incur 500 000 of uncollected accounts receivable to create the allowance the company must debit a loss most often companies use an account called bad debt expense then the company establishes the allowance by crediting an allowance account often called allowance for doubtful accounts though this allowance for doubtful accounts is presented on the balance sheet with other assets it is a contra asset that reduces the balance of total assets let s say six months passes the company now has a better idea of which account receivables will be collected and which will be lost for example say the company now thinks that a total of 600 000 of receivables will be lost this means its allowance of 500 000 is 100 000 short the company must record an additional expense for this amount to also increase the allowance s credit balance note that if a company believes it may recover a portion of a balance it can write off a portion of the account now let s say a specific customer that owes a company 50 000 officially files for bankruptcy this client s account had previously been included in the estimate for the allowance because the company has a very low priority claim without collateral to the debt the company decides it is unlikely it will every receive any of this 50 000 to properly reflect this change the company must reduce its accounts receivable balance by this amount on the other hand once the receivable is removed from the books there is no need to record an associated allowance for this account note that the debit to the allowance for doubtful accounts reduces the balance in this account because contra assets have a natural credit balance also note that when writing off the specific account no income statement accounts are used this is because the expense was already taken when creating or adjusting the allowance by a miracle it turns out the company ended up being rewarded a portion of their outstanding receivable balance they d written off as part of the bankruptcy proceedings of the 50 000 balance that was written off the company is notified that they will receive 35 000 the company can recover the account by reversing the entry above to reinstate the accounts receivable balance and the corresponding allowance for the doubtful account balance then the company will record a debit to cash and credit to accounts receivable when the payment is collected you ll notice that because of this the allowance for doubtful accounts increases a company can further adjust the balance by following the entry under the adjusting the allowance section above | |
how do you record the allowance for doubtful accounts | you record the allowance for doubtful accounts by debiting the bad debt expense account and crediting the allowance for doubtful accounts account you ll notice the allowance account has a natural credit balance and will increase when credited | |
is allowance for doubtful accounts a credit or debit | the allowance for doubtful accounts account is a contra asset contra assets are still recorded along with other assets though their natural balance is opposite of assets while assets have natural debit balances and increase with a debit contra assets have natural credit balance and increase with a credit | |
are allowance for doubtful accounts a current asset | yes allowance accounts that offset gross receivables are reported under the current asset section of the balance sheet this type of account is a contra asset that reduces the amount of the gross accounts receivable account | |
why do accountants use allowance for doubtful accounts | accounts use this method of estimating the allowance to adhere to the matching principle the matching principle states that revenue and expenses must be recorded in the same period in which they occur therefore the allowance is created mainly so the expense can be recorded in the same period revenue is earned the bottom linethe allowance for doubtful accounts is a general ledger account that is used to estimate the amount of accounts receivable that will not be collected a company uses this account to record how many accounts receivable it thinks will be lost the balance may be estimated using several different methods and management should periodically evaluate the balance of the allowance account to ensure the appropriate bad debt expense and net accounts receivables are being recorded | |
what is alpha | alpha is a term used in investing to describe an investment strategy s ability to beat the market or its edge alpha is thus also often referred to as excess return or the abnormal rate of return in relation to a benchmark when adjusted for risk alpha is often used in conjunction with beta the greek letter which measures the broad market s overall volatility or risk known as systematic market risk alpha is used in finance as a measure of performance indicating when a strategy trader or portfolio manager has managed to beat the market return or other benchmark over some period alpha often considered the active return on an investment gauges the performance of an investment against a market index or benchmark that is considered to represent the market s movement as a whole the excess return of an investment relative to the return of a benchmark index is the investment s alpha alpha may be positive or negative and is the result of active investing beta on the other hand can be earned through passive index investing sydney saporito investopediaunderstanding alphaalpha is one of five popular technical investment risk ratios the others are beta standard deviation r squared and the sharpe ratio these are all statistical measurements used in modern portfolio theory mpt all of these indicators are intended to help investors determine the risk return profile of an investment active portfolio managers seek to generate alpha in diversified portfolios with diversification intended to eliminate unsystematic risk because alpha represents the performance of a portfolio relative to a benchmark it is often considered to represent the value that a portfolio manager adds to or subtracts from a fund s return in other words alpha is the return on an investment that is not a result of a general movement in the greater market as such an alpha of zero would indicate that the portfolio or fund is tracking perfectly with the benchmark index and that the manager has not added or lost any additional value compared to the broad market applying alpha to investingthe concept of alpha became more popular with the advent of smart beta index funds tied to indexes like the standard poor s 500 index and the wilshire 5000 total market index these funds attempt to enhance the performance of a portfolio that tracks a targeted subset of the market despite the considerable desirability of alpha in a portfolio many index benchmarks manage to beat asset managers the vast majority of the time due in part to a growing lack of faith in traditional financial advising brought about by this trend more and more investors are switching to low cost passive online advisors often called robo advisors who exclusively or almost exclusively invest clients capital into index tracking funds the rationale being that if they cannot beat the market they may as well join it moreover because most traditional financial advisors charge a fee when one manages a portfolio and nets an alpha of zero it actually represents a slight net loss for the investor for example suppose that jim a financial advisor charges 1 of a portfolio s value for his services and that during a 12 month period jim managed to produce an alpha of 0 75 for the portfolio of one of his clients frank while jim has indeed helped the performance of frank s portfolio the fee that jim charges is in excess of the alpha he has generated so frank s portfolio has experienced a net loss for investors the example highlights the importance of considering fees in conjunction with performance returns and alpha efficient market hypothesisthe efficient market hypothesis emh postulates that market prices incorporate all available information at all times so securities are always properly priced the market is efficient therefore according to the emh there is no way to systematically identify and take advantage of mispricings in the market because they do not exist if mispricings are identified they are quickly arbitraged away so persistent patterns of market anomalies that can be taken advantage of tend to be few and far between empirical evidence comparing historical returns of active mutual funds relative to their passive benchmarks indicates that fewer than 10 of all active funds are able to earn a positive alpha over a 10 plus year time period and this percentage falls once taxes and fees are taken into consideration in other words alpha is hard to come by especially after taxes and fees because beta risk can be isolated by diversifying and hedging various risks which comes with various transaction costs some have proposed that alpha does not really exist but simply represents the compensation for taking some unhedged risk that hadn t been identified or was overlooked seeking investment alphaalpha is commonly used to rank active mutual funds as well as all other types of investments it is often represented as a single number like 3 0 or 5 0 and typically refers to a percentage measuring how the portfolio or fund performed compared to the referenced benchmark index i e 3 better or 5 worse a deeper analysis of alpha may also include jensen s alpha jensen s alpha takes into consideration the capital asset pricing model capm market theory and includes a risk adjusted component in its calculation beta or the beta coefficient is used in the capm which calculates the expected return of an asset based on its own particular beta and the expected market returns alpha and beta are used together by investment managers to calculate compare and analyze returns the entire investing universe offers a broad range of securities investment products and advisory options for investors to consider different market cycles also have an influence on the alpha of investments across different asset classes this is why risk return metrics are important to consider in conjunction with alpha example of alphaalpha is illustrated in the following two historical examples of a fixed income exchange traded fund etf and an equity etf the ishares convertible bond etf icvt is a fixed income investment with low risk it tracks a customized index called the bloomberg u s convertible cash pay bond 250mm index the three year standard deviation was 18 94 as of feb 28 2022 the year to date return as of feb 28 2022 was 6 67 the bloomberg u s convertible cash pay bond 250mm index had a return of 13 17 over the same period therefore the alpha for icvt was 6 5 compared to the bloomberg u s aggregate index and a three year standard deviation of 18 97 1however since the aggregate bond index is not the proper benchmark for icvt it should be the bloomberg convertible index this alpha may not be as large as initially thought in fact it may be misattributed since convertible bonds have far riskier profiles than plain vanilla bonds the wisdomtree u s quality dividend growth fund dgrw is an equity investment with higher market risk that seeks to invest in dividend growth equities its holdings track a customized index called the wisdomtree u s quality dividend growth index it had a three year annualized standard deviation of 10 58 higher than icvt 2as of feb 28 2022 dgrw s annualized return was 18 1 which was also higher than the s p 500 at 16 4 so it had an alpha of 1 7 compared to the s p 500 but again the s p 500 may not be the correct benchmark for this etf since dividend paying growth stocks are a very particular subset of the overall stock market and may not even be inclusive of the 500 most valuable stocks in the united states 3alpha considerationswhile alpha has been called the holy grail of investing and as such receives a lot of attention from investors and advisors alike there are a couple of important considerations that one should take into account when using alpha | |
when using a generated alpha calculation it is important to understand the calculations involved alpha can be calculated using various different index benchmarks within an asset class in some cases there might not be a suitable preexisting index in which case advisors may use algorithms and other models to simulate an index for comparative alpha calculation purposes | alpha can also refer to the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like capm in this instance a capm might aim to estimate returns for investors at various points along an efficient frontier the capm analysis might estimate that a portfolio should earn 10 based on the portfolio s risk profile if the portfolio actually earns 15 the portfolio s alpha would be 5 0 or 5 over what was predicted in the capm | |
what are alpha and beta in finance | alpha measures the excess return above a benchmark for an investment while beta is the measure of volatility also known as risk active investors seek to achieve alpha returns by employing unique strategies | |
what is a good alpha in finance | in finance specifically in trading and investing what is considered a good alpha will vary depending on the goal of the investor and the risk tolerance generally a good alpha is one that is greater than zero when adjusted for risk | |
what does a negative alpha mean in stocks | a negative alpha in stocks means that a stock is underperforming the benchmark when adjusted for risk if an investor is intending to match or outperform a specific benchmark and their investment portfolio is performing under that rate then their alpha is negative the bottom linethe goal of an investor is to achieve the highest returns possible alpha is a measure of performance regarding investment returns that are better when compared to a benchmark when adjusted for risk active investors seek to achieve returns that are higher than a benchmark and can employ a variety of strategies to do so many funds such as hedge funds have the purpose of achieving alpha and charge high management fees for doing so | |
what is alphabet stock | an alphabet stock refers to a separate class of common stock that is tied to a specific subsidiary of a corporation more broadly it refers to shares of common stock that are distinguished in some way from other common stock of the same company it is called an alphabet stock because the classification system used to identify each class of common stock uses letters to distinguish it from the parent company s stock alphabet stock may have different voting rights from the parent company s stock understanding alphabet stockpublicly traded companies may issue alphabet stock when purchasing a business unit from another company this unit becomes a subsidiary of the acquirer and holders of the alphabet stock are only entitled to the earnings dividends and rights of the subsidiary not the entire acquirer a similar situation would be the issuance of tracking stock where a firm issues a subclass of shares on an existing subsidiary alternatively like with all stock issuance a firm may issue a new class of common stock to raise capital however this new asset class of stock may have limited voting rights allowing insiders and management to maintain control of the firm alphabet shares may be indicative of a complex capital structure companies with complex capital structures and several subsidiaries and divisions may have a combination of several different varieties of common stock classes with each share class carrying different voting rights and dividend rates special considerations | |
when alphabet stock is issued typical nomenclature is to see a period and letter behind the existing stock symbol indicating a separate share class so for example if abc company whose stock symbol is abc issued class a and b shares the new ticker for these shares would be abc a and abc b respectively | there is no standard format for alphabet stock in terms of which share class has more voting rights if voting rights differ among them typically class a shares would have more rights than class b and so forth but it is important to read the details about share classes before investing to learn more about the issuance of multiple share classes by a firm check out related writing on the topic | |
what is an altcoin | altcoins are generally defined as all cryptocurrencies other than bitcoin btc however some people consider altcoins to be all cryptocurrencies other than bitcoin and ethereum eth because most cryptocurrencies are forked from one of the two some altcoins use different consensus mechanisms to validate transactions open new blocks or attempt to distinguish themselves from bitcoin and ethereum by providing new or additional capabilities or purposes most altcoins are designed and released by developers with different visions or uses for their tokens or cryptocurrency learn more about altcoins and what makes them different from bitcoin investopedia michela buttignolunderstanding altcoins altcoin is a combination of the two words alternative and coin the term generally includes all cryptocurrencies and tokens that are not bitcoin altcoins belong to the blockchains for which they were explicitly designed many are forks creating a blockchain from another chain from bitcoin and ethereum these forks generally have more than one reason for occurring most of the time a group of developers disagree with others and leave to make their own coin many altcoins are used within their respective blockchains to accomplish something such as ether which is used in ethereum to pay transaction fees some developers have created forks of bitcoin and re emerged as an attempt to compete with it as a payment method like the fork that created bitcoin cash others fork or are developed from scratch attempting to create a blockchain and token that appeals to a specific industry or group such as ripple s attempt to use the xrp ledger and xrp to attract the banking industry with a faster payment system dogecoin the popular meme coin was apparently created as somewhat of a joke it was forked from litecoin which itself was forked from bitcoin in 2011 whatever the intent behind its creation it was still designed to be a digital payment method altcoins attempt to improve upon the perceived limitations of whichever cryptocurrency and blockchain they are forked from or competing with the first altcoin was litecoin forked from the bitcoin blockchain in 2011 litecoin uses a different proof of work pow consensus mechanism than bitcoin called scrypt pronounced ess crypt which is less energy intensive and quicker than bitcoin s sha 256 pow consensus mechanism ether is another altcoin however it did not fork from bitcoin it was designed by vitalik buterin dr gavin wood and a few others to be used in ethereum the world s largest blockchain based virtual machine ether eth is used to pay network participants for the transaction validation work their machines do it is also used as collateral called staking for the privilege of becoming a validator and block proposer types of altcoinsaltcoins come in various flavors and categories here s a brief summary of some of the types of altcoins and what they are intended to be used for it is possible for an altcoin to fall into more than one category such as terrausd which was a stablecoin and utility token as the name implies payment tokens are designed to be used as currency to exchange value between parties bitcoin is the prime example of a payment token cryptocurrency trading and use have been marked by volatility since its launch stablecoins aim to reduce this overall volatility by pegging value to another asset this is accomplished by holding assets in reserve some of the assets held by stablecoin creators are fiat currencies precious metals or investment assets price fluctuations for stablecoins are not meant to exceed a very narrow range notable stablecoins include tether s usdt makerdao s dai and the usd coin usdc in march 2021 payment processing giant visa inc v announced that it would begin settling some transactions on its network in usdc over the ethereum blockchain with plans to roll out further settlement solutions 1security tokens are tokens that represent fundraising efforts or ownership they could also represent tokenized assets tokenization is the transfer of value from an asset to a token any asset can be tokenized such as real estate or stocks for this to work the asset must be transparently secured and held otherwise the tokens are worthless because they wouldn t represent anything security tokens are regulated by the securities and exchange commission because they are designed to act as securities in 2021 the bitcoin wallet firm exodus successfully completed a securities and exchange commission qualified reg a token offering allowing for 75 million shares of common stock to be converted to tokens on the algorand blockchain 2 this historic event was the first digital asset security to offer equity in a united states based issuer utility tokens are used to provide services within a network for example they might be used to purchase services pay network fees or redeem rewards filecoin which is used to buy storage space on a network and secure the information is an example of a utility token 3ether eth is also a utility token it is designed to be used in the ethereum blockchain and virtual machine to pay for transactions the former stablecoin usterra used utility tokens to attempt to maintain its peg to the dollar which it lost on may 11 2022 by minting and burning two utility tokens to create downward or upward pressure on its price 4utility tokens can be purchased on exchanges and held but they are meant to be used in the blockchain network to keep it functioning as their name suggests meme coins are inspired by a joke or a silly take on other well known cryptocurrencies they typically gain popularity quickly often hyped online by prominent influencers or investors attempting to exploit short term gains many refer to the sharp run up in this type of altcoins during april and may 2021 as meme coin season with hundreds of these cryptocurrencies posting enormous percentage gains based on pure speculation 5an initial coin offering ico is the cryptocurrency industry s equivalent of an initial public offering ipo a company looking to raise money to create a new coin app or service launches an ico to raise funds governance tokens allow holders certain rights within a blockchain such as voting for changes to protocols or having a say in the decisions of a decentralized autonomous organization dao because they are generally native to a private blockchain and used for blockchain purposes they are utility tokens but have come to be accepted as a separate type because of their purpose 6pros and cons of altcoinsimprove upon another cryptocurrency s weaknesseshigher survivabilitythousands to choose fromlower popularity and smaller market capless liquid than bitcoindifficult to determine use casesmany altcoins are scams or have lost developer and community interestfuture of altcoinsdiscussions about the future of altcoins and cryptocurrencies have a precedent in the circumstances that led to a federally issued dollar in the 19th century various forms of local currencies circulated in the united states each had unique characteristics and was backed by a different instrument 8local banks were also issuing currency sometimes backed by fictitious reserves that diversity of currencies and financial instruments parallels the current situation in altcoin markets there are thousands of altcoins available in the markets today each claiming to serve a different purpose and market the current state of affairs in the altcoin market indicates that it will unlikely consolidate into a single cryptocurrency however it is likely that most of the thousands of altcoins listed in crypto markets will not survive the altcoin market will probably coalesce around a few altcoins those with strong utility use cases and a solid blockchain purpose which will dominate the markets if you re looking to diversify within the cryptocurrency market altcoins can be less expensive than bitcoin however the cryptocurrency market regardless of the type of coin is young and volatile cryptocurrency is still finding its role in the global economy so it s best to approach all cryptocurrencies cautiously | |
what is considered an altcoin | an altcoin is any cryptocurrency other than bitcoin and to some people ethereum | |
what are the top 5 altcoins | by market cap the top five altcoins are eth usdt bnb sol and usdc 9 | |
which altcoin will take off in 2024 is anyone s guess there might not be any changes in the market or a new one could be introduced that attracts a whirlwind of investors | the bottom linealtcoins are any cryptocurrency that is not bitcoin or ethereum there are thousands of altcoins on the market so it is difficult to tell which might be legitimate and which are not it s best to read all the documentation behind whichever cryptocurrency piques your interest if there is a purpose for the blockchain and token it might be worth watching if not consider other coins or investments if you re unsure talk to a financial advisor familiar with cryptocurrencies to help you decide if they are suitable for your portfolio the comments opinions and analyses expressed on investopedia are for informational purposes only read our warranty and liability disclaimer for more info |
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