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when macd rises or falls rapidly the shorter term moving average pulls away from the longer term moving average it signals that the security is overbought or oversold and will soon return to normal levels traders often combine this analysis with the rsi or other technical indicators to verify overbought or oversold conditions | image by sabrina jiang investopedia 2022it is not uncommon for investors to use the macd s histogram the same way they may use the macd itself positive or negative crossovers divergences and rapid rises or falls can be identified on the histogram some experience is needed before deciding which is best in any given situation because there are timing differences between signals on the macd and its histogram | |
how do traders use moving average convergence divergence macd | traders use macd to identify changes in the direction or strength of a stock s price trend macd can seem complicated at first glance because it relies on additional statistical concepts such as the exponential moving average ema but fundamentally macd helps traders detect when the recent momentum in a stock s price may signal a change in its underlying trend this can help traders decide when to enter add to or exit a position | |
is macd a leading indicator or a lagging indicator | macd is a lagging indicator after all all the data used in macd is based on the historical price action of the stock because it is based on historical data it lags the price however some traders use macd histograms to predict when a change in trend will occur for these traders this aspect of macd might be viewed as a leading indicator of future trend changes | |
what is a macd bullish bearish divergence | a macd positive or bullish divergence is a situation in which macd does not reach a new low despite the price of the stock reaching a new low this is seen as a bullish trading signal hence the term positive bullish divergence if the opposite scenario occurs the stock price reaches a new high but macd fails to do so this would be seen as a bearish indicator and termed negative bearish divergence in both cases the setups suggest that the move higher lower will not last so investors need to look at other technical studies like the relative strength index rsi the bottom linemacd is a moving average best used with daily data just as a crossover of the nine and 14 day smas may generate a trading signal for some traders a crossover of the macd above or below its signal line may also generate a directional signal macd is based on emas with more weight placed on the most recent data which means that it can react very quickly to changes of direction in the current price move crossovers of macd lines should be noted but confirmation should be sought from other technical signals such as the rsi or perhaps a few candlestick price charts because it is a lagging indicator macd argues that confirmation in subsequent price action should develop before taking the signal | |
what is the msci all country world index acwi | the msci all country world index acwi is a stock index designed to track broad global equity market performance maintained by morgan stanley capital international msci the index comprises the stocks of nearly 3 000 companies from 23 developed countries and 24 emerging markets as of dec 29 2023 1fund managers use the msci acwi as a guide for asset allocation and a benchmark for the performance of global equity funds the index is also used as the basis for creating investment products such as exchange traded funds etfs understanding the msci all country world index acwi investors can diversify their portfolio holdings in many ways a portfolio manager or investor can purchase a range of individual stocks that have a low or negative correlation with each other on the other hand a less costly and more efficient way to invest might be to own etfs replicating the performance of an index such as the dow jones industrial average djia or the s p 500 index for investors who also want to have exposure to global stocks the msci acwi index can be a good option institutional investors including those who manage mutual funds and pension funds can use the msci acwi as a benchmark to measure the performance of their portfolios and a guide to geographical diversification individual investors can also use the acwi as a benchmark to compare which funds have the best risk adjusted returns as of dec 29 2023 the countries representing the highest allocation for the msci acwi index are the u s 62 57 japan 5 4 china 3 62 the united kingdom 3 55 and france 2 9 below are the weightings for each sector 3below are the top 10 holdings by their portfolio weighting within the index as of dec 29 2023 3the top 10 holdings represent 18 36 of the weighting for the index 3 | |
how to invest in the msci acwi index ishares msci acwi etf | investors can t buy an index directly such as the msci acwi since it s designed to represent a measurement of performance and characteristics of various sectors countries and equity holdings instead investors can buy an etf that tracks or mirrors the composition and performance of the index one of the etfs that track and invest in the msci acwi index is blackrock s ishares msci acwi etf which has nearly 18 3 billion in assets under management aum as of jan 18 2024 4the etf owns the stocks of 2 340 holdings from the index and has an expense ratio of 0 32 as of jan 18 2024 the expense ratio represents the cost to investors for blackrock to manage the fund 4the ishares etf has the same sectors and all but one of the top 10 holdings eli lilly instead of jpmorgan with nearly the same portfolio weightings as the msci acwi index as of jan 18 2024 below is the fund s performance versus the msci acwi index as of dec 31 2023 4alternatives to the msci acwi for global equitiesan investor seeking to diversify their portfolio geographically could invest a portion of their funds in an etf that tracks the msci acwi all cap index which has more than 15 000 equity holdings from 23 developed markets and 24 emerging markets this would provide exposure to a wide range of global stocks but include many more small and mid cap stocks 5it s important to note that investors should be aware that an index containing foreign equities might also contain u s stocks as a result investors should monitor whether they d be overexposed to u s equities if they have already allocated a significant portion of their portfolio to u s stocks please consult a qualified financial advisor to determine the best asset allocation strategy for your investment needs and long term financial goals | |
how do you invest in the msci acwi index | you cannot directly invest in the msci acwi index because it is only an index not a fund you can however invest in funds that track the index such as the ishares msci acwi etf you can purchase this etf as you would any other stock or etf through your brokerage account | |
what is the difference between the msci acwi index and the msci world index | while both the msci acwi and the msci world indexes provide investors with exposure to multiple countries and over 1 000 equity holdings the key difference is that the world index focuses only on developed markets while the acwi index focuses on both developed and emerging markets 65 | |
does the msci acwi include china | yes the msci acwi index does include shares from china in 2019 msci decided to increase its index weights in china 7the bottom linefor investors looking to gain exposure to both domestic and international markets and a large number of companies funds that track the msci all country world index will provide that access the index covers developed and emerging countries for a total of almost 50 nations allowing for extreme diversification | |
what is msci | msci is an acronym for morgan stanley capital international it is an investment research firm that provides stock indexes portfolio risk and performance analytics and governance tools to institutional investors and hedge funds msci is perhaps best known for its benchmark indexes including the msci emerging market index and msci frontier markets index the company continues to launch new indexes each year understanding mscicapital international introduced a number of stock indexes in 1965 to mirror the international markets the first global stock market indexes for markets outside the united states 1 when morgan stanley bought the licensing rights to capital s data in 1986 it began using the acronym msci 2in 2004 msci acquired barra a risk management and portfolio analytics firm for approximately 816 4 million 3 after the merger there was a spin off in an initial public offering ipo in 2007 and msci began trading on the new york stock exchange nyse under the stock ticker mxb 4 the firm became a fully independent stand alone public company from morgan stanley in 2009 5the firm provides its clients with investment tools including those from barra and riskmetrics it also publishes indexes that are widely available to the investing public 6msci indexesmsci is perhaps best known for its stock indexes which focus on different geographic areas and stock types such as small caps mid caps and large caps they track the performance of the stocks that are included in them and act as a base for exchange traded funds etfs as of dec 31 2023 there were 15 6 trillion in assets under management aum benchmarked to the firm s indexes msci offers more than 280 000 indexes 7 some of the most widely used are the emerging markets index frontier markets index all country world index and eafe index launched in 1988 this index lists constituents from 24 emerging economies including china egypt india korea thailand brazil south africa and mexico 8 it compiles the market capitalization of all the companies that are listed on these countries stock exchanges the emerging markets index is considered a good way to track the performance and growth of emerging markets emerging markets offer investors growth potential as their economies expand as well as creating risk diversification for global investors the frontier market index is used to track markets in countries that are considered more volatile and unpredictable than emerging markets this index focuses on 28 markets from the middle east africa south america and europe some of the frontier regions with stocks included in this index are vietnam morocco iceland romania and bahrain 9frontier markets can be profitable for investors since they have plenty of room for growth however they are not heavily traded which can make them difficult to sell if a country s economy takes a downturn due to global or local changes this is the firm s flagship global equity index which tracks the performance of small to large cap stocks from 23 developed and 24 emerging markets the more than 2 800 stocks represented are for companies that have a global presence it covers about 85 of the market capitalization in each market that it includes 10the acwi is often used as a way to represent the global stock market eafe is an abbreviation for europe australasia and the far east this lists 766 stocks from 21 developed market countries excluding canada and the united states it covers approximately 85 of the market capitalization in each of the countries it includes 11eafe countries are considered highly stable they are widely traded making it easy to both buy and sell even in times of economic trouble index reviews and weightingsthe msci indexes are market cap weighted indexes which means stocks are weighted according to their market capitalization calculated as stock price multiplied by the total number of shares outstanding 12 the stock with the largest market capitalization gets the highest weighting on the index this reflects the fact that large cap companies have a bigger impact on an economy than mid or small cap companies a percent change in the price of the large cap stocks in an msci index will lead to a bigger movement in the index than a change in the price of a small cap company each index in the msci family is reviewed quarterly and rebalanced twice a year 13 stocks are added or removed from an index by analysts within msci to ensure that the index still acts as an effective equity benchmark for the market it represents | |
what is the purpose of msci | msci provides tools to support and inform the investment industry the firm provides research data and tools to help clients analyze and invest in different global markets msci is also known for its stock indexes which are used as benchmarks for funds tracking different global markets | |
what is the difference between the s p 500 and msci | the s p 500 index is a market value weighted index of 500 stocks that generally represent the broader u s stock market the msci all country world index is a market capitalization weighted index that measures market performance in both developed and emerging markets | |
how many stocks are in the msci world | the msci all country world index includes over 2 800 stocks from 47 markets it includes both developed and emerging markets around the world 10the bottom linemorgan stanley capital international or msci is a firm that provides investment data and analytics services to investors it was formed in 1986 when morgan stanley bought the licensing rights to data from capital international msci is known for its stock indexes which are used by mutual funds etfs and individual investors as market benchmarks there are multiple msci indexes tracking different sectors of the global economy including emerging frontier developed and global markets | |
what is a multi asset class | a multi asset class also known as a multiple asset class or multi asset fund is a combination of asset classes such as cash equity or bonds used as an investment a multi asset class investment contains more than one asset class thus creating a group or portfolio of assets the weights and types of classes vary according to the individual investor | |
how multi asset classes work | multi asset class investments increase the diversification of an overall portfolio by distributing investments throughout several classes this reduces risk volatility compared to holding one class of assets but might also hinder potential returns for example a multi asset class investor might hold bonds stocks cash and real property whereas a single class investor might only hold stocks one asset class might outperform during a particular period of time but historically no asset class will outperform during every period risk tolerance fundsmany mutual fund companies offer asset allocation funds that are designed to perform according to an investor s tolerance for risk the funds can range from aggressive to conservative an aggressive style fund would have a much higher allocation to equities with maybe as much as 100 the fidelity asset manager 85 fund famrx is an example of an aggressive fund the fund is designed to keep 85 of the fund s allocation in equities and 15 between fixed income and cash for conservative investors a fund s allocation would have significantly more concentration in fixed income the fidelity asset manager 20 fund fasix has 20 in stocks 50 in fixed income and 30 in short term money market funds target date fundstarget date funds are multi asset funds that change the allocation according to the investor s time horizon investors would select the fund that would closely mirror their time horizon for example an investor not retiring for over 30 years should select one of the 2045 or later target funds the later the date on the fund the more aggressive the fund is due to the longer time horizon a 2050 target date fund has over 85 to 90 in equities and the remaining in fixed income or money market an investor whose time horizon is significantly shorter would select one of the more recent maturing funds someone retiring in five years would have a target date fund with a higher level of fixed income to reduce the overall risk and focus on capital preservation target date funds are beneficial for investors who do not want to be involved in choosing an appropriate asset allocation as the investor ages and the time horizon lessens so does the risk level of the target date fund over time the fund gradually moves from equities to fixed income and money market automatically benefits of multi asset class fundsunlike balanced funds which typically focus on meeting or beating a benchmark multi asset class funds are composed to achieve a certain investment outcome such as exceeding inflation their broad options for investing ranging across securities sectors real estate and other types of securities give them enormous flexibility to meet their goals this type of fund also offers more diversification than most balanced funds which may combine mainly fixed income and equities many are actively managed meaning a person or group of people make decisions based on the dynamics of the market to maximize returns and limit risk | |
what is a multi factor model | a multi factor model is a financial model that employs multiple factors in its calculations to explain market phenomena and or equilibrium asset prices a multi factor model can be used to explain either an individual security or a portfolio of securities it does so by comparing two or more factors to analyze relationships between variables and the resulting performance understanding a multi factor modelmulti factor models are used to construct portfolios with certain characteristics such as risk or to track indexes when constructing a multi factor model it is difficult to decide how many and which factors to include also models are judged on historical numbers which might not accurately predict future values multi factor models also help explain the weight of the different factors used in the models indicating which factor has more of an impact on the price of an asset multi factor model formulafactors are compared using the following formula ri ai i m rm i 1 f1 i 2 f2 i n fn ei | |
where | ri is the return of securityrm is the market returnf 1 2 3 n is each of the factors used is the beta with respect to each factor including the market m e is the error terma is the intercepttypes of multi factor modelsmulti factor models can be divided into three categories macroeconomic models fundamental models and statistical models macroeconomic models macroeconomic models compare a security s return to such factors as employment inflation and interest fundamental models fundamental models analyze the relationship between a security s return and its underlying financials such as earnings market capitalization and debt levels statistical models statistical models are used to compare the returns of different securities based on the statistical performance of each security in and of itself many times historical data is used in this type of modeling construction of multi factor modelsthe three most commonly used models to construct a multi factor model are a combination model a sequential model and an intersectional model combination model in a combination model multiple single factor models which utilize a single factor to distinguish stocks are combined to create a multi factor model for example stocks may be sorted based on momentum alone in the first pass subsequent passes will use other factors such as volatility to classify them sequential model a sequential model sorts stocks based on a single factor in a sequential manner to create a multi factor model for example stocks for a specific market capitalization may be sequentially analyzed for various factors such as value and momentum sequentially intersectional model in the intersectional model stocks are sorted based on their intersections for factors for example stocks may be sorted and classified based on intersections in value and momentum measurement of betathe beta of a security measures the systematic risk of a security in relation to the overall market a beta of 1 indicates that the security theoretically experiences the same degree of volatility as the market and moves in tandem with the market a beta greater than 1 indicates the security is theoretically more volatile than the market conversely a beta less than 1 indicates the security is theoretically less volatile than the market | |
when multi factor models are used by investment managers to assess the risk of investments beta is an important factor that they can use | fama french three factor modelone widely used multi factor model is the fama french three factor model the fama french model has three factors the size of firms book to market values and excess returns on the market in other words the three factors used are smb small minus big hml high minus low and the portfolio s return less the risk free rate of return smb accounts for publicly traded companies with small market caps that generate higher returns while hml accounts for value stocks with high book to market ratios that generate higher returns in comparison to the market | |
what is multicollinearity | multicollinearity is the occurrence of high intercorrelations among two or more independent variables in a multiple regression model multicollinearity can lead to skewed or misleading results when a researcher or analyst attempts to determine how well each independent variable can be used most effectively to predict or understand the dependent variable in a statistical model in general multicollinearity can lead to wider confidence intervals that produce less reliable probabilities in terms of the effect of independent variables in a model in technical analysis multicollinearity can lead to incorrect assumptions about an investment it generally occurs because multiple indicators of the same type have been used to analyze a stock understanding multicollinearitystatistical analysts use multiple regression models to predict the value of a specified dependent variable based on the values of two or more independent variables the dependent variable is sometimes called the outcome target or criterion variable an example is a multivariate regression model that attempts to anticipate stock returns based on metrics such as the price to earnings ratio p e ratios market capitalization or other data the stock return is the dependent variable the outcome and the various bits of financial data are the independent variables multicollinearity in a multiple regression model indicates that collinear independent variables are not truly independent for example past performance might be related to market capitalization the stocks of businesses that have performed well experience investor confidence increasing demand for that company s stock which increases its market value although multicollinearity does not affect the regression estimates it makes them vague imprecise and unreliable thus it can be hard to determine how the independent variables influence the dependent variable individually this inflates the standard errors of some or all of the regression coefficients a statistical technique called the variance inflation factor vif can detect and measure the amount of collinearity in a multiple regression model vif measures how much the variance of the estimated regression coefficients is inflated as compared to when the predictor variables are not linearly related a vif of 1 will mean that the variables are not correlated a vif between 1 and 5 shows that variables are moderately correlated and a vif between 5 and 10 will mean that variables are highly correlated | |
when analyzing stocks you can detect multicollinearity by noting whether the indicators graph the same for instance choosing two momentum indicators on a trading chart will generally create trend lines that indicate the same momentum | reasons for multicollinearitymulticollinearity can exist when two independent variables are highly correlated it can also happen if an independent variable is computed from other variables in the data set or if two independent variables provide similar and repetitive results again if you re using the same data to create two or three of the same type of trading indicators the outcomes will be multicollinear because the data and its manipulation to create the indicators are very similar the statistical inferences from a model that contains multicollinearity may not be dependable types of multicollinearityperfect multicollinearity demonstrates a linear relationship that is exact between multiple independent variables this is usually seen on a chart where the data points fall along the regression line in technical analysis it can be seen when you use two indicators that measure the same thing such as volume if you overlaid one on top of the other there would be no difference between them high multicollinearity demonstrates a correlation between multiple independent variables but it is not as tight as in perfect multicollinearity not all data points fall on the regression line but it still signifies data is too tightly correlated to be used in technical analysis indicators with high multicollinearity have very similar outcomes structural multicollinearity occurs when you use data to create new features for instance if you collected data and then used it to perform other calculations and ran a regression on the results the outcomes will be correlated because they are derived from each other this is the type of multicollinearity seen in investment analysis because the same data is used to create different indicators a poorly designed experiment or data collection process such as using observational data generally results in data based multicollinearity where data is correlated due to the nature of the way it was collected some or all of the variables are correlated stock data used to create indicators is generally collected from historical prices and trading volume so the chances of it being multicollinear due to a poor collection method are small multicollinearity in investingfor investing multicollinearity is a common consideration when performing technical analysis to predict probable future price movements of a security such as a stock or a commodity future market analysts want to avoid using technical indicators that are collinear in that they are based on very similar or related inputs the inputs referred to here are not the data itself but how it was manipulated to achieve the outcome instead the analysis must be based on markedly different indicators to ensure that the market is analyzed from independent analytical viewpoints for example momentum and trend indicators share the same data but they will not be perfectly multicollinear or even demonstrate high multicollinearity these two indicators have different outcomes based on how the data was manipulated most investors won t worry about the data and techniques behind the indicator calculations it s enough to understand what multicollinearity is and how it can affect an analysis | |
how to fix multicollinearity | one of the most common ways of eliminating the problem of multicollinearity is first to identify collinear independent predictors and then remove one or more of them generally in statistics a variance inflation factor calculation is run to determine the degree of multicollinearity an alternative method for fixing multicollinearity is to collect more data under different conditions noted technical analyst john bollinger creator of the bollinger bands indicator wrote that a cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators to solve the problem analysts avoid using two or more technical indicators of the same type instead they analyze a security using one type of indicator such as a momentum indicator and then do a separate analysis using a different type of indicator such as a trend indicator tradingviewfor example stochastics the relative strength index rsi and williams r wm r are all momentum indicators that rely on similar inputs and are likely to produce similar results in the image above the stochastics and wm r are the same so using them together doesn t reveal much in this case it is better to remove one of the indicators and use one that isn t tracking momentum in the image below stochastics show price momentum and the bollinger band width shows price consolidation before price movement tradingview | |
how can one deal with multicollinearity | to reduce the amount of multicollinearity found in a statistical model one can remove the specific variables identified as the most collinear you can also try to combine or transform the offending variables to lower their correlation if that does not work or is unattainable there are modified regression models that better deal with multicollinearity such as ridge regression principal component regression or partial least squares regression in stock analysis the best method is to choose different types of indicators | |
what is multicollinearity in regression | multicollinearity describes a relationship between variables that causes them to be correlated data with multicollinearity poses problems for analysis because they are not independent | |
how do you interpret multicollinearity results | data will have high multicollinearity when the variable inflation factor is more than five if the vif is between one and five variables are moderately correlated and if equal to one they are not correlated in technical analysis the indicators will be generally identical | |
what is perfect multicollinearity | perfect multicollinearity exists when there is an exact 1 1 correspondence between two independent variables in a model this can be either a correlation of 1 0 or 1 0 | |
why is multicollinearity a problem | multicollinearity is a problem because it produces regression model results that are less reliable this is due to wider confidence intervals larger standard errors that can lower the statistical significance of regression coefficients in stock analysis it can lead to false impressions or assumptions about an investment the bottom linemulticollinearity exists whenever an independent variable is highly correlated with one or more of the other independent variables in a multiple regression equation multicollinearity is a problem because it will make the statistical inferences less reliable however the variance inflation factor vif can provide information about which variable or variables are redundant and thus the variables that have a high vif can be removed | |
what is a multilateral development bank mdb | a multilateral development bank mdb is an international financial institution chartered by two or more countries for the purpose of encouraging economic development in poorer nations multilateral development banks consist of member nations from developed and developing countries mdbs provide loans and grants to member nations to fund projects that support social and economic development such as the building of new roads or providing clean water to communities | |
how a multilateral development bank mdb works | multilateral development banks are subject to international law they and other international financial institutions such as the international monetary fund imf originated in the waning days of world war ii when the united states and its allies established the bretton woods institutions to rebuild war ravaged nations and stabilize the post war international financial system the world bank which has been semi officially dominated by the u s since its founding is one of these institutions unlike commercial banks mdbs do not seek to maximize profits for their shareholders instead they prioritize development goals such as ending extreme poverty and reducing economic inequality they often lend at low or no interest or provide grants to fund projects in infrastructure energy education environmental sustainability and other areas that promote development at a time when few institutions were lending during the global financial crisis the mdbs provided 222 billion in financing which was critical to global stabilization efforts according to the u s department of the treasury along with financial assistance multilateral development banks often provide member nations with advisers auditors and expert assistance in implementing and monitoring bank funded projects types of multilateral development banksthere are two main forms of multilateral development banks the first which includes the largest and best known institutions makes loans and grants these banks often distinguish between poorer borrowing members and wealthier non borrowing members examples include the world bank founded in 1945 and the inter american development bank idb founded in 1959 the second type of multilateral development bank is formed by governments of low income countries that can then borrow collectively via the mdb in order to secure more favorable rates the caribbean development bank cdb founded in 1969 is an example of this type according to the world bank s 2019 annual report the organization disbursed 49 4 billion during the year to member countries in the form of grants and low interest loans special considerationsmany countries have chafed at the u s s influence over the world bank and regional mdbs such as the asian development bank founded in 1966 and based in the philippines in october 2013 chinese president xi jinping proposed the asian infrastructure investment bank aiib as an alternative to these american dominated institutions the aiib began operations in 2016 with headquarters in beijing the u s reportedly attempted to discourage allies from signing on to the project putting pressure on south korea and australia in particular both ended up joining along with 58 other members and 22 prospective members as of 2019 the aiib has grown to 70 members and 23 prospective members major multilateral development banksthe following is a list of the major multilateral development banks ranked by total assets as of dec 31 2018 except for the world bank group which reflects dec 31 2019 assets exchange rates are as of april 15 2020 | |
what is the multilateral investment guarantee agency miga | the multilateral investment guarantee agency is an international institution that promotes investment in developing countries by offering political and economic risk insurance by promoting foreign direct investment into developing countries the agency aims to support economic growth reduce poverty and improve people s lives understanding the multilateral investment guarantee agency miga the multilateral investment guarantee agency miga is a member of the world bank group and is headquartered in washington d c as of october 2023 182 member governments make up miga 154 developing nations and another 28 industrialized countries 1history of migathe agency was created to complement both public and private investment insurance sources against non commercial risks in developing countries its multilateral character and sponsorship by advanced and developing nations were seen as bolstering confidence among people going across borders to invest their money 2in september 1985 the world bank endorsed the idea of a multilateral political risk insurance provider and established miga in april 1988 the agency started out with 1 billion worth of capital among its initial 29 member states these nations included bahrain bangladesh barbados canada chile cyprus denmark ecuador egypt germany grenada indonesia jamaica japan jordan korea kuwait lesotho malawi netherlands nigeria pakistan samoa saudi arabia senegal sweden switzerland united kingdom and the united states in 1991 the number of member states of miga topped 100 eight years later guarantees issued by the agency reached a total of 1 3 billion topping the 1 billion dollar mark for the first time ever the agency also provided guarantees worth 1 2 billion in 2009 to support the economies in europe and central asia following the global financial crisis 3miga offers a variety of services in order to encourage foreign direct investment these include risk insurance against foreign exchange restrictions an outbreak of conflicts or wars imposed spending limits and related restrictions on company assets in addition to providing political risk insurance to corporations that want to invest in developing countries miga offers advisory services to developing country governments the organization advises on the policies and procedures these governments should follow and the best ways these countries can attract foreign investment other services by miga include licensing arrangements franchising and technology support 4to help ease the flow of foreign investment dollars into certain regions the agency supports and runs a number of international projects 5 for instance in september 2023 miga backed a 621 million loan to the national railway company kazakhstan temir zholy ktz 6 the project will help kazakhstan repair and improve its national railways and expand its fleet of electric railcars while supporting the nation s low carbon initiatives these modernizations will improve the speed and reliability of rail transit and transport miga s leadership teamaccording to miga the people in its group have experience in political risk insurance and are well versed in banking and capital markets environmental and social sustainability project finance and sector specialties and international law and dispute settlement the group s management team include hiroshi matano executive vice president and junaid kamal ahmad vice president operations other members of senior leadership include ethiopis tafara vice president and chief risk legal and administrative officer aradhana kumar capoor director and general counsel muhamet fall director for infrastructure mas and trade operations and deepti jerath director finance and risk 7who is eligible for miga corporations and financial institutions can be eligible for miga coverage as can state owned companies and investments by non profit organizations as long as certain requirements are met companies must be incorporated in a member country or majority owned by nationals of a member country state owned companies and non profit investments must be made on a commercial basis to qualify 4 | |
is miga part of world bank | yes miga is part of world bank group world bank group s stated mission is to end extreme poverty and promote prosperity the four other institutions that comprise world bank group are the international bank for reconstruction and development the international development association the international finance corporation and the international centre for settlement of investment disputes 8 | |
what risks does miga cover | as a guarantee agency miga provides coverage against political risk including the risk of war the risk of currency inconvertibility and the risk of expropriation such as if the government nationalizes a project making it impossible to complete miga also protects against the risk that a sovereign nation doesn t honor its obligations 9the bottom linewith insurance from the multilateral investment guarantee agency cross border investors and lenders can confidently commit capital in developing countries miga promotes the flow of capital and investment as part of its mission to reduce poverty across the globe and its coverage reduces the risk of loss from political reasons such as war | |
what is a multilateral trading facility mtf | a multilateral trading facility mtf is a european term for a trading system that facilitates the exchange of financial instruments between multiple parties mtfs allow eligible contract participants to gather and transfer a variety of securities especially instruments that may not have an official market these facilities are often electronic systems controlled by approved market operators or larger investment banks traders usually submit orders electronically where a matching software engine pairs buyers with sellers understanding a multilateral trading facility mtf mtfs provide retail investors and investment firms with an alternative to traditional exchanges before their introduction investors had to rely on national securities exchanges such as euronext or the london stock exchange lse mtfs have fewer restrictions surrounding the admittance of financial instruments for trading allowing participants to exchange more exotic assets and over the counter otc products for example the lmax exchange offers spot foreign exchange and precious metals trading faster transaction speeds lower costs and trading incentives have helped mtfs become increasingly popular in europe although the nasdaq omx europe was closed in 2010 as mtfs face intense competition with each other and established exchanges 2 the introduction of mtfs has led to greater fragmentation in the financial markets since single securities may now list across multiple venues brokers responded by offering smart order routing sor and other strategies to secure the best price between these many venues mtfs operate under the european union s eu s mifid ii regulatory environment a revised legislative framework designed to protect investors and instill confidence in the financial industry 1mtfs in the united statesin the united states alternative trading systems ats operate similarly to mtfs atss are regulated as broker dealers rather than exchanges in most cases but must still be approved by the securities and exchange commission sec and meet certain restrictions 3in recent years the sec has intensified its enforcement activities surrounding atss in a move that could lead to stricter mtf regulation in europe this is especially true for dark pools and other atss that are relatively obscure and difficult to trade and value the most widely known atss in the united states are electronic communication networks ecns computerized systems that automatically match buy and sell orders for securities in the market in the united states alternative trading facilities atss are similar to the european mtfs benefits of mtfsmultilateral trading facilities offer multiple advantages for buying and selling securities and other assets one key advantage is that the operators cannot pick and choose which trades to execute they must set and follow clear rules allowing transparency in trades and pricing with high speed trading mtfs use computer algorithms to match buyers and sellers this facilitates higher liquidity than over the counter trades resulting in lower bid ask spreads and more effective price discovery moreover mtfs typically operate on a commission basis meaning that they have no conflicts of interest with individual traders real world examplesinvestment banks and financial data companies can leverage economies of scale to compete with traditional securities exchanges and potentially realize synergies with their existing trading operations some investment banks which already ran internal crossing systems have also converted their internal systems into mtfs for example ubs group established its own mtf that works in conjunction with its internal crossing systems 4in 2019 financial data and media company bloomberg announced that it received authorization from the netherlands authority for the financial markets afm to operate an mtf from amsterdam throughout the eu bloomberg s mtf provides quote and trading functionality to eligible participants in products such as cash bonds repos credit default swaps cds interest rate securities irs exchange traded funds etf equity derivatives and forex fx derivatives 5 | |
what is the difference between an mtf and an otf | an organized trading facility or otf is a new type of european trading venue for bonds derivatives and emissions allowances but not equities multilateral trading facilities can trade in stocks and other equity products in addition the operators of otfs are required to exercise discretion when they place orders as the dutch authority for financial markets explains the operator of an otf does have a degree of discretion in deciding whether to place or withdraw an order on its otf and in deciding not to match a client order with other orders available in the systems of the otf | |
what are some of the largest multilateral trading facilities | the largest multilateral trading facility is the london based chi x europe which is passported across the european economic area and regulated by the financial conduct authority other notable entities include liquidnet europe currenex mtf and ubs mtf | |
what products can be traded on bloomberg s multilateral trading facility | bloomberg s multilateral trading facility or bmtf can be used to trade bonds repos credit default swaps interest rate swaps exchange traded funds equity derivatives and foreign exchange derivatives investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is multilevel marketing mlm | multilevel marketing mlm refers to a strategy used by some direct sales companies to sell products and services mlm encourages existing members to promote and sell their offerings to other individuals and bring new recruits into the business distributors are paid a percentage of their recruits sales new recruits become the distributor s network or downline and are in turn encouraged to make sales to earn money many mlm schemes are legal but there also are illegal operations run as pyramid schemes this has cast some negative light on legitimate mlm businesses alex dos diaz investopediaunderstanding multilevel marketing mlm multilevel marketing is a legitimate business strategy commonly used by businesses that rely heavily on sales to generate revenue unlike traditional sales channels multilevel marketing programs use networks for sales and to recruit new participants as such they re often referred to as network marketing here s how it works individuals are brought into the business as contractors independent business owners distributors or direct salespeople these people are then tasked with selling the company s products and or services to others including family and friends sales can be done in person or online they are given a commission for every sale they make participants also are encouraged to recruit others into the program as participants while they may not be pressured to do so signing up new contractors provides a financial incentive for participants who receive a percentage of the sales of their recruits and their recruits and so on 1there can be hundreds even thousands of participants depending on the size of a company members at all levels receive some form of commission as long as the chain keeps going the more layers there are the more money people can make think of it as a pyramid the person or people at the top earn the most while those who sit toward the bottom earn fewer commission dollars relatively few though generally earn any meaningful income from their efforts 2because multilevel marketing plans are commission based the participants do not receive salaries this means that mlm businesses are often best suited for people with an entrepreneurial spirit who can set their own goals and schedules who are good at sales and who can effectively network with others not only to sell products but also to recruit new marketers special considerationsalthough it is legal multilevel marketing often is controversial one problem is pyramid schemes that use money from new recruits to pay people at the top rather than those who perform the work these schemes and the people behind them take advantage of others by pretending to be engaged in legitimate multilevel or network marketing you can spot pyramid schemes by their greater focus on recruitment than on product sales 1an issue in determining the legitimacy of a multilevel marketing company is whether it sells its products primarily to consumers or to its members who must recruit new members to buy their products if it is the former the company is likely a legitimate multilevel marketer if it is the latter it could be an illegal pyramid scheme 2since relatively few earn meaningful income from their efforts this reflects the characteristics of a pyramid scheme to some observers you can often spot pyramid schemes by their far greater focus on recruitment than on product sales real world examples of multilevel marketingthere are a lot of examples of multilevel marketing in the corporate world the following are just two of the most popular and well known companies that operate in this sphere amway is a well known direct sales company that uses mlm to generate revenue the company which sells health beauty and home care products in more than 100 countries regularly reports billions of dollars in sales conducted by its independent business owners 3 this makes it the largest mlm business in the world by revenue 4herbalife nutrition is a high profile mlm company that manufactures and distributes weight loss and nutritional products the company argues that most of its revenue is from product sales not recruitment it also says it offers members many protections such as a money back guarantee so they will not be stuck with products they could not sell there have been multiple lawsuits against herbalife accusing it of misrepresenting its sales practices including a settlement reached with the federal trade commission ftc in 2016 under which it had to restructure its business 5activist investor william ackman also shed a national spotlight on the company by shorting 1 billion of the company s stock in 2012 ackman accused the company of operating a pyramid scheme backing up his allegations with a bet that the stock price would fall under the weight of the scam he gave up on that bet in 2018 6 | |
what is mlm and is it legal | broadly speaking multilevel marketing mlm is a sales structure where members of a company are encouraged to recruit new members once recruited this salesperson receives a cut of their recruiter s sales at the same time each salesperson profits from the sale of a given product mlms are often legal legitimate businesses whose distributors earn money from the sale of actual products and from commissions on products sold by distributors who they recruit | |
is multilevel marketing a pyramid scheme | multilevel marketing is controversial and often compared to pyramid schemes while some multilevel marketing operations are legal others have come under investigation this typically occurs when the majority of the operation s profits funnel up to the top leaving little for the rest of its members | |
when an organization focuses primarily on recruitment rather than selling products this may also signal that it is operating under a pyramid scheme sometimes members of these schemes will number in the hundreds or even thousands | image by julie bang investopedia 2019 | |
what are some red flags to look out for an illegal mlm pyramid scheme | the federal trade commission ftc warns people to take note of and avoid mlm promoters who 1another warning sign is seeing existing distributors who continue to buy products that they can never sell so that they can qualify for some kind of reward | |
what is an example of multilevel marketing | avon is an example of multilevel marketing the company operates under a model where sales are driven through a network of salespeople through presentations or one on one settings in homes or businesses like a number of other multilevel marketing businesses avon typically does not operate a fixed retail location the parent company instead provides the tools and resources to entrepreneurs to conduct their business at various locations this type of business model is also referred to as a direct sales model other examples of mlm businesses include tupperware rodan fields natura co vorwerk nu skin and pm international among many others 4the bottom linemultilevel marketing is a legitimate approach to sales but it does share some characteristics with illegal pyramid schemes the key difference between mlm and a pyramid scheme is that mlm keeps the focus on sales while pyramid schemes generally focus on recruitment even though mlm focuses on sales earning money is difficult without also being successful at recruiting additional salespeople and thus increasing commissions | |
what is a multinational corporation | a multinational corporation mnc is a company that has business operations in at least one country other than its home country and generates revenue beyond its borders chances are the clothes you re wearing the smartphone in your pocket and the transportation you take to work all have one thing in common they were likely manufactured by an mnc as are 90 of american imports 12multinationals permeate nearly every aspect of our modern lives while wielding a staggering influence politically and economically with more than a quarter of american workers employed by one 3 the first multinationals were colonial enterprises the east india company formed 1600 dutch east india company voc 1602 and the hudson bay colony hbc 1649 stand out as central to imperialist histories whose rapaciousness still haunts anyone with even the vaguest sense of history 4 remarkably hbc endures as does its core business model sourcing clothing and other materials while holding massive amounts of real estate in one part of the world to sell finished goods to western consumers 5the mncs formed more recently have often not equipped themselves much better just 57 multinationals were responsible for unleashing 80 of global carbon emissions between 2016 and 2022 6 yet despite their ubiquity in what we wear and even the air we breathe there is still widespread confusion about what defines a company as multinational is it simply having offices or factories overseas selling products internationally or is there more to it multinationals have fundamentally shaped the flow of capital goods and services in a world that they helped connect perhaps more than any military during the centuries long process of globalization their incredible economic clout has also sparked heated debates around their power labor practices environmental impacts and tax avoidance strategies in this article we take you through their history organizational structures and complex role in globalization investopedia jessica olah | |
how a multinational corporation works | mncs operate in at least two countries with significant business activities and investments spanning across national borders their rise can be traced to the 1600s and colonialism though the modern corporation took shape with the emergence of large scale industries such as oil automobiles and consumer goods in the late 19th and early 20th centuries companies like standard oil ford and coca cola were among the forerunners in expanding their operations globally while amassing revenues on par with entire nations later the post world war ii era saw their accelerated growth driven by trade liberalization advances in shipping and other technologies and the increasing interconnectedness of global markets vinci sa the french multinational construction firm had the most subsidiaries worldwide at 2 689 in second place is hca healthcare the u s pharmaceutical and healthcare giant with 2 447 7but what are they these companies take different forms from giant conglomerates with diverse portfolios to specialized firms focusing on specific industries or regions here are the main points about their structure the foreign direct investment fdi flows of multinational corporations increased by over 106 times between 1970 and 2023 from 13 billion to 1 37 trillion 8the specific organizational design of mncs depends on where they are and their industry though the two terms are often used interchangeably multinational enterprises mnes and mncs are different mnes are entities that engage in foreign direct investment fdi and own or control production or material development firms in more than one country this is a very broad definition for a reason mnes include corporations partnerships state run enterprises and other types of business structures mnes can be private or state owned and may operate in various sectors such as manufacturing services or extractive industries mncs are a specific type of mne that takes the form of a corporation in sum while all mncs are mnes not all mnes are mncs developing an international presence can open up new markets where multinationals can sell goods or produce the same quality of products at lower costs mncs can thus reduce prices and increase the purchasing power of consumers worldwide they may also take advantage of lower tax rates in countries eager for fdi and critics point to their propensity for developing monopolies where they operate this can drive up prices squelch competition and inhibit innovation types of multinational corporationsmultinational corporations and foreign direct investmentsthe post world war ii era saw a significant acceleration in the growth of mncs fueled by advances in transportation shipping communication and trade liberalization the rise of global brands like coca cola international business machines corporation ibm and mcdonald s exhibited the growing reach and influence of mncs these global entities had the power to shape economies industries and societies across borders making them a force to be reckoned with in the modern world for critics it seemed that as the armies of europe receded from their colonies mncs stepped in to take their place spanning continents and with the ability to mobilize resources larger than many nations annual revenues mncs can drive economic growth and development for millions multinationals have attracted praise for their benefits to economic growth and criticism for their potential to exert undue influence over so called host countries those nations where their subsidiaries set up shop international monetary fund imf and other economists generally credit mncs positive contributions to global development 10 among the most significant is their ability to attract foreign direct investment fdi which can inject much needed capital technology and expertise into an economy the most common method of fdi is when a multinational acquires a local firm but it can include foreign joint ventures constructing new plants and reinvesting earnings in a foreign subsidiary given the natural involvement of mncs in these investments it s an indirect measure of their spread into new markets according to the world bank total fdi inflows to developing countries were 1 37 trillion in 2023 8typically economists analyze inflows for specific nations to see if mncs and others are finding a country a good place to invest the more fdi coming into a country the more jobs it can produce and the more taxes it can collect fdi inflows don t include portfolio investments like buying bonds stocks and other assets in a foreign country without gaining ownership control for decades the imf argued for countries to increase their fdi inflows through lower taxes and less regulation hence shrinking the size of the state which its economists typically couch in the moral language of macroeconomic discipline 11 as such for much of the post colonial period the imf and other multinational organizations have been pushing developing economies to attract mncs to set up shop there making fdi the most capital flows into less developed countries for the decades after decolonization 12however this push for increased fdi has not been without its critics particularly those in developing countries mnc influence has raised complex questions about the role of foreign investment the distribution of benefits and popular and local sovereignty once an mnc moves into an area it can often sideline local industries and then use its monopolistic hold to gain significant political influence in the country then in moves reminiscent for some of the flows of capital during the era of state colonialism the profits might be repatriated by mncs to their home country limiting the benefits of fdi for host countries these issues have led to various responses from host governments including protests restrictions exclusion and even expropriation of mncs meanwhile it s become clear that many mncs aren t returning their funds to where they re headquartered as a percentage of gdp the highest fdi inflows aren t into the u s or newly opened markets but tax havens like the cayman islands which have no corporate income capital gains or payroll taxes 8 this makes it an attractive destination for multinational corporations to park funds to minimize their taxes to the countries where that wealth was earned critiques of mncs tend to fall under the following categories below is a chart of the global fdi inflows as a percentage of gross domestic product gdp in recent decades as you can see the percentage spikes at the turn of the millennium during the financial crisis and then immediately after this indicates a substantial increase in the flow of foreign capital into economies worldwide reflecting a growing interest from multinational corporations and investors in expanding their operations and investments abroad it could also of course suggest moments when capital flowed abroad when there was significant volatility in the home markets the largest fdi inflows occur into the u s and other developed economies developing countries have encouraged fdi that is the expansion of mncs to finance infrastructure and create new jobs for local workers for their part the mncs gain from fdi by expanding further into international markets several factors are said to drive increases in fdi inflows a measure of mnc expansion beyond their home countries borders global fdi flows have declined significantly as a share of gdp from around 3 3 in the 2000s to only 1 5 or so in recent years and this drop has disproportionately affected emerging markets 13 while fdi flows to developed countries like the u s increased by 29 in 2023 flows to developing countries decreased by 9 8while the percentages and acronyms thrown around in many of these discussions can seem abstract the consequences are not these represent millions of jobs the aspirations of local and regional economies and massive inequalities worldwide that keep poverty entrenched in some regions of the globe the political stakes couldn t be higher the terms economists use for the recent drop in fdi flows include global economic fragmentation which suggests a movement away from a previous era s economic integration and globalization 13 the trade wars between the u s and china the pandemic rising nationalism and regional wars have upended earlier investment patterns just as they have billions of lives we seem to have entered a new chapter perhaps in the history of the multinational corporation | |
why would a business want to become a multinational company | usually a business s primary goal is to increase profits and growth if it can grow a global customer base and increase its market share abroad it may believe opening offices in foreign countries is worth the expense and effort companies may benefit from certain tax structures or regulatory regimes found abroad | |
how do multinational corporations influence global trade policies | mncs greatly affect trade policies through lobbying efforts and economic diplomacy they advocate for trade agreements and regulations that favor their business operations often helping to shape policies to reduce tariffs improve market access and protect intellectual property rights mncs leverage their economic might to negotiate favorable terms with governments influencing international trade to attain environments conducive to their growth | |
what are some risks multinational corporations face | multinational corporations are exposed to risks related to the different countries and regions in which they operate these can include regulatory or legal risks political instability crime and violence cultural sensitivities and fluctuations in currency exchange rates the bottom linemultinational corporations are as influential as any stakeholders in the global economy with the potential to drive economic growth and development in the countries where they operate however their impact on host countries particularly in the developing world is not without controversy while mncs can bring valuable foreign direct investment technology and expertise they also raise concerns about exploitation loss of sovereignty and uneven distribution of benefits as global fdi flows decline especially in developing countries policymakers businesses and civil society must work together to create a more balanced and equitable framework for international investment ultimately the role of mncs in global development is complex and constantly evolving shaped by the actions and decisions of countless stakeholders worldwide | |
what is a multiple | a multiple measures some aspect of a company s financial well being determined by dividing one metric by another metric investors use multiples to quantify a company s growth productivity and efficiency they use multiples to make comparisons among companies and find the best investment opportunities types of multiples include price to earnings p e and enterprise value ev to sales multiples formula and calculation of multiplesthe formula for calculating multiples is multiple performance metric a performance metric b begin aligned text multiple frac text performance metric a text performance metric b end aligned multiple performance metric b performance metric a to calculate the multiple divide the first metric by the second metric keep in mind that the metric in the numerator is typically larger than the one in the denominator understanding multiplesmetrics are quantitative tools that measure a company s performance these metrics are used by different people for various reasons for instance company executives use metrics to analyze corporate finance and operational strategies similarly analysts can use metrics to make opinions and investment recommendations while investment professionals use metrics to make important decisions about their investing portfolios metrics can be used together to measure a company s financial health and well being when grouped together these metrics are called multiples as noted above when one metric is divided by another it results in a multiple this figure can be used to make different determinations for instance investors and analysts generally rely on two major methods when they make stock valuations one is based on cash flow while the other is based on a multiple of some performance measure such as earnings or sales the multiples approach to valuation is a theory based on the concept that similar assets should sell for similar prices types of multiplesthe most common multiple used in the valuation of stocks is the p e multiple it is used to compare a company s market value price with its earnings a company with a price or market value that is high compared to its level of earnings has a high p e multiple a company with a low price compared to its level of earnings has a low p e multiple a p e of five times 5x means a company s stock is trading at a multiple of five times its earnings a p e of 10 times 10x means a company is trading at a multiple that is equal to 10 times earnings a company with a high p e is considered to be overvalued likewise a company with a low p e is considered to be undervalued ev is a popular performance metric used to calculate different types of multiples ev shows how much money would be needed to buy a specific company the ev of a company is calculated by taking the company s market capitalization adding total debt including long term and short term debt and subtracting all cash and cash equivalents many investors see ev as a better performance metric than relying on market capitalization alone because it offers a more complete picture of a company s valuation a widely used multiple is the ev to earnings before interest taxes depreciation and amortization ebitda multiple also referred to as ev ebitda this multiple helps investors compare companies in the same industry or sector before making an investment decision many equity analysts consider ev ebitda to be a solid measure of cash flow available to a firm the ev to earnings before interest and taxes ebit multiple also referred to as ev ebit is similar to the p e multiple but is preferred by some analysts for its ability to give a more complete picture of a company s financial performance and actual worth the multiple is useful for pinpointing companies that might be undervalued or overvalued it s best used for less capital intensive companies with fewer depreciation and amortization expenses the ev to sales or the ev sales sales multiple compares a company s enterprise value to its annual sales this multiple is considered an important valuation tool because it takes into account a company s equity and debt while giving investors a quantifiable metric of how to value a company based on sales it s also useful in evaluating companies with negative earnings to be most effective investors should compare the ev sales multiple of the company they are analyzing to that of other companies in the same industry example of a multiplea multiple can be used to show how much investors are willing to pay per dollar of earnings as computed by the p e ratio let s assume that you are analyzing a stock with 2 of earnings per share eps which is trading at 20 this stock has a p e of 10 this means investors are willing to pay a multiple of 10 times the current eps for the stock | |
what is the multiples approach | the multiples approach is a valuation theory the premise of this theory is that assets that are similar to one another sell at similar prices as such it implies that financial ratios that are used to compare companies are the same across similar firms ratios commonly used in the multiples approach are equity multiples and enterprise value multiples such as ev ebit and ev ebitda | |
what do trading multiples tell you | trading multiples are financial metrics that are used to evaluate companies they are typically used to highlight their financial strength and well being some of the most commonly used trading multiples include a company s discounted cash flow price to earnings and enterprise value to revenue | |
what does price to earnings tell you | price to earnings is a popular multiple used by investors and analysts when they value stocks this multiple compares the company s market value with its earnings a high p e is indicated by a high market value compared to its earnings this means that the company is overvalued a company is said to be undervalued when it has a low p e or when its market value is low compared to its earnings the bottom linethere are many tools you can use to evaluate the health and well being of different companies multiples allow you to highlight their growth how efficient they are and how well they re performing this is done by dividing one metric by another price to earnings and enterprise value to sales are just two common multiples that analysts and investors can use to ensure that your analysis is as accurate as possible make sure you use different multiples rather than relying on one set | |
what is a multiple employer welfare arrangement mewa | a multiple employer welfare arrangement mewa is a system for marketing health and welfare benefits to employers for their employees also described as a multiple employer trust met a multiple employer welfare arrangement happens when a group of employers combines their contributions in a self contributing benefits plan for the benefit of their employees for the arrangement to work the employers must make contributions to the plan based on the number of employees they have and the estimated costs associated with each employee mewas are a way for smaller companies to offer employee benefits outside of the government run health insurance exchanges by sharing risk they became popular as a result of the patient protection and affordable care act aca for more on mewas from the department of labor see erisa s multiple employer welfare arrangement informational page which lists the rules governing them fact sheets filing requirements news releases current amendments public comments and more | |
how a multiple employer welfare arrangement mewa works | as defined by the employee retirement income security act erisa a multiple employer welfare arrangement is an employee welfare benefit plan or any other arrangement which is established or maintained for the purpose of offering or providing medical surgical or hospital care or benefits or benefits in the event of sickness accident disability death or unemployment or vacation benefits apprenticeship or other training programs or daycare centers scholarship funds or prepaid legal services to the employees of two or more employers including one or more self employed individuals or to their beneficiaries overall a multiple employer welfare arrangement is a good way for smaller employers to get group health and other insurance benefits for their employers by pooling their contributions together these smaller employers are better positioned to offer the best benefits packages from insurance companies due to economies of scale also since each employer is a partner in a mewa they have the ability to suggest plan changes giving them more power over what they can offer employees than when they go it alone special considerationsthere are some financial considerations and challenges that need to be taken into account when an employer is thinking of participating in a mewa in some cases multiple employer welfare arrangements find themselves unable to pay claims as a result of inadequate funding or reserves in more extreme cases due to poor management or outright fraud and embezzlement some mewas have seen their funds drained altogether as such most mewa administrators and participants buy stop loss insurance to limit their liability such insurance covers errors and omissions fidelity bonds directors and officers crime cyber liability and more mewas must follow erisa law and also may be subject to state insurance regulation which can vary by jurisdiction some states are mewa friendly some not so much an example of such state level regulatory requirements can be found at the new jersey department of banking and insurance an example of a state with generally higher oversight standards at a minimum mewas must follow filing reporting and funding guidelines | |
what is multiple linear regression mlr | multiple linear regression mlr also known simply as multiple regression is a statistical technique that uses several explanatory variables to predict the outcome of a response variable the goal of mlr is to model the linear relationship between the explanatory independent variables and response dependent variables in essence multiple regression is the extension of ordinary least squares ols regression because it involves more than one explanatory variable formula and calculation of multiple linear regression mlr y i 0 1 x i 1 2 x i 2 p x i p where for i n observations y i dependent variable x i explanatory variables 0 y intercept constant term p slope coefficients for each explanatory variable the model s error term also known as the residuals begin aligned y i beta 0 beta 1 x i1 beta 2 x i2 beta p x ip epsilon textbf where for i n textbf observations y i text dependent variable x i text explanatory variables beta 0 text y intercept constant term beta p text slope coefficients for each explanatory variable epsilon text the model s error term also known as the residuals end aligned yi 0 1 xi1 2 xi2 p xip where for i n observations yi dependent variablexi explanatory variables 0 y intercept constant term p slope coefficients for each explanatory variable the model s error term also known as the residuals 1 | |
what multiple linear regression mlr can tell you | simple linear regression is a function that allows an analyst or statistician to make predictions about one variable based on the information that is known about another variable linear regression can only be used when one has two continuous variables an independent variable and a dependent variable the independent variable is the parameter that is used to calculate the dependent variable or outcome a multiple regression model extends to several explanatory variables the mlr model is based on the following assumptions mlr assumes there is a linear relationship between the dependent and independent variables that the independent variables are not highly correlated and that the variance of the residuals is constant 2the coefficient of determination r squared is a statistical metric that is used to measure how much of the variation in outcome can be explained by the variation in the independent variables r2 always increases as more predictors are added to the mlr model even though the predictors may not be related to the outcome variable r2 by itself can t thus be used to identify which predictors should be included in a model and which should be excluded r2 can only be between 0 and 1 where 0 indicates that the outcome cannot be predicted by any of the independent variables and 1 indicates that the outcome can be predicted without error from the independent variables | |
when interpreting the results of multiple regression beta coefficients are valid while holding all other variables constant all else equal the output from a multiple regression can be displayed horizontally as an equation or vertically in table form | example of how to use multiple linear regression mlr as an example an analyst may want to know how the movement of the market affects the price of exxonmobil xom in this case the linear equation will have the value of the s p 500 index as the independent variable or predictor and the price of xom as the dependent variable in reality multiple factors predict the outcome of an event the price movement of exxonmobil for example depends on more than just the performance of the overall market other predictors such as the price of oil interest rates and the price movement of oil futures can affect the price of exon mobil xom and the stock prices of other oil companies to understand a relationship in which more than two variables are present mlr is used mlr is used to determine a mathematical relationship among several random variables 3 in other terms mlr examines how multiple independent variables are related to one dependent variable once each of the independent factors has been determined to predict the dependent variable the information on the multiple variables can be used to create an accurate prediction on the level of effect they have on the outcome variable the model creates a relationship in the form of a straight line linear that best approximates all the individual data points referring to the mlr equation above in our example the least squares estimates b0 b1 b2 bp are usually computed by statistical software as many variables can be included in the regression model in which each independent variable is differentiated with a number 1 2 3 4 p multiple regression can also be non linear in which case the dependent and independent variables would not follow a straight line the multiple regression model allows an analyst to predict an outcome based on information provided on multiple explanatory variables still the model is not always perfectly accurate as each data point can differ slightly from the outcome predicted by the model the residual value e which is the difference between the actual outcome and the predicted outcome is included in the model to account for such slight variations we ran our xom price regression model through a statistics computation software it returned this output image by sabrina jiang investopediaan analyst would interpret this output to mean if other variables are held constant the price of xom will increase by 7 8 if the price of oil in the markets increases by 1 the model also shows that the price of xom will decrease by 1 5 following a 1 rise in interest rates r2 indicates that 86 5 of the variations in the stock price of exxon mobil can be explained by changes in the interest rate oil price oil futures and s p 500 index the difference between linear and multiple regressionordinary linear squares ols regression compares the response of a dependent variable given a change in some explanatory variables however a dependent variable is rarely explained by only one variable in this case an analyst uses multiple regression which attempts to explain a dependent variable using more than one independent variable multiple regressions can be linear and nonlinear mlrs are based on the assumption that there is a linear relationship between both the dependent and independent variables it also assumes no major correlation between the independent variables | |
what makes a multiple regression multiple | a multiple regression considers the effect of more than one explanatory variable on some outcome of interest it evaluates the relative effect of these explanatory or independent variables on the dependent variable when holding all the other variables in the model constant | |
why would one use a multiple regression over a simple ols regression | a dependent variable is rarely explained by only one variable in such cases an analyst uses multiple regression which attempts to explain a dependent variable using more than one independent variable the model however assumes that there are no major correlations between the independent variables can i do a multiple regression by hand it s unlikely as multiple regression models are complex and become even more so when there are more variables included in the model or when the amount of data to analyze grows to run a multiple regression you will likely need to use specialized statistical software or functions within programs like excel | |
what does it mean for a multiple regression to be linear | in multiple linear regression the model calculates the line of best fit that minimizes the variances of each of the variables included as it relates to the dependent variable because it fits a line it is a linear model there are also non linear regression models involving multiple variables such as logistic regression quadratic regression and probit models | |
how are multiple regression models used in finance | any econometric model that looks at more than one variable may be a multiple factor models compare two or more factors to analyze relationships between variables and the resulting performance the fama and french three factor mod is such a model that expands on the capital asset pricing model capm by adding size risk and value risk factors to the market risk factor in capm which is itself a regression model by including these two additional factors the model adjusts for this outperforming tendency which is thought to make it a better tool for evaluating manager performance the bottom linemlr is a statistical tool used to predict the outcome of a variable based on two or more explanatory variables if just one variable affects the dependent variable a simple linear regression model is sufficient if on the other hand more than one thing affects that variable mlr is needed a classic example would be the drivers of a company s valuation on the stock market usually a company s share price is influenced by a variety of factors in this case the dependent variable would be the share price which is the thing we are trying to predict while the independent explanatory variables would be the factors that affect it | |
what is multiple linear regression mlr | multiple linear regression mlr also known simply as multiple regression is a statistical technique that uses several explanatory variables to predict the outcome of a response variable the goal of mlr is to model the linear relationship between the explanatory independent variables and response dependent variables in essence multiple regression is the extension of ordinary least squares ols regression because it involves more than one explanatory variable formula and calculation of multiple linear regression mlr y i 0 1 x i 1 2 x i 2 p x i p where for i n observations y i dependent variable x i explanatory variables 0 y intercept constant term p slope coefficients for each explanatory variable the model s error term also known as the residuals begin aligned y i beta 0 beta 1 x i1 beta 2 x i2 beta p x ip epsilon textbf where for i n textbf observations y i text dependent variable x i text explanatory variables beta 0 text y intercept constant term beta p text slope coefficients for each explanatory variable epsilon text the model s error term also known as the residuals end aligned yi 0 1 xi1 2 xi2 p xip where for i n observations yi dependent variablexi explanatory variables 0 y intercept constant term p slope coefficients for each explanatory variable the model s error term also known as the residuals 1 | |
what multiple linear regression mlr can tell you | simple linear regression is a function that allows an analyst or statistician to make predictions about one variable based on the information that is known about another variable linear regression can only be used when one has two continuous variables an independent variable and a dependent variable the independent variable is the parameter that is used to calculate the dependent variable or outcome a multiple regression model extends to several explanatory variables the mlr model is based on the following assumptions mlr assumes there is a linear relationship between the dependent and independent variables that the independent variables are not highly correlated and that the variance of the residuals is constant 2the coefficient of determination r squared is a statistical metric that is used to measure how much of the variation in outcome can be explained by the variation in the independent variables r2 always increases as more predictors are added to the mlr model even though the predictors may not be related to the outcome variable r2 by itself can t thus be used to identify which predictors should be included in a model and which should be excluded r2 can only be between 0 and 1 where 0 indicates that the outcome cannot be predicted by any of the independent variables and 1 indicates that the outcome can be predicted without error from the independent variables | |
when interpreting the results of multiple regression beta coefficients are valid while holding all other variables constant all else equal the output from a multiple regression can be displayed horizontally as an equation or vertically in table form | example of how to use multiple linear regression mlr as an example an analyst may want to know how the movement of the market affects the price of exxonmobil xom in this case the linear equation will have the value of the s p 500 index as the independent variable or predictor and the price of xom as the dependent variable in reality multiple factors predict the outcome of an event the price movement of exxonmobil for example depends on more than just the performance of the overall market other predictors such as the price of oil interest rates and the price movement of oil futures can affect the price of exon mobil xom and the stock prices of other oil companies to understand a relationship in which more than two variables are present mlr is used mlr is used to determine a mathematical relationship among several random variables 3 in other terms mlr examines how multiple independent variables are related to one dependent variable once each of the independent factors has been determined to predict the dependent variable the information on the multiple variables can be used to create an accurate prediction on the level of effect they have on the outcome variable the model creates a relationship in the form of a straight line linear that best approximates all the individual data points referring to the mlr equation above in our example the least squares estimates b0 b1 b2 bp are usually computed by statistical software as many variables can be included in the regression model in which each independent variable is differentiated with a number 1 2 3 4 p multiple regression can also be non linear in which case the dependent and independent variables would not follow a straight line the multiple regression model allows an analyst to predict an outcome based on information provided on multiple explanatory variables still the model is not always perfectly accurate as each data point can differ slightly from the outcome predicted by the model the residual value e which is the difference between the actual outcome and the predicted outcome is included in the model to account for such slight variations we ran our xom price regression model through a statistics computation software it returned this output image by sabrina jiang investopediaan analyst would interpret this output to mean if other variables are held constant the price of xom will increase by 7 8 if the price of oil in the markets increases by 1 the model also shows that the price of xom will decrease by 1 5 following a 1 rise in interest rates r2 indicates that 86 5 of the variations in the stock price of exxon mobil can be explained by changes in the interest rate oil price oil futures and s p 500 index the difference between linear and multiple regressionordinary linear squares ols regression compares the response of a dependent variable given a change in some explanatory variables however a dependent variable is rarely explained by only one variable in this case an analyst uses multiple regression which attempts to explain a dependent variable using more than one independent variable multiple regressions can be linear and nonlinear mlrs are based on the assumption that there is a linear relationship between both the dependent and independent variables it also assumes no major correlation between the independent variables | |
what makes a multiple regression multiple | a multiple regression considers the effect of more than one explanatory variable on some outcome of interest it evaluates the relative effect of these explanatory or independent variables on the dependent variable when holding all the other variables in the model constant | |
why would one use a multiple regression over a simple ols regression | a dependent variable is rarely explained by only one variable in such cases an analyst uses multiple regression which attempts to explain a dependent variable using more than one independent variable the model however assumes that there are no major correlations between the independent variables can i do a multiple regression by hand it s unlikely as multiple regression models are complex and become even more so when there are more variables included in the model or when the amount of data to analyze grows to run a multiple regression you will likely need to use specialized statistical software or functions within programs like excel | |
what does it mean for a multiple regression to be linear | in multiple linear regression the model calculates the line of best fit that minimizes the variances of each of the variables included as it relates to the dependent variable because it fits a line it is a linear model there are also non linear regression models involving multiple variables such as logistic regression quadratic regression and probit models | |
how are multiple regression models used in finance | any econometric model that looks at more than one variable may be a multiple factor models compare two or more factors to analyze relationships between variables and the resulting performance the fama and french three factor mod is such a model that expands on the capital asset pricing model capm by adding size risk and value risk factors to the market risk factor in capm which is itself a regression model by including these two additional factors the model adjusts for this outperforming tendency which is thought to make it a better tool for evaluating manager performance the bottom linemlr is a statistical tool used to predict the outcome of a variable based on two or more explanatory variables if just one variable affects the dependent variable a simple linear regression model is sufficient if on the other hand more than one thing affects that variable mlr is needed a classic example would be the drivers of a company s valuation on the stock market usually a company s share price is influenced by a variety of factors in this case the dependent variable would be the share price which is the thing we are trying to predict while the independent explanatory variables would be the factors that affect it | |
what is the multiples approach | the multiples approach is a valuation theory based on the idea that similar assets sell at similar prices it assumes that the type of ratio used in comparing firms such as operating margins or cash flows is the same across similar firms investors also refer to the multiples approach as multiples analysis or valuation multiples when doing so they may refer to a financial ratio such as the price to earnings p e ratio as the earnings multiple understanding the multiples approachgenerally multiples is a generic term for a class of different indicators that can be used to value a stock a multiple is simply a ratio that is calculated by dividing the market or estimated value of an asset by a specific item on the financial statements the multiples approach is a comparables analysis method that seeks to value similar companies using the same financial metrics an analyst using the valuation approach assumes that a particular ratio is applicable and applies to various companies operating within the same line of business or industry in other words the idea behind multiples analysis is that when firms are comparable the multiples approach can be used to determine the value of one firm based on the value of another the multiples approach seeks to capture many of a firm s operating and financial characteristics e g expected growth in a single number that can be multiplied by a specific financial metric e g ebitda to yield an enterprise or equity value common ratios used in the multiples approachenterprise value multiples and equity multiples are the two categories of valuation multiples enterprise value multiples include the enterprise value to sales ratio ev sales ev ebit and ev ebitda equity multiples involve examining ratios between a company s share price and an element of the underlying company s performance such as earnings sales book value or something similar common equity multiples include the price to earnings p e ratio the price earnings to growth peg ratio the price to book ratio p b and the price to sales p s ratio equity multiples can be artificially impacted by a change in capital structure even when there is no change in enterprise value ev since enterprise value multiples allow for direct comparison of different firms regardless of capital structure they are said to be better valuation models than equity multiples additionally enterprise valuation multiples are typically less affected by accounting differences since the denominator is computed higher up on the income statement however equity multiples are more commonly used by investors because they can be calculated easily and are readily available via most financial websites and newspapers using the multiples approachinvestors start the multiples approach by identifying similar companies and evaluating their market values a multiple is then computed for the comparable companies and aggregated into a standardized figure using a key statistics measure such as the mean or median the value identified as the key multiple among the various companies is applied to the corresponding value of the firm under analysis to estimate its value when building a multiple the denominator should use a forecast of profits rather than historical profits unlike backward looking multiples forward looking multiples are consistent with the principles of valuation in particular that a company s value equals the present value of future cash flow not past profits and sunk costs example of the multiples approachlet s assume that an analyst wants to conduct the multiples approach to compare where major banking stocks trade in relation to their earnings they can do this easily by creating a watchlist of the s p 500 s four largest banking stocks with each bank s p e ratio like in the hypothetical example below an analyst can quickly see that citigroup trades at a discount to the other three banks in relation to its earnings having the lowest p e ratio of the group at 15 4x wells fargo meanwhile has a far larger p e multiple nearing 100x likely due to poor earnings that are expected to turn around the p e ratio mean or average of the four stocks is calculated by adding them together and dividing the number by four the analyst now knows that bank of america jp morgan and citigroup all trade at a discount to the major bank p e ratio mean using the multiples approach | |
what are the advantages and disadvantages of the multiples approach | the advantage of the multiple approach is that it is simple and quick allowing investors and analysts to gather valuable insight without having to perform detailed calculations or research the disadvantages are that it takes financial information and boils it down to one number disregarding the complexities of that financial information | |
what are important financial ratios to evaluate a company | some of the most important financial ratios to evaluate companies are price to earnings p e debt to equity d e price to book p b return on equity return on invested capital and profit margin | |
what is ev ebitda | ev ebitda is a financial ratio that compares a company s enterprise value to its earnings before interest taxes depreciation and amortization ebitda enterprise value is the economic value of a company the ratio is used to measure a company s return on investment roi the bottom lineanalysts and investors need ways to compare companies to provide recommendations accurate analysis and to make investment decisions the multiples approach allows for a simple way that companies can be analyzed and compared to one another and the overall industry | |
what is a multiplier | in economics a multiplier broadly refers to an economic factor that when increased or changed causes increases or changes in many other related economic variables in terms of gross domestic product the multiplier effect causes gains in total output to be greater than the change in spending that caused it the term multiplier is usually used in reference to the relationship between government spending and total national income multipliers are also used in explaining fractional reserve banking known as the deposit multiplier investopedia julie bangexplaining multipliersa multiplier is simply a factor that amplifies or increase the base value of something else a multiplier of 2x for instance would double the base figure a multiplier of 0 5x on the other hand would actually reduce the base figure by half many different multipliers exist in finance and economics the fiscal multiplier is the ratio of a country s additional national income to the initial boost in spending or reduction in taxes that led to that extra income for example say that a national government enacts a 1 billion fiscal stimulus and that its consumers marginal propensity to consume mpc is 0 75 consumers who receive the initial 1 billion will save 250 million and spend 750 million effectively initiating another smaller round of stimulus the recipients of that 750 million will spend 562 5 million and so on an investment multiplier similarly refers to the concept that any increase in public or private investment has a more than proportionate positive impact on aggregate income and the general economy the multiplier attempts to quantify the additional effects of a policy beyond those immediately measurable the larger an investment s multiplier the more efficient it is at creating and distributing wealth throughout an economy the earnings multiplier frames a company s current stock price in terms of the company s earnings per share eps of stock it presents the stock s market value as a function of the company s earnings and is computed as price per share earnings per share commonly called the earnings multiple the equity multiplier is a commonly used financial ratio calculated by dividing a company s total asset value by total net equity it is a measure of financial leverage companies finance their operations with equity or debt so a higher equity multiplier indicates that a larger portion of asset financing is attributed to debt the equity multiplier is thus a variation of the debt ratio in which the definition of debt financing includes all liabilities the keynesian multiplier theoryone popular multiplier theory and its equations were created by british economist john maynard keynes keynes believed that any injection of government spending created a proportional increase in overall income for the population since the extra spending would carry through the economy in his 1936 book the general theory of employment interest and money keynes wrote the following equation to describe the relationship between income y consumption c and investment i y c iwhere y incomec consumptioni investment begin aligned y c i textbf where y text income c text consumption i text investment end aligned y c iwhere y incomec consumptioni investment the equation states that for any level of income people spend a fraction and save invest the remainder he further defined the marginal propensity to save and the marginal propensity to consume mpc using these theories to determine the amount of a given income that is invested keynes also showed that any amount used for investment would be consumed or reinvested many times over by different members of society the fractional reserve money multiplierassume a saver invests 100 000 in a savings account at his or her bank because the bank is only required to maintain a portion of that money on hand to cover deposits it can loan out the remainder of the deposit to another party assume the bank loans out 75 000 of the initial deposit to a small construction company which uses it to build a warehouse over time if the bank continues to lend up to its required reserve ratio r 25 the amount of additional demand deposits or money created by the initial deposit will be 1 r or 1 25 4 times which is typically called the money multiplier the funds spent by the construction company go to pay electricians plumbers roofers and various other parties to build it these parties then go on to spend the funds they receive according to their own interests the 100 000 has earned a return for the investor the bank the construction company and the contractors that built the warehouse since keynes theory showed that investment was multiplied increasing incomes for many parties keynes coined the term multiplier to describe the effect the deposit multiplier is frequently confused or thought to be synonymous with the money multiplier however although the two terms are closely related they are not interchangeable if banks loaned out all available capital beyond their required reserves and if borrowers spent every dollar borrowed from banks then the deposit multiplier and the money multiplier would be essentially the same in actual practice the money multiplier which designates the actual multiplied change in a nation s money supply created by loan capital beyond bank s reserves is always less than the deposit multiplier which can be seen as the maximum potential money creation through the multiplied effect of bank lending | |
what is the multiplier effect | the multiplier effect refers to the proportional amount of increase or decrease in final income that results from an injection or withdrawal of capital the multiplier effect measures the impact that a change in economic activity like investment or spending will have on total economic output this degree of amplification is known as the multiplier investopedia mira norianunderstanding the multiplier effectgenerally economists are most interested in how infusions of capital positively affect income or growth many economists believe that capital investments of any kind whether it be at the governmental or corporate level will have a broad snowball effect on various aspects of economic activity as its name suggests the multiplier effect provides a numerical value or estimate of a magnified expected increase in income per dollar of investment in general the multiplier used in gauging the multiplier effect is calculated as follows multiplier change in income change in spending begin aligned text multiplier frac text change in income text change in spending end aligned multiplier change in spendingchange in income the multiplier effect can be seen in several different types of scenarios and is used by a variety of different analysts when estimating expectations for new capital investments example of the multiplier effectassume a company makes a 100 000 capital investment to expand its manufacturing facilities in order to produce more and sell more after a year of production with the new facilities operating at maximum capacity the company s income increases by 200 000 this means that the multiplier effect was 2 200 000 100 000 simply put every 1 of investment produced an extra 2 of income the keynesian multipliermany economists believe that new investments can go far beyond just the effects of a single company s income depending on the type of investment it may have widespread effects on the economy at large a key tenet of keynesian economic theory is that of the multiplier the notion that economic activity can be easily influenced by investments causing more income for companies more income for workers more supply and ultimately greater aggregate demand essentially the keynesian multiplier is a theory that states the economy will flourish the more the government spends and the net effect is greater than the exact dollar amount spent different types of economic multipliers can be used to help measure the exact impact that changes in investment have on the economy for example when looking at a national economy overall the multiplier would be the change in real gdp divided by the change in investments government spending changes in income brought about by changes in disposable income through tax policy or changes in investment spending resulting from monetary policy via changes in interest rates some economists also like to factor in estimates for savings and consumption this involves a slightly different type of multiplier when looking at savings and consumption economists might measure how much of the added income consumers are saving versus spending if consumers save 20 of new income and spend 80 of new income then their marginal propensity to consume mpc is 0 8 using an mpc multiplier the equation would be mpc multiplier 1 1 mpc 1 1 0 8 5 where mpc marginal propensity to consume begin aligned text mpc multiplier frac 1 1 text mpc frac 1 1 0 8 5 textbf where text mpc text marginal propensity to consume end aligned mpc multiplier 1 mpc1 1 0 81 5where mpc marginal propensity to consume therefore in this example every new production dollar creates an extra spending of 5 money supply multiplier effecteconomists and bankers often look at a multiplier effect from the perspective of banking and a nation s money supply this multiplier is called the money supply multiplier or just the money multiplier the money multiplier involves the reserve requirement set by the federal reserve and it varies based on the total amount of liabilities held by a particular depository institution in general there are multiple levels of money supply across the entire u s economy the most familiar ones are 1 | |
when a customer makes a deposit into a short term deposit account the banking institution can lend one minus the reserve requirement to someone else while the original depositor maintains ownership of their initial deposit the funds created through lending are generated based on those funds if a second borrower subsequently deposits funds received from the lending institution this raises the value of the money supply even though no additional physical currency actually exists to support the new amount | the money supply multiplier effect can be seen in a country s banking system an increase in bank lending should translate to an expansion of a country s money supply the size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves when the reserve requirement decreases the money supply reserve multiplier increases and vice versa back in 2020 prior to the covid 19 pandemic the fed mandated that institutions with more than 127 5 million have reserves of 10 of their total deposits however as the pandemic sparked an economic crisis the fed took a dramatic step on march 26 2020 it reduced the reserve ratio to 0 essentially eliminating these requirements entirely to free up liquidity 2most economists view the money multiplier in terms of reserve dollars and that is what the money multiplier formula is based on theoretically this leads to a money supply reserve multiplier formula of msrm 1 rrr where msrm money supply reserve multiplier rrr reserve requirement ratio begin aligned text msrm frac 1 text rrr textbf where text msrm text money supply reserve multiplier text rrr text reserve requirement ratio end aligned msrm rrr1 where msrm money supply reserve multiplierrrr reserve requirement ratio for example in the case of banks with the highest required reserve requirement ratio 10 prior to covid 19 their money supply reserve multiplier would be 10 1 0 10 this means every one dollar of reserves should have 10 in money supply deposits if the reserve requirement is 10 then the money supply reserve multiplier is 10 and the money supply should be 10 times reserves when a reserve requirement is 10 this also means that a bank can lend 90 of its deposits investopedia sabrina jianglooking at the money multiplier in terms of reserves helps one to understand the amount of expected money supply in this example 651 equates to reserves of 65 13 if banks are efficiently using all of their deposits lending out 90 then reserves of 65 should result in a money supply of 651 if banks are lending more than their reserve requirement allows then their multiplier will be higher creating more money supply if banks are lending less then their multiplier will be lower and the money supply will also be lower moreover when 10 banks were involved in creating total deposits of 651 32 these banks generated a new money supply of 586 19 for a money supply increase of 90 of the deposits types of multipliersa multiplier may occur in a variety of ways impacting different instruments or balances the most common types of multipliers are below impact of multiplier effectthe multiplier effect has several implications on an economy first the multiplier effect often has a positive impact on the economy and economic growth instead of being limited to the actual quantity of funds in possession or in circulation the multiplier effect can scale programs and allow for more efficient use of capital multiplier effects may also impact economies in different ways first economies experience direct impacts when an economic factor is directly attributed to an entity for example when a government awards a tax incentive to an individual that individual is said to have received the direct financial impact however the multiplier effect incorporates two additional impacts the indirect impact and the induced impact the indirect impact of the government benefit above is that the individual takes their tax benefit and spends it these funds do not sit idly by in one bank account it may be spread across a dozen different businesses potentially relating to grocery stores restaurants car dealerships or online purchases the last impact induced impact highlights the true benefit of multiple effects although a single individual received a tax benefit many companies and their employees benefited for example imagine the individual dined at a restaurant and left a tip that tip would now be the benefit of the waitstaff who may buy a crafted item at a local market and increase the income of a local artist as currency flows through an economy more than one individual or entity may residually receive benefits from a financial instrument therefore the single tax benefit is said to have a multiplier effect on the economy | |
what is a multiplier | in economics a multiplier broadly refers to an economic factor that when changed causes changes in many other related economic variables the term is usually used in reference to the relationship between government spending and total national income in terms of gross domestic product the multiplier effect causes changes in total output to be greater than the change in spending that caused it | |
how does the multiplier effect fit into keynesian economics | the multiplier effect is one of the chief components of keynesian countercyclical fiscal policy a key tenet of keynesian economic theory is the notion that an injection of government spending eventually leads to added business activity and even more spending which boosts aggregate output and generates more income for companies this would translate to more income for workers more supply and ultimately greater aggregate demand 3 | |
how is the multiplier effect related to mpc | the magnitude of the multiplier is directly related to the marginal propensity to consume mpc which is defined as the proportion of an increase in income that gets spent on consumption for example if consumers save 20 of new income and spend the rest then their mpc would be 0 8 1 0 2 the multiplier would be 1 1 0 8 5 so every new dollar creates extra spending of 5 essentially spending from one consumer becomes income for a business that then spends on equipment worker wages energy materials purchased services taxes and investor returns when a worker from that business spends their income it perpetuates the cycle | |
is a high multiplier good | each type of multiplier is individually defined and often has different metrics that define success very broadly speaking most multipliers that are high indicate higher economic output or growth for example a higher money multiplier by banks often signals that currency is being cycled through an economy more times and more efficiently often leading to greater economic growth | |
what causes the multiplier effect | some multiplier effects are simply the product of metric analysis as one number is compared to another in other cases the multiplier effect is a product of public policy or corporate governance for example the government may establish boundaries on how many times a deposit may be cycled through an economy these regulations are often in place to restrict the multiplier effect otherwise financial institutions may become encumbered with too much risk the bottom linemultiplier effects describe how small changes in financial resources such as the money supply or bank deposits can be amplified through modern economic processes sometimes to great effect john maynard keynes was among the first to describe how governments can use multipliers to stimulate economic growth through spending in fractional reserve banking the money multiplier or deposit multiplier effect shows how banks can re lend a portion of the deposits on hand to increase the amount of money in the economy in this way commercial banks have a large degree of influence on economic outcomes | |
what was the mumbai interbank offer rate mibor | the mumbai interbank offer rate mibor was the rate at which banks in india wanted to charge other banks to lend them money it was used in conjunction with the mumbai interbank bid mibid rate which was the rate banks wanted to pay to borrow money the mibor was the indian version of the london intrabank offer rate and was fixed for funds that ranged from overnight to three months understanding the mumbai interbank offer rate mibor banks borrow and lend money to one another on the interbank market to maintain appropriate legal liquidity levels and to meet reserve requirements placed on them by regulators interbank lending rates are made available only to the largest and most creditworthy financial institutions mibor was the asking rate for overnight to three month loans calculated every day by the national stock exchange of india nse as a weighted average of proposed lending rates data was gathered by polling 30 major banks throughout india on the rates they intended to use to lend funds to their most trusted borrowers history of the miborthe mibor was launched on june 15 1998 by the indian national stock exchange nse committee for the development of the debt market as a benchmark for the call money market the nse launched the 14 day mibor on november 10 1998 and the one month and three month mibors on december 1 1998 between 1998 and 2015 mibor rates were used as benchmark rates for the majority of money market deals made in india in 2015 it was decided that polled respondents could too easily manipulate mibor by exaggerating their rate estimates for profitability purposes the latest version of mibor is the financial benchmarks india pvt ltd fbil overnight mumbai interbank outright rate fbil overnight mibor which is based on actual transaction rates and includes a maximum and minimum rate 1mibor vs mibidoriginally mibor was the rate that banks wanted to be paid for overnight loans in 2015 it was replaced by the fbil overnight mibor due to concerns that the banks polled could easily falsify the rates they claimed they were going to charge the new mibor is based on observable rates so there is no question of whether the rate estimations are accurate or honest the mumbai interbank bid rate mibid was the companion rate to the original mibor in that it was the rate at which banks wanted to pay for a loan it was lower than the mibor rate which created a bid ask spread between the two rates mibid was also discontinued in 2015 instead of using two rates created by polling banks the fbil overnight mibor is a range of rates calculated by observing transactions between banks rather than asking them what rates they would charge and ask | |
what is the interbank offered rate | interbank offered rates are interest rates charged between banks on overnight loans these rates are important because they are considered risk free rates many other rates are based on | |
what is the mumbai interbank forward rate | the mumbai interbank forward offer rate was the rate used to set prices on forward rate agreements and derivatives in india before it was discontinued in 2018 2 | |
what is the difference between libor and mibor | the london intrabank offered rate libor was set by submissions from a panel of banks in the u k and was used by several countries libor was replaced by the secured overnite financing rate sofr the original mumbai intrabank overnight rate was india s version of libor and was set based on polls from 30 banks and dealers in india but it was replaced in 2015 by the fbil overnight mibor the bottom linethe mumbai intrabank offered rate was the overnight rate banks charged each other for loans in india it was used in conjunction with mibid to create a rate spread for banks rates were derived by polling specific banks and dealers who could influence rates based on the probability of profitability it was replaced in 2015 by the fbil overnight mibor which is a rate range calculated using the weighted averages of transactions occurring in the indian market | |
what is a municipal bond | the term municipal bond refers to a type of debt security issued by local county and state governments they are commonly offered to pay for capital expenditures including the construction of highways bridges or schools municipal bonds act like loans with bondholders becoming creditors in exchange for borrowed capital bondholders investors are promised interest on their principal balance the latter being repaid by the maturity date municipal bonds are often exempt from most taxes which makes them attractive to people in higher income tax brackets types of municipal bonds include general obligation and revenue bonds investopedia jake shiunderstanding municipal bondsa municipal bond is a debt obligation issued by a nonprofit organization a private sector corporation or another public entity using the loan for public projects such as constructing schools hospitals and highways municipal bonds which are also known as muni bonds or munis can generate tax free income for qualified residents but pay lower coupon interest rates as a result compared with taxable bonds types of municipal bondsa municipal bond is categorized based on the source of its interest payments and principal repayments a bond can be structured in different ways offering various benefits risks and tax treatments income generated by a municipal bond may be taxable for example a municipality may issue a bond not qualified for federal tax exemption resulting in the generated income being subject to federal taxes the value of municipal bonds outstanding as of q4 2023 1risks of municipal bondsdefault risk is low for municipal bonds compared with corporate bonds however revenue bonds are more vulnerable to changes in consumer tastes or general economic downturns than go bonds for example a facility delivering water treating sewage or providing other fundamental services has more dependable revenue than a park s rentable shelter area as a fixed income security the market price of a municipal bond fluctuates with changes in interest rates when interest rates rise bond prices decline when interest rates decline bond prices rise in addition a bond with a longer maturity is more susceptible to interest rate changes than a bond with a shorter maturity causing even greater changes in the municipal bond investor s income furthermore the majority of municipal bonds are illiquid an investor needing immediate cash has to sell other securities instead many municipal bonds carry call provisions allowing the issuer to redeem the bond prior to the maturity date an issuer typically calls a bond when interest rates drop and reissues municipal bonds at a lower interest rate when a bond is called investors lose income from interest payments and face reinvesting in a bond with a lower return | |
what is the minimum amount you need to invest in municipal bonds | most municipal bonds are issued in 5 000 increments municipal bonds may be included in some exchange traded funds etfs as well as mutual funds allowing investors to purchase bond fractions | |
what term lengths are available for municipal bonds | municipal bonds are available in a variety of terms ranging from two to 30 years 2 | |
what are the benefits of a municipal bond | although municipal bonds may have lower interest rates than riskier investments like corporate bonds or stocks they offer stability for your capital with low default rates interest from munis is also generally exempt from federal taxes making it an attractive investment the bottom linemunicipal bonds are debt instruments issued by local governments to finance the needs of a community such as the building of a community center or park they offer investors a low risk investment of fixed income and can be a good option to diversify a bond portfolio | |
what is the municipal securities rulemaking board msrb | the municipal securities rulemaking board msrb is a regulating body that creates rules and policies for investment firms and banks in the issuing and sale of municipal bonds notes and other municipal securities states cities and counties issue municipal securities for a variety of reasons activities regulated by the msrb include the underwriting trading and selling of municipal securities that are financing public projects understanding the municipal securities rulemaking boardthe municipal securities rulemaking board ms rb is a self regulating organization sro managed by a board of directors with four committees that oversee specific aspects of the organization s governance and operation like the new york stock exchange nyse or the national association of securities dealers nasd finra the msrb sets its own rules and standards but which are subject to ultimate supervision by the securities and exchange commission sec 1 the u s congress created the municipal securities rulemaking board in 1975 it was given the assignment of creating rules and policies that would help prevent fraud and misleading acts in the securities industry the msrb was also designed to implement and support fair trading principles in addition it was tasked with creating and maintaining a system that would allow free and open trade in the securities market one of its first accomplishments was creating a set of uniform standards dictating fair practices that municipal securities dealers should follow the organization was also instrumental in paving the way for a smooth transition from traditional paper bonds to electronic versions in the 1980s 2 types of municipal securities the msrb overseesa municipal bond is categorized based on the source of its interest payments and principal repayments a bond can be structured in different ways offering various benefits risks and tax treatments disclosure and the regulatory role of the msrbin the 1980s the municipal securities rulemaking board played a central role in assisting the sec in creating sec rule 15c2 12 which focuses on continuing disclosure this ensures that issuers of municipal securities must agree to provide specific information to the msrb on a regular basis about the investment securities they handle this information includes annual financial reports and notices about events such as delinquencies defaults unscheduled draws on debt service reserves and any activities that would affect the tax exempt status of the security 3 this rule and related principles involving disclosures were prompted by an incident in 1983 in which the washington public power supply system defaulted on more than 2 billion in municipal bonds representing one of the biggest and most costly municipal bond disasters in u s history more recently the municipal securities rulemaking board has served a role as a pioneer in helping to usher in the age of open electronic records in the securities industry in the late 2000s the msrb launched the electronic municipal market access website which provides free public access to information related to municipal bond trading along with important disclosure documents 4 | |
what is murabaha | murabaha is an islamic financing structure in which the seller and buyer agree to the cost and markup of an asset it s also referred to as cost plus financing the markup takes the place of interest which is illegal in islamic law murabaha isn t an interest bearing loan or qardh ribawi it s an acceptable form of credit sale under islamic law the purchaser doesn t become the true owner until the loan is fully paid as with a rent to own arrangement understanding murabahaa client in a murabaha contract of sale petitions a bank to purchase an item on their behalf the bank establishes a contract setting the cost and profit for the item with repayment typically in installments a set fee is charged rather than riba or interest so this type of loan is legal in islamic countries 1islamic banks are prohibited from charging interest on loans according to the religious tenet that money is only a medium of exchange and has no inherent value banks must therefore charge a flat fee for continuing daily operations many argue that this is simply another method of charging interest but the difference lies in the structure of the contract the bank buys an asset and then sells it back to the client with a profit charge in a murabaha contract for sale this type of transaction is halal or valid according to islamic sharia shar ah issuing conventional loans and charging interest on them are considered interest based activities and these are haram prohibited according to islamic shar ah murabaha and defaultadditional charges may not be imposed after a murabaha due date and this makes murabaha default an increasing concern for islamic banks many banks believe that defaulters should be blacklisted and not allowed future loans from any islamic bank as a method of decreasing murabaha default this arrangement is permissible in sharia even if it s not expressly mentioned in the loan agreement respite may be given as described in the quran if a debtor is facing a genuine hardship and can t repay a loan on time the government can take action in cases of willful default however defaults under murabaha arrangements have become a problem for companies operating under islamic law and there has been no clear consensus on how to deal with them use of murabahathe murabaha form of financing is typically used in place of loans in diverse sectors consumers use murabaha when purchasing household appliances cars or real estate businesses use this type of financing when purchasing machinery equipment or raw materials murabaha is also commonly used in short term trade such as issuing letters of credit for importers a murabaha letter of credit is issued on behalf of an applicant or importer the bank issuing the letter of credit agrees to pay an amount of money in compliance with the terms described in the letter of credit the bank s creditworthiness replaces that of the applicant so the beneficiary or exporter is guaranteed payment this benefits the exporter because the bank assumes the payment risk the importer is required to repay the bank for the cost of goods plus a profit markup amount following the murabaha contract provisions example of murabahabilal would like to buy a boat that sells for 100 000 from x boat shop bilal would contact a murabaha bank to do so the bank would buy the boat from x boat shop for 100 000 and sell it to bilal for 109 000 to be paid in installments over three years the amount bilal pays is a fixed amount to a bank that owns the asset there s no interest charge involved bilal would not incur additional charges for default on any payments the additional amount bilal pays over the cost price from the boat shop is in effect a 3 loan but it s allowed by islamic law because it s offered as a fixed payment without any additional costs | |
what is a rent to own agreement | rent to own agreements are common in the united states as an option for consumers who want to become homeowners but don t have the necessary funds to make a down payment to purchase a home they re similar to murabaha in some ways a lease is entered into that provides the tenant with an option to ultimately buy the property at a predetermined time the rental amount usually includes a non refundable percentage that s set aside by the landlord toward the eventual down payment 2 | |
what countries use murabaha | murabaha financing was used in bahrain malaysia indonesia saudi arabia bangladesh and pakistan as of 2023 other smaller nations also rely on this financing structure and many offer other financing options as well more than 65 of wholesale islamic banks in bahrain used murabaha in 2022 3 | |
what is willful default | willful default is the intentional failure to perform under the terms of a contract or obligation the defaulter deliberately violates the terms this type of default isn t committed due to misguidance negligence or carelessness willful defaulters know that their course of action is wrong but they proceed anyway 4the bottom lineinterest bearing loans are prohibited under islam s sharia law but this doesn t mean that islamic consumers don t ever need financing murabaha financing is used instead this type of financing doesn t charge interest but a markup is built into repayment the consumer doesn t own the product until the loan is fully paid as with interest bearing financing islamic law provides that money has no real value in and of itself so banks charge a flat extra fee for extending loans instead | |
what is musharakah | musharakah is a joint enterprise or partnership structure in islamic finance in which partners share in the profits and losses of an enterprise since islamic law sharia does not permit profiting from interest in lending musharakah allows for the financier of a project or company to achieve a return in the form of a portion of the actual profits according to a predetermined ratio however unlike a traditional creditor the financier also will share in any losses should they occur also on a pro rata basis musharakah is a type of shirkah al amwal or partnership which in arabic means sharing understanding musharakahmusharakah plays a vital role in financing business operations based on islamic principles for example suppose that individual a wants to start a business but has limited funds individual b has excess funds and wishes to be the financier in musharakah with a the two people would come to an agreement to the terms and begin a business in which both share a portion of the profits and losses this negates the need for a to receive a loan from b musharakah is frequently used in in real estate deals the partners request from a bank an assessment of the property s value via imputed rent the sum a partner might pay to live in the property in question profits are divided between partners in predetermined ratios based on the value that was assigned and the sum of their different stakes every party that puts up capital is entitled to a say in the property s management | |
when musharakah is employed to finance large purchases banks tend to lend by using floating rate interest loans pegged to a company s rate of return that peg serves as a lending partner s profit | musharakah are not binding contracts either party can terminate the agreement unilaterally types of musharakahwithin musharakah there are differing partnership arrangements a diminishing musharakah also known as a declining musharakah usually takes one of two forms a declining balance musharakah is common in home buying the lender generally a bank buys a property and receives payment from a buyer via monthly rent payments until the whole balance is paid off in the case of a default both the buyer and lender get a share of the proceeds from the sale of the property on a pro rata basis this differs from more traditional lending structures which have the lender alone benefiting from any property sale following a foreclosure | |
where is musharakah practiced | musharakah is used in islamic financing around the world its system of partnership is used by islamic banks as well as by debt and equity markets countries where it is common include sudan kuwait the united arab emirates and malaysia | |
what is sharia in finance | sharia is a set of islamic religious laws as well as religious rituals these laws govern many day to day activities for muslims this includes the areas of finance banking and investments for example sharia prohibits investing in tobacco and alcohol based businesses as well as collecting interest | |
what is the difference between mudarabah and musharakah | musharakah is a type of joint partnership in which all partners participate in both the investment and the profits profits are shared proportionately based on the size of each partner s investment mudarabah is another type of islamic financing structure in which one partner provides the capital investment and the other provides labor or expertise profits are then shared according to a ratio that has been agreed on in advance the bottom linemusharakah is a type of joint financial partnership in islamic finance under islamic law profits from interested are not permitted mucharakah creates a structure in which all parties share in profits and losses if there is a default both lender and buyer receive a share of the proceeds from the sale of the property based on their investment in the partnership there are different types of musharakah which can be used in transactions ranging from real estate to financing a large purchase the arrangement can be temporary or permanent a permanent musharakah has no specific end date and continues until the involved parties decide to dissolve it | |
what is a mutual company | a mutual company is a private firm that is owned by its customers or policyholders the company s customers are also its owners as such they are entitled to receive a share of the profits generated by the mutual company the distribution of profits is typically made in the form of dividends paid on a pro rata basis based on the amount of business each customer conducts with the mutual company alternately some mutual companies choose to use their profits to reduce members premiums a mutual company is sometimes referred to as a cooperative | |
how a mutual company works | the mutual company structure is commonly found in the insurance industry and sometimes in savings and loans associations many banking trusts and community banks in the u s as well as credit unions in canada also are structured as mutual companies the first mutual insurance company was formed in england in the 17th century the word mutual was probably adopted to reflect the fact that the policyholder or customer was also the insurer or part owner the first insurance company in the u s was a mutual company the philadelphia contributionship for the insurance of houses from loss by fire it was founded in 1752 by none other than benjamin franklin most institutions that are structured as mutual companies are private entities rather than publicly traded companies in recent decades many mutual companies in the u s and canada have opted to change from a mutual structure to a joint stock corporate structure a process known as demutualization as part of this process policyholders get a one time award of stock in the newly created joint stock corporation there is little substantive difference between the two corporate structures a joint stock corporation is generally seen as more focused on short term profit while a mutual company may prioritize strong cash reserves in case of unusual claims levels advantages of a mutual companya major selling point of mutual insurance companies is its shared ownership structure policyholders get some of the cost of their premiums back in the form of dividends or reduced premium prices many mutual companies have changed to a joint stock corporate structure this process is called demutualization for example lawyers mutual insurance co a california based company recently paid a 10 dividend to its shareholders it has paid dividends for 23 consecutive years as suggested by the name of that company mutual companies often are specialized they were formed by and for a group of professionals who often have common needs | |
what is a mutual fund | mutual funds are pooled investments managed by professional money managers they trade on exchanges and provide investors with access to a wide mix of assets selected for the fund a professional fund manager handles this mix of investments and the fund s assets and goals are detailed in the prospectus for those who deposit into their mutual funds from their paychecks they offer automatic investing and lower investment risk than buying stocks on your own because most funds have diverse holdings investopedia ellen lindnerthese funds hold much of the retirement funds of middle income americans but this wasn t always the case in 1980 under 6 of u s households had money in mutual funds 1 by 2023 about 52 of american households were invested in them and these households held shares for a vast majority 88 of all mutual fund assets 23 | |
when setting aside their money in mutual funds these households can access a broad range of investments which can help cut their risk compared to investing in a single stock or bond investors earn returns based on the fund s performance minus any fees or expenses charged mutual funds are often the investment of choice for middle america providing a broad swath of middle income workers with professionally managed portfolios of equities bonds and other asset classes 3 | understanding mutual fundsmutual funds are defined as a portfolio of investments funded by all the investors who have purchased shares in the fund so when an individual buys shares in a mutual fund they gain part ownership of all the underlying assets the fund owns the fund s performance depends on how its collective assets are doing when these assets increase in value so does the value of the fund s shares conversely when the assets decrease in value so does the value of the shares the mutual fund manager oversees the portfolio deciding how to divide money across sectors industries companies etc based on the strategy of the fund about half of the mutual funds held by american households are in index equity funds which have portfolios that comprise and weigh the assets of indexes to mirror the s p 500 or the dow jones industrial average djia 4 the largest mutual funds are managed by vanguard and fidelity they are also index funds these generally have limited investment risk unless the entirety of the market goes down nevertheless over the long run index funds tied to the market have gone up helping to meet the investment objectives of many future retirees most mutual funds are part of larger investment companies or fund families such as fidelity investments vanguard t rowe price and oppenheimer |
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