instruction
stringlengths 5
1.05k
| output
stringlengths 6
22.3k
| input
stringclasses 1
value |
|---|---|---|
why is the base year always 100 | the cpi value for the base year is always 100 because it is a starting point to measure changes in price a basket of goods in future years will be compared to the base year to measure the increase decrease in price | |
does the base year change | for purposes of calculating inflation the base year does change the base year changes to adjust for changes in the economy over time when that happens all the information is recalculated back to the new base year for consistent reporting the bottom linewithout a basis for comparison data points won t be able to provide meaningful insight a basis point always needs to be selected changing the basis point would alter the meaning of the data as well known as the base effect understanding the base effect and the appropriate reference points to choose can help better understand data make adjustments and adjust policies | |
what is base pay | base pay is the initial salary paid to an employee not including any benefits bonuses or raises it is the rate of compensation an employee receives in exchange for services an employee s base pay can be expressed as an hourly rate or weekly monthly or annual salary understanding base paybase pay does not include all forms of compensation for instance shift differential pay on call pay special assignments and incentive based pay are typically excluded from base pay generally an employee s base pay is the minimum amount they should expect to receive during a specified pay period excluding additional financial or tangible compensation that may increase the total pay above this level in contrast to hourly employees who are compensated for the exact number of hours they work in a pay period a salaried employee is usually expected to work a minimum number of hours in exchange for their base pay some companies do not require salaried employees to keep track of their hours many workers who receive a base salary are exempt from federal labor laws governing overtime compensation 1 consequently they do not receive overtime pay if they work more than the minimum hours required by the employer some positions may necessitate working significantly more hours than the typical 40 hour workweek some salaried employees that make less than 35 568 are entitled to overtime pay for any hours worked over 40 during a week 1base pay vs annual paywhile base pay excludes supplemental compensation received in employment annual income takes into account actual earnings over the year annual pay may be significantly higher than the base pay including bonuses overtime benefits or awards annual pay also factors in any amounts paid by an employer for a worker s medical dental and life insurance policies the sum of these premiums is added to the base rate and other forms of compensation such as overtime or bonuses to calculate the amount of pay received in a calendar year special considerationsbase pay rates vary significantly between professions in general professions requiring advanced education and specialized skill sets pay higher base rates than jobs requiring basic skills in competitive fields employers often offer attractive base pay rates to recruit highly qualified applicants in addition to paying high base salaries companies may woo prospective employees with additional perks including a generous benefits package retirement plan bonuses investment options and tangible rewards such as a company vehicle or paid leisure travel these extras can substantially increase a company s likelihood of hiring and retaining top notch personnel | |
what is military base pay | military base pay also known as basic pay refers to the standard compensation amount received by u s military members military base pay represents the biggest part of a member s total compensation and excludes other forms of compensation such as housing and food allowances active duty pay is based on the member s pay grade and their number of years of service 2 | |
how is military base pay calculated | a military member s monthly base pay is calculated based on their pay grade and the number of years of service military base pay is the military member s basic compensation excluding additional allowances base pay does not include other forms of compensation that the member receives such as the basic allowance for housing bah clothing bonuses hazard pay and cost of living adjustment cola annual increases to a member s base pay are calculated by measuring the increase in private sector wages and salaries as reflected in the employment cost index eci 3 | |
what is e 5 base pay | e 5 base pay is the standard compensation received by an enlisted member of the u s military with the e 5 pay grade e 5 base pay changes annually due to annual pay raises in 2021 the e 5 base pay for an active duty member ranged from 2 541 60 to 3 606 90 per month 4 | |
what is a base year | a base year is the first of a series of years in an economic or financial index in this context it is typically set to an arbitrary level of 100 new up to date base years are periodically introduced to keep data current in a particular index base years are also used to measure the growth of a company any year can serve as a base year but analysts typically choose recent years understanding base yeara base year is used for comparison in the measure of business activity or economic or financial index for example to find the rate of inflation between 2016 and 2021 2016 is the base year or the first year in the time set the base year can also describe the starting point from a point of growth or a baseline for calculating same store sales many financial ratios are based on growth because analysts want to know how much a particular number changes from one period to the next the growth rate equation is current year base year base year the past in ratio analysis is the base period 1growth analysis is a commonly used way to describe company performance particularly for sales if company a grows sales from 100 000 to 140 000 this implies that the company increased sales by 40 where 100 000 represents the base year value investors can perform a base year analysis of a company s financial statements to determine whether or not its bottom line is growing consistently base year and same store sales calculationscompanies are always looking for ways to increase sales one way that companies grow sales is by opening new stores or branches new stores have higher growth rates because they are starting from zero and each new store sale is an incremental sale as a result analysts look at additional factors such as how much sales grew on a same store sales basis this is also referred to as measuring comparable stores or comp store sales in the calculation of comp store sales the base year represents the starting point for the number of stores and the amount of sales those stores generated the store sold an average of 1 000 if company a has 100 stores that sold a total of 100 000 last year this is the base year following this method the base year determines the base sales and the base number of stores 2let s say that company a opens 100 more stores in the following year and these stores generate 50 000 but same store sales decline in value by 10 from 100 000 to 90 000 the company can report a 40 growth in sales from 100 000 to 140 000 but savvy analysts are more interested in the 10 decline in same store sales | |
how is a base year used | base years are used to compare or measure business activity or an economic or financial index for example a base year is used in the calculation of same store sales base years are also used in calculating gross domestic product gdp | |
how is a base year chosen | a base year is determined depending on the analysis being performed for example a company established in 2021 could use that year to measure sales growth moving forward | |
how do you calculate growth rate | a growth rate can be calculated by dividing the difference between the ending and starting values for the period being analyzed and dividing that by the starting value the growth rate formula is current year base year base year the base year represents the starting point from which to determine growth 3the bottom linebase years are used in economic and financial indexes as well as to measure the growth of a company the base year chosen depends on the analysis being conducted when researching stocks investors can conduct a base year analysis to track a company s growth or lack of as part of research to determine whether or not they should invest in it | |
what is basel i | basel i is a set of international banking regulations established by the basel committee on banking supervision bcbs it prescribes minimum capital requirements for financial institutions with the goal of minimizing credit risk under basel i banks that operate internationally were required to maintain at least a minimum amount of capital 8 based on their risk weighted assets basel i is the first of three sets of regulations known individually as basel i ii and iii and collectively as the basel accords history of the basel committeethe bcbs was founded in 1974 as an international forum where members could cooperate on banking supervision matters the bcbs says it aims to enhance financial stability by improving supervisory know how and the quality of banking supervision worldwide 1 this is done through regulations known as accords basel i the committee s first accord was issued in 1988 and focused mainly on credit risk by creating a classification system for bank assets the bcbs regulations do not have legal force members are responsible for implementation in their home countries basel i originally called for a minimum ratio of capital to risk weighted assets of 8 which was to be implemented by the end of 1992 in september 1993 the bcbs announced that g10 countries banks with material international banking business were meeting the minimum requirements set out in basel i according to the bcbs the minimum capital ratio framework was adopted not only in its member countries but in virtually every other country with active international banks benefits of basel ibasel i was developed to mitigate risk to consumers financial institutions and the economy at large basel ii brought forth some years later lessened the capital reserve requirements for banks that came under some criticism but because basel ii did not supersede basel i many banks continued to operate under the original basel i framework later supplemented by basel iii addendums perhaps the greatest legacy of basel i was that it contributed to the ongoing adjustment of banking regulations and best practices paving the way for further protective measures criticism of basel ibasel i has been criticized for hampering bank activity and slowing growth in the overall world economy by making less capital available for lending critics on the other side of that argument maintain that the basel i reforms did not go far enough both basel i and basel ii were faulted for their failure to avert the financial crisis and great recession of 2007 to 2009 events that became a catalyst for basel iii basel i was developed to mitigate risk to consumers financial institutions and the economy at large requirements for basel ithe basel i classification system groups a bank s assets into five risk categories labeled with the percentages 0 10 20 50 and 100 a bank s assets are assigned to these categories based on the nature of the debtor the 0 risk category consists of cash central bank and government debt and any organisation for economic co operation and development oecd government debt public sector debt can be placed in the 0 10 20 or 50 category depending on the debtor development bank debt oecd bank debt oecd securities firm debt non oecd bank debt under one year of maturity non oecd public sector debt and cash in collection all fall into the 20 category the 50 category is for residential mortgages and the 100 category is represented by private sector debt non oecd bank debt maturity over a year real estate plant and equipment and capital instruments issued at other banks the bank must maintain capital referred to as tier 1 and tier 2 capital equal to at least 8 of its risk weighted assets this is meant to ensure that banks hold an adequate amount of capital to meet their obligations for example if a bank has risk weighted assets of 100 million it is required to maintain capital of at least 8 million tier 1 capital is the most liquid type and represents the core funding of the bank while tier 2 capital includes less liquid hybrid capital instruments loan loss and revaluation reserves as well as undisclosed reserves | |
what is basel i | basel i is the first of three sets of international banking regulations established by the basel committee on banking supervision based in basel switzerland it has since been supplemented by basel ii and basel iii the latter of which is still implemented as of 2022 | |
what is the purpose of basel i | the purpose of basel i was to establish an international standard for how much capital banks must keep in reserve in order to meet their obligations its regulations were intended to enhance the safety and stability of the banking system worldwide | |
how is basel i different from basel ii and basel iii | basel i introduced guidelines for how much capital banks must keep in reserve based on the risk level of their assets basel ii refined those guidelines and added new requirements basel iii further refined the rules based in part on the lessons learned from the worldwide financial crisis of 2007 to 2009 the bottom linebasel i was the earliest of the three basel accords and introduced capital reserve requirements for banks based on the riskiness of their assets it has since been supplemented by basel ii and basel iii | |
what is basel ii | basel ii is a set of international banking regulations first released in 2004 by the basel committee on banking supervision it expanded the rules for minimum capital requirements established under basel i the first international regulatory accord provided a framework for regulatory supervision and set new disclosure requirements for assessing the capital adequacy of banks 1understanding basel iibasel ii is the second of three basel accords it is based on three main pillars minimum capital requirements regulatory supervision and market discipline minimum capital requirements play the most important role in basel ii and obligate banks to maintain certain ratios of capital to their risk weighted assets because banking regulations varied significantly among countries before the introduction of the basel accords the unified framework of basel i and subsequently basel ii helped countries standardize their rules and alleviate market anxiety regarding risks in the banking system the basel framework currently consists of 14 standards 2the basel committee is made up of 45 members from 28 countries and other jurisdictions representing central banks and supervisory authorities 3 it has no legal authority to enforce its rules but relies on the regulators in its member countries to do so those regulators are expected to follow the basel rules in full but also have the discretion to impose even stricter ones 4 for example in the united states the regulators are the board of governors of the federal reserve system the federal reserve bank of new york the office of the comptroller of the currency and the federal deposit insurance corporation 3basel ii requirementsbuilding on basel i basel ii provided guidelines for the calculation of minimum regulatory capital ratios and confirmed the requirement that banks maintain a capital reserve equal to at least 8 of their risk weighted assets basel ii divides the eligible regulatory capital of a bank into three tiers the higher the tier the more secure and liquid its assets tier 1 capital represents the bank s core capital and is composed of common stock as well as disclosed reserves and certain other assets at least 4 of the bank s capital reserve must be in the form of tier 1 assets 5minimum capital requirements play the most important role in basel ii and obligate banks to maintain certain ratios of capital to their risk weighted assets tier 2 is considered supplementary capital and consists of items such as revaluation reserves hybrid instruments and medium and long term subordinated loans tier 3 consists of lower quality unsecured subordinated debt basel ii also refined the definition of risk weighted assets used in calculating whether a bank meets its capital reserve requirements risk weighting is intended to discourage banks from taking on excessive amounts of risk in terms of the assets they hold the main innovation of basel ii in comparison to basel i is that it takes into account the credit rating of assets in determining their risk weights the higher the credit rating the lower the risk weight regulatory supervision and market disciplineregulatory supervision is the second pillar of basel ii and provides a framework for national regulatory bodies to deal with various types of risks including systemic risk liquidity risk and legal risks the market discipline pillar introduces various disclosure requirements for banks risk exposures risk assessment processes and capital adequacy it is intended to foster greater transparency into the soundness of a bank s business practices and allow investors and others to compare banks on equal footing pros and cons of basel iion the plus side basel ii clarified and expanded the regulations introduced by the original basel i accord it also helped regulators begin to address some of the financial innovations and new financial products that had come along since basel i s debut in 1988 basel ii was not entirely successful however and has even been called a miserable failure in its central mission of making the financial world safer 6the subprime mortgage meltdown and great recession of 2008 showed that basel ii underestimated the risks involved in current banking practices and that the financial system was overleveraged and undercapitalized despite basel ii s requirements even the bank for international settlements the organization behind the basel committee on banking supervision today acknowledges the banking sector entered the financial crisis with too much leverage and inadequate liquidity buffers these weaknesses were accompanied by poor governance and risk management as well as inappropriate incentive structures the dangerous combination of these factors was demonstrated by the mispricing of credit and liquidity risks and excess credit growth 1responding to the financial crisis the basel committee issued new risk management and supervision guidelines to strengthen basel ii in 2008 and 2009 those reforms and others issued in 2010 and later represented the beginnings of the next basel accord basel iii which as of 2022 is still being phased in | |
what is basel ii | basel ii is a set of international banking regulations established by the basel committee on banking supervision based in basel switzerland basel ii was released in 2004 with the goal of being phased in over a series of years did basel ii replace basel i basel ii built upon basel i refining and clarifying some of its rules as well as adding new ones but did not replace it altogether | |
what was wrong with basel ii | the beginning of the subprime mortgage meltdown in 2007 and the ensuing worldwide financial crisis showed that the regulations created under basel i and basel ii were inadequate for curtailing the risks that some banks were taking and the dangers they posed to the worldwide financial system basel iii introduced during the financial crisis and still being phased in intends to better address those risks the bottom linebasel ii is the second of the three basel accords developed to create international standards for bank regulation and reduce risk in the worldwide banking system it built on and refined the original basel accord now known as basel i and led to basel iii which aims to address the inadequacies of the two earlier accords | |
what are the basel accords | the basel accords are a series of three sequential banking regulation agreements basel i ii and iii set by the basel committee on bank supervision bcbs the committee provides recommendations on banking and financial regulations specifically concerning capital risk market risk and operational risk the accords ensure that financial institutions have enough capital on account to absorb unexpected losses understanding the basel accordsthe basel accords were developed over several years beginning in the 1980s the bcbs was founded in 1974 as a forum for regular cooperation between its member countries on banking supervisory matters the bcbs describes its original aim as the enhancement of financial stability by improving supervisory knowhow and the quality of banking supervision worldwide later the bcbs turned its attention to monitoring and ensuring the capital adequacy of banks and the banking system the basel i accord was originally organized by central bankers from the g10 countries who were at that time working toward building new international financial structures to replace the recently collapsed bretton woods system the meetings are named basel accords since the bcbs is headquartered in the offices of the bank for international settlements bis located in basel switzerland member countries include australia argentina belgium canada brazil china france hong kong italy germany indonesia india korea the united states the united kingdom luxembourg japan mexico russia saudi arabia switzerland sweden the netherlands singapore south africa turkey and spain basel ithe first basel accord known as basel i was issued in 1988 and focused on the capital adequacy of financial institutions the capital adequacy risk the risk that an unexpected loss would hurt a financial institution categorizes the assets of financial institutions into five risk categories 0 10 20 50 and 100 under basel i banks that operate internationally must maintain capital tier 1 and tier 2 equal to at least 8 of their risk weighted assets this ensures banks hold a certain amount of capital to meet obligations for example if a bank has risk weighted assets of 100 million it is required to maintain capital of at least 8 million tier 1 capital is the most liquid and primary funding source of the bank and tier 2 capital includes less liquid hybrid capital instruments loan loss and revaluation reserves as well as undisclosed reserves basel iithe second basel accord called the revised capital framework but better known as basel ii served as an update of the original accord it focused on three main areas minimum capital requirements supervisory review of an institution s capital adequacy and internal assessment process and the effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices including supervisory review together these areas of focus are known as the three pillars basel ii divided the eligible regulatory capital of a bank from two into three tiers the higher the tier the less subordinated securities a bank is allowed to include in it each tier must be of a certain minimum percentage of the total regulatory capital and is used as a numerator in the calculation of regulatory capital ratios the new tier 3 capital is defined as tertiary capital which many banks hold to support their market risk commodities risk and foreign currency risk derived from trading activities tier 3 capital includes a greater variety of debt than tier 1 and tier 2 capital but is of a much lower quality than either of the two under the basel iii accords tier 3 capital was subsequently rescinded basel iiiin the wake of the lehman brothers collapse of 2008 and the ensuing financial crisis the bcbs decided to update and strengthen the accords the bcbs considered poor governance and risk management inappropriate incentive structures and an overleveraged banking industry as reasons for the collapse in november 2010 an agreement was reached regarding the overall design of the capital and liquidity reform package this agreement is now known as basel iii basel iii is a continuation of the three pillars along with additional requirements and safeguards for example basel iii requires banks to have a minimum amount of common equity and a minimum liquidity ratio basel iii also includes additional requirements for what the accord calls systemically important banks or those financial institutions that are considered too big to fail in doing so it got rid of tier 3 capital considerations the basel iii reforms have now been integrated into the consolidated basel framework which comprises all of the current and forthcoming standards of the basel committee on banking supervision basel iii tier 1 has now been implemented and all but one of the 27 committee member countries participated in the basel iii monitoring exercise held in june 2021 the final basel iii framework includes phase in provisions for the output floor which will start at 50 on jan 1 2023 rising in annual steps of 5 and be fully phased in at the 72 5 level from january 2028 these 2023 onward measures have been referred to as basel 3 1 or basel iv | |
basel iii endgame sounds more like an ominously titled spy thriller sequel than the last stage of u s regulators implementation of reforms meant to ensure the stability of the banking system however the banking industry has depicted the reforms which largely call for the country s largest banks to put aside more capital in reserve to weather financial storms as a threat to the american economy in a lobbying blitz basel iii s supporters have called unprecedented the banking lobby has amassed an army of lobbyists in washington d c and poured millions into a media campaign to denounce the proposed regulations 1 | understanding basel iiithe regulations date to the wake of the 2007 to 2009 financial crisis when financial watchdogs worldwide met to discuss ways to avoid a similar catastrophe in 2009 they agreed through the international basel committee on banking supervision to develop minimum capital leverage and liquidity requirements to ensure major banks could survive another upheaval 2 the final components of basel iii known as basel iii endgame in the united states designed and set to be implemented by regulators at the federal reserve the federal deposit insurance corporation and the office of the comptroller of the currency was sent out for comments in mid 2023 3lobbies like the bank policy institute have taken to the airwaves and online warning that the suggested regulations which targeted only about 37 u s banks with holdings of 100 billion in assets or more would put young families dreams of homeownership and small businesses expansion plans at risk 4 the banks claim the reforms would not make them any more stable and would have knock on effects on their ability to lend funds to those with less credit including minorities who have historically faced problems obtaining credit from american financial institutions 56soon after the end of the commentary period in early 2024 federal regulators were already backtracking on their initial proposals from 2023 which made the rules defenders furious 7 when the heat was on last year you talked a lot about getting tougher on the banks u s senator elizabeth warren told jerome powell chair of the federal reserve during a march 7 2024 congressional hearing now the giant banks are unhappy about that and you ve gone weak kneed on this 8the final regulations are set to be released with enough time to take effect on july 1 2025 at that point a three year phase in of the regulations would begin 9 but what exactly does basel iii entail and why has it led to such heated rhetoric in the financial world below we go through what s in the reforms how they would impact banks and why what happens to basel iii endgame is important for everyday investors investopedia sydney burnsa deeper dive into basel iiibasel iii was rolled out by the basel committee on banking supervision a consortium of central banks from 28 countries based in basel switzerland shortly after the financial crisis of 2007 2008 10 many banks were overleveraged and undercapitalized during this period despite earlier reforms called basel i and basel ii also called the third basel accord basel iii is a continuing effort to strengthen an international banking framework that began in 1975 the basel i and basel ii accords aimed at improving the banking system s ability to deal with financial stress improve risk management and promote transparency the first basel accords were introduced in 1988 and came on the heels of that decade s debt crises in latin america basel i required banks to hold 8 of their risk weighted assets as a buffer against potential losses this was a significant step in ensuring that banks had enough financial strength to withstand losses and didn t jeopardize the rest of the financial system following basel i and the many changes in the financial markets in the dot com era further measures were deemed necessary leading to basel ii in 2004 basel ii introduced more sophisticated models for calculating risk expanding beyond credit risk to account for operational and market risks losses due to changes in market prices basel ii also encouraged banks to build their own internal models to better assess the specific risks they faced it didn t take long though before the approach of basel ii already looked outdated given the banking storms of the 2007 2008 period the transition from basel ii to basel iii would mark a significant shift in the global approach to banking regulation while basel ii focused primarily on the amount of capital the banks held and how they managed risk basel iii included new rules on liquidity leverage and systemic risk factors 11many parts of basel iii are already in place worldwide including the u s however the final changes called basel iii endgame and agreed upon in 2017 have been delayed for years by the covid 19 pandemic and banks calling for more time to adjust to and lobby against the new regulations 12 deadlines have come and gone with mid 2025 the latest date for when the rules are supposed to go into effect in the u s which means announcing them months earlier to provide regulators banks and other stakeholders the time needed to prepare to meet the new standards banks would start using the rules on july 1 2025 with the goal of having them fully in place three years later 9basel iii endgame includes updates to how banks calculate the risk of people not paying back their loans how they use their own internal models to determine how much money they need to keep in reserve and how they should handle operational risks like fraud or system failures let s go through each of these areas before turning to what this all means for everyday investors minimum capital requirements under basel iiibefore starting it s worth reviewing that banks have two main silos of capital to work with tier 1 is a bank s core capital equity and reserves that appear on the bank s financial statements if a bank experiences significant losses tier 1 capital is what can allow it to weather stress and keep its doors open by contrast tier 2 refers to a bank s supplementary capital such as undisclosed reserves and unsecured subordinated debt instruments tier 1 capital is more liquid and more secure than tier 2 capital 13under the proposed basel iii endgame banks with over 100 billion in assets would have to keep more money in their reserves to cover potential losses 14 the new rules would allow banks to calculate the riskiness of assets like loans and investments in multiple ways they d have to use whichever method puts aside more capital to err on the side of safety and stability an important type of capital banks would need more of is called common equity tier 1 cet1 this includes the money banks get when they issue stock and the profits they hold onto instead of paying out to shareholders big banks would also have to keep a minimum level of capital as a proportion of all their assets including things that aren t on their main balance sheet not just the risky ones if the economy is doing well regulators could make banks hold even more capital to prepare for a possible downturn banks would also need a minimum of 6 of their risky assets in tier 1 capital including cet1 and a few other super safe investments the minimum for total capital tier 1 plus tier 2 which is slightly riskier would stay at 8 13so while the total capital ratio tier 1 tier 2 remains at 8 as it s been since basel i the composition of what banks can use as that capital is changing with a greater emphasis on higher quality forms of capital since it s also changing what it s a percentage of removing any consideration of riskier capital tier 3 from the calculation 1516 that would mean the way banks calculate their risk weighted assets the denominator or bottom figure in the capital ratios would change thus while the 8 figure might look the same the changes to the capital ratios numerator and denominator and new buffer requirements mean that basel iii endgame would increase capital requirements for the banks targeted by these regulations 16 estimates have varied with the higher ones coming from the banking lobby but the biggest banks would need to increase the amount of capital they have on hand by up to 20 over what they keep in reserve now 176basel iii introduces new capital buffer requirements that banks must maintain above the minimum capital ratios these buffers are designed to ensure that banks build up capital reserves during good times that they can draw down during economic and financial stress periods basel iii also introduced new leverage and liquidity requirements to protect against excessive and risky lending while ensuring that banks have enough liquidity during periods of financial stress in particular it sets a higher leverage ratio for g sibs the ratio is tier 1 capital divided by the bank s total assets with a minimum ratio requirement of 3 21in addition basel iii has new liquidity rules a liquidity coverage ratio requires that banks hold a sufficient reserve of high quality liquid assets hqla to allow them to survive a period of significant liquidity stress lasting 30 calendar days 22 hqla includes cash central bank reserves and certain government securities that can be easily converted to cash with little or no loss of value 23another liquidity related provision is the net stable funding nsf ratio which compares the bank s available stable funding essentially capital and liabilities with a time horizon of more than one year with the amount of stable funding that it must hold based on the liquidity outstanding maturities and risk level of its assets the bank s nsf ratio must be at least 100 the aim is to create incentives for banks to fund their activities with more stable sources of funding on an ongoing basis rather than load up their balance sheets with relatively cheap and abundant short term wholesale funding 24 | |
why this matters for everyday investors | while the complexities of bank capital regulations may seem far removed from the everyday concerns of retail investors the basel iii endgame proposal has important implications for the broader economy and financial markets here are some of them while the basel iii endgame rules primarily aim to strengthen the banking system their effects would ripple through the entire economy | |
what impact would basel iii have on the profits of the big banks | given the millions the big banks are spending on commercials opposing basel iii endgame it s reasonable to assume they think it will hurt their bottom line higher capital requirements can affect bank profitability as banks may need more capital in reserve instead of using it to generate returns this could in turn influence bank stock valuations and dividend payouts which would be scrutinized should they not meet some of the capital requirements however better capitalized banks may be viewed as safer investments which could attract more investors over the long term and some research has suggested they could do better financially too 127 | |
what affect would basel iii have on small and medium sized banks | while basel iii primarily targets very large internationally active banks critics charge that its regulations would also affect small and medium sized banks this has been the focus of much of the advertising campaign around the issue these banks may face increased operational costs because the banks that they work with would face higher costs however federal regulators have said this isn t the case and the framework allows for some flexibility recognizing the different risk profiles and business models of smaller banks 628 | |
when does basel iii go into effect | while we can report the deadlines u s regulators have given a wait and see approach might be in order since the basel iii endgame process began bank requests for more time to digest and comment on the plans covid 19 and shifts in the post pandemic economy have all pushed back the deadlines as it stands now the regulations should start taking effect july 1 2025 followed by a three year phase in period to give banks time to transition to the new rules 9 while previous deadlines have come and gone the commentary period is over which offers u s federal regulators more room to maneuver in going ahead with implementation the bottom linethe global financial crisis of 2007 2008 exposed critical weaknesses in the banking system highlighting the need for more robust market protections enter basel iii a comprehensive set of international banking reforms designed to fortify banks against future shocks as the 2028 deadline for full implementation approaches stakeholders continue to debate its requirements and what s needed to safeguard the economy against the systemic risk destabilized banks have presented in past crises | |
what is a baseline | a baseline is a fixed point of reference that is used for comparison purposes in business the success of a project or product is often measured against a baseline number for costs sales or any number of other variables a project may exceed a baseline number or fail to meet it for example a company that wants to measure the success of a product line can use the number of units sold during the first year as a baseline against which subsequent annual sales are measured the baseline serves as the starting point against which all future sales are measured understanding a baselinea baseline can be any number that serves as a reasonable and defined starting point for comparison purposes it may be used to evaluate the effects of a change track the progress of an improvement project or measure the difference between two periods of time for example a public company will track the performance of each product line by choosing one year as a baseline and measuring all subsequent years against it a baseline is typically used when a financial statement or budget analysis is prepared the statement or analysis uses existing revenues and spending as a baseline for assessing whether a new project is implemented successfully a financial statement analysis that uses a baseline is called horizontal analysis it compares a company s historical financial information over a number of reporting periods that may be monthly quarterly or annually the first period in a horizontal analysis is denoted as the baseline period all subsequent periods are then measured as a percentage of the baseline so a period that has the same revenue as the baseline would have 100 revenue in information technology there are three commonly used baseline points cost scope and schedule this exercise is useful in spotting trends looking at areas of growth or decline and assessing financial performance overall ratios like profit margin are also compared horizontally against the baseline year to draw conclusions about a company s ongoing performance project budgeting works from what is known as a cost baseline the cost baseline is the budget approved for the project usually broken down in some detail by cost category and cost period of time if a company opens a new warehouse for example and the cost baseline has been set at 100 000 per month every month for 10 months any monthly cost exceeding 100 000 is a red flag for the budget analyst however project costs inevitably fluctuate from baseline numbers as unknown and unexpected expenses or even in some cases savings are realized the cost baseline can be updated to reflect actual project costs in information technology management a baseline may be set for anticipated or maximal levels of performance there are three commonly used baseline points cost scope and schedule software applications used by project management professionals typically are designed to maintain and track these three critical baseline measurements | |
what is basic earnings per share | basic earnings per share eps tells investors how much of a firm s net income was allotted to each share of common stock it is reported in a company s income statement and is especially informative for businesses with only common stock in their capital structures understanding basic earnings per shareone of the first performance measures to check when analyzing a company s financial health is its ability to turn a profit earnings per share eps is the industry standard that investors rely on to see how well a company has done basic earnings per share is a rough measurement of the amount of a company s profit that can be allocated to one share of its common stock businesses with simple capital structures where only common stock has been issued need only release this ratio to reveal their profitability basic earnings per share does not factor in the dilutive effects of convertible securities basic eps net income preferred dividends weighted average of common shares outstanding during the period net income can be further broken down into continuing operations p l and total p l and preferred dividends should be removed as this income is not available to common stockholders if a company has a complex capital structure where the need to issue additional shares might arise then diluted eps is considered to be a more precise metric than basic eps diluted eps takes into account all of the outstanding dilutive securities that could potentially be exercised such as stock options and convertible preferred stock and shows how such an action would affect earnings per share companies with a complex capital structure must report both basic eps and diluted eps to provide a more accurate picture of their earnings the main difference between basic eps and diluted eps is that the latter factors in the assumption that all convertible securities will be exercised as such basic eps will always be the higher of the two since the denominator will always be bigger for the diluted eps calculation basic earnings per share examplea company reports net income of 100 million after expenses and taxes the company issues preferred dividends to its preferred stockholders of 23 million leaving earnings available to common shareholders of 77 million the company had 100 million common shares outstanding at the beginning of the year and issued 20 million new common shares in the second half of the year as a result the weighted average number of common shares outstanding is 110 million 100 million shares for the first half of the year and 120 million shares for the second half of the year 100 x 0 5 120 x 0 5 110 dividing the earnings available to common shareholders of 77 million by the weighted average number of common shares outstanding of 110 million gives a basic eps of 0 70 impact of basic earnings per sharestocks trade on multiples of earnings per share so a rise in basic eps can cause a stock s price to appreciate in line with the company s increasing earnings on a per share basis increasing basic eps however does not mean the company is generating greater earnings on a gross basis companies can repurchase shares decreasing their share count as a result and spread net income less preferred dividends over fewer common shares basic eps could increase even if absolute earnings decrease with a falling common share count another consideration for basic eps is its deviation from diluted eps if the two eps measures are increasingly different it may show that there is a high potential for current common shareholders to be diluted in the future | |
the basic materials sector an overview | the basic materials sector is an industry category made up of businesses engaged in the discovery development and processing of raw materials the sector includes companies engaged in mining and metal refining chemical products and forestry products within this sector are the companies that supply most of the materials used in construction that makes the companies and their stocks sensitive to changes in the business cycle they tend to thrive when the economy is strong the category is sometimes referred to simply as the materials sector basic materials explainedcompanies in the basic materials sector are involved in the physical acquisition development and initial processing of the many products commonly referred to as raw materials oil gold and stone are examples for the most part raw materials are naturally occurring resources some are considered finite that is it takes millions of years for them to develop well outside the long range plans of any company others are reusable but are not available in infinite quantities at any given point in time for the purposes of stock categorization the most common materials within the sector are mined products such as metals and ore and forestry products or lumber the stocks of certain chemical producers and energy sources also are included in the basic materials sector containers and packaging are categorized as basic materials whether they re made of glass metal or cardboard not all businesses that work with basic materials are included in the sector for example while a metal mining company is considered a basic materials processor a jewelry company even one which works only with mined metal is not it is deemed a retailer or a wholesaler who is a buyer of the basic material not even all chemicals qualify as basic materials for example industrial fertilizers and paint additives are categorized as complex cleaning products or pharmaceuticals more than 200 mutual funds index funds and etfs focus their investments in the basic materials sector certain energy sources notably natural gas are considered basic materials crude oil and coal qualify in their natural state as do some refined products such as gasoline the refined versions of these products are included because the demand for them is nearly universal they are critical to the operation of almost every industry the basic materials sector is subject to the law of supply and demand in the same way as consumer goods are in fact they are closely interrelated if the demand for consumer goods drops the demand for the raw materials involved in their production also drops the basic materials sector also is affected by shifts in the housing market as many raw materials are finished in order to be used in construction projects if new housing development slows the demand for lumber products decreases examples of basic materials companiesthree of the biggest american companies are included in the basic materials sector and all three are involved in the oil business these are exxon mobil corp chevron corp and the oil field services company schlumberger ltd dupont de nemours and co and monsanto co both chemicals companies are listed in this sector so are two big producers of construction materials vulcan materials co a producer of crushed stone gravel and concrete and steel dynamics inc a maker of finished steel products more than 300 stock mutual funds index funds and exchange traded funds etfs focus on investments in the basic materials sector 1 the many etfs include vanguard s vanguard materials etf blackrock s ishares global materials etf and ishares u s basic materials etf 2 3 4 mutual funds in the sector sometimes focus narrowly on one segment such as the fidelity select chemicals fund and the vaneck vectors gold miners etf 5 6 | |
what does basis mean | although the term basis holds various meanings in finance it most frequently refers to the difference between the prices and the expenses involved in transactions when calculating taxes such usage relates to the broader terms cost basis or tax basis and is specifically used when capital gains or losses are calculated for income tax filings in another context basis refers to the variation between the spot price of a deliverable commodity and the relative price of the futures contract basis may also be used in reference to securities transactions simply put a security s basis is its purchase price after commissions or other expenses basis in the futures marketin the futures market basis represents the difference between the cash price of the commodity and the futures price of that commodity it is a critically important concept for portfolio managers and traders to grasp because the relationship between cash and futures prices affects the value of the contracts used in hedging but the concept is also fuzzy at times because there are gaps between spot and relative price until the expiry of the nearest contract therefore the basis is not necessarily accurate in addition to the deviations created because of the time gap between the expiry of the futures contract and the spot commodity there may be other variations due to actuals different levels of product quality and delivery locations in general the basis is used by investors to gauge the profitability of delivery of cash or the actual and is also used to search for arbitrage opportunities basis as costa security s basis is the purchase price after commissions or other expenses it is also known as cost basis or tax basis this figure is used to calculate capital gains or losses when a security is sold for example let s assume you purchase 1 000 shares of a stock for 7 per share your cost basis is equal to the total purchase price or 7 000 in the context of iras basis originates from nondeductible ira contributions and rollover of after tax amounts earnings on these amounts are tax deferred similar to earnings on deductible contributions and rollover of pre tax amounts distributions of amounts representing basis in an ira are tax free however to ensure that this tax free treatment is realized the taxpayer must file irs form 8606 for any year that basis is added to the ira and for any year that distributions are made from any of the individual s traditional sep or simple iras failure to file form 8606 may result in double taxation of these amounts and an irs assessed penalty of 50 1 for example let s assume your ira is worth 100 000 of which 20 000 was nondeductible contributions which accounts for 20 of the total this ratio of basis applies to withdrawals so if you withdraw 40 000 20 is considered basis and is not taxed which calculates to 8 000 | |
what is a basis point bps | a basis point bps is used to indicate changes in interest rates of a financial instrument basis points are typically expressed with the abbreviations bp bps or bips one basis point is equal to 1 100th of 1 or 0 01 in decimal form one basis point appears as 0 0001 0 01 100 investopedia joules garciaunderstanding basis points bps the word basis in the term basis point comes from the base move between two percentages or the spread between two interest rates since the changes recorded are usually narrow and because small changes can have outsized outcomes the basis is a fraction of a percent the basis point is commonly used for calculating changes in interest rates equity indices and the yield of a fixed income security it is common for bonds and loans to be quoted in terms of basis points for example it could be said that the interest rate offered by your bank is 50 basis points higher than the secured overnight financing rate sofr a bond whose yield increases from 5 to 5 5 is said to increase by 50 basis points interest rates that have risen by 1 are said to have increased by 100 basis points if the federal reserve board raises the target interest rate by 25 basis points it means that rates have risen by 0 25 percentage points if rates were at 2 50 and the fed raised them by 25 basis points the new interest rate would be 2 75 if you start with a decimal and want the figure in percentage form multiply by 100 if you start with a percentage and want the figure in decimal form divide by 100 special considerationsby using basis points in the conversation traders and analysts remove some of the ambiguity or confusion that can arise when talking about percentage moves for example if a financial instrument is priced at a 10 rate of interest and the rate experiences a 10 increase it could conceivably mean that the financial instrument is now 11 0 10 x 1 0 10 or it could mean that it is now 20 10 10 20 the use of basis points in this case makes the meaning clear if the instrument is priced at a 10 rate of interest and experiences a 100 bp move up its rate would then be 11 if the instrument experiences a 1 000 bp move up it would be 20 price value of a basis pointthe price value of a basis point pvbp is a measure of the change in the absolute value of the price of a bond for a one basis point change in yield this may also be referred to as dv01 or the dollar value change for a one bp move it is another way to measure interest rate risk and is similar to duration which measures the percent change in a bond price given a 1 change in rates pvbp is just a special case of dollar duration instead of using a 100 basis point change the price value of a basis point simply uses a one basis point change it does not matter if there is an increase or decrease in rates because such a small move in rates will be about the same in either direction basis points and investmentsbasis points are also used when referring to the cost of mutual funds and exchange traded funds etfs for example a mutual fund s annual management expense ratio mer of 0 15 will be quoted as 15 bps | |
when funds are compared basis points are used to provide a clearer understanding of the difference in their costs for example an analyst may state that a fund with 0 35 in expenses is 10 basis points lower in cost than another with an annual expense of 0 45 since interest rates don t apply to equities basis points are less commonly used as terminology for price quotes in the stock market instead stock prices are quoted in dollars and cents | basis points and credit spreadscredit spreads are typically expressed in basis points where one basis point is equal to 0 01 for instance if a corporate bond yields 3 and a comparable government bond yields 2 the credit spread is 100 basis points 3 2 1 or 100 basis points the precision of basis points allows for clear communication of even small changes in credit spreads which is crucial for accurate market assessments the credit spread measured in basis points reflects the perceived credit risk of the bond issuer a wider spread indicates higher credit risk and vice versa for example if the credit spread of a company s bond widens from 100 basis points to 150 basis points it suggests that investors perceive an increase in the company s credit risk this change in perception can be due to various factors including the deteriorating financial health of the issuer or unfavorable market conditions changes in credit spreads therefore measured in basis points impact bond prices inversely when credit spreads widen and there s an increase in basis points bond prices generally fall because investors demand higher yields to compensate for the increased risk conversely when credit spreads narrow a decrease in basis points bond prices typically rise as the perceived risk decreases and investors are willing to accept lower yields basis points and risk managementbasis points can also generally be used as part of risk management techniques though some of the following points may seem intuitive after reading the article above it s a worthwhile callout to note that small changes in basis points can tell more information than just a change in percent basis points offer a high level of precision this precision is allows for accurate measurement and communication of even the smallest changes in financial variables for instance when discussing interest rate changes or credit spread variations even the slighted deviation in either direction can give vital information about broader markets like we talked about in the last section about credit spreads a widening of credit spreads indicates increased perceived risk of default therefore it may not even matter the quantity of basis points for risk management the key part is understanding the direction in which basis points are aggregating risk managers use basis points to monitor these spreads and adjust their credit exposure accordingly market risk or the risk of losses due to changes in market conditions can also be assessed using basis points fluctuations in market variables such as equity prices foreign exchange rates and commodity prices can be measured in basis points therefore users of this information can use basis points to evaluate how volatile these items may be and the direction in which they re moving last in stress testing and scenario analysis risk managers use basis points to model the impact of extreme but plausible changes in market conditions for example they might analyze the effect of an interest rate increase of 200 basis points on the portfolio s value they then can refine that model to as fine of a level as they want i e they can adjust to 201 basis points to see how that minute change can impact models | |
why should i use basis points instead of percentages | the reason that traders use basis points to express changes in value or rate is that they can be clearer and prevent any ambiguity this can help expedite communications and avoid trading mistakes since the values of financial instruments are often highly sensitive to even small changes in underlying interest rates ensuring clarity can be very important for traders | |
where does the term basis point come from | the term basis point originates from the term basis which refers to the difference or spread between two interest rates | |
how are basis points used | oftentimes traders will use basis points to refer to the change in value of a security or when comparing the rates on different securities for example you may hear the term used when yields on corporate bonds and treasury securities are compared | |
how much is one basis point | one basis point is 0 01 or 1 100th of 1 this value is mathematically fixed it does not vary with markets or economic conditions the bottom linebasis points are a common unit of measurement in finance a basis point is 1 100th of 1 and is commonly used to indicate interest rates or changes in rates in bonds and other financial instruments | |
what is basis risk | basis risk is the financial risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other this imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy thus adding risk to the position understanding basis riskoffsetting vehicles are generally similar in structure to the investments being hedged but they are still different enough to cause concern for example in the attempt to hedge against a two year bond with the purchase of treasury bill futures there is a risk the treasury bill and the bond will not fluctuate identically to quantify the amount of the basis risk an investor simply needs to take the current market price of the asset being hedged and subtract the futures price of the contract for example if the price of oil is 55 per barrel and the future contract being used to hedge this position is priced at 54 98 the basis is 0 02 when large quantities of shares or contracts are involved in a trade the total dollar amount in gains or losses from basis risk can have a significant impact other forms of basis riskanother form of basis risk is known as locational basis risk this is seen in the commodities markets when a contract does not have the same delivery point as the commodity s seller needs for example a natural gas producer in louisiana has locational basis risk if it decides to hedge its price risk with contracts deliverable in colorado if the louisiana contracts are trading at 3 50 per one million british thermal units mmbtu and the colorado contracts are trading at 3 65 mmbtu the locational basis risk is 0 15 mmbtu product or quality basis risk arises when a contract of one product or quality is used to hedge another product or quality an often used example of this is jet fuel being hedged with crude oil or low sulfur diesel fuel because these contracts are far more liquid than derivatives on jet fuel itself companies making these trades are generally well aware of the product basis risk but willingly accept the risk instead of not hedging at all calendar basis risk arises when a company or investor hedges a position with a contract that does not expire on the same date as the position being hedged for example rbob gasoline futures on the new york mercantile exchange nymex expire on the last calendar day of the month prior to delivery thus a contract deliverable in may expires on april 30 though this discrepancy may only be for a short period of time basis risk still exists | |
what is a basket of goods | the consumer price index cpi a common measure of inflation measures the price change over time for a basket of goods and services the basket is representative of consumer spending patterns and the change in its price represents the rate of inflation faced by consumers as a whole 1for example if the basket s price has increased 5 in the course of the year consumer inflation can be said to be running at a 5 annual rate the definition and contents of the measured basket can vary widely by country in the u s the bureau of labor statistics bls monthly collects the prices of some 80 000 items from a scientifically selected sample of goods and services to assemble its representative basket the numbers are then adjusted to ensure price changes don t reflect improvements in product quality and weighted in proportion with consumer spending patterns derived from a separate survey of about 21 000 consumers in a given year 2 | |
what is basket trade | a basket trade is a type of order used by investment firms and big institutional traders to buy or sell a group of securities simultaneously understanding basket tradesbasket trading is essential for institutional investors and investment funds that wish to hold a large number of securities in certain proportions as cash moves in and out of the fund large baskets of securities must be bought or sold simultaneously so that price movements for each security do not alter the portfolio allocation to consider how a basket trade is beneficial to an investment fund suppose an index fund aims to track its target index by holding most or all the securities of the index as new cash comes in that could increase the value of the fund the manager must simultaneously buy a large number of securities in the proportion they are present in the index if it were not possible to execute a basket trade on all of these securities then the rapid price movements of the securities would prevent the index fund from holding the securities in the correct proportions a basket trade typically involves the sale or purchase of 15 or more securities and is generally used to purchase stocks such baskets are typically measured against a benchmark or tracked against an entity such as an index to measure their returns suppose an investment fund wishes to take advantage of the volatility in an index the fund manager creates a long short basket to track the index the basket does not actually contain securities instead it has a collection of call and put options baskets can also be used to trade currencies and commodities for example an investor may create a basket that includes soft commodities such as wheat soybeans and corn most investment or brokerage firms that offer basket trading require a minimum investment amount the distribution of dollars between various components of a typical basket can be determined using various types of weightings for example dollar weighting criteria distribute the overall dollar amount for the basket equally between its components a basket trading strategy that uses share weighting will divide the overall amount equally between blocks of shares basket trades allow investors to create a trade that is tailored to them that allows for easy allocation across many securities and that gives them control over their investments basket trade benefits | |
what are bat stocks | bat is an acronym referring to three of the largest tech companies in china baidu inc bidu alibaba group holding ltd baba and tencent holdings ltd 0700 hong kong tcehy these stocks are frequently compared with the faang stocks in the united states meta formerly facebook meta amazon amzn apple aapl netflix inc nflx and alphabet goog understanding bat stocksas is usually the case in the financial world there are competing attitudes in regard to the value of bat stocks many commentators cite china s rapid economic growth and growing consumer base as signs that bat presents a solid investment opportunity other investors bullish on bat note that chinese companies have a larger potential domestic market and have pulled ahead of american firms in some areas such as mobile payments skeptics however point out that chinese stocks are frequently subject to speculative swings and that tech is a frothy sector in any case these investors would likely claim that both faang and bat stocks are overvalued setting aside opinions on the future of bat stocks let s take a look at these companies history and where their finances stand as of 2021 baidu bidu baidu co founded by robin li and eric xu in 2000 is the most popular search engine in china according to the company baidu s portfolio of products and services reaches over one billion devices each month baidu has been listed on the nasdaq since aug 2005 and was dual listed on the stock exchange of hong kong limited sehk in march 2021 41it offers an encyclopedia similar to wikipedia though editing permissions are more tightly controlled other services include maps social media and music the company also researches artificial intelligence and self driving cars 5as of aug 2021 baidu controls 76 91 of the domestic market share in the search engine industry 6 its market cap stood at 58 billion in sept 2021 7 the company brought in roughly 16 4 billion in revenue in fy2020 a slight decrease from 2019 s revenue of 16 5 billion 8robin li one of the company s co founders has served as ceo of baidu since 2000 9alibaba baba alibaba holding group ltd baba sometimes referred to as china s amazon is a multi faceted company comprised of core commerce cloud computing digital media and entertainment and innovation initiatives alibaba s e commerce firm operates via two main online portals taobao for consumer to consumer commerce and a business to consumer counterpart tmall 10the company also created alipay which provides payment other financial services for consumers and merchants that operate on its platforms according to the company alibaba was founded in 1999 by 18 individuals and led by jack ma a former english teacher from hangzhou china as of june 30 2021 annual active consumers for the alibaba ecosystem reached a milestone of over 1 18 billion including 912 million consumers within china and approximately 265 million consumers outside china 11as of sept 7 2021 alibaba group has a market cap of 476 96 billion 12 the company reported total revenue for fiscal year 2021 at 109 48 billion in us dollars a 41 increase from the year before which stood at roughly 78 98 billion 13daniel zhang has served as the company s ceo since 2015 14tencenttencent founded in 1998 in shenzen china is a multi faceted tech company whose platform offers numerous products and services including social media music web portals e commerce mobile games internet services payment systems smartphones and multiplayer online games tencent is also the owner of wechat a messaging service with more than 1 billion users per month 153the app supports a popular payments service as well as a number of other features leading fastcompany to call it china s app for everything 16 one notable multiplayer online game owned by tencent is clash of clans which boasts tens of millions of users 17as of sept 7 2021 tencent has a market cap of 646 74 billion 18 the company reported revenue of 74 69 billion in us dollars in fy 2020 and 58 46 billion in fy 2019 marking a 27 7 increase 19pony ma one of the company s co founders serves as the tencent ceo 20 | |
what is batch processing | batch processing is the processing of transactions in a group or batch no user interaction is required once batch processing is underway this differentiates batch processing from transaction processing which involves processing transactions one at a time and requires user interaction while batch processing can be carried out at any time it s particularly suited to end of cycle processing such as for processing a bank s reports at the end of a day or generating monthly or biweekly payrolls understanding batch processingfor large enterprises batch processing became a normal way of data compilation organization and report generation around the middle of the 20th century with the introduction of the mainframe computer the early mechanics of processing a batch involved feeding a computer a stack of punched cards that held commands or directions for the computer to follow herman hollerith 1860 1929 is credited with developing the punch card around 1890 when he was employed as a statistician for the u s census bureau 1 it was this punch card that became the foundation for widespread batch processing around 50 years later batch processing jobs are run at regularly scheduled times e g overnight or on an as needed basis as an example bills for utilities and other services received by consumers are typically generated by batch processing each month batch processing is beneficial because it is a cost effective means of handling large amounts of data at once one caveat is that the inputs for the processing must be correct or else the results of the whole batch will be faulty wasting time and money history of batch processinga defining characteristic of batch processing is minimal human intervention with few if any manual processes required this is part of what makes it so efficient though it wasn t always that way batch processing started with punch cards which were tabulated into instructions for computers entire decks or batches of cards would be processed at one time this system created by herman hollerith goes as far back as 1890 hollerith developed it to be used to process data from the u s census 1 punched manually the card was fed into and read by an electromechanical device hollerith patented his invention as the electronic tabulating machine and later joined a group of other inventors and investors to form the computing tabulating recording company ctr which would eventually become international business machines or ibm batch processing started out with the use of paper punch cards unlike earlier iterations the functions of modern batch processing are completely automated to meet certain conditions of time while some tasks are done immediately others are conducted in real time and monitored on a regular basis if there are any problems with the process the system notifies the appropriate personnel through exception based management alerts this automation provides managers time for other duties the software identifies exceptions through a system of monitors and dependencies which causes the batch processing to start exceptions may include online customer orders or a request from the system for new supplies because batch processing involves handling large amounts of data at once if the inputs are off in any way the whole batch will be flawed wasting time and money advantages of batch processingoperational costs such as labor and equipment are cut with batch processing because it cuts the need for human oversight physical hardware like computers and because batch processing is designed to be quick efficient and error free personnel can focus on other duties unlike others batch processing systems work anywhere any time that means they continue to work outside regular business hours they can also work in the background in an offline setting so even during down periods they ll still work without putting a dent in the organization s daily routine as mentioned above having a batch processing system in place gives managers and other key personnel time to do their own jobs without having to spend time supervising batches alerts are sent when problems arise this allows workers a hands off approach to batch processing disadvantages of batch processingbusiness owners may want to consider a few of the pitfalls of batch processing before putting such a system into place like many technologies training is required to manage batch processing systems managers will need to learn what triggers a batch how to schedule processing and what exception notifications mean among other things the systems are often complex requiring someone on staff to be familiar with the program otherwise companies or organizations may need to hire an information technology specialist for help batch processing infrastructure can be an expensive upfront investment for some businesses the costs may not seem feasible | |
bayes theorem named after 18th century british mathematician thomas bayes is a mathematical formula for determining conditional probability conditional probability is the likelihood of an outcome occurring based on a previous outcome in similar circumstances bayes theorem provides a way to revise existing predictions or theories update probabilities given new or additional evidence | in finance bayes theorem can be used to rate the risk of lending money to potential borrowers the theorem is also called bayes rule or bayes law and is the foundation of the field of bayesian statistics investopedia lara antalunderstanding bayes theoremapplications of bayes theorem are widespread and not limited to the financial realm for example bayes theorem can be used to determine the accuracy of medical test results by taking into consideration how likely any given person is to have a disease and the general accuracy of the test bayes theorem relies on incorporating prior probability distributions in order to generate posterior probabilities in bayesian statistical inference prior probability is the probability of an event occurring before new data is collected in other words it represents the best rational assessment of the probability of a particular outcome based on current knowledge before an experiment is performed posterior probability is the revised probability of an event occurring after considering the new information posterior probability is calculated by updating the prior probability using bayes theorem in statistical terms the posterior probability is the probability of event a occurring given that event b has occurred special considerationsbayes theorem thus gives the probability of an event based on new information that is or may be related to that event the formula also can be used to determine how the probability of an event occurring may be affected by hypothetical new information supposing the new information will turn out to be true for instance consider drawing a single card from a complete deck of 52 cards there are four kings in the deck so the probability that the card is a king is four divided by 52 which equals 1 13 or approximately 7 69 now suppose it is revealed that the selected card is a face card the probability the selected card is a king given it is a face card is four divided by 12 or approximately 33 3 as there are 12 face cards in a deck formula for bayes theoremexamples of bayes theorembelow are two examples of bayes theorem the first example shows how the formula can be derived from a stock investing example using amazon com inc amzn the second example applies bayes theorem to pharmaceutical drug testing bayes theorem follows simply from the axioms of conditional probability which is the probability of an event given that another event occurred for example a simple probability question may ask what is the probability of amazon com s stock price falling conditional probability takes this question a step further by asking what is the probability of the amzn stock price falling given that the dow jones industrial average djia index fell earlier the conditional probability of a given that b has happened can be expressed as if a is amzn price falls then p amzn is the probability that amzn falls and b is the djia is already down and p djia is the probability that the djia fell then the conditional probability expression reads as the probability that amzn drops given a djia decline is equal to the probability that amzn price declines and djia declines over the probability of a decrease in the djia index p amzn and djia is the probability of both a and b occurring this is also the same as the probability of a occurring multiplied by the probability that b occurs given that a occurs expressed as p amzn x p djia amzn the fact that these two expressions are equal leads to bayes theorem which is written as p amzn and p djia are the probabilities that amazon and the dow have fallen independently of each other the formula explains the relationship between the probability of the hypothesis before seeing the evidence that p amzn and the probability of the hypothesis after getting the evidence p amzn djia given a hypothesis for amazon given evidence in the dow as a numerical example imagine there is a drug test that is 98 accurate meaning that 98 of the time it shows a true positive result for someone using the drug and 98 of the time it shows a true negative result for nonusers of the drug next assume 0 5 of people use the drug if a person selected at random tests positive for the drug the following calculation can be made to determine the probability the person is actually a user of the drug where the terms are the formula would look like this using the values the calculation works out as follows bayes theorem shows that even if a person tested positive in this scenario there is a 19 76 chance the person takes the drug and an 80 24 chance they don t | |
what is the bayes rule used for | the bayes rule is used to update a probability with an updated conditional variable investment analysts use it to forecast probabilities in the stock market but it is used in many other industries | |
why is bayes theorem so powerful | mathematically it shows that two probabilities are equal used in statistics investing or other industries it allows you to view conditional probabilities | |
how do you know when to use bayes theorem | if you need to determine the probability of something occuring given that another condition exists that can influence the occurence you would use bayes theorem the bottom lineat its simplest bayes theorem takes a test result and relates it to the conditional probability of that test result given other related events for high probability false positives the theorem gives a more reasoned likelihood of a particular outcome | |
what is the bcg growth share matrix | the boston consulting group bcg growth share matrix is a planning tool that uses graphical representations of a company s products and services to help the company decide what it should keep invest more money in or sell the company s offerings are plotted in a four square matrix the y axis represents the rate of market growth and the x axis represents market share the bcg growth share matrix was introduced by the boston consulting group in 1970 1understanding the bcg growth share matrixthe bcg growth share matrix breaks down products into four categories known as dogs cash cows stars and question marks each category quadrant has its own set of unique characteristics a company is considered a dog and should be sold liquidated or repositioned if its product has a low market share and is at a low growth rate dogs are found in the lower right quadrant of the grid dogs don t generate much cash for the company because they have a low market share and little to no growth they can turn out to be cash traps tying up company funds for long periods so they re prime candidates for divestiture 2products that are in low growth areas but for which the company has a relatively large market share are considered cash cows the company should milk the cash cow for as long as it can cash cows are seen in the lower left quadrant they re typically leading products in mature markets these products often generate returns that are higher than the market s growth rate they sustain themselves from a cash flow perspective these products should be taken advantage of for as long as possible the value of cash cows can be easily calculated because their cash flow patterns are highly predictable low growth high share cash cows should be milked for cash to reinvest in high growth high share stars with high future potential 2the matrix is not a predictive tool it takes into account neither new disruptive products entering the market nor rapid shifts in consumer demand products that are in high growth markets and that make up a sizable portion of that market are considered stars and should be invested in stars appear in the upper left quadrant stars generate high income but also consume large amounts of company cash a star eventually becomes a cash cow when the market s overall growth rate declines if it can remain a market leader 2questionable opportunities are those in high growth rate markets but in which the company doesn t maintain a large market share question marks or problem children appear in the upper right portion of the grid question marks typically grow fast but consume large amounts of company resources products in this quadrant should be analyzed frequently and closely to see if they re worth maintaining 2limitations of the matrixthe matrix is a decision making tool it doesn t necessarily take into account all the factors that a business must ultimately face increasing market share may be more expensive than the additional revenue gained from new sales product development can take years so businesses must plan carefully for contingencies the matrix only classifies businesses as low and high so it leaves midsize businesses out of the mix midsize companies often make up a big part of the market so leaving them out means that the business environment isn t truly reflected the bcg matrix assumes that all businesses operate independently of each other but that isn t always necessarily true certain players in the market such as dogs can end up giving others a boost sometimes unintentionally bruce henderson founded bcg and created the concept of the growth matrix in 1970 2example of a bcg growth share matrixwe can apply the growth matrix to many companies in the real world apple aapl is a great candidate let s take a look at the products apple has on the market according to the matrix categories the company earned 383 28 billion in net sales in 2023 out of which almost 298 1 billion was attributed to its products section the remaining 85 2 billion came from its services division 3 | |
what are the 4 quadrants of the bcg matrix | the bcg growth share matrix uses a 2 2 grid with growth on one axis and market share on the other each of the four quadrants represents a specific combination of relative market share and growth | |
how does the bcg matrix work | the bcg growth share matrix considers a company s growth prospects and available market share by assigning each business to one of these four categories executives can then decide where to focus their resources and capital to generate the most value as well as where to cut their losses | |
is the bcg matrix used in the real world | the growth share matrix was used by about half of all fortune 500 companies at the height of its success according to bcg it s still central in business school teachings on business strategy the bottom linethe bcg growth share matrix is a business management tool that allows companies to identify which aspects of their business should be prioritized and which might be jettisoned a company s businesses can be categorized into one of four classifications stars pets cash cows and question marks by constructing a 2 2 table along the dimensions of growth and market share | |
what is the bcg growth share matrix | the boston consulting group bcg growth share matrix is a planning tool that uses graphical representations of a company s products and services to help the company decide what it should keep invest more money in or sell the company s offerings are plotted in a four square matrix the y axis represents the rate of market growth and the x axis represents market share the bcg growth share matrix was introduced by the boston consulting group in 1970 1understanding the bcg growth share matrixthe bcg growth share matrix breaks down products into four categories known as dogs cash cows stars and question marks each category quadrant has its own set of unique characteristics a company is considered a dog and should be sold liquidated or repositioned if its product has a low market share and is at a low growth rate dogs are found in the lower right quadrant of the grid dogs don t generate much cash for the company because they have a low market share and little to no growth they can turn out to be cash traps tying up company funds for long periods so they re prime candidates for divestiture 2products that are in low growth areas but for which the company has a relatively large market share are considered cash cows the company should milk the cash cow for as long as it can cash cows are seen in the lower left quadrant they re typically leading products in mature markets these products often generate returns that are higher than the market s growth rate they sustain themselves from a cash flow perspective these products should be taken advantage of for as long as possible the value of cash cows can be easily calculated because their cash flow patterns are highly predictable low growth high share cash cows should be milked for cash to reinvest in high growth high share stars with high future potential 2the matrix is not a predictive tool it takes into account neither new disruptive products entering the market nor rapid shifts in consumer demand products that are in high growth markets and that make up a sizable portion of that market are considered stars and should be invested in stars appear in the upper left quadrant stars generate high income but also consume large amounts of company cash a star eventually becomes a cash cow when the market s overall growth rate declines if it can remain a market leader 2questionable opportunities are those in high growth rate markets but in which the company doesn t maintain a large market share question marks or problem children appear in the upper right portion of the grid question marks typically grow fast but consume large amounts of company resources products in this quadrant should be analyzed frequently and closely to see if they re worth maintaining 2limitations of the matrixthe matrix is a decision making tool it doesn t necessarily take into account all the factors that a business must ultimately face increasing market share may be more expensive than the additional revenue gained from new sales product development can take years so businesses must plan carefully for contingencies the matrix only classifies businesses as low and high so it leaves midsize businesses out of the mix midsize companies often make up a big part of the market so leaving them out means that the business environment isn t truly reflected the bcg matrix assumes that all businesses operate independently of each other but that isn t always necessarily true certain players in the market such as dogs can end up giving others a boost sometimes unintentionally bruce henderson founded bcg and created the concept of the growth matrix in 1970 2example of a bcg growth share matrixwe can apply the growth matrix to many companies in the real world apple aapl is a great candidate let s take a look at the products apple has on the market according to the matrix categories the company earned 383 28 billion in net sales in 2023 out of which almost 298 1 billion was attributed to its products section the remaining 85 2 billion came from its services division 3 | |
what are the 4 quadrants of the bcg matrix | the bcg growth share matrix uses a 2 2 grid with growth on one axis and market share on the other each of the four quadrants represents a specific combination of relative market share and growth | |
how does the bcg matrix work | the bcg growth share matrix considers a company s growth prospects and available market share by assigning each business to one of these four categories executives can then decide where to focus their resources and capital to generate the most value as well as where to cut their losses | |
is the bcg matrix used in the real world | the growth share matrix was used by about half of all fortune 500 companies at the height of its success according to bcg it s still central in business school teachings on business strategy the bottom linethe bcg growth share matrix is a business management tool that allows companies to identify which aspects of their business should be prioritized and which might be jettisoned a company s businesses can be categorized into one of four classifications stars pets cash cows and question marks by constructing a 2 2 table along the dimensions of growth and market share | |
what is a bear call spread | a bear call spread or a bear call credit spread is a type of options strategy used when an options trader expects a decline in the price of the underlying asset a bear call spread is achieved by simultaneously selling a call option and buying a call option at a higher strike price but with the same expiration date the maximum profit to be gained using this strategy is equal to the credit received when initiating the trade a bear call spread is also called a short call spread it is considered a limited risk and limited reward strategy advantages of a bear call spreadthe main advantage of a bear call spread is that the net risk of the trade is reduced purchasing the call option with the higher strike price helps offset the risk of selling the call option with the lower strike price it carries far less risk than shorting the stock or security since the maximum loss is the difference between the two strikes reduced by the amount received or credited when the trade is initiated selling a stock short theoretically has unlimited risk if the stock moves higher if the trader believes the underlying stock or security will fall by a limited amount between the trade date and the expiration date then a bear call spread could be an ideal play however if the underlying stock or security falls by a greater amount then the trader gives up the ability to claim that additional profit it is a trade off between risk and potential reward that is appealing to many traders example of a bear call spreadlet s assume that a stock is trading at 45 an options trader can use a bear call spread by purchasing one call option contract with a strike price of 40 and a cost premium of 0 50 0 50 100 shares contract 50 premium and selling one call option contract with a strike price of 30 for 2 50 2 50 100 shares contract 250 in this case the investor will receive a net credit of 200 to set up this strategy 250 50 if the price of the underlying asset closes below 30 upon expiration then the investor will realize a total profit of 200 or the full premium received the profit from the bear call spread therefore maxes out if the underlying security closes at 30 the lower strike price at expiration if it closes farther below 30 there will not be any additional profit if it closes between the two strike prices there will be a reduced profit while closing above the higher strike 40 will result in a loss of the difference between the two strike prices reduced by the amount of the credit received at the onset image by sabrina jiang investopedia 2021 | |
what is a bear hug | a bear hug is an offer to buy a publicly listed company at a significant premium to the market price of its shares it is an acquisition strategy designed to appeal to the target company s shareholders bear hugs are used to pressure a reluctant company s board to accept the bid or risk upsetting its shareholders unsolicited in nature a bear hug bidder makes it difficult for the target s board to refuse by offering a price well above the pursued company s market value understanding bear hugsbear hugs are unsolicited takeover bids but to qualify as one the offer must include a meaningful premium to the market value of the target company s stock because company boards have a fiduciary duty to act in the best interests of the company and its shareholders refusing a rich premium risks lawsuits proxy contests and other forms of shareholder activism bear hugs can be a costly strategy for the acquirer as such they occur when the target company s board has either rejected or would be expected to reject such an advance necessitating a direct appeal to shareholders at a minimum bear hugs force the targeted company s leadership to explain why the bid to say nothing of the market undervalues their stock and what the company intends to do about the low valuation a bear hug puts incumbent management on the defensive and focuses attention on the company s share price one company chief executive on the receiving end of the tactic described it as a gradual rolling dispiriting of the opposition the whole idea of a bear hug is that it becomes an inevitable self fulfilling prophecy 1a bear hug offer though usually financially favorable is not solicited by the target company advantages and disadvantages of a bear huga bear hug allows the acquirer to present its bid directly to shareholders bypassing the targeted company s board the downside for the pursuer is that the tactic is unlikely to result in friendly talks with the incumbent management and board who may seek a white knight deal with a different buyer viewed as more acceptable shareholders of a company who receive a bear hug benefit from the prospect of a higher share price on offer even if it doesn t lead to a quick deal a bear hug puts pressure on a company s board and management to get the share price above that offered by the bear hugger a bear hug implies incumbent management and board members are not interested in a friendly deal and absent a formal tender offer a bear hug has no sure way to overcome that resistance this acquisition tactic has the potential to distract managers and directors of the targeted company to the ultimate detriment of its business and all stakeholders including the bear hugger if they are successful whether directly or by implication a bear hug draws critical attention to the company s current management and share price if the bear hug is ultimately successful incumbent managers are likely to face an ouster from the new owners they might have to content themselves with golden parachutes triggered by change of control provisions in their executive pay agreements acquirer can go directly to the shareholderspotential for offer of deal with higher share pricedistracts and draws critical attention to management and share pricemanagement may be ousted if the bear hug is successfulexamples of bear hugsbear hugs can happen when a company s stock falls on hard times or simply because the acquirer places a high value on the targeted business elon musk s unofficial offer to buy twitter now x in april 2022 at an 18 premium to its market value but a 22 discount to twitter s share price a year earlier was described as a bear hug 2 musk eventually succeeded taking over the company in oct 2022 for 44 billion 3 the company changed its name to x corp in april 2023 and the platform changed its name to x in july 2023 45earlier examples include none of those efforts ultimately succeeded | |
how does a bear hug work | a bear hug is a type of acquisition strategy used by companies to target others unlike other types of deals the acquirer in a bear hug approaches the target company s shareholders rather than its leadership and or board bear hugs are unsolicited deals that involve making an offer to shareholders at a premium above its market value shareholders can force the company to accept the offer or go into negotiations with the acquirer | |
why would a company use a bear hug as an acquisition strategy | there are several reasons why a company would resort to a bear hug to make an acquisition some acquirers choose to do so in order to avoid any conflict with the target company s leadership the acquirer usually hopes that the board and or management would be more receptive to the deal by approaching the target s shareholders with an offer above market value another reason why some companies may choose to take this route is to cut out the competition if the target is very attractive there may be multiple interested parties by making the offer of a bear hug it sweetens the pot for shareholders and keeps other acquirers at bay | |
what is a bear hug letter | a bear hug is an ambitious tactic that companies use to acquire other companies in some cases they will send a letter to the target company s board and or management team or publicly along with the offer especially if the target is unreceptive to an offer this is called a bear hug letter sending a bear hug letter can be a smart move especially if the offer comes at a significant premium as the board has a fiduciary duty to shareholders the bottom linehostile takeovers are part and parcel of the corporate world the bear hug is just one type of takeover attempt that acquirers use but rather than work their way into the company s board or management by force they usually sweeten the pot by making shareholders an offer that s well above market value by doing this shareholders can then take their reins and force the target s board to either accept or go into talks with the acquirer | |
what is a bear market | a bear market is a financial market experiencing prolonged price declines generally of 20 or more a bear market usually occurs along with widespread investor pessimism large scale liquidation of securities and other assets and a weakening economy bear markets are often associated with declines in an overall market or index like the s p 500 but individual securities or commodities can also be considered to be in a bear market if they experience a decline of 20 or more over a sustained period of time typically two months or more bear markets also may accompany general economic downturns such as a recession bear markets are seen as the opposite of upward trending bull markets investopedia daniel fishelunderstanding bear marketsstock prices generally reflect how investors expect companies to perform if a company has lower than expected profits or experiences less growth than analysts predicted investors may respond by selling the company s stock which makes the overall price decline the combination of herd behavior and fear can create a rush to minimize losses which in turn can lead to prolonged periods of depressed asset prices one definition of a bear market says markets are in bear territory when stocks on average fall at least 20 off their high but 20 is an arbitrary number just as a 10 decline is an arbitrary benchmark for a correction another definition of a bear market is when investors are more risk averse than risk seeking this kind of bear market can last for months or years as investors shun speculation in favor of boring sure bets the causes of a bear market often vary but in general a weak or slowing or sluggish economy bursting market bubbles pandemics wars geopolitical crises and drastic paradigm shifts in the economy such as shifting to an online economy are all factors that might cause a bear market the signs of a weak or slowing economy are typically government interventions in the economy can also trigger a bear market for example changes in the tax rate or the federal funds rate can lead to a bear market similarly a drop in investor confidence may also signal the onset of a bear market when investors believe something is about to happen they will take action in the case of an imminent bear market selling off shares to avoid losses bear markets can last for multiple years or just several weeks a secular bear market can last anywhere from 10 to 20 years and is characterized by below average returns on a sustained basis there may be rallies within secular bear markets where stocks or indexes rally for a period but the gains are not sustained and prices revert to lower levels a cyclical bear market on the other hand can last anywhere from a few weeks to several months the u s major market indexes were close to bear market territory on december 24 2018 falling just shy of a 20 drawdown 1 more recently major indexes including the s p 500 and dow jones industrial average djia fell sharply into bear market territory between march 11 and march 12 2020 2 prior to that the last prolonged bear market in the united states occurred between 2007 and 2009 during the financial crisis and lasted for roughly 17 months the s p 500 lost 50 of its value during that time 3in february 2020 global stocks entered a sudden bear market in the wake of the global coronavirus pandemic sending the djia down 38 from its all time high on february 12 29 568 77 to a low on march 23 18 213 65 in just over one month 4 however both the s p 500 and the nasdaq 100 made new highs by august 2020 5phases of a bear marketbear markets usually have four different phases the first phase is characterized by high prices and high investor sentiment towards the end of this phase investors begin to drop out of the markets and take in profits in the second phase stock prices begin to fall sharply trading activity and corporate profits begin to drop and economic indicators that may have once been positive start to become below average some investors begin to panic as sentiment starts to fall this is referred to as capitulation the third phase shows speculators start to enter the market consequently raising some prices and trading volume in the fourth and last phase stock prices continue to drop but slowly as low prices and good news starts to attract investors again bear markets start to lead to bull markets the bear market phenomenon is thought to get its name from the way in which a bear attacks its prey swiping its paws downward this is why markets with falling stock prices are called bear markets just like the bear market the bull market may be named after the way in which the bull attacks by thrusting its horns up into the air bear markets vs correctionsa bear market should not be confused with a correction which is a short term trend that has a duration of fewer than two months while corrections offer a good time for value investors to find an entry point into stock markets bear markets rarely provide suitable points of entry this barrier is because it is almost impossible to determine a bear market s bottom trying to recoup losses can be an uphill battle unless investors are short sellers or use other strategies to make gains in falling markets between 1900 and 2018 the dow jones industrial average djia had approximately 33 bear markets averaging one every three years 6 one of the most notable bear markets in recent history coincided with the global financial crisis occurring between october 2007 and march 2009 during that time the dow jones industrial average djia declined 54 3 the global covid 19 pandemic caused the most recent 2020 bear market for the s p 500 and djia the nasdaq composite most recently entered a bear market in march 2022 on fears surrounding war in ukraine economic sanctions against russia and high inflation 7short selling in bear marketsinvestors can make gains in a bear market by short selling this technique involves selling borrowed shares and buying them back at lower prices it is an extremely risky trade and can cause heavy losses if it does not work out a short seller must borrow the shares from a broker before a short sell order is placed the short seller s profit and loss amount is the difference between the price where the shares were sold and the price where they were bought back referred to as covered for example an investor shorts 100 shares of a stock at 94 the price falls and the shares are covered at 84 the investor pockets a profit of 10 x 100 1 000 if the stock trades higher unexpectedly the investor is forced to buy back the shares at a premium causing heavy losses short selling is a risky trading strategy with the possibility for high losses it is not suitable for inexperienced investors puts and inverse etfs in bear marketsa put option gives the owner the freedom but not the responsibility to sell a stock at a specific price on or before a certain date put options can be used to speculate on falling stock prices and hedge against falling prices to protect long only portfolios investors must have options privileges in their accounts to make such trades outside of a bear market buying puts is generally safer than short selling inverse etfs are designed to change values in the opposite direction of the index they track for example the inverse etf for the s p 500 would increase by 1 if the s p 500 index decreased by 1 there are many leveraged inverse etfs that magnify the returns of the index they track by two and three times like options inverse etfs can be used to speculate or protect portfolios real world examples of bear marketsthe ballooning housing mortgage default crisis caught up with the stock market in october 2007 back then the s p 500 had touched a high of 1 565 15 on october 9 2007 8 by march 5 2009 it had crashed to 682 55 as the extent and ramifications of housing mortgage defaults on the overall economy became clear 9 the u s major market indexes were again close to bear market territory on december 24 2018 falling just shy of a 20 drawdown 1most recently the dow jones industrial average went into a bear market on march 11 2020 and the s p 500 entered a bear market on march 12 2020 10 this followed the longest bull market on record for the index which started in march 2009 stocks were driven down by the onset of the covid 19 pandemic which brought with it mass lockdowns and the fear of depressed consumer demand during this period the dow jones fell sharply from all time highs close to 30 000 to lows below 19 000 in a matter of weeks from february 19 to march 23 the s p 500 declined 34 1112other examples include the aftermath of the bursting of the dot com bubble in march 2000 which wiped out approximately 49 of the s p 500 s value and lasted until october 2002 13 and the great depression which began with the stock market collapse of october 28 29 1929 14 | |
what s the main difference between a bear market and a bull market | the main difference between a bear market and a bull market is that a bear market refers to a major downturn in financial markets while a bull market refers to a major upswing markets are doing well during a bull market and poorly during a bear market | |
is it good to buy during a bear market | long term investors can find many valuable stocks at lower prices during a bear market making bear markets a good time to buy if you can afford to wait to see your investments rebound traders looking to make a short term profit may need to use other strategies during a bear market such as short selling | |
should i sell my stocks during a bear market | for most investors a buy and hold strategy is the best way to make money through investing rather than rushing to buy or sell investments every time the market changes if you have a balanced diversified portfolio that includes assets such as government bonds defensive stocks and cash as well as equities you shouldn t need to sell during a bear market indeed if you sell your stocks during a bear market because you are afraid of them dropping further you may miss out on substantial profits when the market eventually rebounds the bottom linea bear market is a downward trend in financial markets indicating a weakening economy and a loss of investor confidence generally a market is considered a bear market when prices have declined more than 20 bear markets can be as short as a few weeks or as long as a several years buy and hold investors can often take advantage of lower prices during a bear market to add valuable stocks to their portfolios day traders and other short term investors though may need to use strategies such as short selling put options and inverse etfs to make a profit during a bear market | |
what is a bear put spread | a bear put spread is a type of options strategy where an investor or trader expects a moderate to large decline in the price of a security or asset and wants to reduce the cost of holding the option trade a bear put spread is achieved by purchasing put options while also selling the same number of puts on the same asset with the same expiration date at a lower strike price the maximum profit using this strategy is equal to the difference between the two strike prices minus the net cost of the options a put option gives the holder the right but not the obligation to sell a specified amount of underlying security at a specified strike price at or before the option expires a bear put spread is also known as a debit put spread or a long put spread the basics of a bear put spreadfor example let s assume that a stock is trading at 30 an options trader can use a bear put spread by purchasing one put option contract with a strike price of 35 for a cost of 475 4 75 x 100 shares contract and selling one put option contract with a strike price of 30 for 175 1 75 x 100 shares contract in this case the investor will need to pay a total of 300 to set up this strategy 475 175 if the price of the underlying asset closes below 30 upon expiration the investor will realize a total profit of 200 this profit is calculated as 500 the difference in the strike prices 35 30 x 100 shares contract 300 the net price of the two contracts 475 175 equals 200 advantages and disadvantages of a bear put spreadthe main advantage of a bear put spread is that the net risk of the trade is reduced selling the put option with the lower strike price helps offset the cost of purchasing the put option with the higher strike price therefore the net outlay of capital is lower than buying a single put outright also it carries far less risk than shorting the stock or security since the risk is limited to the net cost of the bear put spread selling a stock short theoretically has unlimited risk if the stock moves higher if the trader believes the underlying stock or security will fall by a limited amount between the trade date and the expiration date then a bear put spread could be an ideal play however if the underlying stock or security falls by a greater amount then the trader gives up the ability to claim that additional profit it is the trade off between risk and potential reward that is appealing to many traders less risky than simple short sellingworks well in modestly declining marketslimits losses to the net amount paid for the optionsrisk of early assignmentrisky if asset climbs dramaticallylimits profits to difference in strike priceswith the example above the profit from the bear put spread maxes out if the underlying security closes at 30 the lower strike price at expiration if it closes below 30 there will not be any additional profit if it closes between the two strike prices there will be a reduced profit and if it closes above the higher strike price of 35 there will be a loss of the entire amount spent to buy the spread also as with any short position options holders have no control over when they will be required to fulfill the obligation there is always the risk of early assignment that is having to actually buy or sell the designated number of the asset at the agreed upon price early exercise of options often happens if a merger takeover special dividend or other news occurs that affects the option s underlying stock real world example of bear put spreadas an example let s say that levi strauss co levi is trading at 50 on october 20 2019 winter is coming and you don t think the jeans maker s stock is going to thrive instead you think it s going to be mildly depressed so you buy a 40 put priced at 4 and a 30 put priced at 1 both contracts will expire on november 20 2019 buying the 40 put while simultaneously selling the 30 put would cost you 3 4 1 if the stock closed above 40 on november 20 your maximum loss would be 3 if it closed under or at 30 however your maximum gain would be 7 10 on paper but you have to deduct the 3 for the other trade and any broker commission fees the break even price is 37 a price equal to the higher strike price minus the net debt of the trade | |
what is a bear spread | a bear spread is an options strategy used when one is mildly bearish and wants to maximize profit while minimizing losses the goal is to net the investor a profit when the price of the underlying security declines the strategy involves the simultaneous purchase and sale of either puts or calls for the same underlying contract with the same expiration date but at different strike prices a bear spread may be contrasted with a bull spread which is utilized by investors expecting moderate increases in the underlying security understanding bear spreadsthe main impetus for an investor to execute a bear spread is that they expect a decline in the underlying security but not in an appreciable way and want to either profit from it or protect their existing position there are two main types of bear spreads that a trader can initiate a bear put spread and a bear call spread both instances would be classified as vertical spreads a bear put spread involves simultaneously buying one put so as to profit from the expected decline in the underlying security and selling writing another put with the same expiry but at a lower strike price to generate revenue to offset the cost of buying the first put this strategy results in a net debit to the trader s account a bear call spread on the other hand involves selling writing a call to generate income and buying a call with the same expiry but at a higher strike price to limit the upside risk this strategy results in a net credit to the trader s account bear spreads can also involve ratios such as buying one put to sell two or more puts at a lower strike price than the first because it is a spread strategy that pays off when the underlying declines it will lose if the market rises however the loss will be capped at the premium paid for the spread image by julie bang investopedia 2019bear put spread examplesay that an investor is bearish on stock xyz when it is trading at 50 per share and believes the stock price will decrease over the next month the investor can put on a bear put spread by buying a 48 put and selling writing a 44 put for a net debit of 1 the best case scenario is if the stock price ends up at or below 44 the worst case scenario is if the stock price ends up at or above 48 options expire worthless and the trader is down the cost of the spread bear call spread exampleone can also use a bear call spread an investor is bearish on stock xyz when it is trading at 50 per share and believes the stock price will decrease over the next month the investor sells writes a 44 call and buys a 48 call for a net credit of 3 if the stock price ends up at or below 44 then the options expire worthless and the trader keeps the spread credit conversely if the stock price ends up at or above 48 then the trader is down the spread credit minus 44 48 amount benefits and drawbacks of bear spreadsbear spreads are not suited for every market condition they work best in markets where the underlying asset is falling moderately and not making large price jumps moreover while bear spreads limit potential losses they also cap possible gains limits losses | |
what was bear stearns | bear stearns was a global investment bank located in new york city that collapsed during the 2008 financial crisis the bank was heavily exposed to mortgage backed securities that turned into toxic assets when the underlying loans began to default bear stears was ultimately sold to jpmorgan chase at a fraction of its pre crisis value understanding bear stearnsthe bear stearns company was founded in 1923 and survived the stock market crash of 1929 becoming a global investment bank with branches around the world competent management and risk taking saw bear stearns continue to grow with the global economy 1 it was one of the many firms to embrace lewis ranieri s securitization of debt to create new financial products 3by the early 2000s bear stearns was among the world s largest investment banks and a highly respected member of wall street s pantheon of investment banks despite surviving and then thriving after the great depression bear stearns was a player in the mortgage meltdown and great recession that followed bear stearns operated a wide range of financial services inside this mix were hedge funds that used enhanced leverage to profit from collateralized debt obligations cdos and other securitized debt markets in april 2007 the bottom fell out of the housing market and the investment bank quickly began to realize that the actual risk of these hedge fund strategies was much larger than originally believed 4the collapse of the housing market caught the whole financial system by surprise as much of the system was based upon a foundation of a solid housing market underpinning a solid derivatives market the bear stearns funds used techniques to further jack up the leverage to these supposed market fundamentals only to find out that the downside risk on the instruments they were dealing with wasn t limited in this extreme case of market collapse 4the bear stearns hedge fund collapsethe hedge funds using these strategies posted massive losses that required them to be bailed out internally costing the company several billion upfront and then additional billion dollar losses in writedowns throughout the year this was bad news for bear stearns but the company had a market cap of 20 billion so the losses were considered unfortunate but manageable 5this turmoil saw the first quarterly loss in 80 years for bear stearns 6 quickly the rating firms piled on and continued to downgrade bear stearns mortgage backed securities and other holdings this left the firm with illiquid assets in a down market the company ran out of funds and in march 2008 went to the federal reserve for a credit guarantee through the term securities lending facility another downgrade hit the firm and a bank run started by march 13 bear stearns was broke its stock plummeted 5jpmorgan chase buys bear stearns assetswith insufficient liquidity to open its doors bear stearns approached the federal reserve bank of new york for a cash loan of 25 billion when that was denied jpmorgan chase agreed to buy bear stearns for 2 a share with the federal reserve guaranteeing 30 billion in mortgage backed securities the final price was ultimately raised to 10 a share still a sharp drop for a company that had traded at 170 a year earlier 72jamie dimon the ceo of jpmorgan chase would later regret the decision saying it cost the company several billion to close out the failing trades and settle litigation against bear stearns under normal conditions the price we ultimately paid for bear stearns would have been considered low he wrote in his 2008 letter to shareholders the reason bear stearns was sold off so cheaply is that at the time no one knew which banks held toxic assets or how big of a hole these seemingly innocuous synthetic products could knock in a balance sheet we were not buying a house we were buying a house on fire 8jpmorgan would go on to acquire another investment bank washington mutual shortly after the two acquisitions would ultimately cost a combined 19 billion in fines and settlements 910jpmorgan s acquisition of bear stearns was only possible thanks to a 30 billion guarantee from the federal reserve this bailout raised major questions about the role of the government in a free market economy 2lehman brothers collapsethe illiquidity that bear stearns faced due to its exposure to securitized debt exposed troubles at other investment banks as well many of the biggest banks were heavily exposed to this sort of investment including lehman brothers a major lender of subprime mortgages by 2007 lehman brothers held 111 billion in real estate assets and securities more than four times its shareholder equity 11 it was also heavily leveraged meaning that a relatively minor downturn could wipe out the value of its portfolio for most of 2008 lehman brothers attempted to unwind its positions by selling stock and decreasing leverage however investor confidence continued to bleed out after a failed takeover by barclays and bank of america lehman brothers declared bankruptcy 12 | |
what happened to bear stearns s investors after the collapse | as part of the stock swap deal with jpmorgan bear stearns investors received about 10 of jpmorgan stock in exchange for every share they owned from bear stearns this was a sharp discount from the final share price of 30 2 had those investors kept those shares they would have recouped their losses 11 years later according to the wall street journal 13 | |
what role did deregulation play in the bear stearns collapse | some economists have attributed the subprime mortgage crisis to financial deregulation particularly the 1999 repeal of parts of the glass steagall act this repeal removed the legal barriers between commercial and investment banking allowing banks like bear stearns to issue and underwrite securities these securities would ultimately become a major catalyst for the financial collapse 14who benefited from the bear stearns collapse while there are no clear winners from the bear stearns collapse stockholders would have suffered arguably greater losses had the bank gone bankrupt jpmorgan chase which acquired bear stearns at fire sale prices would also benefit although it would be some time before jpmorgan would break even 13who went to jail for the 2008 financial crisis although the 2008 financial crisis caused a public outcry there was no reckoning for the bankers who were blamed for the crisis two managers at bear stearns hedge funds were arrested for misleading investors but they were found not guilty 15 the only successful prosecution was of kareem serageldin a credit suisse executive who was convicted of mismarking bond prices to hide the bank s losses 16the bottom lineformerly one of the largest investment banks on wall street the collapse of bear stearns is now regarded as a cautionary tale against corporate greed and the whims of the free market in the housing bubble of the early 2000s bear stearns leaned heavily into mortgage backed securities vastly underestimating the risks of the subprime housing market when the housing market collapsed and borrowers began to default the value of those securities plummeted ultimately bear stearns was acquired by jpmorgan in a fire sale since the purchase was supported by the federal reserve the acquisition raised ethical questions about corporate bailouts and the government s role in a market economy 2 | |
financial markets are inherently stochastic or probabilistic not deterministic even a well founded analysis can quickly become irrelevant as market conditions change traders and investors are thus often caught off guard one common scenario where this plays out is known as the bear trap 1 | a bear trap occurs when the price of a financial asset appears to be on a steady decline this leads investors to expect a further drop and they short sell to profit from the continuing downtrend the trap is now set instead of continuing to fall the price suddenly reverses and goes back up investors get ensnared taking on losses as the price of the security continues to increase bear traps are typically caused by a lack of sustained selling momentum and can be seen as deceptive signals that trick investors into acting prematurely this phenomenon underscores the complexity and unpredictability of market movements highlighting the importance of understanding and managing risk before entering a trading 1trading viewunderstanding bear trapsin technical analysis bear traps occur when the price of a security or index appears to decline misleading investors into believing that a downtrend will continue traders might then start short selling expecting the price to continue falling however the price suddenly reverses catching them with significant losses the trader might then need to cover short positions at higher prices effectively trapping them in unfavorable positions 2bear traps bring home the psychological and speculative elements of trading they are a cautionary example of what can happen when analyses lead you to trade in the wrong direction like a person stepping more gingerly through the woods knowing pitfalls might be around you can enter trades while being aware of the potential for misleading signals sometimes even the best analysis can walk you right into a trap which is why managing risk through stop loss orders and other strategies is your best path to relative safety bear traps are more likely in the following conditions a memorable historical example of a bear trap that led to a short squeeze and ended up causing congressional hearings and investigations by various regulators 4 in january 2021 investors believed that gamestop gme a video game retailer was on a downward trajectory due to long term business challenges as a result a significant amount of short interest accumulated that is many institutional investors were short selling the stock hoping to profit from its continued fall however a sudden surge in buying of the stock partly fueled by retail investors coordinating through social media platforms like reddit caused increased buying and dramatically pushed the stock s price up this rapid price increase caused massive losses for the short sellers there are many lessons from the affair but at least one is that traders should always be prepared with exit strategies and risk management tools no matter how sure they are of a stock s continued decline 5bear traps in point and figure chartsbear traps can be seen in different types of charts point and figure p f charts for example focus only on price movements disregarding time and volume in the plotting process they comprise a series of xs and os where xs represent rising prices and os represents falling prices p fs help filter minor price fluctuations thus highlighting only larger price movements this feature makes them particularly useful in identifying clear trends and breakouts or breakdowns 6in p fs bear traps happen when a series of os suggests a downward trend prompting traders to anticipate continued declines a p f bear trap only occurs if multiple columns of os form stopping at prior lows then a subsequent column of os forms and moves one box below the lows of the prior two or three columns of os this breakdown can only form one box below the prior lows before a reversal occurs i e a column of x forms this column of x s reverses the trend upwards because p f chart signals are very specific the breakdown of the column of o s can be only one box below the prior columns of o s before the reversal occurs for it to be a bear trap if the breakdown column of o s is more than one box it is no longer a bear trap even if the subsequent reversal of a column of xs happens 7it is important to note that p f bear traps differ from bear traps on traditional price charts like candlestick charts these bear traps are often identified through price and volume chart patterns and require analysis of time related elements 8 in p f charts the simplicity and focus on significant price changes make it easier to identify bear traps however the setup for bear traps across different charts is similar including high volatility market sentiment shifts and technical rebound setups from oversold conditions identifying bear trapsto effectively identify bear traps traders should combine the tools of technical analysis one is to note quick reversals in price after a security appears to break below a significant support level if the price sharply rebounds after breaking support it might be a sign of a bear trap 910another way is through checking anomalies in trading volume a decline in price not supported by an increase in trading volume suggests a lack of conviction among sellers this could indicate a bear trap a sudden spike in volume accompanying the price rebound would confirm it in addition technical indicators like the relative strength index or stochastic oscillator often signal oversold conditions before a reversal or bear trap 11 these indicators help identify when a security is overextended in its downward movement also specific candlestick patterns such as a hammer or a bullish engulfing pattern after a decline help you see a reversal or potential bear trap 2traders and investors often fall into bear traps because of some common mistakes which can be mitigated with careful strategy and awareness one is entering short positions based solely on the price breaking below key support levels without first confirming with volume and other indicators traders should always confirm a downward trajectory several ways whenever possible before taking a position another mistake is failing to consider the broader market context or news that might affect investor sentiment which results in misinterpreting price moves investors should consider incorporating fundamental analysis and market sentiment into their trading decisions not using stop loss orders exposes traders to significant risks when a bear trap occurs setting a stop loss order at a reasonable level above the entry point can limit losses if the market reverses unexpectedly finally chasing the market can lead investors right into a trap entering a trade too late after significant moves have already happened increases your likelihood of getting caught in a bear trap experienced traders enter trades when there is enough potential downside or upside to justify the risk overall by combining careful analysis with disciplined trading practices investors can significantly reduce their risk of falling into bear traps strategies to navigate bear trapsavoiding bear traps requires vigilance strategic planning and disciplined risk management for traders and long term investors understanding market dynamics and maintaining a robust investment strategy are crucial to avoiding such pitfalls some methods to avoid bear traps include the following 129long term investors are typically less affected by short term volatility yet they can still work to protect their portfolios from bear traps first they can diversify across different asset classes sectors and geographical regions to mitigate the effects of a bear trap 13also long term investors can focus on high quality securities with solid fundamentals and technicals to reduce their vulnerability to bear traps these securities will likely bounce back after market downturns and provide stable long term growth moreover long term investors should periodically review their portfolios to ensure they align with their goals and economic conditions 13to avoid bear traps effectively managing your risks is critical here are some options 12combining these strategies traders and long term investors can safeguard their investments against the misleading downturns characteristic of bear traps enhancing their overall market performance and protecting their capital the psychology of bear trapsbear traps often result from psychological factors and market sentiment many investors follow the crowd or the prevailing trend without thoroughly analyzing the reasons for the movement this is a herd mentality when a security declines the herd instinct kicks in prompting more investors to sell their holdings fearing further losses this collective action can drive the price down temporarily setting the stage for a bear trap 13negative news and market events can trigger emotional reactions such as fear or panic leading investors to make hasty decisions like selling at the first sign of a price drop these reactions are often exaggerated causing sharp but unsustainable declines in addition traders can often overemphasize technical levels like support and resistance a break below a key support level might be considered a bearish signal prompting widespread short selling however without confirming with other indicators such moves can quickly reverse trapping short sellers 13there are inherent biases that traders and investors need to overcome to avoid the pitfalls of bear traps by understanding the psychological factors and biases that contribute to bear traps and implementing disciplined trading strategies investors can better navigate the complexities of financial markets further examples of bear trapsin december 2022 the advisor shares pure cannabis etf yolo began a noticeable decline that continued through august 2023 indicating a strong downward trend in july 2023 the exchange traded fund etf displayed a bearish engulfing chart pattern where the closing price falls below the opening price overshadowing the previous day s price movement 16 this is typically a warning of further price drops despite these indicators the etf s price unexpectedly surged shortly after suggesting that the earlier signs were misleading a bear trap this sudden rise caught short sellers by surprise marking a shift to a bullish phase you can see this in the chart below tradingview | |
what s a bull trap | a bull trap is a false signal in financial markets it occurs when a declining trend in a security or other asset appears to reverse and head upward but then resumes its downward trend this temporary reversal misleads traders into thinking the asset is on the path to recovery prompting them to buy only for the price to fall again trapping investors in unfavorable positions 2 | |
what is a bearer bond | a bearer bond is a fixed income security that is owned by the holder or bearer rather than by a registered owner the coupons for interest payments are physically attached to the security the bondholder is required to submit the coupons to a bank or government treasury for payment and then redeem the physical certificate when the bond reaches the maturity date as with registered bonds bearer bonds are negotiable instruments with a stated maturity date and a coupon interest rate bearer bonds are virtually extinct in the u s and some other countries as the lack of registration made them ideal for use in money laundering tax evasion and any number of other under handed transactions they also are vulnerable to theft nevertheless bearer bonds are still issued in some countries understanding bearer bondsbearer bonds are bonds that have no registration these bonds are were issued by companies or governments and sold to investors to raise money the owner of the bond certificate is the recipient of the bond s payments and the bond value at maturity in the u s bearer bonds were issued by the government and corporations from the late 19th century after the civil war into the second half of the 20th century they gradually fell out of favor as modern technology outmoded them and investors shunned them because of their vulnerability to loss or theft the u s government discontinued them in 1982 under the tax equity and fiscal responsibility act of 1982 123redeeming old bearer bondsif you still hold old bearer bonds there are ways to claim them the u s government states that if you have bearer bonds you can send the bonds and coupons to the treasury using insured mail you should also include payment instructions primarily an address where the government can send the check you will also need to include an irs form w 9 4old bearer bonds issued by corporations may or may not have retained their face value even if the maturity dates have long since expired the holder of a corporate bearer bond can check for the name of the company that issued it and contact that company if it still exists or the company that bought it out if it was taken over the bearer bond may be honored | |
how bonds are issued and registered today | unlike the bearer bonds of the past bonds are registered and tracked nearly all securities are now issued in book entry form meaning that they are registered in the investor s name electronically no physical certificate is issued a registrar or transfer agent is responsible for tracking the name of each registered stock or bond owner this ensures that bond owners receive all interest payments due and that stockholders receive their cash or stock dividends every time a book entry security is sold a transfer agent or registrar changes the name of the registered owner obviously this system is highly automated or it would collapse | |
do bearer bonds still exist | bearer bonds may exist in some countries but they are no longer legal in the u s it s also possible that some people are still holding on to old bearer bonds | |
what is the point of a bearer bond | bearer bonds which no longer exist in the u s are used to secure debt financing whoever held the bond certificate was entitled to its value and coupon payments at maturity | |
what do i cash in old bearer bonds | if you have old government issued bearer bonds you can redeem them at the u s treasury you will need to send the government the bond certificate and coupons via insured mail and provide your address so they can send you a check you will also need to fill out irs form w 9 4the bottom lineas time has progressed federal agencies have been created to protect investors through various regulations and monitoring investing in securities is highly regulated and every transaction is registered though bearer bonds served their purpose in the late 19th and 20th centuries their lack of registration left them vulnerable to too much risk bearer bonds have been discontinued in many countries bonds issued today are registered and tracked so it is ensured that only the true owner of the bond will receive payment | |
what is a bearer share | a bearer share is equity security wholly owned by the person or entity that holds the physical stock certificate thus the name bearer share the issuing firm neither registers the owner of the stock nor tracks transfers of ownership the company disperses dividends to bearer shares when a physical coupon is presented to the firm because the share is not registered to any authority transferring the ownership of the stock involves only delivering the physical document | |
how a bearer share works | bearer shares lack the regulation and control of common shares because ownership is never recorded bearer shares are similar to bearer bonds which are fixed income securities belonging to the holders of physical certificates rather than registered owners bearer shares are often international securities common in europe and south america although the use of bearer shares in these nations has dwindled as governments crackdown on anonymity related illegal activity while some jurisdictions such as panama allow the use of bearer shares they impose punitive tax withholdings on dividends issued to owners to discourage their use the marshall islands is the only country in the world where the shares can be used without problems or extra costs many large foreign corporations over the past decade or so have also chosen to transition to full usage of registered shares germany based pharmaceutical giant bayer ag for example started to convert all its bearer shares to registered shares in 2009 1 and in 2015 the united kingdom abolished the issuance of bearer shares under the provisions of the small business enterprise and employment act 2015 2 switzerland a jurisdiction known for its emphasis on secrecy in banking transactions has abolished bearer shares in june 2019 the federal council of the swiss government adopted a new federal act declaring the end of bearer shares with the exception of publicly listed companies and intermediated securities all other existing bearer shares must be converted into registered shares 3 in the united states bearer shares are mostly an issue of state governance and they are not traditionally endorsed in many jurisdictions corporate laws delaware became the first state in the u s to ban the sale of bearer shares in 2002 4 bearer shares appeal to some investors because of privacy but the tradeoff is the increased costs associated with maintaining that privacy including attorney fees and taxes benefits of using bearer sharesthe only tangible benefit to be gained from using bearer shares is privacy the highest degree of anonymity possible is maintained with respect to ownership in a corporation by a holder of bearer shares although the banks that handle the purchases know the contact information of the people purchasing the shares in some jurisdictions banks are under no legal obligation to disclose the identity of the purchaser banks may also receive dividend payments on behalf of the shareholder and provide ownership confirmation at shareholders general meetings moreover purchases can be made by a representative such as a law firm of the actual owner bearer shares have some valid uses despite their inherent detriments asset protection is the most common reason to use bearer shares because of the privacy they provide for example individuals who do not want to risk their assets being seized as part of a legal proceeding such as a divorce or a liability suit may resort to the use of bearer shares disadvantages and risks of bearer sharesthe ownership of bearer shares often coincides with an increased cost incurred from hiring professional representation and advisors to maintain the anonymity that bearer shares provide unless the bearer shareholder is a financial and or legal expert in these matters avoiding the many legal and tax traps associated with bearer shares can be a difficult challenge also in a post 9 11 world in which the threat of terrorism looms heavily part of the strategy to counter the threat is to cut off the sources of terrorist funding consequently in a worldwide effort to deter terrorism funding money laundering and other illicit nefarious corporate activity many jurisdictions have enacted new legislation that places very tight restrictions on the use of bearer shares or has altogether abolished their use bearer shares examplefor example the panama papers scandal extensively used bearer shares to conceal the true ownership of shares the panama papers scandal was a leak of financial files that exposed a network of more than 200 000 tax havens involving high net worth individuals public officials and entities from 200 nations 5 it resulted in the reluctance of many banks and financial institutions to open accounts or have any associations with corporations or shareholders that deal with bearer shares the choice of jurisdictions and financial institutions willing to deal with bearer shares has narrowed significantly | |
in technical analysis the bearish engulfing pattern is a chart pattern that can signal a reversal in an upward price trend comprising two consecutive candles the pattern features a smaller bullish candle followed by a larger bearish candle that engulfs the first this formation is considered a strong indicator that the prior upward momentum is waning and a reversal is on the horizon 1 | traders can use the bearish engulfing pattern as a signal to initiate short positions typically a stop loss is set just above the high of the engulfing candle the top of the second one to mitigate risk while the pattern is considered powerful for identifying market reversals it s more effective when used with other technical indicators like the relative strength index rsi the moving average convergence divergence macd or volume analysis as such the chart pattern can be more valuable in a diversified trading strategy 23interpreting the bearish engulfing patternthe chart pattern can be a warning sign signaling a potential reversal from a bullish upward to a bearish downward trend the bearish engulfing pattern indicates a sudden shift in market sentiment when the sellers have overtaken the buyers the appearance of a bearish engulfing pattern after an uptrend suggests that the bullish or ascending momentum is weakening 2the bearish engulfing pattern has several implications the pattern is often an early indicator that a downtrend may be on the horizon for investors holding long positions the pattern can be a signal to consider exiting or to tighten stop loss levels additionally for traders shorting the asset or the market this pattern can mark a good entry point although additional confirmation is typically needed 2while the pattern is a bearish signal it is prudent to confirm it with other technical indicators like moving averages or the rsi a stop loss above the high of the engulfing candle is often placed to manage risk at this point 23also the pattern s reliability depends in part on its position within broader trends the volume during the pattern and the price action that follows the psychology behind the bearish engulfing patternthe psychology behind the bearish engulfing pattern helps understand the shifting dynamics between the buyers and the sellers in the market let s look at what the bearish engulfing pattern might indicate the bearish engulfing pattern suggests a psychological tug of war between optimism and pessimism confidence and fear its appearance could mark a pivotal moment when the balance of power shifts from buyers to sellers and a downtrend begins 2 understanding this psychology helps make more informed decisions and manage risk effectively trading the bearish engulfing patternthe bearish engulfing pattern can be a critical technical signal in financial charts that heralds a potential reversal from bullish to bearish sentiment in the market this pattern can have an important role in guiding traders decisions but like all technical indicators it should be used with other tools and with a clear understanding of its implications the bearish engulfing pattern typically appears at the end of an uptrend signaling a potential reversal in price direction 1 it can be seen as more significant when there is a high trading volume during the bearish candle period for further validation traders can wait for a subsequent bearish candle in the next trading session another strong confirmation comes from a gap down which means the opening price of a trading session is lower than the closing price of the previous session 2additional technical tools like moving averages rsi or the macd could be used to confirm the bearish signal for example a crossover in macd or an rsi heading below 70 could be additional confirmation also if the pattern occurs near a known support level and the price breaks below it that s often considered strong confirmation 12 | |
when acting on this pattern traders typically initiate a short position after they ve confirmed the bearish signal setting a stop loss above the highest point of the engulfing candle potentially curtailing a financial setback alternatively to save any gains as the price decreases some traders employ a trailing stop an order set at a percentage or dollar amount below the market price which adjusts as the price increases ensuring gains are locked in 21 | however it s worth noting that as with all trading strategies there s no guarantee of success the bearish engulfing pattern can be misleading this is why traders consider a stop loss crucial if the pattern fails traders can then re evaluate the market conditions a failed bearish signal could indicate underlying strength in the asset and it isn t the right time to go short 12a setup that doesn t pan out can be emotionally taxing investors and traders find it best then to stick to a well defined plan and not let emotions dictate actions 2the pros and cons of using the bearish engulfing patternearly warning systemsimple to identifyhighly versatilerisk managementstronger confirmationfalse signalsdepends on contextlagging indicatorrequires confirmationemotional pitfallsthere are benefits and disadvantages to using the bearish engulfing pattern as a signal in trading 4benefits drawbacks the bearish engulfing pattern offers several benefits such as ease of identification and versatility across markets however it also has limits like the potential for false signals and the need for additional confirmation understanding the pros and cons of this pattern could help traders use it more effectively as part of a balanced trading strategy an example of the bearish engulfing patterntradingviewin this scenario a bearish engulfing pattern appeared on apple inc s aapl daily chart backed by a bearish crossover in the rsi and its five day moving average following these signals the stock had a 3 4 decline if you were considering a short position on aapl at the time this appeared you might have used the following strategy of course this is just an illustration of how the pattern can help guide trading you should conduct thorough backtesting and risk assessment before incorporating such patterns into your trading strategies investment decisions should ideally be made with the assistance of a financial advisor | |
are there any other chart patterns like the bearish engulfing pattern | several other chart patterns are like the bearish engulfing pattern each with its subtleties and implications for trading these include the bearish harami dark cloud cover the evening star the shooting star the three black crows the tweezer top the double top and the head and shoulders chart patterns | |
what are the similarities between bar charts and candlestick charts | bar charts and candlestick charts are popular tools used by traders and investors to visualize price changes over a specified period they have key information about the open close high and low prices for the selected time frame the primary components of both are vertical lines representing the price range with horizontal notches or specific shapes like the body of a candle indicating open and close prices while the main distinction lies in the presentation with bar charts using single bars and candlestick charts using candles to signify bullish or bearish price trends both charts enable you to identify trends reversals and potential signals to buy or sell | |
how reliable is the bearish engulfing pattern | the reliability of the bearish engulfing pattern varies based on several factors including market conditions the asset being traded and your broader trading strategy some factors that could increase its reliability include volume analysis confirmatory indicators and the overall market context and environment | |
how do i confirm the bearish engulfing pattern signal | improving the reliability of the bearish engulfing pattern signal involves a multifaceted approach that incorporates additional technical indicators contextual analysis and risk management strategies by integrating additional layers of analysis and risk management you can improve the reliability of the bearish engulfing pattern as a bearish signal it should be noted that no single indicator should be used in isolation a well rounded strategy often involves several forms of analysis for more robust decision making | |
what is the best time frame to use for the bearish engulfing pattern | the ideal time frame for using the bearish engulfing pattern largely depends on your trading style objectives and risk tolerance longer time frames generally offer more reliable signals but may require more patience and capital while shorter time frames enable you to move more quickly but have a greater chance of not panning out traders often incorporate additional indicators and risk management techniques to improve the pattern s reliability regardless of your chosen time frame the bottom linethe bearish engulfing pattern is a technical chart pattern that can help identify reversals in an uptrend it consists of two candles a smaller bullish candle followed by a larger bearish candle that engulfs the previous one the pattern can be a warning sign that the bulls for this asset or market depicted are losing control and a bearish reversal is coming the signal is more reliable if confirmed by high trading volume additional bearish candles or other technical indicators like rsi or macd in practice traders use the bearish engulfing pattern as a signal to enter short positions typically setting a stop loss above the high of the engulfing candle to manage risk the pattern is applicable across various time frames and asset classes but its reliability can vary therefore traders often use it with other forms of technical and fundamental analysis as part of a well rounded trading strategy | |
what is behavioral economics | behavioral economics is the study of psychology as it relates to the economic decision making processes of individuals and institutions behavioral economics is often related with normative economics it draws on psychology and economics to explore why people sometimes make irrational decisions and why and how behavior diverges from the predictions of economic models investopedia mira norianunderstanding behavioral economicsin an ideal world people would always make optimal decisions that provide them with the greatest benefit and satisfaction in economics rational choice theory states that when humans are presented with various options under the conditions of scarcity they would choose the option that maximizes their individual satisfaction this theory assumes that people given their preferences and constraints are capable of making rational decisions by effectively weighing the costs and benefits of each option available to them the final decision made will be the best choice for the individual the rational person has self control and is unmoved by emotions and external factors and hence knows what is best for himself alas behavioral economics explains that humans are not rational and are incapable of making good decisions because humans are emotional and easily distracted beings they make decisions that are not in their self interest for example according to the rational choice theory if charles wants to lose weight and is equipped with information about the number of calories available in each edible product he will opt only for food products with minimal calories behavioral economics states that even if charles wants to lose weight and sets his mind on eating healthy food going forward his end behavior will be subject to cognitive bias emotions and social influences if a commercial on tv advertises a brand of ice cream at an attractive price and quotes that all human beings need 2 000 calories a day to function effectively after all the mouth watering ice cream image price and seemingly valid statistics may lead charles to fall into the sweet temptation and fall off of the weight loss bandwagon showing his lack of self control behavioral economics and behavioral finance are often driven by many of the same factors though behavior finance is often more related to financial markets history of behavioral economicsnotable individuals in the study of behavioral economics include nobel laureates gary becker motives consumer mistakes 1992 herbert simon bounded rationality 1978 daniel kahneman illusion of validity anchoring bias 2002 george akerlof procrastination 2001 and richard h thaler nudging 2017 in the 18th century adam smith noted that people are often overconfident with their own abilities noting the chance of gain is by every man more or less over valued and the chance of loss is by most men under valued and by scarce any man who is in tolerable health and spirits valued more than it is worth 1 in this sense smith believed individuals are not rational with their own limitations more recently behavioral economics took shape as early as the 1960 s when several economists identified key biases when recalling information this idea called availability heuristic was explained by amos tversky and daniel kahneman and it leads individuals to irrationally interpret data 2 for example shark attacks tend to happen less than people think but headlines may make people feel otherwise tversky and kahneman are also credited with developing prospect theory how people are potentially more adverse to losses as opposed to receiving an equal win in 2017 richard thaler received the sveriges riksbank price in economics science for his work in identifying factors that guide individuals economic decision making thaler s work included limited rationality social preferences lack of self control and individual decision making factors that influence behaviorthere are often five factors that are cited when analyzing how individual behavior is influenced bounded rationality is the idea that individuals make decisions based on the knowledge they have unfortunately this information is often limited whether by the individual s lack of expertise of lack of available information in regards to finance and investing the same public information is available to everyone though investors may not know true circumstances of what is happening with a company internally people can be easily manipulated and this is often on display in the way promoters craft incentives or deals to make consumers buy certain products consider how a cracker display may be presented right next to the cheese aisle within a supermarket this type of design is meant to steer a consumer into making a decision based on a choreographed demonstration often between complementary goods whether people realize it or not everybody makes decisions that are influenced by cognitive bias consider the choice of choosing between two companies to invest in behavioral economics holds the theory that the color of the logo the name of the ceo or the city in which each company is headquartered in may stir up an unknown bias that yields us to choose the other company in a similar light behavioral economics is often associated with discrimination people perceive things events or other people through their own lenses potentially discriminating towards others because they simply favor a different alternative this does not necessarily mean the alternative is a better option though many consumer decisions are influenced by what other people are doing whether it is the fear of missing out or whether others want to be part of a larger collective herd mentality is the belief that individual decisions are swayed based on what other people do not necessarily on what is the best outcome after all it is much easier rooting for your favorite team even if they haven t won a championship in a while as long as other fans share your pain the media plays a critical part in behavioral economics consider how a single headline can grab your attention and make you want to either pursue or avoid a product principals of behavioral economicsthe field of economics is vast although behavioral economics is just a subset of the field it itself has a number of guiding principles that dictate the themes within behavioral economics some of the primary principles and themes are listed below framing is the principle of how something is presented to an individual this behavioral economics concept presents a cognitive bias in that an outcome may be determined based on the structure of how something has been presented consider how someone may feel about the two following statements about babe ruth both of which are describing the same thing heuristics is a complicated field but it simply means that humans tend to make decisions using mental shortcuts as opposed to using long rational optimal reasoning most often people latch onto something as true even if it may no longer be the case in this situation it s easier for the consumer to continue what they ve been doing as opposed to realizing a more beneficial situation exists behavioral economics is rooted in the notion that people do not like losses in fact people are loss averse to the point that an economic outcome of one financial value that is negative outweighs the emotional toll of the same financial value but positive for example some people feel there is much stronger negative emotions associated with losing a 20 bill compared to finding a 20 bill on the ground for lack of a better phrase the market can take advantage of behavior economics for this reason market inefficiencies play a crucial part in behavior economics consider how overpriced stocks may still lure in investors due to drops in p e ratios though the trading multiple may still be abnormally high investors may think something in the market is more reasonable simply because it is lower for example a stock worth 20 may be trading at 50 should the price to 40 investors may feel this is a great opportunity consumers and investors may change their spending and trading tendencies based on circumstances though this is fair often times it is illogical and shapes many aspects of behavioral economics for example after receiving one s annual bonus an investor may choose to invest in riskier stocks this mental accounting exercise led an investor to make a decision based on their circumstances not their long term strategy the sunk cost fallacy is the emotional attachment to costs that have been incurred in the past consumers and investors tend to have a harder time letting go of failed investments or committed capital consider a failed stock that was purchased at 100 share that is now worth 15 share an investor may not feel compelled to buy in at 15 share because they think the company is not worth that however they are unwilling to sell their shares bought at 100 share due to an emotional attachment to that committed capital | |
when performing a cost benefit analysis sunk costs are ignored entirely that is because the price has already been paid and if it can not be recovered it has no financial bearing on the future outcome of a decision | applications of behavioral economicsone field in which behavioral economics can be applied to is behavioral finance which seeks to explain why investors make rash decisions when trading in the capital markets much like how poker professionals not only study the mathematics and odds of poker they also attempt to capitalize on the irrational nature of other players the same can be said of financial markets | |
when a decision made leads to error heuristics can lead to cognitive bias behavioral game theory an emergent class of game theory can also be applied to behavioral economics as game theory runs experiments and analyzes people s decisions to make irrational choices this concept attempts to override illogical behavior to predict consumption outcomes | companies are increasingly incorporating behavioral economics to increase sales of their products in 2007 the price of the 8gb iphone was introduced for 600 and quickly reduced to 400 by introducing the phone at a higher price and bringing it down to 400 consumers believed they were getting a pretty good deal even if the true value of the product was only 400 consider a soap manufacturer who produces the same soap but markets them in two different packages to appeal to multiple target groups one package advertises the soap for all soap users the other for consumers with sensitive skin the latter target would not have purchased the product if the package did not specify that the soap was for sensitive skin they opt for the soap with the sensitive skin label even though it s the exact same product in the general package | |
what do behavioral economists do | behavioral economists work to understand what consumers do and why they make the choices they make such economists also assist markets in helping consumers make those decisions behavioral economists may work for the government to shape public policy to protect consumers other times they may work for private companies and assist in fostering sales growth | |
what is the goal of behavioral economics | the goal of behavioral economics is to understand why humans make the decisions they do there are usually outcomes that are the best for people and many times people do not choose that outcome behavioral economics is an incredibly complex and sometimes inexplainable science of why people do things and why they choose to not be rational | |
what is the difference between behavioral economics and psycology | both behavioral economics and psychology refer to the dispositions emotions and decision making of individuals behavior economics is a much more niche field that studies the financial decision making of an individual while psychology may cover any aspect of human rationality | |
what is the downside to behavioral economics | one downside to behavioral economics is that it can be used to deceive or manipulate people and their decision making though people are often not rational this irrationality may be predictable companies can choose to exploit this by packaging their products in a certain way pricing their goods at specific levels or customizing their marketing to attract certain markets the bottom linebehavioral economics is a field of study aimed at understanding why people make economically irrational decisions rational choice theory holds that consumers make choices that maximize their utility in reality people can be swayed or distracted from doing so behavioral economics attempts to understand how and why this happens | |
what is behavioral finance | behavioral finance a subfield of behavioral economics proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners moreover influences and biases can be the source for the explanation of all types of market anomalies and specifically market anomalies in the stock market such as severe rises or falls in stock price as behavioral finance is such an integral part of investing the securities and exchange commission has staff specifically focused on behavioral finance understanding behavioral financebehavioral finance can be analyzed from a variety of perspectives stock market returns are one area of finance where psychological behaviors are often assumed to influence market outcomes and returns but there are also many different angles for observation the purpose of the classification of behavioral finance is to help understand why people make certain financial choices and how those choices can affect markets within behavioral finance it is assumed that financial participants are not perfectly rational and self controlled but rather psychologically influential with somewhat normal and self controlling tendencies financial decision making often relies on the investor s mental and physical health as an investor s overall health improves or worsens their mental state often changes this impacts their decision making and rationality towards all real world problems including those specific to finance one of the key aspects of behavioral finance studies is the influence of biases biases can occur for a variety of reasons biases can usually be classified into one of five key concepts understanding and classifying different types of behavioral finance biases can be very important when narrowing in on the study or analysis of industry or sector outcomes and results read about investopedia s 10 rules of investing by picking up a copy of our special issue print edition behavioral finance conceptsbehavioral finance typically encompasses five main concepts behavioral finance is exploited through credit card rewards as consumers are more likely to be willing to spend points rewards or miles as opposed to paying for transactions with direct cash some biases revealed by behavioral financebreaking down biases further many individual biases and tendencies have been identified for behavioral finance analysis some of these include confirmation bias is when investors have a bias toward accepting information that confirms their already held belief in an investment if information surfaces investors accept it readily to confirm that they re correct about their investment decision even if the information is flawed an experiential bias occurs when investors memory of recent events makes them biased or leads them to believe that the event is far more likely to occur again for this reason it is also known as recency bias or availability bias for example the financial crisis in 2008 and 2009 led many investors to exit the stock market many had a dismal view of the markets and likely expected more economic hardship in the coming years the experience of having gone through such a negative event increased their bias or likelihood that the event could reoccur in reality the economy recovered and the market bounced back in the years to follow loss aversion occurs when investors place a greater weighting on the concern for losses than the pleasure from market gains in other words they re far more likely to try to assign a higher priority to avoiding losses than making investment gains as a result some investors might want a higher payout to compensate for losses if the high payout isn t likely they might try to avoid losses altogether even if the investment s risk is acceptable from a rational standpoint applying loss aversion to investing the so called disposition effect occurs when investors sell their winners and hang onto their losers investors thinking is that they want to realize gains quickly however when an investment is losing money they ll hold onto it because they want to get back to even or their initial price investors tend to admit they are correct about an investment quickly when there s a gain however investors are reluctant to admit when they made an investment mistake when there s a loss the flaw in disposition bias is that the performance of the investment is often tied to the entry price for the investor in other words investors gauge the performance of their investment based on their individual entry price disregarding fundamentals or attributes of the investment that may have changed the familiarity bias is when investors tend to invest in what they know such as domestic companies or locally owned investments as a result investors are not diversified across multiple sectors and types of investments which can reduce risk investors tend to go with investments that they have a history or have familiarity with familiarity bias can occur in so many ways you may resist investing in a specific company because of what industry it is in where it operates what products it sells who oversees the management of the company who its clientele base is how it performs its marketing and how complex its accounting is behavioral finance in the stock marketthe efficient market hypothesis emh says that at any given time in a highly liquid market stock prices are efficiently valued to reflect all the available information however many studies have documented long term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured plausibly in models based on perfect investor rationality the emh is generally based on the belief that market participants view stock prices rationally based on all current and future intrinsic and external factors when studying the stock market behavioral finance takes the view that markets are not fully efficient this allows for the observation of how psychological and social factors can influence the buying and selling of stocks the understanding and usage of behavioral finance biases can be applied to stock and other trading market movements on a daily basis broadly behavioral finance theories have also been used to provide clearer explanations of substantial market anomalies like bubbles and deep recessions while not a part of emh investors and portfolio managers have a vested interest in understanding behavioral finance trends these trends can be used to help analyze market price levels and fluctuations for speculation as well as decision making purposes | |
what does behavioral finance tell us | behavioral finance helps us understand how financial decisions around things like investments payments risk and personal debt are greatly influenced by human emotion biases and cognitive limitations of the mind in processing and responding to information | |
how does behavioral finance differ from mainstream financial theory | mainstream theory on the other hand makes the assumptions in its models that people are rational actors that they are free from emotion or the effects of culture and social relations and that people are self interested utility maximizers it also assumes by extension that markets are efficient and firms are rational profit maximizing organizations behavioral finance counters each of these assumptions | |
how does knowing about behavioral finance help | by understanding how and when people deviate from rational expectations behavioral finance provides a blueprint to help us make better more rational decisions when it comes to financial matters | |
what is an example of a finding in behavioral finance | investors are found to systematically hold on to losing investments far too long than rational expectations would predict and they also sell winners too early this is known as the disposition effect and is an extension of the concept of loss aversion to the domain of investing rather than locking in a paper loss investors holding lose positions may even double down and take on greater risk in hopes of breaking even | |
what is a bell curve | a bell curve is a common type of distribution for a variable also known as the normal distribution the term bell curve originates from the fact that the graph used to depict a normal distribution consists of a symmetrical bell shaped curve the highest point on the curve or the top of the bell represents the most probable event in a series of data its mean mode and median in this case while all other possible occurrences are symmetrically distributed around the mean creating a downward sloping curve on each side of the peak the width of the bell curve is described by its standard deviation investopedia nez riazunderstanding a bell curvethe term bell curve is used to describe a graphical depiction of a normal probability distribution whose underlying standard deviations from the mean create the curved bell shape a standard deviation is a measurement used to quantify the variability of data dispersion in a set of given values around the mean the mean in turn refers to the average of all data points in the data set or sequence and will be found at the highest point on the bell curve financial analysts and investors often use a normal probability distribution when analyzing the returns of a security or of overall market sensitivity in finance standard deviations that depict the returns of a security are known as volatility for example stocks that display a bell curve usually are blue chip stocks and ones that have lower volatility and more predictable behavioral patterns investors use the normal probability distribution of a stock s past returns to make assumptions regarding expected future returns in addition to teachers who use a bell curve when comparing test scores the bell curve is often also used in the world of statistics where it can be widely applied bell curves are also sometimes employed in performance management placing employees who perform their job in an average fashion in the normal distribution of the graph the high performers and the lowest performers are represented on either side with the dropping slope it can be useful to larger companies when doing performance reviews or when making managerial decisions investopedia julie bangexample of a bell curvea bell curve s width is defined by its standard deviation which is calculated as the level of variation of data in a sample around the mean using the empirical rule for example if 100 test scores are collected and used in a normal probability distribution 68 of those test scores should fall within one standard deviation above or below the mean moving two standard deviations away from the mean should include 95 of the 100 test scores collected moving three standard deviations away from the mean should represent 99 7 of the scores see the figure above test scores that are extreme outliers such as a score of 100 or 0 would be considered long tail data points that consequently lie squarely outside of the three standard deviation range bell curve vs non normal distributionsthe normal probability distribution assumption doesn t always hold true in the financial world however it is feasible for stocks and other securities to sometimes display non normal distributions that fail to resemble a bell curve non normal distributions have fatter tails than a bell curve normal probability distribution a fatter tail skews negative signals to investors that there is a greater probability of negative returns limitations of a bell curvegrading or assessing performance using a bell curve forces groups of people to be categorized as poor average or good for smaller groups having to categorize a set number of individuals in each category to fit a bell curve will do a disservice to the individuals as sometimes they may all be just average or even good workers or students but given the need to fit their rating or grades to a bell curve some individuals are forced into the poor group in reality data are not perfectly normal sometimes there is skewness or a lack of symmetry between what falls above and below the mean other times there are fat tails excess kurtosis making tail events more probable than the normal distribution would predict | |
what are the characteristics of a bell curve | a bell curve is a symmetric curve centered around the mean or average of all the data points being measured the width of a bell curve is determined by the standard deviation 68 of the data points are within one standard deviation of the mean 95 of the data are within two standard deviations and 99 7 of the data points are within three standard deviations of the mean | |
how is the bell curve used in finance | analysts will often use bell curves and other statistical distributions when modeling different potential outcomes that are relevant for investing depending on the analysis being performed these might consist of future stock prices rates of future earnings growth potential default rates or other important phenomena before using the bell curve in their analysis investors should carefully consider whether the outcomes being studied are in fact normally distributed failing to do so could seriously undermine the accuracy of the resulting model | |
what are the limitations of the bell curve | although the bell curve is a very useful statistical concept its applications in finance can be limited because financial phenomena such as expected stock market returns do not fall neatly within a normal distribution therefore relying too heavily on a bell curve when making predictions about these events can lead to unreliable results although most analysts are well aware of this limitation it is relatively difficult to overcome this shortcoming because it is often unclear which statistical distribution to use as an alternative | |
what is below the line advertising | below the line advertising is an advertising strategy where products are promoted in media other than mainstream radio television billboards print and film formats the main types of below the line advertising systems include direct mail campaigns social media marketing trade shows catalogs and targeted search engine marketing below the line advertising methods tend to be less expensive and more focused versus above the line strategies understanding below the line advertisingbelow the line advertising seeks to reach consumers directly instead of casting a wide net to reach mass audiences rather than airing a national commercial during a hit network television show a below the line campaign might instead focus on an in store demonstration of a product that consumers may wish to investigate in person this allows for a more high touch experience where a salesperson can answer direct questions and better explain the products some examples of below the line advertising include companies can target specific demographics with their advertising campaigns such as the age of a consumer or the industry of a company linkedin for example allows marketers to target specific people with sidebar advertisements based on their profession or groups that they belong to on the website companies still engage in direct mail advertising especially the older demographics that are not online as often as the younger generations catalogues and postcard mailings are still popular and effective marketing tools businesses often present their products and services through the local chambers of commerce banks host mortgage seminars to answer questions about mortgages interest rates and home affordability with the goal of landing new loan customers of course there s no perfect marketing tool that works each and every time instead companies often subscribe to multiple strategies for example a company might send out a direct mailing of fliers advertising an upcoming event that the company is hosting at the local convention center above the line vs below the line advertisingabove the line advertising is designed to reach mass audiences the epitome of above the line marketing is a super bowl television ad which costs millions of dollars for mere seconds of airtime but instantly reaches tens of millions of consumers on a global basis on the downside statistically speaking a significant percentage of those viewers may not typify a company s target consumer conversely below the line advertising reaches fewer people but is more selective about its audience in most cases below the line advertisers initially conduct extensive market research in an effort to identify a target niche of buyers more likely to purchase the products once the target demographic is identified below the line advertising reaches consumers in a more personalized direct manner above the line casts a wide net versus below the line which uses a proverbial fishing pole through direct mailings face to face contacts at trade shows or paid search engine results that pop up when consumers enter specific queries the return on investment roi from a below the line campaign can be higher versus an above the line since below the line is less costly and more easily monitored advantages of below the line advertisinglower costs are arguably the biggest advantage of below the line advertising while tv and radio ads tend to be pricy direct mailing and search engine marketing are far more economical and below the line methods can be more cheaply and easily scaled up or down furthermore below the line methods make it easier to track conversions with intended consumers case in point though there are multiple strategies for tracking the effectiveness of tv and radio ads it s hard to gauge overall impact asking customers how they heard about a company for example can yield unreliable responses because people sometimes recall their experiences inaccurately on the other hand email and search engine marketing precisely track the links consumers click in order to provide businesses with more exacting details below the line marketing fosters superior customer engagement which is critical in today s modern business landscape while above the line methods are ideal for spreading general brand awareness below the line tactics are preferable for fostering more meaningful relationships with potential customers | |
ben bernanke was the chair of the board of governors of the u s federal reserve from 2006 to 2014 bernanke took over the helm from alan greenspan on feb 1 2006 ending greenspan s 18 year leadership at the fed 1 | a former fed governor bernanke was chair of the u s president s council of economic advisors prior to being nominated as greenspan s successor in late 2005 investopedia alison czinkotaearly life and educationborn benjamin shalom bernanke on dec 13 1953 he is the son of a pharmacist and a schoolteacher and was raised in south carolina 2 a high achieving student bernanke completed his undergraduate degree summa cum laude at harvard university and then completed his ph d at mit in 1979 3he taught economics at stanford and then at princeton university where he chaired the department until 2002 when he left his academic work for public service 3 he officially left his post at princeton in 2005 4notable accomplishmentsbernanke was first nominated as chair of the fed by president george w bush in 2005 5 he had been appointed to president bush s council of economic advisors earlier the same year which was widely seen as a test run for succeeding greenspan as chair 6in 2009 president barack obama nominated him for a second term as chair 7 he was succeeded by janet yellen as chair in 2014 before serving his two terms as chair of the federal reserve bernanke was a member of the federal reserve s board of governors from 2002 to 2005 1ben bernanke was instrumental in stimulating the u s economy after the 2008 banking crisis that sent the economy into a downward spiral he took an aggressive and experimental approach to restore confidence in the financial system one of the multiple strategies that the fed applied to curb the global crisis was enacting a low rate policy to stabilize the economy under the tutelage of bernanke the fed slashed the benchmark interest rates near to zero by reducing the federal funds rate banks lend each other money at a lower cost and in turn can offer low interest rates on loans to consumers and businesses 8the total net worth american households lost between 2007 and 2009 of the great recession 9as conditions worsened bernanke proposed a quantitative easing program the quantitative easing scheme involved the unconventional purchase of treasury bond securities and mortgage backed securities mbs to increase the money supply in the economy 8 by purchasing these securities on a large scale the fed increased the demand for them which led to an increase in the prices since bond prices and interest rates are inversely related interest rates fell in response to the higher prices the lower interest rates reduced the financing costs for business investments hence improving a business financial position by bolstering operations and activities businesses were able to create more jobs which contributed to a reduction in the unemployment rate ben bernanke also helped to curb the effects of the rapidly deteriorating economic conditions by bailing out several troubled big financial institutions while the fed underwrote the decision to let lehman brothers fail they bailed out companies such as aig insurance due to the higher risk that the bailed out companies posed if they went bankrupt 10in the case of aig bernanke believed that the company s huge liability was solely isolated in its financial products which involved hundreds of billions of dollars in derivatives speculation if the company lost out on its speculative position on these derivatives it would not have sufficient funds to pay out or cover its losses 11 for companies like merrill lynch and bear stearns the federal reserve incentivized bank of america and jpmorgan to purchase and take over both companies by guaranteeing the bad loans of the troubled banks 1213published worksin 2013 bernake released the federal reserve and the financial crisis a compilation of his lectures about the history of the federal reserve and the financial crisis of 2008 it features his insights on the fed s activities decisions and responses to events 14two years later he published the courage to act a memoir of a crisis and its aftermath chronicling his experiences as the chairman of the federal reserve board and exposed how close the global economy came to collapsing in 2008 stating that it would have done so had the federal reserve and other agencies not taken extreme measures 15 president barack obama has also stated that bernanke s actions prevented the financial crisis from becoming as bad as it could have been 7 however bernanke has also been the subject of critics who claim he didn t do enough to foresee the financial crisis legacyalthough bernanke s actions were indelible to the recovery of the global economy he faced criticism for the approaches that he took to achieve this recovery economists criticized his pumping hundreds of billions of dollars into the economy through the bond purchase program which potentially increased individual and corporate debt and led to inflation in addition to these economists legislators also criticized his extreme measures and opposed his re appointment as federal reserve chair in 2010 16 president barack obama however reappointed him for a second term as of august 2022 ben bernanke is currently serving as an economist at the brookings institution a nonprofit public organization based in washington dc where he provides advice on fiscal and monetary policies 3 he also serves as a senior advisor to citadel 17 | |
what boards did ben bernake serve on | after stepping down as the chair of the board of governors of the u s federal reserve ben bernake served as a member of the montgomery township board of education in new jersey for two years and is now an economist for the brookings institution and advisor for financial services firm citadel 317 | |
what did ben bernake do during the financial crisis | to counter the effects of the financial crisis of 2008 bernake employed a low rate policy whereby rates were reduced to practically nothing and a quantitative easing plan to increase the money supply bernake also bailed out many large failing financial institutions 8to what economic school of thought does ben bernake belong ben bernake belongs to the milton friedman and anna schwartz school of thought 18 bernake subscribed to the principle that the federal reserve board could reduce inflation and revitalize the economy by increasing the money supply at the same rate as the gross national product gnp the bottom lineben bernake the former two term chair of the federal reserve is largely regarded for implementing strategies that saved the u s economy his methods albeit somewhat controversial led to an increase in u s jobs the bailout of well known established financial institutions and a robust economy his actions were not exempt from scrutiny however as there were a host of critics who believed his actions were more detrimental than good despite varying opinions bernake remains in high demand as an economist and advisor and is esteemed as one of the most influential fed chairs in history |
Subsets and Splits