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what is a valoren number | a valoren number is an identification number assigned to financial instruments in switzerland these numbers are similar to the cusip numbers that are used in canada and the u s a typical valoren number is between six to nine digits in length | |
how a valoren number works | a valoren number is a numeric code that intrinsically has no meaning when a new valoren is needed the next one from the list is simply allocated an instrument s number indicates nothing about the instrument itself market data firms and other financial institutions throughout europe typically refer to swiss companies and or store trade data on these companies using valoren numbers as a means of security identification unlike isins or cusips valoren numbers have no data implanted in the numbers swiss valoren numbers are issued by six financial information a subsidiary of six group a multinational financial data vendor based in zurich switzerland the company also has offices in over 20 countries the company provides market data which it gathers from the world s major trading venues directly and in real time its database has structured and encoded securities administration data for more than 20 million financial instruments six financial information was originally called telekurs in 1996 the firm was restructured into a holding company and it launched an expansion of its product range in 2007 telekurs acquired part of the fininfo group in 2008 the telekurs group merged with swx group sis swiss financial services group and sega intersettle to form six group telekurs financial was renamed to six telekurs and became the financial information division of six group on april 23 2012 the use of the telekurs name was phased out a valoren number can be used for a number of purposes in identifying a financial instrument globally a valoren number is allocated for any type of financial instrument which meets the allocation rules it can be used in conjunction with the market identifier code mic and the currency code to uniquely identify a traded instrument it can also be used in transaction reporting and for position keeping in switzerland and liechtenstein the valoren number is the main identifier in the swiss value chain it is used as the main identifier by financial institutions throughout the region and beyond valoren numbers for derivatives may be reused after the derivative expires | |
what is valuable papers insurance | valuable papers insurance is a special type of property casualty insurance valuable papers insurance reimburses the policyholder for the monetary value of any valuable papers such as wills trusts or corporate charters that are lost for any reason though it cannot actually replace these papers it is often purchased by corporations small businesses and wealthy people understanding valuable papers insurancevaluable papers insurance protects businesses from the expensive and often time consuming process of replacing important documents the coverage limits for valuable papers insurance can be very high in some cases however the coverage is always limited to either the actual monetary value of the papers themselves or their replacement value furthermore the papers insured must always be carefully guarded in order to file a claim for example let s say a company s headquarters is destroyed in a flood the company s property deeds documents related to a court case the company was once involved in as well as information related to personnel and other important papers were all destroyed in the flood this company has valuable papers insurance so it files a claim and is reimbursed for these documents thus saving the company money as well as time and effort involved in reconstructing the evidence from the court case medical and legal records are often the toughest to reproduce as well as documents related to research and development if a business s commercial property policy does not include valuable papers those items can be insured with an endorsement which generally provides the same or in some cases broader coverage than what is included in a typical property casualty insurance policy valuable papers insurance typically does not cover electronic files money or securities | |
what is and isn t covered | valuable papers policies are used for businesses that rely on highly sensitive documents such as medical records contracts accounting data or blueprints since these documents may be essential to a company s business operations a valuable papers policy can offset the losses if they are damaged or lost most insurance policies for valuable papers specifically exclude documents stored electronically even though many businesses keep a wealth of important records in electronic form few property policies provide coverage for damage to electronic data however businesses can protect this information with coverage specifically for electronic documents money and securities are also excluded mitigating the risk of lossmost policies will state the conditions of coverage for valuable papers for example an insurance company might require a company to store their essential records in a safe behind locked doors or beneath a chemical extinguishing system if a company manager forgets to store papers safely the accidental destruction of those papers may not be covered by their insurance policy insurers may also require important information to be regularly backed up and archived creating duplicates of the most essential records if records are backed up electronically they must be stored with the same care and precision as paper records | |
what is covered by valuable papers business insurance | valuable papers insurance covers the loss or damage of important papers such as medical records contracts property deeds blueprints or any other important documents valuable papers insurance generally does not cover the loss of money securities certificates or electronic records | |
what is a monoline policy | a monoline policy is an insurance policy that only covers one specific type of risk for example some monoline insurers may specialize in whole life insurance auto insurance or specific types of property | |
how can i insure my electronic documents | electronic documents can be insured through a separate endorsement called a data loss policy these policies cover traditional sources of damage such as fire or flooding as well as hacking viruses and hard drive crashes however such policies typically do not cover wear and tear or losses due to improper file storage 1 | |
what is valuation | valuation is the analytical process of determining the current or projected worth of an asset or company many techniques are used for doing a valuation among other metrics an analyst placing a value on a company looks at the business s management the composition of its capital structure the prospect of future earnings and the market value of its assets fundamental analysis is often employed in valuation although several other methods may be employed such as the capital asset pricing model capm or the dividend discount model ddm investopedia mira norianunderstanding valuationa valuation can be useful when you re trying to determine the fair value of a security determined by what a buyer is willing to pay a seller assuming that both parties enter the transaction willingly buyers and sellers determine the market value of a stock or bond when a security trades on an exchange the concept of intrinsic value refers to the perceived value of a security based on future earnings or some other company attribute it s unrelated to the market price of a security and this is where valuation comes into play analysts do a valuation to determine whether a company or asset is overvalued or undervalued by the market types of valuation modelsthe original company might be considered undervalued if the p e is lower than the p e multiple of a comparable company the relative valuation model is typically a lot easier and quicker to calculate than the absolute valuation model this is why many investors and analysts begin their analysis with this model types of valuation methodsyou can do a valuation in various ways the comparable company analysis looks at companies that are in size and industry and how they trade to determine a fair value for a company or asset the past transaction method looks at past transactions of similar companies to determine an appropriate value there s also the asset based valuation method which adds up all the company s asset values to get the intrinsic value assuming that they were sold at fair market value a comparables approach is often synonymous with relative valuation in investments sometimes doing all these and then weighing each is appropriate to calculate intrinsic value but some methods are more appropriate for certain industries you wouldn t use an asset based valuation approach to valuing a consulting company that has few assets an earnings based approach like the dcf would be more appropriate analysts also place a value on an asset or investment using the cash inflows and outflows generated by the asset this is called a discounted cash flow dcf analysis these cash flows are discounted into a current value using a discount rate which is an assumption about interest rates or a minimum rate of return assumed by the investor dcf approaches to valuation are used in pricing stocks such as with dividend discount models like the gordon growth model the firm analyzes the cash outflow for the purchase and the additional cash inflows generated by the new asset if a company is buying a piece of machinery all the cash flows are discounted to a present value and the business determines the net present value npv the company should invest and buy the asset if the npv is a positive number the precedent transaction method compares the company being valued to other similar companies that have recently been sold the comparison works best if the companies are in the same industry the precedent transaction method is often employed in mergers and acquisition transactions | |
how earnings affect valuation | the earnings per share eps formula is stated as earnings available to common shareholders divided by the number of common stock shares outstanding eps is an indicator of company profit because the more earnings a company can generate per share the more valuable each share is to investors analysts also use the price to earnings p e ratio for stock valuation this is calculated as the market price per share divided by eps the p e ratio calculates how expensive a stock price is relative to the earnings produced per share an analyst would compare the p e ratio with other companies in the same industry and with the ratio for the broader market if the p e ratio of a stock is 20 times earnings using ratios like the p e to value a company is referred to as a multiples based or multiples approach valuation in equity analysis other multiples such as ev ebitda are compared with similar companies and historical multiples to calculate intrinsic value limitations of valuationit s easy to become overwhelmed by the number of valuation techniques available to investors when you re deciding which valuation method to use to value a stock for the first time some valuation methods are fairly straightforward others are more involved and complicated unfortunately no one method is best suited for every situation each stock is different and each industry or sector has unique characteristics that can require multiple valuation methods different valuation methods will produce different values for the same underlying asset or company which can lead analysts to employ the technique that provides the most favorable output | |
what is an example of valuation | a common example of valuation is a company s market capitalization this takes the share price of a company and multiplies it by the total shares outstanding a company s market capitalization would be 20 million if its share price is 10 and the company has two million shares outstanding | |
how do you calculate valuation | you can calculate valuation in many ways they ll differ based on what s being valued and when a common calculation in valuing a business involves determining the fair value of all of its assets minus all of its liabilities this is an asset based calculation | |
what is the purpose of valuation | the purpose of valuation is to determine the worth of an asset or company and compare that to the current market price this is done for a variety of reasons such as bringing on investors selling the company purchasing the company selling off assets or portions of the business the exit of a partner or inheritance purposes the bottom linevaluation is the process of determining the worth of an asset or company it s important because it provides prospective buyers with an idea of how much they should pay for an asset or company and how much prospective sellers should sell for valuation plays an important role in the m a industry as well as the growth of a company there are many valuation methods all of which come with their pros and cons | |
what is valuation analysis | valuation analysis is a process to estimate the approximate value or worth of an asset whether its a business equity fixed income security commodity real estate or other assets the analyst may use different approaches to valuation analysis for different types of assets but the common thread will be looking at the underlying fundamentals of the asset understanding valuation analysisvaluation analysis is mostly science number crunching but there is also a bit of art involved because the analyst is forced to make assumptions for model inputs the value of an asset is basically the present value pv of all future cash flows that the asset is forecasted to produce inherent in the estimation model for a company for example is a myriad of assumptions regarding sales growth margins financing choices capital expenditures tax rates discount rate for the pv formula etc once the model is set up the analyst can play with the variables to see how valuation changes with these different assumptions there is no one size fits all model for assorted asset classes whereas a valuation for a manufacturing company may be amenable to a multi year dcf model and a real estate company would be best modeled with current net operating income noi and capitalization rate cap rate commodities such as iron ore copper or silver would be subject to a model centered around global supply and demand forecasts | |
how valuation analysis is used | the output of valuation analysis can take many forms it can be a single number such as a company having a valuation of approximately 5 billion or it could be a range of numbers if the value of an asset is largely dependent on a variable that often fluctuates such as a corporate bond with a high duration having a valuation range between par and 90 of par depending on the yield on the 30 year treasury bond valuation can be expressed as a price multiple for example as a tech stock is trading at a price to earnings p e multiple of 40x a telecom stock is valued at 6x enterprise value to earnings before interest taxes depreciation and amortization ev ebitda or a bank is trading at 1 3x price to book p b ratio valuation analysis can also take the final form of as asset value per share or net asset value nav per share valuation and intrinsic valuevaluation analysis is important for investors to estimate intrinsic values of company shares in order to make better informed investment decisions fair values of bonds do not deviate much if at all from intrinsic values but opportunities do arise once in a while in the case of financial stress of a heavily indebted company valuation analysis is a useful tool for comparing companies within the same sector or estimating a return on an investment over a given time period | |
what is a valuation clause | the term valuation clause refers to a provision in some insurance policies that specifies the amount of money the policyholder will receive from the insurance provider if a covered hazard event occurs this clause stipulates a fixed amount to be paid in the event of a loss for an insured property there are several types of valuation clauses that can be written into a policy including actual cash value and replacement cost among others understanding valuation clausesas noted above valuation clauses are insurance policy provisions they are written into insurance contracts and state the amount the insurer reimburses to the insured party in the event of a loss of property valuation clauses are based on an array of different factors about the specific property and individual budget requirements determining the cost of articles covered by insurance is an essential but time consuming step in getting insurance coverage by understanding how much an item is worth the policyholder is better able to determine the level of coverage they require policyholders should also determine their coverage based on maximum foreseeable loss insurance providers may also require a review by an appraiser or specialist to determine the value of a property before underwriting this requirement is particularly true in cases where the policyholder gets insurance coverage for classic antique customized and one of a kind property as well as for historic structures or items an appraisal may be required if a policyholder tries to get insurance in a dollar amount that exceeds the assessed value of a property there are several key factors that policyholders should be aware of when it comes to the valuation clauses associated with their insurance policies for instance keep in mind that values that do not keep up with the reasonable cost of living inflation or changes to the local building code cost increases may not adequately protect the policyholder in some cases the insurance provider may expect the insured to periodically update the value of items covered in the policy using a full reporting clause special considerationsvaluation clauses are also common outside the insurance industry as such they are used in contracts to highlight the value of assets for instance corporations may put valuation clauses in the contract for mergers and acquisitions m a in other cases these clauses may be used in distribution or licensing agreements between two companies types of valuation clausestwo of the most common types of valuation clauses are the actual cash valuation clause and the replacement cost valuation clause there are other types as well all of which are discussed in more detail below the actual cash valuation clause or actual cash value acv is the most frequently used method to calculate property benefit values in a homeowners policy this value is based on the cost of repairing or replacing a piece of property such as a boat a car or a home to its pre loss status the insurer factors the depreciation of the property into its value depreciation determines how much of an asset s useful lifespan value remains and will impact the benefit value due to the policyholder in the case of a covered loss another consideration of an acv policy is the valued policy law vpl arkansas california florida georgia kansas louisiana massachusetts minnesota mississippi missouri montana nebraska new hampshire north carolina north dakota ohio south carolina south dakota tennessee texas west virginia wisconsin and wyoming all have valued policy laws 1under this regulation insurance providers must pay the full listed face value of a policy in the event of a total loss without consideration of the depreciated actual cash value the law requires the payment of the full face value of the policy even if the value at the time of loss is a lower dollar amount however in some situations where there is concurrent causation for damage the insurer may issue a reduced payment the replacement cost is the amount necessary to repair or replace a piece of property to the same or equal level of quality as the original property these costs may change as the prices in the marketplace change depreciation of the property is not a consideration in replacement cost coverage however unless a policy also contains a law and ordinance provision it may not include enough coverage to satisfy all the costs of rebuilding a property the law and ordinance clause increases the replacement benefit amount by a percentage to allow for changes to the state building code this provision becomes crucial in the case of a covered hazard that destroys the property to 50 or more most local building codes will require structures that receive damages totaling 50 or more of the home s insured value to be demolished and rebuilt to current codes policyholders must understand that coverage only applies to the damaged portion of a structure the following are some other less common types of valuation clauses example of valuation clauseshere s an example of how valuation clauses work let s say a driver takes out a policy with abc insurance on their new car the car insurance company puts a provision into the policy indicating the amount it will reimburse the driver if the car is totaled in a no fault accident the company may introduce an actual cash value which is the total value less depreciation | |
why are valuation clauses important | valuation clauses are provisions that insurers put into insurance contracts they inform the insured party how much they receive if they file a claim these clauses can range in type from the actual cash value to the replacement cost value among others in areas other than insurance they indicate the value of assets that are described in a contract for instance a buyer may outline the amount of money they are willing to pay to a seller of property and equipment | |
do valuation clauses only apply to the insurance sector | no although they are very common in insurance valuation clauses are also applied in different types of business contracts they may be used in corporate mergers and acquisitions m a distributions and licensing agreements valuation clauses are put into place in order to determine the value of assets between two or more parties | |
what effects do valuation clauses have on insurance claims | valuation clauses have a big impact on insurance claims they indicate the type of valuation method that an insurance company uses to reimburse their clients when a claim is filed these methods include actual cash replacement cost stated value agreed value and market value since they are written into the contract policyholders should be well aware of how much they can expect to receive if and when they file a claim with the insurer in the event of loss the bottom lineinsurance can be a complicated and complex issue there are different nuances that consumers need to understand about their policies before they sign on the dotted line for instance you should be aware of any valuation clauses in your policy these are provisions that the insurer writes into your contract that will tell you the value of your property when and if you file a claim this is the amount you ll receive in the event of a loss | |
what is a valuation mortality table | a valuation mortality table is a statistical chart used by insurance companies to help calculate the statutory reserve and cash surrender values of life insurance policies a mortality table shows the death rate at any given age based on the number of deaths that occur for every thousand individuals of that age it provides statistics indicating the likelihood that a person of a given age will live a set number of years this allows the insurance company to assess risks in individual policies and in their overall insured population insurance companies then use this information to set premiums for how much your life insurance costs understanding valuation mortality tablelife insurance companies use valuation mortality tables to determine their legal reserve the amount of liquid assets they are required by law to set aside for claims and benefits those statutory reserves are one factor that companies must consider as they design new products and set premiums the national association of insurance commissioners naic sets minimum reserve requirements for insurance and related products and updates that guidance periodically 1a valuation mortality table typically has a safety margin integrated into the mortality rates to protect the insurers regulators often require the use of safety margins by carriers many carriers build in their own additional margins as well as those included in regulatory tables those margins are also applied differently for insurance policies and annuities 2insurers use this safety margin to build a buffer in case more people pass away than expected leading to more claims having to be paid out without a reserve an insurance company could go bankrupt from paying too many claims | |
how mortality tables work | section 7520 of the internal revenue code requires the use of a set of actuarial tables for valuing annuities life estates remainders and reversions for most purposes under title 26 of the u s code 3 these tables are available on the irs website the commissioners standard ordinary cso mortality table prepared by the naic in conjunction with the society of actuaries soa is used to calculate life insurance ages across all 50 states and the district of columbia 45mortality tables are used by insurers to determine your actuarial life expectancy this statistic represents an average it could be more or less than how long you as an individual actually live still when spread across millions of people the tables are remarkably accurate in predicting death rates insurers use this information to set insurance premiums and payouts the cso soa tables were last updated in 2017 adding significantly more data that was available to construct the previous 2001 tables the new tables lower mortality rates reflect longer longevity among americans during the new millennium by 2020 all insurance companies were required to transition to the 2017 cso table for all new products sold 6example of valuation mortality tablesay for example a male non smoker wants to buy a 100 000 life insurance policy at age 40 the insurer estimates with mortality tables that this person will live on average to age 81 that means the insurer can expect to receive 41 years of premium payments before the company has to pay the death benefit the insurer sets a premium based on this mortality prediction and the future payout this one person could end up dying tomorrow or living to 100 one individual result doesn t matter that much to an insurer they sell tens of thousands of policies every year so they can count on the large number of policies to track the mortality average on which it based the premiums this is a simple example of how actuaries look at longevity but there s much more to it actuaries have algorithms that take into account many other factors including whether you have high blood pressure or cholesterol your family history and other variables overall the four major factors affecting longevity are your age gender use of tobacco products and current health the longer your expected longevity the less you ll pay for life insurance the insurer predicts you will live longer and pay more total premiums versus someone with a shorter expected mortality | |
what benefits would knowing my actuarial age provide | consumers can use online calculators to get a rough estimate of their own actuarial age this can give you a rough idea of how an insurance company will approach pricing your policy it can also be useful in financial planning and when making such decisions as when you should begin collecting social security you can use your actuarial age to predict how many years of income you ll need in retirement | |
how often are mortality tables updated | the irs updates its actuarial tables every 10 years the current table based on 2010 data became effective in may 2023 7 however naic and sac update their tables less frequently most recently transitioning from 2001 to 2017 cso tables for all new products sold | |
what is a normal mortality rate | the 2021 mortality rate in the united states was 835 4 deaths per 100 000 people this meant an average life expectancy of 76 1 years however your expected mortality changes as you get older the life expectancy for a 65 year old was 83 4 years in 2021 8the bottom linevaluation mortality tables are tools used by insurance companies to help calculate various values used in designing and pricing insurance products mortality rates reflect the likelihood that a person will die at a given age based on such factors as their current health even though mortality tables are mainly used by insurers you can also use this information for your own financial insurance and retirement planning | |
what is a valuation period | the valuation period is the interval at the end of a given period of time during which value is determined for variable investment options valuation is the calculation of a product s value and is typically done by appraisers at the end of each business day understanding the valuation periodthe valuation period applies to investment products like variable annuities and certain life insurance policies annuities are financial products that offer investors a source of income during retirement variable annuities are annuity products that provide payouts and are variable dependent on the value of the annuity s investments the owner of the annuity can choose their investment products and designate percentages or whole dollar amounts toward the various investment vehicles the contract value of a variable annuity will depend on the performance of its investments a variable annuity offers the potential for greater earnings and larger payouts but because of the day to day valuation variable annuities involve more risk than other kinds of annuities such as fixed deferred annuities calculating present and future valuesin thinking about valuation it s helpful to understand the process when it comes to valuation and annuities there are present and future value formulas the present value of an annuity is today s value of future payments from an annuity when factoring in a specified rate of return or discount rate the annuity s future cash flows are cut at the discount rate the higher the discount rate the lower the present value of the annuity this calculation relies on the concept of the time value of money which says that a dollar now is worth more than a dollar earned later this concept means that receiving money today is worth more than receiving the same amount of money in the future because the money today can be invested at a given rate of return for example receiving a lump sum of 10 000 today is worth more than getting 1 000 per year for ten years the lump sum if invested today is going to be worth more at the end of the decade than incremental investments of 1 000 each this is true even if invested at the same rate of interest knowing the future value fv of an ordinary annuity formula is useful when an investor knows how much they can invest per period for a certain time period and wants to find out how much they will have in the future fv is also useful knowledge when making payments on a loan as it helps to calculate the total cost of the loan calculating the future value of the annuity requires calculating the future value of each cash flow over a period of time annuities have a number of cash flows the future value calculation requires taking the value of each cash flow factoring in the original investment and interest rate and adding these values together to determine the accumulated future value example of a valuation period | |
what is annuity due | an annuity due is when the payment is required at the beginning of the period the most common example is when a landlord requires rent to be paid at the beginning of the rental cycle a different more complicated example would be a whole life annuity due where an insurance company requires payments at the beginning of each period just like the landlord example | |
what is the difference between an annuity due and an ordinary annuity | the main difference between an annuity due and an ordinary annuity is when the payments are required annuity due payments are required at the beginning of the period whereas an ordinary annuity requires the payment at the end annuity due payments tend to favor the recipient as it provides them access to capital at the beginning of the period which they can then use to invest | |
what is the valuation of a corporation | the valuation of a corporation is different from an annuity valuation there are many more facets that must be considered when valuing a corporation such as assets debts revenues the potential for expansion and others a corporation can be valued to determine a fair stock price when paying out equity to shareholders or when entering or considering a liquidity event | |
what is an annuity period | an annuity period is when the annuity starts making payments to the investor this is different from the accumulation period of an annuity which is when the investor is making payments on the annuity | |
what is a valuation premium | a valuation premium is a life insurance calculation that determines the charges for premiums based on the company s liabilities insurance companies charge monthly premiums or fees to their policyholders and in exchange provide financial coverage for an event such as death the premiums that are collected from their customers called reserves are usually held in short term term investments | |
when determining the valuation premium the insurance company must ensure that it has adequate policy reserves to cover payouts such as a death benefit an insurance company s policy reserve represents today s value or the present value of all of the future cash flows or premiums it s due to receive the total amount of liability for an insurer is the sum of the reserves for every individual policy | understanding a valuation premiumlife insurance is a contract between an insurer and a policyholder in which the insurance company guarantees payment of a death benefit to named beneficiaries upon the death of the insured the insurance company promises a death benefit in consideration of the payment of premiums by the insured the amount of insurance premiums charged by the insurance companies is determined by statistics and mathematical calculations done by the underwriting department of the insurance company the underwriting process involves investigating familial diseases and analyzing records like medical information and motor vehicle reports statisticians hired by the insurance company known as actuaries analyze the data and attempt to predict how likely the insurance applicant will be to file a claim on their policy the higher the probability of a claim the higher the premiums usually are for the policyholders the life insurance company s valuation premium is the total amount of premiums paid by policyholders set aside for mandated reserves regulated insurers are required to offset their assets to cover liabilities once the insurer determines the value of its policy reserves the company can calculate the valuation premium that will cover its liabilities in this manner the insurance company can make sure that it will have the assets necessary to cover all its policies benefits of a valuation premiumvaluation premiums help ensure an insurance company stays financially solvent and has the necessary means to pay any claims that may arise from its policies higher valuation premiums tend to correspond with higher risks and values of covered assets or items at times an insurance company may opt to set a premium lower than the calculated valuation premium if its experience and statistical records indicate that a lower premium is justified if a lower premium is charged the insurance company would be obligated to hold the difference in a deficiency reserve | |
what is a valuation reserve | valuation reserves are assets that insurance companies set aside per state law to mitigate the risk of declines in the value of investments they hold they function as a hedge to an investment portfolio and ensure that an insurance company remains solvent because policies such as life insurance health insurance and various annuities may be in effect for extended periods of time valuation reserves protect the insurance company from losses from investments that may not perform as expected this helps ensure that the policyholders are paid for claims and that annuity holders receive income even if an insurance company s assets lose value understanding a valuation reserveinsurance companies receive premiums for the services they provide in return when a client files an insurance claim that needs to be paid out an insurance company must ensure that it has money on hand to honor this request the same applies to any annuities that an insurance company issues it must ensure that it can meet the regular payments of an annuity for these reasons it is critical for an insurance company to monitor its reserves and investments so that it remains solvent valuation reserves help insurance companies do this valuation reserves make sure that an insurance company holds enough assets to cover any risks that arise from the contracts it has underwritten regulators are focused on using risk based capital requirements to measure the solvency levels of insurance companies which is a view of a company s assets versus its obligations separately rather than its assets versus its liabilities together history of valuation reservesvaluation reserve requirements have changed over the years before 1992 a mandatory securities valuation reserve was required by the national association of insurance commissioners to protect against a decline in the value of the securities an insurance company holds 1 after 1992 however the mandatory securities valuation reserve requirements were changed to include an asset valuation reserve and an interest maintenance reserve this reflected the nature of the insurance business with companies holding different categories of assets and customers purchasing more annuity related products 1 changing valuation reserve requirementslife insurance companies have the obligation to pay beneficiaries that purchase insurance and annuities these companies need to hold an appropriate level of assets in reserve to make sure they can meet these obligations over the many years that the policies may be in effect various state laws and standards require that this level be calculated on an actuarial basis this approach accounts for expected claims among policyholders plus forecasts on future premiums that the company will receive and how much interest a company can expect to earn yet the market for insurance and annuity products had been shifting in the 1980s the american council of life insurers reported that in 1980 life insurance represented 51 of reserves held by companies while reserves held for individual annuities accounted for only 8 then by 1990 reserves for life insurance fell to 29 of all reserves while the percentage held for individual annuities climbed up to 23 2 this reflected the growth in the popularity of retirement plans that were administered by insurance companies a changing interest rate climate can create risk that impacts reserves needed for ongoing annuity payments more than for life insurance benefits that are paid in one lump sum by recommending changing regulations to separate asset valuation reserves from interest maintenance reserves the national association of insurance commissioners recognized the need to protect against fluctuations in the value of equity and credit related capital gains and losses differently than interest related gains and losses | |
what is value | value is the monetary material or assessed worth of an asset good or service value is attached to a myriad of concepts including shareholder value the value of a firm fair value and market value some of the terms are well known business jargon and some are formal terms for accounting and auditing standards of reporting to the securities and exchange commission sec understanding valuevalue can mean a quantity or number but in finance it s often used to determine the worth of an asset a company and its financial performance investors stock analysts and company executives estimate and forecast the value of a company based on numerous financial metrics companies can be valued based on how much profit they generate on a per share basis meaning the profit divided by how many equity shares are outstanding the process of calculating and assigning a value to a company or an asset is a process called valuation however the term valuation is also used to assign a fair value for a company s stock price equity analysts that work for investment banks often calculate a valuation for a company to determine whether it s fairly valued undervalued or overvalued based on the financial performance as it relates to the current stock price comparing the different values and valuations of a company to other companies within the same industry can help with determining investment opportunities for example if the value of a firm is estimated at 50 per share but the stock is trading at 35 per share in the market an investor might consider buying the stock on the other hand if the stock is trading at 85 per share far above the perceived value the investor could consider selling or shorting the stock below are some common uses for the term value in finance and in the stock market a company s market value represents the value according to market participants in the stock market in stock valuation market value is typically synonymous with the term market capitalization market cap is merely the share price of a company multiplied by the total number of outstanding shares book value is the value of a company according to its financial statements or accounting books book value represents the total amount of money remaining if the company liquidated or sold all of its assets and paid off all of its financial obligations such as debts or liabilities a value stock is a company s stock that trades at a lower price when considering its financial performance and fundamentals which could include earnings or profit performance dividends which are cash payments to shareholders and revenue generated from sales typically investors searching for well run companies that trade at a discount are called value investors enterprise value is the total value of a company which includes a company s cash on its balance sheet short term and long term debt as the market capitalization of the company the enterprise value of a company shows how well the management team uses its capital which is financed by debt and issuing equity shares in calculating the valuation of a company and its stock price investors often analyze financial data but the interpretation of that data can vary greatly between investors making valuation analysis both an art and a science there are many other uses for the term value that go beyond the stock market real estate and homes have a value associated with them within a situation something or someone could add value or be value added value added describes the enhancement to a product or service by a company such as an extra feature or benefit the goal is to increase the value of the product or service being offered the term value proposition is used in the corporate world to represent a company s promise to its customers that they ll deliver the product or service as a result of doing business with them net asset value nav represents the net value of a company or investment which is calculated by subtracting the total amount of assets by the total amount of liabilities net asset value is typically used with investment funds containing a basket of securities such as mutual funds valuation of a companythe term value can also be applied to the value of a company versus the valuation of a company although value and valuation are often used interchangeably the value of a firm is a number while valuation is expressed as a multiple to earnings earnings before interest and taxes ebit or cash flow earnings represent the profit or net income generated by a company cash flow represents the inflows credits or outflows debits to the cash position of a company during an accounting period there are various methods that investors use to value a company depending on what they believe is more important some investors use the cash a company generates by applying discounted cash flow dcf analysis the dcf method attempts to forecast or estimate the future cash flows of a company if a company can generate cash it can meet its debt obligations invest in the company or pay dividends in other words dcf analysis attempts to determine an investment s value today based on projections of the cash generated in the future | |
when investors calculate the valuation of a company and its stock price they re essentially comparing how much earnings are generated as a result of another financial metric within the company | for example one might want to know how much earnings are generated as a result of outstanding shares of stock which is called earnings per share eps remember stock and debt issuance are used by companies to raise funds to invest in the business investors want to know how effectively the management team is using those funds to generate earnings the price to earnings p e ratio is the most common way to calculate the value of a stock it is equal to the company s share price divided by its earnings per share eps what s the valuation of the firm is not the same question as what is the value of the firm the market valuation would be a multiple of the current trading price to earnings per share eps such as the stock price to book value per share or another price multiple using price multiples allows for valuation comparisons across peer groups an investor cannot make sense that the value of firm a is 4 billion and firm b is 9 billion to make a more informed investment decision the investor is better off knowing that the valuation of firm a is 15x eps and firm b is 18x eps | |
what does value mean in real estate | value in real estate refers to the worth of a property whether that be a home or land as determined by the amount that the seller and buyer agree upon value in real estate is only determined when the buyer and seller agree upon a price the price may be affected by variables such as property taxes the community the current economic conditions and the appraisal | |
what is absolute value | absolute value refers to the value of a number without regard to whether it is positive or negative it is simply the distance from zero that a number sits for example both 5 and 5 have an absolute value of 5 | |
what is a value stock | a value stock is one whose share price is trading below what a fundamental analysis would otherwise indicate if an analysis of a company s fundamentals such as its earnings dividends cash flow operating income and so on indicates that its stock should be trading at a specific price and the share price is below that number it is considered a value stock if an investor purchased the stock at this lower price they would be getting a good value as the stock will most likely at some point correct and increase in price | |
what is value | value is the monetary material or assessed worth of an asset good or service value is attached to a myriad of concepts including shareholder value the value of a firm fair value and market value some of the terms are well known business jargon and some are formal terms for accounting and auditing standards of reporting to the securities and exchange commission sec understanding valuevalue can mean a quantity or number but in finance it s often used to determine the worth of an asset a company and its financial performance investors stock analysts and company executives estimate and forecast the value of a company based on numerous financial metrics companies can be valued based on how much profit they generate on a per share basis meaning the profit divided by how many equity shares are outstanding the process of calculating and assigning a value to a company or an asset is a process called valuation however the term valuation is also used to assign a fair value for a company s stock price equity analysts that work for investment banks often calculate a valuation for a company to determine whether it s fairly valued undervalued or overvalued based on the financial performance as it relates to the current stock price comparing the different values and valuations of a company to other companies within the same industry can help with determining investment opportunities for example if the value of a firm is estimated at 50 per share but the stock is trading at 35 per share in the market an investor might consider buying the stock on the other hand if the stock is trading at 85 per share far above the perceived value the investor could consider selling or shorting the stock below are some common uses for the term value in finance and in the stock market a company s market value represents the value according to market participants in the stock market in stock valuation market value is typically synonymous with the term market capitalization market cap is merely the share price of a company multiplied by the total number of outstanding shares book value is the value of a company according to its financial statements or accounting books book value represents the total amount of money remaining if the company liquidated or sold all of its assets and paid off all of its financial obligations such as debts or liabilities a value stock is a company s stock that trades at a lower price when considering its financial performance and fundamentals which could include earnings or profit performance dividends which are cash payments to shareholders and revenue generated from sales typically investors searching for well run companies that trade at a discount are called value investors enterprise value is the total value of a company which includes a company s cash on its balance sheet short term and long term debt as the market capitalization of the company the enterprise value of a company shows how well the management team uses its capital which is financed by debt and issuing equity shares in calculating the valuation of a company and its stock price investors often analyze financial data but the interpretation of that data can vary greatly between investors making valuation analysis both an art and a science there are many other uses for the term value that go beyond the stock market real estate and homes have a value associated with them within a situation something or someone could add value or be value added value added describes the enhancement to a product or service by a company such as an extra feature or benefit the goal is to increase the value of the product or service being offered the term value proposition is used in the corporate world to represent a company s promise to its customers that they ll deliver the product or service as a result of doing business with them net asset value nav represents the net value of a company or investment which is calculated by subtracting the total amount of assets by the total amount of liabilities net asset value is typically used with investment funds containing a basket of securities such as mutual funds valuation of a companythe term value can also be applied to the value of a company versus the valuation of a company although value and valuation are often used interchangeably the value of a firm is a number while valuation is expressed as a multiple to earnings earnings before interest and taxes ebit or cash flow earnings represent the profit or net income generated by a company cash flow represents the inflows credits or outflows debits to the cash position of a company during an accounting period there are various methods that investors use to value a company depending on what they believe is more important some investors use the cash a company generates by applying discounted cash flow dcf analysis the dcf method attempts to forecast or estimate the future cash flows of a company if a company can generate cash it can meet its debt obligations invest in the company or pay dividends in other words dcf analysis attempts to determine an investment s value today based on projections of the cash generated in the future | |
when investors calculate the valuation of a company and its stock price they re essentially comparing how much earnings are generated as a result of another financial metric within the company | for example one might want to know how much earnings are generated as a result of outstanding shares of stock which is called earnings per share eps remember stock and debt issuance are used by companies to raise funds to invest in the business investors want to know how effectively the management team is using those funds to generate earnings the price to earnings p e ratio is the most common way to calculate the value of a stock it is equal to the company s share price divided by its earnings per share eps what s the valuation of the firm is not the same question as what is the value of the firm the market valuation would be a multiple of the current trading price to earnings per share eps such as the stock price to book value per share or another price multiple using price multiples allows for valuation comparisons across peer groups an investor cannot make sense that the value of firm a is 4 billion and firm b is 9 billion to make a more informed investment decision the investor is better off knowing that the valuation of firm a is 15x eps and firm b is 18x eps | |
what does value mean in real estate | value in real estate refers to the worth of a property whether that be a home or land as determined by the amount that the seller and buyer agree upon value in real estate is only determined when the buyer and seller agree upon a price the price may be affected by variables such as property taxes the community the current economic conditions and the appraisal | |
what is absolute value | absolute value refers to the value of a number without regard to whether it is positive or negative it is simply the distance from zero that a number sits for example both 5 and 5 have an absolute value of 5 | |
what is a value stock | a value stock is one whose share price is trading below what a fundamental analysis would otherwise indicate if an analysis of a company s fundamentals such as its earnings dividends cash flow operating income and so on indicates that its stock should be trading at a specific price and the share price is below that number it is considered a value stock if an investor purchased the stock at this lower price they would be getting a good value as the stock will most likely at some point correct and increase in price | |
what is a value added monthly index vami | a value added monthly index vami tracks the monthly performance of a hypothetical 1 000 investment assuming reinvestment over a period of time understanding a value added monthly index vami a value added monthly index charts the total return gained by an investor over a specified period of time it includes capital gains as well as reinvestment of any disbursements such as dividends and additional interest earned through compounding another key aspect of vami is that it is calculated using net monthly returns this means that any applicable fees such as management incentive brokerage fees have already been deducted and what s left is the real return this is one of the most commonly used metrics to depict a fund s overall performance to investors vami s popularity stems from the fact that it is quite descriptive in that it shows an investor how 1 000 has performed over a given period and that it is easy to understand a value added monthly index can be used for a variety of purposes it may provide insight into the growth of invested capital over time sometimes it can be used to evaluate the performance of a fund manager it is also helpful in comparing multiple funds and index benchmarks vami is calculated by multiplying the previous month s vami by the current month s net return using vami for comparisonvami charts can be a reliable way to compare the growth of various funds and benchmarks across the market investors can customize these charts to choose from the options in a fund company s family of funds vami charts provide investors with a perspective on how an investment has performed over time they may also provide insight on potential expectations with future projections vami charts can also provide a visual representation of how similar funds or funds from different asset class categories have performed over a specified time frame with benchmark returns also included for broader analysis vami toolsnumerous market platforms provide vami tools for investor analysis these tools can allow for varying inputs such as higher initial capital values and varying durations a value added monthly index can be constructed using technical software programming it typically begins with a hypothetical investment of 1 000 however initial investment levels can vary when using this modeling technique it is important to ensure the availability and quality of data to provide relevant charting as estimated outcomes can be skewed by data quality vami charts can be built in microsoft excel or other technical software programs online versions are often provided by financial services companies to help provide a graphical representation of investment values over time morningstar provides an example with its vami tool which is part of its research offering for mutual funds under the chart tab investors are provided with the hypothetical growth of an initial 10 000 investment when researching the vanguard 500 index fund for the one year period from jan 26 2017 to jan 26 2018 the vami chart shows that an investor s 10 000 investment would have increased to more than 12 500 | |
what is a value added network van | a value added network van is a private hosted service that provides companies with a secure way to send and share data with its counterparties value added networks were a common way to facilitate electronic data interchange edi between companies as the internet created competition for this service with the advent of secure email vans responded by expanding their service offerings to include things like message encryption secure email and management reporting a value added network simplifies the communications process by reducing the number of parties with which a company needs to communicate the van accomplishes this by acting as an intermediary between business partners that share standards based or proprietary data vans are set up with audit capabilities so that the data being exchanged is formatted correctly and validated before it is transferred to the next party vans are sometimes referred to as added value networks or turnkey communications lines | |
how a value added network van works | value added networks are generally used by large companies for efficient supply chain management with their suppliers or by industry consortiums or telecommunications companies vans usually operate in a mailbox setting wherein a company sends a transaction to a van and the van places it in the receiver s mailbox the receiver contacts the van and picks up the transaction and then sends a transaction of its own the system is similar to email except that it is used for standardized structured data rather than unstructured text vans in the internet erathe ubiquity of the internet has lessened the attraction of vans largely due to cost considerations simply put it is often more cost effective to move data over the internet than to pay the minimum monthly fees and per character charges included in typical van contracts vans have countered the challenge from the internet by focusing on specific industry verticals such as healthcare retail and manufacturing these industries have unique data integrity and security concerns that make vans a true value added solution vans simplify the communications process by allowing the company to communicate with fewer parties the data being exchanged through the van can be formatted to go directly into the software application of the receiving organization an enterprise resource planning erp suite for example this direct exchange between two companies increases the speed of commerce while also reducing the chances of human errors that occur with manual data entry vans can also provide visibility tools that show the delivery status of data and some corresponding workflows allowing companies to better coordinate dependent activities through the system rather than exchanging phone calls and emails not only is using a van more efficient and more accurate but it also saves the cost of hiring human data entry professionals for the exchange of information like many pre internet technologies vans have had to reinvent themselves to remain relevant going forward today vans offer services that go above and beyond mailboxes for edi exchange and retrieval authentication of messages and archival of past transactions modern vans create value for businesses by offering automatic backups of edi data flexible access to that data via secure web portals and unlimited data pricing packages | |
what is a value added reseller var | a value added reseller is a firm that enhances the value of third party products by adding customized products or services for resale to end users value added resellers play a prominent role in the information technology it industry providing additional hardware installation services consulting troubleshooting or other related products or services on top of core products value added resellers play an important and prominent role in the information technology it industry understanding value added resellervalue added resellers exist because they represent an important distribution channel for manufacturers particularly those in the it sector a value added reseller takes a core hardware or software product or an entire system and customizes a package of additional system add ons for a customer the reseller is not the manufacturer of the equipment but it is expected to have a thorough knowledge of the product to properly customize install test and maintain for the customer recognizing the benefit of value added resellers an it corporation will typically offer product discounts to them as a means to increase sales through this channel some of these resellers can be exclusive to one company but most carry a few or several brands to offer more choices to customers example of value added resellerlike other large it product manufacturers cisco cultivates a reseller program that encompasses authorization certification training and auditing of the members to ensure quality control a reseller must first be authorized to carry cisco products demonstrating that it has the personnel and infrastructure to support the sales of the products depending on the level of service it may receive a select premier or gold certification from cisco cisco further provides training for resellers to specialize in a number of areas such as enterprise networks cybersecurity internet of things iot and data centers periodically value added resellers must submit to audits by cisco to prove their ongoing worthiness as members of the reseller network advantages of value added resellersa value added reseller can increase its potential for repeat business by virtue of the added value they provide a var can also act as the single point of customer service centric contact for customers of certain products and solutions a var is often better positioned to understand the customers challenges and offer the kind of expertise that ensures customer satisfaction the majority of a var margin comes from the value added products and services not the products themselves which usually are marked up only a small amount there is no such thing as a standardized var program every company has a unique business climate and terms conditions and methods disadvantages of value added resellersvalue added resellers can t really control the cost of the product they re selling and the whole reselling process is sometimes not transparent sometimes manufacturers will try to alleviate this problem by offering a discount to resellers which allows a reseller greater control over the prices they charge their customers a reseller also has little to no control over the quality or features of their product and they must rely on their manufacturer to adjust to changing customer requirements | |
what is a value added tax vat | the term value added tax vat refers to a consumption tax on goods and services levied at each stage of the supply chain where value is added as such a vat is added from the initial production of goods and services to the point of sale the amount of vat the user pays is based on the cost of the product minus any costs of materials that were taxed at a previous stage value added tax rates vary not all countries impose a vat on goods and services including the united states understanding value added taxes vats as noted above a value added tax is a tax that is added to goods and services at every level of the supply chain the tax is usually passed on to the consumer or end user it is based on consumption rather than income in contrast to a progressive income tax which levies more taxes on the wealthy vat is charged equally on every purchase more than 160 countries use a vat system it is most commonly found in the european union eu 1vat is levied on the gross margin at each point in the process of manufacturing distributing and selling an item the tax is assessed and collected at each stage that is different from a sales tax system in which the tax is assessed and paid only by the consumer at the very end of the supply chain 1let s say a candy called dulce is manufactured and sold in the imaginary country of alexia alexia has a 10 vat here is how the tax would work advocates say vat raises government revenues without charging wealthy taxpayers more as income taxes do it is also considered simpler and more standardized than a traditional sales tax with fewer compliance issues critics on the other hand argue that vat is a regressive tax that places an undue economic burden on lower income consumers while increasing the bureaucratic burden on businesses 23history of value added taxesthe idea of a value added tax was a largely european creation it was introduced by french tax authority maurice laur in 1954 although the idea of taxing each stage of the production process was said to have first been floated a century earlier in germany 4the vast majority of industrialized countries that make up the organisation for economic co operation and development oecd have a vat system the united states remains a notable exception 1according to an international monetary fund imf study any nation that switches to vat initially feels the negative impact of reduced tax revenues in the long run however the study concluded that vat adoption has in the majority of cases increased government revenue and proved effective 5vat has a negative connotation in parts of the world even hurting its proponents politically for example filipino lawmaker ralph recto a chief proponent of vat in the early 2000s was voted out of office by the electorate when he ran for reelection 67 however the population eventually accepted the tax in the years after it was implemented recto was eventually reelected becoming a proponent of an expanded vat vat is often broken down into a standard rate and a reduced rate where the latter is usually applied to goods and services deemed necessities 8advantages and disadvantages of vatscloses tax loopholesprovides incentive to earnstable revenue sourcecreates higher business costsmay encourage tax evasionconflicts between different levels of governmenthigher pricesvalue added taxes vs sales taxesthe main difference between a vat and a sales tax is that a vat is instead collected multiple times during the production of a finished product each time value is added or a sale is made the vat tax is collected and remitted to the government a sales tax on the other hand is only paid once at the initial point of sale this means only the retail customer pays the sales tax vats and sales taxes can raise roughly the same amount of revenue the differences lie in the point at which the money is paid and by whom here is an example that again assumes a vat of 10 just as it would with a traditional 10 sales tax the government receives 10 cents on a 1 sale the vat differs in that it is paid at different stops along the supply chain the farmer pays 3 cents the baker pays 4 cents and the supermarket pays 3 cents the advantages of a vat over a national sales tax lie in the ease of tracking and the fact that the exact tax levied at each step of production is known because vats only tax each value addition not the sale of a product itself it eliminates the double taxation of goods and services with sales taxes the entire amount is rendered after the sale this makes it difficult to allocate to specific production stages to avoid administrative burdens over small value items countries may impose a minimum value to get a vat refund for instance the eu requires at least eur 175 or the equivalent in national currency outside the eurozone for the total purchase but individual eu countries may set lower thresholds 9value added tax vat and the united statesthere has been much debate in the united states about replacing the current income tax system with a federal vat advocates claim it would increase government revenue help fund essential social services and reduce the federal deficit a vat was advocated by 2020 presidential candidate andrew yang 10in 1992 the congressional budget office conducted an economic study on implementing a vat at the time the cbo concluded that a vat would add only 150 billion in annual revenue or less than 3 of national output 11 if you adjust those numbers to 2024 dollars it comes out to roughly 334 billion using these approximations a vat might raise between 250 billion and 500 billion in government revenue of course these figures don t account for all the external impacts of a vat system a vat would change the structure of production in the u s because not all firms would be equally able to absorb the increased input or production costs it s also uncertain whether the additional revenue would serve as an excuse to borrow more money or reduce taxes in other areas potentially making the vat budget neutral the baker institute for public policy at rice university partnered with ernst young to conduct a macroeconomic analysis of the vat in 2010 the principal findings were that vat would reduce retail spending by 2 5 trillion over 10 years the economy could lose up to 850 000 jobs in the first year alone and the vat would have significant redistributional effects that would harm current workers 12three years later in a 2013 brookings institution report william gale and benjamin harris proposed a vat to help solve the country s fiscal problems coming out of the great recession they calculated that a 5 vat could reduce the deficit by 1 6 trillion over 10 years and raise revenues without distorting savings and investment choices 13in addition to the fiscal arguments proponents of a vat in the united states suggest that replacing the current income tax system with a federal vat would have other positive effects value added tax vat refundsif you paid a vat in a country you visited where you aren t a resident you may be eligible for a vat refund on certain items while food hotels and tourist attractions don t qualify you can claim a refund on purchases of clothing jewelry crafts and other similar items this allows for some tax free shopping to get a refund you will need to keep your receipts or other proof of purchase sometimes there will be a special vat receipt and fill out paperwork at the airport or other port of departure before you leave 9 this service generally carries a service charge so you won t get all of your vat taxes spent back on qualified purchases the vat refund is usually mailed to you in your domestic currency in some larger ports and airports you may be able to obtain a refund straight away once the customs officer stamps your forms | |
what does a value added tax do | a value added tax is a flat tax levied on an item it is similar to a sales tax in some respects except that with a sales tax the full amount owed to the government is paid by the consumer at the point of sale with a vat portions of the tax amount are paid by different parties to a transaction | |
does the united states have a value added tax | no the united states has no vat the federal government raises money primarily through the income tax system the states and local governments establish and collect their own sales taxes local governments rely primarily on property taxes who benefits from a vat and who doesn t wealthier consumers could ultimately come out ahead if a vat replaced the income tax as with other flat taxes a vat s impact would be felt less by the wealthy and more by the poor who spend most of their income on necessities in short lower income consumers would pay a much higher proportion of their earnings in taxes with a vat system according to critics such as the tax policy center 14can the negative effects of a vat on lower income people be fixed yes to some extent a government can exclude certain basic household goods food products or medicines from the vat or it can charge a substantially lower vat rate it can also provide rebates or credits to low income citizens to offset the effects of the tax | |
does the u s impose a vat | the only major economy without vat is the united states this is because each state in the u s has its own sales tax regime with some cities or counties additionally levying a sales tax rather than a federal sales tax a vat system in the u s would require agreement and close coordination among all 50 states in order to bring it about which is unlikely to happen the bottom linea value added tax is a common form of consumption tax that is due at every stage of a product s production from the sale of the raw materials to its final purchase by a consumer more than 170 countries worldwide including all of the countries in the european union levy a vat on goods and services 3 this system differs from a sales tax which is found in the united states in that a sales tax is only paid once by consumers at the point of sale | |
what is value at risk var | value at risk var is a statistic that quantifies the extent of possible financial losses within a firm portfolio or position over a specific time frame this metric is most commonly used by investment and commercial banks to determine the extent and probabilities of potential losses in their institutional portfolios risk managers use var to measure and control the level of risk exposure one can apply var calculations to specific positions or whole portfolios or use them to measure firm wide risk exposure lara antal investopediaunderstanding value at risk var var modeling determines the potential for loss in the entity being assessed and the probability that the defined loss will occur one measures var by assessing the amount of potential loss the probability of occurrence for the amount of loss and the time frame for example a financial firm may determine an asset has a 3 one month var of 2 representing a 3 chance of the asset declining in value by 2 during the one month time frame the conversion of the 3 chance of occurrence to a daily ratio places the odds of a 2 loss at one day per month using a firm wide var assessment allows for the determination of the cumulative risks from aggregated positions held by different trading desks and departments within the institution using the data provided by var modeling financial institutions can determine whether they have sufficient capital reserves in place to cover losses or whether higher than acceptable risks require them to reduce concentrated holdings var methodologiesthere are three main ways of computing var the historical method the variance covariance method and the monte carlo method the historical method looks at one s prior returns history and orders them from worst losses to greatest gains following from the premise that past returns experience will inform future outcomes see value at risk var example below for the formula and how it s calculated rather than assuming that the past will inform the future the variance covariance method also called the parametric method instead assumes that gains and losses are normally distributed this way potential losses can be framed in terms of standard deviation events from the mean the variance covariance method works best for risk measurement in which the distributions are known and reliably estimated it is less reliable if the sample size is very small a third approach to var is to conduct a monte carlo simulation this technique uses computational models to simulate projected returns over hundreds or thousands of possible iterations then it takes the chances that a loss will occur say 5 of the time and reveals the impact the monte carlo method can be used with a wide range of risk measurement problems and relies upon the assumption that the probability distribution for risk factors is known image by julie bang investopedia 2020advantages of value at risk var there are several advantages to using var in risk measurement disadvantages of value at risk var one problem is that there is no standard protocol for the statistics used to determine asset portfolio or firm wide risk statistics pulled arbitrarily from a period of low volatility for example may understate the potential for risk events to occur and the magnitude of those events risk may be further understated using normal distribution probabilities which rarely account for extreme or black swan events another disadvantage is that the assessment of potential loss represents the lowest amount of risk in a range of outcomes for example a var determination of 95 with 20 asset risk represents an expectation of losing at least 20 one of every 20 days on average in this calculation a loss of 50 still validates the risk assessment the financial crisis of 2008 that exposed these problems as relatively benign var calculations understated the potential occurrence of risk events posed by portfolios of subprime mortgages risk magnitude was also underestimated which resulted in extreme leverage ratios within subprime portfolios as a result the underestimations of occurrence and risk magnitude left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed 1value at risk var examplethe formula sounds easy as it only has a few inputs however manually calculating the var for a large portfolio is computationally laborious though there are several different methods of calculating var the historical method is the simplest value at risk vm vi v i 1 m is the number of days from which historical data is taken and vi is the number of variables on day i the purpose of the formula is to calculate the percent change of each risk factor for the past 252 trading days the total number in a year each percent change is then applied to current market values to determine 252 scenarios for the security s future value | |
what is the value at risk var formula | you can use several different methods with different formulas to calculate var but the simplest method to manually calculate var is the historical method in this case m is the number of days from which historical data is taken and vi is the number of variables on day i value at risk formula using the historical method vm vi v i 1 | |
what is the difference between value at risk var and standard deviation | value at risk var is a measure of the potential loss that an asset portfolio or firm might experience over a given period of time standard deviation on the other hand measures how much returns vary over time it is a measure of volatility in the market the smaller the standard deviation the lower an investment s risk and the larger the standard deviation the more volatile it is | |
what is marginal value at risk var | marginal var is a calculation of the additional risk that a new investment position will add to a portfolio or a firm it is simply an estimate of the change in the total amount of risk not the precise amount of risk that a position is adding to or subtracting from the whole portfolio that more precise measurement is known as incremental var the bottom linevalue at risk var is a well known commonly used risk assessment technique the var calculation is a probability based estimate of the minimum loss in dollar terms expected over a period the data produced is used by investors to strategically make investment decisions var is often criticized for offering a false sense of security as var does not report the maximum potential loss one of its limitations is that the statistically most likely outcome isn t always the actual outcome | |
what is value averaging | value averaging va is an investing strategy that works like dollar cost averaging dca in terms of making steady monthly contributions but differs in its approach to the amount of each monthly contribution in value averaging the investor sets a target growth rate or an amount of their asset base or portfolio each month and then adjusts the next month s contribution according to the relative gain or shortfall made on the original asset base therefore instead of investing a set amount each period a va strategy makes investments based on the total size of the portfolio at each interval understanding value averagingthe main goal of value averaging va is to acquire more shares when prices are falling and fewer shares when prices are rising this is what happens in dollar cost averaging as well but the effect is less pronounced several independent studies have shown that over multiyear periods value averaging can produce slightly superior returns to dollar cost averaging although both will closely resemble market returns over the same period in dollar cost averaging dca investors always make the same periodic investment the only reason they buy more shares when prices are lower is that the shares cost less in contrast using value averaging investors buy more shares because prices are lower and the strategy ensures that the bulk of investments is spent on acquiring shares at lower prices the reason value averaging may be more or less attractive to an investor than using a set contribution schedule is that you are somewhat protected from overpaying for stock when the market is hot if you avoid overpaying your long term returns will be stronger compared to people who invested set amounts no matter the market condition image by sabrina jiang investopedia 2020example of value averagingfor the example above suppose the goal is for the portfolio to increase by 1 000 every quarter if in a quarter s time the assets have grown to 1 250 based on the 100 shares in q1 multiplied by q2 price of 12 50 the investor will fund the account with 750 2 000 1250 worth of assets q2 purchase of 750 divided by a share price of 12 50 will buy 60 additional shares bringing the total to 160 shares 160 shares x 12 50 2 000 value for q2 in the following quarter the goal would be to have account holdings of 3 000 this pattern continues to be repeated in the following quarter and so on while there are performance differences between value averaging dollar cost averaging and set investment contributions each is a good strategy for disciplined long term investment particularly for retirement challenges to value averagingthe biggest potential challenge with value averaging is that as an investor s asset base grows the ability to fund shortfalls can become too large to keep up with this is especially noteworthy in retirement plans where an investor might not even have the potential to fund a shortfall given limits on annual contributions one way around this problem is to allocate a portion of assets to a fixed income fund or funds then rotate money in and out of equity holdings as dictated by the monthly targeted return this way instead of allocating cash in the form of new funding cash can be raised in the fixed income portion and allocated in higher amounts to equity holdings as needed another potential problem with the va strategy is that in a down market an investor might actually run out of money making the larger required investments impossible before things turn around this problem can be amplified after the portfolio has grown larger when drawdown in the account could require substantially larger amounts of capital to stick with the va strategy | |
what is value based pricing | value based pricing is a strategy of setting prices primarily based on a consumer s perceived value of a product or service value based pricing is customer focused meaning companies base their pricing on how much the customer believes a product is worth value based pricing is different from cost plus pricing which factors the costs of production into the pricing calculation companies that offer unique or highly valuable features or services are better positioned to take advantage of the value based pricing model than companies that chiefly sell commoditized items understanding value based pricingthe value based pricing principle mainly applies to markets in which possessing an item enhances a customer s self image or facilitates unparalleled life experiences to that end this perceived value reflects the worth of an item that consumers are willing to assign to it and consequently directly affects the price that the consumer ultimately pays although pricing value is an inexact science the price can be determined with marketing techniques for example luxury automakers solicit customer feedback that serves to quantify customers perceived value of their experiences driving a particular car model as a result sellers can use the value based pricing approach to establish a vehicle s price going forward characteristics needed for value based pricingany company engaged in value based pricing must have a product or service that differentiates itself from the competition the product must be customer focused meaning that any improvements and added features should be based on the customer s wants and needs of course the product or service must be of high quality if the company s executives are looking to have a value added pricing strategy the company must also have open communication channels and strong relationships with its customers in doing so companies can obtain feedback from customers regarding the features they re looking for in a product and how much they re willing to pay for companies to develop a successful value based pricing strategy they must invest a significant amount of time with their customers to determine their wants scenarios in which value based pricing is usedthere are countless scenarios in which value based pricing may be an appropriate strategy a few potential value based pricing scenarios include types of value based pricingthere are two types of value based pricing good value pricing and value added pricing a brief description of each is below good value pricing refers to the practice of pricing a product based on its quality or the service that it provides to a customer value added pricing refers to the practice of pricing a product based on the perceived value that products and their features add for a customer sellers attempt to determine what customers believe the value of a particular feature of the product is worth and price the product accordingly 2common misconceptions about value based pricingvalue based pricing is very widespread but there remain some misconceptions about this practice such as difference between value based pricing and cost based pricingan alternative pricing method to value based pricing is cost based pricing also known as cost plus pricing value based pricing is dependent on the value that customers are willing to assign to or pay for particular products features and services on the other hand cost based pricing assigns a selling price to an item by factoring in the costs associated with producing that item once those costs are tallied a markup is added to the final price to generate a profit advantages and disadvantages of value based pricingvalue based pricing offers a number of pros and cons for sellers some of the potential advantages include some of the possible disadvantages of value based pricing include allows companies to charge a higher price pointpromotes customer loyaltymay increase brand valueincorporates customer feedback in future productsrequires a significant investment to collect customer datamay price out some customerscustomer perceptions of value are likely to change | |
what is the opposite of value based pricing | value based pricing focuses on providing the greatest value for the highest price that customers are willing to pay the opposite strategy is cost based pricing which focuses on providing the lowest price possible while still making a profit value based pricing models tend to work well with luxury brands and well differentiated products while cost based pricing works best in highly competitive markets where there are many similar products | |
what are two types of value based pricing | value based pricing can be applied to a wide range of products but two of the most common are luxury fashion items and consumer staples such as milk | |
what are the advantages of value based pricing | value based pricing can allow a seller to increase the price of an item to the highest level that customers will be willing to pay it can help to promote customer and brand loyalty it can also help to drive innovations in future products based on greater knowledge of the features that customers value the most the bottom linevalue based pricing is a powerful pricing tool that incorporates information about the value that customers perceive to come from a product its various features and related services while value based pricing is resource intensive because it requires gathering and analyzing customer data it can lead to advantages in sales elevated price points and customer loyalty and other benefits on the other hand value based pricing is not a guarantee of sales success | |
what is a value chain | a value chain is a series of consecutive steps that go into the creation of a finished product from its initial design to its arrival at a customer s door the chain identifies each step in the process at which value is added including the sourcing manufacturing and marketing stages of its production a company conducts a value chain analysis by evaluating the detailed procedures involved in each step of its business the purpose of a value chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost dennis madamba investopediaunderstanding value chainsbecause of ever increasing competition for unbeatable prices exceptional products and customer loyalty companies must continually examine the value they create in order to retain their competitive advantage a value chain can help a company to discern areas of its business that are inefficient and then implement strategies that will optimize its procedures for maximum efficiency and profitability in addition to ensuring that production mechanics are seamless and efficient it s critical that businesses keep customers feeling confident and secure enough to remain loyal value chain analyses can help with this too michael e porter of harvard business school introduced the concept of a value chain in his book competitive advantage creating and sustaining superior performance he wrote competitive advantage cannot be understood by looking at a firm as a whole it stems from the many discrete activities a firm performs in designing producing marketing delivering and supporting its product 1in other words it s important to maximize value at each specific point in a firm s processes the overarching goal of a value chain is to deliver the most value for the least cost in order to create a competitive advantage components of a value chainin his concept of a value chain porter splits a business s activities into two categories primary and support of which sample activities for each are listed below specific activities in each category will vary according to the industry 1primary activities consist of five components all essential for adding value and creating competitive advantage the role of support activities is to help make the primary activities more efficient when you increase the efficiency of any of the four support activities it benefits at least one of the five primary activities these support activities are generally denoted as overhead costs on a company s income statement example of a value chaina value chain example is the privately held grocery store trader joe s which also has received much press about its tremendous value and competitive edge because the company is private there are many aspects of its strategy that we don t know however when you enter a trader joe s store you can readily observe instances of trader joe s business that reflect the five primary activities of the value chain 1 inbound logistics unlike traditional supermarkets trader joe s does all of its receiving shelving and inventory taking during regular store hours although potentially maddening for shoppers this system creates a ton of cost savings in terms of employee wages alone moreover the logistics of having this work take place while customers are still shopping sends the strategic message that we re all in this together 2 operations here s an example of how a company could apply the value chain creatively in primary activity number two above converting raw materials into finished product is cited as an operations activity however because converting raw materials is not an aspect of the supermarket industry we can use operations to mean any other regular grocery store function so let s substitute product development as that operation is critical for trader joe s the company selects its products carefully featuring items that you generally can t find elsewhere its private label products account for more than 80 of its offerings which often have the highest profit margins too as trader joe s can source them efficiently in volume another vital piece of product development for trader joe s is its taste testing and chef partnership programs which ensure high quality and continuous product refinement 233 outbound logistics many supermarkets offer home delivery but trader joe s does not yet here we can apply the activity of outbound logistics to mean the range of amenities that shoppers encounter once they are inside a trader joe s store the company has thought carefully about the kind of experience it wants us to have when we visit its stores among trader joe s many tactical logistics are its in store tastings usually there are a few product tastings happening simultaneously which create a lively atmosphere and often coincide with the seasons and holidays the tasting stations feature both new and familiar items that are prepared and served by staff 4 marketing and sales compared to its competitors trader joe s barely does any traditional marketing however its entire in store experience is a form of marketing the company s copywriters craft product labels to appeal specifically to its customer base the unique branding and innovative culture of trader joe s indicate that the company knows its customers well which it should as the firm has actually chosen the type of customers it prefers and has not deviated from that model via this indirect marketing of style and image trader joe s has succeeded in differentiating itself in the marketplace thus sharpening its competitive edge 5 service customer service is paramount for trader joe s generally you see twice as many employees as shoppers in their stores whatever work they are doing at the moment the friendly knowledgeable and articulate staff are there primarily for you employees welcome shoppers interruptions and will instantly rush to find your item or answer your question in addition the company has always employed a no questions asked refund program you don t like it you get your money back period this list could go on and on before ever reaching the four support activities cited above as trader joe s is a wildly successful example of applying value chain theory to its business | |
what is a value chain vs a supply chain | a supply chain is the system and resources needed to move a product or service from supplier to customer a value chain expands on this also taking into consideration how value is added along the chain | |
what are the steps to value chain analysis | according to harvard business school the steps in value chain analysis are can the value chain span the globe yes the term global value chain refers to production broken into activities and tasks carried out in different countries a global value chain is carried out by a transnational corporation an enterprise composed of linked entities in two or more countries the bottom linea value chain is the consecutive steps that go into making a finished product from the initial design to the customer s doorstep the chain identifies each step in the process at which value is added value chain analysis is a company s evaluation of the detailed procedures involved in each step of its business the analysis aims to increase production efficiency so that a company can deliver maximum value for the least possible cost | |
what is a value change | the term value change refers to a daily adjustment made to the price of a company s stock this change reflects the number of outstanding shares issued and currently held by investors this figure is updated on a daily basis since the number of shares held by investors changes daily this number can be updated every day to reflect the changes it allows a group of stocks to be equally weighted and more easily evaluated by investors analysts and other financial professionals | |
how value changes work | people often confuse a stock s value with its price it s common for individuals to believe they re one and the same while that s true to a certain degree there are some key differences between the two the price of a stock indicates its current or present value in the market put simply it indicates what the stock trades at or what it costs at any given moment in time 1value on the other hand refers to the actual worth of an asset including a stock the stock s value is determined by factors such as market share earnings and a number of other metrics 2 the price of a stock is normally at the same level or near its intrinsic value but changes can arise when the market rises or drops as noted above a value change is reflective of the total number of outstanding shares issued and currently held by investors as such it describes a type of calculation used to compare and evaluate investment instruments by taking the number of shares held by investors into consideration and since shares change hands every day the value change of a company s stock also changes daily 3one of the main reasons that the value change adjustment is so important is because it is intended to equally weigh individual stocks that are included in a group or category 3 for instance investors can group together a number of stocks in the financial industry consumer staples or retail sector and determine the value change of one company s stock compared to its peers the total number of outstanding shares doesn t include stock that has been reinvested by the company example of value changelet s use a hypothetical example to show how value changes work suppose xyz company has one million shares outstanding in the public market and decides to issue an additional million shares these shares will be issued to investors on the secondary market by doing this the company s stock price may undergo a value change that s because of the significant change caused by the doubling of the total number of outstanding shares | |
a value date is a future date that is used for determining the present value of a product or security that fluctuates in price it is the date at which funds assets or money s value becomes effective typically value dates are used in determining the payment of financial products and accounts where there is a possibility for discrepancies due to differences in the timing of valuations such financial products can include forward currency contracts option contracts and the interest payable or receivable on personal accounts | in forex markets the value date may be referred to as the valuta where it may also be used to describe the value of one currency expressed in terms of its exchange rate with another value date in banking | |
when a payee presents a check to the bank the bank credits the payee s account however it could take days until the bank receives the funds from the payor s bank assuming the payor and payee have accounts with different financial institutions if the payee has access to the funds immediately the receiving bank runs the risk of recording a negative cash flow to avoid this risk the bank will estimate the day it will receive the money from the paying institution and hold the funds in the payee s account until the expected day of receipt in effect the bank will post the amount of the deposit for a couple of days after which the payee can use the funds the date the funds are released is referred to as the value date | likewise when a wire transfer is made from an account in one bank to an account in another bank the value date is the date on which the incoming wire becomes available to the receiving bank and its customer value date in trading | |
when there is a possibility for discrepancies due to differences in the timing of asset valuation the value date is used in forex trading the value date is regarded as the delivery date on which counterparties to a transaction agree to settle their respective obligations by making payments and transferring ownership due to differences in time zones and bank processing delays the value date for spot trades in foreign currencies is usually set two days after a transaction is agreed on the value date is the day that the currencies are traded not the date on which the traders agree to the exchange rate | the value date is also used in the bond market to calculate accrued interest on a bond calculation of accrued interest takes into account three key dates trade date settlement date and value date the trade date is the date on which a transaction was executed the settlement date is the date on which a transaction is completed the value date is usually but not always the settlement date the settlement date can only fall on a business day if a bond was traded on friday trade date the transaction will be deemed complete on monday not saturday 1 the value date can fall on any day as seen when calculating accrued interest which takes into account every day of a given month the value date is also used when evaluating coupon bonds that make semi annual interest payments for example in the case of savings bonds the interest is compounded semi annually so the value date is every six months 2 this removes any uncertainty for investors since their calculations of interest payments will be the same as the governments | |
what is value deflation | value deflation or shrinkflation occurs when retailers and service providers cut their costs and sell smaller packages give out smaller portions or generally provide less for the same price so as to maintain the same sticker price businesses may do this as a way of stealthily raising prices when costs are rising and consumers are particularly price conscious economy wide value deflation is actually a form of price inflation to the extent that it results in lower real consumption at the same price level value deflation can lead to an understatement of the rate of inflation and the cost of living if it is not accounted for in the calculation of price indexes value deflation is a form of hidden inflation reflected in qualitative changes that are difficult to track with traditional inflation indexes for example companies may choose to cut corners on their assembly lines to produce less durable goods or they may introduce preservatives to extend the shelf life of what was previously sold as fresh produce understanding value deflationvalue deflation is a way of raising prices so the consumer is less likely to notice and it can take the form of reductions in the amount of food in a typical package reduced portion sizes at restaurants increased wait times and reduction in customer service and support or switching to lower cost ingredients or materials it can be a successful tactic because a lot of shoppers are more sensitive to a price change than to a quality change from a marketing standpoint shrinking packages is better than raising prices in order to maintain a consistent price point but value deflation can backfire as kraft discovered when it shrunk its toblerone bar in 2016 and made headlines in the united kingdom 1 british food retailers have made such extensive use of value deflation to compensate for the weak pound and the increased cost of imported ingredients that shrinkflation has become a phenomenon over 2 500 products were subject to value deflation from 2012 to 2017 according to the office for national statistics 2 in 2021 in the u k walkers removed two bags of crisps from its 24 pack but kept the price the same at gbp 3 50 3special considerationsvalue deflation may not show up in inflation measures such as the consumer price index or the retail price index many economic statistics agencies use quality adjustment processes to isolate price movements from the changes in a product s weight or quality so in there it should still show up as a price rise in official inflation statistics however many of the techniques of value deflation may by design be difficult to measure manufacturers might switch to lower cost inputs without greatly changing the product for example a hot cocoa maker switches to a less expensive sweetener or a maker of grated cheese products might increase the wood pulp filler content of its products this may reduce the quality for some customers but despite the lower quality it might not be enough for them to change their behavior other consumers might not notice the change at all this may or may not be caught by official data and statistical agencies in particular cutbacks in services or reductions in the quality of ingredients and materials may be difficult or impossible for consumers and statisticians to account for and adjust for for example a hotel might direct its cleaning staff to reduce the amount of time spent cleaning per room resulting in a decline in cleanliness or a consumer electronics maker might switch to a lower cost customer support provider resulting in increased call wait times or lower quality service to its users whether value deflation amounts to the perfect business crime or not consumers around the world should be on the lookout for these packaging tricks the question is how far can big fast moving consumer goods companies take value deflation and risk damaging their brands before they are forced to raise sticker prices or face squeezed operating margins | |
what are the reasons for value deflation | the primary reason for value deflation is the increase in production costs but without wanting to pass these costs directly on to consumers in the form of higher prices so they can keep the price the same but reduce the size of the product as in the case of shrinkflation | |
what is deflation vs value deflation | deflation is when prices drop in an economy and is the opposite of inflation value deflation is actually a response to inflation whereby higher costs induce producers to cut back on their offerings to customers in some way | |
is value deflation accounted for in the cpi | the cpi or consumer price index is a measure used to gauge inflation by tracking the price changes of a basket of consumer goods however it cannot account for things like reduced quality of a product shortened shelf life shrinkflation or other forms of value deflation as a result these types of hidden inflation can be missed from official figures | |
what is value engineering | value engineering is a systematic organized approach to providing necessary functions in a project at the lowest cost value engineering promotes the substitution of materials and methods with less expensive alternatives without sacrificing functionality it is focused solely on the functions of various components and materials rather than their physical attributes value engineering is also called value analysis understanding value engineeringvalue engineering is the review of new or existing products during the design phase to reduce costs and increase functionality to increase the value of the product the value of an item is defined as the most cost effective way of producing an item without taking away from its purpose therefore reducing costs at the expense of quality is simply a cost cutting strategy the concept of value engineering evolved in the 1940s at general electric in the midst of world war ii due to the war purchase engineer lawrence miles and others sought substitutes for materials and components since there was a chronic shortage of them these substitutes were often found to reduce costs and provided equal or better performance 1with value engineering cost reduction should not affect the quality of the product being developed or analyzed ratio of function to costmiles defined product value as the ratio of two elements function to cost the function of an item is the specific work it was designed to perform and the cost refers to the cost of the item during its life cycle 2 the ratio of function to cost implies that the value of a product can be increased by either improving its function or decreasing its cost in value engineering the cost related to production design maintenance and replacement are included in the analysis product value function cost begin aligned text product value frac text function text cost end aligned product value costfunction for example consider a new tech product is being designed and is slated to have a life cycle of only two years the product will thus be designed with the least expensive materials and resources that will serve up to the end of the product s life cycle saving the manufacturer and the end consumer money this is an example of improving value by reducing costs another manufacturing company might decide to create added value by maximizing the function of a product with minimal cost in this case the function of every component of the item will be assessed to develop a detailed analysis of the purpose of the product part of the value analysis will require evaluating the multiple alternate ways that the project or product can accomplish its function keep in mind that the steps below may slightly vary depending on the precise organization defining the steps for example it s common to see a step between gather information and think creatively for work done to review and analyze what needs improving eliminating or creating usually defined as function analysis steps in value engineeringvalue engineering often entails the following six steps starting from the information gathering stage and ending with change implementation value engineering begins by analyzing what a product lifecycle will look like this includes a forecast of all the spending and processes related to manufacturing selling and distributing a product value engineers will often break these considerations down into more manageable data sets in addition to assigned financial values value engineers may prioritize processes or elements along a product s manufacturing plan value engineering may also call for expectations regarding time labor or other resources for different manufacturing stages with the core baseline expectations for the product having been documented it s now time for the value engineering team to consider new different ways for the product to be developed this includes trying new approaches taking risks on things never been done before or creatively applying existing processes in a new way levering these creative ideas value engineers will re imagine how the product will be created and distributed from state to finish this phase is the idea generation stage where members of the team should be encouraged to brainstorm freely without fear of criticism examples of thinking creatively may include changing the materials used changing the product s design removing redundant features trading off reliability for flexibility or changing the steps order of the manufacturing process with a bunch of ideas now on the table it s time to decide which are reasonable and which aren t each idea is often assessed for its advantages and disadvantages instead of focusing on the quantity of each tally the value engineering team must consider which pros and cons outweigh their counterpart for example a single change may result in five new benefits however doing so would outlaw distribution to a country that the company exports the most goods to in this case the five benefits may not outweigh the one disadvantage once the ideas are ranked the best ideas are taken and further analyzed this includes drafting model plans detailing changes and their impacts producing revised financial projections redesigning physical renderings and assessing the overall viability of the change be mindful of timeline constraints and considerations when analyzing changes especially if other departments will be negatively impacted by pushed out schedules or deadline changes also consider how the break even point of a product may change as a result of the adjustment to ensure the strategy aligns with the philosophy and financial capability of the organization with plans devised and presentations pulled together it s time to deliver the best ideas to upper management or the board for their consideration often more than one idea will be presented at a time so the deciding group can consider and compare alternatives each alternative should be consistently presented with fair representation across each choice value engineering calls for enhancing the value of each product therefore presentations should begin and end with how the change will benefit the company presentations should also include revised timelines financial projections drawings and risks often management may seek specific answers on changes or desire to see different analysis performed than what is presented as management gives confirmation to move forward with changes value management shifts from a theoretical practice to an change management implementation process when proposed changes are accepted new teams are formed and assigned areas of oversight value engineer team leads often remain engaged with the changes to monitor what is being adjusted and how expectations are being aligned with new realities if a company lacks the required expertise to brainstorm changes it may rely on external third parties to manage the first five steps with the company taking over once it has decided what changes to make guiding principles of value engineeringregardless of the steps a company chooses to perform when value engineering there are a handful of high level vague guiding principles of value engineering these principles include types of value | |
when performing value engineering analysts must often consider how to define value after all one customer s perception of a product may be very compared to another customer based on their assigned value of the good in general there are four primary types of value recognized by value engineering | use value is the primary type of value and it is determined by the attributes of the good 3 these attributes define what the product is able to do how it is used and what its purpose is this heavily ties to product differentiation where consumers can only derive value from a specific good without competitors the use value of a product is the primary purpose of value engineering without a use value consumers would not initially purchase the good for instance if a type of shoe did not adequately protect someone s feet or make it so they could walk down the street the shoe has little to no use value without use value products will ultimately fail because they serve no purpose assuming we have a good generating use value it s now time to consider how it takes to make that good 3 let s assume the shoes from above are tremendous for hiking rugged wear and waterproof protection this means the shoes may require experienced labor to craft specifically treated raw materials for its production and premium quality control for consumer safety in this example all of the variables mentioned above represent different cost variables with different values a consumer may value the shoes at 50 pair if the company determines its cost value is 75 pair the company must assess how to rebalance the equation alternatively charging a customer prices too high will likely yield negative cost value while the use value describes the physical benefit of a product consumers may also experience intrinsic value that often extends beyond what the product is 3 for example should the shoe above come from nike consumers may be willing to pay higher premium for the shoe because of the added esteem benefit of the brand recognition though esteem value is often positive and associated with brand recognition it can also be negative and correlated to brand dissonance this is often related to the target consumer of the product for example low cost budget conscious consumers may have negative esteem value when considering apple s innovative higher cost product line the last and smallest component of value relates to a product s ability to be exchanged 3 with the introduction of international shipping and supply chain analytics it is now becoming easier for almost any consumer to receive any product in a reasonable amount of time still a value engineer must how to facilitate the distribution of a product the physical characteristics of a product and other attributions that make it so the good can easily be bought or traded should consumers find it very difficult to buy or receive the good value may be lost or destroyed there are countless ways to define or categorize customer value in reality value engineering encompasses every value perceived or received by a customer whether it conforms to the four primary types above value engineering toolsdifferent companies can choose what tools they want to use not all tools listed below need to be used in every value engineering situation however these are the most common techniques companies leverage when performing value engineering value engineering vs value analysiswhile value engineering is the technique often used before a product has been fabricated value analysis is the technique used to analyze an existing product the goal of value analysis is often to review an existing set of costs and benefits with the intention of enhancing its value while value engineering occurs earlier to prevent value loss value analysis occurs after the fact and may be used to remediate product deficiencies value engineering is generally used to aid manufacturing while value analysis may sometimes be used more heavily in the business or sales department though the two terms may often be used interchangeably value engineering is the practice of preventing unnecessary costs or deficient value while value analysis is the practice of eliminating costs or negative value components changes made in response to value analysis may be brought about during different stages of a product s life span while value engineering only occurs at the initial product stage limitations of value engineeringthe value engineering process involves a detailed approach to analyzing functions teams must gather and assess extensive data hold numerous meetings to brainstorm and evaluate alternatives and meticulously document their findings and decisions this substantial initial time investment pulls valuable resources without the guarantee that products or processes will be re engineered with success value engineering efforts can sometimes prioritize immediate cost reductions over long term value this short term focus may lead to decisions that save money initially but result in higher costs or lower performance over the product s or system s lifecycle for instance choosing cheaper materials to reduce upfront costs might lead to increased maintenance or replacement costs in the future teams need to balance short term implications with long term value while reducing costs is a primary goal of value engineering an excessive focus on cost cutting can lead to unintended consequences as well for example eliminating certain features to save money might diminish the product s appeal or performance ultimately negatively impacting the cost benefit analysis the same could somewhat be said about engineering in some cases value engineering can lead to over engineering where the pursuit of optimization results in overly complex solutions this complexity can ultimately increase costs and complicate implementation even when trying to capture very little value last value engineering is not universally applicable to all projects some projects may have rigid specifications regulatory requirements or client preferences that limit the scope for applying value engineering principles projects in highly regulated industries such as pharmaceuticals or aerospace may have strict compliance requirements companies may also simply lack the internal resources or headcount with the necessary skill sets to perform the analysis needed to re engineer products example of value engineeringthe initial design for the golden gate bridge faced significant challenges including spanning a 4 200 foot wide strait with strong ocean currents and high winds however financial resources were limited due to the great depression and initial cost estimates were prohibitively high chief engineer joseph strauss and his team led the value engineering process striving to reduce costs without compromising safety or performance strauss and his team focused on essential functions such as providing a safe durable and efficient means of transportation across the strait they substituted expensive materials with high strength silicon steel simplified the design by eliminating unnecessary elements and employed innovative construction techniques pre fabrication of components off site further reduced labor costs and construction time through these value engineering efforts the final cost of the golden gate bridge was significantly reduced to approximately 35 million from the original budget of 100 million the bridge met all functional requirements i e millions of travelers have successfully capitalized on the value of the bridge s transportation capability 45 | |
what is the role of value engineering | value engineering is the process of designing a product to ensure the value a customer receives is maximized this is a careful activity of balancing the functions of the product along with the financial consideration of a product in general value engineering strives to maximize the benefit a consumer receives while minimizing costs | |
what are the phases of value engineering | value engineering is often broken into six stages information gathering brainstorming evaluating developing plans presentation and implementation the phases range from collecting relevant data to designing alternatives to see what management thinks of the potential changes keep in mind that some entities may tweak these steps i e emphasize evaluating the functionality of processes while spending less time on the implementation steps | |
why is value engineering important | value engineering is the process to ensuring your customer s satisfaction and utility of a product is maximized without considering a product s use cost or functionality a good may lose its place in the marketplace because it doesn t solve a problem or reflect accurate financial prices value engineering is important because it forces a company to evaluate its future plans to maximize profitability | |
what are the types of value in value engineering | value engineering often breaks values into the use cost exchange and esteem value though other departments may use different categories to define consumer benefit the end goal is to ensure all benefits of a consumer are captured for analysis 3the bottom linevalue engineering is the process of ensuring a product doesn t waste away its potential products that lack purpose or drive value will get lost in the marketplace becoming cost centers for a company that yields little to no profit by implementing value engineering a company evaluates how a product can better serve its customers how value can be created and costs can be minimized | |
what is a value fund | a value fund seeks to invest in stocks that are deemed to be undervalued in price based on fundamental characteristics value investing is often contrasted with growth investing which focuses on emerging companies with high growth prospects | |
how a value fund works | value funds and value investing are often synonymous with strategies developed by investors benjamin graham and warren buffett value managers choose stocks for value funds based on the fundamental characteristics associated with a stock s intrinsic value value funds are typically used as long term investing allocations that have the potential to grow steadily over time value fund investing is thus often associated with investment due diligence and patience nearly every large fund family offers a value fund value funds are often broken down into varying components one of the most popular categories for variation is market capitalization for example investors may choose from a fund family that includes small mid and large cap value funds the premise behind value investing is that the market has some inherent inefficiencies causing specific companies to trade at levels below their actual worth for various reasons value fund managers are skilled in identifying these market inefficiencies in theory once the market corrects these inefficiencies the value investor will gain from an increase in the share price often value stocks are also associated with dividend payments since they are usually well established companies with committed dividend distribution programs a blend fund or blended fund is a type of equity mutual fund that includes a mix of both value and growth stocks these funds offer investors diversification among these popular investment styles in a single portfolio examples of value fundsbelow are four examples of some of the investment market s value mutual funds and exchange traded funds etf the vanguard equity income fund investor shares focuses on investing in large cap companies that pay investors above average dividends the fund is best for investors who want higher yields and have a long term investment horizon 1 the clearbridge large cap value fund is an actively managed value fund that seeks capital appreciation and income through a value focused investing strategy the fund offers multiple share classes it also pays a consistent quarterly dividend 2 the invesco s p 500 enhanced value etf tracks the performance of the s p 500 enhanced value index fund managers invest at least 90 of the fund s assets in stocks that are part of the underlying index stocks in the index have a high value score which means they tend to be undervalued based on fundamental analysis 3 the ishares edge msci usa value factor etf is an index fund it seeks to replicate the holdings and return of the msci usa enhanced value index the index includes u s large and mid cap stocks with value characteristics that trade at a comparatively low valuation 4 | |
what is value investing | value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value value investors actively ferret out stocks they think the stock market is underestimating they believe the market overreacts to good and bad news resulting in stock price movements that do not correspond to a company s long term fundamentals the overreaction offers an opportunity to profit by purchasing stocks at discounted prices warren buffett is probably the best known value investor today but there are many others including benjamin graham buffett s professor and mentor david dodd charlie munger buffet s business partner christopher browne another graham student and billionaire hedge fund manager seth klarman investopedia sydney saporitounderstanding value investingthe basic concept behind everyday value investing is straightforward if you know the true value of something you can save a lot of money when you buy it most folks would agree that whether you buy a new tv on sale or at full price you re getting the same tv with the same screen size and picture quality stock prices work in a similar manner meaning a company s share price can change even when the company s valuation has remained the same this means strictly speaking there is no such thing as a true or intrinsic value of the stock of a given company but there are relative values market participants can buy or sell shares without being tethered to an objective price figure therefore stocks like tvs go through periods of higher and lower demand leading to price fluctuations if the company s fundamentals are the same and its future opportunities are unchanged then the value of the shares is largely the same even though the price differs value investing developed from a concept by columbia business school professors benjamin graham and david dodd in 1934 and was popularized in graham s 1949 book the intelligent investor just like savvy shoppers would argue that it makes no sense to pay full price for a tv since tvs go on sale several times a year savvy value investors believe stocks work the same way of course unlike tvs stocks won t go on sale at predictable times of the year such as black friday and their sale prices won t be advertised value investing is the process of doing detective work to find these secret sales on stocks and buying them at a discount compared to how the market values them in return for buying and holding these value stocks for the long term investors can be rewarded handsomely intrinsic value and value investingin the stock market the equivalent of a stock being cheap or discounted is when its shares are undervalued value investors hope to profit from shares they perceive to be deeply discounted investors use various metrics to attempt to find the valuation or intrinsic value of a stock intrinsic value is a combination of using financial analysis such as studying a company s financial performance revenue earnings cash flow profit and fundamental factors it includes the company s brand business model target market and competitive advantage some metrics used to value a company s stock include free cash flow is the cash remaining after expenses have been paid including operating expenses and large purchases called capital expenditures which is the purchase of assets like equipment or upgrading a manufacturing plant if a company is generating free cash flow it ll have money left over to invest in the future of the business pay off debt pay dividends or rewards to shareholders and issue share buybacks of course there are many other metrics used in the analysis including analyzing debt equity sales and revenue growth after reviewing these metrics the value investor can decide to purchase shares if the comparative value the stock s current price vis a vis its company s intrinsic worth is attractive enough margin of safetyvalue investors require some room for error in their estimation of value and they often set their own margin of safety based on their particular risk tolerance the margin of safety principle one of the keys to successful value investing is based on the premise that buying stocks at bargain prices gives you a better chance of earning a profit later when you sell them the margin of safety also makes you less likely to lose money if the stock doesn t perform as you had expected so if you believe a stock is worth 100 and buy it for 66 you ll make a profit of 34 simply by waiting for the stock s price to rise to the 100 true value on top of that the company might grow and become more valuable giving you a chance to make even more money if the stock s price rises to 110 you ll make 44 since you bought the stock on sale if you had purchased it at its full price of 100 you would only make a 10 profit benjamin graham the father of value investing recommended buying stocks when they were priced at two thirds or less of their liquidation value this was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside 1value investors believe the markets are not efficientvalue investors don t believe in the efficient market hypothesis which says that stock prices already take all information about a company into account so their price always reflects their value instead value investors believe that stocks may be over or underpriced for various reasons for example a stock might be underpriced because the economy is performing poorly and investors are panicking and selling as was the case during the great recession or a stock might be overpriced because investors have gotten too excited about an unproven new technology as was the case of the dot com bubble psychological biases can push a stock price up or down based on news such as disappointing or unexpected earnings announcements product recalls or litigation stocks may also be undervalued because they trade under the radar meaning analysts and the media inadequately cover them value investors don t follow the herdvalue investors possess many characteristics of contrarians they don t follow the herd not only do they reject the efficient market hypothesis but when everyone else is buying they re often selling or standing back when everyone else is selling they re buying or holding value investors don t buy trendy stocks because they re typically overpriced instead they invest in companies that aren t household names if the financials check out they also take a second look at stocks that are household names when those stocks prices have plummeted believing such companies can recover from setbacks if their fundamentals remain strong and their products and services still have quality value investors only care about a stock s intrinsic value they think about buying a stock for what it actually is a percentage of ownership in a company they want to own companies that they know have sound principles and sound financials regardless of what everyone else is saying or doing value investing requires diligence and patienceestimating the true intrinsic value of a stock involves some financial analysis but also involves a fair amount of subjectivity meaning at times it can be more of an art than a science two different investors can analyze the exact same valuation data on a company and arrive at different decisions so you ll need to develop a strategy that works for you some investors who look only at existing financials don t put much faith in estimating future growth other value investors focus primarily on a company s future growth potential and estimated cash flows some do both noted value investment gurus warren buffett and peter lynch who ran fidelity investment s magellan fund for several years are both known for analyzing financial statements and looking at valuation multiples in order to identify cases where the market has mispriced stocks despite different approaches the underlying logic of value investing is to purchase assets for less than they are currently worth hold them for the long term and profit when they return to the intrinsic value or above it doesn t provide instant gratification you can t expect to buy a stock for 50 on tuesday and sell it for 100 on thursday instead you may have to wait years before your stock investments pay off and you will occasionally lose money the good news is that for most investors long term capital gains are taxed at a lower rate than short term investment gains like all investment strategies you must have the patience and diligence to stick with your investment philosophy some stocks you might want to buy because the fundamentals are sound but you ll have to wait if it s overpriced you ll want to buy the stock that is most attractively priced at that moment and if no stocks meet your criteria you ll have to sit and wait and let your cash sit idle until an opportunity arises | |
why stocks become undervalued | if you don t believe in the efficient market hypothesis you can identify reasons why stocks might be trading below their intrinsic value here are a few factors that can drag a stock s price down and make it undervalued sometimes people invest irrationally based on psychological biases rather than market fundamentals when a specific stock s price is rising or when the overall market is rising they buy they see that if they had invested 12 weeks ago they could have earned 15 by now and they develop a fear of missing out conversely when a stock s price is falling or when the overall market is declining loss aversion compels people to sell their stocks so instead of keeping their losses on paper and waiting for the market to change directions they accept a certain loss by selling such investor behavior is so widespread that it affects the prices of individual stocks exacerbating both upward and downward market movements and creating excessive moves a bubble is the result of investor exuberance with prices growing ever higher when the market reaches an unbelievable high it usually results in the bubble bursting because the price levels are unsustainable investors end up panicking and selling off related assets en masse this results in a market crash that s what happened in the early 2000s with the dot com bubble when the values of tech stocks shot up beyond what the companies were worth we saw the same thing happen when the housing bubble burst in 2006 and the market crashed in the following years look beyond what you re hearing in the news you may find really great investment opportunities in undervalued stocks that may not be on people s radars like small caps or even foreign stocks most investors want in on the next big thing such as a technology startup instead of a boring established consumer durables manufacturer for example stocks like meta formerly facebook apple and google are more likely to be affected by herd mentality investing than conglomerates like proctor gamble or johnson johnson even good companies face setbacks such as litigation and recalls however just because a company experiences one adverse event doesn t mean it isn t still fundamentally valuable or that its stock won t bounce back in other cases there may be a segment or division that puts a dent in a company s profitability but that can change if the company decides to dispose of or close that arm of the business analysts do not have a great track record for predicting the future yet investors often panic and sell when a company announces earnings that are lower than analysts expectations but value investors who can see beyond the downgrades and negative news can buy stock at deeper discounts because they can recognize a company s long term value cyclicality is defined as the fluctuations that affect a business companies are not immune to ups and downs in the economic cycle whether that s seasonality and the time of year or consumer attitudes and moods all of this can affect profit levels and the price of a company s stock but it doesn t affect its long term value value investing strategiesthe key to buying an undervalued stock is to thoroughly research the company and make common sense decisions value investor christopher h browne recommends asking if a company is likely to increase its revenue via the following methods browne also suggests studying a company s competitors to evaluate its future growth prospects but the answers to all of these questions tend to be speculative without any real supportive numerical data simply put no quantitative software programs are yet available to help achieve these answers making value stock investing somewhat of a grand guessing game for this reason warren buffett recommends investing only in industries you have personally worked in or whose consumer goods you are familiar with like cars clothes appliances and food one thing investors can do is choose the stocks of companies that sell high demand products and services while it s difficult to predict when innovative new products will capture market share it s easy to gauge how long a company has been in business and study how it has adapted to challenges over time for our purposes insiders are the company s senior managers and directors plus any shareholders who own at least 10 of the company s stock 3 a company s managers and directors have unique knowledge about the companies they run so if they are purchasing its stock it s reasonable to assume that the company s prospects look favorable likewise investors who own at least 10 of a company s stock wouldn t have bought so much if they didn t see profit potential conversely a stock sale by an insider doesn t necessarily point to bad news about the company s anticipated performance the insider might simply need cash for any number of personal reasons nonetheless if mass sell offs are occurring by insiders such a situation may warrant further in depth analysis of the reason behind the sale at some point value investors have to look at a company s financials to see how its performing and compare it to industry peers financial reports present a company s annual and quarterly performance results the annual report is sec form 10 k and the quarterly report is sec form 10 q companies are required to file these reports with the securities and exchange commission sec 4 you can find them on the sec website or the company s investor relations page on their website 5you can learn a lot from a company s annual report it will explain the products and services offered as well as where the company is heading financial statementsfinancial statements are generally included in a company s financial reports to regulators but they provide a big picture view of the company s financial condition there are three statements publicly traded companies are required to file the balance sheet the income statement and the statement of cash flows the balance sheet consists of two sections one listing the company s assets and another listing its liabilities and equity the assets section is broken down into a company s cash and cash equivalents investments accounts receivable or money owed from customers inventories and fixed assets such as plant and equipment the liabilities section lists the company s accounts payable or money owed accrued liabilities short term debt and long term debt the shareholders equity section reflects how much money is invested in the company how many shares are outstanding and how much the company has in retained earnings retained earnings is a type of savings account that holds the cumulative profits from the company retained earnings are used to pay dividends for example and are considered a sign of a healthy profitable company the income statement tells you how much revenue is being generated the company s expenses and profits looking at the annual income statement rather than a quarterly statement will give you a better idea of the company s overall position since many companies experience fluctuations in sales volume during the year the statement of cash flows lists everywhere cash came from and went to in a company it tells you which activities created inflow such as operating investing or financing activities it also lists which of these activities created outflows studies have consistently found that value stocks outperform growth stocks and the market over the long term couch potato value investingit is possible to become a value investor without ever reading a 10 k couch potato investing is a passive strategy of buying and holding a few investing vehicles for which someone else has already done the investment analysis i e mutual funds or exchange traded funds in the case of value investing those funds would be those that follow the value strategy and buy value stocks or track the moves of high profile value investors like warren buffett investors can buy shares of his holding company berkshire hathaway which owns or has an interest in dozens of companies the oracle of omaha has researched and evaluated risks with value investingas with any investment strategy there s the risk of loss with value investing despite it being a low to medium risk strategy below we highlight a few of those risks and why losses can occur many investors use financial statements when they make value investing decisions so if you rely on your own analysis make sure you have the most updated information and that your calculations are accurate if not you may end up making a poor investment or miss out on a great one if you aren t yet confident in your ability to read and analyze financial statements and reports keep studying these subjects and don t place any trades until you re truly ready one strategy is to read the footnotes these are the notes in form 10 k or form 10 q that explain a company s financial statements in greater detail the notes follow the statements and explain the company s accounting methods and elaborate on reported results if the footnotes are unintelligible or the information they present seems unreasonable you ll have a better idea of whether to pass on the stock there are some incidents that may show up on a company s income statement that should be considered exceptions or extraordinary these are generally beyond the company s control and are called extraordinary item gain or extraordinary item loss some examples include lawsuits restructuring or even a natural disaster if you exclude these from your analysis you can probably get a sense of the company s future performance however think critically about these items and use your best judgment if a company has a pattern of reporting the same extraordinary item year after year it might not be too extraordinary also if there are unexpected losses year after year it can be a sign that the company is having financial problems extraordinary items are supposed to be unusual and nonrecurring also beware of a pattern of write offs earlier sections of this tutorial have discussed calculating various financial ratios that help investors diagnose a company s financial health there isn t just one way to determine financial ratios which can be fairly problematic the following can affect how the ratios can be interpreted overpaying for a stock is one of the main risks for value investors you can risk losing part or all of your money if you overpay the same goes if you buy a stock close to its fair market value buying a stock that s undervalued means your risk of losing money is reduced even when the company doesn t do well recall that one of the fundamental principles of value investing is to build a margin of safety into all your investments this means purchasing stocks at a price of around two thirds or less of their intrinsic value value investors want to risk as little capital as possible in potentially overvalued assets so they try not to overpay for investments conventional investment wisdom says that investing in individual stocks can be a high risk strategy instead we are taught to invest in multiple stocks or stock indexes so that we have exposure to a wide variety of companies and economic sectors however some value investors believe that you can have a diversified portfolio even if you only own a small number of stocks as long as you choose stocks that represent different industries and different sectors of the economy value investor and investment manager christopher h browne recommends owning a minimum of 10 stocks 6 according to benjamin graham you should look at choosing 10 to 30 stocks if you want to diversify your holdings 7another set of experts though say differently if you want to get big returns try choosing just a few stocks according to the authors of the second edition of value investing for dummies they say having more stocks in your portfolio will probably lead to an average return 8 of course this advice assumes that you are great at choosing winners which may not be the case particularly if you are a value investing novice it is difficult to ignore your emotions when making investment decisions even if you can take a detached critical standpoint when evaluating numbers fear and excitement may creep in when it comes time to actually use part of your hard earned savings to purchase a stock more importantly once you have purchased the stock you may be tempted to sell it if the price falls keep in mind that the point of value investing is to resist the temptation to panic and go with the herd so don t fall into the trap of buying when share prices rise and selling when they drop such behavior will obliterate your returns playing follow the leader in investing can quickly become a dangerous game example of a value investmentvalue investors seek to profit from market overreactions that usually come from the release of a quarterly earnings report as a historical real example on may 4 2016 fitbit released its q1 2016 earnings report and saw a sharp decline in after hours trading after the flurry was over the company lost nearly 19 of its value however while large decreases in a company s share price are not uncommon after the release of an earnings report fitbit not only met analyst expectations for the quarter but even increased guidance for 2016 9the company earned 505 4 million in revenue for the first quarter of 2016 up more than 50 when compared to the same time period from one year previous further fitbit expected to generate between 565 million and 585 million in the second quarter of 2016 which was above the 531 million forecasted by analysts 9the company looked to be strong and growing however since fitbit invested heavily in research and development costs in the first quarter of the year earnings per share eps declined compared to the previous year this is all average investors needed to jump selling off enough shares to cause the price to fall however a value investor who looked at the fundamentals of fitbit understood it was an undervalued security poised to potentially increase in the future case in point in 2019 fitbit posted more than 1 4 billion in revenues then in 2021 google finalized its purchase of fitbit for 2 1 billion 1011 a value investor purchasing fitbit stock at an undervalued price of 5 35 on feb 9 2017 would have done well because the stocks were converted to cash at a value of 7 35 per share at the merger and paid to investors 1213 | |
what is a value investment | value investing is an investment philosophy that involves purchasing assets at a discount to their intrinsic value this is also known as a security s margin of safety benjamin graham known as the father of value investing first established this term with his landmark book the intelligent investor in 1949 notable proponents of value investors include warren buffett seth klarman mohnish pabrai and joel greenblatt | |
what is an example of value investing | common sense and fundamental analysis underlie many of the principles of value investing the margin of safety which is the discount a stock trades at compared to its intrinsic value is one leading principle fundamental metrics such as the price to earnings pe ratio for example illustrate company earnings in relation to their price a value investor may invest in a company with a low pe ratio because it provides one barometer for determining whether it is undervalued or overvalued | |
what are common value investing metrics | along with analyzing a company s price to earnings ratio which can illustrate how expensive it is in relation to its earnings common metrics include the price to book ratio free cash flow fcf and debt to equity ratio d e who is mr market first coined by benjamin graham mr market represents a hypothetical investor that is prone to sharp mood swings of fear apathy and euphoria mr market represents the consequences of emotionally reacting to the stock market rather than rationally or with fundamental analysis as an archetype for behavior mr market speaks to the price fluctuations inherent in markets and the emotions that can influence these on extreme scales such as greed and fear the bottom linevalue investing is a long term strategy warren buffett for example buys stocks with the intention of holding them almost indefinitely he once said i never attempt to make money on the stock market i buy on the assumption that they could close the market the next day and not reopen it for five years you will probably want to sell your stocks when it comes time to make a major purchase or retire but by holding a variety of stocks and maintaining a long term outlook you can sell your stocks only when their price exceeds their fair market value and the price you paid for them correction feb 8 2024 this article has been corrected to state that benjamin graham recommended buying stocks when they were priced at two thirds or less of their liquidation value | |
what is value line composite index | the value line composite index is a stock index containing approximately 1 700 companies from the nyse american stock exchange nasdaq toronto and over the counter markets 1 the value line composite index has two forms the value line geometric composite index the original equally weighted index and the value line arithmetic composite index an index which mirrors changes if a portfolio held equal amounts of stock these indexes are typically published in the value line investment survey created by arnold bernhard the founder and ceo of value line inc 2 3 understanding value line composite indexthe value line where the index receives its namesake refers to a multiple of cash flow that bernhard would superimpose over a price chart to normalize the value of different companies value line is one of the most respected investment research firms its performance record has been extremely strong in fact the firm s model portfolios have generally beat the market over the long run the value line composite index is composed of the same companies as the value line investment survey excluding closed end funds 3 the number of companies in the value line index fluctuates based on factors including the addition or delisting of the companies on the exchanges themselves mergers acquisitions bankruptcies and the coverage decisions made by value line for the value line index value line s decisions as to which companies to include are undertaken with the intention to create a broad representation of the north american equity market additionally the number of companies listed on any given exchange may vary as a company may move from one exchange to another or be added or delisted however delisting or movement of companies on the exchanges are not factors in the value line index methodology regardless whether the geometric or arithmetic calculations are employed the year that the original value line geometric composite index was launched the value line geometric composite indexthis is the original index introduced on june 30 1961 it is an equally weighted index using a geometric average the daily price change of the value line geometric composite index is found by multiplying the ratio of each stock s closing price to its previous closing price and raising that result to the reciprocal of the total number of stocks 3 the value line arithmetic composite indexthis index was established on february 1 1988 using the arithmetic mean to more closely mimic the change in the index if you held a portfolio of stocks in equal amounts the daily price change of the value line arithmetic composite index is calculated by adding the daily percent change of all the stocks and then dividing by the total number of stocks 3 | |
what is a value network | a value network is a set of connections between organizations and or individuals interacting with each other to benefit the entire group a value network allows members to buy and sell products as well as share information these networks can be visualized with a simple mapping tool showing nodes members and connectors relationships understanding a value networkin business and commerce value networks are an example of an economic ecosystem each member relies on one another to foster growth and increase value value network members can consist of external members e g customers or internal members such as research and development teams value networks enhance innovation social welfare and the environment as well as many other areas weakness in one node can affect the entire network for example if a development team is weak the production team has a harder time creating the product which can leave a buyer waiting for their shipment types of value networksthe main types of value networks include the clayton christensen network the fjeldstad and stabells network normann and ramirez constellations and verna allee s networks the clayton christensen network describes relationships that already exist externally and that any new entrants into the network will be molded to fit the current network or business model s shape new entrants will have a difficult time to break through and or provide new ideas or implement changes because the new entrants will most likely end up accommodating and falling in line with the current network 1fjeldstad and stabells believe that the most important parts of a network are 1 customers 2 services 3 service providers and 4 contracts that allow access to services this theory states that customers are essential to the network and their involvement provides the added value 2 the most common example is social media e g facebook youtube instagram and tiktok where customers sign up agree to terms in the contract and add the value to the network the normann and ramirez constellations value network believes networks to be fluid setups that allow for constant change and improvement it is up to members in the network to analyze the current relationships and look for openings and opportunities as a way to add value 3verna allee s networks believe that networks create both tangible and intangible values and that value network analysis should be incorporated into all facets of a business to extract the most value in every stage 4benefits of a value networkthe benefit that a value network provides comes from the way a business or individual applies the resources influence and insight of others to whom they are connected a startup for example may look to its external connections such as its investors and mentors to provide experienced guidance on how to approach the development and growth of the business while many founders have a deep understanding of the product or service they develop bringing that service to market finding customers and scaling up the business may be unfamiliar to them to make up for this shortcoming they may seek the advice of trusted stakeholders with experience on such matters which is considered an intangible benefit of their relationship they might also look to groups that specialize in assisting startups such as incubators and accelerators to increase their exposure to potential mentors and investors example of a value networkan investor typically provides their guidance to the startup they are backing because by helping the leaders grow their ideas into a tangible company stakeholders stand to benefit from the startup s development that guidance can take the form of expertise that the investor possesses the investor might foster introductions between the founders of the startup and other businesses they can work with to further their plans for example if the company needs to produce a prototype of its product an investor might be able to direct them to another company that creates made to order prototypes likewise if the startup is looking for a mass manufacturer or a distributor the guidance they receive may benefit all involved as it can mean increased business for each organization and individual | |
what is a value network analysis | value network analysis is the assessment of an organization s members and the interactions of these members within a value network value network analysis is usually done by visualizing relationships using a chart or web participants of the value network analysis are evaluated both individually and on the benefits that they bring to the network value network analysis looks at the business as a whole including financial and non financial aspects of operations understanding value network analysisvalue network analysis provides ways to assess both the financial and non financial values and aspects of a business most forms of analysis are done in a visual form usually through a diagram or map of the important relationships and transactions that take place between different points of each network these points generally represent people individuals groups business units and even individual businesses in an industry value networks are made up of members and their interactions while producing a product or providing a service these connections are extremely important in identifying strong companies as well as finding a company s potential risks value network analysis helps identify company strengths as well as risks for a business for example if a network member has a large influence the loss of that member could devastate the entire group this is known as intrinsic value analysis because there is value but it is hard to put on a price tag applying value network analysisthe methodology applied through value network analysis can help an organization optimize its internal and external value networks making the most of its outside relations along with the synergies of the teams within the operation this includes the exchange of knowledge information and expertise across the relationships woven into the organization the goal of the analysis is to improve communication and collaboration with all involved parties in order to operate at peak and improve overall productivity the application of the value network analysis can help organizations for needs such as internal restructuring improvement of workflow across interrelated departments as well as for project planning the analysis can also assist an organization undergoing a merger or acquisition as it looks to better connect with and make the most use of the new divisions and operations that must be integrated if a company is undergoing a process redesign wherein an extensive overhaul and new framework must be established a value network analysis could be applied to provide a clearer picture for changes that must be made if the organization needs to formulate a new business model the value network analysis approach can be applied to identify resources that may be drawn upon to provide new insights into developing such a model as well as toward how the new model can operate going forward the research and development r d aspects of an organization can also benefit from a value network analysis by identifying what information and expertise are available to collaborate in the creation of new services or products internal vs external value networksas mentioned above there are two types of value network analysis internal and external the internal branch or factors as the name implies lies within the business these may include employees management different divisions within the business as well as processes and activities that take place internally in some cases the value created by these networks can also apply to cases outside of business such as the relationship between two people working together for the same goal the value of an internal network is assessed by analyzing the relationships between these different points within the business an external value network analysis on the other hand is dependent on factors outside the business this may include analysis of its suppliers business partners and any other stakeholders in the company and its customers and other end users when an external value network analysis is conducted it reviews the relationship and value created by these external factors have to the business | |
what is value of risk vor | value of risk vor is the financial benefit that a risk taking activity will bring to the stakeholders of an organization it requires the organization to determine whether an activity will help to move it closer to completing its objectives understanding value of risk vor in financial theory corporations don t have any risk preferences but their stakeholders do the goal is generally to make money without being reckless company management knows that if they put the resources available to good use they stand a decent chance of keeping their jobs and boosting the wealth of investors sitting idly means missing out on opportunities or as some are keen to point out taking profits and setting fire to them the problem is that gain seldom comes without an element of pain every decision is accompanied by risk and therefore needs to be scrutinized carefully before pursuing all activities that a company may undertake from entering a new market to developing a new product carry risk how much depends on the type of activity and the likelihood that the company will not be able to recoup costs at the same time there s also the recognition that spending money on one endeavor carries with it an opportunity cost the potential benefits a business misses out on when choosing one alternative over another value of risk vor methodvalue of risk vor requires a company to examine the various components of the cost of risk they include the actual costs for losses incurred the cost of bonds insurance or reinsurance to fund losses the costs of mitigating the risks that could cause the company to experience a loss and the cost of administering a risk management and loss mitigation program value of risk vor treats each component of the cost of risk as an investment option just as with a stock or a bond the components must show a return on investment roi examples of value of risk vor a company that starts a risk management department is incurring a substantial personnel expense the department is expected to shrink the company s loss exposure by managing insurance and reinsurance portfolios identifying potential threats and developing methods for reducing risk exposure | |
should the risk management department be unable to do this then it s not contributing to shareholder value if on the other hand a company s expected earnings are higher than the cost incurred to reduce risk then the risk reduction investment can be considered a positive one | elsewhere another company that got into the smart luggage business making baggage with embedded microchips and batteries that track location and more bet that the airlines and regulatory agencies would have no problem with customers checking in these bags it bet wrong the smart bags were banned in the u s amid fears about battery fires causing the company to liquidate everything was at risk on that one factor this begs the question of whether the baggage manufacturer and its peers assessed the possibility of rejection at a high percentage of probability if they had done so they likely would have never entered this line of business in the first place value of risk vor calculations are only as good as the data and assumptions imputed limitations of value of risk vor many businesses especially financial ones calculate a value of risk vor for nearly all their activities along with estimated confidence levels that the risk taken will be worth the reward this task sounds relatively straightforward but is actually riddled with complications calculations are often based on subjective assumptions prone to oversight and subject to change in an ideal world potential errors of judgment should be accounted for and every angle covered as objectively as possible by relying on more than one source | |
what is a value proposition | a value proposition in marketing is a concise statement of the benefits that a company is delivering to customers who buy its products or services it serves as a declaration of intent both inside the company and in the marketplace the term value proposition is believed to have first appeared in a mckinsey co industry research paper in 1988 which defined it as a clear simple statement of the benefits both tangible and intangible that the company will provide along with the approximate price it will charge each customer segment for those benefits 1investopedia nono floresunderstanding value propositionsa value proposition stands as a promise by a company to a customer or market segment the proposition is an easy to understand reason why a customer should buy a product or service from that particular business a value proposition should clearly explain how a product fills a need communicate the specifics of its added benefit and state the reason why it s better than similar products on the market the ideal value proposition is to the point and appeals to a customer s strongest decision making drivers companies use this statement to target customers who will benefit most from using the company s products and this helps maintain a company s economic moat an economic moat is a competitive advantage the moat analogy coined by super investor warren buffett of berkshire hathaway states that the wider the moat the bigger and more resilient the firm is to competition 2a great value proposition demonstrates what a brand has to offer a customer that no other competitor has and how a service or product fulfills a need that no other company is able to fill components of a value propositiona company s value proposition communicates the number one reason why a product or service is best suited for a customer segment therefore it should always be displayed prominently on a company s website and in other consumer touch points it also must be intuitive so that a customer can read or hear the value proposition and understand the delivered value without needing further explanation value propositions that stand out tend to make use of a particular structure a successful value proposition typically has a strong clear headline that communicates the delivered benefit to the consumer the headline should be a single memorable sentence phrase or even a tagline it frequently incorporates catchy slogans that become part of successful advertising campaigns 3often a subheadline will be provided underneath the main headline expanding on the explanation of the delivered value and giving a specific example of why the product or service is superior to others the consumer has in mind the subheading can be a short paragraph and is typically between two and three sentences long the subheading is a way to highlight the key features or benefits of the products and often benefits from the inclusion of bullet points or another means of highlighting standout details this kind of structure allows consumers to scan the value proposition quickly and pick up on product features added visuals increase the ease of communication between business and consumer in order to craft a strong value proposition companies will often conduct market research to determine which messages resonate the best with their customers special considerationsvalue propositions can follow different formats as long as they are unique to the company and to the consumers the company services all effective value propositions are easy to understand and demonstrate specific results for a customer using a product or service they differentiate a product or service from any competition avoid overused marketing buzzwords and communicate value within a short amount of time for a value proposition to effectively turn a prospect into a paying customer it should clearly identify who the customers are what their main problems are and how the company s product or service is the ideal solution to help them solve their problem 3frequently asked questions | |
what is the purpose of a value proposition | a value proposition is meant to convince stakeholders investors or customers that a company or its products or services are worthwhile if the value proposition is weak or unconvincing it may be difficult to attract investment and consumer demand | |
what is an employee value proposition | an employee value proposition evp applies to the job market here a company that is hiring will try to frame itself as a good place to work offering not only monetary compensation but also a range of benefits perks and a productive environment in return the job candidate will need to convince the hiring company that they have the appropriate skills experience demeanor and ambition to succeed | |
what happens if a value proposition fails | if a company cannot convince others that it has value or that its products or services or valuable it will lose profitability and access to capital and may ultimately go out of business | |
what is a value reporting form | a value reporting form is an insurance form businesses complete to provide information to their insurance company in order to receive variable coverage amounts businesses that hold irregular inventories typically are the ones that will submit value reporting forms to their insurance companies throughout the year the irregular inventory may be differences in the quantity quality and specific items held the value reporting form enables the company to periodically report the values of this shifting stock to the insurance provider the insurer in turn adjusts the amount of coverage to reflect the value of the current inventory using a value reporting form can help the company avoid being overinsured or underinsured insurance companies may also call this form a stock reporting form understanding value reporting formsa company must maintain adequate insurance to cover hazards and a value reporting form is an essential tool in determining the proper commercial property insurance levels some business commerce requires a company to have inventories that vary significantly throughout the year depending on seasonal factors consumer needs and fluctuations in supply and demand from retailers to manufacturers this cyclic ebb and flow of merchandise and commodities require regular oversight and monitoring most of the insurance industry uses the standardized insurance services office iso form number cp 13 10 for reporting but there are other forms in use 1 businesses should make sure they work with an insurance agent or broker who is familiar with the unique requirements necessary when using a value reporting method special considerations | |
when it comes to obtaining insurance coverage to insure shifting inventory a company has several options | they may purchase coverage which will include the historically highest or lowest level of stock on one side of this method the business is overinsured and spending capital where it is not needed on the opposite side the company is putting itself at grave risk if any of many hazards should befall them the company may split the difference between highs and lows and buy property insurance for the average amount of inventory once again they are gambling they are on the right side of any possible loss businesses may also use limit endorsements which allow changes to the policy throughout the term period but will also impact the premium however endorsements are problematic in that the business must foresee dates and inventory levels which still leaves the company open to risk the value reporting form gives companies yet another choice in setting limits for insurance premiums will usually be lower when using the value reporting method however this method requires dedication to avoid penalties from misreporting a business may face an assessment of substantial penalties for incorrectly filing forms particularly when a business later makes a claim for a covered hazard the insurance provider may also apply sanctions for under and overreporting of property values 2requirements for value reporting formsthe company chooses how often it should complete the form value reporting submittal may happen daily weekly monthly quarterly or even by the policy term depending on the frequency chosen there are mandatory dates that the full accounting must arrive at the insurer s office a company will also decide what to include and how to include items on the reporting form however a full and accurate accounting of costs for the reported stock is a requirement some businesses will use the value reporting form for inventory and use separate property insurance coverage for items such as computers desks equipment and other business property which remains relatively static throughout the year 3 in this way companies can maintain an appropriate level of coverage by adjusting each month s or each quarter s insurance needs based on current inventories the value reporting form must bear the signature of an authorized company officer or designated employee the company will need to identify any improvement of the location as well as new locations added since the last reporting period | |
what is a value stock | a value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals such as dividends earnings or sales making it appealing to value investors a value stock can generally be contrasted with a growth stock investopedia jake shiunderstanding value stocksa value stock is a security trading at a lower price than what the company s performance may otherwise indicate investors in value stocks attempt to capitalize on inefficiencies in the market since the price of the underlying equity may not match the company s performance common characteristics of value stocks include high dividend yield low price to book ratio p b ratio and a low price to earnings ratio p e ratio investors can find value stocks using the dogs of the dow investing strategy by purchasing the 10 highest dividend yielding stocks on the dow jones at the beginning of each year and adjusting the portfolio every year thereafter in contrast to value stocks growth stocks are equities of companies with strong anticipated growth potential a balanced diversified portfolio will hold both value stock and growth stocks investment managers refer to these as a blend fund | |
how to determine and invest in value stocks | a value stock will have a bargain price as investors see the company as unfavorable in the marketplace a value stock will most likely come from a mature company with a stable dividend issuance that is temporarily experiencing adverse events however companies that have recently issued equities have high value potential as many investors may be unaware of the entity investors can invest in these value stocks directly or by buying value exchange traded funds etfs and value mutual funds there are several ways you can analyze a stock to determine whether it is undervalued these methods include | |
why are some stocks undervalued | there s no single reason a stock is undervalued in some cases stocks may be undervalued as a result of investor mood and market dynamics stock prices may drop as a result of unfavorable news or pessimism about a certain industry business or market potentially resulting in discounted possibilities a firm may become undervalued as a result of poor financial performance unfavorable earnings surprises managerial problems or legal challenges for investors temporary setbacks or market overreactions to bad news can present purchasing opportunities on the other hand stocks may be undervalued based on more macroeconomic concerns the state of the economy might affect stock valuations stock prices may drop during recessions or other uncertain times undervaluing them in comparison to their intrinsic value stocks in sectors that are presently unpopular or going through a downturn can be undervalued due to a lack of investor knowledge stocks of smaller companies or those active in specialized markets may be undervalued a company s stock may trade at a lower valuation compared to its genuine value if it is underfollowed or ignored by analysts and investors simply put investors may overlook good stocks in turn for ones that are more popular or more commonly receive media attention a single company can transition from a growth stock to a value stock for example once the company has achieved success investors now measure it differently value stocks vs growth stocksthere s fundamental differences that distinguish value stocks from growth stocks the goal of value investing is to identify stocks that are cheap in comparison to their intrinsic value investors look for stocks that are trading for less than their intrinsic value meanwhile growth investing focuses on stocks of businesses that have a potential for above average growth in terms of profits sales or market share companies with significant growth potential cutting edge goods or services and the potential to generate returns above average are given priority by growth investors traditional valuation indicators like pe ratios pb ratios or dividend yield are frequently used to identify value stocks these measurements assist in identifying whether a stock is trading at a lower valuation than its fundamental indicators or its competitors in the same sector alternatively growth stocks are frequently assessed using unconventional valuation techniques this includes the price to sales p s ratio or the forward pe ratio instead of reflecting current earnings or book value these measurements show predictions for future growth value stocks are frequently linked to solid well established businesses that operate in dependable sectors although their development rates may be slower they are seen as financially reliable and may be undervalued by the market growth stocks are often found in sectors that have a strong potential for growth such as emerging markets healthcare or technology these businesses may have greater volatility because they are frequently in their early phases and reinvesting profits in growth value stocks frequently place a strong emphasis on dividend payments and investors may look for shares in companies that offer high dividend yields these equities are more common in mature industries consumer staples and utility sectors this is because the company may not need as much capital for growth as the company has already scaled alternatively rather than paying dividends growth stocks frequently place a higher priority on reinvesting profits in the expansion of the business these businesses frequently have to use their resources for marketing r d or business expansion value stocks are considered relatively less risky compared to growth stocks they are typically more stable and have lower volatility the potential for capital appreciation may be moderate but they often offer steady income through dividends in addition the company is already established so may have already overcome many risks start up or infant companies face meanwhile growth stocks carry higher risk due to their higher volatility and market expectations while they offer the potential for significant capital appreciation they may also experience greater price fluctuations and have a higher chance of underperforming during market downturns seeks to find undervalued stocksoften uses traditional valuation metrics | |
are usually more established companies | often issue dividends as there is less need for cashflowmay be less risky as the company is already establishedseeks to find companies set to growoften uses untraditional valuation metrics | |
are usually younger companies | often do not issue dividends as there is resource constraintsmay be more risky as the company is yet to prove its business model or operationsexample of value stockhonda motor hmc produces and sells outboard engines power generators lawn mowers and automobiles all over the world because the company has a less comprehensive vehicle lineup compared to rivals it may fly under the radar with some investors for instance honda does not offer a huge suv or a full sized truck as a result honda is vulnerable to losing market share if consumer preferences move further in favor of those larger vehicles however the manufacturer also possesses other traits that might be beneficial in the long run one is that honda has a reputation for quality particularly with regard to fuel efficient vehicles the leadership group is skilled at organizing the company s is currently embarking on a cost cutting plan to decrease expenses in addition honda aims to have 100 of their vehicles be electric in north america by 2040 on the stock side as of may 2023 honda s stock had a p e ratio of 8 57 this is notably less than rival companies such as toyota who boasts a p e ratio as of may 5 2023 of 10 14 also honda boasts a stronger dividend yield as of may 2023 honda s dividend yield was 2 87 | |
are value stocks a good investment | value stocks may be a good investment for investors looking for lower risk equities value stocks tend to relate to companies that have already been established but are undervalued by the market for investors not willing to invest in start ups or unknown entities value stocks may make a good alternative |
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