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when putting together mutual funds and etfs fund sponsors attempt to create portfolios mirroring the components of a certain index this allows an investor to buy a security likely to rise and fall in tandem with the stock market as a whole or with a segment of the market | index examplesthe s p 500 index is one of the world s best known market proxy indexes and one of the most commonly used benchmarks for the stock market it includes 80 of the total stocks traded in the united states conversely the dow jones industrial average is also well known but represents stock values from just 30 of the nation s publicly traded companies other prominent indexes include the nasdaq 100 index wilshire 5000 total market index msci eafe index and the bloomberg us aggregate bond index like mutual funds indexed annuities are tied to a trading index however rather than the fund sponsor trying to put together an investment portfolio likely to closely mimic the index in question these securities feature a rate of return that follows a particular index but typically have caps on the returns they provide for example if an investor buys an annuity indexed to the dow jones and it has a cap of 10 its rate of return will be between 0 and 10 depending on the annual changes to that index indexed annuities allow investors to buy securities that grow along with broad market segments or the total market adjustable rate mortgages feature interest rates that adjust over the life of the loan the adjustable interest rate is determined by adding a margin to an index one of the most popular indexes on which mortgages are based is the london inter bank offer rate libor for example if a mortgage indexed to the libor has a 2 margin and the libor is 3 the interest rate on the loan is 5 | |
what is an index fund | an index fund is a mutual fund or etf that seeks to replicate the performance of an index often by constructing its portfolio to mirror that of the index itself index investing is considered a passive strategy since it does not involve any stock picking or active management studies show that over time indexing strategies tend to perform better than stock picking strategies because they are passive index funds also tend to have lower fees and tax exposure | |
what are different ways to construct an index | indexes can be built in a number of ways often with consideration to how to weight the various components of the index the three main ways include | |
why are indexes useful | indexes are useful for providing valid benchmarks against which to measure investment performance for a given strategy or portfolio by understanding how a strategy does relative to a benchmark one can understand its true performance indexes also provide investors with a simplified snapshot of a large market sector without having to examine every single asset in that index for example it would be impractical for an ordinary investor to study hundreds of different stock prices in order to understand the changing fortunes of different technology companies a sector specific index can show the average trend for the sector | |
what are some major stock indexes | in the united states the three leading stock indexes are the dow jones industrial average the s p 500 the nasdaq composite and the russell 2000 for international markets the financial times stock exchange 100 ftse 100 index and the nikkei 225 index are popular proxies for the british and japanese stock markets respectively most countries with stock exchanges publish at least one index for their major stocks | |
what are some bond indexes | while stock market indexes may most often come to mind indexes are also constructed around other asset classes in the bond market for example the bloomberg aggregate bond index tracks the investment grade bond market while the emerging market bond index looks at government bonds of emerging market economies the bottom linemarket indexes provide a broad representation of how markets are performing these indexes serve as benchmarks to gauge the movement and performance of market segments investors also use indexes as a basis for portfolio or passive index investing in the u s such representative indexes include the large cap s p 500 and the technology heavy nasdaq 100 | |
index funds aim to mirror the performance of benchmarks like the s p 500 by mimicking their makeup these passive investments long considered an unimaginative way to invest are behind a quiet revolution in u s equity markets as they seize the attention and dollars of a widening swath of investors the numbers tell the story passive index funds tracking market benchmarks accounted for just 21 of the u s equity fund market in 2012 1 by 2023 passive funds had crossed above 50 of assets beating their actively traded peers 2 | the seismic shift has come as index funds have convincingly outperformed their active fund peers 32 according to the widely followed s p indices versus active spiva scorecards about 9 out of 10 actively managed funds didn t match the returns of the s p 500 benchmark over the previous 15 years 3 rather than having some unique stock picking wizardry critics argue that managers of actively traded funds have only demonstrated a magical power for extracting higher fees for themselves while returning less to clients whatever the outcome of these debates over fund performance for many who once put their faith in what those fees in actively managed funds bought the spell has clearly been broken to see why below we unpack what index funds are and how they work we ll discuss the benefits and drawbacks of building a portfolio with index funds along the way investopedia madelyn goodnight | |
what are index funds | indexes and index funds exist for almost any part of the financial market index funds invest in the same assets using the same weights as the target index typically stocks or bonds if you re interested in the stocks of an economic sector or the whole market you can find indexes that aim to gain returns that closely match the benchmark index you want to track index funds use a passive investing strategy trading as little as possible to keep costs low for broad indexes like the s p 500 that would be impractical or expensive to do on your own index funds do the work for you by holding a rep sample of the securities s p 500 index funds the most popular in the u s mimic the moves of the stocks in the s p 500 which covers about 80 of all u s equities by market cap 4the portfolios of index funds only change substantially when their benchmark indexes change if the fund follows a weighted index its managers may periodically rebalance the weights the percentage by market cap and components of their fund s securities to keep matched with the target index besides the s p 500 these funds mirror other major indexes like the nasdaq composite index made up of 3 000 stocks listed on the nasdaq exchange the bloomberg u s aggregate bond index which follows the total u s dollar denominated bond market and the dow jones industrial average djia consisting of 30 large cap companies chosen by the editors of the wall street journal 567index funds provide broad market exposure and diversification across various sectors and asset classes according to their underlying index the broader index funds are often quite good at keeping tracking errors low the difference between the fund s performance and the target index however you ll want to thoroughly review any fund s fees and performance before investing to give an idea of how close the funds should track their targets as of march 2024 fidelity s nasdaq composite index fund fncmx had a 10 year average annual return of 15 16 versus 15 23 for the nasdaq composite a 0 07 difference 8investing in index funds means putting your money not behind the skills of active fund managers but on the prospects for the market or its parts benefits of index fundsthe primary advantage index funds have over their actively managed peers is lower fees so if actively managed funds don t outperform their passive peers more investors are asking why are clients paying fund managers so much more in fees each year using spiva data as a proxy which compares the performance of actively managed funds with certain benchmarks 87 of actively traded funds had underperformed the s p 500 the previous five years from data last published in mid 2023 when you extend that to 15 years it s 92 3a greater public understanding of statistics like these helps explain the growing popularity of passive funds almost all of which are index funds you still have to pay an expense ratio with these funds which is charged as a percentage of the assets under management to pay to advisors and managers and cover transaction fees taxes and accounting costs 9 since the managers of index funds are simply replicating the performance of a benchmark index they don t need research analysts and others to choose stocks timing trades etc they also trade holdings less frequently meaning fewer transaction fees and commissions by contrast actively managed funds have large staffs and conduct trades with more complications and volume driving up the costs as such index funds can charge less than their actively trading peers they often cost about 0 05 or less compared with the higher fees that actively managed funds command typically 0 44 and sometimes higher than 1 00 depending on the assets 1011 what does this fee buy you passively managed funds don t try to beat the market they want to match it here are some more of these funds advantages these funds have many virtues that make them well suited for ordinary long term investors that said the best choice for you active or passive or any fund at all will depend more on your financial goals the investment environment risk tolerance and other specifics about your situation than these general characteristics drawbacks of index fundsamong the critiques of index funds is their inherent lack of flexibility because they are designed to mirror a specific market they decline in value when the market does and they can t pivot away in an unfavorable environment similarly they are also criticized for automatically including all the securities in an index this means they may invest in companies that are overvalued or fundamentally weak leaving aside greater weighting or investments in assets that could be chosen by a fund manager and provide better returns of course this automated strategy has often outperformed active management perhaps in part by holding onto assets that active fund managers have misjudged another disadvantage has to do with what s called market cap weighting which many index funds use companies with higher market capitalizations have a greater influence on the fund s performance in such funds this concentration can lead to being too tied to the fate of a few large companies magnifying your risks if these companies underperform best index funds | |
are index funds good investments | index funds are very popular among investors they offer a simple no fuss way to gain exposure to a broad diversified portfolio at a low cost for the investor they are passively managed investments and for this reason they often have low expense costs in bull markets these types of funds can provide attractive returns as the market rises lifting all boats they do come with disadvantages however one is the lack of downside protection in prolonged downtrends these funds can perform very poorly in line with the broader market index mutual funds vs index etfsif you re interested in index funds you ll likely have to choose between investing in mutual funds or etfs that track specific indexes both are funds replicating the performance of a specific market index however they differ in several key aspects that can influence your decision depending on your investment goals and strategy index mutual funds pool money to buy a portfolio of stocks or bonds investors buy shares directly from the mutual fund company at the net asset value nav price which is calculated at the end of each trading day among the main advantages of index mutual funds in the chart below are the simplicity of automatically reinvesting dividends and dollar cost averaging making regular set contributions index etfs meanwhile are traded on exchanges like individual stocks this lets investors employ far more trading strategies timing etf share trades using limit or stop loss orders short selling etc which are among the benefits of index etfs found below find out investopedia s 10 rules of investing by ordering a copy of our special issue print edition example of an index fundindex funds have been around since the 1970s but have exploded in popularity over the past decade or so the fund that started it all founded by vanguard chair john bogle in 1976 remains among the best as judged by its long term performance and low cost the vanguard 500 index fund has tracked the s p 500 faithfully in composition and performance as of march 2024 vanguard s admiral shares vfiax posted an average 10 year average annual return of 12 75 vs the s p 500 s 12 78 a very small tracking error 12 the expense ratio is low at 0 04 and its minimum investment is 3 000 | |
how to invest in index funds | investing in index funds is straightforward for both new and experienced investors here s how to get started investing in index funds | |
are index funds better than stocks | index funds track portfolios composed of many stocks or bonds as a result investors benefit from the positive effects of diversification such as increasing the expected return of the portfolio while minimizing the overall risk while any individual stock may see its price drop steeply if it s a relatively small part of a larger index it won t be as damaging | |
what are the best index funds for retirement | the best index funds for retirement offer growth potential and solid risk management that aligns with your time to retirement and risk tolerance for long term growth consider broad market equity index funds like the vanguard total stock market index fund vtsax or the fidelity 500 index fund fxaix for diversification and income bond index funds like the fidelity total bond fund ftbfx can be a good choice target date retirement funds which automatically adjust their allocation as your retirement approaches can also be a convenient option for retirement planning | |
are index funds good for beginners | index funds can be an excellent option for beginners stepping into the investment world they are a simple cost effective way to hold a broad range of stocks or bonds that mimic a specific benchmark index meaning they are diversified index funds have lower expense ratios than most actively managed funds making them affordable and often outperform them too these reasons make them a solid choice not only for beginners but many expert investors as well 3 a final bonus for newer investors if your fund is tied to a main index like the s p 500 or nasdaq composite you ll see news coverage of it often helping you keep abreast of your investment while learning the broader market s ebbs and flows | |
how much should you pay for an index fund | index funds generally have low annual fees and these fees on average have been declining over the past several years according to the last published data from the investment company institute in 2023 the average fee for an index fund is 0 04 with some index funds offering even lower expense ratios all else being equal you might wish to choose the lower cost fund among those that equally track the same index well 11the bottom lineindex funds are a popular choice for investors seeking low cost diversified and passive investments that happen to outperform many higher fee actively traded funds they are designed to replicate the performance of financial market indexes like the s p 500 and are ideal for long term investing such as in retirement accounts while they offer advantages like lower risk through diversification and long term solid returns index funds are also subject to market swings and lack the flexibility of active management despite these limits index funds are often favored for their consistent performance and are now a staple in many investment portfolios consider your investment objectives and risk tolerance when choosing an index fund talking first with a financial advisor for personalized advice is always prudent | |
index futures are agreements whose value is derived from a financial index essentially they are agreements to trade the value of an index at a future time reflecting expectations of the index s future direction in price originally intended for institutional investors index futures are open to individual investors traders can use these contracts to speculate on the price direction indexes such as the s p 500 and the dow jones industrial average djia popular futures include fractional index futures that trade at lower prices than those aimed at institutional investors like the chicago mercantile exchange s cme e mini s p 500 investors also use index futures to hedge their equity positions against potential losses | understanding index futuresan index tracks the price of an asset or a group of assets such as equities commodities and currencies a futures contract is a derivative that obligates traders to buy or sell the underlying asset on a set day at a predetermined price putting these together an index future is a legal contract that obligates traders to buy or sell a contract derived from a stock market index by a specific date at a predetermined price index futures which are also called stock or equity market index futures work just like other futures contracts they give investors the power and obligation to deliver the contract s cash value based on an underlying index on a specified date at an agreed upon price unless the contract is unwound before expiration through an offsetting trade the trader is obligated to deliver the cash value on expiry this differs from other types of futures like those involving commodities where a party might be obligated to hand over the underlying asset at expiry not cash traders use index futures to hedge or speculate against future price changes in the underlying equity index for example the s p 500 tracks the stock prices of 500 of the largest companies traded in the u s an investor could trade index futures on the s p 500 to hedge or speculate on gains or losses of the index index futures do not predict future index performance types of index futuresthe most popular index futures are based on equities which means investors hedge their bets on the individual index named in the contract 1for instance traders can invest in the s p 500 index by purchasing e mini s p 500 futures contracts investors can also trade futures for the dow jones industrial average and nasdaq 100 index as well as their more accessible versions the e mini dow and e mini nasdaq 100 futures and their even smaller variants the micro e mini dow and micro e mini nasdaq 100 2outside the u s there are futures available for the dax stock index which comprises 30 major german companies and the swiss market index both of these futures trade on the eurex in hong kong hang seng index futures allow traders to speculate on that market s major index index futures may use different multiples to determine the contract price for example the e mini s p 500 futures contract which trades on the cme has a value of 50 times the value of the index so if the index trades at 3 400 points the market value of the contract would be 3 400 x 50 or 170 000 3aside from the more conventional futures contracts that derive their value from the fluctuations in prices of financial instruments there are index event futures which depend on expectations for a specific index events covered by these kinds of futures can range from electoral results illegal except for research purposes in the u s to shifts in equities and commodity prices as well as specific indexes an event futures contract has a binary outcome it culminates at a predetermined value and resolves at zero if the anticipated event fails to occur the cme began offering events futures in 2022 with daily expiries expanding them to include quarterly and annual expirations in 2024 a typical index future might be will e mini s p 500 daily close above a given point value like 5 000 points you would get a certain return if you bet on yes and another return based on no if it turns out you were correct and depending on how others in the market are feeling about that outcome 4in 2022 the chicago mercantile exchange began offering index event futures which require you to choose yes or no to whether an index will go above a certain level paying out if you re right and leaving you with nothing if you re wrong 4index futures and marginsfutures contracts don t require the buyer to put up the entire value of the contract when entering a trade instead buyers must keep just a fraction of the contract amount in their account this is called the initial margin 5index futures prices can fluctuate significantly until the contract expires as such traders must have enough money in their accounts to cover a potential loss which is called the maintenance margin this sets the minimum amount of funds an account must hold to satisfy future claims the financial industry regulatory authority requires a minimum of 25 of the total trade value as the minimum account balance although some brokerages ask for more 6 as the value of the trade climbs before expiration the broker can require that more funds be added to the account this is called a margin call 7it s important to note that index futures contracts are legally binding agreements between the buyer and seller futures differ from options since futures come with an obligation an option meanwhile is a right the holder may or may not exercise profits and losses from index futuresan index futures contract states the holder agrees to purchase an index at a particular price on a specified date index futures typically settle quarterly in march june september and december there are usually several annual contracts as well 5equity index futures are cash settled this means there will be no delivery of the underlying asset at the end of the contract if the index price is higher than the agreed upon contract price at the expiry date the buyer makes a profit while the seller known as the future s writer suffers a loss in the reverse scenario the buyer suffers a loss while the seller makes a profit for example if the djia closes at 16 000 at the end of september the holder with a september futures contract one year earlier at 15 760 reaps a profit the difference between the entry and exit prices of the contract determines profits as with any speculative trade there are risks the market could move against the position the trading account must meet margin requirements and could receive a margin call to cover any risk of further losses the trader must understand that many factors can drive market index prices including macroeconomic conditions such as economic growth and corporate earnings index futures for hedgingportfolio managers often buy equity index futures as a hedge against potential losses if the manager has positions in many stocks index futures can help hedge the risk of declining stock prices by selling equity index futures 8since many stocks tend to move in the same general direction the portfolio manager could sell or short an index futures contract if stock prices decline if there s a market downturn the stocks within the portfolio would fall in value but the sold index futures contracts would gain offsetting the losses from the stocks the fund manager could hedge all the downside risks of the portfolio or only partially offset them the downside of hedging is that this reduces profits if the hedge isn t required so if an investor with a september futures contract shorts index futures and the market rises the index futures would fall in value the losses from the hedge would offset gains in the portfolio as the stock market rises index futures for speculatingspeculation is a sophisticated trading strategy not suited for many investors experienced traders tend to use index futures to speculate on the direction of an index instead of buying individual stocks or assets a trader can bet on the direction of a group of assets by buying or selling index futures for example to replicate the s p 500 index investors would need to buy all 500 stocks in the index instead index futures can be used to bet on the direction of all 500 stocks with one contract creating the same effect of owning and properly weighing the 500 stocks in the s p 500 pros and cons of using index futuresindex futures can hedge against declines in similar holdingsbrokerage accounts require only a fraction of the contract s value held as a marginindex futures allow for speculation on changes in the index s valuehelps businesses prepare for potential changes in the wider market that would affect their bottom lineunnecessary or wrongly directed hedges will curtail portfolio gainsbrokers may demand additional funds to maintain the account s margin amountindex futures speculation is high riskunforeseen events may cause the index to move in the opposite directionindex futures vs commodities futures contractsby their nature stock index futures work differently from commodity futures the latter allow traders to buy or sell a specified amount of a commodity at an agreed upon price on an agreed upon date in the future contracts are usually exchanged for tangible goods such as cotton soybeans sugar crude oil gold etc investors generally trade commodity futures to hedge or speculate on the price of the underlying commodity unlike index futures which are cash settled long position holders of commodity futures contracts will need to take physical delivery if the position has not been closed out ahead of expiry 8businesses frequently use commodity futures to lock in prices for the raw materials they need for production examples of index futureslet s say you decide to speculate on the s p 500 the e mini s p 500 futures are priced at 50 multiplied by the index value so you might buy a futures contract when it s trading at 5 000 points resulting in a contract value of 250 000 50 x 5 000 because index futures don t require investors to put up the full 100 you need only to maintain a small percentage in your brokerage account | |
how do you trade index futures | you must open an account with a brokerage firm to trade index futures once your account is open choose the index you want to trade and decide whether to go long you believe the price will increase or short you think the price will decrease keep an eye on your contract as it nears the expiration date can index futures be used to predict market performance index futures are generally considered an educated wager not a predictor traders who invest in equity index futures speculate on the index moving in a particular direction investors who take long positions speculate that the index s price will increase while those who take short positions bet that the price will drop various factors can move markets which means they can go in any direction though some directions are more likely than others as such the market has no fail safe predictors including index futures only enter into futures once you ve gained ample experience in the market and never invest more than you can afford to lose | |
is index futures trading riskier than stock trading | index futures trading can be riskier than stock trading especially when leverage is involved which can amplify both gains and losses while index futures offer diversification since they re based on a broad market index their volatility and the potential for rapid financial changes heighten the risk in contrast stock trading allows investors to avoid inherent leverage limiting losses to the invested amount hedging with futures meant to offset risks in part of a portfolio could lower your overall risk still results can vary significantly based on market knowledge experience and the ability to manage leverage and diversification effectively | |
how are index futures priced | the price of index futures tracks the value of the underlying index but won t be precisely the same as it things that impact the price of a futures contract include how much time remains until the contract expires the date the current value of the index and the interest rate charged by the broker | |
how long can i hold a futures contract | futures contracts have an expiration date when the contract expires the buyer of the contract pays the agreed upon price for the underlying asset and the seller must deliver it if you own a futures contract you may hold it for as long as you d like up to the expiry investors can often roll over the contract to the next month to avoid the costs related to settling the futures contract the bottom lineindex futures contracts allow investors to make trades on various indices based on their predictions about the overall price movement of the particular index futures contracts involve margin meaning investors can trade much larger amounts of money than their actual available capital before trading futures ensure you understand how they work and that you can handle the volatility and potential losses they involve while futures trading has expanded dramatically in the past decade or so it s still often a losing bet for inexperienced traders | |
what is index investing | index investing is a passive investment technique that attempts to generate returns similar to a broad market index investors use this buy and hold strategy to replicate the performance of a specific index generally an equity or fixed income index by purchasing the component securities of the index or investing in an index mutual fund or exchange traded fund etf that itself closely tracks the underlying index there are several advantages of index investing for one empirical research finds index investing tends to outperform active management over a long time frame taking a hands off approach to investing eliminates many of the biases and uncertainties that arise in a stock picking strategy index investing as well as other passive strategies may be contrasted with active investment | |
how index investing works | index investing is an effective strategy to manage risk and gain consistent returns proponents of the strategy eschew active investing because modern financial theory claims it s impossible to beat the market once trading costs and taxes are taken into account since index investing takes a passive approach index funds usually have lower management fees and expense ratios ers than actively managed funds the simplicity of tracking the market without a portfolio manager allows providers to maintain modest fees index funds also tend to be more tax efficient than active funds because they make less frequent trades more importantly index investing is an effective method of diversifying against risks an index fund consists of a broad basket of assets instead of a few investments this serves to minimize unsystematic risk related to a specific company or industry without decreasing expected returns for many index investors the s p 500 is the most common benchmark to evaluate performance against as it gauges the health of the u s economy other widely followed index funds track the performance of the dow jones industrial average djia and the corporate bond sector active u s equity funds have experienced outflows every year from 2015 to 2020 according to morningstar with most of that withdrawn money being plowed into passive funds 1index investing methodspurchasing every stock in an index at its given component weight is the most complete way to ensure that a portfolio will achieve the same risk and return profile as the benchmark itself however depending on the index this can be time consuming and quite costly to implement for instance to replicate the s p 500 index an investor would need to accumulate positions in each of the 500 companies that are inside the index for the russell 2000 there would need to be 2000 different positions depending on commissions paid to a broker this can become cost prohibitive more cost effective ways to track an index involve only owning the most heavily weighted index components or sampling a certain proportion say 20 of the index s holdings the most cost effective way to own an index these days is to seek out an index mutual fund or etf that does all of that work for you combining the entire index essentially into a single security or share limitations of index investingdespite gaining immense popularity in recent years there are some limitations to index investing many index funds are formed on a market capitalization basis meaning the top holdings have an outsized weight on broad market movements so if say giants such as amazon com inc amzn and meta platforms inc meta formerly facebook inc experience a weak quarter it would have a noticeable impact on the entire index this entirely passive strategy neglects a subset of the investment universe focused on market factors such as value momentum and quality these factors now constitute a corner of investing called smart beta which attempts to deliver better risk adjusted returns than a market cap weighted index smart beta funds offer the same benefits of a passive strategy with the additional upside of active management otherwise known as alpha real world example of index investingindex mutual funds have been around since the 1970s the one fund that started it all founded by vanguard chair john bogle in 1976 remains one of the best for its overall long term performance and low cost 2over the years the vanguard 500 index fund has tracked the s p 500 faithfully in composition and performance for its admiral shares the expense ratio is 0 04 and its minimum investment is 3 000 2 | |
what is an index linked bond | an index linked bond is a bond in which payment of interest income on the principal is related to a specific price index usually the consumer price index cpi this feature provides protection to investors by shielding them from changes in the underlying index the bond s cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return an index linked bond is also known as a real return bond in canada treasury inflation protected securities tips in the u s and a linker in the u k | |
how an index linked bond works | a bond investor holds a bond with a fixed interest rate the interest payments known as coupons are usually paid semi annually and represent the bondholder s return on investing in the bond however as time goes by inflation also increases thereby eroding the value of the investor s annual return this is unlike returns on equity and property in which dividend and rental income increase with inflation to mitigate the impact of inflation index linked bonds are issued by the government an index linked bond is a bond which has its coupon payments adjusted for inflation by linking the payments to some inflation indicator such as the consumer price index cpi or retail price index rpi these interest bearing investments typically pay investors a real yield plus accrued inflation providing a hedge against inflation the yield payment and principal amount are calculated in real terms not nominal numbers one can think of the cpi as the exchange rate that converts the return on a bond investment to a real return an indexed linked bond is valuable to investors because the real value of the bond is known from purchase and the risk involved with uncertainty is eliminated these bonds are also less volatile than nominal bonds and help investors maintain their purchasing power index linked bonds provide a real yield plus inflation with everything yield payment principal calculated in real terms not nominal example of an index linked bondconsider two investors one purchases a regular bond and another buys an index linked bond both bonds are issued and purchased for 100 during july 2019 having the same terms 4 coupon rate 1 year to maturity and 100 face value the cpi level at the time of issuance is 204 the regular bond pays an annual interest of 4 or 4 100 x 4 and the principal amount of 100 is repaid at maturity at maturity the principal and the interest payment due that is 100 4 104 will be credited to the bondholder assuming the cpi level in july 2020 is 207 the interest and principal value must be adjusted for inflation with the index linked bond coupon payments are calculated using an inflation adjusted principal amount and an indexation factor is used to determine the inflation adjusted principal amount for a given date the indexation factor is defined as the cpi value for the given date divided by the cpi at the original issue date of the bond the indexation factor in our example is 1 0147 207 204 therefore the inflation rate is 1 47 and the bondholder will receive 105 53 104 x 1 0147 when it matures the annual interest rate on the bond is 5 53 105 53 100 100 x 100 the investor s approximate real return rate is 4 06 5 53 1 47 calculated as the nominal rate less the inflation rate | |
what is an index option | an index option is a financial derivative that gives the holder the right but not the obligation to buy or sell the value of an underlying index such as the s p 500 index at the stated exercise price no actual stocks are bought or sold often an index option will utilize an index futures contract as its underlying asset index options are always cash settled and are typically european style options meaning they settle only on the date of maturity and have no provision for early exercise understanding index optionsindex call and put options are popular tools used to trade the general direction of an underlying index while putting very little capital at risk the profit potential for index call options is unlimited while the risk is limited to the premium paid for the option for index put options the risk is also limited to the premium paid while the potential profit is capped at the index level less the premium paid as the index can never go below zero beyond potentially profiting from general index level movements index options can be used to diversify a portfolio when an investor is unwilling to invest directly in the index s underlying stocks index options can also be used to hedge specific risks in a portfolio the busiest index options in the u s market are options on spxw representing the s p 500 and vix the cboe volatility index 1note that while american style options can be exercised at any time before expiry index options tend to be european style and can be exercised only on the expiration date rather than tracking an index directly most index options actually utilize an index futures contract as the underlying security an option on an s p 500 futures contract therefore can be thought of as a second derivative of the s p 500 index since the futures are themselves derivatives of the index as such there are more variables to consider as both the option and the futures contract have expiration dates and their own risk reward profiles with such index options the contract has a multiplier that determines the overall premium or price paid usually the multiplier is 100 the s p 500 however has a 250x multiplier example of an index optionimagine a hypothetical index called index x which currently has a level of 500 assume an investor decides to purchase a call option on index x with a strike price of 505 if this 505 call option is priced at 11 the entire contract costs 1 100 or 11 x a 100 multiplier it is important to note the underlying asset in this contract is not any individual stock or set of stocks but rather the cash level of the index adjusted by the multiplier in this example it is 50 000 or 500 x 100 instead of investing 50 000 in the stocks of the index an investor can buy the option at 1 100 and utilize the remaining 48 900 elsewhere the risk associated with this trade is limited to 1 100 the break even point of an index call option trade is the strike price plus the premium paid in this example that is 516 or 505 plus 11 at any level above 516 this particular trade becomes profitable if the index level is 530 at expiration the owner of this call option would exercise it and receive 2 500 in cash from the other side of the trade or 530 505 x 100 less the initial premium paid this trade results in a profit of 1 400 | |
what are index options strategies | common index options strategies include 1 long call long put 2 covered call protective put 3 straddle and 4 strangle | |
how are index options taxed | because traders are unlikely to hold options for more than a year these instruments are taxed as short term capital gains however broad based index options are taxed according to the 60 40 rule 60 of the gains are treated as long term gains and 40 as short term gains regardless of the holding period these tax advantages give broad based index options an advantage over other options instruments 2 | |
when you trade an index option you are actually buying the right to buy or sell a futures contract on the underlying index since these futures are themselves derivatives an index option can be considered a second derivative of the underlying index | the bottom lineindex options give traders the ability to hedge their portfolios with exposure to a broad cross section of the market as with other options it is important to understand how expiration dates and strike prices affect their value unlike some other options index options are usually cash settled and cannot be redeemed before their expiration date | |
what is indexation | indexation is a system or technique used by organizations or governments to connect prices and asset values it s accomplished by linking adjustments made to the value of a good the price of a service or another specified value to a predetermined price or composite index indexation requires identifying a price index and determining whether linking the value to the price index will accomplish the organization s goals it s most commonly used with wages in a high inflation environment indexation is also known as escalating understanding indexationindexing a given price or payment to other prices can serve two main purposes it s a pre specified process all parties involved are typically aware of how the link works indexation can be used to maintain a stable relative price between two or more goods or services this is done by specifying the desired target ratio of two prices and adjusting one price when the other changes to maintain the ratio an ice cream stand might index the sale price of ice cream cones to the wholesale price they pay for ice cream this maintains a steady profit margin by keeping the price of the cones constant relative to the cost of bulk ice cream the output price and the business remain profitable if the wholesale price of the input doubles indexation can also maintain a stable real price of a good or service relative to the purchasing power of a currency unit a price or asset value is linked to the price level of a basket of goods which is usually set equal to 100 price indexes are commonly published by official government agencies often for the specific purpose of convenient use in the indexation of prices wages and transfer payments businesses may use this type of indexation to match an employee s salary increases to the inflation rate an increase in the consumer price level over time will lead to an increase in salary this particular type of indexation is called a cost of living increase cola | |
why indexation is necessary | the use of indexation can theoretically mitigate the impact of inflation on a worker s standard of living most workers would effectively be getting a real wage cut each year as inflation cuts into the purchasing power of their nominal wages but there are still possibilities for economic changes to force some disparity between salaries and the pace of inflation governments might similarly use indexation as a way to potentially alleviate the negative effects inflation can have on the recipients of transfer payments and entitlements social security payments are indexed to the annual increase in the consumer price index 1types of indexationprices and wages can be indexed over different geographic areas a company with employees in multiple states or cities might want to link compensation in other areas to local prices because rents and costs of living vary from place to place this can be accomplished by indexing pay to the prevailing wages paid by other businesses in those areas or by using an index such as the regional price parities published by the bureau of economic analysis various assets and values might be subject to indexation some countries might apply indexation on certain types of tax payments at varying periods it can be applied to debt mutual funds that have been held for a certain minimum amount of time before being sold the original purchase price is adjusted for inflation when calculating long term capital gains that will be taxed when those debt funds are sold this can lead to a discount on taxes for the seller after the transaction indexation might also be applied to pension funds to reassure participants that their assets will keep pace with inflation the value of those assets won t erode as time passes life insurance companies might offer their clients policies that include terms for indexation they might promise a payout that s adjusted for inflation the premiums for such plans can be higher with annual increases however such a product might raise concerns about consumers overspending on premiums especially during periods when inflation is minimal and below the rate of increase that s charged for indexation 2 | |
how does the irs use indexation | the irs says that it makes tax inflation adjustments annually to prevent taxpayers from losing the value of various benefits an example is the standard deduction for single filers that increased by 750 from the 2023 tax year to 2024 the earned income tax credit is indexed for inflation as are numerous other credits tax breaks and income spans for tax brackets 3 | |
what are the signs of inflation | the primary sign of inflation is the steadily increasing costs of many goods and services over time a carton of eggs might cost 1 85 in june and hover in that area for the next several months that s not inflation but inflation might exist if the price increases to 2 00 in july and to 2 10 in august and if the cost of many other products and services climb as well 4 | |
what is the consumer price index | the u s bureau of labor statistics defines the consumer price index cpi as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services indexes are broken down into food costs energy costs and all costs the overall index increased by 3 4 from april 2023 through april 2024 5the bottom linethe term indexation essentially translates to adjustment in terms of the values of goods and services commonly purchased by businesses and consumers adjustments are based on changes in various price data and ideally keep pace with the effects of inflation over time this can mean taking actions such as increasing the minimum wage when the costs of groceries are climbing | |
what is an indexed annuity | an indexed annuity is a type of insurance contract that pays an interest rate based on the performance of a market index such as the s p 500 it differs from a fixed annuity which pays a fixed rate of interest and a variable annuity which bases its interest rate on a portfolio of securities chosen by the annuity owner indexed annuities are sometimes referred to as equity indexed or fixed indexed annuities | |
how indexed annuities work | indexed annuities offer their owners or annuitants the opportunity to earn higher yields than fixed annuities when the financial markets perform well typically they also provide some protection against market declines the rate on an indexed annuity is calculated based on the year over year gain in the index or its average monthly gain over a 12 month period in years when the stock index declines the insurance company credits the account with a minimum rate of return a typical minimum rate guarantee is about 2 some can be as low as 0 or as high as 3 there are no losses when the market isn t performing well only gains when it is however these gains may be limited via provisions in the contract such as participation rates and rate caps while indexed annuities are linked to the performance of a specific index the annuitant won t necessarily reap the full benefit of any rise in that index one reason is that indexed annuities often set limits on the potential gain at a certain percentage commonly referred to as the participation rate the participation rate can be as high as 100 meaning the account is credited with all of the gain or as low as 25 most indexed annuities offer a participation rate between 80 and 90 at least in the early years of the contract if the stock index gained 15 for example an 80 participation rate translates to a credited yield of 12 80 x 15 many indexed annuities offer a high participation rate for the first year or two after which the rate adjusts downward most indexed annuity contracts also include a yield or rate cap that can further limit the amount that s credited to the accumulation account a 4 rate cap for example limits the credited yield to 4 no matter how much the stock index has gained rate caps typically range from a high of 15 to a low of 2 they are subject to change in the example above the 15 gain reduced by an 80 participation rate to 12 would be further reduced to 4 if the annuity contract specifies a 4 rate cap if you re shopping for an indexed annuity ask about its participation rate and rate caps both can reduce your potential gains from any rise in the markets at specific intervals the insurer will adjust the value of the account to include any gain that occurred in that time frame the principal which the insurer guarantees never declines in value unless the account owner makes a withdrawal insurers use several different methods to adjust the account s value such as a year over year reset or a point to point reset which incorporates two or more years worth of returns | |
how does an annuity work | an annuity is an insurance contract that you buy to provide a steady stream of income during retirement first there s an accumulation phase after that you can begin receiving regular income by annuitizing the contract and directing the insurer to start the payout phase this income provides security because you can t outlive it it varies based on the type of annuity you choose indexed variable or fixed 1an indexed annuity tracks a stock market index such as the s p 500 it doesn t participate in the market itself though your returns are based on market performance they may be limited by a participation rate and a rate cap a variable annuity allows you to choose between various investment options typically mutual funds your payout depends on these investments a fixed annuity is the most conservative of the three with a steady interest rate and a payout that is consistent over time with periodic payments you might also have the opportunity to purchase a rider so that the contract has death benefits as well so your beneficiaries such as your spouse would receive benefits after you die | |
which is better a fixed annuity or an indexed annuity | this depends on what you want out of this retirement product a fixed annuity offers a guarantee that an index annuity doesn t a set amount of income in the payout phase however the potential for growth is smaller than what you might get with an indexed annuity in fact the interest rate on a fixed annuity might be so low that it won t match inflation that said there is a bit more risk with an indexed annuity since it follows but doesn t participate in the stock market | |
what are the pitfalls of indexed annuities | with an indexed annuity you re not getting the full upside when the market does well your gains are limited by a participation rate and a rate cap the guaranteed rate of return may not keep pace with inflation so you may be essentially losing money and don t forget about the surrender fee if you need to pull your funds from the account during the surrender period which can be up to ten years you ll need to pay a hefty fee which can be 10 or even double that annuities like other retirement savings vehicles follow internal revenue service irs rules about early withdrawals if you withdraw funds before you turn age 59 you ll need to pay a 10 fee once you deposit this money it s up to the insurance company to distribute income during the payout phase of the contract at the extreme end of this is what happens if the insurance company becomes insolvent every state has a safety net a guaranty fund to protect these funds but not all funds may be covered for example the policy may only protect up to 100 000 and the process to recover them may be complex and protracted 2 that s why it s crucial to choose an insurance company with a high financial health rating the bottom linean indexed annuity or fixed indexed annuity is a tax deferred insurance product that tracks a market index like the s p 500 designed to provide income in retirement the indexed annuity does not participate in the market like a variable annuity instead it follows it there is no downside risk if the index declines only upside potential however these gains may be limited via a participation rate and a rate cap there s also a potential surrender fee to be aware of if you need to withdraw funds before the years long surrender period is over you ll have to pay a high fee it shares many pros with its more conservative cousin the fixed annuity one benefit is it helps your estate avoid probate and it may come with benefits for the beneficiaries you select the principal is protected and the account s exposure to market lows is limited via a guaranteed return which may be between 0 and 3 make sure to weigh these pros and cons before signing on the dotted line | |
what is indexing | indexing broadly refers to the use of some benchmark indicator or measure as a reference or yardstick in finance and economics indexing is used as a statistical measure for tracking economic data such as inflation unemployment gross domestic product gdp growth productivity and market returns indexing may also refer to passive investment strategies that replicate benchmark indexes index investing has become increasingly popular over the past decades understanding indexingindexing is used in the financial market as a statistical measure for tracking economic data indexes created by economists provide some of the market s leading indicators for economic trends economic indexes closely followed in the financial markets include the purchasing managers index pmi the institute for supply management s manufacturing index ism and the composite index of leading economic indicators these indexes are tracked to measure changes over time statistical indexes may also be used as a gauge for linking values the cost of living adjustment cola is a statistical measure obtained through analysis of the consumer price index cpi that indexes prices to inflation 1 many pension plans and insurance policies use cola and the consumer price index as a measure for retirement benefit payout adjustments with the adjustment using inflation based indexing measures indexing in financial marketsan index is a method to track the performance of a group of assets in a standardized way indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market these could be a broad based index that captures the entire market such as the standard poor s 500 index or dow jones industrial average djia indexes can also be more specialized such as indexes that track a particular industry or segment the dow jones industrial average is a price weighted index which means it gives greater weight to stocks in the index with a higher price the s p 500 index is a market capitalization weighted index which means it gives greater weight to stocks in the s p 500 index with a higher market capitalization 2index providers have numerous methodologies for constructing investment market indexes investors and market participants use these indexes as benchmarks on performance if a fund manager is underperforming the s p 500 over the long term for example it will be hard to entice investors into the fund indexes also exist that track bond markets commodities and derivatives indexing and passive investingindexing is broadly known in the investment industry as a passive investment strategy for gaining targeted exposure to a specified market segment the majority of active investment managers typically do not consistently beat index benchmarks moreover investing in a targeted segment of the market for capital appreciation or as a long term investment can be expensive given the trading costs associated with buying individual securities therefore indexing is a popular option for many investors an investor can achieve the same risk and return of a target index by investing in an index fund most index funds have low expense ratios and work well in a passively managed portfolio 3 index funds can be constructed using individual stocks and bonds to replicate the target indexes they can also be managed as a fund of funds with mutual funds or exchange traded funds as their base holdings most brokerages will offer index funds that are benchmarked against the major stock market indexes these can be mutual funds or exchange traded funds since index investing takes a passive approach index funds usually have lower management fees and expense ratios ers than actively managed funds the simplicity of tracking the market without a portfolio manager allows providers to maintain modest fees index funds also tend to be more tax efficient than active funds because they make less frequent trades indexing and tracker fundsmore complex indexing strategies may seek to replicate the holdings and returns of a customized index customized index tracking funds have evolved as a low cost investment option for investing in a screened subset of securities tracking funds are based on a range of filters including these tracker funds are essentially trying to take the best of the best within a category of stocks for example a fund may pull from the best energy companies within the broader indexes that track the energy industry | |
how is indexing used in investing | in investing indexing is a passive investment strategy you create a portfolio that tracks a common market index such as the s p 500 with the goal of mimicking the index s performance as a strategy indexing offers broad diversification as well as lower expenses than investing strategies that are actively managed | |
what is a broad market index | a broad market index tracks the performance of a large group of stocks this large group is chosen to represent the entire stock market a broad market index adds significant diversification to any portfolio examples of broad based indexes include the s p 500 index and the russell 3000 index | |
is indexing a smart way to invest | indexing is a good investment strategy for many people it creates a diversified portfolio and it usually requires lower fees and expenses than an actively managed fund it also mimics the broader stock market which over the long run will generally perform better than any single person picking stocks the bottom lineindexing refers to compiling economic data into a single metric it can also mean comparing data to such a metric in order to measure its change or performance in economics there are many indexes that summarize or reflect economic and market activity for example cost of living adjustments to social security payments are indexed to inflation in investing indexes are benchmarks that are used to measure the performance of fund managers and portfolios it can also refer to a passive investing strategy that aims to mimic broad market returns rather than picking individual stocks | |
what is the indian rupee inr | the indian rupee inr is the currency of india inr is the international organization for standardization currency code for the indian rupee the currency symbol for the indian rupee is understanding the indian rupee inr the indian rupee derives its name from the rupiya a silver coin first issued by sultan sher shah suri in the 16th century 1coins in india are issued in denominations of 50 paise one rupee two rupees five rupees ten rupees and 20 rupees 2 a paise is 1 100th of a rupee coins worth 50 paise are called small coins while coins equal to or above one rupee are known as rupee coins 3paper currency or banknotes are issued in denominations of 5 10 20 50 100 500 and 2 000 rupees on the reverse side of paper rupees denominations are printed in 15 languages while denominations are printed in hindi and english on the front side 3the banknotes are updated frequently with new designs including distinct differences from old mahatma gandhi series of banknotes to the new ones of the same name the notes include various themes of india s history and heritage 4security and counterfeiting of the rupeeindia is a cash based economy which has resulted in fake currency being circulated by those engaged in illegal behavior the reserve bank of india rbi has had to change and update rupee notes with new security features over the years fake notes which might appear similar to legal notes are counterfeited by money launderers and terrorists typically the high denominations are the most counterfeited notes 4in 2016 the indian government announced the demonetization of all 500 and 1 000 banknotes of the mahatma gandhi series claiming it would hamstring the underground economy making the use of illegal and counterfeit cash in funding illegal activity and terrorism more difficult the 500 note has been replaced by one in the new mahatma gandhi series with enhanced security features 5special considerations capital and convertibility controlsthe rupee has been subject to various capital controls and convertibility restrictions over the years for example it is illegal for foreign nationals to import or export rupees and indian nationals may only import and export rupees in limited amounts 6a country s current account is comprised of the country s savings investment flows and the net trade in goods and services india s current account has no currency conversion restrictions aside from trade barriers 7the capital account measures foreign reserves business and institutional flows the indian government relaxes and tightens restrictions on foreign investment putting caps or removing them periodically to maintain a healthy and balanced capital account 7in recent years the government relaxed foreign investment flow restrictions to boost the weakening currency exchange rate and encourage business investment in the country 8 foreign institutional investors and local companies can bring money in and take money out of the country but need to check with the reserve bank of india for the current rules and regulations 7the rupee s value in modern timesin the 19th century large increases in the quantity of silver production caused a precipitous drop in silver s value leading to a steep decline in the rupee s value from 1927 to 1946 the rupee was pegged to the british pound it was then pegged to the u s dollar until 1975 currently it mostly floats on the foreign exchange market with the reserve bank of india actively trading the currency to manage its value 9various factors can impact the exchange rate of the currency including india imports oil and a rise in prices can cause inflation and force the rbi to intervene to support the economy examples of the indian rupee inr the denominations of coins and notes in circulation as of march 2024 are any changes in which coins or notes are in circulation and accepted as legal tender in india can be found on the website of the reserve bank of india | |
what is the indian rupee symbol | the currency symbol is used to represent the indian rupee inr it was selected through a public contest and approved by the government of india in 2010 1011 | |
what does rs stand for in money | the rupee sign rs is used for currency in the seychelles pakistan nepal sri lanka and mauritius it was also used in india before the introduction of the indian rupee symbol in 2010 | |
is the indian rupee backed by gold | all banknotes that are issued by the reserve bank of india are backed by assets such as gold government securities or foreign currency assets 3the bottom linethe national currency of india is the indian rupee its currency code is inr and the rupee currency symbol is the reserve bank of india issues both coins and notes for different rupee denominations as well as a 50 paise coin there are 100 paise in one rupee india is a cash based economy which has led to trouble with counterfeit and other fake currency the reserve bank has reissued multiple denominations of rupee notes with additional security features to combat currency fraud | |
what is an indication of interest ioi | an indication of interest is an underwriting expression showing a conditional non binding interest in buying a security that is currently in registration and awaiting approval by the securities and exchange commission sec the investor s broker must provide the investor with a preliminary prospectus however iois have similar intent but are done differently when it comes to mergers and acquisitions m a | |
how an indication of interest ioi works | in the securities and investing world an indication of interest is typically expressed in advance of an initial public offering ipo it demonstrates a conditional non binding interest in buying a security that is currently awaiting regulatory approval as securities in the u s must be cleared by the sec the ioi is non binding because it is illegal to sell a security while still in the registration process the investor s stockbroker must provide the investor with a preliminary prospectus the ioi remains open ended and is not a commitment to buy an ioi comprises expressions of trading interest that contain one or more of the following elements firms and broker dealers can communicate electronically they can also advertise proprietary or client trading interests in the form of iois to the marketplace either through their own systems or through dedicated trading platforms indications of interest for ipos are usually accepted on a first come first served basis because the demand for securities may exceed the supply available to distribute placing an indication of interest does not guarantee you ll be able to buy into an ipo an indication of interest is not a legal obligation to purchase however it does give the investor a general idea of how the company is doing financially this will help the decision process of buying in or not iois in mergers and acquisition m a an indication of interest in mergers and acquisitions is similar in intent to an ioi for an initial public offering but there are some different components involved once again it is a non binding agreement but this kind of ioi usually comes as a prepared letter written by a buyer and addressed to the seller the purpose is to communicate a genuine interest in purchasing a company among other things an ioi should provide guidance on a target valuation for the acquisition target company and it should also outline the general conditions for completing a deal elements of a typical ioi for m a often include but are not limited to indication of interest ioi vs letter of intent loi an indication of interest ioi is an informal notice of an investor s interest in purchasing or acquiring an asset it is non binding and less definitive than a letter of intent loi the indication of interest includes value ranges and less specific transaction details the ioi coming before the loi begins the negotiation process 1at the end of negotiations the formal loi is created defining the specific details of the transaction like the ioi it is not a legally binding agreement rather it expresses the investor s commitment to purchase a security and serves as the foundation for the formal contract upon review an agreement can be made if the seller accepts the terms of the loi upon execution the seller enters an exclusive agreement with the buyer prohibiting them from engaging with other buyers for a period 2either party to a transaction can terminate negotiations since iois and lois are non binding example of ioiin may 2008 blackbaud s chief executive officer ceo marc chardon submitted a revised ioi to richard labarbera president and ceo of kintera the offer expressed chardon s interest in acquiring 100 of his company 3 in the notice he asked for a time bound exclusive deal in exchange for a higher all cash offer details in the ioi included in its management retention plan chardon proposed that kintera s ceo and some executives and senior managers would receive employment agreements the ioi also outlined the exclusivity conditions it stated that until the purchase agreement was executed or when the purchaser terminated negotiations kintera could not enter into an agreement with a third party regarding an acquisition discuss or negotiate with a third party provide information about kintera to a third party solicit proposals or allow representatives of the company to engage in any of these prohibited activities the end of the notice listed the binding provisions including the notice s termination date may 21 2008 and statements about the ioi being a non binding precursor to an agreement | |
what is an actionable indication of interest | an actionable indication of interest is an ioi that provides specific details about the purchase 4 such details include the symbol of the security a price comparable to or exceeding the national best bid and offer nbbo size etc who can cancel an indication of interest the buyer submitting the notice can cancel the indication of interest 5 if left unconfirmed beyond the confirmation period it will be canceled automatically | |
what is a natural indication of interest | a natural indication of interest occurs when ioi originates with the customer rather than a firm finra defines it as referring either to customer interest a firm represents on an agency basis or to proprietary interest that was established to facilitate a customer order or as part of an execution of a customer order on a riskless principal basis 6the bottom linean indication of interest is a brief letter or notice that expresses a buyer s interest in buying a security in registration or a company s interest in acquiring another company for investments the ioi precedes the ipo and in finance it precedes the letter of intent although it is not a formal agreement it carries weight as it communicates the serious interest of the buyer | |
what is indicative net asset value inav | indicative net asset value inav is a measure of the intraday net asset value nav of an investment inav is reported approximately every 15 seconds it gives investors a measure of the value of the investment throughout the day understanding indicative net asset value inav the inav is reported by a calculation agent typically the exchange that the investment is trading on an inav can be reported for both closed end mutual funds and exchange traded funds etfs the inav uses the same methodology as a fund s accounting nav the calculation agent will use the established price of all securities in the portfolio to generate the total asset value the fund s liabilities are subtracted from total assets and the remainder is divided by the number of shares calculation agents have access to fund data for generating the inav every 15 seconds throughout the day in some cases the inav may also be given its own ticker for tracking purposes indicative net asset value inav vs net asset value nav the inav is a tool that helps to keep funds trading near their par value with inav reports every 15 seconds it represents a nearly real time view of the value of a fund reporting an inav can help a fund to avoid significant premium and discount trading closed end funds and etfs calculate net asset values because of their status as a mutual fund investment under the investment company act of 1940 while they calculate a daily net asset value the funds trade on the open market like stocks with transactions occurring at the market price the accounting nav is a function of their registered status and a requirement of the securities and exchange commission sec an investment s accounting nav is calculated at the end of each trading day special considerationssince closed end funds and etfs trade on an exchange they will often offer a premium or discount to their nav the inav can help to keep funds trading more closely to their accounting value although deviations still occur premiums and discounts can occur for many reasons and they are often a consistent trend for many funds a premium may occur when investors are bullish on a fund s underlying holdings or have a positive outlook on the fund s management discounts generally occur when investors are bearish on the fund or skeptical of the fund s management supply demand and timing of financial market reporting can also affect the fund s exchange trading price | |
what is an indicator | indicators are statistics used to measure current conditions as well as to forecast financial or economic trends in the world of investing indicators typically refer to technical chart patterns deriving from the price volume or open interest of a given security common technical indicators include moving averages moving average convergence divergence macd relative strength index rsi and on balance volume obv in economics indicators usually refer to pieces of economic data used to measure the overall health of the economy and predict its direction they include the consumer price index cpi gross domestic product gdp and unemployment figures understanding indicatorsindicators can be broadly categorized into economic indicators and technical indicators economic indicators are statistical metrics used to measure the growth or contraction of the economy as a whole or sectors within the economy in fundamental analysis economic indicators that quantify current economic and industry conditions are used to provide insight into the future profitability potential of public companies technical indicators are used extensively in technical analysis to predict changes in stock trends or price patterns in any traded asset economic indicatorsthere are many economic indicators created by different sources in both the private and public sectors for example the bureau of labor statistics which is the research arm of the u s department of labor compiles data on prices employment and unemployment compensation and work conditions and productivity the price report contains information about inflation import and export prices and consumer spending the institute for supply management ism is a not for profit professional association for supply management and purchasing professionals it has published its ism manufacturing report on business monthly since 1931 the report contains a composite index the purchasing managers index pmi which contains information on manufacturing and non manufacturing orders the index is a closely watched barometer of economic activity the u s department of commerce uses ism data in its evaluation of the economy for most of the 21st century housing and real estate have been leading economic indicators there are several metrics used to measure housing growth including the s p case shiller index which measures house sale prices and the nahb wells fargo housing market index which is a survey of home builders that measures the market appetite for new homes other economic indicators include interest rates the money supply and consumer sentiment beware of leaning too heavily on economic indicators to make investment decisions economic data is usually far from perfect and still needs to be analyzed and interpreted correctly technical indicatorsin the context of technical analysis an indicator is a mathematical calculation based on a security s price or volume the result is used to predict future prices common technical analysis indicators are the moving average convergence divergence macd indicator and the relative strength index rsi the macd is based on the assumption that the tendency of the price of a traded asset is to revert to a trend line the rsi compares the size of recent gains to recent losses to determine the asset s price momentum either up or down using tools like the macd and the rsi technical traders will analyze assets price charts looking for patterns that will indicate when to buy or sell the asset under consideration examples of indicatorsone of the most common economic indicators is the consumer price index cpi which is simply the weighted price average of a basket of consumer goods and services changes in cpi are used to measure changes in the cost of living and to identify periods of inflation or deflation at the time of writing summer 2021 investors are becoming increasingly concerned that rising inflation will finally upend the bull run in the stock market in april 2021 the cpi increased 0 8 making it the biggest 12 month increase since september 2008 1moving average ma is a technical indicator used to identify the general direction or trend of a given stock its purpose is to smoothen historical price data by generating a constantly updated average price if the ma is moving in a positive negative direction that s a bullish bearish sign for the stock at the time of writing amazon stock recently broke through its 50 day moving average suggesting that it s an attractive pick from a technical standpoint indicator faqsemails that are completely unsolicited contain several typos require urgent action and demand unusual actions from you are all indicators of a phishing attempt a steadily declining cpi is an indicator of generally declining prices a key performance indicator refers to a quantifiable measurement used to measure a company s success against a specific target or objective common kpis include net profit sales and customer retention rate the relative strength index rsi is a technical analysis indicator that compares the size of recent gains to recent losses rsi is used to determine the asset s price momentum either up or down genuine progress indicator gpi is a metric used to gauge a country s rate of economic growth it is often considered a more reliable measure of economic progress than the more widely used gross domestic product gdp figure commonly used indicators of a company s profitability include gross margin operating margin net margin and return on equity roe | |
what is an indifference curve | an indifference curve is a chart showing various combinations of two goods or commodities that consumers can choose points along the curve represent combinations that will leave the consumer equally well off a consumer is indifferent to changes in a combination as long as it falls somewhere along the curve look at this indifference curve you may be indifferent to buying a combination of 14 hot dogs and 20 hamburgers a combination of 10 hot dogs and 26 hamburgers or a combination of nine hot dogs and 41 hamburgers if you like both hot dogs and hamburgers each of these three combinations provides the same utility image by julie bang investopedia 2019investopedia paige mclaughlinunderstanding indifference curvesstandard indifference curve analysis operates using a simple two dimensional chart each axis represents one type of economic good a consumer will have no preference between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer a young boy might be indifferent between possessing two comic books and one toy truck or four toy trucks and one comic book both of these combinations would be points on an indifference curve of the young boy indifference curves are heuristic devices that are used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget economists have adopted the principles of indifference curves in the study of welfare economics some economists argue that the concept of indifference is hypothetical and therefore incompatible with real life economic actions taken by consumers every action indicates a preference not indifference people s relative preferences have been found to change over time and depending on their social context indifference curve analysisthe slope of the indifference curve is known as the marginal rate of substitution mrs the mrs is the rate at which the consumer is willing to give up or substitute one good for another a consumer who values apples will be slower to give them up for oranges and the slope will reflect this rate of substitution each indifference curve is typically convex to the origin and no two indifference curves ever intersect consumers are always assumed to be more satisfied when they re achieving bundles of goods on indifference curves that are farther from the origin an individual will typically shift their consumption level as their income increases because they can afford more commodities they ll end up on an indifference curve that s farther from the origin as a result and hence better off many core principles of microeconomics appear in indifference curve analysis including individual choice marginal utility theory income substitution effects and the subjective theory of value indifference curve analysis emphasizes marginal rates of substitution mrs and opportunity costs it typically assumes that all other variables are constant or stable 1most economic textbooks build upon indifference curves to introduce the optimal choice of goods for any consumer based on that consumer s income classic analysis suggests that the optimal consumption bundle takes place at the point where a consumer s indifference curve is tangent with their budget constraint criticisms and complications of the indifference curvelike many aspects of contemporary economics indifference curves have been criticized for oversimplifying or making unrealistic assumptions about human behavior 2consumer preferences might change between two points in time rendering specific indifference curves practically useless other critics note that it s theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points | |
what does an indifference curve explain | an indifference curve is used by economists to explain the tradeoffs that people consider when they encounter two goods they wish to buy people can be constrained by limited budgets so they can t purchase everything a cost benefit analysis must be considered instead indifference curves visually depict this tradeoff by showing which quantities of two goods provide the same utility to a consumer | |
what is the formula for an indifference curve | the formula used in economics for constructing an indifference curve is | |
where | different values of c correspond to different indifference curves so we obtain a new indifference curve that s plotted above and to the right of the previous one if we increase our expected utility 3 | |
what are the properties of indifference curves | indifference curves assume that individuals have stable and ordered preferences and seek to maximize their utility indifference curves will have these four properties as a result the bottom linean indifference curve is a tool used in economics and business each point on the curve is a different combination of two goods in various quantities any point on the curve will theoretically provide equal satisfaction or utility to an individual consumers are thus indifferent to which combination they choose over another indifference curves have been criticized for making unrealistic assumptions about consumer behavior some economists argue that every choice indicates a preference for one combination over another rather than indifference to the outcome others note that consumer preferences can change over time this would make a given indifference curve useless for any analysis | |
what is an indirect loan | an indirect loan can refer to an installment loan in which the lender either the original issuer of the debt or the current holder of the debt does not have a direct relationship with the borrower indirect loans can be obtained through a third party with the help of an intermediary loans trading in the secondary market may also be considered indirect loans by allowing borrowers to obtain financing through third party relationships indirect loans can help to improve funding availability and risk management often applicants who don t qualify for a direct loan can opt for an indirect loan instead indirect loans tend to be more expensive carry higher interest rates that is than direct loans are understanding an indirect loan dealer financing many dealerships merchants and retailers that handle big ticket items such as cars or recreational vehicles will work with a variety of third party lenders to help their customers obtain installment financing for purchases dealerships often have lending networks that include a variety of financial institutions willing to support the dealership s sales oftentimes these lenders may be able to approve a wider range of borrowers due to their network relationship with the dealer in the indirect loan process a borrower submits a credit application through the dealership the application is then sent to the dealership s financing network allowing the borrower to receive multiple offers the borrower can then choose the best loan for their situation the dealership also benefits in that by helping the customer receive financing it makes the sale because the interest rate on the dealer is likely to be higher than from a credit union or bank it s always best for buyers to check other financing options before agreeing to finance their car through a dealer while this sort of indirect loan is often known as dealer financing it s actually the dealer s network financial institutions that are approving the loan based on the borrower s credit profile setting its terms and rates and collecting the payments although an indirect loan is offered through a dealer or retailer the consumer is actually borrowing from a separate financial institution | |
how an indirect loan works secondary market | loans not originated directly by the lender that holds them can be considered indirect loans when a lender sells a loan they are no longer responsible for it or receive any interest income from it instead everything is transferred to a new owner who assumes the burden of administering the loan and collects the repayments read any indirect loan contract very carefully if the dealer cannot sell the loan the buyer signed to a lender it may have the right to cancel the contract within a specified period of time and require the buyer to return the car the buyer is then entitled to get back the down payment and trade in or the value of the trade in if a trade in was involved in this situation the dealer may try to pressure a car buyer to sign another contract on less favorable terms but the buyer is not required to sign it indirect loan examplesauto dealerships are one of the most common businesses involved with indirect loans in fact some authorities even call indirect loans a type of car loan many consumers use dealer financed loans for the convenience of being able to apply on premises and to easily compare offers on the downside obtaining an auto loan directly from a bank or credit union on his own gives the buyer more leverage to negotiate as well as the freedom to shop around among other lenders and the interest rates might be better but if a buyer has a spotty credit history or low credit score an indirect loan may be their best option loans actively trade on the secondary markets as well specifically a pool of loans that have been combined rather than individual loans often a bank or credit union sells its consumer loans or mortgages doing so allows lenders to acquire new capital reduce administrative costs and manage their level of risk in the home lending market for example the federal national mortgage association fannie mae and federal home loan mortgage corp freddie mac support the secondary trading of mortgages through their loan programs these two government sponsored enterprises buy home backed loans from lenders package them and then re sell them in order to facilitate liquidity and increased availability of funds across the lending market | |
what is the indirect method | the indirect method is one of two accounting approaches used to create a cash flow statement it uses increases and decreases in balance sheet line items to modify the operating section of the cash flow statement from the accrual method to the cash method of accounting the indirect method for calculating cash flow from operating activities begins with net income and adjusts for accrual impacts during the reporting period common adjustments include depreciation and amortization 1the other option for completing a cash flow statement is the direct method which involves listing actual cash inflows and outflows during the reporting period the indirect method is more commonly employed particularly among larger firms due to its ease of use and direct connection to the balance sheet understanding the indirect methodthe cash flow statement primarily centers on a company s cash sources and uses it s closely monitored by investors creditors and other stakeholders it provides information on cash generated from various activities and depicts the effects of changes in asset and liability accounts on a company s cash position the indirect method starts with net income and then removes noncash items nonoperational gains and losses to calculate cash flow from operating activities adjustments are made for changes in connector accounts to convert accrual accounting figures to cash balances 2the indirect method is simpler to prepare than the direct method because most companies keep their records on an accrual basis example of the indirect methodrevenue is recognized when it s earned under the accrual method of accounting not necessarily when cash is received for example if a customer buys a 500 widget on credit the revenue is recognized in the month of the sale even though the cash hasn t yet been received the indirect method of the cash flow statement adjusts net income to reflect actual cash inflows and outflows during the period at the time of the sale a debit is made to accounts receivable and a credit to sales revenue for 500 this increases accounts receivable which is then displayed on the balance sheet even though no cash has been received in this example 500 in revenue is recognized overstating net income on a cash basis by this amount the offset sits in the accounts receivable line item on the balance sheet to adjust the cash flow statement reduces net income by the 500 increase in accounts receivable displayed as increase in accounts receivable 500 in the cash flow statement using the indirect method net income is presented on the first line subsequent lines show increases and decreases in asset and liability accounts which are added to or subtracted from net income based on their cash impact 3indirect method vs direct methodthe cash flow statement is divided into three categories cash flows from operating activities cash flows from investing activities and cash flows from financing activities the total cash generated from operating activities is the same under both the direct and indirect methods though the information is presented differently under the direct method cash flow from operating activities is shown as actual cash inflows and outflows without starting from net income on an accrued basis the investing and financing sections are prepared similarly for indirect and direct methods many accountants prefer the indirect method because it s simpler to prepare the cash flow statement using information from the income statement and the balance sheet most companies use the accrual method of accounting so the figures on the income statement and balance sheet will be consistent with this method | |
which method does the financial accounting standards board prefer | the financial accounting standards board fasb prefers that companies use the direct method because it offers a clearer picture of cash flows in and out of a business however if the direct method is used a reconciliation of the cash flow statement to the balance sheet is still recommended 4 | |
what is net income | net income is what remains after all of a firm s expenses have been paid expenses include cost of goods sold interest taxes amortization depreciation and non production costs 5 | |
what are operating activities | operating activities are the actions taken by a business to produce and provide its goods and services to consumers cash outflows relating to operating activities can include taxes and refunds 6the bottom linebusinesses can generate cash flow statements using either the indirect or direct method the indirect method starting with net income and adjusting for noncash items and balance sheet changes is simpler and more commonly used especially by larger firms because it s efficient and easy to prepare conversely the direct method lists actual cash inflows and outflows and offers a clearer and more detailed picture of cash flows while the indirect method is widely preferred the financial accounting standards board recommends the direct method for its transparency regardless of the method used both approaches ultimately report the same total cash generated from operating activities | |
what is an indirect quote | the term indirect quote is a currency quotation in the foreign exchange market that expresses the variable amount of foreign currency required to buy or sell one unit of the domestic currency an indirect quote is also known as a quantity quotation since it expresses the quantity of foreign currency required to buy units of the domestic currency in other words the domestic currency is the base currency in an indirect quote while the foreign currency is the counter currency understanding indirect quotesan indirect quote is the opposite or reciprocal of a direct quote also known as a price quotation which expresses the price of one unit of a foreign currency in terms of a variable number of units of the domestic currency as the u s dollar usd is the dominant currency in global foreign exchange markets the convention is to generally use direct quotes that have the u s dollar as the base currency and other currencies like the canadian dollar cad japanese yen jpy and indian rupee inr as the counter currency exceptions to this rule are the euro and commonwealth currencies like the british pound gbp australian dollar aud and new zealand dollar nzd which are typically quoted in indirect form for example gbp 1 usd 1 30 consider the example of the cad which we assume is trading at 1 2500 to the u s dollar in canada the indirect form of this quote would be c 1 us 0 8000 i e 1 1 2500 however the conventional quotation in foreign exchange markets is 1 2500 which is an indirect quote from the u s perspective because it shows how much of a foreign currency cad is required to get 1 usd conversely usd 0 8000 would be a direct quote in an indirect quote a lower exchange rate implies that the domestic currency is depreciating or becoming weaker continuing with the above example if the usd cad quotation now changes to us 1 c 1 2300 indirect quote then that means the usd domestic currency has gotten weaker as less cad would be needed to get 1 usd the direct quote which is 0 8130 1 1 2300 shows that 1 cad will get you usd 0 8130 as opposed to 0 8000 currency crosses | |
what about cross currency rates which express the price of one currency in terms of a currency other than the u s dollar a trader or investors should first ascertain which type of quotation is being used direct or indirect to price the cross rate accurately | for example if usd jpy is quoted at 100 and usd cad is quoted at 1 2700 what is the quotation of cad jpy from both the canadian and japanese perspectives cad jpy conventional quote usd jpy usd cadso if domestic currency is cad then1 cad indirect 100 1 2700 78 74 jpyandif domestic currency is jpy thenso 1 jpy indirect 1 2700 100 0 0127 cad | |
what is an indirect tax | an indirect tax is collected by one entity in the supply chain such as a manufacturer or retailer and paid to the government however the tax is passed onto the consumer by the manufacturer or retailer as part of the purchase price of a good or service the consumer is ultimately paying the tax by paying more for the product investopedia ryan oakley | |
how an indirect tax works | in contrast to direct taxes indirect taxes are taxation on an individual or entity which is ultimately paid for by another person the body that collects the tax will then remit it to the government with direct taxes the person immediately paying the tax is the person that the government is seeking to tax 1excise duties on fuel liquor and cigarettes are all considered examples of indirect taxes 2 by contrast income tax is the clearest example of a direct tax since the person earning the income is the one immediately paying the tax admission fees to a national park are another example of direct taxation some indirect taxes are also referred to as consumption taxes such as a value added tax vat 2regressive nature of an indirect taxindirect taxes are commonly used and imposed by the government to generate revenue they are essentially fees that are levied equally upon taxpayers no matter your income so rich or poor everyone has to pay them but many consider them to be regressive taxes as they can bear a heavy burden on people with lower incomes who end up paying the same amount of tax as those who make a higher income 3for example the import duty on a television from japan will be the same amount no matter the income of the consumer purchasing the television 4 and because this levy has nothing to do with a person s income that means someone who earns 25 000 a year will have to pay the same duty on the same television as someone who earns 150 000 there are also concerns that indirect taxes can be used to further a particular government policy by taxing certain industries and not others some economists argue that indirect taxes lead to an inefficient marketplace and alter market prices from their equilibrium price 5common indirect taxesthe most common example of an indirect tax is import duties the duty is paid by the importer of a good at the time it enters the country if the importer goes on to resell the good to a consumer the cost of the duty in effect is included in the price that the consumer pays the consumer is likely to be unaware of this but they will be indirectly paying the import duty 4essentially any taxes or fees imposed by the government at the manufacturing or production level is an indirect tax 6 in recent years many countries have imposed fees on carbon emissions to manufacturers these are indirect taxes since their costs are passed along to consumers 7sales taxes can be direct or indirect if they are imposed only on the final supply to a consumer they are direct if they are imposed as value added taxes vats along the production process then they are indirect 2 | |
what are indirect taxes in the u s | some examples of indirect taxes in the u s include taxes like sales taxes that are not paid directly to the government but paid to a business that pays taxes to the government import taxes are also levied on goods coming into the u s the u s does not have a national sales tax | |
how do businesses offset the cost of taxes | businesses may increase the purchase price of the goods you buy with a sales tax to try to recoup some of the losses they face paying taxes | |
what are value added taxes vats | value added taxes vats are taxes that are added in the production stages of a product that cost can be deducted at the next stage of production when the consumer pays for the product the vat is not deducted so the consumer ends up paying the tax 8the bottom lineindirect taxes are common taxes levied on goods on services paid for by the consumer they re not charged to an individual or a company no matter your income you will pay the same indirect sales tax on a product that other consumers pay | |
what is an ira | an individual retirement account ira is a long term tax advantaged savings account that individuals with earned income can use to save for the future the ira is designed primarily for self employed people who do not have access to workplace retirement accounts such as the 401 k which is available only through employers however anyone with a retirement plan at work can also open an ira and invest additional savings with it you can open an ira through a bank an investment company an online brokerage or a personal broker investopedia paige mclaughlin | |
how does an ira work | anyone with earned income can open and contribute to an ira including those who have a 401 k account through an employer the only limitation is on the total that you can contribute to your retirement accounts in a single year the best ira accounts will offer the ability to invest in a wide range of financial products including stocks bonds exchange traded funds etfs and mutual funds there are also self directed iras sdiras that permit investors to make all the investing decisions sdiras offer access to a broader selection of investments including real estate and commodities only the riskiest investments are off limits 2there are several kinds of iras each with different rules regarding eligibility taxation and withdrawals these types include individual taxpayers can establish traditional and roth iras small business owners and self employed individuals can set up sep and simple iras an ira must be opened with an institution that has received internal revenue service irs approval to offer these accounts choices include banks brokerages federally insured credit unions and savings and loan associations 3because iras are meant to be used to invest and maximize the growth of funds for retirement savings there is usually an early withdrawal penalty of 10 if you take money out before age 59 that s in addition to taxes you d pay on the withdrawn amount however there are some notable exceptions to the penalty rule withdrawals for educational expenses and first time home purchases among others 4a roth account is funded with post tax money so no further taxes are due when the money is withdrawn you can only contribute to an ira if you have earned income income from interest and dividends social security benefits or child support does not count 56 | |
what are the different types of iras and their rules | the following is a breakdown of the various types of iras and the rules regarding each one in most cases contributions to traditional iras are tax deductible so if you put 4 000 into an ira your taxable income for the year decreases by that amount your money grows tax deferred in a traditional ira when you withdraw the money after retiring it is taxed at your ordinary income tax rate for that year for 2023 the maximum annual individual contribution to traditional iras is 6 500 if you are age 50 or older you can also contribute a catch up contribution of 1 000 for a total of 7 500 7for 2024 the maximum annual individual contribution is 7 000 the catch up contribution continues to be 1 000 for those 50 and over 8if you don t have a retirement plan at work your traditional ira contributions are fully deductible but if you or your spouse if you are married have a retirement plan at work such as a 401 k or 403 b your modified adjusted gross income magi determines whether and how much of your traditional ira contributions can be deducted if you have a retirement plan at workfor 2023 if you are single or file as head of household and have a retirement plan at work your traditional ira contributions are fully deductible if your magi is below 73 000 for 2024 your magi must be below 77 000 8if you are married and filing jointly for 2023 your traditional ira contributions are fully deductible if your magi is below 116 000 for 2024 your magi must be below 123 000 from there the deductibility of your contributions starts to phase out as your magi increases 8it is possible to have both a roth ira and a traditional ira or several iras at different institutions however the total annual contribution to all of your iras cannot exceed 6 500 or 7 500 for those age 50 or older for 2023 and 7 000 or 8 000 for those age 50 or older for 2024 9for 2023 the income range that phases out the deductibility of traditional ira contributions for married couples is 116 000 to 136 000 for 2024 it s 123 000 to 143 000 8for single taxpayers or heads of households the phase out range for 2023 is 73 000 to 83 000 for 2024 it s 77 000 to 87 000 8if you don t have a plan at work but your spouse doesif you contribute to an ira and aren t covered by a workplace plan but are married to someone who is the income phase out range in 2023 is 218 000 to 228 000 for 2024 it s 230 000 to 240 000 8use this chart to see how much of your contribution may be deductible roth ira contributions are not tax deductible in the year in which you make them but the distributions are tax free that means you contribute to a roth ira using after tax dollars and pay no taxes even on your investment gains also roth iras do not have required minimum distributions rmds if you don t need the money you don t have to take it out of your account where it continues growing tax free you can contribute to a roth ira as long as you have eligible earned income no matter how old you are 10roth ira contribution limits for the 2023 and 2024 tax years are the same as they are for traditional iras however there is a catch there are income limitations on contributions to a roth ira the phase out range for single filers is 138 000 to 153 000 for 2023 and 146 000 to 161 000 for 2024 for married couples filing joint returns the phase out range is 218 000 to 228 000 in 2023 and 230 000 to 240 000 in 2024 118as of jan 1 2023 the age at which required minimum distributions rmds must begin is 73 that applies to withdrawals from traditional ira and 401 k accounts as well as simple and sep iras roth account owners aren t subject to rmds the penalty for failing to take an rmd is from 10 to 25 of the amount not withdrawn 12self employed individuals such as independent contractors freelancers and small business owners can set up sep iras a sep ira adheres to the same tax rules for withdrawals as a traditional ira for 2023 sep ira contributions are limited to 25 of compensation or 66 000 whichever is less 13 for 2024 the maximum allowed contribution is 69 000 1415business owners who set up sep iras for their employees are able to deduct the contributions that they make on behalf of employees however the employees cannot contribute to their own accounts and the irs taxes their withdrawals as income 13the simple ira is also intended for small businesses and self employed individuals this type of ira follows the same tax rules for withdrawals as a traditional ira 16unlike sep iras simple iras allow employees to make contributions to their accounts and the employer is required to make contributions as well all the contributions are tax deductible potentially pushing the business or employee into a lower tax bracket the simple ira employee contribution limit is 15 500 in 2023 and the catch up limit for workers age 50 and older is 3 500 17 for 2024 the contribution limit is 16 000 and the maximum catch up amount remains 3 500 188in 2008 the irs issued revenue ruling 2008 5 which states that ira transactions can trigger the wash sale rule should shares be sold in a non retirement account followed by the purchase of substantially identical shares in an ira within a 30 day period the investor cannot claim tax losses for the sale the investment s basis in the individual s ira won t increase either 19required minimum distributions rmds required minimum distributions rmds are withdrawals that owners of traditional ira and 401 k accounts must take every year after they reach a certain age the age has been revised upwards a couple of times as of jan 1 2023 an account holder must begin taking money out in the year he or she turns age 73 that age rises to 75 in 2033 20the amount a person must withdraw is based on the account size and the person s life expectancy the irs has a worksheet to calculate the amount 21failure to take the minimum triggers a severe tax penalty as of 2023 that penalty is 25 of the balance of the account that s half the previous penalty but still expensive enough to keep us on our toes 12this penalty can be reduced to 10 in many cases however if the taxpayer takes corrective action early 12comparing ira optionsuse the chart below to get a better sense of how the different iras work note to view the full chart use the slider at the bottom to see the column at the far right | |
what does ira stand for | the acronym ira is used to refer to two distinct but overlapping concepts for the internal revenue service the term stands for individual retirement arrangement a selection of plans available that provide tax advantages to people saving for retirement 22in common usage ira also stands for individual retirement account or a type of plan that one can pay into throughout their career and withdraw from in retirement in such cases a plan would be both a retirement account for a specific person as well as an individual retirement arrangement in the eyes of the irs | |
what are the advantages of an individual retirement account ira | an ira offers a tax advantaged way to save for retirement depending on what type of ira you use it can reduce your tax bill either when you make contributions or when you take withdrawals in retirement investment gains are tax deferred for a traditional ira or tax free for a roth ira that means contributing money towards your retirement either reduces your taxes on income for the year or eliminates the taxes from your retirement money iras are insured by the federal deposit insurance corp fdic a government run agency that provides protection when a financial institution fails the fdic covers customer deposits up to 250 000 per account in most cases that are held at fdic insured banks or savings and loan associations 23 | |
how can i start a roth ira or a traditional ira | you can open your ira at most banks credit unions online brokers or other financial services providers fidelity charles schwab and e trade are all brokers that provide iras opening an account is as easy as visiting a bank branch or website and filling in a form | |
when can i withdraw from an ira | the best time to withdraw from an ira is at age 60 and beyond if you withdraw before age 59 you will incur a 10 early withdrawal penalty in addition to taxes on the withdrawal there are some exceptions to this penalty for medical expenses disabilities first time home purchases and other unusual life events generally speaking the longer you can wait before taking distributions the more time that money has to grow 4 | |
how is a 401 k plan different from an ira | both 401 k plans and iras provide tax advantages to employees investing for their retirement but a 401 k plan is only available through an employer contributions are automatically deducted from the employee s paycheck some companies match part of employee contributions also 401 k plans have higher contribution limits an ira can be set up by anyone who has earned income regardless of whether they have a 401 k plan at work most 401 k plans offer a limited choice of mutual funds and exchange traded funds etfs an ira can offer a wider range of funds stocks and other securities 2425the bottom lineiras are retirement savings accounts that offer tax advantages they work a bit like a 401 k but they don t require an employer to sponsor them there are several types of iras traditional iras roth iras sep iras and simple iras there are annual income limitations on deducting contributions to traditional iras and contributing to roth iras so there is a limit on how much tax you can avoid by investing in an ira iras are meant to be long term retirement savings accounts if you take money out early you defeat that purpose by diminishing your retirement assets that s why money held in an ira usually can t be withdrawn before age 59 without incurring a hefty tax penalty of 10 of the amount withdrawn in addition to normal taxes owed | |
an industrial bank is a state chartered financial institution usually owned by a commercial firm that is not regulated by a federal banking agency industrial banks accept customer deposits and provide loans for consumers and small businesses | industrial banks are also known as industrial loan companies ilcs industrial banks are only chartered by a few states the state of utah provides the majority of charters for industrial banks in the u s understanding industrial banksindustrial banks were originally founded in the early 1900s in order to provide low to moderate income industrial workers who were unable to qualify for credit at traditional lending institutions with a means to access capital industrial banks are regulated by state regulators and by the federal deposit insurance corp fdic because of their distinct corporate structure industrial banks can be owned by companies they are not subject to some of the regulations that govern traditional institutions and do not have to comply with the bank holding company act in addition industrial banks do not face supervision by the federal reserve 3 as a result of this lack of regulatory restrictions many financial technology companies and investment companies have started to apply for industrial bank charters while industrial banks have limited banking powers nationwide they generally maintain the same powers and privileges as a traditional commercial bank industrial banks are controversial amongst those who support a more stalwart division between banks and commercial firms criticisms of industrial banks claim that they provide companies with the privileges but not the supervision of a bank charter criticism of industrial banksin 2005 walmart inc filed an application to form a new industrial bank for the purpose of reducing credit and debit card transaction fees this triggered widespread opposition and protests from commercial banks and financial regulators 4 the fdic eventually placed a temporary moratorium on industrial bank applications in 2006 5 at the same time state level legislation was passed that would block any prospective industrial banks from opening branches in different jurisdictions 6walmart inc withdrew its application in 2007 before the fdic could make any decision regarding the status of their application opponents of walmart s application claimed that the company s engagement in the business of banking posed a threat to the banking system and to the fdic deposit insurance fund 6in early 2019 lobbyists from the independent community bankers of america icba distributed a policy paper that called for a moratorium on providing federal deposit insurance to industrial banks their actions were motivated by a new wave of fintech companies including payment processor square inc that have submitted applications for state bank charters a bank charter would allow square inc to provide loans and other financial services directly to its merchants however icba claims that industrial bank charters are a loophole that congress needs to address not only would fintech companies who receive bank charters be exempt from supervision by the federal reserve but they also wouldn t be required to disclose any nonbanking related commercial activities 78in november 2019 senator john kennedy of louisiana introduced a bill called the eliminating corporate shadow banking act of 2019 that would effectively end the ability of nonfinancial companies to form industrial banks the icba has expressed its support for sen kennedy s bill claiming that it would close the loophole of industrial banks create a safer financial system and help maintain the separation of banking and commerce 910 | |
what is the industrial goods sector | the industrial goods sector is a broad sector of the economy this sector is made up of companies that provide capital goods used in the manufacturing construction and production of goods and services these goods include machinery equipment and supplies subsectors of the industrial goods sector include aerospace construction and home building understanding the industrial goods sectoras noted above the industrial goods sector is made up of companies involved in the manufacturing and construction of finished goods and services these are products that are used directly by consumers the sector includes companies involved with manufacturing capital goods such as aerospace and defense goods and building products 1 | |
when the economy contracts during recessions activity in this sector drops because companies postpone expansion and produce fewer goods however with this sector covering a wide range of subsectors there is usually at least one area of growth in the industrial goods sector the industrial goods sector goes through life cycles that see different subsectors in growth phases | the major stages of the growth cycle are accelerating growth decelerating growth accelerating decline and decelerating decline investors do well when they pay attention to the industry trends and progression of the growth cycle companies in the accelerating growth and decelerating decline phases have the best performance and are given higher multiples due to their upcoming growth many of the subsectors go through bullish growth cycles lasting for years before seeing a retraction for example the aerospace and homebuilding sectors have both gone through these cycles other areas such as industrial conglomerates and waste management have provided steady streams of revenue generation the industrial goods sector s performance is largely driven by supply and demand for building construction in the residential commercial and industrial real estate segments as well as the demand for manufactured products industrial goods sector statisticsthe bureau of labor statistics bls is a valuable resource for investors and analysts at the sector level the industrial goods sector is listed as the goods producing industry and is broken down by subsector in its reports the bls provides information like employment union membership growth projections hourly wages and fatalities injuries investors can interpret these statistics to determine growth cycles as of april 2024 the industry employed 21 82 million people including 15 54 million people in production and non supervisory roles 2the u s census bureau publishes monthly data on new orders of capital goods broken down into various subsectors which can provide powerful insights into long and short term trends in the industrial goods sector the agency reported 100 42 billion in new orders of capital goods 3subsectors of the industrial goods sectoras noted above the industrial goods sector includes the following subsectors the industrial goods sector includes some of the largest companies in the united states some examples include honeywell hon union pacific unp caterpillar cat 3m mmm and boeing ba the dow jones industrial average djia is a widely watched benchmark index in the u s containing 30 blue chip stocks weighted heavily to the industrial goods sector when the index initially launched in 1896 it included only 12 companies those companies were primarily in the industrial sector including the railroads cotton gas sugar tobacco and oil in the early 20th century the performance of industrial companies was typically tied to the overall growth rate in the economy that cemented the relationship between the index s performance and that of the overall economy even today a strong performing dow equals a strong economy while a weak performing dow indicates a slowing economy for many investors | |
how to invest in the industrial goods sector | the msci usa industrials index is the common benchmark for the industry the index returned 10 11 on a 10 year basis and 10 93 over five years as of april 30 2024 the index is made up of 96 constituents with a median market capitalization of 29 95 billion 4investors can invest in individual industrial goods stocks or look to mutual funds and exchange traded funds etfs fund offerings cover the entire industrial goods sector and some cover subsectors of the industry as well such as aerospace the industrial select sector spdr fund and vanguard industrials etf are two of the largest funds tracking the sector | |
how important is the industrial goods sector | even though consumers and other end users don t have a direct interaction with the industrial goods sector it is a very critical part of the economy that s because it provides the capital goods equipment machinery etc needed for goods and services producers to make the planes trucks clothing tools and other things we need in our daily lives | |
what are capital goods | capital goods are products that are used to manufacture and produce goods and services also known as durable goods capital goods are tangible fixed assets like machinery buildings and equipment capital goods can also include assets that aren t fixed such as devices digital imaging systems and those used in the service industry such as painting tools and musical instruments | |
what are some companies in the industrial goods sector | some of the world s major companies fall in the industrial goods sector they include honeywell 3m caterpillar and boeing these companies are involved in the manufacturing of capital goods that other companies use to produce final goods for consumers to use the bottom linethe industrial goods sector is a key part of the overall economy companies that operate in this space are responsible for manufacturing the capital goods machinery and equipment for many of the finished goods we need in our everyday lives this includes things like clothing cars planes trains and food although some companies are affected by changing trends in the economy others are shielded from negative growth if you re interested in investing in the sector consider stocks mutual funds and etfs of companies that operate in this space | |
what is industrial organization | industrial organization is a field of economics dealing with the strategic behavior of firms regulatory policy antitrust policy and market competition industrial organization applies the economic theory of price to industries economists and other academics who study industrial organization seek to increase understanding of the methods by which industries operate improve industries contributions to economic welfare and improve government policy in relation to these industries the industrial in industrial organization refers to any large scale business activity such as tourism or agriculture not just manufacturing industrial organization is also sometimes referred to as industrial economy understanding industrial organizationthe study of industrial organization builds on the theory of the firm a set of economic theories that describe explain and attempt to predict the nature of a firm in terms of its existence behavior structure and its relationship to the market in a 1989 paper economists bengt holmstrom and jean tirole posed two simple questions for a theory of the firm the first question was why do firms exist meaning what is the need that they fill in society or an economic system the second question succeeds the first and relates to determining the scale and scope of their operations answers to these two questions form the basis of industrial organization economics above all industrial organization focuses on how markets and industries compete with one another by factoring in real world complications such as government intervention in the marketplace transaction costs barriers to entry and more some believe that since microeconomics focuses on markets and how they operate industrial organization is a subset of it rather industrial organization is defined by its emphasis on market interactions such as price competition product placing advertising research and development and more more pertinently the study of oligopolies where a handful of big players dominate a market gives industrial organization its reason for being whereas microeconomics focuses on perfect competition or extreme monopolies according to a massachusetts institute of technology mit white paper it is easier to give an example of industrial organization than it is to define it though the white paper s authors still managed to come up with this description the economics of imperfect competition the imperfect competition referenced in this description gives rise to several questions relating to the success or failure of a product or an organization by analyzing the factors that contributed to success or failure industrial organization attempts to answer these questions industrial organization areas of studybelow is a sample listing of topics that the study of industrial organization can focus on industrial organization and policyseveral organizations exist to promote research and collaboration on the study of industrial organization one such organization is the industrial organization society ios founded in 1972 by stanley boyle and willard mueller to promote research on antitrust policy regulatory policy and competition and market power in real world markets the review of industrial organization is the official journal of the ios along with northeastern university the ios has sponsored an annual international industrial organization conference since 2003 example of industrial organizationas mentioned earlier industrial organization is concerned with analyzing industries and determining answers related to their development for example consider the smartphone industry apple inc aapl was the first company to manufacture smartphones in an attractive design and load it with features for the average consumer but the product s price 499 for 4gb and 599 for 8gb was prohibitively expensive to ensure mainstream adoption without denting its profit margins the cupertino company tied up with network providers to defray the cost of a smartphone over a period of time apple s sales were on an upward curve until google and samsung came along they exploited the demand for smartphones by offering cheaper versions packed with similar features into the market the competition turned out to be good for the overall industry and over time the device s market expanded beyond the united states it encompasses major markets in developed and developing countries the number of smartphone manufacturers has also exploded this fairly simple account of the smartphone industry s growth gives rise to several questions here are some industrial organization studies such questions and attempts to answer them | |
what is the industrial production index ipi | the industrial production index ipi is a monthly economic indicator measuring real output in the manufacturing mining electric and gas industries relative to a base year it is published in the middle of every month by the federal reserve board frb and reported on by the conference board a member driven economic think tank the frb also releases revisions to previous estimates at the end of every march | |
how does the industrial production index ipi work | the industrial production index ipi measures levels of production in the manufacturing mining including oil and gas field drilling services and electrical and gas utilities sectors it also measures capacity an estimate of the production levels that could be sustainably maintained and capacity utilization the ratio of actual output to capacity industrial production and capacity levels are expressed as an index level relative to a base year currently 2012 in other words they do not express absolute production volumes or values but the percentage change in production relative to 2012 the source data is varied including physical inputs and outputs such as tons of steel inflation adjusted sales figures and in some cases hours logged by production workers the frb obtains this data from industry associations and government agencies and aggregates them into an index using the fisher ideal formula the indices are available in seasonally adjusted and unadjusted formats within the overall ipi there are a number of sub indices providing a detailed look at the output of highly specific industries examples of a few of the dozens of industries for which monthly production data is available include residential gas sales ice cream and frozen dessert carpet and rug mills spring and wire products pig iron audio and video equipment and paper benefits of the industrial production index ipi industry level data are useful for managers and investors within specific lines of business while the composite index is an important macroeconomic indicator for economists and investors fluctuations within the industrial sector account for most of the variation in overall economic growth at the same time ipi differs from the most popular measure of economic output gross domestic product gdp gdp measures the price paid by the end user so it includes value added in the retail sector which ipi ignores it is also important to note that the industrial sector makes up a low and falling share of the u s economy less than 20 of gdp as of 2016 capacity utilization is a useful indicator of the strength of demand low capacity utilization or overcapacity signals weak demand policymakers could read this as a signal that fiscal or monetary stimulus is needed investors meanwhile could interpret it as a sign of a coming downturn or depending on the signals from washington as a sign of coming stimulus high capacity utilization on the other hand can act as a warning that the economy is overheating suggesting the risk of price rises and asset bubbles policymakers could react to those threats with interest rate rises or fiscal austerity alternatively they could let the business cycle take its course likely resulting in an eventual recession historical databelow is the seasonally adjusted ipi for the 50 years to october 2017 data is available going back to january 1919 | |
what are industrial revenue bonds irbs | industrial revenue bonds irb are municipal debt securities issued by a government agency on behalf of a private sector company and intended to build or acquire factories or other heavy equipment and tools irbs were formerly called industrial development bonds idb understanding industrial revenue bonds irbsmunicipal bonds aka munis are tax exempt debt obligations issued by a state city or county to raise money for major capital projects such as infrastructure or new schools investors expect a timely and periodic stream of interest income on these bonds and upon maturity repayment of their principal the source of funds used for interest payments and principal depends on whether the muni bond is a general obligation bond or a revenue bond one type of revenue bond is the private activity bond pab which is issued by the municipality on behalf of private organizations either for profit or non profit to finance particular projects although a private entity is doing the work the project is one that will benefit the community in some way a hospital airport or sports stadium an industrial revenue bond irb is a variety of pab one issued by the state or local government on behalf of a for profit company the municipality s aim is to improve the economic and employment conditions of its region and via the irb is willing to help fund a project and issue to tax breaks to the entity undertaking it | |
how industrial revenue bonds irbs work | municipalities issue irbs to assist a company that might otherwise be unable to obtain financing for its industrial venture or unwilling to undertake the project on its own the proceeds from the bond are used to fund the acquisition construction reconstruction expansion or improvement of property that qualifies as a manufacturing facility or equipment as with pabs in general the irb s underlying borrower the for profit company agrees to reimburse the issuer which pays the interest and principal on the securities solely from the revenue stream of the borrowers projects a private company s project qualifies for an irb if it involves manufacturing waste disposal recovery or wastewater treatment also to qualify total capital expenditures at the project site for the three years prior and subsequent to the issuance of the bonds must be 20 million or less other irb provisions include as these provisions suggest irbs tend to be small issue manufacturing bonds many idbs are sold as variable rate demand obligation bonds vrdo secured by a bank letter of credit with a long term credit rating of at least a3 from moody s investors service or an a from standard poor s or fitch ratings tax treatment of industrial revenue bonds irbsas with other munis the interest irbs pay is exempt from both federal and state income taxes as a result these bonds carry lower nominal interest rates than comparable conventional debt obligations irbs are subject to irs statutes since the project is legally owned by a governmental entity however the company developing the project obtains the status of a state or local government for this project the property being developed thus becomes exempt from many taxes especially property taxes until the bonds mature if the company defaults on the lease payments the bond trustee forecloses and sells the company s assets to repay bondholders | |
what was the industrial revolution | the industrial revolution was a period of major mechanization and innovation that began in great britain during the mid 18th and early 19th centuries and later spread throughout much of the world the british industrial revolution was dominated by the exploitation of coal and iron 1the american industrial revolution sometimes referred to as the second industrial revolution began during the gilded age in the 1870s and continued through world war ii the era saw the mechanization of agriculture and manufacturing and the introduction of new modes of transportation including steamships the automobile and airplanes 234 | |
how did the industrial revolution impact society | although the industrial revolution began more than 200 years ago it is a period that left a profound impact on how people lived and the way businesses operated arguably the factory systems developed during the industrial revolution are responsible for creating capitalism and the modern cities of today before this period most households subsisted by farming and lived primarily in small rural communities with the advent of factories during the 18th century people began working for companies located in urban areas for the first time often the wages were low and conditions harsh however working for such businesses still paid a better living wage than farming 5production efficiency improved during the industrial revolution with inventions such as the steam engine which dramatically reduced the time it took to manufacture products 3 more efficient production subsequently reduced prices for products primarily due to lower labor costs opening the marketing doors to a new level of customers the industrial revolution developed in conjunction with the capitalist economies business owners capitalists began to organize labor centrally into factories and introduced a division of labor to increase output and profitability compared with the craft and guild systems that preceded it capitalist production incentivized technological change and innovation at an unprecedented rate the industrial revolution was driven in part by the adoption of coal as an energy source before the use of coal wood was the primary energy source coal provided three times more energy than wood and britain had large coal deposits 67 | |
what were the effects of the industrial revolution on tariffs | the industrial revolution was not always organic or directed by free market forces alone the united states government for instance helped domestic industry at the time by instituting tariffs taxes on foreign imported goods so that products such as steel were cheaper than foreign imports cheaper steel prices encouraged the development of infrastructure such as railroads and bridges during the american industrial revolution 8advantages of industrializationthe industrial revolution created an increase in employment opportunities wages at factories were higher than what individuals were making as farmers as factories became widespread additional managers and employees were required to operate them increasing the supply of jobs and overall wages as most of the factories and large companies were located near cities populations migrated to urban areas searching for jobs often overwhelming the available housing supply 9 this led to significant improvements in city planning increased innovation disrupted the status quo bringing new technologies to the masses and leading to higher levels of education such groundbreaking inventions still used today include the sewing machine x ray lightbulb calculator and anesthesia due to the industrial revolution s advancements the nation saw the first combustible engine incandescent light bulb and modern assembly line used in manufacturing the industrial revolution changed how people worked and the technologies available to them which affected where they lived it made life comfortable for many though living conditions for workers remained abhorrent which eventually fueled the rise of labor unions this led to improved working conditions and fair wages 10disadvantages of industrializationalthough there were numerous advancements during the industrial revolution rapid progress caused many problems as workers left their farms to work in factories for higher wages it led to a shortage of food production the sharp increase in the number of factories caused an increase in urban pollution pollution wasn t contained only in the factories as people flocked to the cities living conditions became deplorable as the urban resources were overwhelmed 9 sewage flowed in the streets in some cities and manufacturers dumped waste from factories into rivers water supplies were not tested and protected which eventually led to regulations and laws being enacted 11the industrial revolution provided an incentive to increase profits and as a result working conditions in factories deteriorated long hours inadequate remuneration and minimal breaks became the norm child labor was a significant issue health issues arose for many of the factory workers giving rise to the labor movement throughout the u s 8advancements in productiongrowth in innovations and inventionshigher wagesimprovements in transportation networksdeplorable working conditions and child laborunsanitary living conditions and pollutionfood shortagesinequitable distribution of profits | |
what key innovations took place during the industrial revolution | the first cotton mill was built after samuel slater brought britain s manufacturing technology to the united states the mill was powered by water bringing jobs and commerce to the northeast in the following years many factories and mills were built using the same technologies in 1869 the first transcontinental railroad was completed this was a major accomplishment for the u s as it allowed the transportation of goods people and raw materials nationwide also during the american industrial revolution samuel morse created the telegraph which sent electric signals over a wire allowing the nation to communicate andrew carnegie built the first steel mills in the u s thomas alva edison created the lightbulb and the phonograph and alexander graham bell invented the telephone 8 philo farnsworth came up with television in 1928 though it didn t establish itself as a popular entertainment medium until after world war ii 12 | |
how is the industrial revolution best defined | the industrial revolution shifted societies from an agrarian economy to a manufacturing one with products being made by machines rather than by hand this led to increased production and efficiency lower prices more goods improved wages and migration from rural areas to urban areas | |
when was the industrial revolution | the first industrial revolution began in great britain in the mid to late 1700s when machine manufacturing led to goods being produced in large quantities this spread around the globe and the second industrial revolution began in the u s in the late 1800s creating further advancements in technology that drove greater efficiency | |
what 3 things played a role in the industrial revolution | the use of iron and steel new energy sources such as coal and steam and the factory system all fueled technological progress | |
what were the most important inventions of the industrial revolution | among the most important inventions of the first industrial revolution are the steam engine spinning jenny cotton gin and telegraph the second industrial revolution brought the advent of the internal combustion engine controlled electricity the lightbulb the telephone the phonograph radio and television | |
what is industrialization | industrialization is the process of transforming the economy of a nation or region from a focus on agriculture to a reliance on manufacturing mechanized methods of mass production are an essential component of this transition the positive characteristics of industrialization include economic growth a more efficient division of labor and a growth spurt in technological innovation investopedia nono floresunderstanding industrializationindustrialization can be driven by a combination of factors including government policy labor saving inventions entrepreneurial ambitions and a demand for goods and services it has profound implications for the population causing a wave of migration from small farms to cities and towns where jobs can be found the most dramatic example in recent history is that of china where government policy changes in the late 20th century led to the nation s transition from an economy based on subsistence farming to a global manufacturing powerhouse in the western world industrialization is most commonly associated with the industrial revolution in europe that began in the late 18th century and the subsequent burst of industrialization in the u s through the 19th century in europe the era was characterized by a surge in local manufacturing of goods for export made possible by a growing population of consumers great britain played an outsized role in the process through technological innovations such as steam powered machinery 1industrialization quickly spread to the united states the epicenter of laissez faire capitalism inventions including the cotton mill and steam power made possible the establishment of mill towns such as lowell ma and pawtucket ri 2world war ii created an unprecedented demand for certain manufactured goods leading to a buildup of production capacity post war prosperity provided further catalysts that kept capacity utilization high and stimulated further growth innovation specialization and wealth creation were the causes and effects of industrialization in this period the late 20th century was marked by rapid industrialization in other parts of the world notably asia the asian tigers hong kong south korea taiwan and singapore all participated in economic growth based on manufacturing for global customers china experienced its own industrial revolution after moving away from a strict communist model 3effects of industrializationthe innovations of the 19th century allowed for the mass production of commercial goods as manufacturing activities grew transportation finance and communications industries all expanded to support the new production capacity it also led to increased labor specialization and allowed cities to support larger populations motivating a rapid demographic shift people left rural areas in large numbers seeking jobs in budding industries the industrial revolution led to unprecedented expansion in wealth and financial well being for some a larger middle class emerged as consumer demand for more goods and services grew and business creation boomed to feed the demand modes of industrializationdifferent strategies and methods of industrialization have been followed over time with varying degrees of success the industrial revolution in europe and the united states initially took place under mercantilist and protectionist government policies that fostered the early growth of industry these later adopted a laissez faire or free market approach that encouraged foreign trade providing new outlets for industrial output in the post second world war era developing nations across latin america and africa adopted a strategy of import substituting industrialization which involved protectionist barriers to trade coupled with direct subsidization or nationalization of domestic industries nearly at the same time parts of europe and several east asian economies pursued an alternative strategy of export led growth this strategy emphasized the deliberate pursuit of foreign trade to build exporting industries and depended in part on maintaining a weak currency to make exports more attractive to foreign buyers in general export led growth has outperformed import substituting industrialization the socialist nations of the 20th century repeatedly embarked on centrally planned programs of industrialization these include the first and second five year plans in the soviet union and the great leap forward in china while these efforts did re orient the respective economies toward a more industrial base and an increase in output of industrial commodities they were also accompanied by harsh government repression deteriorating living and working conditions for workers and even widespread starvation examples of industrializationindustrialization is dependent on growth and innovation in at least four industries industrialization began with the invention of machines that greatly increased the manufacture of goods one such invention was the cotton gin patented by eli whitney in 1794 whether hand cranked or steam powered the machine made it possible to greatly increase the speed with which cotton fluff could be separated from its seeds before being woven into cloth 4another was the spinning jenny a contraption that could multiply the number of spindles that a single spinner could handle at the same time to weave cotton or wool 5perhaps the key invention of them all was the steam engine an improved version of which was invented by scottish engineer james watt in 1763 coal powered steam engines drove the industrial revolution 1many of the great inventions of the 19th century were developed to serve the mining industry the 19th century was a period of unparalleled innovation in ways to transport goods from and to marketplaces among them before contactless payments and self service checkouts there were innovations in retailing that were designed to appeal to 19th century shoppers | |
how does industrialization impact society | industrialization creates jobs that draw people from farms and villages to cities where manufacturing takes place however hard those jobs were they were often preferable to the precarious existence of a small farming family the result is a new generation of urban consumers businesses of all kinds spring up to provide goods and services to these consumers over time a larger middle class of artisans and shopkeepers emerges a large working class also emerges and conditions were often much harsher for them the evolution of labor unions is a direct result of the conditions faced by the powerless workers of the industrial revolution 14 | |
what is industrial activity | industrial activity is any business process that is necessary to create a manufactured product the activity may be related to the sourcing processing assembly repair or dismantling of a manufactured product |
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