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do banks report check deposits to the irs | banks report check deposits to the irs if the amount is over 10 000 this doesn t matter if it is a check or cash a bank is legally required to report this to the irs 3 | |
are my bank deposits insured | yes bank deposits of up to 250 000 are insured by the federal deposit insurance commission fdic the national credit union association ncua insures accounts of up to 250 000 for credit unions 21the bottom linebank deposits are the primary means by which people store their money mainly in savings accounts checking accounts and money market accounts bank deposits are a way to safely keep money with the ability to access it at any time in a conveniently | |
what is a bank identification number bin | the term bank identification number bin refers to the first four to six numbers on a payment card this set of numbers identifies the financial institution that issues the card as such it matches transactions to the issuer of the card being used bins can be found on various payment cards including credit cards charge cards and debit cards the bin system helps financial institutions identify fraudulent or stolen payment cards and can help prevent identity theft | |
how bank identification numbers bins work | the bank identification number is a numbering system developed by the american national standards institute ansi and the international organization for standardization iso to identify institutions that issue payment cards the ansi is a nonprofit organization npo that creates business standards in the u s while the iso is an international nongovernmental group that creates standards for various industries 12all payment cards come with a bin number this is a set of four to six numbers randomly assigned to debit cards credit cards charge cards gift cards electronic benefit cards and other payment cards the number is embossed on the front of the card and appears in print just below as well the first digit specifies the major industry identifier the digits that follow specify the issuing institution or bank for example visa credit cards start with a four which falls under the banking and financial category | |
when the customer initiates a transaction the issuer receives the authorization request to verify if the card and account are valid and whether the purchase amount is available this process results in the charge being either approved or denied without a bin the credit card processing system would be unable to determine the origin of the customer s funds and would be unable to complete the transaction | the bin number allows merchants to accept multiple forms of payment and allows faster processing of transactions | |
what are bins used for | bins have a variety of useful applications the primary purpose is to allow merchants to evaluate and assess payment card transactions they also allow merchants to identify originating banks along with their address and phone number and whether issuing banks are in the same country as the device used to make the transaction it also verifies the address provided by the customer but more importantly the numbering system helps identify identity theft or potential security breaches by comparing data such as the address of both the issuing institution and the cardholder bins are also used to increase the speed and efficiency of checkout when paying with a debit or credit card as a customer swipes their card the store s payment processor scans the bin on their card and validates their account with the card issuer this also determines if the transaction is authorized and compliant with any relevant national laws bank identification numbers are also commonly referred to as issuer identification numbers iins example of a bank identification number bin here s a hypothetical example to show how bins work let s say a customer uses their bank card at the gas pump when they fill up their tank once they swipe the card the system scans the bin to detect the specific institution that issued the card an authorization request is then put on the customer s account the request is authorized within a few seconds and the transaction is approved if the funds are available or declined if the customer doesn t have enough funds to cover the charge | |
what is a bank identification code | a bank identification code which is also known as a bank identifier code is a special code made up of eight to 11 digits it is an international standard that identifies a bank or non financial institution whenever someone makes an international purchase or transaction a bic can be connected or non connected the former is part of the swift network and is called a swift code while the latter is generally used for reference only | |
how do you use a bank identification number | consumers generally don t use bins but it is important to know what they mean the first digit is the major industry identifier while the remaining digits specify the issuing financial institution | |
what is bin scamming | bin scamming is a fraud scheme it occurs when a fraudster calls impersonating someone from your bank claiming that your account information has been compromised the scammer may give you information to try to gain your trust once you re hooked they try to confirm the number of your card and begin by asking where you bank | |
why are bin numbers important | bins allow merchants to accept multiple payments at the same time they also make payment processing much faster bins help banks and financial institutions identify cards that have been compromised or stolen because it provides information about the type of card being used the type of bank and other information about the issuing company and cardholder the bottom linebank identification numbers are used to identify which payment cards belong to which issuing financial institution but aside from that they help facilitate financial transactions and ensure that consumers are protected from identity theft and fraud that s why it s so important to keep your financial information including your bin confidential remember your bank will never call or send you an email to inform you that your account information has been compromised if you ever receive a call don t engage with the scammer instead hang up and notify your bank you can also file a complaint with the ftc on the agency s website 3 | |
what is a bank rating | a bank rating refers to a letter or numerical grade assigned to banks and thrift institutions by rating agencies grades are assigned to provide the public with information about an organization s level of credit risk and financial safety and soundness they also help bank leaders identify problems within their institution if any that need to be addressed 1many rating agencies use a proprietary formula to determine ratings while others use the camels system to assess financial institutions understanding bank ratingsregulatory and credit rating agencies assign ratings to banks in order to provide the public with information about the safety and soundness of a financial institution or its risk of default on debt obligations these ratings are issued by regulatory bodies such as the federal deposit insurance corporation fdic and credit rating agencies like standard poor s s p moody s and fitch ratings are updated on a regular basis by bank supervisors normally every quarter 1ratings give consumers insight into the health and stability of financial institutions such as banks and other thrift institutions these rankings are also provided to the bank s management team and its board to address any problems if any grades can be based on a series of factors including the capital amounts liquidity asset quality and the capability of management 1agencies may use different ratings system they may consider the workings of such systems proprietary and maintain confidentiality about how ratings are derived the fdic is an independent government agency that protects depositors money in fdic insured banks up to a certain amount in the event that a financial institution fails it regularly examines financial institutions to ensure financial safety and soundness its ratings are different from those provided by credit rating agencies which focus on the ability of financial institutions and corporations to pay debt obligations on time for instance the fdic presents ratings related to the level of consumer compliance with consumer protection and civil rights statutes regulations that it finds at each federally regulated commercial bank savings and loan association mutual savings bank and credit union 2it also provides ratings relating to the safety and soundness of these financial institutions 2government regulators assign ratings based on the camels system which is used worldwide to provide guidance about the financial soundness of financial institutions the letters in the acronym camels stand for capital adequacy asset quality management earnings liquidity and sensitivity 1the fdic safety and soundness ratings use a scale of 1 to 5 where 2example of how to interpret credit ratingsbank customers and investors can visit a credit rating agency site to learn about its ratings structure and the meaning of its individual ratings for example fitch rates banks with letters and numbers in september 2022 it assigned bank of america corporation a rating of aa for the category of long term issuer default and an f1 rating for the category of short term issuer default 3according to fitch aa ratings denote expectations of very low default risk they indicate very strong capacity for payment of financial commitments this capacity is not significantly vulnerable to foreseeable events 4the f1 rating indicates the lowest default risk and the greatest ability to meet timely payments of financial obligations to financial institutions in the same country fitch appends the sign when a bank s liquidity is particularly strong 5because no rating service is identical or infallible investors and clients should consult multiple ratings and financial metrics when analyzing their financial institutions components of camelsas stated above many agencies use camels or similar criteria to rate banks here is what the camels system helps agencies examine 1capital adequacy refers to the amount of cash held in reserve by financial institutions compared to what authorities require them to hold institutions must also address guidelines and regulatory policies related to interest and dividends 6this entails an evaluation of credit risk associated with a bank s interest bearing assets such as loans rating organizations may also look at whether a bank s portfolio is appropriately diversified they may look for policies that limit credit risk and support the efficiency of operations by reviewing the management team an agency wants to examine whether a bank s leaders understand the direction of the institution and have specific plans to move forward in a given regulatory environment visualizing what is possible placing a bank in context with industry trends and taking risks to grow the business are all required of strong leaders bank financial statements are often harder to decipher than those of other companies given their distinct business models banks take deposits from savers and pay interest on some of these accounts to generate revenues they will take deposits loan them to borrowers and receive interest on them their profits are derived from the spread between the rate they pay for funds and the rate they receive from borrowers ratings take into account liquidity or a bank having enough assets of a type that can be converted to cash quickly and easily so that short term financial obligations can be met those obligations include withdrawals by customers sensitivity refers to an institution s risk exposure for instance market risk for example a regulator may examine how a bank monitors its credit concentrations and the industries to which it lends money | |
why are credit ratings important | credit ratings important and useful because they indicate the credit risk that potential investors in the debt issued by an institution may face credit ratings project how likely it is that bond investors will be repaid in full and on time for their loans | |
are ratings always accurate | ratings are a forward looking opinion rendered by rating agencies based on a close examination of a financial institution as a consequence there s no guarantee that a financial institution with an excellent rating won t default that s why ratings should be just one of a variety of indicators of financial soundness that investors take into account before making investments | |
what role do bank credit ratings play | importantly they can be a source of information and transparency for consumers and investors credit ratings are vital to healthy and efficient capital markets along with other important financial data they can provide investors with the confidence to invest which in the long run can mean ongoing and vital economic activity and wealth building the bottom linebank ratings are grades related to aspects of financial institution safety and soundness assigned by government agencies or private rating agencies they are produced to ensure that the public has adequate and clear information about the financial institutions that they may open accounts with invest in or lend to | |
what are bank reserves | bank reserves are the cash minimums that financial institutions must have on hand in order to meet central bank requirements this is real paper money that must be kept by the bank in a vault on site or held in its account at the central bank cash reserves requirements are intended to ensure that every bank can meet any large and unexpected demand for withdrawals in the u s the federal reserve dictates the amount of cash called the reserve ratio that each bank must maintain historically the reserve ratio has ranged from zero to 10 of bank deposits 1 | |
how bank reserves work | bank reserves are primarily an antidote to panic the federal reserve obliges banks to hold a certain amount of cash in reserve so that they never run short and have to refuse a customer s withdrawal possibly triggering a bank run a central bank may also use bank reserve levels as a tool in monetary policy it can lower the reserve requirement so that banks are free to make a number of new loans and increase economic activity or it can require that the banks increase their reserves to slow economic growth in recent years the u s federal reserve and the central banks of other developed economies have turned to other tactics such as quantitative easing qe to achieve the same goals the central banks in emerging nations such as china continue to rely on raising or lowering bank reserve levels to cool down or heat up their economies the federal reserve cut the cash reserve minimum to zero percent effective march 26 2020 as the global pandemic set in 1bank reserves are termed either required reserves or excess reserves the required reserve is the minimum cash the bank can keep on hand the excess reserve is any cash over the required minimum that the bank is holding in its vault rather than lending out to businesses and consumers banks have little incentive to maintain excess reserves because cash earns no return and may even lose value over time due to inflation thus banks normally minimize their excess reserves lending the money to clients rather than holding it in their vaults in good times businesses and consumers borrow more and spend more during recessions they can t or won t take on additional debt in downtimes the banks may also toughen their lending requirements to avoid defaults bank reserves decrease during periods of economic expansion and increase during recessions history of bank reservesdespite the determined efforts of alexander hamilton among others the u s didn t have a national banking system for more than a couple of short periods of time until 1913 when the federal reserve system was created 2 by 1863 the country at least had a national currency and a national bank chartering system 3until then banks were chartered and regulated by states with varying results bank collapses and runs on banks were common until a full blown financial panic in 1907 led to calls for reform the federal reserve system was created to oversee the nation s money supply 2its role was significantly expanded in 1977 when during a period of double digit inflation congress defined price stability as a national policy goal and directed the federal open market committee fomc within the fed to carry it out 4special considerationsthe required bank reserve follows a formula set by federal reserve board regulations the formula is based on the total amount deposited in the bank s net transaction accounts the figure includes demand deposits automatic transfer accounts and share draft accounts net transactions are calculated as the total amount in transaction accounts minus funds due from other banks and minus cash that is in the process of being collected 1the required reserve ratio can also be used by a central bank as a tool to implement monetary policies through this ratio a central bank can influence the amount of money available for borrowing in addition to bank reserve requirements set by the federal reserve banks must also follow liquidity requirements set by the basel accords the basel accords are a series of banking regulations established by representatives from major global financial centers 5required bank reserves are determined by the federal reserve for each bank based on its net transactions after the collapse of the u s investment bank lehman brothers in 2008 the basel accords were strengthened in an agreement known as basel iii this required banks to maintain an appropriate liquidity coverage ratio lcr the lcr requires banks and other financial institutions to hold enough cash and liquid assets to cover fund outflows for 30 days 6in the event of a financial crisis the lcr is designed to help banks keep from having to borrow money from the central bank the lcr is intended to ensure banks have enough capital on hand to ride out any short term capital disruptions it s important to note that even when the federal reserve decreases bank reserve minimums banks must still meet lcr requirements to ensure they have enough cash on hand to meet their short term obligations impact of the 08 crisisuntil the financial crisis of 2008 2009 banks earned no interest for the cash reserves they held that changed on oct 1 2008 7 as part of the emergency economic stabilization act of 2008 the federal reserve began paying banks interest on their reserves 8 at the same time the fed cut interest rates in order to boost demand for loans and get the economy moving again the result defied the conventional wisdom that banks would rather lend money out than keep it in the vault the banks took the cash injected by the federal reserve and kept it as excess reserves rather than lending it they preferred to earn a small but risk free interest rate over lending it out for a slightly higher but riskier return for this reason the total amount of excess reserves spiked after 2008 despite an unchanged required reserve ratio | |
how much money do banks need to keep in reserve | the reserve amount has historically ranged from zero to 10 since march 26 2020 it has been zero 1 | |
are bank reserves assets or liabilities | a bank s reserves are considered part of its assets and are listed as such in its accounts and annual reports | |
how are bank reserves calculated | a bank s reserves are calculated by multiplying its total deposits by the reserve ratio for example if a bank s deposits total 500 million and the required reserve is 10 multiply 500 by 0 10 the bank s required minimum reserve is 50 million | |
where do banks keep their reserves | some of it is stashed in a vault at the bank reserves also may be kept in the bank s account at one of the 12 regional federal reserve banks some small banks keep part of their reserves at larger banks and tap into them as needed this flow of cash between vaults peaks at certain times like during holiday seasons when consumers withdraw extra cash once the demand subsides the banks ship off some of their excess cash to the nearest federal reserve bank 9the bottom linethe past banking system that existed in the u s before banks regulation became centralized seems a bit wild west by today s standards each state could charter banks and small banks popped up and went under regularly runs on the banks were common that changed with the creation of the federal reserve system and among the changes was a requirement that banks hold a minimum amount of cash in reserve to meet demand since march 2020 the reserve minimum has been zero suggesting that the federal reserve is comfortable with the level of cash kept voluntarily by the nation s banks combined with the 30 day liquidity coverage ratio required by the basel accords | |
what is a bank statement | a bank statement summarizes all the account s monthly transactions and is typically sent by the bank to the account holder every month in paper or digital form bank statements contain checking and savings account information such as account numbers and a detailed list of deposits and withdrawals | |
how a bank statement works | a bank issues a bank statement to an account holder that shows the detailed activity in the account it allows the account holder to see all the transactions processed typically chronologically most banks send statements to the account holder either monthly or quarterly banks and credit unions aren t required to send you a monthly statement unless you made at least one electronic fund transfer that month electronic fund transfers include 1your bank can usually change the bank account statement cycle date at any time 2banks must keep records of any deposit of over 100 for at least five years 3types of bank statementsmany banks offer account holders the option of receiving paper or electronic statements usually via email an electronic statement or e statement allows account holders to access statements online for downloading or printing many recipients of e statements still print out their statements at home preferring to keep a permanent record some banks email statements to customers as an attachment bank automatic teller machines atms may be able to print a summarized version of a bank statement called a transaction history receiving digital statements is typically free and opting into digital statements can sometimes spare you monthly account maintenance fees even with the convenience value and accessibility of electronic statements paper statements aren t likely to go away anytime soon however receiving paper bank statements may lead to a fee due to the labor and supplies cost of printing and mailing the statement overall banks usually charge a few dollars per statement for this service which can add up per year if sent monthly credit unions may charge less fees will vary by institution paper statement fees may be waived for people over a certain age such as 65 or minors under a certain age benefits of a bank statementbank statements are a great tool to help account holders keep track of their finances identify errors and recognize spending habits you should verify bank accounts regularly daily weekly or monthly to ensure your records match the bank s this helps reduce overdraft fees errors and fraud account holders can check for discrepancies while reconciling their bank account with the bank statement discrepancies must be reported to the bank promptly account holders may have as little as 30 days to dispute errors but timelines vary by account and state 4 you should keep monthly statements for at least one year requirements for a bank statementparts of a bank statement include information about details of each transaction notably the amount date and payee that took place in the bank account during the period will also be included such as 5for example for the period sept 1 through sept 30 a bank statement may show a non interest bearing checking account with | |
what is an official bank statement | an official bank statement is typically sent by the bank to the account holder every month summarizing all the account s transactions during the month bank statements contain bank account information such as account numbers and a detailed list of deposits and withdrawals | |
how can i get a bank statement | typically you can access your latest bank statements on your financial institution s website otherwise you can request a monthly paper statement be delivered to your home | |
what is the difference between a bank statement and a transaction history | a transaction history displays all bank account transactions for a set period you choose typically a bank statement only covers one month of transactions and may leave recent or pending transactions out can anyone check my bank statement no one can check your bank statement without your permission unless you give out your account number banks do not release information regarding your bank statement to unknown third parties without your consent the bottom linebank statements allow you to ensure transactions and deposits align with your expectations and record keeping reviewing your bank statements you may find that you re paying for subscriptions you don t need or want or you may find you were charged twice for the same transaction you can also review how much interest you re earning in your bank account as a percentage and a dollar amount and whether you might want to switch to a higher earning checking or savings account however be aware of fees for mailed paper statements that can add up over the year | |
what is a bank stress test | a bank stress test is an analysis conducted under hypothetical scenarios designed to determine whether a bank has enough capital to withstand a negative economic shock these scenarios include unfavorable situations such as a deep recession or a financial market crash in the united states banks with 50 billion or more in assets are required to undergo internal stress tests conducted by their own risk management teams and the federal reserve 1bank stress tests were widely put in place after the 2008 financial crisis many banks and financial institutions were left severely undercapitalized the crisis revealed their vulnerability to market crashes and economic downturns as a result federal and financial authorities greatly expanded regulatory reporting requirements to focus on the adequacy of capital reserves and internal strategies for managing capital banks must regularly determine their solvency and document it 2 | |
how a bank stress test works | stress tests focus on a few key areas such as credit risk market risk and liquidity risk to measure the financial status of banks in a crisis using computer simulations hypothetical scenarios are created using various criteria from the federal reserve and international monetary fund imf the european central bank ecb also has strict stress testing requirements covering approximately 70 of the banking institutions across the eurozone 3 company run stress tests are conducted on a semiannual basis and fall under tight reporting deadlines all stress tests include a standard set of scenarios that banks might experience a hypothetical situation could involve a specific disaster in a particular place a caribbean hurricane or a war in northern africa or it could include all of the following happening at the same time a 10 unemployment rate a general 15 drop in stocks and a 30 plunge in home prices banks might then use the next nine quarters of projected financials to determine if they have enough capital to make it through the crisis historical scenarios also exist based on real financial events in the past the collapse of the tech bubble in 2000 the subprime mortgage meltdown of 2007 and the coronavirus crisis of 2020 are only the most prominent examples others include the stock market crash of 1987 the asian financial crisis of the late 1990s and the european sovereign debt crisis between 2010 and 2012 in 2011 the u s instituted regulations that required banks to do a comprehensive capital analysis and review ccar which includes running various stress test scenarios 4benefits of bank stress teststhe main goal of a stress test is to see whether a bank has the capital to manage itself during tough times banks that undergo stress tests are required to publish their results these results are then released to the public to show how the bank would handle a major economic crisis or a financial disaster regulations require companies that do not pass stress tests to cut their dividend payouts and share buybacks to preserve or build up their capital reserves that can prevent undercapitalized banks from defaulting and stop a run on the banks before it starts sometimes a bank gets a conditional pass on a stress test that means the bank came close to failing and risks being unable to make distributions in the future reducing dividends in this way often has a strong negative impact on share prices consequently conditional passes encourage banks to build their reserves before they are forced to cut dividends furthermore banks that pass on a conditional basis have to submit a plan of action criticism of bank stress testscritics claim that stress tests are often overly demanding by requiring banks to be able to withstand once in a century financial disruptions regulators force them to retain too much capital as a result there is an underprovision of credit to the private sector that means creditworthy small businesses and first time homebuyers may be unable to get loans overly strict capital requirements for banks have even been blamed for the relatively slow pace of the economic recovery after 2008 critics also claim that bank stress tests lack sufficient transparency some banks may retain more capital than necessary just in case requirements change the timing of stress testing can sometimes be difficult to predict which makes banks wary of extending credit during normal fluctuations in business on the other hand disclosing too much information could let banks artificially boost reserves in time for tests real world examples of bank stress testsmany banks fail stress tests in the real world even prestigious institutions can stumble for instance santander and deutsche bank failed stress tests multiple times 5 | |
what is a bank draft | a bank draft is a payment that is like a check but its amount is guaranteed by the issuing bank the funds are drawn from the requesting payer s account and are then placed in the bank s reserve account until the draft is cashed by the payee bank drafts provide the payee with a form of payment that is more secure than personal checks | |
how a bank draft works | you have several options available to make secure certified payment options including certified checks wire transfers and bank drafts certified payment options give the payee more security because the funds are guaranteed bank drafts also called banker s drafts bank check or teller s check are guaranteed by the issuing bank in many cases for a large amount of money you may be required to provide a bank draft when you make payment for a major purchase such as for a down payment to buy property 1 | |
when you request a bank draft the bank ensures you have enough money in your account to cover the amount requested it then withdraws the money from your account and moves it to the bank s reserve account | the bank then prepares the draft with your name and the amount you are paying the third party the payee the draft has a serial number watermarks and may even have micro encoding that identifies it as a legitimate form of payment since the funds are already withdrawn from your account when you buy the draft the issuing bank essentially becomes the payer bank drafts may be required by a seller when they have no relationship with a buyer when a transaction involves a large sum or if the seller believes collecting payment may be difficult banks normally charge customers for drafts this means that in addition to the amount of the draft the requesting customer may be liable for a fee usually a flat fee based on the total amount of the draft or a percentage of the draft banks may waive the fee for customers who have a good relationship with the institution or for those who are considered high net worth individuals hnwis 1 | |
how to cancel a bank draft | some banks may not put stop payments on drafts once they re issued that s because the transaction has already taken place according to their records if you want to reverse the transaction the bank usually requires that you redeem the draft for the full amount in some cases it is possible to cancel or replace a lost stolen or destroyed draft as long as you have the required documentation bank drafts vs money ordersa bank draft and a money order are both guaranteed for a specific amount and they are both considered a secure method of payment for a payee the payer does not need to carry large amounts of money when using a bank draft or money order however a bank draft is a check drawn on a bank s funds after accepting the amount from the issuer s account whereas cash is used when purchasing a money order you can use cash or a debit card to buy a money order but you cannot use a credit card 23you can only purchase bank drafts from a financial institution like a bank or credit union you can buy money orders from certified stores and post offices as well as banks since money orders could be used to launder money you can only purchase a money order in the u s for up to 1 000 if you are sending it domestically or for up to 700 if you are sending it internationally bank draft amounts can be much higher 4due to the limited amounts of money orders and the process banks go through when issuing drafts money orders typically cost less than bank drafts getting a bank draft can be more difficult than getting a money order because you must get the draft from your bank | |
what is the difference between a bank draft and a certified check | with a bank draft the funds are withdrawn from your bank account and then the check is made out from the bank which guarantees it your funds are placed into the bank s reserve account with a certified check the money is also guaranteed by the bank but your funds are not withdrawn until the check is cashed instead they are placed on hold 5 | |
how do you cancel a bank draft | once a bank draft is given to the person it was intended for it cannot be cancelled you as the purchaser are responsible for delivering the draft to the payee if you lose it you will have to take several steps to get a new draft which may include providing a surety bond or signing an indemnity 6 | |
how much does a bank draft cost | the amount a bank draft will cost will vary by financial institution some may charge a flat fee while others may charge a percentage of the check amount for example td bank charges 9 95 for a bank draft 6the bottom linewhile not ideal for everyday purchases bank drafts can be very useful payments methods when you are making a major purchase a seller may request a bank draft for added security to ensure they will receive their funds you may find you need to provide a bank draft for purchases like a car or a home in that case you can pay a fee to a bank to get the draft which you then provide to the seller | |
what is bank owned life insurance boli | bank owned life insurance boli is a product where the bank is the policy beneficiary and usually the owner such insurance is used as a tax shelter for the financial institutions which leverage its tax free savings provisions as funding mechanisms for employee benefits this permanent life insurance policy is often purchased for high earners and or board members of a bank which pays for the policy and benefits after the insured individual s death banks do not take out bank owned life insurance for every employee working for them but only those key players whose death could cause the bank to lose money bank owned life insurance is a type of life insurance created to benefit a bank not the insured or their beneficiaries bank employees may be offered a traditional at work life insurance plan to cover their loved ones if they die as part of a workplace benefits package 1 | |
what is a banker s acceptance ba | a banker s acceptance ba is a negotiable piece of paper that functions like a post dated check a bank rather than an account holder guarantees the payment banker s acceptances are also known as bills of exchange they re used by companies as a relatively safe form of payment for large transactions bas can also be short term debt instruments similar to u s treasury bills that trade at a discount to face value in the money markets 1investopedia sydney burnsunderstanding banker s acceptancea banker s acceptance is a way for the company that issues it to pay for a purchase without borrowing to do so the bill is a guaranteed form of payment for the company that receives it a banker s acceptance requires that the bank pay the holder a set amount of money on a set date bas are most commonly issued 30 days before the date of maturity but they can mature at any later date from one to 180 days 2bas are issued at a discount to their face value they earn a return like a bond does they also can be traded like bonds in the secondary money market there s no penalty for cashing them in early except for the lost interest that would have been earned had they been held until their maturity dates history of banker s acceptancebanker s acceptances have been around since the 12th century they were used as a method of facilitating trade bas started to become an actively traded market in london in the 18th and 19th centuries 3the u s launched the federal reserve in the early 1900s to help create banker s acceptances that would compete with london s the fed s goal was to boost u s trade and it was given the authority to purchase certain bas the fed still buys government bonds but it no longer buys bas go to a bank that you have a good working relationship with if you re looking to obtain a ba not all banks offer them banker s acceptance as checksbanker s acceptances are a relatively safe form of payment for both sides of a transaction just like certified checks the money owed is guaranteed to be paid on the date specified on the bill the use of bas is most common in international trade transactions a buyer with an importing business can issue a banker s acceptance with a date after a shipment is due to be delivered and the seller with an exporting business will have the payment instrument in hand before finalizing the shipment an individual who s paid with a banker s acceptance can hold onto it until its maturity date to receive its full value or they can sell it immediately at a discount to face value banker s acceptances are a relatively safe form of payment for both sides of a transaction a banker s acceptance relies on the creditworthiness of the banking institution rather than the individual or business that issues it unlike a regular check the bank requires that the issuer meet its credit eligibility requirements typically including a deposit sufficient to cover the banker s acceptance banker s acceptance as investmentsbanks and institutional investors trade banker s acceptances on the secondary market before they reach maturity the strategy is similar to that used in trading zero coupon bonds the ba is sold below face value at a discount that s determined by the length of time remaining before the maturity date banker s acceptances are considered to be relatively safe investments because the bank and the borrower are liable for the amount that s due when the instrument matures advantages and disadvantages of a banker s acceptanceone of the key advantages of a banker s acceptance is that it s backed by a financial institution and therefore protected against default this gives the seller assurances related to payment buyers are afforded the ability to make purchases in a timely manner and not worry about having to make payments in advance the key risk for the bank is that the financial institution will have to make good on the promised payment if the buyer defaults the bank may require the buyer to post collateral to help hedge against this it provides the seller with assurances against default the buyer doesn t have to prepay or pay in advance for goods it provides the ability to purchase and sell goods in a timely manner it has a relatively low cost compared to the hedge or benefit provided the bank may require the buyer to post collateral before issuing a banker s acceptance the buyer may default forcing the financial institution to make the payment | |
how does a banker s acceptance work | the importer will seek to purchase from an exporter generally in another country the exporter wants assurance of payment but the importer also wants assurance that the seller can deliver a banker s acceptance is a form of payment backed by a bank that eliminates transaction related risks for both the importer and the exporter | |
is a banker s acceptance a money market instrument | banker s acceptances are money market instruments they re relatively safe and liquid like most money markets particularly when the paying bank enjoys a strong credit rating 4 | |
what is a banker s acceptance rate | banker s acceptances are assumed to be safe investments because they re backed by the bank so they often trade at a discount to face value the banker s acceptance rate is the market rate at which these instruments trade it s the return an investor would receive if they purchased today and held it until the payment date | |
what is the difference between banker s acceptance and commercial paper | commercial paper is a promissory note that pays a fixed rate it s unsecured and can be for a few days or years commercial paper is generally used to cover short term obligations such as the cost of a new project or short term receivables bas are also short term promissory notes although they have the unconditional guarantee of a bank and are often used for trade the bottom linebanker s acceptances are relatively safe investments from an investment perspective because they re money market investments and they re in line with t bills from a risk return perspective bas help boost trade by reducing transaction related risks for importers and exporters | |
what is a bank guarantee | a bank guarantee is a financial backstop offered by a financial institution promising to cover a financial obligation if one party in a transaction fails to hold up their end of a contract generally used outside the united states a bank guarantee enables the bank s client to acquire goods buy equipment or perform international trade if the client fails to settle a debt or deliver promised goods the bank will cover it investopedia joules garciaunderstanding bank guaranteesa bank guarantee is a promise by a lending institution to cover a loss if a business transaction doesn t unfold as planned the buyer receives compensation if a party doesn t deliver goods or services as agreed or fulfill contractual obligations 1non u s financial institutions and intermediaries in countries such as spain the u k and elsewhere may more heavily rely on bank guarantees in commercial transactions but sometimes a bank guarantee may help an individual rent a property 2a bank guarantee may also be called a standby letter of credit or be referred to as a bond bank guarantees from a reputable institution can help you establish business relationships increase your access to cash flow and capital protect your business from losses and set you up for international opportunities 34another type of guarantee is the loan guarantee from the export import bank of the u s this guarantees creditworthy foreign buyers of financing for u s capital goods and services purchases u s companies receive payment when the product is shipped from the u s to a foreign buyer 5the u s securities and exchange commission sec warns investors to be wary of secretive high yield investments marketed as as a prime bank program or prime world bank financial instrument these fraudulent investments may involve legitimate sounding language such as bank guarantee or standby letter of credit 6examples of bank guaranteeshere are several kinds of bank guarantees that cover various risks including 1for example the world bank offers a bank guarantee program for projects these guarantees provide commercial lenders security against payment default or failure to meet performance obligations by governments 7 | |
what are the different types of bank guarantees | two key types of bank guarantees include a tender bank guarantee bid bond and a performance guarantee the tender bank guarantees to reimburse the buyer who has already supplied some funding if you the supplier don t sign a contract or fulfill conditions performance based guarantees are for obligations laid out in a contract such as particular tasks 8 | |
what is the financial instrument for a bank guarantee | the financial instrument used in a bank guarantee is called a banker s acceptance | |
do banks in the u s issue bank guarantees | banks in the u s often do not issue bank guarantees instead they issue standby letters of credit serving the same purpose 9bottom lineguarantees help protect international trade relationships by mitigating risks if a contract falls through suppliers don t perform according to a contract s terms or a buyer won t pay for goods while bank guarantees are not common in the u s you should be able to get a similar guarantee via a standby letter of credit | |
what is a bank reconciliation statement | a company prepares a bank reconciliation statement to compare the balance in its accounting records with its bank account balance the statement shows reasons for any discrepancies between the two a bank reconciliation statement is a valuable internal tool that can affect tax and financial reporting and detect errors and intentional fraud understanding the bank reconciliation statementreconciliation is the process of comparing two different records a bank reconciliation statement can help you identify differences between your company s bank and book balances in this case the reconciliation includes the deposits withdrawals and other activities affecting a bank account for a specific period any discrepancies lead to making necessary adjustments or corrections 1here are other uses of a bank reconciliation statement bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank bank reconciliation statements are often used to catch simple errors duplications and accidental discrepancies some mistakes could adversely affect financial reporting and tax reporting without reconciling companies may pay too much or too little in taxes 2bank reconciliation statements are effective tools for detecting fraud theft and loss for example if a check is altered the payment made for that check will be larger than you anticipate if you notice this while reconciling your bank accounts you can take measures to halt the fraud and recover your money 3however you typically only have a limited period such as 30 days from the statement date to catch and request correction of errors 4financial statements show the health of a company or entity for a specific period or point in time accurate financial statements allow investors to make informed decisions the statements give companies clear pictures of their cash flows which can help with organizational planning and making critical business decisions an accountant typically processes reconciliation statements at least once a month for a company software that automates bank reconciliation can help reduce errors associated with manual processing make sure that any staff or employee reconciling bank accounts doesn t also have access to funds through means such as deposits accounts payable or electronic fund transfer authorization 5 | |
how to do a bank reconciliation | to successfully complete your bank reconciliation you ll need your bank statements for the current and previous months as well as your company ledger an online template can help guide you but a simple spreadsheet is just as effective here are the basic steps to follow 3if you find a large dollar amount discrepancy between bank and company ledgers your current bank statement may include a significant deposit or withdrawal from the previous month adjusting discrepancies between books and bankthe cash account balance in an entity s financial records may also require adjusting in some specific circumstances if you find discrepancies with the bank statement in these cases journal entries record any adjustment to the book s balance after fee and interest adjustments are made the book balance should equal the ending balance of the bank account a bank may charge an account maintenance fee typically withdrawn and processed automatically from the bank account when preparing a bank reconciliation statement a journal entry is prepared to account for fees deducted interest earned also requires an adjustment interest is automatically deposited into a bank account after a certain period of time so the company s accountant prepares an entry increasing the cash currently shown in the financial records after adjustments are made the book balance should equal the ending balance of the bank account bank reconciliation statements compare transactions from financial records with those on a bank statement where there are discrepancies companies can identify and correct the source of errors for example say abc holding co recorded an ending balance of 500 000 on its records however its bank statement shows an ending balance of 520 000 after careful investigation abc holding found that a vendor s check for 20 000 hadn t been presented to the bank it also missed two 25 fees for service charges and non sufficient funds nsf checks during the month the reconciliation statement allows the accountant to catch these errors each month the company can now take steps to rectify the mistakes and balance its statements here s an example in the table below | |
what are common problems with bank reconciliations | infrequent reconciliations make it difficult to address problems with fraud or errors when they first arise as the needed information may not be readily available also when transactions aren t recorded promptly and bank fees and charges are applied it can cause mismatches in the company s accounting records | |
where do non sufficient funds nsf checks go on a bank reconciliation | non sufficient funds nsf checks are recorded as an adjusted book balance line item on the bank reconciliation statement the nsf amount deducted from its balance | |
why is bank reconciliation important | bank reconciliation helps to identify errors that can affect estimated tax payments and financial reporting it also helps to identify stop and prevent fraud | |
how often should you do a bank reconciliation | to quickly identify and address errors reconciling bank statements should be done by companies or individuals at least monthly they also can be done as frequently as statements are generated such as daily or weekly the bottom linebank reconciliation statements are tools companies and accountants use to detect errors omissions and fraud in a financial account bank reconciliation is a simple and invaluable process to help manage cash flows | |
what is a bank run | a bank run is when the customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank s solvency as more people withdraw their funds the probability of default increases which in turn can cause more people to withdraw their deposits in extreme cases the bank s reserves may not be sufficient to cover the withdrawals investopedia zoe hansen | |
how bank runs work | bank runs happen when a large number of people start making withdrawals from a bank because they fear the institution will run out of money a bank run is typically the result of panic rather than true insolvency however a bank run triggered by fear can push a bank into bankruptcy 1most institutions have a set limit on how much they store in their vaults daily these limits are set based on need and security reasons many banks also keep specific amounts in reserve at the nation s central bank to minimize the risks related to bank runs and other issues in fact the federal reserve pays them interest to do so a program which it calls interest on reserve balances iorb this program gives banks an incentive to keep deposits in reserve 23because banks typically keep only a small percentage of deposits as cash on hand they must increase their cash position to meet the withdrawal demands of their customers one method a bank uses to increase cash on hand is to sell assets sometimes at significantly lower prices than if it did not have to sell quickly losses taken when selling assets at lower prices can cause customer concerns which can trigger withdrawals examples of bank runsin modern history bank runs are often associated with the great depression in the wake of the 1929 stock market crash american depositors panicked and began withdrawing their deposits a succession of bank runs on thousands of banks occurred in the early 1930s creating a domino effect on the economy 4more recent examples of significant bank runs include those on silicon valley bank washington mutual bank wamu and wachovia bank 5the collapse of silicon valley bank in march 2023 was a result of a bank run caused by venture capitalists the bank reported that it needed 2 25 billion to shore up its balance sheet and by the end of the following business day customers had withdrawn about 42 billion as a result regulators closed the bank and took control of its assets 67silicon valley bank had last reported 209 billion in assets as of the fourth quarter of 2022 making it the second largest bank failure of all time 8washington mutual wamu which had about 310 billion in assets at the time of its failure in 2008 was the largest bank failure in the u s its collapse was caused by several factors including a poor housing market and rapid expansion the bank also suffered a run when customers withdrew 16 7 billion within two weeks 9jpmorgan chase eventually bought washington mutual for 1 9 billion 10wachovia bank was also shuttered after depositors withdrew more than 15 billion over a two week period following negative earnings results wachovia was eventually acquired by wells fargo for 15 billion 1112much of the withdrawals at wachovia were concentrated among commercial accounts with balances above the limit insured by the federal deposit insurance corporation fdic drawing those balances down to just below the fdic limit the failure of large investment banks like lehman brothers aig and bear stearns was not the result of a bank run instead these bank failures resulted from a credit and liquidity crisis involving derivatives asset backed securities and poor risk management practices 1314preventing bank runsin response to the turmoil of the 1930s governments took several steps to diminish the risk of future bank runs perhaps the biggest was establishing reserve requirements which mandated that banks had to maintain a certain percentage of total deposits on hand as cash this requirement has since been reduced to zero by the federal reserve because other monetary policy tools have been created 1516additionally the u s congress established the fdic in 1933 to insure bank deposits in response to the many bank failures in the preceding years its mission is to maintain stability and public confidence in the u s financial system 17the fdic provides insurance based on ownership category there are several fdic recognized ownership categories but generally each depositor is insured for up to 250 000 in each different category 18in some cases the fdic may extend its coverage for example when silicon valley bank failed in 2023 the fdic used funds from the deposit insurance fund to fully reimburse depositors the money in the fund is furnished by quarterly fees assessed on banks 1920in some cases banks need to take a more proactive approach if faced with the threat of a bank run for example they may temporarily close to prevent people from withdrawing their money en masse franklin d roosevelt implemented another solution when he declared a bank holiday in 1933 calling for inspections to ensure banks solvency so they could continue operating 21 | |
what is a silent bank run | a silent bank run is when depositors withdraw funds electronically in large volumes without physically entering the bank silent bank runs are similar to other bank runs except funds are withdrawn via ach transfers wire transfers and other methods that do not require physical withdrawals of cash | |
what is meant by a run on the bank | this happens when people try to withdraw all of their funds for fear of a bank collapse when this is done simultaneously by many depositors the bank can run out of cash causing it to become insolvent | |
why is a bank run bad | bank runs can bring down banks and cause a more systemic financial crisis a bank usually only has a limited amount of cash on hand that is not the same as its overall deposits so if too many customers demand their money the bank simply won t have enough to return to their depositors the bottom linea bank run is when customers flock to banks either physically or online to withdraw their funds because they lose confidence in the bank in extreme cases they can cause the collapse of a bank as a bank run did in 2023 when silicon valley bank became insolvent to reduce your risk of losing money in a bank run you can keep your deposit amounts under the fdic insured limit of 250 000 per depositor per insured bank if you need to deposit more funds you can open an account at another bank and receive the same protection 18 | |
what is bankruptcy | bankruptcy is a legal proceeding initiated when a person or business cannot repay outstanding debts or obligations it offers a fresh start for people who can no longer afford to pay their bills the bankruptcy process begins with a petition filed by the debtor which is most common or on behalf of creditors which is less common all of the debtor s assets are measured and evaluated and the assets may be used to repay a portion of the outstanding debt | |
how bankruptcy works | bankruptcy offers an individual or business a chance to start fresh by forgiving debts that they can t pay meanwhile creditors have a chance to get some repayment based on the individual s or business s assets available for liquidation in theory the ability to file for bankruptcy benefits the overall economy by allowing people and companies a second chance to gain access to credit it can also help creditors regain a portion of debt repayment all bankruptcy cases in the united states go through federal courts a bankruptcy judge makes decisions including whether a debtor is eligible to file and whether they should be discharged of their debts administration over bankruptcy cases is often handled by a trustee an officer appointed by the united states trustee program of the department of justice to represent the debtor s estate in the proceeding the debtor and the judge usually have no contact unless there is some objection made in the case by a creditor when bankruptcy proceedings are complete the debtor is relieved of their debt obligations 1investopedia ryan oakley | |
what are the types of bankruptcy filings | bankruptcy filings in the united states are categorized by which chapter of the bankruptcy code applies for example chapter 7 involves the liquidation of assets chapter 11 deals with company or individual reorganizations and chapter 13 arranges for debt repayment with lowered debt covenants or specific payment plans 2bankruptcy filing costs vary depending on the type of bankruptcy the complexity of the case and other factors most people file for chapter 7 bankruptcy which allows you to dispose of unsecured debts such as credit card balances and medical bills you must liquidate property to repay some or all of your unsecured debts if you have nonexempt assets such as family heirlooms collections with high valuations like coin or stamp collections second homes or investments like stocks or bonds | |
when you file chapter 7 bankruptcy you essentially sell off your assets to clear debt people who have no valuable assets and only exempt property such as household goods clothing tools for their trades and a personal vehicle worth up to a certain value may end up repaying no part of their unsecured debt 3 | businesses often file for chapter 11 bankruptcy with the goal of reorganizing and remaining in business filing chapter 11 bankruptcy gives a company the opportunity to create plans for profitability cut costs and find new ways to increase revenue its preferred stockholders if any may still receive payments though common stockholders will be last in line 4for example a housekeeping business filing chapter 11 bankruptcy might increase its rates slightly and offer more services to become profitable chapter 11 bankruptcy allows the business to continue conducting its business activities without interruption while working on a debt repayment plan under the court s supervision in rare cases individuals can also file for chapter 11 bankruptcy 5individuals who make too much money to qualify for chapter 7 bankruptcy may file under chapter 13 also known as a wage earner s plan it allows individuals as well as businesses with consistent income to create workable debt repayment plans the repayment plans are commonly in installments over the course of a three to five year period in exchange for repaying their creditors these debtors are allowed per the courts to keep all of their property including otherwise nonexempt property 6while chapter 7 chapter 11 and chapter 13 are the most common bankruptcy proceedings there are several other types being discharged from bankruptcy | |
when a debtor receives a discharge order they are no longer legally required to pay the debts specified in the order what s more any creditor listed on the discharge order cannot legally undertake any type of collection activity such as making phone calls or sending letters against the debtor once the discharge order is in force | however not all debts qualify to be discharged some of these include tax claims anything that was not listed by the debtor child support or alimony payments personal injury debts and debts to the government in addition any secured creditor can still enforce a lien against property owned by the debtor provided that the lien is still valid 10debtors do not necessarily have the right to a discharge when a petition for bankruptcy has been filed in court creditors receive a notice and can object if they choose to do so if they do they will need to file a complaint in court before the deadline this leads to the filing of an adversary proceeding to recover money owed or enforce a lien 11the discharge from chapter 7 is usually granted about four months after the debtor files a petition for bankruptcy for any other type of bankruptcy the discharge can occur when it becomes practical 11advantages and disadvantages of bankruptcydeclaring bankruptcy can help relieve you of your legal obligation to pay your debts and save your home business or ability to function financially depending on which kind of bankruptcy petition you file but it will also lower your credit rating making it more difficult to get a loan mortgage or credit card buy a home or business or rent an apartment if you re trying to decide whether you should file for bankruptcy your credit is probably already damaged but it s worth noting that a chapter 7 filing will stay on your credit report for 10 years while a chapter 13 will remain there for seven any creditors or lenders you apply to for new debt such as a car loan credit card line of credit or mortgage will see the discharge on your report which can prevent you from getting any credit 12allows debtors to emerge from defaultwipes clean certain unsecured debtsavoids legal judgmentleaves a scar on one s credit scoresecured debts will have the collateral seizedcertain debts like child support are not eligible for dischargealternatives to bankruptcyif you want to avoid bankruptcy several alternatives may be able to reduce your debt obligations negotiating with your creditors without involving the courts can sometimes work to the benefit of both sides rather than risk receiving nothing a creditor might agree to a repayment schedule that reduces your debt or spreads your payments over a longer period of time if you are unable to make your mortgage payments it s worth calling your loan servicer to find out what options you might have short of filing for bankruptcy those could include forbearance which will allow you to stop making payments for a specified time or a repayment plan designed to stretch smaller monthly payments over a longer period another option might be loan modification which will change the terms of your loan such as lowering the interest rate on a permanent basis making it easier to repay however beware of unsolicited offers from companies claiming that they can keep your home out of foreclosure they may be nothing more than scam artists if you owe tax money to the irs you may be eligible for an offer in compromise allowing you to settle with the agency for an amount less than you owe in some instances the irs also offers monthly payment plans for taxpayers who can t pay their tax obligations all at once | |
what is the downside of filing for bankruptcy | one downside of filing for bankruptcy is an immediate large and negative impact on your credit score bankruptcy will remain on your credit report for seven to 10 years as a result it will be more difficult and more costly to borrow money depending on the type of bankruptcy you could lose assets like your home and car | |
is bankruptcy a good choice | for some people or businesses unfortunately bankruptcy is the right choice if debts become too large to manage the alternative could be a liquidation of all of your assets and legal judgments for non payment or breach of contract while damaging to your credit and reputation bankruptcy is a legal channel for avoiding this type of worst case scenario | |
do you get out of all your debts if you file for bankruptcy | bankruptcy can renegotiate or erase many types of unsecured debts such as those on credit cards or personal loans other debts cannot be discharged in bankruptcy the u s bankruptcy code lists 19 different categories of debts that cannot be discharged 11will i lose my car if i declare bankruptcy if you bought your car with a loan your vehicle may be seized as collateral during a bankruptcy proceeding however you can usually keep your car by reaffirming your car loan and continuing to make payments similarly you can usually keep your home if you declare bankruptcy even if you owe money on it as long as you continue making payments and don t have more equity than you are permitted under state and federal bankruptcy laws | |
how does one file for bankruptcy | bankruptcy is a legal process so it begins when the debtor files a petition with the relevant bankruptcy court this is often achieved through the help of a lawyer specialized in these types of cases the bottom linebankruptcy can provide the financial benefit of wiping out debt you cannot pay and helping you start fresh but there are consequences having a bankruptcy on your credit history can harm your credit score and make it more difficult to get loans in the future before filing for bankruptcy weigh all your options for resolving your debt including a debt consolidation program and renegotiating the terms with your lender consider consulting a professional financial advisor who can review all the options and guide you through how they would work in your specific financial situation | |
what is banner advertising | banner advertising refers to the use of a rectangular graphic display that stretches across the top bottom or sides of a website or online media property the horizontal type of banner advertisement is called a leaderboard while the vertical banners are called a skyscraper and are positioned on a web page s sidebars banner ads are image based rather than text based and are a popular form of online advertising the purpose of banner advertising is to promote a brand and or to get visitors from the host website to go to the advertiser s website | |
how banner advertising works | internet advertising has gone from an uncertain bet to serving as the primary platform for most companies marketing in the u s the growth in digital advertising continues to grow by double digits on an annual revenue basis with 2020 revenue report at 138 9 billion 1banner advertising also called display advertising consists of static or animated images or media and is usually placed in high visibility areas on high traffic websites banner advertising is attractive because it can help create brand awareness generate leads and re target an audience such as giving a visitor a chance to sign up for a newsletter or free trial before they click away banner advertising functions mainly the same way as traditional advertising however the method by which the advertiser pays the host can differ greatly from traditional ad space sales the host is paid for the banner advertisement through one of three methods cost per impression payment for every website visitor who sees the ad cost per click payment for every website visitor who clicks on the ad and visits the advertiser s website or cost per action payment for every website visitor who clicks on the ad goes to the advertiser s website and completes a task such as filling out a form or making a purchase traditional banner advertising has expanded to other forms such as facebook ads and instagram sponsored ads facebook is estimated to account for roughly 42 5 of online display advertising spending in the u s in 2022 2 the trend in online advertising has seen digital display ad spending including banner ads video rich media and sponsorships continue to grow as of 2020 31 5 of all online ad spending goes to digital advertising which includes banner ads 3the first banner advertisement was deployed in 1994 on the website of wired com then called hotwired the banner read have you ever clicked your mouse right here you will and the ad then sent the user to a campaign for at t 4banner advertising technologyad networks are in charge of matching advertisers to websites that want to sell advertising they keep track of what advertising space is available and match it with advertiser demand the technology that enables ad networks to do this is a central ad server which selects specific ads that are tailored to the website s visitor based on keywords from the visitor s search and website viewing behavior or based on the overall context of the host website content banner advertising and virtually all online advertising currently utilizes real time bidding technology known as programmatic bidding which allows approved companies to bid on ad space during the time it takes for a banner ad to load trends for content marketing revolve around personalization the ability to make consumers feel as though you are speaking directly to them as a result targeted banner ads have gotten ever more common | |
what does baptism by fire mean | baptism by fire is a phrase commonly used to describe a person or employee who is learning something the hard way through a challenge or difficulty in many cases someone who starts a new job must undergo a baptism by fire meaning they must immediately deal with one or more difficult situations no one is immune to a baptism of fire which means new and old employees members of a company s management team and others can experience one the phrase which has its roots in the bible originated in europe understanding baptism by fireas mentioned above the phrase baptism by fire is rooted in the bible s matthew 3 11 the following passage is from the new revised standard version of the bible i baptize you with water for repentance but one who is more powerful than i is coming after me i am not worthy to carry his sandals he will baptize you with the holy spirit and fire the phrase was originally synonymous with a personal ordeal that someone went through in biblical and christian references a baptism by fire is also used to describe the martyrdom of an individual as time progressed the phrase was used to describe a soldier s first time at war with the battle representing the soldier s baptism in most cases baptism by fire is still used as a wartime reference baptism by fire has also been adopted by the modern work world primarily in europe a baptism by fire may refer to an employee s strength wit and quick thinking to come out on top of a situation whether it s deliberate or by chance it is sometimes considered a good way to quickly train a new employee the rationale being that they will have to deal with complicated real life situations sooner rather than later for instance those in uniform police officers firefighters and military personnel may be thrown into the fire to quickly acclimate to the tough demands of their jobs once this baptism or test is complete these workers should be able to perform their duties effectively because they ve already demonstrated their mental physical and emotional strength to survive the initial challenge if an employee passes their baptism by fire they should be able to handle any other situation that arises on the job examples of baptism by firethe phrase baptism by fire can be used to describe any number of situations for instance a new trader may find the market is moving violently and often against them they survive their baptism by fire if they can successfully execute their trades with minimal or no losses regardless of which way the market moves similarly the chief executive officer ceo of a big company may suddenly face their own baptism by fire when a public relations pr crisis hits this may be because the company physically abused a customer on video or because of a problem with the company s product line for example in 2009 michael mccain ceo of canadian meat company maple leaf foods faced a series of issues after the company s cold cuts were linked to a national listeriosis outbreak that caused 22 deaths mccain issued an apology and an expanded product recall here are a few other situations in which someone may have to undergo a baptism by fire | |
what is a barbell | the barbell is an investment strategy applicable primarily to a fixed income portfolio following a barbell method half the portfolio contains long term bonds and the other half holds short term bonds the barbell gets its name because the investment strategy looks like a barbell with bonds heavily weighted at both ends of the maturity timeline the graph will show a large number of short term holdings and long term maturities but little or nothing in intermediate holdings understanding barbellsthe barbell strategy will have a portfolio consisting of short term bonds and long term bonds with no intermediate bonds short term bonds are considered bonds with maturities of five years or less while long term bonds have maturities of 10 years or more long term bonds usually pay higher yields interest rates to compensate the investor for the risk of the long holding period however all fixed rate bonds carry interest rate risk which occurs when market interest rates are rising in comparison to the fixed rate security being held as a result a bondholder might earn a lower yield compared to the market in a rising rate environment long term bonds carry higher interest rate risk than short term bonds since short term maturity investments allow the investor to reinvest more frequently comparably rated securities carry the lower yield with the shorter holding requirements asset allocation with the barbell strategythe traditional notion of the barbell strategy calls for investors to hold very safe fixed income investments however the allocation can be mixed between risky and low risk assets also the weightings the overall impact of one asset on the entire portfolio for the bonds on both sides of the barbell don t have to be fixed at 50 adjustments to the ratio on each end can shift as market conditions require the barbell strategy can be structured using stock portfolios with half the portfolio anchored in bonds and the other half in stocks the strategy could also be structured to include less risky stocks such as large stable companies while the other half of the barbell might be in riskier stocks such as emerging market equities getting the best of both bond worldsthe barbell strategy attempts to get the best of both worlds by allowing investors to invest in short term bonds taking advantage of current rates while also holding long term bonds that pay high yields if interest rates rise the bond investor will have less interest rate risk since the short term bonds will be rolled over or reinvested into new short term bonds at the higher rates for example suppose an investor holds a two year bond that pays a 1 yield market interest rates rise so that current two year bonds now yield 3 the investor allows the existing two year bond to mature and uses those proceeds to buy a new issue two year bond paying the 3 yield any long term bonds held in the investor s portfolio remain untouched until maturity as a result a barbell investment strategy is an active form of portfolio management as it requires frequent monitoring short term bonds must be continuously rolled over into other short term instruments as they mature the barbell strategy also offers diversification and reduces risk while retaining the potential to obtain higher returns if rates rise the investor will have the opportunity to reinvest the proceeds of the shorter term bonds at the higher rates short term securities also provide liquidity for the investor and flexibility to deal with emergencies since they mature frequently reduces interest rate risk since short term bonds can be reinvested in a rising rate environmentincludes long term bonds which usually deliver higher yields than shorter term bondsoffers diversification between short term and long term maturitiescan be customized to hold a mix of equities and bondsinterest rate risk can occur if the long term bonds pay lower yields than the marketlong term bonds held to maturity tie up funds and limit cash flowinflation risk exists if prices are rising at a faster pace than the portfolio s yieldmixing equities and bonds can increase market risk and volatilityrisks from the barbell strategythe barbell investment strategy still has some interest rate risk even though the investor is holding long term bonds with higher yields than the shorter maturities if those long term bonds were purchased when yields were low and rates rise afterward the investor is stuck with 10 to 30 year bonds at yields much lower than the market the investor must hope that the bond yields will be comparable to the market over the long term alternatively they may realize the loss sell the lower yielding bond and buy a replacement paying the higher yield also since the barbell strategy does not invest in medium term bonds with intermediate maturities of five to 10 years investors might miss out if rates are higher for those maturities for example investors would be holding two year and 10 year bonds while the five year or seven year bonds might be paying higher yields all bonds have inflationary risks inflation is an economic concept that measures the rate at which the price level of a basket of standard goods and services increases over a specific period while it is possible to find variable rate bonds for the most part they are fixed rate securities fixed rate bonds might not keep up with inflation imagine that inflation rises by 3 but the bondholder has bonds paying 2 in real terms they have a net loss of 1 finally investors also face reinvestment risk which happens when market interest rates are below what they were earning on their debt holdings in this instance let s say the investor was receiving 3 interest on a note that matured and returned the principal market rates have fallen to 2 now the investor will not be able to find replacement securities that pay the higher 3 return without going after riskier lower credit worthy bonds real world example of the barbell strategyas an example let s say an asset allocation barbell consists of 50 safe conservative investments such as treasury bonds on one end and 50 stocks on the other end assume that market sentiment has become increasingly positive in the short term and it is likely the market is at the beginning of a broad rally the investments at the aggressive equity end of the barbell perform well as the rally proceeds and the market risk rises the investor can realize their gains and trim exposure to the high risk side of the barbell perhaps they sell a 10 portion of the equity holdings and allocate the proceeds to the low risk fixed income securities the adjusted allocation is now 40 stocks to 60 bonds | |
what is a bar chart | bar charts consist of multiple price bars with each bar illustrating how the price of an asset or security moved over a specified time period each bar typically shows opening high low and closing ohlc prices although this may be adjusted to show only the high low and close hlc understanding bar chartsa bar chart is a collection of price bars with each bar showing price movements for a given period each bar has a vertical line that shows the highest and lowest prices reached during the period the opening price is marked by a small horizontal line on the left of the vertical line and the closing price is marked by a small horizontal line on the right of the vertical line if the closing price is above the opening price the bar may be colored black or green conversely if the close is below the open the price dropped during that period so it could be colored red color coding the bars helps traders see trends and price movements more clearly color coding is available as an option in most charting platforms technical analysts use bar charts or other chart types such as candlestick or line charts to monitor price action which aids in trading decisions bar charts allow traders to analyze trends spot potential trend reversals and monitor volatility and price movements traders and investors decide which period they want to analyze a 1 minute bar chart which shows a new price bar each minute would be useful for a day trader but not an investor a weekly bar chart which shows a new bar for each week of price movement may be appropriate for a long term investor but not so much for a day trader interpreting bar chartsbecause a bar chart shows the opening high low and closing prices for each period there is a lot of information that traders and investors can utilize long vertical bars show there was a big price difference between the high and low of the period that means volatility increased during that period when a bar has very small vertical bars it means there is little volatility if there is a large distance between the open and close it means the price made a significant move if the close is far above the open it shows buyers were very active during the period which may indicate more buying in future periods is forthcoming if the close is very near the open it shows there was not a lot of conviction in the price movement during the period the location of the close relative to the high and low may also provide valuable information if an asset rallied higher during the period but the close was well below the high it signals that toward the end of the period sellers came in that is less bullish than if the asset closed near its high for the period if the bar chart is color coded based on whether the price rises or falls during the period the colors can provide information at a glance an overall uptrend is typically represented by more green black bars downtrends on the other hand are typically represented by more red bars bar charts vs candlestick chartsbar charts are very similar to japanese candlestick charts the two chart types show the same information but in different ways a bar chart is composed of a vertical line with small horizontal lines on the left and right that show the open and close candlesticks also have a vertical line showing the high and low of the period called a shadow or wick but the difference between the open and close is represented by a thicker portion called a real body the body is shaded in or colored red if the close is below the open and shaded in or colored white or green if the close is above the open while the information is the same the visual look of the two chart types is different example of a bar chartthe following image is a bar chart for the spdr s p 500 spy etf during declines the bars typically get longer showing an increase in volatility declines are also marked by more down red price bars compared to up green bars image by sabrina jiang investopedia 2021as the price rises there tend to be more green bars than red bars this helps to visually spot the trend even though there are typically red and green bars during an uptrend or downtrend one is more dominant this is how prices move in order for the price to move higher within an uptrend the price bars will need to reflect that by moving higher as well on average if the price starts moving lower on average by creating more red bars then the price is moving into a pullback or a trend reversal | |
which charts are used in technical analysis | there are three charts used in technical analysis bar line and candlestick all three monitor the movements of an asset s price helping traders discover price trends and make buying and selling decisions | |
how do you read a bar chart for trading | the range between the high price and low price of an asset is represented by the vertical height of a bar chart this bar uses horizontal lines to note the opening and closing prices | |
what is a bar chart in technical analysis | in technical analysis a bar chart is a way for a trader to monitor the price movement of an asset and spot trends in order to make trading decisions a bar chart shows the opening high low and closing prices of an asset on a trading day the bottom linein technical analysis bar charts are used by traders to monitor price movements in order to make trading decisions particularly for entry and exit points bar charts help traders notice trends in the price movement of an asset the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what is a bare trust | a bare trust is a basic trust in which the beneficiary has the absolute right to the capital and assets within the trust as well as the income generated from these assets trust assets are held in the name of a trustee who has the responsibility of managing the trust assets prudently so as to generate maximum benefit for the beneficiaries or as lawfully directed by beneficiaries or the trust s creator however the trustee has no say in how or when the trust s capital or income is distributed the united states does not allow the creation of bare trusts but they can be set up in canada or in the united kingdom understanding bare trustsalso known as simple trusts or naked trusts bare trusts are widely used by parents and grandparents to transfer assets to their children or grandchildren bare trust rules allow beneficiaries to decide when they want to recover the trust s assets as long as they are at least 18 years of age in the united kingdom beneficiaries can use the capital and income they inherit from a bare trust any way they please a bare trust is established using a deed of settlement or a declaration of trust in the simplest form of a bare trust the assets bequeathed by the individual who set up the bare trust are owned by the trustee and beneficiary but the trustee in a bare trust has no responsibilities or powers they act per the beneficiary s instructions there are key differences between a bare trust and other types of trusts income generated from trust assets in the form of interest dividends and rent is taxed to the beneficiary because they are the legal owner of these assets this stipulation can offer beneficiaries substantial tax relief if they are low earning individuals as tax policies typically favor individuals over trusts beneficiaries would have to report income generated by the trust assets as well as capital gains that exceed the annual exemption in their self assessment tax returns this tax will be levied on the trust s creator or settlor however if the beneficiary is under the age of 18 for example a grandparent opening a bare trust for an infant grandchild would have to pay taxes on the income generated by trust assets until the infant beneficiary turns 18 inheritance tax implications of bare trustsbeneficiaries may also be responsible for paying inheritance tax if the trust settlor dies within seven years of establishing the trust because bare trusts are treated by tax authorities as potentially exempt transfers no inheritance tax will be owed however if the settlor outlives those seven years there is no tax implication for the individual who sets up a bare trust because they give up legal title to the assets when they are transferred to the trust once a beneficiary or beneficiaries for a bare trust are set the decision can t be reversed | |
what is a barrel of oil equivalent boe | a barrel of oil equivalent boe is a term used to summarize the amount of energy that is equivalent to the amount of energy found in a barrel of crude oil by encompassing different types of energy resources into one figure analysts investors and management can assess the total amount of energy the firm can access this is also known as crude oil equivalent coe many oil companies produce both oil and gas among other petroleum products but the unit of measure for each is different oil is measured in barrels and natural gas is measured in billions of cubic feet bcfe to help facilitate like for like comparisons the industry standardized natural gas production into equivalent barrels of oil one barrel of oil is generally deemed to have the same amount of energy content as 6 000 cubic feet of natural gas so this quantity of natural gas is equivalent to one barrel of oil boe can be compared with natural gas equivalent which translates the energy in an amount of oil or other energy product into that of gas understanding a barrel of oil equivalent boe the boe is frequently used when exploration and production companies are reporting the total amount of reserves they have oil and natural gas are formed through the same geological processes therefore the two energy commodities are often found together many energy companies have a mixed reserve base and they need a way to communicate the total energy content of their reserves in a manner that is easily understood they can accomplish this by converting all of their reserves to boe an energy company s primary asset is the amount of energy it owns so an energy company bases its financial decisions and planning on its reserve base for investors a company s reserves are important in assessing the value of the company and determining whether or not the company is a good investment both investors and companies want to see a company s total energy resource increase over time representing reserves in boe facilitates the comparison of total energy assets over time and against other similar energy companies it would be more complicated to compare a company s energy assets over time and against other companies if natural gas and oil were presented separately calculating barrel of oil equivalentsconverting assets to boe is fairly simple in terms of volume oil is represented per barrel and natural gas is represented per thousand cubic feet mcf there are 42 gallons approximately 159 liters in one barrel of oil the energy contained in a barrel of oil is approximately 5 8 million british thermal units mbtus or 1 700 kilowatt hours kwh of energy this is an approximate measure because different grades of oil have slightly different energy equivalents one mcf of natural gas contains approximately one sixth of the energy of a barrel of oil therefore 6 000 cubic feet of natural gas 6 mcf have the energy equivalent of one barrel of oil for large quantities of energy boe can be represented at kilo barrels of oil equivalent kboe which is 1 000 boe the society of petroleum engineers provides conversion tables that help illustrate unit equivalencies and some of the factors that affect comparison and conversion barrel of oil equivalents and productionboe also comes up when communicating daily energy production and consumption this is expressed in barrels of oil equivalent per day boe d barrels of oil equivalent per day is a term that is used often in conjunction with the production or distribution of crude oil and natural gas boe d is important to the financial community because it is used as a way to help determine the value of a company there are several different metrics that equity and bond analysts use to evaluate the performance of an oil company first is a company s total production which is calculated on a total equivalent barrel basis this helps to determine the scale of the business companies that produce little oil and a lot of natural gas could be unfairly evaluated if equivalent barrels were not counted | |
what is barrel of oil equivalents boe in economics | oil is measured in barrels and natural gas is measured in cubic feet to help facilitate like for like comparisons the industry standardized natural gas production into equivalent barrels of oil | |
how do i calculate boe | one barrel of oil is standardized to have the same amount of energy content as 6 000 cubic feet of natural gas so this quantity of natural gas is equivalent to one barrel of oil | |
why is a barrel of oil 42 gallons | the 42 gallon barrel was a commonly used standard prior to the 18th century this sized container was used for shipping everything from fish molasses soap butter wine and whale oil when filled with oil instead of fish or other commodities a 42 gallon tierce weighed 300 pounds the 42 gallon oil barrel was officially adopted in 1866 1 | |
how much crude oil does it take to make one gallon of gasoline | crude oil is refined into various end products including gasoline used in cars refineries use approximately 2 15 gallons of crude oil to generate one gallon of gasoline 2the bottom linea barrel of oil equivalent boe is basically the amount of energy contained in a barrel of crude oil this unit of measurement is a way of standardizing different forms of energy resources oil natural gas coal and renewables to a barrel of oil s energy so they can be easily compared the boe is frequently used in the oil and gas industry for example when exploration and production companies are reporting the total amount of reserves they have investors can also use the boe to know about a company s reserves and thus assess the value of the company and determine whether or not it is a good investment | |
what does barrels of oil equivalent per day mean | barrels of oil equivalent per day boe d is a term that is used often in conjunction with the production or distribution of crude oil and natural gas many oil companies produce both of these commodities but the unit of measure for each is different oil is measured in barrels and natural gas is measured in cubic feet to help facilitate like for like comparisons the industry standardized natural gas production into equivalent barrels of oil one barrel of oil is generally deemed to have the same amount of energy content as 6 000 cubic feet of natural gas so this quantity of natural gas is equivalent to one barrel of oil | |
when measuring a company s natural gas production output management often wants to know how many equivalent barrels of oil they are producing this makes it easier to compare themselves to other industry participants the society of petroleum engineers provides conversion tables that help illustrate unit equivalencies and some of the factors that affect comparison and conversion | understanding barrels of oil equivalent per day boe d large oil producers are evaluated and refer to their production by the number of cubic feet of natural gas and or by the barrels of oil equivalent they produce per day this is an industry standard and a way that investors can compare the production and or the reserves of two oil gas companies boe d is important to the financial community because it is used as a way to help determine the value of a company there are several different metrics equity and bond analysts use to evaluate the performance of an oil company first is a company s total production which is calculated on a total equivalent barrel basis this helps to determine the scale of the business companies that produce little oil and a lot of natural gas could be unfairly evaluated if equivalent barrels were not counted another important measure of a company is the size of its reserves equivalent barrels play an important role here too because excluding natural gas reserves can unfairly impact the size of a company when banks are determining the size of a loan to extend it is important to consider the total size of the company s reserve base converting natural gas reserves to equivalent barrels is an easy to understand like for like metric that helps to determine the amount of debt a company has relative to its reserve base if this isn t evaluated correctly a company can be unfairly impacted with higher borrowing costs | |
what is a barrier option | a barrier option is a type of derivative where the payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price a barrier option can be a knock out meaning it expires worthless if the underlying exceeds a certain price limiting profits for the holder and limiting losses for the writer it can also be a knock in meaning it has no value until the underlying reaches a certain price barrier options are considered exotic options because they are more complex than basic american or european options barrier options are also considered a type of path dependent option because their value fluctuates as the underlying value changes during the option s contract term in other words a barrier option s payoff is based on the underlying asset s price path the option becomes worthless or may be activated upon the crossing of a price point barrier types of barrier optionsbarrier options are typically classified as either knock in or knock out a knock in option is a type of barrier option where the rights associated with that option only come into existence when the price of the underlying security reaches a specified barrier during the option s life once a barrier is knocked in or comes into existence the option remains in existence until it expires knock in options may be classified as up and in or down and in in an up and in barrier option the option only comes into existence if the price of the underlying asset rises above the pre specified barrier which is set above the underlying s initial price conversely a down and in barrier option only comes into existence when the underlying asset price moves below a pre determined barrier that is set below the underlying s initial price contrary to knock in barrier options knock out barrier options cease to exist if the underlying asset reaches a barrier during the life of the option knock out barrier options may be classified as up and out or down and out an up and out option ceases to exist when the underlying security moves above a barrier that is set above the underlying s initial price a down and out option ceases to exist when the underlying asset moves below a barrier that is set below the underlying s initial price if an underlying asset reaches the barrier at any time during the option s life the option is knocked out or terminated other types of barrier optionsother variants of the barrier options described above are possible here are three of them reasons to trade barrier optionsbecause barrier options have additional conditions built in they tend to have cheaper premiums than comparable options with no barriers therefore if a trader believes the barrier is unlikely to be reached then they may opt to buy a knock out option for example since it has a lower premium and the barrier condition is unlikely to affect them someone who wants to hedge a position but only if the price of the underlying reaches a specific level may opt to use knock in options the lower premium of the barrier option may make this more appealing than using non barrier american or european options examples of barrier optionshere are two examples of barrier options described above assume an investor purchases an up and in call option with a strike price of 60 and a barrier of 65 when the underlying stock is trading at 55 the option would not come into existence until the underlying stock price moved above 65 while the investor pays for the option and the potential that it could become valuable the option only becomes applicable if the underlying reaches 65 if it doesn t the option is never triggered and the option buyer loses what they paid for the option assume a trader purchased an up and out put option with a barrier of 25 and a strike price of 20 when the underlying security was trading at 18 the underlying security rises above 25 during the life of the option and therefore the option ceases to exist the option is now worthless even if it only touched 25 briefly and then dropped back below | |
what are exotic options | an exotic option is a type of derivative contract that differs from the more traditional american and european options in their payment structure expiration date and strike price exotic options are also more complex provide more investment alternatives and can be customized to meet the investor s risk tolerance and goals | |
what s the difference between american and european options | an american option allows holders to exercise their rights at any time before and including the expiration date a european option on the other hand only allows execution on the day of expiration | |
what are the benefits of barrier options | the main advantage of barrier options is that they have lower premiums for the option buyer than standard options they also carry less risk for the option seller and provide investors with more freedom and flexibility to set the terms of their contracts | |
what are barriers to entry | in economics barriers to entry are factors that can prevent or impede newcomers to a market or industry sector as such they can limit competition barriers to entry can include high startup costs regulatory hurdles or other obstacles that prevent new competitors from easily entering a business sector they benefit existing firms because they protect their market share and ability to generate revenues and profits common barriers to entry include special tax benefits to existing firms patent protections strong brand identity customer loyalty and high customer switching costs other barriers include the need for new companies to obtain licenses or regulatory clearance before operation investopedia julie bangunderstanding barriers to entrysome barriers to entry exist because of government intervention while others occur naturally within a free market often companies lobby the government to erect new barriers to entry ostensibly this is done to protect the integrity of the industry and prevent new entrants from introducing inferior products into the market generally firms favor barriers to entry in order to limit competition and claim a larger market share when they are already comfortably ensconced in an industry other barriers to entry occur naturally often evolving over time as certain industry players establish dominance barriers to entry are often classified as primary or ancillary a primary barrier to entry presents as a barrier alone for instance in the case of steep startup costs an ancillary barrier is not a barrier in and of itself rather combined with other barriers it weakens a potential firm s ability to enter the industry in other words it reinforces other barriers barriers to entry may be natural high startup costs to drill a new oil well or created by governments licensing fees or patents stand in the way or by other firms monopolists can buy or compete away startups government barriers to entryindustries heavily regulated by the government are usually the most difficult to penetrate examples include commercial airlines defense contractors and cable companies the government creates formidable barriers to entry for varying reasons in the case of commercial airlines not only are regulations strict but the government restricts new entrants to limit air traffic and simplify monitoring 1 cable companies are heavily regulated and limited because their infrastructure requires extensive public land use 2sometimes the government imposes barriers to entry not by necessity but because of lobbying pressure from existing firms for example one state requires government licensing to become a florist and two states and washington d c require government licensing to become an interior designer 34 critics assert that regulations on such industries are needless accomplishing nothing but limiting competition and stifling entrepreneurship natural barriers to entrybarriers to entry can also form naturally as the dynamics of an industry take shape brand identity and customer loyalty serve as barriers to entry for potential entrants certain brands such as kleenex and jell o have identities so strong that their brand names are synonymous with the types of products they manufacture high consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a switch barriers to entry may also be referred to as barriers to competition entry barriers or market entry barriers industry specific barriers to entryindustry sectors also have their own barriers to entry that stem from the nature of the business as well as the position of powerful incumbents before any company can make and market even a generic pharmaceutical drug in the united states it must be granted a special authorization by the fda the fda cites that even the most important drugs for general public health may take up to six months to approve although the standard review timeline is around 10 months more complex drugs or applications may be required to enter this review cycle multiple times due to revisions 56moreover just 18 9 of applications for generic drugs were approved in the first cycle in 2023 7 each application is incredibly political and even more expensive in the meantime established pharmaceutical companies can replicate the product awaiting review and then file a special 180 day market exclusivity patent which essentially steals the product and creates a temporary monopoly 8it may take billions of dollars to bring a drug to market equally as important it can take up to 10 years for a drug to be approved for a prescription even if a startup company had the capital on hand to develop and test the drug according to fda rules it still might not receive revenue for 10 years 9 lastly ultimate success is far from guaranteed between 2011 to 2020 the likelihood of approval for development candidates for just the first phase was 7 9 10consumer electronics with mass popularity are more susceptible to economies of scale and scope as barriers economies of scale mean that an established company can easily produce and distribute a few more units of existing products cheaply because overhead costs such as management and real estate are spread over a large number of units a small firm attempting to produce these same few units must divide overhead costs by its relatively small number of units making each unit very costly to produce established electronics companies such as apple aapl may strategically build in switching costs to retain customers these strategies may include contracts that are costly and complicated to terminate or software and data storage that cannot be transferred to new electronic devices this is prevalent in the smartphone industry wherein consumers may pay termination fees and face the cost of reacquiring applications when they consider switching phone service providers 11the barriers to entry in the oil and gas sector are extremely strong and include high resource ownership high startup costs patents and copyrights in association with proprietary technology government environmental regulations and high fixed operating costs high startup costs mean that very few companies even attempt to enter the sector this lowers potential competition from the start in addition proprietary technology forces even those with high startup capital to face an immediate operating disadvantage upon entering the sector high fixed operating costs make companies with startup capital wary of entering the sector local and foreign governments also force companies within the industry to closely comply with environmental regulations these regulations often require capital to comply forcing smaller companies out of the sector 12it is generally very expensive to establish a new financial services company high fixed costs and large sunk costs in the production of wholesale financial services make it difficult for startups to compete with large firms that have scale efficiencies regulatory barriers exist between commercial banks investment banks and other institutions and in many cases the costs of compliance and threat of litigation are sufficient to deter new products or firms from entering the market compliance and licensure costs are disproportionately damaging to smaller firms a large cap financial services provider does not have to allocate as large of a percentage of its resources to ensure it does not run into trouble with the securities and exchange commission sec truth in lending act tila fair debt collection practices act fdcpa consumer financial protection bureau cfpb federal deposit insurance corporation fdic or a host of other agencies and laws | |
how to overcome barriers to entry | companies deploy a number of strategies to avoid or overcome barriers to entry here are some common barriers and potential solutions to address them if governments are employing trade sanctions it may be more difficult to import or export goods in relation to that country companies may seek different markets to work with or seek which products are specifically excluded from trade sanctions if all else fails a company may simply delay the timing of transacting with the country with the sanction as many government sanctions are temporary companies may preemptively decide they want to burden the consumer with additional barrier charges such as import tariffs or taxes companies may also seek ways to avoid taxes such as partnering with local organizations to manufacture goods or develop value added activities in the local market so the imported goods are assessed at a lower value and assessed lower fees a company seeking to join or create a brand new market may simply not have enough information needed to feel it may be successful for these types of barriers it may be best for the company to develop a minimum viable product for market research this test product may be used to elicit consumer feedback as well as shape financial planning expectations a company may also consider acquiring an existing company within the market it seeks to join not only will this company have already overcome some if not all aspects of the barriers to entry the company may have knowledge and information useful to the long term success of the company in some cases the market leader position is so advanced as to be nearly impossible to catch in the short term for these barriers companies may consider using a disruptive pricing model and even incurring a short term loss to steal long term customers a company may also set difference objectives such as be the lowest cost producer though many costs likely can t be overcome a company may consider using open source software instead of custom proprietary software to cut costs the company may seek short term leases instead of capital investments for equipment to gauge financial success in the near term the company may also choose to only manufacture on demand or on order to avoid over committing resources that could have been used elsewhere | |
what are some barriers to entry | the most obvious barriers to entry are high startup costs and regulatory hurdles which include the need for new companies to obtain licenses or regulatory clearance before operation also industries heavily regulated by the government are usually the most difficult to penetrate other forms of barrier to entry that prevent new competitors from easily entering a business sector include special tax benefits to existing firms patent protections strong brand identity customer loyalty and high customer switching costs | |
why would a government create a barrier to entry | governments create barriers to entry for varying reasons in some cases such as consumer protection laws these barriers are intended to protect public safety but have the unintended effect of favoring incumbent businesses in other cases such as broadcasting licenses or commercial airlines the barriers are due to the inherent scarcity of the public resources needed by these industries in some cases the government may impose barriers to entry explicitly to protect favored industries | |
what are natural barriers to entry | barriers to entry can also form naturally as the dynamics of an industry take shape brand identity and customer loyalty serve as barriers to entry for potential entrants certain brands such as kleenex and jell o have identities so strong that their brand names are synonymous with the types of products they manufacture high consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a change switch | |
which industries have high barriers to entry | industries requiring heavy regulation or high upfront capital often have the highest barriers to entry telecommunications transport i e car or airplane casinos parcel delivery services pharmaceutical electronics oil and gas and financial services often all require substantial initial investments each of those industries is also heavily regulated or requires substantial oversight from governing bodies the bottom linethere are many aspects of many industries that prevent companies from entering into a market these barriers to entry may be set by government policy created due to high financial cost or occur naturally due to the industry itself for companies already within the industry barriers to entry protects against competition easily stealing market share for companies seeking entry it ll be a larger hurdle trying to overcome the hurdles preventing easy access into an industry | |
what is barter | barter is an act of trading goods or services between two or more parties without the use of money or a monetary medium such as a credit card in essence bartering involves the provision of one good or service by one party in return for another good or service from another party a simple example of a barter arrangement is a carpenter who builds a fence for a farmer instead of the farmer paying the builder 1 000 in cash for labor and materials the farmer could instead recompense the carpenter with 1 000 worth of crops or foodstuffs investopedia sydney saporitoprinciples of barteringbartering is based on a simple concept two individuals negotiate to determine the relative value of their goods and services and offer them to one another in an even exchange it is the oldest form of commerce dating back to a time before hard currency even existed while the current senior generation bartered with the limited goods they had on hand i e produce and livestock or services they could personally render i e carpentry and tailoring to someone they knew today most americans have access to a nearly unlimited source of potential bartering partners through the internet virtually any item or service can be bartered if the parties involved agree to the terms of the trade individuals companies and countries can all benefit from such cashless exchanges particularly if they are lacking hard currency to obtain goods and services while it is mostly associated with commerce during ancient times bartering has been reinvented in this era through the internet benefits of barteringbartering allows individuals to trade items that they own but are not using for items that they need while keeping their cash on hand for expenses that cannot be paid through bartering such as a mortgage medical bills and utilities bartering can have a psychological benefit because it can create a deeper personal relationship between trading partners than a typical monetized transaction bartering can also help people build professional networks and market their businesses in an economic crunch bartering can be a great way to get the goods and services you need without having to pull money out of your pocket on a broader level bartering can result in the optimal allocation of resources by exchanging goods in quantities that represent similar values bartering can also help economies achieve equilibrium which occurs when demand equals supply | |
when two people each have items the other wants both parties can determine the values of the items and provide the amount that results in an optimal allocation of resources | for instance if an individual has 20 pounds of rice that they value at 10 they can exchange it with another individual who needs rice and who has something that the individual wants that s valued at 10 a person can also exchange an item for something that the individual does not need because there is a ready market to dispose of that item | |
how companies barter | companies may want to barter their products for other products because they do not have the credit or cash to buy those goods it is an efficient way to trade because the risks of foreign exchange are eliminated the most common contemporary example of business to business b2b barter transactions is an exchange of advertising time or space it is typical for smaller firms to trade the rights to advertise on each others business spaces bartering also occurs among companies and individuals for example an accounting firm can provide an accounting report for an electrician in exchange for having its offices rewired by the electrician | |
how countries barter | countries also engage in bartering when they are deeply in debt and are unable to obtain financing goods are exported in exchange for goods that the country needs in this way countries manage trade deficits and reduce the amount of debt they incur the estimated annual dollar range of barter transactions in the u s according to the international reciprocal trade association irta 2bartering during downturnsonline barter exchanges became especially popular with small businesses after the 2008 financial crisis which culminated in the great recession as prospects and sales dwindled small businesses increasingly turned to barter exchanges to generate revenue these exchanges enabled members to find new customers for their products and get access to goods and services using unused inventory 3the exchanges also used custom currency which could be hoarded and used to purchase services such as hotel stays during vacations the barter economy during the financial crisis was estimated to have touched 3 billion 3there have been several other examples of bartering growing in popularity during times of economic uncertainty for instance in 2020 a year associated with covid 19 enforced lockdowns the bbc reported that bartering in the united kingdom had become much more widespread moreover in 2022 it was reported that frustrated argentines against a backdrop of high inflation and low wages introduced barter fairs in and around buenos aires 45tax implications of barteringthe internal revenue service irs considers bartering a form of revenue and something that must be reported as taxable income 1under the u s s generally accepted accounting principles gaap businesses are expected to estimate the fair market value of their bartered goods or services this is done by referring to past cash transactions of similar goods or services and using that historical revenue as a reportable value when it is not possible to accurately calculate the value most bartered goods are reported based on their carrying value 61for the irs estimated barter dollars are identical to real dollars for tax purposes which means that barter arrangements are considered the same as cash payments the barter dollars are reported as income and taxed in the fiscal year in which the barter occurred 17the irs further distinguishes between different forms of bartering and there are slightly different rules for each type 7 most nonmonetary business income is reported on form 1040 schedule c profit or loss from business 8since bartering has tax implications it s worth consulting a tax professional before making any significant commitments 1 | |
how to barter | so how can an individual successfully barter here are some tips identify your resources what items do you have that you could easily part with use a critical eye to go through your home and consider possessions you may have in storage or that another family member or friend is currently using if you would prefer to offer services honestly assess what you could provide for others that they would otherwise pay a professional to do it could be a skill or a talent or even a hobby such as photography put a price tag on it successful bartering must result in the satisfaction of both parties this can only happen if the items bartered are realistically valued if you have an item you would like to trade obtain an accurate appraisal an item is only worth what someone is willing to pay for it therefore do your research and look at the selling section on ebay to find out what online buyers have paid for similar items to value a service call around for local estimates from professionals to find out how competitively you can price your abilities remember to be honest about your skills and to factor in costs associated with the exchange for example shipping for goods or materials for trading a skill identify your needs be specific about what you are looking for in a barter exchange in addition to specific items you may need here is a list of potential services that you could barter for search for bartering partners after you know what you have to offer and exactly what you need want in a barter situation find a barter partner if you don t have a specific person or business in mind try word of mouth let your friends colleagues and social network know about your specific need and what you want in a barter situation check online swap markets and online auctions that have a bartering component such as craigslist com check under for sale for the bartering category swapace com and barterquest com also check for local bartering clubs your local chamber of commerce may be able to provide you with information on similar clubs in your area make the deal after you ve found a barter partner get the agreement in writing make sure you detail what services or goods will be involved the date of the exchange or work to be done and any recourse if either party reneges on their part of the deal if you are working through a membership based bartering association they will likely provide all the structure and paperwork you need for the deal limits of barteringbartering does have its limitations much bigger i e chain businesses will not entertain the idea and even smaller organizations may limit the dollar amount of goods or services for which they will barter they may not agree to a 100 barter arrangement and instead require that you make at least partial payment membership based bartering trading exchangessome businesses that may not directly barter with customers might swap goods or services through membership based trading exchanges such as itex or international monetary systems ims by joining a trading network which often charge fees members can trade with other members for barter dollars each transaction is subject to a minimal fee the exchange facilitates the swap and manages the tax components of bartering such as issuing 1099 b forms to participating members you may find a nearby exchange through the international reciprocal trade association irta member directory before you sign up and pay for a membership however make sure that members offer the types of goods and services you need otherwise you may find yourself with barter money or credit that you cannot use | |
what is an example of a barter | a barter transaction could occur say between a plumber and a copywriter in this example the plumber goes to the writer s house to fix some leaking pipes and then rather than asking for payment asks the writer to help pen some promotional materials for the plumber s business instead what we are witnessing here is one service plumbing work being exchanged for another writing without any money changing hands | |
is bartering illegal | bartering is legal in many countries in the world provided it is carried out correctly issues can arise when exchanges aren t declared to local tax authorities in which case the bartering transaction becomes illegal | |
is bartering still used today | absolutely the use of a cashless exchange system is still flourishing today examples of modern forms of bartering include time banking child care cooperatives and house sitting the bottom linebartering is often associated with underdeveloped economies medieval markets and times of old however in reality this ancient custom continues to flourish throughout the world goods or services of similar value are regularly exchanged without cash changing hands from the united states of america all the way to china and technological developments such as the internet have made it easier than ever before to find potential bartering partners and useful services to exchange for | |
what is the base effect | the base effect is the effect that choosing a different reference point for a comparison between two data points can have on the result of the comparison this often involves the use of some kind of ratio or index value between two points in a time series data set but can also apply to cross sectional or other types of data thinking about the base effect in comparing different numbers or pieces of data means considering the question compared to what the choice of the basis for comparison can have a large effect on the apparent result of a comparison if ignored or misunderstood the base effect can lead to a major distortion and possibly mistaken conclusions however if considered carefully it can be leveraged to improve an analyst s understanding of the data and the underlying processes that generate them understanding the base effectthe base effect occurs whenever two data points are compared as a ratio where the current data point or point of interest is divided or expressed as a percentage of another data point the base or point of comparison because the base number makes up the denominator in the comparison comparisons using different base values can yield widely varying results if the base has an abnormally high or low value it can greatly distort the ratio resulting in a potentially deceptive comparison the base effect is most commonly pointed out when discussing comparisons using time series data where the raw data value at one point in time is being compared to another chosen point it can occur whether there is a constant index base to which many values in the series are being compared or when doing a moving period to period comparison choosing the right basis pointthe base effect can work for or against you choosing an inappropriate basis for comparison or ignoring the base effect in a time index can lead to a distorted perception of the magnitude or rate of change of the current point in a data series this is related to the idea of garbage in garbage out if the value of the denominator in a comparison is uncharacteristic or unrepresentative of the overall data trend then the comparison will likewise be unrepresentative of the relationship between the current data point and the data series as a whole and whatever process generates that data for example the base effect can lead to an apparent under or overstatement of figures such as inflation rates or economic growth rates if the point chosen for comparison has an unusually high or low value relative to the current period or the overall data on the other hand understanding the base effect and choosing appropriate bases for the comparison you want to make or at least accounting for the base effect in your comparison can lead to a better understanding of the data or even the underlying process for example comparing monthly data points to their previous values 12 months prior can help filter out seasonal effects alternatively comparing a data point to a long run moving average of its own values can help reveal if the current datum shows an anomalously high or low value inflation as an example of the base effectinflation is often expressed as a month over month figure or a year over year figure typically economists and consumers want to know how much higher or lower prices are today than they were one year ago but a month in which inflation spikes may produce the opposite effect a year later essentially creating the impression that inflation has slowed the distortion in a monthly inflation figure that results from abnormally high or low levels of inflation in the year ago month is an example of the base effect a base effect can make it difficult to accurately assess inflation levels over time it diminishes over time if inflation levels are relatively constant without strong outlier values inflation is calculated based on price levels that are summarized in an index the index may spike in june for example perhaps due to a surge in gasoline prices over the following 11 months the month over month changes may return to normal but when june arrives again the following year its price level will be compared to those of a year earlier when the index reflected a one time spike in gasoline prices 1in that case because the index for that month was high the price change this june will be less implying that inflation has become subdued when in fact the small change in the index is just a reflection of the base effect the result of the higher price index value a year earlier | |
what is the base effect in an economy | the base effect in an economy is commonly used to understand inflation if inflation is compared on a monthly or yearly basis the information can become distorted so choosing a base point or base year that is a point earlier in time can help smooth the changes in inflation |
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