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how to calculate the money flow index | there are several steps for calculating the money flow index if doing it by hand using a spreadsheet is recommended | |
what does the money flow index tell you | one of the primary ways to use the money flow index is when there is a divergence a divergence is when the oscillator is moving in the opposite direction of price this is a signal of a potential reversal in the prevailing price trend for example a very high money flow index that begins to fall below a reading of 80 while the underlying security continues to climb is a price reversal signal to the downside conversely a very low mfi reading that climbs above a reading of 20 while the underlying security continues to sell off is a price reversal signal to the upside traders also watch for larger divergences using multiple waves in the price and mfi for example a stock peaks at 10 pulls back to 8 and then rallies to 12 the price has made two successive highs at 10 and 12 if mfi makes a lower higher when the price reaches 12 the indicator is not confirming the new high this could foreshadow a decline in price the overbought and oversold levels are also used to signal possible trading opportunities moves below 10 and above 90 are rare traders watch for the mfi to move back above 10 to signal a long trade and to drop below 90 to signal a short trade other moves out of overbought or oversold territory can also be useful for example when an asset is in an uptrend a drop below 20 or even 30 and then a rally back above it could indicate a pullback is over and the price uptrend is resuming the same goes for a downtrend a short term rally could push the mfi up to 70 or 80 but when it drops back below that could be the time to enter a short trade in preparation for another drop the difference between the money flow index and the relative strength index rsi the mfi and rsi are very closely related the main difference is that mfi incorporates volume while the rsi does not proponents of volume analysis believe it is a leading indicator therefore they also believe that mfi will provide signals and warn of possible reversals in a more timely fashion than the rsi one indicator is not better than the other they are simply incorporating different elements and will therefore provide signals at different times limitations of the money flow indexthe mfi is capable of producing false signals this is when the indicator does something that indicates a good trading opportunity is present but then the price doesn t move as expected resulting in a losing trade a divergence may not result in a price reversal for instance the indicator may also fail to warn of something important for example while a divergence may result in a price reversing some of the time divergence won t be present for all price reversals because of this it is recommended that traders use other forms of analysis and risk control and not rely exclusively on one indicator | |
what is the money flow index mfi | the money flow index mfi is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset it can also be used to spot divergences which warn of a trend change in price the oscillator moves between 0 and 100 unlike conventional oscillators such as the relative strength index rsi the money flow index incorporates both price and volume data as opposed to just price for this reason some analysts call mfi the volume weighted rsi image by sabrina jiang investopedia 2021the formulas for the money flow index are money flow index 100 1001 money flow ratiowhere money flow ratio 14 period positive money flow14 period negative money flowraw money flow typical price volumetypical price high low close3 begin aligned text money flow index 100 frac 100 1 text money flow ratio textbf where text money flow ratio frac text 14 period positive money flow text 14 period negative money flow text raw money flow text typical price volume text typical price frac text high low close 3 end aligned money flow index 100 1 money flow ratio100 where money flow ratio 14 period negative money flow14 period positive money flow raw money flow typical price volumetypical price 3high low close | |
how to calculate the money flow index | there are several steps for calculating the money flow index if doing it by hand using a spreadsheet is recommended | |
what does the money flow index tell you | one of the primary ways to use the money flow index is when there is a divergence a divergence is when the oscillator is moving in the opposite direction of price this is a signal of a potential reversal in the prevailing price trend for example a very high money flow index that begins to fall below a reading of 80 while the underlying security continues to climb is a price reversal signal to the downside conversely a very low mfi reading that climbs above a reading of 20 while the underlying security continues to sell off is a price reversal signal to the upside traders also watch for larger divergences using multiple waves in the price and mfi for example a stock peaks at 10 pulls back to 8 and then rallies to 12 the price has made two successive highs at 10 and 12 if mfi makes a lower higher when the price reaches 12 the indicator is not confirming the new high this could foreshadow a decline in price the overbought and oversold levels are also used to signal possible trading opportunities moves below 10 and above 90 are rare traders watch for the mfi to move back above 10 to signal a long trade and to drop below 90 to signal a short trade other moves out of overbought or oversold territory can also be useful for example when an asset is in an uptrend a drop below 20 or even 30 and then a rally back above it could indicate a pullback is over and the price uptrend is resuming the same goes for a downtrend a short term rally could push the mfi up to 70 or 80 but when it drops back below that could be the time to enter a short trade in preparation for another drop the difference between the money flow index and the relative strength index rsi the mfi and rsi are very closely related the main difference is that mfi incorporates volume while the rsi does not proponents of volume analysis believe it is a leading indicator therefore they also believe that mfi will provide signals and warn of possible reversals in a more timely fashion than the rsi one indicator is not better than the other they are simply incorporating different elements and will therefore provide signals at different times limitations of the money flow indexthe mfi is capable of producing false signals this is when the indicator does something that indicates a good trading opportunity is present but then the price doesn t move as expected resulting in a losing trade a divergence may not result in a price reversal for instance the indicator may also fail to warn of something important for example while a divergence may result in a price reversing some of the time divergence won t be present for all price reversals because of this it is recommended that traders use other forms of analysis and risk control and not rely exclusively on one indicator | |
what is money laundering | money laundering is an illegal activity that makes large amounts of money generated by criminal activity such as drug trafficking or terrorist funding appear to have come from a legitimate source the money from the criminal activity is considered dirty and the process launders it to look clean financial institutions employ anti money laundering aml policies to detect and prevent this activity investopedia julie bang | |
how money laundering works | money laundering is essential for criminal organizations that use illegally obtained money criminals deposit money in legitimate financial institutions to appear as if it comes from legitimate sources laundering money typically involves three steps although some stages may be combined or repeated 1the bank secrecy act bsa requires financial institutions to keep records of cash purchases of negotiable instruments file reports of cash transactions exceeding 10 000 and report suspicious activity that might signal money laundering 2types of transactionselectronic money launderingthe rise of online banking institutions anonymous online payment services and peer to peer p2p transfers with mobile phones have made detecting the illegal transfer of money increasingly difficult proxy servers and anonymous software make the third component of money laundering integration difficult to detect as money can be transferred or withdrawn with little or no trace of an internet protocol ip address money can be laundered through online auctions and sales gambling websites and virtual gaming sites where ill gotten money is converted into gaming currency then back into real usable and untraceable clean money money laundering may involve cryptocurrencies such as bitcoin while not completely anonymous they can be used in blackmail schemes the drug trade and other criminal activities due to their relative anonymity compared with fiat currency aml laws have been slow to catch up to cybercrime since most laws are still based on detecting dirty money as it passes through traditional banking institutions and channels 3preventionaccording to the united nations office on drugs and crime global money laundering transactions account for roughly 800 billion to 2 trillion annually or 2 to 5 of global gross domestic product gdp 1in 1989 the group of seven g 7 formed an international committee called the financial action task force fatf to fight money laundering on an international scale in the early 2000s its purview was expanded to include terrorist activity 4the united states passed the bank secrecy act in 1970 requiring financial institutions to report cash transactions above 10 000 or unusual activity on a suspicious activity report sar to the department of the treasury 32 this information is used by the financial crimes enforcement network fincen to be shared with domestic criminal investigators international bodies or foreign financial intelligence units 5money laundering was deemed illegal in the united states in 1986 with the passage of the money laundering control act after sept 11 2001 the usa patriot act expanded money laundering efforts the association of certified anti money laundering specialists acams offers a professional designation known as a certified anti money laundering specialist cams these individuals work as brokerage compliance managers bank secrecy act officers financial intelligence unit managers surveillance analysts and financial crimes investigative analysts 6 | |
what is an example of money laundering | cash earned illegally from selling drugs may be laundered through highly cash intensive businesses such as a laundromat or restaurant where the illegal cash is mingled with business cash before deposit these types of businesses are often referred to as fronts | |
what are signs of money laundering | money laundering red flags include suspicious or secretive behavior by an individual around money matters making large transactions with cash owning a company that seems to serve no real purpose conducting overly complex transactions or making several transactions just under the reporting threshold | |
how is real estate used for money laundering | criminals use real estate transactions including undervaluation or overvaluation of properties buying and selling properties rapidly using third parties or companies that distance the transaction from the criminal source of funds and private sales 7 | |
how are cryptocurrencies used in money laundering | the u s financial crimes enforcement network fincen noted in a june 2021 report that convertible virtual currencies cvcs or cryptocurrencies are a currency of choice in various online illicit activities cvcs can layer transactions and obfuscate the origin of money derived from criminal activity criminals use several money laundering techniques involving cryptocurrencies including mixers and tumblers that break the connection between an address or crypto wallet sending cryptocurrency and the address receiving it 8the bottom linemoney laundering disguises illegally obtained financial assets global governments and financial institutions have anti money laundering measures in place online activity and digital assets have added to money laundering transactions | |
what is money management | money management refers to the processes of budgeting saving investing spending or otherwise overseeing the capital usage of an individual or group the term can also refer more narrowly to investment management and portfolio management the predominant use of the phrase in financial markets is that of an investment professional making investment decisions for large pools of funds such as mutual funds or pension plans understanding money managementmoney management is a broad term that involves and incorporates services and solutions across the entire investment industry consumers have access to a wide range of resources and applications that allow them to individually manage nearly every aspect of their personal finances as investors increase their net worth they also often seek the services of financial advisors for professional money management financial advisors are typically associated with private banking and brokerage services offering support for holistic money management plans that can involve estate planning retirement and more in the growing financial technology market personal finance apps exist to help consumers with nearly every aspect of their finances investment company money management is also a central aspect of the investment industry investment company money management offers individual consumers investment fund options that encompass all investable asset classes in the financial market investment company money managers also support the capital management of institutional clients with investment solutions for institutional retirement plans endowments foundations and more top money managers by assetsglobal investment managers offer retail and institutional investment management funds and services that encompass every investment asset class in the industry two of the most popular types of funds include actively managed funds and passively managed funds passively managed funds replicate specified indexes and usually charge low management fees the list below shows the top global money managers by assets under management aum 1in 1988 blackrock inc was launched as a 1 division of the blackrock group by the end of 1993 it boasted 17 billion in aum and by 2022 that number swelled to a whopping 8 6 trillion blackrock s exchange traded fund etf division called ishares has about 2 5 trillion in aum globally amounting to roughly 29 of the group s total assets overall the firm employs approximately 13 000 professionals and maintains offices in more than 30 countries around the world 213the vanguard group is one of the most well known investment management companies catering to more than 30 million clients across 170 countries vanguard was founded by john c bogle in 1975 in valley forge pennsylvania as a division of wellington management co where bogle was previously chair since its launch vanguard has grown its total assets to beyond 8 trillion becoming the world s second largest asset manager thanks to the popularity of its low cost investment funds 41fidelity management research co was founded in 1946 by edward c johnson ii as of dec 31 2022 fidelity had more than 40 million customers with 10 3 trillion in total assets and 3 9 trillion in aum 51the firm offers hundreds of mutual funds including domestic equity foreign equity sector specific fixed income index money market and asset allocation funds | |
what is the difference between a money manager and an asset manager | as implied in their respective names money managers manage money and asset managers manage assets however as assets essentially represent money the two can largely be considered the same thing | |
what are the main principles of money management | the main principles of money management are generally income investing savings and spending with the right balance these principles can help individuals to maximize their financial well being | |
what is the goal of money management | the ultimate goal of money management is to maximize wealth the bottom linemoney management is precisely that the management of money when people talk about money management they may be referring to how an individual or company handles their finances whether that be budgeting saving investing or spending alternatively they could be referring to the companies that many people count on to manage their capital in financial markets the term money management is generally synonymous with big investment firms or asset managers taking people s money and investing it the biggest money managers in the world are blackrock vanguard and fidelity among them they oversee many of the largest most well known mutual funds and pension plans | |
what is a money manager | a money manager is a person or financial firm that manages the securities portfolio of an individual or institutional investor typically a money manager employs people with various expertise ranging from research and selection of investment options to monitoring the assets and deciding when to sell them in return for a fee the money manager has the fiduciary duty to choose and manage investments prudently for clients including developing an appropriate investment strategy and buying and selling securities to meet those goals a money manager may also be known as a portfolio manager asset manager or investment manager | |
how a money manager works | money managers provide their clients with personalized service an individualized portfolio and ongoing management with fee based management as opposed to transaction based management the client and his or her adviser are on the same side which means clients no longer have to question the decisions of a broker to buy or sell their securities a professional money manager does not receive commissions on transactions and is paid based on a percentage of assets under management thus it is in the best interest of both the money manager and client to see the portfolio grow reasons to use a money managera professionally trained money manager has the expertise to select the most appropriate investments for his or her client s portfolio money managers typically hold a chartered financial analyst cfa designation that helps them assess a company s fundamentals by analyzing their financial statements a money manager may also have expertise in a specific sector for example the manager may have previously held roles in the automotive industry that provides an edge when selecting auto stocks money managers have access to a plethora of information and tools such as interviews with company executives research reports analytics data and advanced financial modeling software having these resources allows money managers to make investment decisions that have a higher probability of success for instance a money manager might discover that a company has a unique competitive advantage after interviewing its ceo median money manager annual salary in the u s as of may 2020 according to the u s bureau of labor statistics 1 | |
how is a money manager paid | money managers typically charge management fees ranging from 0 5 to 2 per annum depending on the portfolio size for example an asset management firm may charge a 1 management fee on a 1 million portfolio in dollar terms this equals a 10 000 management fee 1 000 000 x 1 100 asset managers and hedge funds may also charge a performance fee which is remuneration for generating positive returns performance fees typically range between 10 and 20 of the fund s profit for instance if the fund charges a 10 performance fee and returns 250 000 profit the client pays an additional 25 000 in fees 250 000 x 10 100 real life example of a money managerexamples of leading money management firms that accept retail investors funds include vanguard group inc pacific investment management co pimco and j p morgan asset management famous individual money managers include warren buffett of berkshire hathaway and bruce berkowitz of the fairholme fund | |
what is the money market | the money market refers to trading in very short term debt investments it involves continuous large volume trades between institutions and traders at the wholesale level it includes money market mutual funds bought by individual investors and money market accounts opened at banks at the retail level the money market is characterized by a high degree of safety and relatively low rates of return on investment understanding the money marketthe money market is one of the pillars of the global financial system it involves overnight swaps of vast amounts of money between banks and the u s government the majority of money market transactions are wholesale transactions that take place between financial institutions and companies institutions that participate in the money market include banks that lend to each other and to large companies in the euro currency and time deposit markets they also include companies that raise money by selling commercial paper into the market and investors who purchase bank cds as a safe place to park money in the short term some of those wholesale transactions eventually make their way into the hands of consumers as components of money market mutual funds and other investments who can invest in the money market individuals can invest in the money market by buying money market funds short term certificates of deposit cds municipal notes or u s treasury bills the money market has retail locations for individual investors they include local banks the u s government s treasurydirect website and brokerages the one buck baselinemoney market funds seek stability and security with the goal of never losing money and keeping net asset value nav at 1 this one buck nav baseline gave rise to the phrase break the buck some of the original investment is gone and investors will lose money if the value falls below the 1 level this scenario happens very rarely however it last occurred in 2008 and involved a fund that held assets of the bankrupt lehman brothers investment company its investors eventually received 98 cents on the dollar 1many money market funds aren t fdic insured so they can nonetheless lose money 2types of money market instrumentsthe wholesale money market is limited to companies and financial institutions that lend and borrow in amounts ranging from 5 million to well over 1 billion per transaction mutual funds offer baskets of these products to individual investors the net asset value nav of such funds is intended to stay at 1 money market accounts are a type of savings account they pay slightly higher interest rates than regular savings accounts but they often come with restrictions on withdrawing money or writing checks withdrawals are limited by federal regulations the bank will promptly convert the money market account to a checking account if the limits are exceeded banks typically calculate interest on a money market account daily and make a monthly credit to the account average interest rates for money market accounts can vary based on the amount deposited the best paying money market account advertised online as of july 2024 was offered by brilliant bank at 5 35 with a 1 000 minimum deposit 3money market accounts have become more popular because of their perceived safety compared to more volatile investments given a high interest rate market funds in money market accounts are insured by the federal deposit insurance corporation fdic when they re held at banks and the national credit union administration ncua when they re held in credit unions 24most certificates of deposit cds aren t strictly money market funds because they re sold with terms of up to 10 years cds with terms as short as three months to six months are available however larger deposits and longer terms yield better interest rates just as they do with money market accounts rates in early july 2024 ranged from about 5 35 to 6 00 the rates offered on a cd remain constant for the deposit period unlike with a money market account there s usually a penalty associated with an early withdrawal of funds from a cd they ve gained in popularity due to their safety and the relatively high rates available however the u s government issues treasury bills in the money market with maturities ranging from a few days to one year cash management bills come with maturities of a few days to one year 56primary dealers buy these bills in large amounts directly from the government to trade between themselves or to sell to individual investors individual investors can buy them directly from the government through the treasurydirect website or a bank or a broker state county and municipal governments also issue short term notes the commercial paper market is for buying and selling unsecured loans for corporations in need of a short term cash infusion only highly creditworthy companies participate in this market so the risks remain low commercial paper is a popular borrowing mechanism in the wholesale market because the interest rates are higher than for bank time deposits or treasury bills a greater range of maturities is available as well averaging about 30 days and extending up to nine months 7 the risk of default is significantly higher for commercial paper than for bank or government instruments however a banker s acceptance is a short term loan that s guaranteed by a bank used extensively in foreign trade a banker s acceptance is like a post dated check it serves as a guarantee that an importer who has ordered goods can pay for them there s a secondary market for buying and selling banker s acceptances at a discount eurodollars are dollar denominated deposits held in foreign banks so they re not subject to federal reserve regulations very large deposits of eurodollars are held in banks in the cayman islands and the bahamas money market funds foreign banks and large corporations invest in them because they pay a slightly higher interest rate than u s government debt the repo or repurchase agreement is part of the overnight lending money market treasury bills or other government securities are sold to another party with an agreement to repurchase them at a set price on a set date money markets vs capital marketsthe money market is defined as dealing in debt of less than one year it s used primarily by governments and corporations to keep their cash flows steady and by investors to make a modest profit the capital market is dedicated to the sale and purchase of long term debt and equity instruments the term capital markets refers to the entirety of the stock and bond markets stocks have no expiration date unless the company itself ceases to operate unlike many money market products advantages and disadvantages of money marketsmost money market securities are considered extremely low risk due to the protection of fdic insurance backing by a government or bank or the high creditworthiness of the borrowers they re also very liquid they can readily be exchanged for cash at short notice the tradeoff is that these investments have low returns money markets generally underperform other asset classes and often don t even keep pace with inflation any fees associated with an account can easily eat into these slim returns and these advantages don t extend to all money market securities some aren t fdic insured and there s a chance that even the most trustworthy borrowers may default some money market accounts have minimum balance requirements or restrictions on withdrawals extremely low riskmay be insured by fdichighly liquidhigher returns than most bank accountslow returns that may not keep pace with inflationnot all money market securities are insuredmay have high minimum investments or withdrawal restrictions | |
why is it called the money market | the money market deals in highly liquid very safe short term debt securities and these attributes make them virtual cash equivalents they can be exchanged for cash at short notice | |
why is the money market important | the money market keeps the financial economy running smoothly it allows savers to lend money to those in need of short term loans and it allocates capital toward its most productive use these loans are often made overnight or for a matter of days or weeks they re needed by governments corporations and banks to meet their near term obligations or regulatory requirements and they allow those with some excess cash on hand to earn a small amount of interest | |
what are some examples of money market instruments | the money market is composed of several types of securities including short term treasuries t bills certificates of deposit cds commercial paper repurchase agreements repos and money market mutual funds that invest in these instruments the money market funds typically have shares priced at 1 can you lose money in the money market most money market accounts are insured by the fdic up to 250 000 per institution just like bank deposits there s virtually no chance you ll lose your money by owning a cd or t bill because money market instruments are very low risk some money market funds can break the buck and briefly incur losses during periods of extreme financial stress such as at the height of the 2008 financial crisis this was quickly corrected however | |
what are the downsides of money markets | money market investments pay very low returns because they re virtually risk free they can t provide substantial capital gains or investment growth compared to riskier assets like stocks or even bonds some types of money market accounts like cds lock your money up until a future date that can be months or even years ahead individual investors should also look carefully at the fees they ll be charged for money market accounts they can eat into the already modest rates of return on these investments the bottom linemoney market accounts and money market funds are among the safest ways to invest money they also have much lower returns than other investments and they may even fail to keep up with inflation many individuals and businesses use money markets as a short term investment for their cash reserves these investments are virtually risk free and offer at least a modest return on savings | |
what is a money market account mma | the term money market account mma refers to an interest bearing account at a bank or credit union sometimes referred to as money market deposit accounts mmda money market accounts have some features that are not found in other types of accounts most money market accounts pay a higher interest rate than regular passbook savings accounts and often include check writing and debit card privileges they may also come with restrictions that make them less flexible than a regular checking account they are important for calculating tangible net worth investopedia tara anand | |
how money market accounts mmas work | money market accounts are financial products that are offered to customers at traditional and online banks and at credit unions they give account holders some of the key benefits of a savings account while providing them with the features of a checking account including banks often require a minimum initial deposit in order to open an mma and balances must be maintained over a certain threshold while they are active banks may impose a service charge if the balance falls below that minimum amount money market accounts are suited for individuals who want to earn more interest than they would with a savings account with short term goals in mind as such an mma may be a good idea if you re saving up for a specific purchase such as a vacation the down payment for a car or for a rainy day or emergency fund they are not intended for long term purposes like retirement history of money market accounts mmas until the early 1980s the federal government placed a cap or limit on the amount of interest that banks and credit unions could offer customers on their savings accounts 1many institutions gave out small appliances such as toasters and waffle irons and other incentives to attract deposits because they couldn t compete with money market mutual funds when it came to interest rates introduced in the 1970s money market mutual funds are sold by brokerages and mutual fund companies 2 under pressure from the banking industry congress passed the garn st germain depository institutions act in 1982 this new law allowed banks and credit unions to offer money market accounts that paid a money market rate which was higher than the previous capped rate 1advantages and disadvantages of money market accounts mmas there are advantages and disadvantages to having a money market account especially when you compare them to other types of accounts their advantages include higher interest rates check writing and debit card privileges banks and credit unions generally require customers to deposit a certain amount of money to open an account and to keep their account balance above a certain level many impose monthly fees if the balance falls below the minimum these accounts also provide federal insurance protection accounts held at banks are insured by the federal deposit insurance corporation fdic while those held at credit unions are insured by national credit union administration ncua the fdic and ncua cover certain types of accounts including mmas up to 250 000 per depositor per bank multiple insurable accounts at the same bank checking savings certificate of deposit count toward the 250 000 insurance limit joint accounts are insured for 500 000 345potential disadvantages include limited transactions fees and minimum balance requirements higher interest ratescheck writing privilegesdebit cardsinsurance protectionlimited transactionsfeesminimum balance requirementfor depositors who want to insure more than 250 000 the easiest way to accomplish that is to open accounts at more than one bank or credit union money market accounts mmas vs savings accountsone of the attractions of money market accounts is that they offer higher interest rates than savings accounts for example the average interest rate for an mma in may 2022 was 0 08 while the average savings account paid about 0 07 6 | |
when overall interest rates are higher as they were during the 1980s 1990s and much of the 2000s the gap between the two types of accounts will be wider money market accounts can offer higher interest rates because they re permitted to invest in certificates of deposit cds government securities and commercial paper which savings accounts cannot do | the interest rates on money market accounts are variable so they rise or fall with inflation how that interest is compounded yearly monthly or daily for example can have a substantial impact on the depositor s return especially if they maintain a high balance in their account unlike savings accounts many money market accounts offer some check writing privileges and also provide a debit card with the account much like a regular checking account the lines between high yield savings accounts and money market accounts are increasingly blurred and you may want to compare both money market accounts and savings account rates to ensure you re picking the best product for you money market accounts mmas vs checking accountsmoney market and checking accounts share some basic characteristics the same way they do with savings accounts account holders can make unlimited deposits 7 some of them even offer debit cards which allow account owners to make point of sale pos transactions they can also write checks against an mma too in april 2020 the federal reserve lifted restrictions set for accounts like mmas under regulation d 8 prior to this depositors were limited to a total of six transfers and electronic payments per month the types of transfers affected were pre authorized transfers including overdraft protection telephone transfers electronic transfers checks or debit card payments to third parties ach transactions and wire transfers depositors who exceeded the limits were fined 7although the rules were amended under federal regulations some banks may still impose limitations and restrictions on how their mmas may be used as such it s important to check with your financial institution about the rules money market accounts mmas vs mutual fundsunlike the various bank and credit union accounts described above money market mutual funds offered by brokerage firms and mutual fund companies are not fdic or ncua insured banks may also offer mutual funds but they aren t insured either however because they invest in safe short term vehicles such as cds government securities and commercial paper they are considered to be very low risk 2both money market accounts and money market mutual funds offer quick access to the depositor s cash the companies that offer them however can place limits on how often depositors can make withdrawals or redeem shares others may require that any checks they write be for over a certain amount the returns on money market mutual funds tend to be higher than those on money market accounts the table below compares some of the common features found in money market accounts and other types of deposit accounts because interest rates and other provisions can vary from one financial institution to another it s worth shopping around source investopedia | |
don t confuse a money market account with a money market mutual fund they re two different beasts while a money market account is a type of deposit account a money market mutual fund is a mutual fund that invests in highly liquid short term assets | alternatives to money market accounts mmas banks and credit unions offer many types of accounts some with features that can make them competitive with or superior to money market accounts unlike money market accounts regular savings accounts typically have no initial deposit or minimum balance requirements they also pay interest although usually not as much as a money market account like money market accounts passbook savings accounts are fdic or ncua insured 9 check with your bank to see if there are any restrictions on withdrawals many banks and credit unions also offer high yield savings accounts and depending on the institution the interest rate may be better than on their money market accounts high yield savings accounts are also fdic or ncua insured 3 a potential downside compared with money market accounts is that they may have more rules such as requiring direct deposits checking accounts have one big advantage over their money market cousins unlimited transactions including checks atm withdrawals wire transfers and so forth they are also fdic or ncua insured 53 their main disadvantage is that they pay a very low often zero interest rate like high yield savings accounts these accounts offer interest rates that rival and sometimes exceed those of money market accounts they also share the high yield savings accounts principal weakness which is that they may have more complicated requirements such as a minimum number of debit transactions each month they also impose a cap for example 5 000 above which the high interest rate does not apply in other respects high yield checking is like regular checking with unlimited checks a debit card atm access and fdic or ncua insurance 53this type of checking account may offer a sign up bonus and other rewards such as high yields atm fee reimbursements airline miles or cashback the main downside is similar to high yield checking notably high fees unless the depositor satisfies all the rules which vary by the institution otherwise rewards checking functions like a regular checking account including fdic or ncua insurance 35a cd is like a savings account with a fixed duration such as three six nine or 12 months or multiple years up to 10 in exchange for locking in their money for that period of time depositors generally get a higher rate of interest than they would with a regular savings account however if they withdraw their money or part of it early they ll pay a penalty usually in the form of lost interest some cds known as liquid cds don t penalize depositors for early withdrawals but pay a lower rate of interest cds are fdic or ncua insured but typically offer no provision to write checks withdraw funds with a debit card or add to the balance after the initial purchase 53frequently asked questions faqs | |
are money market accounts safe | money market accounts at a bank are insured by the federal deposit insurance corporation an independent agency of the federal government the fdic covers certain types of accounts including mmas up to 250 000 per depositor per bank 3 if the depositor has other insurable accounts at the same bank checking savings certificate of deposit they all count toward the 250 000 insurance limit for depositors who want to insure more than 250 000 the easiest way to accomplish that is to open accounts at more than one bank or credit union joint accounts are insured for 500 000 | |
what are the benefits of money market accounts | some of the benefits of mmas include higher interest rates insurance protection check writing and debit card privileges the lure of higher interest rates than savings accounts is one of the main attractions of mmas they are able to offer higher interest rates because they re permitted to invest in certificates of deposit government securities and commercial paper which savings accounts cannot do these accounts also offer easy access to funds as well as the flexibility to transfer funds between multiple accounts at the same institution and unlike savings accounts many mmas offer some check writing privileges and also provide a debit card with the account much like a regular checking account | |
what are the disadvantages of mmas | potential disadvantages include limited transactions fees withdrawal restrictions and minimum balance requirements banks and credit unions generally require customers to deposit a certain amount of money to open an account and to keep their account balance above a certain level many will impose monthly fees if the balance falls below the minimum while some mmas offer attractive rates most will not be able to compete with other higher yielding alternatives banks and credit unions offer many types of accounts some with features that can make them competitive with or superior to money market accounts although the federal reserve amended withdrawal restrictions banks may limit the amount of times that depositors can take money out of their mmas | |
what is a money market fund | a money market fund is a kind of mutual fund that invests in highly liquid near term instruments these instruments include cash cash equivalent securities and high credit rating debt based securities with a short term maturity such as u s treasuries money market funds are intended to offer investors high liquidity with a very low level of risk money market funds are also called money market mutual funds while they sound similar in name a money market fund is not the same as a money market account mma a money market fund is an investment that is sponsored by an investment fund company therefore it carries no guarantee of principal a money market account is a type of interest earning savings account money market accounts are offered by financial institutions they are insured by the federal deposit insurance corporation fdic and they typically have limited transaction privileges | |
how a money market fund works | money market funds work like a typical mutual fund they issue redeemable units or shares to investors and they are mandated to follow the guidelines drafted by financial regulators for example those set by the u s securities and exchange commission a money market fund may invest in the following types of debt based financial instruments returns from these instruments are dependent on the applicable market interest rates and therefore the overall returns from the money market funds are also dependent on interest rates order your copy of investopedia s what to do with 10 000 magazine for more wealth building advice types of money market fundsmoney market funds are classified into various types depending on the class of invested assets the maturity period and other attributes a prime money fund invests in floating rate debt and commercial paper of non treasury assets like those issued by corporations u s government agencies and government sponsored enterprises gses a government money fund invests at least 99 5 of its total assets in cash government securities and repurchase agreements that are fully collateralized by cash or government securities 1a treasury fund invests in standard u s treasury issued debt securities such as treasury bills treasury bonds and treasury notes 2a tax exempt money fund offers earnings that are free from u s federal income tax depending on the exact securities it invests in a tax exempt money fund may also have an exemption from state income taxes municipal bonds and other debt securities primarily constitute such types of money market funds 3some money market funds are targeted to attract institutional money with a high minimum investment amount oftentimes 1 million still other money market funds are retail money funds and are accessible to individual investors as a result of their small minimums special considerationsall the features of a standard mutual fund apply to a money market fund with one key difference a money market fund aims to maintain a net asset value nav of 1 per share 4 any excess earnings that get generated through interest on the portfolio holdings are distributed to the investors in the form of dividend payments investors can purchase or redeem shares of money market funds through investment fund companies brokerage firms and banks one of the primary reasons for the popularity of money market funds is their maintenance of the 1 nav this requirement forces the fund managers to make regular payments to investors providing a regular flow of income for them it also allows easy calculations and tracking of the net gains the fund generates occasionally a money market fund may fall below the 1 nav this creates a condition that is sometimes referred to with the colloquial term breaking the buck when this condition occurs it may be attributed to temporary price fluctuations in the money markets however if it persists the condition may trigger a moment when the investment income of the money market fund fails to exceed its operating expenses or investment losses for example if the fund used excess leverage in purchasing instruments or overall interest rates dropped to very low levels nearing zero and the fund broke the buck then one of these scenarios could lead to a condition where the fund cannot meet redemption requests if this happens regulators may jump in and force the fund s liquidation however instances of breaking the buck are very rare in 1994 the first instance of breaking the buck occurred the community bankers u s government money market fund was liquidated at 0 96 per share 5 this was the result of large losses that the fund incurred following a period of heavy investment in derivatives in 2008 following the bankruptcy of lehman brothers the venerable reserve primary fund also broke the buck the fund held millions of the lehman brothers debt obligations and panicked redemptions by its investors caused its nav to fall to 0 97 per share 6 the pullout of money caused the reserve primary fund to liquidate this event triggered mayhem throughout the money markets to prevent this from happening again in 2010 in the aftermath of the 2008 financial crisis the sec issued new rules to better manage money market funds these rules were intended to provide more stability and resilience by placing tighter restrictions on portfolio holdings and introducing provisions for imposing liquidity fees and suspending redemptions 7in the u s money market funds are under the purview of the sec this regulatory body defines the necessary guidelines for the characteristics maturity and variety of allowable investments in a money market fund under the provisions a money fund mainly invests in the top rated debt instruments and they should have a maturity period under 13 months the money market fund portfolio is required to maintain a weighted average maturity wam period of 60 days or less this wam requirement means that the average maturity period of all the invested instruments taken in proportion to their weights in the fund portfolio should not be more than 60 days this maturity limitation is done to ensure that only highly liquid instruments qualify for investments and the investor s money is not locked into long maturity instruments that can mar the liquidity 8a money market fund is not allowed to invest more than 5 in any one issuer in order to avoid issuer specific risk however government issued securities and repurchase agreements provide an exception to this rule 9advantages and disadvantages of money market fundsmoney market funds compete against similar investment options such as bank money market accounts ultrashort bond funds and enhanced cash funds these investment options may invest in a wider variety of assets as well as aim for higher returns the primary purpose of a money market fund is to provide investors with a safe avenue for investing in secure and highly liquid cash equivalent debt based assets using smaller investment amounts in the realm of mutual fund like investments money market funds are characterized as low risk low return investments many investors prefer to park substantial amounts of cash in such funds for the short term however money market funds are not suitable for long term investment goals like retirement planning this is because they don t offer much capital appreciation money market funds appear attractive to investors as they come with no loads no entry charges or exit charges many funds also provide investors with tax advantaged gains by investing in municipal securities that are tax exempt at the federal tax level and in some instances at the state level too very low riskhighly liquidbetter returns than bank accountsnot fdic insuredno capital appreciationsensitive to interest rate fluctuations monetary policyit s important to keep in mind that money market funds are not covered by the fdic s federal deposit insurance while money market deposit accounts online savings accounts and certificates of deposit are covered by this type of insurance 10 like other investment securities money market funds are regulated under the investment company act of 1940 9an active investor who has time and knowledge to hunt around for the best possible short term debt instruments offering the best possible interest rates at their preferred levels of risk may prefer investing on their own in the various available instruments on the other hand a less savvy investor may prefer taking the money market fund route by delegating the money management task to the fund operators fund shareholders can typically withdraw their money at any time but they may have a limit on the number of times they can withdraw within a certain period history of money market fundsmoney market funds were designed and launched during the early 1970s in the u s they gained rapid popularity because they were an easy way for investors to purchase a pool of securities that in general offered better returns than those available from a standard interest bearing bank account 11commercial paper has become a common component of many money market funds previously money market funds held only government bonds however this transition away from only government bonds resulted in higher yields at the same time it was this reliance on commercial paper that led to the reserve primary fund crisis in addition to the reforms that the sec introduced in 2010 the sec also implemented some fundamental structural changes to the way they regulate money market funds in 2016 11these changes required prime institutional money market funds to float their nav and no longer maintain a stable price retail and u s government money market funds were allowed to maintain the stable 1 per share policy the regulations also provided non government money market fund boards with new tools to address runs 9today money market funds have become one of the core pillars of the present day capital markets for investors they offer a diversified professionally managed portfolio with high daily liquidity many investors use money market funds as a place to park their cash until they decide on other investments or for funding needs that may arise in the short term the interest rates that are available on the various instruments that constitute the portfolio of a money market fund are the key factors that determine the return from a given money market fund looking at historical data is enough to provide sufficient details on how money market returns have fared during the decade spanning from 2000 to 2010 the monetary policies of the federal reserve bank led to short term interest rates the rates banks pay to borrow money from one another hovering around 0 these near zero rates meant money market fund investors saw returns that were significantly lower compared to those in the prior decades further with the tightening of regulations after the 2008 financial crisis the number of investable securities grew smaller another economic policy in recent years that has had an adverse impact on money market funds is quantitative easing qe qe is an unconventional monetary policy where a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply as major economies across the globe including the u s followed qe measures in the aftermath of the 2008 financial crisis a good portion of the qe money made its way into money market mutual funds as a haven this migration of funds led to interest rates remaining low for a long duration and the diminishing of returns from money market funds | |
are money market funds safe | yes for the most part money market funds are among the safest of all investments with a target value of 1 per share money market funds have only dipped below this value broken the buck on a small number of occasions associated with financial crises and have quickly bounced back | |
what was the first money market fund | the first money market mutual fund appeared in 1971 and was called the reserve fund 12 | |
is a money market account the same as a money market fund | no a money market fund is a mutual fund investment that holds short term treasuries and other money market instruments a money market account is a bank product that credits depositors a rate of interest the bottom linea money market fund is a type of mutual fund that invests in low risk short term debt instruments such as u s treasuries commercial paper and certificates of deposit cds these funds offer investors high liquidity with a very low level of risk while similar in name to money market accounts mmas money market funds differ because they are investment products without fdic insurance and their principal value fluctuates they are intended as a short term liquid investment providing little capital appreciation but generating modest income through interest money market funds aim to maintain a net asset value nav of 1 per share and are popular for their stability and regular income generation although they are sensitive to interest rate fluctuations the regulation and structure of these funds have evolved especially following the 2008 financial crisis to enhance market stability and investor protection today money market funds remain a vital part of the capital markets offering a safe liquid investment option for institutional and individual investors | |
what is the money market yield | the money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year such as negotiable certificates of deposit u s treasury bills and municipal notes money market yield is calculated by taking the holding period yield and multiplying it by a 360 day bank year divided by days to maturity it can also be calculated using a bank discount yield the money market yield is closely related to the cd equivalent yield and the bond equivalent yield bey understanding the money market yieldthe money market is the part of the broader financial markets that deals with highly liquid and short term financial securities the market links borrowers and lenders who are looking to transact in short term instruments overnight or for some days weeks or months but always less than a year active participants in this market include banks money market funds brokers and dealers examples of money market securities include certificates of deposit cd treasury bills t bills commercial paper municipal notes short term asset backed securities eurodollar deposits and repurchase agreements to earn a money market yield it is thus necessary to have a money market account banks for example offer money market accounts because they need to borrow funds on a short term basis to meet reserve requirements and to participate in interbank lending money market investors receive compensation for lending funds to entities that need to fulfill their short term debt obligations this compensation is typically in the form of variable interest rates determined by the current interest rate in the economy since money market securities are considered to have low default risk the money market yield will be lower than the yield on stocks and bonds but higher than the interest rates on standard savings accounts calculating the money market yieldalthough interest rates are quoted annually the quoted interest may actually be compounded semi annually quarterly monthly or even daily the money market yield is calculated using the bond equivalent yield bey based on a 360 day year which helps an investor compare the return of a bond that pays a coupon on an annual basis with a bond that pays semi annual quarterly or any other coupons the formula for the money market yield is for example a t bill with a 100 000 face value is issued for 98 000 and is due to mature in 180 days the money market yield is the money market yield differs slightly from the bank discount yield which is computed on the face value not the purchase price however the money market yield can also be calculated using the bank discount yield as seen in this formula | |
what is a typical money market yield | money market accounts and instruments typically yield between 0 01 and 4 this depends on the amount of money deposited as some institutions require a higher deposit to earn the higher interest rate | |
what is the 7 day yield on the money market | the 7 day yield on the money market is a method of estimating the return of money market instruments on an annual basis it takes the difference between the price today and the price seven days ago and multiplies that by the annualization factor | |
what are the disadvantages of a money market account | some disadvantages of a money market account include a lower yield than some other investment accounts possible limits on the number of transactions allowed in a certain period and minimum account balances the bottom lineinvesting in money market instruments can be a good way to utilize short term funds to generate interest income which is a better use than leaving your cash in a non interest bearing or low interest bearing vehicle | |
what is a money order | a money order is a secure alternative to cash or a personal check which you can use to send money or pay bills it works much like a check and is usually issued by a government or banking institution you can cash a money order or deposit it into a bank account money orders are readily accepted and converted to cash and are often used by people without access to a standard checking account they are an acceptable form of payment for debts both personal and business you can buy a money order for a small service fee from most banking institutions and many other locations money orders were first issued by the u s postal service in 1864 as a safer way to send money through the mail 1 american express introduced a competing money order product in 1882 2 | |
how money orders work | if you buy a money order you will have to fill out the name of the recipient on a form and the amount that the recipient should receive domestic money orders typically have a maximum limit of 1 000 so you d need to purchase multiple orders if you need more than that amount 3 be sure to fill out the money order carefully it s a one off purchase and you need to keep good records of it your money order will show the name of the person or entity being paid the issuer s name and the amount of money that can be cashed this dollar value doesn t include the fees charged be aware that different locations may charge different fees for money orders a bank or credit union will usually charge more than a convenience store to issue money orders | |
when you pay for a money order it comes with a receipt that includes the serial number of the money order you should keep this information until you re certain the money order has cleared without a receipt tracing a money order can be difficult or even impossible | a money order is harder to trace than a check so keep your receipt until you are sure the order has been received and cashed advantages and disadvantages of a money order | |
doesn t include sensitive information | recipient can cash the order at a local bank or credit unioncan be deposited into a bank accountcan be issued in one country and cashed in anothercan be harder to track than a personal checkbuying and cashing the money order can incur a feefunds could be delayed depending on where it s cashedcan be fraudulent | |
how to buy a money order | you can buy a money order at any bank or credit union as well as some drug stores most grocery stores convenience stores and any store that offers check cashing or money services such as moneygram or western union the u s postal service also offers money orders to order one you simply need to bring enough money to pay for the money order including fees either in cash or with a debit card for transactions above 3 000 you may be asked to present your id and fill out a special form this information is used to prevent money laundering 7 | |
how much do money orders cost | although there is a fee for buying a money order it s generally only a small fraction of the value of the order for example the u s postal service charges 2 35 for money orders of up to 500 and 3 40 for orders from 500 01 up to 1 000 fees are lower for money orders issued in military postal facilities 3money orders from commercial institutions may have different prices but the fees will tend to be similar however international money orders may incur higher fees 8money orders vs cashier s checksa cashier s check is similar to a money order in that both are sometimes used for payment in situations where cash or a personal check would be impractical neither can be bought with credit you have to use cash or a debit card 9but unlike a money order a cashier s check is simply a check written by a financial institution against its own assets 10 this is considered more reliable than a personal check because there is no chance of the check bouncing for this reason cashier s checks are frequently used to make large purchases such as for a house or vehicle whereas banks might place a hold on a personal check for that much money funds issued by a cashier s check should be available the next business day in contrast money orders are typically used for smaller transfers such as for rent or mortgage payments many institutions such as the u s postal service cap money orders at 1 000 3alternatives to money ordersin addition to checks and money orders other ways to send guaranteed funds to an individual or business include traveler s checks wire transfers bank drafts and cashier s checks but money orders are frequently used for payment in situations where the party being paid isn t set up to receive cash in some cases a personal check debit card credit card or even online payment apps might also be acceptable for payment however money orders are slightly different from these alternatives unlike card or electronic payments the recipient of a money order doesn t need any special technology to accept a money order and unlike personal checks a money order can t bounce frequently asked questions faqs | |
where can i cash a money order | you can cash a money order in the same places that issue money orders such as a bank credit union post office check cashing store or even some convenience and grocery stores you will need to endorse or sign the order and verify your identity there may be a small fee for cashing the money order which you can skip by depositing the money order into a bank account 12 | |
how long is a money order good for | money orders don t expire but depending on the state and issuer they may incur additional service charges if you cash them more than a year after they were issued these terms will be described on the back of your money order however domestic money orders from the u s postal service will never expire or lose value 1314the bottom linea money order allows the recipient to receive immediate cash payment from a bank or other financial institution for that reason money orders are a popular way to make small to medium sized payments in circumstances where cash or personal checks aren t practical unlike cash lost money orders can be replaced with a receipt presented and they can t bounce due to insufficient funds | |
a money purchase plan is an employee retirement benefit plan that resembles a corporate profit sharing program an employer deposits a percentage of a participating employee s salary in the account every year but the employee is not permitted to contribute to the fund however they can choose how to invest the money based on options offered by the employer | understanding the money purchase plana money purchase plan is a qualified retirement plan eligible for tax benefits and subject to tax regulations 1 the rules are similar to those for other qualified retirement accounts the money purchase plan is designed to provide retirement income upon retirement the total pool of capital in the account can be used to purchase a lifetime annuity or withdrawn in a lump sum 2a money purchase plan may be used in addition to an employee s retirement savings such as a 401 k contributions to a money purchase planthe amount in each member s account differs depending on the employer s level of contributions and the investment return earned on those contributions money purchase plans can be used in addition to profit sharing plans or along with other retirement plans in a money purchase plan the employee s account balance is tax deferred until the money is withdrawn while the employer s contribution is tax deductible 1it is similar to a profit sharing plan but the company cannot adjust its contribution level to a money purchase plan as profits go up or down company contributions must be made whether or not the business makes a profit or how much profit it makes for 2023 the overall contribution limits allowed by the irs are the lesser of 25 of compensation or 66 000 1the participant s benefit at retirement is based on total contributions and the gains or losses on investments as long as the contribution amounts remain within the annual limits the money is tax deferred employers typically establish a vesting period after which an employee is eligible for the program after being fully vested an employee may start taking out funds at age 59 without a tax penalty 3like all defined contribution plans rmds are required for a money purchase plan for 2023 the required minimum distribution age is 73 and will increase to 75 in 2033 4advantages and disadvantagesthe money purchase plan can substantially boost retirement savings if used with other savings plans like a 401 k for the company having such a program gives them an edge in competing for talent as the tax benefit levels the expenditure on the downside the money purchase plan may have higher administrative costs than other retirement plans | |
is a money purchase plan a defined contribution plan | a money purchase plan is a defined contribution plan where employer contributions are based on a fixed percentage of an employee s annual compensation or salary can you withdraw money from a money purchase plan like other retirement plans withdrawals before age 59 1 2 will incur a penalty after retirement age money can be distributed as a lump sum or as an annuity 1 | |
is a money purchase plan an employer sponsored retirement plan | a money purchase plan is considered an employer sponsored retirement plan that requires companies to contribute a specific percentage of an employee s salary each year regardless of the company s profitability 1the bottom linea money purchase plan is an employee retirement benefit plan that resembles a corporate profit sharing program where the employer deposits a percentage of a participating employee s salary in the account every year like most retirement plans the money purchase plan requires that employees refrain from distributions before age 59 1 2 the plan also has a provision for required minimum distributions 1 | |
what is the money supply | the money supply is the sum total of all of the currency and other liquid assets in a country s economy on the date measured the money supply includes all cash in circulation and all bank deposits that the account holder can easily convert to cash governments issue paper currency and coins through their central banks or treasuries or a combination of both in order to keep the economy stable banking regulators increase or reduce the available money supply through policy changes and regulatory decisions investopedia madelyn goodnightthe federal reserve website has a running account of the u s money supply month by month going back to 1999 the fed refers to the money supply as the money stock 1understanding money supplyin the united states the federal reserve known as the fed is the policy making body that regulates the money supply its economists track the money supply over time in order to determine whether too much money is flowing which can lead to inflation or too little money is flowing which can cause deflation the fed has a couple of tools it can use to keep the economy growing at a reasonable pace the money supply is tracked over time as a key factor in analyzing the health of the economy pinpointing its weak spots and developing policies to correct weaknesses in its public releases the fed generally refers to the money supply as the money stock as of march 2024 the seasonally adjusted m1 money supply was 17 99 trillion according to the federal reserve 2effect of money supply on the economyan increase in the supply of money typically lowers interest rates which in turn generates more investment and puts more money in the hands of consumers thereby stimulating spending businesses respond by ordering more raw materials and increasing production the increased business activity raises the demand for labor the opposite can occur if the money supply falls or when its growth rate declines banks lend less businesses put off new projects and consumer demand for home mortgages and car loans declines change in the money supply has long been considered a key factor in driving economic performance and business cycles macroeconomic schools of thought that focus heavily on the role of money supply include irving fisher s quantity theory of money monetarism and austrian business cycle theory historically measuring the money supply has shown that there are relationships between money supply and inflation and between money supply and price levels however since 2000 these relationships have become less predictable reducing their reliability as a guide for monetary policy although money supply measures are still widely used they are among a number of economic measures that economists and the federal reserve collect track and review 3the money supply numbers m1 m2 and beyondthe federal reserve tracks two distinct numbers on the nation s money supply and labels them m1 and m2 each category includes or excludes specific kinds of money there was yet another number m3 but its reporting was discontinued by the fed in 2006 there s also m0 and mb but these are generally included in the main categories rather than being reportedly separately all of the categories are an accounting of the amount of cash in the economy but each category has a slightly different definition of cash or liquid assets m1 also called narrow money is often synonymous with money supply in reports from the financial media this is a count of all of the notes and coins that are in circulation whether they re in someone s wallet or in a bank teller s drawer plus other money equivalents that can be converted easily to cash a regular bank savings account for example is a money equivalent the account holder can convert those savings to cash at any time and instantly m2 includes m1 plus short term time deposits in banks and money market funds generally terms of less than a year are considered short term m3 m0 and mb are not separately represented in the federal reserve reports on money supply the federal reserve releases the latest numbers on m1 and m2 money supplies on a weekly and monthly basis the numbers are reported widely by the financial media and are published on the fed s website | |
what are the determinants of the money supply | the big numbers of m1 or m2 contain a number of components that are analyzed by economists to determine just how all of that money is flowing through the system and where there might be problems economists speak of these components as the determinants of the money supply they include | |
what happens when the federal reserve limits the money supply | a country s money supply has a significant effect on its macroeconomic profile particularly in relation to interest rates inflation and the business cycle when the fed limits the money supply via contractionary or hawkish monetary policy interest rates rise and the cost of borrowing goes higher there is a delicate balance to consider when undertaking these decisions limiting the money supply can slow down inflation as the fed intends but there is also the risk that it will slow economic growth too much leading to more unemployment | |
how is the money supply determined | a central bank regulates the amount of available in a country through monetary policy a central bank can undertake an expansionary or contractionary policy an expansionary policy aims to increase the money supply for example the central bank might engage in open market operations that means it will purchase short term u s treasury bills using newly minted money that money thus enters into circulation a contractionary policy would require selling treasuries that removes some of the money circulating in the economy | |
what s the difference between m0 m1 and m2 | the u s money supply is reported in two main categories m1 and m2 m0 is included in both m1 and m2 | |
why does the money supply expand or contract | consider a main street bank as a microcosm of the economy as a whole local people are prospering lately so they have more money to save they deposit it in the bank the bank keeps part of the deposits in a vault but lends most of it out to other individuals and businesses the loans are repaid with interest and the bank has more money to loan times are good and the money supply is increasing but what happens when times are not so good bank deposits fall because people are just getting by or worse losing their jobs the bank has less money to lend in any case businesses and individuals shy away from big spending due to the poor economy the money supply decreases the bottom linethe money supply may be one of the most tangible and understandable subjects in economics it s a count of every bit of cash floating around the entire u s economy every dollar and every coin down to the small change that people have in their pockets analyzing the number is harder economists want to know precisely where that money is and how is it being used is it being hoarded or splurged invested or spent on day to day necessities the federal reserve considers the money supply when evaluating what kind of monetary policy to enact | |
what is the money weighted rate of return | the money weighted rate of return mwrr is a measure of the performance of an investment the mwrr is calculated by finding the rate of return that will set the present values pv of all cash flows equal to the value of the initial investment the mwrr is equivalent to the internal rate of return irr mwrr can be compared with the time weighted return twr which removes the effects of cash in and outflows understanding the money weighted rate of returnthere are many ways to measure asset returns so it is important to know which method is used when reviewing asset performance the mwrr incorporates the size and timing of cash flows so it effectively measures portfolio returns the mwrr sets the initial value of an investment to equal future cash flows such as dividends added withdrawals deposits and sale proceeds in other words the mwrr helps to determine the rate of return needed to start with the initial investment amount factoring all of the changes to cash flows during the investment period including the sale proceeds the formula for the mwrr is as follows pvo pvi cf0 cf1 1 irr cf2 1 irr 2 cf3 1 irr 3 cfn 1 irr nwhere pvo pv outflowspvi pv inflowscf0 initial cash outlay or investmentcf1 cf2 cf3 cfn cash flowsn each periodirr initial rate of return begin aligned pvo pvi cf 0 frac cf 1 1 irr frac cf 2 1 irr 2 qquad quad frac cf 3 1 irr 3 frac cf n 1 irr n textbf where pvo text pv outflows pvi text pv inflows cf 0 text initial cash outlay or investment cf 1 cf 2 cf 3 cf n text cash flows n text each period irr text initial rate of return end aligned pvo pvi cf0 1 irr cf1 1 irr 2cf2 1 irr 3cf3 1 irr ncfn where pvo pv outflowspvi pv inflowscf0 initial cash outlay or investmentcf1 cf2 cf3 cfn cash flowsn each periodirr initial rate of return because the formula for mwrr is complex and requires guesswork and trial and error you d want to use a spreadsheet or calculator to help you estimate returns so we ll use a spreadsheet to explain how to calculate it let s say you buy one share of a stock for 50 that pays an annual 2 dividend and sell it after three years for 65 you received two dividends before selling the stock the initial outlay of 50 in year one is negative because it is money you ve spent each year after the purchase you gain 2 until you sell it for 65 in year three after receiving the dividend the irr function used in most spreadsheet applications will calculate the mwrr for you as shown in the following table the irr function in the spreadsheet asks for values and a rate guess which is optional to use the function highlight the cells that contain your cashflow values so that the column and cell numbers are entered into the field between the parenthesis skip the rate guess and press enter cash flows and the money weighted rate of returnas stated above the mwrr for an investment is identical in concept to the irr in other words it is the discount rate on which the net present value npv 0 or the present value of inflows the present value of outflows with that in mind it s critical to know how to identify the cash flows in and out of a portfolio including the sale of the asset or investment some of the cash flows that an investor might have in a portfolio include the difference between money weighted rate of return and time weighted rate of returnthe mwrr is often compared to the time weighted rate of return twrr but the two calculations have distinct differences the twrr is a measure of the compound rate of growth in a portfolio the twrr measure is often used to compare the returns of investment managers because it eliminates the distorting effects on growth rates created by inflows and outflows of money it can be difficult to determine how much money was earned on a portfolio because deposits and withdrawals distort the value of the return on the portfolio investors can t simply subtract the beginning balance after the initial deposit from the ending balance since the ending balance reflects both the rate of return on the investments and any deposits or withdrawals during the time invested in the fund the twrr breaks up the return on an investment portfolio into separate intervals based on whether money was added to or withdrawn from the fund the mwrr differs in that it takes into account investor behavior via the impact of fund inflows and outflows on performance but doesn t separate the intervals where cash flows occurred as the twrr does therefore cash outflows or inflows can impact the mwrr if there are no cash flows then both methods should deliver the same or similar results limitations of using money weighted rate of returnthe mwrr considers all the cash flows from the fund or contribution including withdrawals should an investment extend over several quarters for example the mwrr lends more weight to the fund s performance when it is at its largest hence the description money weighted the weighting can penalize fund managers because of cash flows over which they have no control in other words if an investor adds a large sum of money to a portfolio just before its performance rises it equates to positive action this is because the larger portfolio benefits more in dollar terms from the portfolio s growth than if the contribution had not been made on the other hand if an investor withdraws funds from a portfolio just before a performance surge it equates to a negative action the now smaller fund sees less benefit in dollar terms from the portfolio growth than if the withdrawal had not occurred | |
what are the advantages of mwrr | the mwrr allows you to view whether your investment generates a consistent return with an interest rate if your rate is not consistent your rate of return begins falling | |
should i use money weighted or time weighted | the mwrr allows you to see how your changes affect your investment eliminating its usefulness as a comparison tool but letting you see how your decisions affected it twrr lets you see how your investment performs without your changes which lets you compare it to similar investments which you use depends on what you want to view | |
what is better time weighted or money weighted | while each indicates how your investment has performed they demonstrate performance accounting for different investing actions so neither is better or worse they can be used together or separately to determine how an investment is performing the bottom linethe money weighted rate of return is an investment performance measurement it lets you see how it has performed while accounting for your investing activities like adding more capital through contributions or reinvesting dividends | |
what is a monopolist | a monopolist is an individual group or company that controls all of the market for a particular good or service a monopolist probably also believes in policies that favor monopolies since it gives them greater power a monopolist has little incentive to improve their product because customers have no alternatives instead their motivation is focused on protecting the monopoly understanding monopolistsmonopolies exist when a monopolist becomes the only supplier of a particular product or service this is different from a monopsony which refers to a single entity s sole power to purchase a good or service it is also different from an oligopoly which consists of a few sellers dominating a market the hallmark of a monopoly is a lack of economic competition to produce the good or service a lack of viable substitute goods and the possibility of a high monopoly price well above the seller s marginal cost that leads to excessive profit in economics a monopoly is a single seller however according to the law a monopoly only needs to be a business entity that has significant market power enough power to charge overly high prices 2 although monopolies may be big businesses size is not a required characteristic of a monopoly a small business may still have the power to raise prices in a small industry monopolies can be established by a government form organically or form by the merger of formerly independent companies or organizations criticism of monopolistsin many jurisdictions such as the united states there are laws restricting monopolies being the sole or dominant player in a market is often not illegal in itself however certain categories of monopolistic behavior can be considered abusive in a free market and such activities will often attract the monopoly label and legal sanctions to go with it | |
when a company is the sole provider of a good or service it can become powerful enough to prevent other companies from entering the marketplace and providing competition with the lack of alternative choices in the marketplace consumers are often left with no choice but to pay the higher prices the monopolist demands or go without the desired product or service | governments enact and enforce antitrust laws to penalize monopolists and ensure fair competition in the marketplace 1 these laws protect consumers from predatory business practices such as price gouging in some cases the government may step in and force a breakup of the monopoly government granted monopolya government granted monopoly or legal monopoly by contrast is sanctioned by the state often to provide an incentive to invest in a risky venture or enrich a domestic interest group patents copyrights and trademarks are sometimes used as examples of government granted monopolies in the united states many companies in the utilities sector are an example of government granted monopolies a government may also reserve a venture for itself and form a government monopoly characteristics of a true monopolista monopolist has full control of a market and is the one supplier that provides a good or service to many consumers beyond that however there are certain characteristics of a monopolist that stand out above others | |
what is monopolistic competition | monopolistic competition exists when many companies offer competing products or services that are similar but not perfect substitutes the barriers to entry in a monopolistically competitive industry are low and the decisions of any one firm do not directly affect its competitors competing companies differentiate themselves based on pricing and marketing decisions investopedia joules garciaunderstanding monopolistic competitionmonopolistic competition exists along the spectrum between a complete monopoly and perfect competition combining elements from each restaurants hair salons household items and clothing are examples of industries with monopolistic competition items like dish soap or hamburgers are sold marketed and priced by many competing companies demand is highly elastic for goods and services of the competing companies and pricing is often a key strategy for these competitors one company may opt to lower prices and sacrifice a higher profit margin hoping for higher sales another may raise its price and use packaging or marketing that suggests better quality or sophistication companies often use distinct marketing strategies and branding to distinguish their products because the products may all serve the same purpose the average consumer often does not know the precise differences between the various products or how to determine what a fair price may be characteristics of monopolistic competitionin monopolistic competition one firm does not monopolize the market rather multiple companies can enter the market and all can compete for market share companies do not need to consider how their decisions influence competitors and each firm can operate without fear of increasing competition competing companies differentiate their similar products with distinct marketing strategies brand names and different quality levels companies in monopolistic competition act as price makers and set prices for goods and services firms in monopolistic competition can raise or lower prices without inciting a price war often found in oligopolies demand is highly elastic in monopolistic competition and very responsive to price changes consumers will change from one brand name to another for items like laundry detergent based solely on price increases advantages and disadvantages of monopolistic competitionmonopolistic competition provides both benefits and pitfalls for companies and consumers few barriers to entry for new companiesvariety of choices for consumerscompany decision making power for prices and marketingconsistent quality of product for consumersmany competitors limits access to economies of scaleinefficient company spending on marketing packaging and advertisingtoo many choices for consumers means extra research requiredmisleading advertising or imperfect information for consumers | |
what is the difference between monopolistic competition and perfect competition | in perfect competition the product offered by competitors is the same item if one competitor increases its price it will lose all of its market share to the other companies based on market supply and demand forces where prices are not set by companies and sellers accept the pricing determined by market activity in monopolistic competition supply and demand forces do not dictate pricing firms are selling similar yet distinct products so firms determine the pricing product differentiation is the key feature of monopolistic competition where products are marketed by quality or brand demand is highly elastic and any change in pricing can cause demand to shift from one competitor to another | |
how does monopolistic competition function in the short term and long term | companies aim to produce a quantity where marginal revenue equals marginal cost to maximize profit or minimize loss when existing firms are making a profit new firms will enter the market the demand curve and the marginal revenue curve then shift new firms stop entering when all firms are making zero profit in the long run if existing firms are incurring a loss some firms will exit the market the firms stop exiting the market after all firms start making zero profit the market is at equilibrium in the long run only when there is no further exit or entry in the market or when all firms make zero profit in the long run | |
what industry is an example of monopolistic competition | monopolistic competition is present in the fast food industry consider the firms burger king and mcdonald s both are fast food chains that target a similar market and offer similar products and services these two companies are actively competing with one another and seek to differentiate themselves through brand recognition price and by offering different food and drink packages | |
what is the difference between monopolistic competition and a monopoly | a monopoly is when a single company dominates an industry and can set prices for its product without fear of competition monopolies limit consumer choices and control production quantity and quality monopolistic competitive companies must compete with others restricting their ability to substantially raise prices without affecting demand and providing a range of product choices for consumers monopolistic competition is more common than monopolies which are discouraged in free market nations the bottom linemonopolistic competition exists when many companies offer competitive products or services that are similar but not exact substitutes hair salons and clothing are examples of industries with monopolistic competition pricing and marketing are key strategies for competing companies and often rely on branding or discount pricing strategies to increase market share | |
what is a monopolistic market | a monopolistic market is a theoretical condition that describes a market where only one company may offer products and services to the public a monopolistic market is the opposite of a perfectly competitive market in which an infinite number of firms operate in a purely monopolistic model the monopoly firm can restrict output raise prices and enjoy super normal profits in the long run understanding monopolistic marketsa monopolistic market is a market structure with the characteristics of a pure monopoly a monopoly exists when one supplier provides a particular good or service to many consumers ultimately allowing it to set the price and supply of a good or services purely monopolistic markets are scarce and perhaps even impossible in the absence of absolute barriers to entry such as a ban on competition or sole possession of all natural resources | |
when they do occur the monopoly that sets the price and supply of a good or service is called the price maker due to a lack of competition in the market and high barriers to entry the company can inflate prices going further the monopoly can find the level of output that maximizes its profit by determining the point at which its marginal revenue exceeds its marginal cost | with generally only one seller controlling the production and distribution of a good or service other firms cannot enter the market potential entrants to the market are at a disadvantage because the monopoly has the first mover advantage and can lower prices to undercut a potential newcomer and prevent them from gaining market share since there is only one supplier and firms cannot easily enter or exit there are no substitutes for the goods or services therefore a monopoly also has absolute product differentiation because there are no other comparable goods or services the history of monopoliesthe term monopoly originated in english law to describe a royal grant such a grant authorized one merchant or company to trade in a particular good while no other merchant or company could do so historically monopolistic markets arose when single producers received exclusive legal privileges from the government such as the arrangement reached between the federal communications commission fcc and at t between 1913 and 1984 during this period no other telecommunications company was allowed to compete with at t because the government erroneously believed the market could only support one producer more recently short run private companies may engage in monopoly like behavior when production has relatively high fixed costs which causes long run average total costs to decrease as output increases the effect of this behavior could temporarily allow a single producer to operate on a lower cost curve than any other producer effects of monopolistic marketsthe typical political and cultural objection to monopolistic markets is that a monopoly in the absence of other suppliers of the same product or service could charge a premium to their customers consumers have no substitutes and are forced to pay the price for the goods dictated by the monopolist in many respects this is an objection against high prices not necessarily monopolistic behavior the standard economic argument against monopolies is different according to neoclassical analysis a monopolistic market is undesirable because it restricts output not because of monopolist benefits by raising prices restricted output equates to less production which reduces total real social income even if monopolistic powers exist such as the u s postal service s legal monopoly on delivering first class mail consumers often have many alternatives such as using standard mail through fedex or ups or email for this reason it is uncommon for monopolistic markets to successfully restrict output or enjoy super normal profits in the long run regulation of a monopolistic marketas with the model of perfect competition the model for a monopolistic competition is difficult or impossible to replicate in the real economy true monopolies are typically the product of regulations against the competition it is common for instance for cities or towns to grant local monopolies to utility and telecommunications companies nevertheless governments often regulate private business behavior that appears monopolistic such as a situation where one firm owns the lion s share of a market the fcc world trade organization and the european union each have rules for managing monopolistic markets these are often called antitrust laws in march 2024 the justice department sued apple for monopolizing smartphone markets | |
what is an example of a monopolistic market | the railroad industry is considered a monopolistic market due to high barriers of entry and the significant amount of capital needed to build railroad infrastructure these factors stifled competition and allowed operators to have enormous pricing power in a highly concentrated market historically telecom utilities and tobacco industries have been considered monopolistic markets | |
how do you know if a market is monopolistic | the primary characteristics of a monopolistic market are if there is just one supplier high barriers to entry there is an absence of close substitutes and if the monopoly sets the market price | |
what companies are monopolies | historically among the most notable monopolies in american history are standard oil u s steel and american tobacco along with this at t was a major monopoly until 1982 when the u s government broke up its business in order to provide customers with more options and lower prices due to increased competition the bottom linemonopolistic markets exist when there is a single supplier in the market which allows them to have significant pricing power due to the absence of competitors given that they operate as price makers controlling the cost and supply of goods profits are maximized prices are inflated and consumers have limited choices these type of markets have spanned throughout america s history dominating industries from railroads to telecom given their high infrastructure costs and significant barriers to entry | |
what is a monopoly | a monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector monopolies are discouraged in free market economies because they stifle competition limit consumer substitutes and thus limit consumer choice in the united states antitrust legislation is in place to restrict monopolies ensuring that one business cannot control a market and use that control to exploit its customers investopedia jessica olahunderstanding a monopolya monopoly is characterized by a single company supplying a good or service a lack of competition within the market and no similar substitutes for the product being sold monopolies can dictate price changes and create barriers for competitors to enter the marketplace companies become monopolies by controlling the entire supply chain from production to sales through vertical integration or by buying competing companies in the market through horizontal integration and becoming the sole producer monopolies typically reap the benefit of economies of scale which is the ability to produce mass quantities at lower costs per unit types of monopoliesa pure monopoly is a single seller in a market or sector and high barriers to entry such as significant startup costs there are no substitutes for the product sold by the seller microsoft corporation was the first company to hold a pure monopoly position on personal computer operating systems as of may 2024 its desktop windows software still held a market share of more than 73 1multiple sellers in an industry sector with similar substitutes are defined as having monopolistic competition barriers to entry are low and the competing companies differentiate themselves through pricing and marketing efforts their offerings are not perfect substitutes as with visa and mastercard other examples of monopolistic competition include retail stores restaurants and hair salons a natural monopoly develops from reliance on unique raw materials technology or specialization companies with patents or extensive research and development costs like pharmaceutical companies are considered natural monopolies public monopolies such as the utility industry provide essential services and goods only one company commonly supplies energy or water to a region the monopoly is allowed and heavily regulated by government municipalities rates and rate increases are controlled pros and cons of a monopolymonopoly regulationsantitrust laws and regulations are in place to discourage monopolistic operations protect consumers and ensure an open market in 1890 the sherman antitrust act was passed by the u s congress to limit trusts a precursor to monopolies or groups of companies that conspired to fix prices this act dismantled monopolies including the standard oil company and the american tobacco company 2the clayton antitrust act of 1914 created rules for mergers and corporate directors it listed practices that would violate the sherman antitrust act the federal trade commission act created the federal trade commission ftc the ftc along with the antitrust division of the u s department of justice sets standards for business practices and enforces the two antitrust acts 3at tthe most consequential monopoly breakup in u s history was that of at t after controlling the nation s telephone service for decades as a government supported monopoly at t fell to antitrust laws in 1982 at t which had telephone lines that reached nearly every home and business in the u s was forced to divest itself of 22 local exchange service companies which were the main barrier to competition 4microsoftin 1994 microsoft was accused of using its significant market share in the personal computer operating systems business to prevent competition and maintain a monopoly authorities claimed that the company was using exclusionary and anticompetitive contracts to market its personal computer operating system software by these contracts microsoft has unlawfully maintained its monopoly of personal computer operating systems and has unreasonably restrained trade a federal district judge ruled in 1998 that microsoft was to be broken into two technology companies but the decision was later reversed on appeal by a higher court microsoft was free to maintain its operating system application development and marketing methods 5 | |
what is the monopoly meaning | a monopoly is represented by a single seller who sets prices and controls the market the high cost of entry into that market restricts other businesses from taking part thus there is no competition and no product substitutes | |
what is price fixing | price fixing is an agreement among competitors to raise lower maintain or stabilize prices or price levels antitrust laws require that each company establish prices and other competitive terms independently without consulting a competitor consumers expect that prices have been determined based on supply and demand not by an agreement among competitors 6 | |
how do antitrust laws protect consumers | antitrust cases can be brought against companies who violate antitrust laws and prosecuted by state or federal governments this can discourage other companies from behaving in ways that violate such laws and harm consumers consumers who suspect a company is violating antitrust laws can contact the antitrust division or federal trade commission at the federal level a local company operating within one state can be investigated by the attorney general of that state the bottom linea monopoly is a single seller or producer without direct competitors for its products or services due to its business practices a monopoly can dictate price changes and create barriers that prevent competitors from entering the marketplace antitrust legislation is in place to restrict monopolies ensuring that one business or group of businesses cannot control a market and use that control to exploit consumers | |
what is a monopsony | a monopsony is a market condition in which there is only one buyer the monopsonist like a monopoly a monopsony also has imperfect market conditions the difference between a monopoly and a monopsony is primarily in the difference between the controlling entities a single buyer dominates a monopsonized market while an individual seller controls a monopolized market monopsonists are common in areas where they supply most or all of the region s jobs understanding a monopsonyin a monopsony a large buyer controls the market because of their unique position monopsonies have a wealth of power for example being the primary or only supplier of jobs in an area the monopsony has the power to set wages in addition they have bargaining power as they are able to negotiate prices and terms with their suppliers monopsonies take many different forms and may occur in all types of markets for example some economists have accused ernest and julio gallo a conglomerate of wineries and wine producers of being a monopsony the company is so large and has so much buying power over grape growers that grape wholesalers have no choice but to lower prices and agree to the company s terms monopsony comes from two greek words monos meaning single and opsonia meaning purchase characteristics of a monopsonya monopsony is unique to other forms of market situation with distinctive market features some of these characteristics are below in a monopsony there is only one buyer which gives them significant market power and control over the price and quantity of goods or services purchased if more than one buyer is present it is not a monopsony for this reason there s usually natural or built in limitations to the market that make it unfeasible or impossible for there to be other buyers due to there being a single buyer that holds a majority of power monopsonies mean sellers are relatively weak and have reduced bargaining power this usually results in lower prices and lower quantities sold though there may be multiple suppliers or sellers they usually have collective less ability to control the market compared to what the buyer can impose market inefficiencies arise when the single consumer buys less of the good or service than would be produced in a more competitive market this may force producers to cut wages store unsold inventory that would have otherwise been consumed in a normal market or reduce prices to unprofitable levels since the buyer has significant control over the market there is less incentive for suppliers to invest in innovation or quality improvements even if the producers were to innovate or find better ways to produce a good they may not be rewarded by a competitive market through better margins or higher prices therefore monopsonies are most detrimental to the long term growth as it tends to stunt innovative thinking | |
how monopsonies are caused | there are several scenarios where a monopsony can occur like a monopoly a monopsony also does not adhere to standard pricing from balancing supply side and demand side factors a monopsony can arise in a market that is geographically isolated or where transportation costs are high this can limit the number of potential buyers and make it difficult for competitors to enter the market this may also make it hard for market participants outside of the geographic region to ship goods into a physical area | |
when there is limited demand for a good or service there may only be one buyer willing to purchase the product resulting in a monopsony consider agriculture in developing countries the good produced in these extremely rural areas often can t be shipped around the world for this reason this type of agriculture and its associated shipping restrictions is often only demanded by local governments or local food processing companies | high barriers to entry such as regulations or high capital requirements can make it difficult for new buyers to enter the market and compete with the existing buyer this may be true in situations where a buyer must be credentialed hold certain permits or meet exclusive criteria a monopsony can result from market consolidation where several buyers merge and control a significant share of the market consider how the merger of telecommunication giants t mobile and sprint caused changes on the demand side of business instead of there being two different buyers the post merger market resulted in just one company but still potentially buying the same amount of goods in some cases government policies or regulations may lead to a monopsony in a particular market for example if the government is the only buyer of a particular product it can create a monopsony in addition governments may enter into contracts that restrict who sellers can contract with or the quantities the producer may supply to broad markets monopsony in the u s labor marketmonopsony can also be common in labor markets when a single employer has an advantage over the workforce when this happens the wholesalers in this case the potential employees agree to a lower wage because of factors resulting from the buying company s control this wage control drives down the cost to the employer and increases profit margins the technology engineering market offers one example of wage suppression with only a few large tech companies in the market requiring engineers major players have been accused of conspiring on wages to minimize labor costs so that the major tech companies can generate higher profits this example illustrates a sort of oligopsony in which multiple companies are involved criticisms of monopsonieseconomists and policymakers have increasingly become concerned with the domination of just a handful of highly successful companies controlling an outsized market share in a given industry they fear these industry giants will influence pricing power and exert their ability to suppress industry wide wages indeed according to the economic policy institute a nonpartisan and nonprofit think tank the gap between productivity and wage growth has been increasing over the last 50 years with productivity outpacing wages by more than six times monopsony and monopoly are two sides of the same coin while monopsony refers to one buyer in a market of multiple sellers monopoly refers to one seller in a market of multiple buyers monopsony is about demand while monopoly is about supply in 2018 economists alan krueger and eric posner authored a proposal for protecting low income workers from monopsony and collusion for the hamilton project which argued that labor market collusion or monopsonization might contribute to wage stagnation rising inequality and declining productivity in the american economy they proposed a series of reforms to protect workers and strengthen the labor market those reforms include forcing the federal government to provide enhanced scrutiny of mergers for adverse labor market effects banning non compete covenants that bind low wage workers and prohibiting no poaching arrangements among establishments that belong to a single franchise company 1in april 2024 the federal trade commission voted to ban non compete agreements in employment contracts the rule is slated to take effect in september 2024 however the rule may be temporarily blocked depending on ongoing litigation 2monopsony vs monopolya monopoly is a market situation where there is only one seller or producer of a particular good or service this gives that seller considerable power to control prices and output meanwhile a monopsony is a market situation where there is only one buyer of a particular good or service monopsony power arises when the buyer has the ability to lower the price of a product or service by reducing the quantity they purchase the difference between a monopsony and monopoly is the aspect of trade that is being controlled while a monopoly has exclusive control over the supply of a good or service a monopsony has exclusive control over the demand for that good or service a monopoly leads to the producers have excess power while a monopsony leads to a consumer having excess power both a monopoly and monopsony can lead to market inefficiencies however each results in different inefficiencies that arise in different ways for example in a monopoly consumers face higher prices in a monopsony workers may be forced to take on lower wages as a result in imposed lower prices example of a monopsonytake the example of a coal factory in a coal mining town an oft cited example of a monopsony a coal factory sets up shop in an area where there is no civil life or residents the company attracts workers and a town builds up around the factory where the majority of the employees work the factory is the only real employer in town it can set wages below market prices and determine how many individuals will be employed at any time this has a ripple effect on the rest of the community such as the other types of businesses set up in town the amount they can charge and how many people they can hire if the coal factory went bust and closed there would be no jobs and therefore no demand for any of the other goods and services sold by the businesses in the town but because the coal factory is the only real employer its wages can be unfair and its working conditions poor and unsafe yet people will still seek to work there | |
what are the 3 main characteristics of a monopsony | the three primary characteristics of a monopsony are 1 one firm purchasing all of the goods and services in a market 2 no other buyers in the market and 3 barriers to entry into the market | |
what is the advantage of a monopsony | the primary advantage of a monopsony goes towards the single buyer in the market allowing for a controlling advantage that decreases the price levels of the good or service being bought this reduction in price allows for a reduction in costs that can be passed on elsewhere | |
is amazon a monopsony | some experts do consider amazon to be a monopsony as it has become the largest and sometimes only buyer in its market of specific goods and services that it then sells on its platform because it is the only buyer primarily because it controls the largest platform to sell certain goods it can dictate the prices in which it pays for those goods and services it then sells the bottom linea monopsony is a market condition in which there is only one buyer because there is only one buyer for a good or service the buyer sets the demand and therefore controls the price monopsonies like monopolies are inefficient to a free market where supply and demand regulate prices to be fair for consumers | |
what is a monte carlo simulation | a monte carlo simulation is a way to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables it is a technique used to understand the impact of risk and uncertainty monte carlo simulations can be applied to a range of problems in many fields including investing business physics and engineering it is also referred to as a multiple probability simulation eliana rodgers investopedia | |
when faced with significant uncertainty in making a forecast or estimate some methods replace the uncertain variable with a single average number the monte carlo simulation instead uses multiple values and then averages the results | monte carlo simulations have a vast array of applications in fields that are plagued by random variables notably business and investing they are used to estimate the probability of cost overruns in large projects and the likelihood that an asset price will move in a certain way telecoms use them to assess network performance in various scenarios which helps them to optimize their networks insurers use them to measure the risks they may be taking on and to price their policies accordingly investment analysts use monte carlo simulations to assess the risk that an entity will default and to analyze derivatives such as options financial planners can use them to predict the likelihood that a client will run out of money in retirement 1monte carlo simulations also have many applications outside of business and finance such as in meteorology astronomy and physics today monte carlo simulations are increasingly being used in conjunction with new artificial intelligence ai models for example as ibm noted in 2024 many financial firms now use high performance computing systems to run monte carlo simulations and as the numbers of these simulations grow over ever increasing portfolios of financial assets and instruments the interpretation of these as an entirety becomes a growing challenge that is where ai comes in the use of ai to assist a professional in their assessment of these simulations can both improve accuracy as well as deliver more timely insights in a business where time to market is a key differentiator this has direct business value ibm says 2history of the monte carlo simulationthe monte carlo simulation was named after the famous gambling destination in monaco because chance and random outcomes are central to this modeling technique as they are to games like roulette dice and slot machines the technique was initially developed by stanislaw ulam a mathematician who worked on the manhattan project the secret effort to create the first atomic weapon he shared his idea with john von neumann a colleague at the manhattan project and the two collaborated to refine the monte carlo simulation 3 | |
how monte carlo simulations work | the monte carlo method acknowledges an issue for any simulation technique the probability of varying outcomes cannot be firmly pinpointed because of random variable interference therefore a monte carlo simulation focuses on constantly repeating random samples a monte carlo simulation takes the variable that has uncertainty and assigns it a random value the model is then run and a result is provided this process is repeated again and again while assigning many different values to the variable in question once the simulation is complete the results are averaged to arrive at an estimate the 4 steps in a monte carlo simulationto perform a monte carlo simulation there are four main steps as an example microsoft excel or a similar program can be used to create a monte carlo simulation that estimates the probable price movements of stocks or other assets there are two components to an asset s price movement drift which is its constant directional movement and a random input which represents market volatility by analyzing historical price data you can determine the drift standard deviation variance and average price movement of a security these are the building blocks of a monte carlo simulation the four steps are as follows step 1 to project one possible price trajectory use the historical price data of the asset to generate a series of periodic daily returns using the natural logarithm note that this equation differs from the usual percentage change formula step 2 next use the average stdev p and var p functions on the entire resulting series to obtain the average daily return standard deviation and variance inputs respectively the drift is equal to alternatively drift can be set to 0 this choice reflects a certain theoretical orientation but the difference will not be huge at least for shorter time frames step 3 next obtain a random input the equation for the following day s price is step 4 to take e to a given power x in excel use the exp function exp x repeat this calculation the desired number of times each repetition represents one day the result is a simulation of the asset s future price movement by generating an arbitrary number of simulations you can assess the probability that a security s price will follow a given trajectory monte carlo simulation results explainedthe frequencies of different outcomes generated by this simulation will form a normal distribution that is a bell curve the most likely return is in the middle of the curve meaning there is an equal chance that the actual return will be higher or lower the probability that the actual return will be within one standard deviation of the most probable expected rate is 68 the probability is 95 that it will be within two standard deviations and 99 7 that it will be within three standard deviations still there is no guarantee that the most expected outcome will occur or that actual movements will not exceed the wildest projections crucially a monte carlo simulation ignores everything not built into the price movement such as macro trends a company s leadership market hype and cyclical factors in other words it assumes a perfectly efficient market advantages and disadvantages of a monte carlo simulationthe monte carlo simulation was created to overcome a perceived disadvantage of other methods of estimating a probable outcome the difference is that the monte carlo method tests a number of random variables and then averages them rather than starting out with an average like any financial simulation the monte carlo method relies on historical price data as the basis for a projection of future price data it then disrupts the pattern by introducing random variables represented by numbers finally it averages those numbers to arrive at an estimate of the risk that the pattern will be disrupted in real life of course no simulation can pinpoint an inevitable outcome the monte carlo method aims at a sounder estimate of the probability that an outcome will differ from a projection | |
how is the monte carlo simulation used in finance | a monte carlo simulation is used to estimate the probability of a certain outcome as such it is widely used by investors and financial analysts to evaluate the probable success of investments they re considering some common uses include | |
what professions use the monte carlo simulation | it may be best known for its financial applications but the monte carlo simulation is used in virtually every profession that must measure risks and prepare to meet them for example a telecommunications company may build its network to sustain all of its users all of the time to do that it must consider all of the possible variations in demand for the service it must determine whether the system will stand the strain of peak hours and peak seasons a monte carlo simulation may help the company decide whether its service is likely to stand the strain of a super bowl sunday as well as an average sunday in august | |
what factors are evaluated in a monte carlo simulation | a monte carlo simulation in investing is based on historical price data for the asset or assets being evaluated the building blocks of the simulation derived from the historical data are drift standard deviation variance and average price movement the bottom linethe monte carlo simulation shows the spectrum of probable outcomes for an uncertain scenario this technique assigns multiple values to uncertain variables obtains multiple results and then takes the average of these results to arrive at an estimate from investing to engineering the monte carlo method is used in many fields to measure risk including estimating the likelihood of a gain or loss in an investment or the odds that a project will run over budget | |
what is a month to month tenancy | a month to month tenancy is a periodic tenancy created when the renter is granted possession of the property with no definite expiration date and pays the owner on a monthly basis this tenancy is most commonly found in residential leases in situations wherein there is no written agreement tenancy is also considered to be on a month to month basis 1 | |
how a month to month tenancy works | tenancy falls under the real estate laws that cover leases in legal real estate terminology a lease is a contract between the owner of a property also known as the landlord and a tenant who rents the property 2 the lease transfers the owner s rights to the exclusive possession and use of the property to the tenant for an agreed upon period as anyone who has rented an apartment knows the lease sets forth the period of time for which the contract is to run and the amount of rent the tenant is contracted to pay the renter gains access to the property and uses it in whatever manner was agreed upon in the lease the landlord receives rent for a specified period of time and after the lease period is up their ownership rights are returned control over the end date of the tenancyfinancial fluiditypeace of mindmoving out or replacing a tenant on short noticehigher rents less predictable incomeuncertaintypros and cons of a month to month tenancywhether a month to month tenancy is advantageous or disadvantageous depends in part on a renter s or landlord s desire for flexibility and ability to respond quickly to changing circumstances month to month tenancy falls under the real estate laws that cover leases different types of tenancywithin the lease contract the tenant s legal right to possess the property is deemed the leasehold estate or tenancy depending upon the contract s language the following four different tenancies can be established this establishes a possession for the tenant that will last for a fixed time period which could range from days to years it has a specific starting and ending date with the latter signifying the expiration of the renter s tenancy 3this is established when the renter s possession is contracted for an indefinite period with no agreed upon expiration date the tenancy is originally created for a specific period but the renter s tenancy can continue until there is some notification of the lease s termination under the terms of the lease the contract is automatically renewable until the owner or renter gives notice to terminate 4a tenancy at will gives the renter the right to use the property for an unspecified period the tenancy continues until the owner or renter gives notice of termination 5 in the event of either party s death the tenancy is terminated a tenancy at sufferance occurs when the renter who at one time had established a contractual tenancy continues to remain in the property without the owner s consent this can occur when the renter does not surrender the property after the initial expiration date written into the lease it usually leads to eviction proceedings being instituted by the owner if however the landlord accepts a rent payment after the lease expiration date the property is considered to be leased again but now on a month to month basis 6 | |
what is monthly active users mau | monthly active users mau is a key performance indicator kpi used by social networking and other companies to count the number of unique users who have visited a site within the past month websites generally recognize monthly active users via an identification number email address or username mau helps to measure an online business s general health and is the basis for calculating other website metrics mau is also useful when assessing the efficacy of a business s marketing campaigns and gauging both present and potential customers experiences investors interested in the social media industry pay attention when companies report mau as it is a kpi that can affect a social media company s stock price who uses mau and how all too often companies do not the same parameters when calculating mau and there are no industry standards for defining key metrics like user and active for this reason critics of mau believe that the metric creates unfair comparisons among competitors others think mau is useful only in combination with other qualifying metrics and some wonder if it is relevant as a quantitative assessment mau tabulates the number of visitors there is no component that accounts for the depth or quality of a user s experience for example when calculating mau some companies consider a user as someone who has accessed their site for other businesses a user is one who has created a log in and password in others an active user must meet specific requirements defined by the company like many business metrics mau s usefulness depends on the company its services its competitors and its audience for example meta meta formerly facebook defines a monthly active user mau as a registered and logged in user this user must have interacted with facebook through the company s website or a mobile device or used its messenger application and is also a registered user in the last 30 days as of the date of measurement meta also tracks daily active users daus who must meet the same requirements as maus to count but meet those requirements on a daily rather than monthly basis x formerly twitter on the other hand stopped tracking monthly active users before it was acquired by elon musk and renamed x corp instead it looked at what it called monetizable daily active usage or users or mdau twitter defined mdau as people organizations or other accounts who logged in or were otherwise authenticated and accessed twitter on any given day through twitter com or twitter applications that are able to show ads so the difference begs the question if twitter s mau did not include the same engagement variables as meta s mau was the metric an apt comparison of the companies site usage limits of mauthe fact that there are no uniform standards for the individual components of mau and other metrics used to quantify trends in social media makes for a slippery playing field in 2015 meta revised its definition of mau noting that it no longer counted people who were not active facebook users but who shared content only via another site that integrated within the facebook login upon acquiring instagram and whatsapp meta made more adjustments to its user metrics in 2022 it published plans to further change how they measure usage in its annual filing the company has started using family metrics that measure monthly and daily active people map and dap across its family of platforms family monthly active people increased meta s metric by 2 year over year compared to monthly active users likely because it accounted for users across all its platforms the change appears necessary because meta has users with multiple accounts on several linked platforms so there was no way to accurately estimate usage using mau for example according to its annual filing it had 2 96 billion family dap for december 2022 while there were 2 0 billion dau for the same month family map averaged 3 73 billion that december while mau was 2 96 for the month a clear distinction exists between measuring active people and active users nearly one billion people s usage is not captured if the company relies on mau while seemingly an apt move on meta s part this begs the question with social media platforms becoming more centralized have others also decided to change their usage calculations if not how do they compare their success in attracting and maintaining a user base beside year over year numbers | |
what is considered an active user | an active user is someone who uses your service or product during a specific period each business can define active however they want at least until industry standards are introduced | |
how do you calculate monthly active users | you calculate mau by dividing the sum of each month s unique users by 12 this is the average used by most businesses to report their mau | |
what is mau and dau | monthly active users and daily active users are measurements used by companies that offer services or products for their customers to use each one reflects how many customers are using their services daily or monthly whether a user is active depends on the business definition the bottom linemonthly average users is a metric social media platforms websites and businesses use to measure engagement it is a useful metric for gauging the number of accounts using a service but it has become somewhat dated for some service providers especially as service centralization occurs throughout an industry meta makes a strong case for retiring this metric however while it is true that the variations in user metrics can make it difficult to compare social media companies it is still a useful metric for smaller service platforms and companies with websites that are looking for engagement measurements | |
what is moore s law | moore s law states that the number of components on a single chip doubles every two years at minimal cost while not actual science it was an observation and extrapolation that has held steady since 1965 investopedia joules garciaunderstanding moore s lawin 1965 gordon e moore co founder of intel intc observed that the number of transistors on an integrated circuit at minimum cost had increased by a factor of two between 1960 and 1965 using his observations he predicted that the number of components on a single chip at minimum cost would reach 65 000 by 1975 in 1975 he revised the prediction to state that the number of components per single chip would double every two years 12gordon moore did not call his observation moore s law nor did he set out to create a law moore made that statement based on noticing emerging trends in chip manufacturing at fairchild semiconductor eventually moore s insight became a well known adage moore s law in an interview in 1975 he claimed his friend dr carver mead from caltech was responsible for the name 1in the decades that followed gordon moore s original observation moore s law guided the semiconductor industry in long term planning and setting targets for research and development r d moore s law has been a driving force of technological and social change productivity and economic growth that are hallmarks of the late 20th and early 21st centuries moore s law implies that computers machines that run on computers and computing power all become smaller faster and cheaper with time as processes become more efficient and components smaller and faster nearly 60 years old and still strongalmost 60 years later we still feel the lasting impact and benefits of moore s law in many ways as transistors in integrated circuits become smaller computers shrink and become faster today transistors are microscopic structures printed on small sheets of carbon and silicon molecules the number of transistors that can be printed on a small space makes computers much more efficient and faster the cost of higher powered computers has over the longterm been dropping annually partly because of lower labor costs and reduced semiconductor prices 3practically every facet of a high tech society benefits from moore s law in action mobile devices such as smartphones and computer tablets would not work without tiny processors neither would video games spreadsheets accurate weather forecasts and global positioning systems gps moreover smaller and faster computers improve transportation health care education and energy production to name but a few of the industries that have progressed because of the increased power of computer chips moore s law s impending endsome believe that the physical limits of moore s law should be reached at some point in the 2020s 4 the issues chip makers face are increasing costs to continue trying to meet the industry standard created by moore s law and the difficulty cooling an increasing number of components in a small space for instance if you keep shrinking components you can put more in a one inch square chip the more you put in that square inch the hotter it gets and the harder it is to cool it in a 2005 interview moore himself admitted that the fact that materials are made of atoms is the fundamental limitation and it s not that far away we re pushing up against some fairly fundamental limits so one of these days we re going to have to stop making things smaller 5creating the impossible the fact that moore s law may be approaching its natural end is perhaps most painfully present at the chip manufacturers themselves as these companies are saddled with the task of building ever more powerful chips against the reality of physical limitations even intel is competing with itself and its industry to create what ultimately may not be possible in 2012 with its 22 nanometer nm processor intel was able to boast of having the world s smallest and most advanced transistors in a mass produced product 6 in 2014 intel launched an even smaller more powerful 14nm chip the company struggled to bring a 7nm chip to market but finally in 2024 the company began receiving parts for a school bus sized machine that can create technology that pushes moore s law forward 78910this machine designed by asml is a high na extreme ultraviolet lithography system that can print transistors as small as 2nm 11for perspective one nanometer is one billionth of a meter smaller than the wavelength of visible light the diameter of an atom ranges from about 0 1 to 0 5 nanometers 12special considerationsthe vision of an endlessly empowered and interconnected future brings both challenges and benefits shrinking transistors have powered advances in computing for more than half a century but engineers and scientists must find other ways to make computers more capable soon instead of physical processes applications and software may help improve the speed and efficiency of computers cloud computing wireless communication the internet of things iot and quantum physics all may play a role in the future of computer tech innovation despite the growing concerns around privacy and security the advantages of ever smarter computing technology can help keep us healthier safer and more productive in the long run | |
what is moore s law | in 1965 gordon moore posited that roughly every two years the number of transistors on microchips will double commonly referred to as moore s law this phenomenon suggests that computational progress will become significantly faster smaller and more efficient over time 12 widely regarded as one of the hallmark theories of the 21st century moore s law carries significant implications for the future of technological progress along with its possible limitations | |
how has moore s law impacted computing | moore s law has directly influenced the progress of computing power by creating a goal for chip makers to achieve in 1965 moore predicted that there would be 65 000 transistors per chip by 1975 2 in 2024 chip makers can put 50 billion transistors on a chip the size of a fingernail 13 | |
is moore s law coming to an end | according to some moore s law will end sometime in the 2020s 4 if components continue to shrink physical limits will be reached during this decade because it s unlikely that transistors smaller than atoms can be printed there is only 1 5nm of space left to print on depending on the element the bottom linemoore s law began as an observation made by gordon moore in 1965 that the number of components on a microchip appeared to increase by a factor of two every year he predicted that it was possible that by 1975 there would be 65 000 components on an integrated circuit in 1975 he revised his observation and predicted that the number of components would double every two years this prediction remained fairly accurate for nearly 50 years and in 2024 engineers and scientists are still attempting to keep up they have succeeded in printing transistors almost the size of atoms | |
what is moral hazard | moral hazard is the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets liabilities or credit capacity in addition moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles moral hazards can be present anytime two parties come into agreement with one another each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement anytime a party in an agreement does not have to suffer the potential consequences of a risk the likelihood of a moral hazard increases investopedia sydney burnsunderstanding moral hazarda moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party the decision is based not on what is considered right but on what provides the highest level of benefit hence the reference to morality this can apply to activities within the financial industry such as with the contract between a borrower and a lender in addition to the insurance industry for example when a property owner obtains insurance on a property the contract is based on the idea that the property owner will avoid situations that may damage the property the moral hazard exists that the property owner because of the availability of the insurance may be less inclined to protect the property since the payment from an insurance company lessens the burden on the property owner in case of a disaster moral hazards can exist in employer employee relationships as well if an employee has a company car for which they do not have to pay for repairs or maintenance the employee might be less likely to be careful and more likely to take risks with the vehicle | |
when moral hazards in investing lead to financial crises the demand for stricter government regulations often increases | examples of moral hazardprior to the financial crisis of 2008 when the housing bubble burst certain actions on the part of lenders could qualify as moral hazards for example a mortgage broker working for an originating lender may have been encouraged through the use of incentives such as commissions to originate as many loans as possible regardless of the financial means of the borrower since the questionable loans were intended to be sold to investors shifting the risk away from the lending institution the mortgage broker and the originating lender experienced financial gains from the increased risk the burden of the risk would ultimately fall on the investors borrowers who began struggling to make their mortgage payments also experienced moral hazards when determining whether to attempt to meet the financial obligation or walk away from loans that were becoming more difficult to repay as property values decreased borrowers were ending up deeper underwater on their loans the homes were worth less than the amount owed on the associated mortgages some homeowners may have seen this as an incentive to walk away as their financial burden would be lessened by abandoning a property insurance coverage is also prone to moral hazard for example if someone buys the latest cell phone and takes out insurance on it they may be less likely to be careful with it the assumption that it will be replaced regardless of their level of care creates a moral hazard meanwhile replacement costs of damaged cell phones then drive up the cost of insurance for everyone who might purchase the coverage |
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