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what was the housing act of 1949 | the housing act of 1949 was passed to help address the decline of urban housing following the post world war ii exodus to the suburbs a part of the harry truman administration s fair deal it provided governance over how government financial resources would shape the growth of american cities specifically by increasing the fha s mortgage insurance thus making home financing and homeownership more widespread and providing federal funds for slum clearance and public housing projects committing the government to build 810 000 new units 12the consensus is that the act mostly failed in part because large scale slum clearance proved a crude and largely unworkable redevelopment method urban renewal also failed because concerns over social equity such as where to house dislocated people were inadequately addressed twenty five years after the act s passage many observers concluded that public housing and urban renewal programs were fostering the slums and blight that they were meant to eradicate however the act s homeownership goals were by and large met successfully expanding fha authorization did make it easier for many americans to own homes although fha guidelines did still discriminate against non white borrowers | |
what was the fair housing act of 1968 | the fair housing act of 1968 outlaws discrimination against home renters and buyers by landlords sellers and lenders on account of their race color religion national origin later amendments added sex disability and familial status the act is enforced by the u s department of housing and urban development hud 8 the u s department of justice can file suit under the act if there is a pattern or practice of discrimination or where a denial of rights to a group raises an issue of general public importance 13states can enhance but cannot reduce the protections under the fair housing act | |
what was the outcome of the fair housing act of 1968 | despite the historic nature of the fair housing act and its stature as the last major act of legislation of the civil rights movement housing remained segregated and discrimination continued in many regions of the u s in 1974 the federal government expanded the fair housing act of 1968 to include protections for gender 8 in 1988 congress passed the fair housing amendments act which expanded the law to prohibit discrimination in housing based on disability or family status strengthening protections for pregnant women and minor children 14 various state and local jurisdictions have added specific protections for sexual orientation and other categories the bottom linethe national housing act was a landmark piece of legislation its main accomplishment the fha remains an important part of the u s housing finance system providing mortgage insurance and other subsidies that make loans possible to thousands of low and middle income americans each year through the agency it created the national housing act was instrumental in homeownership becoming part of the american dream unfortunately that same agency also helped to deny the dream to many americans and created a legacy of redlining and income inequality | |
what is national income accounting | national income accounting is a bookkeeping system that a government uses to measure the level of the country s economic activity in a given time period accounting records of this nature include data regarding total revenues earned by domestic corporations wages paid to foreign and domestic workers and the amount spent on sales and income taxes by corporations and individuals residing in the country investopedia matthew collinsunderstanding national income accountingalthough national income accounting is not an exact science it provides useful insight into how well an economy is functioning and where money is being generated and spent when combined with information regarding the associated population data regarding per capita income and growth can be examined over a period of time some of the metrics calculated by using national income accounting include the gross domestic product gdp gross national product gnp and gross national income gni the gdp is widely used for economic analysis on the domestic level and represents the total market value of the goods and services produced within a specific nation over a selected period of time in the u s the bureau of economic analysis bea prepares and publishes data on national income accounts examples of national income accounts published by the bea include domestic product and income personal product and income savings and investments and foreign transactions 1uses of national income accountingthe information collected through national income accounting can be used for a variety of purposes such as assessing the current standard of living or the distribution of income within a population additionally national income accounting provides a method for comparing activities within different sectors of an economy as well as changes within those sectors over time a thorough analysis can assist in determining overall economic stability within a nation for example the u s uses information regarding the current gdp in the formation of various policies the commonly used formula for calculating gdp the expenditure approach is also known as the national income accounting equation the formula is gdp c g i nx | |
where | national income accounting vs economic policythe quantitative information associated with national income accounting can be used to determine the effect of various economic policies considered an aggregate of the economic activity within a nation national income accounting provides economists and statisticians with detailed information that can be used to track the health of an economy and to forecast future growth and development the data can provide guidance regarding inflation policy and can be especially useful in the transitioning economies of developing nations as well as statistics regarding production levels as related to shifting labor forces this data is also used by central banks to set and adjust monetary policy and affect the risk free rate of interest that they set governments also look at figures such as gdp growth and unemployment to set fiscal policy in terms of tax rates and infrastructure spending globally the international monetary fund imf the world bank and the organization for economic cooperation and development oecd put together national income accounting information and publish it criticisms of national income accountingthe accuracy of analysis relating to national income accounting is only as accurate as the data collected failure to provide the data in a timely fashion can render it useless in regard to policy analysis and creation additionally certain data points are not examined such as the impact of the underground economy and illegal production this means these activities are not reflected in the analysis even if their effect on the economy is strong as a result it can be argued that certain national accounts such as gdp or the consumer price index cpi used to measure inflation do not accurately capture the real economic output of the economy | |
what is a primary use for national income accounting | national income accounting is used to measure economic growth and activity it can also be useful in tracking trends and guiding monetary policy such as policy tax rate setting | |
what are the problems of national income accounting | the key issues with national income accounting are the exclusion of goods or services that have no monetary value and the possible double counting of goods other issues include the fact that black market goods are excluded and reliable and adequate data is generally lacking | |
what government purchases are included in national income accounting | national income accounting includes government purchases such as any federal state or local government spending government purchases include infrastructure spending such as buying steel for a project and paying employees however transfer payments such as social security payments are not included the bottom linenational income accounting assesses the economic activity of a nation from wages to corporate revenues to taxes and more the information allows policymakers economists and investors to make decisions in their respective fields based on the data analyzed without understanding the economic data of a nation it would be hard for policymakers to adjust monetary policy for example for investors to gauge where stocks may move and for economists to understand how economic factors impact all facets of life | |
what is a national insurance contribution nic | a national insurance contribution nic is a tax paid by british employees and employers to fund government benefits programs contributions are made through payroll deductions and are based on several criteria including an employee s age and earnings individuals need a national insurance number issued by the federal government before nics can be made the nic program works just like the federal insurance contributions act fica system in the u s | |
how national insurance contributions nics work | national insurance is a tax paid by individuals and corporations in the united kingdom it is a withholding tax just like fica in the united states employees and employers pay a share of the national insurance contributions which the employer collects through payroll deductions self employed individuals pay both portions employers regularly report these contributions to the her majesty s revenue and customs hmrc 1in order to begin paying individuals must have a national insurance number which is just like a social security number ssn taxpayers can apply for a nin online this number is unique to an individual so contributions are recorded against only one taxpayer s name 2taxpayers must make nics as long as they meet the following criteria employees can also make additional voluntary contributions so they can qualify for a higher pension amount in the future self employed people and british citizens working outside the country can also make voluntary contributions toward pension eligibility 4nics are collected to fund a number of benefit programs this is done by dividing employees into classes the table below highlights these classes and the benefit programs they fund the basic state pension in the u k is 156 20 each week 5 the full new state pension is 203 85 per week 6categories and rates for national insurance contributions nics employees are divided into different categories there are other categories for taxpayers who work in freeports individuals who don t make nics are categorized with the letter x 7each of these classifications is assigned a different rate based on the amount they earn per week an employee who works or expects to work fewer than 35 years will not qualify for the maximum pension benefit without making additional voluntary payments payouts may be higher for employees who make voluntary contributions or defer taking the benefit until a later age history of national insurance contributions nics british employees pay the national insurance from age 16 through the official retirement age which is age 65 for most but is being gradually increased to age 67 the system began with the national insurance act of 1911 and was limited to a government funded unemployment benefit 8at that time health insurance and pension benefits were administered by private trade unions and approved societies or professional associations an old age pension was paid to people over age 70 at a time when only one in four britons lived that long world war ii was nearing its end by the time the government began contemplating an expansion of the social safety net in great britain in march 1943 prime minister winston churchill in a radio broadcast promised a system of national compulsory insurance for all classes for all purposes from the cradle to the grave the system was not fully in place until 1948 9 a series of expansions in the 20th century extended its reach to add funding for the national health service the public retiree pension plan and unemployment benefits | |
what is a national insurance number | a national insurance number in the u k is a unique identifier assigned to one particular individual the number is used to administer the country s national insurance system and is similar to a social security number in the united states a person s ni number ensures that national insurance contributions are recorded against their name individuals can also use it to reference issues with the social security system | |
does everyone in the u k make national insurance contributions | individuals must meet certain eligibility criteria before they can begin making national insurance contributions employees must be 16 or older and must meet minimum income thresholds employers generally withhold employee contributions through payroll deductions self employed individuals are responsible for making their own contributions employers submit regular accounts of employee contributions to hmrc and complete form p45 when an employee is terminated | |
what do national insurance contributions fund | national insurance contributions made by employees in the united kingdom are used to fund various social benefit programs these include the country s pension system unemployment benefits and sickness benefits among others the bottom linemany countries have systems in place to fund social benefit programs the national insurance system in the united kingdom relies on contributions from employees over the age of 16 to pay for retiree pensions unemployment benefits and other related social programs individuals must have a valid national insurance number before contributions can be made national insurance contributions are similar to the fica system in the united states which funds social security and medicare | |
what is the national market system nms | the national market system nms promotes free market transparency by regulating how all major exchanges disclose and execute trades it is the system for equity trading and order fulfillment in the u s that consists of trading clearing depository and quote distribution functions the nms governs the activities of all formal u s stock exchanges and the nasdaq market understanding the national market system nms the national market system which was created by the securities acts amendments of 1975 is overseen by the national association of securities dealers nasd and nasdaq the nms governs exchange based trading such as on the new york stock exchange and otc trading on the nasdaq for practical purposes the nasdaq is considered an exchange even though the negotiations occur directly among market markers to facilitate the fair distribution of information the nms requires that exchanges make bids and offers ask price available and visible to both retail and institutional investors the advantages are an increase in liquidity and better prices however the system makes it difficult for institutions and large investors to execute large trades unnoticed some people argue that this visibility has pushed such trading off exchange fueling the expansion of private exchanges called dark pools on december 9 2020 the securities and exchange commission sec adopted new rules intended to modernize the infrastructure for the collection consolidation and dissemination of market data for exchange listed national market system stocks among other adopted rules the sec has updated and expanded the content of nms market data read more about these new rules here nms vs other otcnasdaq is the highest of four levels of over the counter otc trading where companies must meet specific criteria of capitalization profitability and trading activity also nasdaq provides more comprehensive intraday trading information that is available for the lower levels of otc stocks information includes last sale prices daily high and low prices cumulative volume and bid and ask quotes here market makers must report actual transacted prices and share sizes within 90 seconds of the transaction this requirement contrasts with the non real time reporting for non nms lower tier otc stocks the nasdaq while still a decentralized system for over the counter stock trading is a virtual exchange with all the regulations requirements and safeguards that come with clearing houses other otc markets have considerably fewer rules and safeguards otc markets break down into three tiers called the otcqx otcqb and pink sheets listing requirements decrease with each level also all of these markets are less stringent than exchanges covered by the national market system regulation national market system reg nms the securities and exchange commission sec saw a need to strengthen the nms and account for changing technology in 2005 they issued the regulation national market system reg nms which contains four main components probably most important of these rules was the order protection or trade through provision trade executions are provided at the best price no matter where that lowest price is available critics complained that it requires traders to transact on a trading venue that had the lowest price even though they would prefer doing business on the site with the fastest execution or the best reliability the feeling was that it would result in worse outcomes for institutional orders with all costs factored in | |
what is the national registration database | the national registration database nrd is a canadian database that was launched in 2003 to replace the original paper form system it allows security dealers and investment advisors to file registration forms electronically understanding the national registration database nrd the nrd increases the efficiency of the filing and sharing of information between provincial security regulators examples of items that need to be filed include a change in the information of a member firm and the termination of an investment advisor an individual or company who trades or underwrites securities or provides investment advice must register annually with one or more provincial securities regulators the goal is to protect the investing public by ensuring that only qualified and reputable individuals and firms are licensed the nrd was initiated by the canadian securities administrators csa and the investment industry regulatory organization of canada iiroc the csa is composed of securities regulators from each province and territory on the csa website investors can search for a company or individual to check if they are registered before they invest the nrd has two websites the nrd information website which contains information for the public and the national registration database for use by authorized representatives | |
why the nrd was formed | securities regulators recognized that the registration process could be drastically improved by introducing an electronic system that would replace the existing paper based system a national web based registration system could help the csa achieve its long term goals of easing the regulatory burden for capital market participants and harmonizing securities regulations across jurisdictions a study commissioned by the csa in 2001 estimated the total economic benefits of nrd to the canadian financial services industry would be 85 million over a five year period expected benefits of the nrdthe study also found that most of the gains would be realized as a result of efficiency gains for example the registration process would provide cash benefits to firms lower labor costs and save time large firms hoped to gain over 50 of the 85 million projected benefits and small firms hoped to benefit on a per registrant basis to a greater extent than large firms small firms expected benefits equal to 2 200 per registrant compared to 264 for each large firm registrant registering with the nrdto register with the nrd firms must pay a fee when they initially register firms and individuals must also pay a fee if they register in an additional jurisdiction or want to reactivate registration the fee is 75 for each form 33 109f4 which must be submitted for each individual or firm applying for registration and 20 50 for each form 33 109f4 which must be submitted for each individual applying for registration in each additional jurisdiction | |
what is the national retail federation nrf | the national retail federation nrf is a retail trade association founded in 1911 that is made up of members from all phases of the retail industry including department stores specialty discount catalog internet and independent retailers restaurant chains and grocers as well as businesses that supply goods and services to retailers the nrf formerly called the national retail dry goods association in 2011 forms an umbrella over many state national and international retail associations understanding the national retail federation nrf the national retail federation states that it is the largest association of retailers in the world it represents a wide variety of retail segments in the united states and over 45 countries it also holds a large annual convention dubbed the big show held in new york city over multiple days 3based in washington d c the nrf offers memberships to retailers industry partners universities and students and distributes retail focused publications such as newsletters and stores magazine 4the nrf has several divisions dealing with different aspects of retailing such as technology and education known as the voice of retail the nrf prides itself on representing the merchants that impact and connect with the everyday lives of the american consumer 5the nrf is also a lobbyist group that spends its time energy and money lobbying for and supporting legislature that impacts the retail industry and labor practices for example in july 2020 during the coronavirus pandemic the nrf lobbied that all retailers adopt a mask mandate for shoppers and employees in all stores 6the nrf foundationthe nrf created the nrf foundation a nonprofit to provide resources and experiences for those interested in jobs or long term careers in retail its main goal is to support the next generation of potential retail leaders the nrf foundation s offerings include a career center job boards and training it also provides scholarship programs for retail employees and students 7the foundation s rise up training and credential program offers skills and practical hands on opportunities for students at over 900 high schools career and technical education centers and workforce boards in the united states rise up s curriculum and exams are industry recognized the foundation created this program in collaboration with major retailers including walmart the home depot burlington stores macy s bjs wholesale club and nordstrom 8according to its website over 400 000 people received rise up credentials in addition the nrf foundation has awarded over half million dollars in college scholarships it provides in person and virtual programming to help interested young people and others learn more about the retail industry and gain introductions and insights from industry experts nrf membershipthe nrf offers memberships for retailers industry partners universities and global membership the federation of international retail associations fira depending on the membership nrf offers member specific networking and event opportunities access to curated online content like research reports and provides opportunities for advocating on policy issues university members gain access to exclusive events and content designed to benefit students studying the retail industry plus access to nrf supported scholarships for students at member universities 9the cost of membership varies depending on the category for example a university membership s annual fee is 1 000 fira s annual dues are 1 400 and membership dues for retailers and industry partners vary 9the national retail federation focuses on the strong representation of the retail industry and advocates for policies that support and protect the retail industry the nrf foundation works to educate the public about innovation in the industry and educate and encourage those interested in working in the retail market retail s big showthe nrf s big show is the oldest over 100 years old retail conference and expo in north america it typically takes place over four days in january at the javits center in new york city where it hosts tens of thousands of guests over 40 000 in 2020 with over 700 booths lectures classrooms industry gatherings networking opportunities guest speakers new tech demonstrations and innovation labs and a gala 10in 2021 the big show moved to a virtual format due to the coronavirus pandemic it will be back at the javits center in january 2022 for its usual four days plus an opening party the night before the conference hall opens 11nrf faqsthe purpose of the national retail federation is to act as an advocate for public policy that impacts retailers to educate lawmakers and the public about the role of retail to train young people for successful careers in the retail industry and to provide opportunities for fellowship networking and provide insights to nrf members like universities and associate retailers among others the national retail federation is run by a board of directors and an executive committee its chairman is mike george president and ceo of qurate retail inc 12the nrf offers a retail industry fundamentals credential program that you can earn by enrolling in the 10 lesson certification course the program offers a broad overview of topics in the retail industry including workplace safety economic impacts customer service and sales basics 13 | |
what is a national securities clearing corporation | national securities clearing corporation nscc is a subsidiary of depository trust clearing corporation dtcc that provides centralized clearing risk management information and settlement services to the financial industry the nscc offers multilateral netting so that brokers can offset buy and sell positions into a single payment obligation this reduces their financial exposure and capital requirements | |
how the national securities clearing corporation nscc works | the national securities clearing corporation was established in 1976 and is a registered clearing corporation regulated by the u s securities and exchange commission sec before its inception strong demand for paper stock certificates had become nearly overwhelming for many stock brokerages causing the stock exchanges to close once a week multilateral netting was proposed to overcome this problem this is an arrangement among multiple parties to sum transactions in a centralized area rather than settle them individually this helps avoid the need for multiple invoicing and payment settlements among various parties the decision to work with multilateral netting led to the formation of the nscc the nscc handles nearly all of the corporate equity and bond trades made each day in the united states it uses continuous net settlement cns to document transactions throughout the day and nets them into single positions at the end of each day today this corporation serves as a seller for every buyer and buyer for every seller for trades that settle in u s markets the nscc helps reduce the value of payments exchanged by an average of 98 daily also it s important to note that nscc generally clears and settles trades on a t 2 basis the nscc and the depository trust company or dtc another subsidiary of the dtcc play a significant part in the settlement and clearing of securities transactions they are the largest providers of these services worldwide nscc and depository trust clearing corporation dtcc as noted above nscc is a subsidiary of dtcc along with nscc dtcc manages an additional four clearing corporations and one depository dtcc is the world s largest financial services corporation dealing in post trade transactions dtcc s core function is to integrate nscc and dtc streamlining clearing and depository transactions to reduce costs and increase capital efficiency founded in 1973 dtcc remains one of the world s largest securities depositories the entity is organized as a limited purpose trust company and provides electronic safekeeping of securities balances also dtc acts as a clearinghouse to process and settle trades in corporate and municipal securities depository trust clearing corporation takes offsetting positions with clients in every transaction to ensures that transactions are completed promptly and efficiently clearing brokers associated with the dtcc are exchange members who help ensure that trades settle appropriately and that transactions are successful also these clearing brokers maintain paperwork associated with the clearing and executing of a transaction | |
what is the national securities markets improvement act nsmia | the national securities markets improvement act is a law passed in 1996 that sought to simplify securities regulation in the u s by apportioning more regulatory power to the federal government understanding national securities markets improvement act nsmia the national securities markets improvement act nsmia amended the investment company act of 1940 and the investment advisers act of 1940 and went into effect on jan 1 1997 its main consequence was to increase the authority of federal regulators at the expense of their state level counterparts a change that was expected to increase the efficiency of the financial services industry prior to the nsmia state level blue sky laws which were passed in order to protect retail investors from scams were considerably more powerful however because the securities subject to this regulation were already subject to hefty federal regulation it s likely these laws slowed things down in the market the nsmia reduced the amount of interplay between competing regulatory agencies by transferring most of the state s regulatory power to the federal government namely the securities and exchange commission sec the law states that covered securities are exempt from having to pass through the state s regulatory agencies today most stocks traded in the u s are considered covered securities in addition to the offers and sales of certain exempt securities the nsmia defines covered securities as securities that history of the national securities markets improvement act nsmia before the nsmia was enacted in 1996 the states blue sky laws had significant regulatory power over capital formation in the securities market the term blue sky law is said to have originated in the early 1900s gaining widespread use when a kansas supreme court justice declared his desire to protect investors from speculative ventures that had no more basis than so many feet of blue sky this law proved to be particularly necessary after the stock market crash in 1929 there was much uncertainty during this time and investors didn t have full trust that the stocks they were investing in were legitimate in fact many companies issued stock promoted real estate and other investment deals while making lofty unsubstantiated claims of greater profits to come at this time the sec did not yet exist and there was little regulatory oversight of the investment and financial industry as a whole however since the creation of the sec and advancements in technology and ledger systems blue sky laws simply duplicate the regulatory measures imposed by the sec which can slow down capital formation particularly among smaller businesses | |
what is the national stock exchange of india nse | the national stock exchange of india nse is india s largest financial market incorporated in 1992 and launched in 1994 the nse has developed into a sophisticated electronic market 1as of december 2023 the nse was the sixth largest stock exchange in the world as measured by market capitalization 2in january 2024 its market capitalization and that of the bombay stock exchange bse totaled 4 33 trillion making india the fourth largest stock market worldwide 3understanding the national stock exchange of indiatrading on the nse commenced in 1994 with the launch of the wholesale debt market and then a cash market segment shortly thereafter today nse conducts transactions in the equity wholesale debt and derivative markets 1the nse offers a solid market infrastructure and is seen as a driving force behind india s economic growth its high standards of operation and corporate governance underscore the attention it places on investor protection and access to capital 4the nse maintains market indices that track various market capitalizations volatility specific sectors and factor strategies one of the more popular these indexes is the cnx nifty 50 index the first of more than 350 nifty branded investments offered by the nse 5the nifty 50 index tracks the largest and most liquid assets in the indian equity market it s composed of 50 companies and covers 14 sectors of the indian economy 6u s investors can gain exposure to the index by investing in an exchange traded fund etf that tracks it such as the ishares india index etf xid 7in december 2023 the nse s market capitalization was 4 3 trillion the value of equity shares traded for that month was 247 55 billion 89the cnx nifty 50 index should not be confused with the compiled list known as the nifty fifty the nifty fifty is not a benchmark index but does contain the names of companies with global reach strong balance sheets and consistent growth the number of companies listed on india s national stock exchange in december 2023 10other considerationsthe nse is located in mumbai and is owned by a group of india s leading financial institutions it was established to bring greater transparency to the indian capital market it was the first exchange in india to provide fully automated electronic trading and the first with an electronic limit order book to trade derivatives and etfs since its inception its focus on modern trading systems has delivered to investors a securities market that s efficient transparent and growing in popularity the exchange supports more than 2 500 very small aperture terminals vsat making the nse the largest private wide area network in the country 11ashishkumar chauhan is the managing director and ceo of the exchange 12benefits of the nsethe nse is a premier marketplace for companies that wish to list on a major exchange the sheer volume of trading activity and application of automated systems promote greater transparency in trade matching and the settlement process this in itself can boost visibility in the market and lift investor confidence using cutting edge technology also allows orders to be filled more efficiently resulting in greater liquidity and accurate prices | |
how old is india s nse | the nse was established in 1992 but didn t commence operations until 1994 1 | |
what is the nse s purpose | the exchange believes its purpose is to improve the financial well being of people key characteristics are reliability expertise innovation and trust 13 | |
what roles does the nse have | the roles the indian stock exchange sees for itself are exchange regulator index provider data and analytics it services educator and market developer 13the bottom lineindia s national stock exchange has grown steadily in value and popularity it is the largest stock exchange in india followed by the bse in january 2024 it became the fourth largest stock market in the world when the combined market capitalization of it and the bse reached 4 33 trillion | |
what is nationalization | nationalization refers to the action of a government taking control of a company or industry which generally occurs without compensation for the loss of the net worth of seized assets and potential income the action may be the result of a nation s attempt to consolidate power resentment of foreign ownership of industries representing significant importance to local economies or to prop up failing industries understanding nationalizationnationalization is more common in developing countries privatization which is the transfer of government run operations into the private business sector occurs more frequently in developed countries nationalization is one of the primary risks for companies doing business in foreign countries due to the potential of having significant assets seized without compensation this risk is magnified in countries with unstable political leadership and stagnant or contracting economies the key outcome of nationalization is the redirection of revenues to the country s government instead of private operators who may export funds with no benefit to the host country nationalization and oilthe oil industry has experienced nationalization actions for decades dating back to mexico s nationalization of the assets of foreign producers such as royal dutch and standard oil in 1938 and iran s nationalization of the assets of anglo iranian 1951 the result of mexico s nationalization of foreigners oil assets was the creation of pemex which is one of the largest oil producers in the world after the nationalization of anglo iranian iran s economy fell into disarray and britain was allowed back in as a 50 partner a few years later in 1954 anglo iranian was renamed the british petroleum company in 2007 venezuela nationalized exxon mobil s cerro negro project and other assets seeking 16 6 billion in compensation exxon mobil was awarded approximately 10 of that amount by a world bank arbitration panel in 2014 nationalization in the united statesthe united states has technically nationalized several companies usually in the form of a bailout in which the government owns a controlling interest the bailouts of aig in 2008 and general motors company in 2009 amounted to nationalization but the u s government exerted very little control over these companies the government also nationalized the failing continental illinois bank and trust in 1984 finally selling it to bank of america in 1994 despite the temporary nature of most nationalization actions in the united states there are exceptions amtrak was transferred to government ownership after several railroad companies failed in 1971 after the terror attacks of sept 11 2001 the airport security industry was nationalized under the transportation security administration tsa | |
what is a natural gas etf | a natural gas exchange traded fund etf is a type of pooled investment product that provides investors with exposure to natural gas prices these funds are often overseen by a professional manager who invests on behalf of the investors and tend to invest in a basket of natural gas futures contracts rather than hold stocks of natural gas companies understanding natural gas etfsnatural gas is a commodity that serves many purposes it is used as a source of energy for heating cooking fuel and electricity generation as well as to manufacture plastics and other organic chemicals it is important for investors to understand the difference between natural gas etfs and other popular types of etfs many etfs own their underlying assets directly such as gold etfs that own physical bullion or industry sector etfs that own the shares of companies operating in their industry natural gas etfs however do not usually own any physical natural gas instead they own natural gas indirectly by purchasing natural gas futures contracts that trade on a commodities exchange the profitability of a natural gas etf is therefore dependent on the overall price direction of natural gas based on the trading that takes place on the commodities exchange the price of natural gas rises and falls according to fluctuations in supply and demand 1diversity of natural gas etf holdingsnatural gas etfs offer investors a range of strategies to gain exposure to the natural gas market most hold futures contracts though there are other opportunities listed below that also expose investors to the industry some natural gas etfs hold physical natural gas in storage facilities these funds purchase and store actual natural gas typically in the form of futures contracts and aim to track the spot price of the commodity investing in physical natural gas can provide a more direct and straightforward exposure to the commodity s price movements though there are obvious and significant carrying costs to this type of investment vehicle instead of holding physical natural gas many natural gas etfs use futures contracts to track the price of natural gas these funds invest in natural gas futures which are agreements to buy or sell the commodity at a predetermined price at a specified future date futures based etfs can provide exposure to short term price movements and can be more liquid than physical natural gas etfs some natural gas etfs invest in the equities of companies involved in the natural gas sector these companies can include natural gas producers exploration and production companies pipeline operators and utilities by investing in equities these etfs provide exposure to the broader natural gas industry and can be influenced by factors beyond just the price of natural gas last there are leveraged and inverse natural gas etfs leveraged etfs aim to amplify the returns of the underlying asset typically on a daily basis inverse etfs on the other hand seek to provide returns that are the opposite of the underlying asset s performance these etfs are more complex and are generally used for short term trading or hedging strategies 2natural gas etfs and forward contractsas mentioned several times above natural gas etfs may use forward contracts as part of their investment strategy to gain exposure to the natural gas market unlike futures contracts which have standardized terms forward contracts are individually tailored to meet the specific needs and objectives of the parties involved forward contracts offer more flexibility in terms of settlement dates and contract terms this flexibility allows etfs to better match their exposure to the desired investment horizon forward contracts are also typically traded in the over the counter otc market meaning they are not as liquid or regulated as futures contracts traded on exchanges this can provide etfs with alternative ways to gain exposure to natural gas but it also introduces counterparty risk as they are directly dealing with another party with very specific risks 3to manage counterparty risk etfs using forward contracts often require the posting of collateral by the counterparty this collateral can serve as a security against potential default ensuring that the terms of the contract are fulfilled also etfs using forward contracts may need to roll over their positions as contracts approach their expiration dates this involves closing out the existing contract and entering into a new one with updated terms limitations of natural gas etfsbecause natural gas etfs hold futures contracts they are exposed to a special type of risk called contango each month the manager of the natural gas etf has to purchase new futures contracts to replace the old contracts that expire the new contracts tend to have slightly higher prices than the old ones meaning that each time contracts are replaced extra costs are incurred by the fund manager over time these small costs can add up to create a large drag on the fund s overall performance 4for this reason investors will generally avoid relying on natural gas etfs as a type of long term investment vehicle because of contango risk an investor could incur significant costs from the ongoing roll over of futures contracts meaning that even if natural gas prices do rise over their investment period they might not rise enough to make the overall investment profitable most investors seeking exposure therefore use natural gas etfs mainly as a short term trading vehicle so that the costs of contango do not accumulate enough to have a meaningful impact there are two natural gas etfs that trade in the u s excluding inverse and leveraged etfs as of dec 2023 5example of a natural gas etfone example of a widely traded natural gas etf is the united states natural gas fund this fund is primarily composed of natural gas futures contracts that are set to expire within the next month and trades on the new york mercantile exchange nymex as ung its goal is to reflect the daily changes in percentage terms of the price of natural gas delivered at the henry hub louisiana a natural gas pipeline that serves as the official delivery location for futures contracts on the nymex 6the united states natural gas fund is very sensitive to fluctuations in natural gas prices so investors need to watch market prices closely to try to yield a profit over the past 20 years natural gas prices have ranged between a high of 22 reached in the fall of 2005 to just under 2 reached in september of 2020 7ung offers exposure to commodities without the need for a dedicated commodity futures account providing features like intraday pricing as well as the ability to place market limit and stop orders additionally ung maintains transparency by regularly updating its website with information on portfolio holdings market price net asset value nav and total net assets tna as of sept 2023 the management fee is 0 60 the total expense ratio is 1 06 and the 1 month net asset value was 4 08 6 | |
what is the objective of investing in a natural gas etf | the objective of investing in a natural gas etf is to gain exposure to the natural gas market investors may seek to profit from price movements hedge against natural gas price changes or diversify their investment portfolios | |
how do natural gas etfs track the price of natural gas | natural gas etfs employ various mechanisms to track the price of natural gas one common approach involves investing in natural gas futures contracts which are financial agreements specifying the purchase or sale of natural gas at a future date these contracts closely mirror the movements in natural gas prices allowing the etfs to track these price changes over time by rolling over expiring contracts these etfs can maintain their exposure to the commodity | |
do natural gas etfs physically hold natural gas | some natural gas etfs may directly hold physical natural gas in storage facilities aiming to replicate the spot price of the commodity the bottom linenatural gas etfs are investment vehicles that provide exposure to the natural gas market they utilize various strategies though many invest via futures contracts the purpose of a natural gas etf is to allow investors an opportunity to profit from or hedge against natural gas price movements while they offer a convenient way to access the energy commodity these etfs come with inherent risks including price volatility and tracking errors similar to the risks of other etfs | |
what are natural gas liquids | natural gas liquids ngl are components of natural gas that are separated from the gas state in the form of liquids this separation occurs in a field facility or a gas processing plant through absorption condensation or other methods there are several types of natural gas liquids and many different applications for ngl products understanding natural gas liquidsnatural gas liquids are valuable as separate products and it is profitable to remove ngl from the natural gas the liquids are first extracted from the natural gas and later separated into different components natural gas liquids are hydrocarbons a hydrocarbon is a molecule composed exclusively of carbon and hydrogen as hydrocarbons ngls belong in the same family of molecules as do natural gas and crude oil types of ngls and their applicationsnatural gas liquids are classified based on their vapor pressure additionally chemical compositions of ngls are similar but their applications vary widely specifically the many uses of natural gas liquids include cooking space heating and blending ngls into fuels for vehicles applications of ethane include plastics production and petrochemical feedstock raw materials fed into an industrial production process to yield a different end product end use products include plastics plastic bags antifreeze and detergent applications and uses of propane include residential and commercial heating cooking fuel small stoves and petrochemical feedstock some vehicles also use propane as fuel butanes can be blended with gasoline and propane products include synthetic rubber for tires and lighter fuel in its purest form butane is useful as a refrigerant combined with propane butane becomes liquified petroleum gas lpg industrial use of isobutanes can include refinery feedstock and petrochemical feedstock end use products include aerosols and refrigerants pentanes are used in natural gasoline and as a blowing agent for polystyrene foam pentanes plus a special category also known as natural gasoline is blended with vehicle fuel and exported for bitumen production in oil sands challenges and opportunitiesthe u s shale boom increased extraction rates of natural gas liquids and ngl extraction is positively related to the price of crude oil that s because as the market price of crude decreases oil gas and chemical companies expand their offerings to include ngls and offset lost revenue there have been significant advancements in technologies such as horizontal drilling and hydraulic fracturing techniques which involve using high pressured water or liquids to extract gas as a result natural gas liquid production has increased steadily in fact ngls provide many natural gas producers with an additional income stream which can help diversify their revenue a challenge with natural gas liquids is that they re expensive to handle store and transport compared to refined products because ngls require high pressure or low temperature to be maintained in their liquid state for shipment and handling ngls are also highly flammable and necessitate the use of special trucks ships and storage tanks the volatility of the natural gas liquids somewhat limits the number of markets available for their use also as production increases so too does the need for processing plants that separate ngls from natural gas ngls are used in petrochemical feedstock that is turned into various chemical based products ngls have many applications including use as home heating plastic production and as a fuel ngls are more widely available with advancements in drilling techniques ngls offer oil and gas companies additional revenue streams the u s has a growing export business in natural gas liquids ngls are expensive to handle store and transport requiring special trucks storage and equipment ngls require high pressure or low temperature to maintain their liquid state for shipment increased ngl use has led to increased demand for processing plants that separate ngls from natural gas their volatility limits the number of natural markets available for their use examples of nglslet s say that a new production facility opened in texas whereby drilling for natural gas has resulted in a significant amount of the fuel the gas is extracted from the well and sent to a production facility to be heated at various temperatures to generate the ngls ethane and propane exxon mobil corp xom is one of the largest producers of natural gas in the united states the ethane is removed from the natural gas stream after it reaches the necessary boiling point followed by propane which is a heavier gas resulting in a lengthier boiling process once the propane and ethane have been removed from the natural gas stream in a process called fractionation the ngls travel via a pipeline eventually natural gas liquids are shipped by specialized trucks to commercial businesses industrial plants and the local gas company the propane can be used for residential and commercial heating as well as cooking lastly ethane is used to create plastics such as water bottles and plastic bags | |
what is the natural gas storage indicator | the natural gas storage indicator is the u s energy information administration s eia estimate of working natural gas volumes held in underground storage facilities at the national and regional levels the eia provides weekly estimates of working gas volumes held in underground storage facilities at the lower 48 states and five regional levels changes in these gas inventories on a weekly basis primarily reflect net withdrawals or injections the report is generally updated and available every thursday at 10 30 am est unexpected changes such as above average withdrawals or injections can have an immediate impact on natural gas prices understanding the natural gas storage indicator eia report the natural gas storage indicator is a measure of working gas which is the volume of gas in a reservoir that is above a specified base level and is the amount of gas that is available for sale to the marketplace the eia report shows gas inventories for the reporting week and previous week as well as the net change on a national basis and for east west and producing regions it also provides inventories for a year ago and the five year average for historical comparison the overall approach relies on weekly survey data from a sample of operators of underground storage facilities these data are used to prepare regional and national estimates for all underground storage history of the indicatorweekly estimates of working gas in storage were first provided by the american gas association aga in 1994 however by 2001 the aga decided that it would discontinue its survey due to resource considerations the eia stepped in to fill the information gap to the natural gas market and released its first estimates of underground u s natural gas storage for the week ending may 3 2002 the indicator goalaccording to the eia the goal of the weekly storage data program is to provide weekly estimates of the level of working gas in underground storage for the united states and five regions the total volume of natural gas in underground storage reservoirs is classified as either base gas or working gas underground storage facilities may be reservoirs in depleted oil and gas fields aquifers or salt caverns the natural gas storage indicator is a very important data source for natural gas traders according to the eia upon release of the report the natural gas market reacts to the derived net change in inventory levels from the prior week this information on the nature of the net changes between weekly inventory data reports is helpful in informing trading decisions that often move natural gas prices 3 cents to 5 cents per million british thermal units mmbtu each week upon release | |
what is a natural hedge | a natural hedge is a management strategy that seeks to mitigate risk by investing in assets whose performances are inherently negatively correlated for instance a natural hedge against owning financial stocks is to hold bonds since interest rate changes tend to influence each in opposite fashion a natural hedge can also be implemented when institutions exploit their normal operating procedures for example if they incur expenses in the same currency that their revenues are generated they will actually reduce their exchange rate risk exposure naturally understanding natural hedgesa natural hedge entails using asset classes that have historically exhibited contrasting performance in a given economic climate to reduce a portfolio s or company s overall risk the key concept is that by allocating resources to two different asset classes the risk emanating from one asset should be offset by the return from the other and vice versa essentially the cash flow from one should cancel out the cash flow from the other thus fulfilling the concept of a hedge a company with significant sales in one country is exposed to currency risk when they want to repatriate that revenue they can reduce this risk if they can shift operations to where they can incur expenses also in that foreign currency which would qualify as a natural hedge a commonly used example is that of an oil producer with refining operations in the us that is at least partially naturally hedged against the cost of crude oil which is denominated in u s dollars while a company can alter its operational behavior to take advantage of a natural hedge such hedges are less flexible than financial hedges special considerationsunlike other conventional hedging methods a natural hedge does not require the use of sophisticated financial products such as forwards or derivatives that said companies can still use financial instruments such as futures to supplement their natural hedges for example a commodity company could shift as much of their operations to the country where they plan to sell their product which is a natural hedge against currency risk then use futures contracts to lock in the price to sell revenue that product at a later date most hedges natural or otherwise are imperfect and usually do not eliminate risk completely but they are still deployed and are considered to be successful if they can reduce a vast portion of potential risk other examples of natural hedgesnatural hedges also occur when a business s structure protects it from exchange rate movements for example when suppliers production and customers are all operating in the same currency large companies may look to source raw materials components and other production inputs in the final consumer s country the business can then set costs and prices in the same currency for mutual fund managers treasury bonds and treasury notes can be a natural hedge against stock price movements this is because bonds tend to perform well when stocks are performing poorly and vice versa bonds are considered to be risk off or safety assets while stocks are considered to be risk on or aggressive assets this is a relationship that has been historically valid most of the time but not always in the years after the 2008 financial crisis this negative correlation between bonds and stocks decoupled as both moved in tandem e g strong bull markets so this natural hedge would not have been successful pairs trading is another type of natural hedge this involves buying long and short positions in highly correlated stocks because the performance of one will offset the performance of the other | |
what is natural language processing nlp | natural language processing nlp is a field of artificial intelligence ai that enables computers to analyze and understand human language both written and spoken it was formulated to build software that generates and comprehends natural languages so that a user can have natural conversations with a computer instead of through programming or artificial languages like java or c understanding natural language processing nlp natural language processing nlp is one step in a larger mission for the technology sector namely to use artificial intelligence ai to simplify the way the world works the digital world has proved to be a game changer for a lot of companies as an increasingly technology savvy population finds new ways of interacting online with each other and with companies social media has redefined the meaning of community cryptocurrency has changed the digital payment norm e commerce has created a new meaning of the word convenience and cloud storage has introduced another level of data retention to the masses through ai fields like machine learning and deep learning are opening eyes to a world of all possibilities machine learning is increasingly being used in data analytics to make sense of big data it is also used to program chatbots to simulate human conversations with customers however these forward applications of machine learning wouldn t be possible without the improvisation of natural language processing nlp stages of natural language processing nlp nlp combines ai with computational linguistics and computer science to process human or natural languages and speech the process can be broken down into three parts the first task of nlp is to understand the natural language received by the computer the computer uses a built in statistical model to perform a speech recognition routine that converts the natural language to a programming language it does this by breaking down a recent speech it hears into tiny units and then compares these units to previous units from a previous speech the output or result in text format statistically determines the words and sentences that were most likely said this first task is called the speech to text process the next task is called the part of speech pos tagging or word category disambiguation this process elementarily identifies words in their grammatical forms as nouns verbs adjectives past tense etc using a set of lexicon rules coded into the computer after these two processes the computer probably now understands the meaning of the speech that was made the third step taken by an nlp is text to speech conversion at this stage the computer programming language is converted into an audible or textual format for the user a financial news chatbot for example that is asked a question like how is google doing today will most likely scan online finance sites for google stock and may decide to select only information like price and volume as its reply special considerationsnlp attempts to make computers intelligent by making humans believe they are interacting with another human the turing test proposed by alan turing in 1950 states that a computer can be fully intelligent if it can think and make a conversation like a human without the human knowing that they are actually conversing with a machine one computer in 2014 did convincingly pass the test a chatbot with the persona of a 13 year old boy 1 this is not to say that an intelligent machine is impossible to build but it does outline the difficulties inherent in making a computer think or converse like a human since words can be used in different contexts and machines don t have the real life experience that humans have for conveying and describing entities in words it may take a little while longer before the world can completely do away with computer programming language | |
what is natural law | natural law is a theory in ethics and philosophy that says that human beings possess intrinsic values that govern their reasoning and behavior natural law maintains that these rules of right and wrong are inherent in people and are not created by society or court judges understanding natural lawnatural law holds that there are universal moral standards that are inherent in humankind throughout all time and these standards should form the basis of a just society human beings are not taught natural law per se instead we discover it by consistently making choices for good instead of evil some schools of thought believe that natural law is passed to humans via a divine presence under the theory of natural law everyone regardless of their governmental or political system culture or religion has the same rights and these rights cannot be denied by others the birthrights granted to humans under natural law however are not the same as human rights which vary and can change depending on societal views for example a human right in the united states is equal pay for equal work however in other countries it is not although natural law mainly applies to the realm of ethics and philosophy it is also used extensively in theoretical economics natural law vs positive lawthe theory of natural law believes that our civil laws should be based on morality ethics and what is inherently correct this is in contrast to what is called positive law or human law which is defined by statute and common law and may or may not reflect the natural law examples of positive law include rules such as the speed at which individuals are allowed to drive on the highway and the age at which individuals can legally purchase alcohol ideally when drafting positive laws governing bodies would base them on their sense of natural law natural laws are inherent in us as human beings positive laws are created by us in the context of society examples of natural lawexamples of natural law abound but philosophers and theologians throughout history have differed in their interpretations of this doctrine theoretically the precepts of natural law should be constant throughout time and across the globe because natural law is based on human nature not on culture or customs | |
when a child tearfully exclaims it s not fair that or when viewing a documentary about the suffering of war we feel pain because we re reminded of the horrors of human evil and in doing this we are also providing evidence for the existence of natural law a well accepted example of natural law in our society is that it is wrong for one person to kill another person | philosophers of natural law often do not explicitly concern themselves with economic matters likewise economists systematically refrain from making explicit moral value judgments yet the fact that economics and natural law are intertwined has been borne out consistently in the history of economics natural law and the u s legal systemto many natural law is the foundation upon which the u s legal system was built natural law is witnessed in the country s laws systems covenants and how its citizens live and interact one of its earliest documents the declaration of independence asserts that every human is granted unalienable rights to life liberty and the pursuit of happiness and it was that assertion that formed the frame of the united states legal system however many early laws were exclusionary affording rights only to a few it took hundreds of years for some inhabitants to be considered legally human and even longer for them to be afforded the same unalienable rights as inscribed by thomas jefferson over time the moral push of activists and natural law proponents led to the ratification of some laws and the enactment of others such as the civil rights act to blanket every human with the ability to exercise these rights and freedoms because natural law as an ethical theory can be understood to be an extension of scientific and rational inquiry into how the world works the laws of economics can be understood as natural laws of how economies should operate moreover to the extent that economic analysis is used to prescribe or proscribe public policy or how businesses ought to conduct themselves the practice of applied economics must rely at least implicitly on some ethical assumptions | |
what is the theory of natural law | natural law is a theory of ethics that says that human beings possess intrinsic values that govern our reasoning and behavior it states that there are universal moral standards that are seen across time periods and societies because these standards form the basis of a just society | |
what are examples of natural law in systems of government | in the u s constitution the right of citizens to life liberty and the pursuit of happiness is a motto based on natural law in the penal code certain crimes are almost universally accepted as punishable including murder and rape these types of crimes are seen as damaging both the humanity of the victim and the social fabric of society | |
how does natural law affect business | natural law is seen in the concept of ethical business practices especially the principle that a firm should not defraud its customers or other stakeholders for instance the marketing of drugs should be made with full disclosure of potential harms and not be sold as snake oil | |
what are some flaws in natural law theory | since natural law assumes universalizing rules it does not account for the fact that different people or different cultures may view the world differently for instance if people interpret differently what it means for something to be fair or just the results will differ the bottom linenatural law is an ethical theory that claims that humans are born with a certain moral compass that guides behaviors these inherited rules essentially distinguish the rights and wrongs in life under natural law everyone is afforded the same rights such as the right to live and the right to happiness natural law is evident in and shapes many of our laws business policies and human rights agendas however unlike these systems its rules do not change and are inherently assigned to everyone | |
what is a natural monopoly | a natural monopoly is a type of monopoly in an industry or sector with high barriers to entry and start up costs that prevent any rivals from competing as such a natural monopoly has only one efficient player this company may be the only provider of a product or service in an industry or geographic location natural monopolies can arise in industries that require unique raw materials technology or similar factors to operate understanding natural monopoliesa natural monopoly becomes a monopoly over time due to market conditions and without any unfair business practices that might stifle competition it generally happens when there are high start up costs or powerful economies of scale that come with conducting a business in a specific industry these barriers can prevent potential competitors from entering the market there are two main factors that can lead to this type of monopoly the natural monopoly of a single large producer is also the most economically efficient way to produce a good or service in question this is not due to large scale fixed assets or investments but can be the result of the simple first mover advantage increasing returns to centralizing information and decision making or network effects an example is electricity transmission where once a grid is set up to deliver electric power to all of the homes in a community putting in a second redundant grid to compete makes little sense some monopolies use tactics to gain an unfair advantage by using collusion mergers acquisitions and hostile takeovers collusion might involve two rival competitors conspiring together to gain unfair market advantage through coordinated price fixing or increases special considerationsthere are regulatory agencies in each region to serve as a watchdog for the public when it comes to government approved natural monopolies utilities are typically regulated by the state run departments of public utilities or public commissions the u s department of transportation has broad responsibilities for the safety of travel for railroads while the u s department of energy is responsible for the oil and natural gas industries keep in mind though that no equivalent agencies in the u s have been empowered to similarly regulate tech and information monopolies nor are they governed as common carriers though this may be a trend in the future just because a company operates as a natural monopoly does not explicitly mean it is the only company in the industry the company might have a monopoly in one region of the country cable companies for example are often regionally based although there has been consolidation in the industry creating national players advantages and disadvantages of natural monopoliesone of the benefits of natural monopolies comes from the use of an industry s limited resources efficiently to offer the lowest unit price to consumers they can serve a good purpose when a single company can supply a product or service at a lower cost than anyone else and at a volume that can service an entire market society can benefit from certain natural monopolies for instance multiple utility companies wouldn t be feasible since there would need to be many distribution networks such as sewer lines electricity poles and water pipes for each competitor since it s economically sensible to have utilities operate as natural monopolies governments allow them to exist but the industry is heavily regulated to ensure that consumers get fair pricing and proper services 12one of the main drawbacks to natural monopolies is that it cuts out the competition and takes away choice from consumers this means that customers can only get certain goods and services from one provider having a natural monopoly in place bars other potential players from entering the market this is due to the high startup costs associated with doing business because there is only one player in the market regulation may be an issue especially when it comes to monopolies that aren t approved or run by the government as such entities may abuse their power increase prices and provide poor quality customer service provide goods and services at lower costs than rivalseconomically sensibleno competitionhigh startup costs and barriers to entrylack of regulation may lead to abuse of power higher pricing and poor customer serviceexamples of natural monopoliescompanies that have a natural monopoly may sometimes exploit the benefits by restricting the supply of a product or service inflating prices or exerting their power in damaging ways other than through prices under the common law many natural monopolies operate as common carriers whose business is recognized as having risks of monopoly abuse but allowed to do business as long as they serve the public interest common carriers are typically required to allow open access to their services without restricting supply or discriminating among customers and in return are allowed to operate as monopolies and given protection from liability for potential misuse by customers the following are some industries that have natural monopolies more modern examples of natural monopolies include social media platforms search engines and online retailing companies such as meta formerly facebook google and amazon have built natural monopolies for various online services due in large part to first mover advantages network effects and natural economies of scale involved with handling large quantities of data and information unlike traditional utilities these types of natural monopolies so far have gone virtually unregulated in most countries | |
how do natural monopolies work | a natural monopoly is a monopoly where there is only one provider of a good or service in a certain industry it occurs when one company or organization controls the market for a particular offering this type of monopoly prevents potential rivals from entering the market due to the high cost of starting up and other barriers | |
how is a natural monopoly different from a regular monopoly | as the name implies a natural monopoly exists naturally market forces allow one player in the market to become the only player in a certain industry without stifling the competition regular monopolies on the other hand are created when a company controls the market by eliminating the competition this happens when a key player buys up the supply chain and buys its rivals monopolies may lead to the removal of substitute products and services higher prices and low quality products | |
what are some of the most common types of natural monopolies | the most common types of natural monopolies include those found in the telecommunications center the utility industry oil and gas companies and the railroad industry the bottom linemonopolies can be both a boon and a blessing to consumers and the market in general unlike regular monopolies natural monopolies occur because market forces shape the industry to the point where there is only one key player that offers a specific good or service to the public even though this type of monopoly is allowed to exist the barriers for potential rivals to enter the market can be high some of the most common examples of natural monopolies include utilities and railroads | |
what is natural selection | in modern biology natural selection is a process whereby species which have traits that enable them to adapt in an environment survive and reproduce and then pass on their genes to the next generation natural selection means that species that can adapt to a specific environment will grow in numbers and eventually greatly outnumber those species that cannot adapt the natural selection process enables a species to better adapt to its environment by changing its genetic configuration with every new generation these changes are gradual and may occur over thousands of years although in some instances natural selection may occur much faster especially in species with short life spans and rapid reproduction rates | |
when natural selection is applied conceptually in the field of finance the assumption is that over the long term only those companies that can respond and successfully adapt to changes in the financial and business environment will survive | understanding natural selectionone of the most well known examples of natural selection in the field of biology is that of the english peppered moth although the english peppered moth has always existed in a variety of colors until the industrial revolution in england the light gray spotted variety was the most abundant that s because these moths could easily camouflage against the background of a lichen of a similar color that grew abundantly in their environment conversely dark winged versions of the moths were easy targets for birds and other predators 1 the industrial revolution which occurred between approximately 1760 and 1840 produced massive amounts of air pollution this air pollution killed some of the lichen covering of rocks in the moths environment at the same time some lighter colored buildings turned black from air pollution as a result the lighter gray colored moths could no longer blend in with their surroundings as easily and were more readily spotted by predators which led to their near extinction the dark winged variety was now better camouflaged and ended up surviving in greater numbers than the light winged variation of the moth 1 | |
when applied in a financial context natural selection means that due to the dynamism and complexity of the business environment only a handful of companies can remain in business for long periods of time companies that don t adapt may experience a potentially decreasing market share due to increased or improving competition over a period of time if a company is unable to adapt they may end up in bankruptcy if a trader or investor doesn t adapt to changing market conditions they will lose money and if they fail to adapt over an extended period of time they may be forced out of the market as their capital dwindles to nothing | natural selection is a dynamic and ongoing process while the ability to adapt to recent changes in the industry may be a good indicator of a company s or trader s overall aptitude it does not guarantee that they will be able to adapt to all future changes in the business environment example of natural selectionduring the credit crisis of 2008 several brokerage firms suffered a similar fate of bankruptcy as a result of this dramatic deterioration in the financial landscape bear stearns founded in 1923 merrill lynch founded in 1914 and lehman brothers founded in 1850 were all unable to retain the independence they had experienced for decades they were all either acquired by larger banks bear stearns by jpmorgan chase 2 and merrill lynch by bank of america 3 or forced into bankruptcy lehman brothers 4 the bottom linebefore the financial collapse of 2008 the collective assumption was that certain institutions were too big to fail unfortunately the events of 2008 proved that when it comes to natural selection size doesn t always matter much more important is flexibility and the ability for a business or an investor to swiftly recognize and adapt to changing business environments | |
what is the natural unemployment rate | the natural unemployment rate is the minimum unemployment rate resulting from real or voluntary economic forces natural unemployment reflects workers moving from job to job the number of unemployed replaced by technology or those lacking the skills to gain employment investopedia theresa chiechiunderstanding natural unemploymentthe term full employment is often a target to achieve when the u s economy is performing well the term is a misnomer because there are always workers looking for employment including new college graduates or those displaced by technological advances there is always movement of labor throughout the economy that represents natural unemployment unemployment is not considered natural if it is cyclical institutional or policy based unemployment an economic crash or steep recession might increase the natural unemployment rate if workers lose the skills necessary to find full time work or if certain businesses close and are unable to reopen due to excessive loss of revenue economists call this effect hysteresis important contributors to the theory of natural unemployment include milton friedman edmund phelps and friedrich hayek all nobel prize recipients the works of friedman and phelps were instrumental in developing the non accelerating inflation rate of unemployment nairu natural unemployment can occur from both voluntary and involuntary factors hysteresis often occurs following extreme or prolonged economic events such as a recession where the unemployment rate may continue to increase despite economic growth causes of natural unemploymenteconomists commonly held that if unemployment existed it was due to a lack of demand for labor or workers and the economy would need to be stimulated through fiscal or monetary measures however history reveals the natural flow of workers to and from companies even during robust economic periods full employment means 100 of the workforce is employed history shows that this is unattainable as workers move from job to job a zero unemployment rate is also undesired as it requires an inflexible labor market where workers cannot quit their current job or leave to find a better one according to the general equilibrium model of economics natural unemployment is equal to the level of unemployment in a labor market at perfect equilibrium this is the difference between workers who want a job at the current wage rate and those willing and able to perform such work under this definition of natural unemployment it is possible for institutional factors such as the minimum wage or high degrees of unionization to increase the natural rate over the long run effects of inflation on unemploymentjohn maynard keynes wrote the general theory of employment interest and money in 1936 leading many economists to believe there is a direct relationship between the level of unemployment in an economy and the level of inflation this direct relationship was formally codified in the phillips curve which showed that unemployment moved in the opposite direction of inflation if the economy was to be fully employed there must be inflation and conversely with periods of low inflation unemployment must increase or persist the phillips curve fell out of favor after the great stagflation of the 1970s during stagflation unemployment and inflation both rise questioning the implied correlation between strong economic activity and inflation or between deflation and unemployment | |
what is natural vs cyclical unemployment | the cyclical unemployment rate is the difference between the natural unemployment rate and the current rate of unemployment as defined by the u s bureau of labor statistics | |
why is the natural unemployment rate significant | the natural rate of unemployment is considered the lowest acceptable level that a healthy economy can sustain without creating inflation | |
what is nav return | the net asset value nav return is the change in the value of a fund s assets over a period a mutual or exchange traded fund s etf nav return can differ from total or market returns because funds may trade at a premium or discount to their nav funds trading above their nav are said to trade at a premium while funds trading below their nav do so at a discount understanding nav returnthe nav return is calculated based on the fund s nav reported after the stock market closes each trading day the nav is the total assets minus total liabilities divided by the outstanding shares the value changes daily as assets fluctuate based on market value the nav return is a transparent accounting measure that reports the actual holdings in the fund at the end of the day therefore dividends interest and capital gains distributed to shareholders are not included in the total assets unless reinvested the total return of a mutual fund includes distribution payouts therefore it accounts for distributions to shareholders whether they are reinvested or not distributions are the main reason you might see a variation in nav and total return investment funds that trade on exchanges in real time such as closed end funds and etfs can also be priced at a premium or discount causing market returns to vary from nav returns these funds typically trade close to their nav though with slight differences if a fund differs too much from its nav authorized participants may intervene to help correct the price closed end funds nav returns and examplesfund managers provide nav returns and other measures of returns which investors monitor to track their performance as we ve noted mutual funds and etfs have price and nav returns that should closely match for example the vanguard total stock market index fund vtsax an open end mutual fund that tracks the entire u s stock market is designed to trade at precisely the nav changes in investor demand shouldn t cause too much of a deviation since the fund manager creates or redeems shares to meet it exactly closed end funds cefs are far more likely to trade at a premium or discount to their nav indeed the investment company institute s 2023 report on cefs notes that discounts for these funds have been widening in recent years in 2022 the last full year available cefs trading averaged discounts of 5 7 for equity funds and 5 0 for bond funds for example the eaton vance tax managed buy write income etb fund as of april 25 2024 is at a discount to its share price 13 19 vs its nav 14 49 in 2023 its price increased by 7 51 but its nav return was 17 64 here are the price and nav returns for 2020 to 2023 and the year to date ytd to april 25 2024 greater differences can be found for the guggenheim strategic opportunities fund gof which as of april 25 2024 was trading at a 20 93 premium making it an outlier among cefs to be clear this means that the market price which was 14 33 exceeded the nav of 11 85 by 20 93 the premium over nav return shows investors are willing to pay more than the calculated value of the underlying assets per share here are the price and nav returns for 2020 to 2023 and the ytd gof s premium could derive from investor optimism about the future returns of the fund s assets its mix of fixed income securities equity and preferred stock the stock also has a more than a decade long history of monthly distributions of 0 1821 to shareholders and slightly lower for years before that but there could be reasons specific to the fund for instance a cef focusing on securities expected to yield higher than average future returns which are typically inaccessible to the average retail investor might trade at a premium due to significant market demand meanwhile a cef holding a substantial amount of unrealized capital gains could trade at a discount as investors likely factor in the potential taxes on those gains when pricing the fund s shares fund managers can try to cut discounts by increasing the market visibility of the fund through public reports and marketing a closed end fund may also try to increase the demand for its shares by offering a dividend reinvestment plan engaging in tender offers the fund offers to buy shares directly from shareholders at or close to nav or starting a stock purchase program the fund buys its shares on the open market finally some closed end funds periodically may consider converting to either an open end fund or etf which would permit shareholders to redeem their shares at nav thus while etfs typically trade close to their nav because fund managers create and redeem shares to keep nav and price returns close cefs like etb and gof can have much wider disparities | |
why might a fund s nav be higher or lower than its market price | the nav for a fund may vary from its market price if the supply of shares in the fund is too high or low compared with demand for shares if there are too few shares but significant demand the share price may rise above nav | |
do mutual funds ever trade above or below nav | no because mutual fund shares are bought and sold directly with the fund provider the shares always trade at nav there is no bid ask spread or opportunity to buy or sell shares above or below nav | |
should you buy a fund that s trading above its nav | buying a fund that s trading above nav may be a good idea but trading above nav isn t a reason to buy the fund on its own it could indicate investor confidence in the portfolio or high demand for the shares but it s important to consider your investment goals and the market risk of it going the wrong way on you before investing the bottom linenav return is the change in the value of a fund s net assets rather than the change in its share price most times you ll see they are quite similar but in some cases especially for cefs a fund can trade above or below its nav meaning its nav return will diverge from the return calculated based on changes in its share price understanding what can cause nav and fund returns to diverge such as splits in supply and demand or investor confidence in the fund s portfolio and managers is important if you re reviewing an investment prospect at an investment more generally the nav return is good to review along with other measures of returns as you look at the various funds you re considering | |
what is near field communication nfc | near field communication nfc is a short range wireless technology that makes your smartphone tablet wearables payment cards and other devices even smarter near field communication is the ultimate technology solution for connectivity with nfc you can transfer information between devices quickly and easily with a single touch whether paying bills exchanging business cards downloading coupons or sharing a research paper understanding near field communication nfc near field communication transmits data through electromagnetic radio fields to enable two devices to communicate with each other to work both devices must contain nfc chips as transactions take place within a very short distance nfc enabled devices must be either physically touching or within a few centimeters of each other for data transfer to occur because the receiving device reads your data the instant you send it near field communications nfcs greatly reduce the chance of human error rest assured for example that you cannot purchase something unknowingly because of a pocket dial or by walking past a location that s embedded with an nfc chip called a smart poster with near field communication you must perform an action intentionally in fact even after nfc technology becomes universal users may still need to carry a backup payment method you cannot do much of anything with a device whose battery is drained whether this would be a permanent downside to nfc technology however remains to be seen as with any evolving technology retailers need time to ramp up their equipment to be able to process nfc transactions so for now consumers should still carry cash or payment cards | |
how does near field communication technology work | nfc technology works by combining four key elements an nfc microchip within a device which acts as an antenna and receiver a reader writer that scans and allows nfc devices to access data an nfc software application on the device that can use data received by the nfc chip and an information or communications service provider isp that manages all device communications that occur through the isp nfc is an extension of rfid technology which relies on radio waves to track goods supplies and merchandise nfc replaces rfid chips with microchips that have the ability to store and encrypt information while rfid devices are passive and so lack the ability to access information nfc enabled devices do for example you can pay for purchases using nfc enabled debit and credit cards when you tap your card on an nfc compliant payment terminal data is transmitted between your card and the payment processing system to complete the transaction an nfc enabled device can operate under three different modes reader writer mode peer to peer mode and card emulation mode a reader writer is an nfc enabled device that manages and coordinates information sent between and received by two or more nfc devices and a handful of other devices that do not yet feature nfc technology examples of reader writers include point of sale pos systems cell phones tablets and rfid enabled cards in reader writer mode nfc enabled devices communicate and exchange data based on instructions from the reader writer this p2p mode enables two nfc enabled devices to exchange information directly for example a peer to peer device may exchange data with an rfid enabled device or some other type of nfc device without the assistance of a reader writer in this mode an nfc enabled device functions as an nfc payment card or virtual credit debit card when an nfc enabled device is activated in this mode it emulates a payment card or other physical card in card readers magnetic stripe readers and contactless card readers used to make payments directly from your mobile device history of nfcperhaps near field communication is best known as the technology that lets consumers pay retailers and each other with their cell phones nfc drives payment services like google wallet goog and apple pay aapl for example although nfc is not currently present in the amazon echo amzn this is a good example of where near field communications could be useful take wanting to tap to pay for a pizza or anything that you just ordered through the echo for example near field communication technology is rooted in radio frequency identification rfid which has been used for decades by retailers to tag and track products within stores near field communication technology began to gain steam in 2004 when nokia nok philips phg and sony sne banded together to form the nfc forum a nonprofit organization that s committed to bringing the convenience of nfc technology to all aspects of life in 2006 the forum formally outlined the architecture for nfc technology whose specifications continue to provide a road map for all interested parties to create powerful new consumer driven products nokia released the first nfc enabled phone in 2007 and by 2010 the telecommunications sector had launched more than 100 nfc pilot projects in 2017 new york city s metropolitan transit authority mta phased in a system that enables riders to pay their subway fares with nfc technology and the rest as they say is history benefits of nfcthere are several benefits of deploying nfc technology these include nfc enabled devices can replace any card or cash that can make a transaction because nfc enabled devices can store multiple credit cards for example you do not need to carry all of them in your purse or wallet instead you can pay for purchases by accessing your virtual wallet on your nfc enabled device nfc uses 128 bit or higher encryption to guarantee security and privacy of transactions because nfc uses tokenization instead of storing credit card information for example no retailer can see your credit card number sharing content goods and money with friends and family is easier when you grant them access to your nfc enabled device for example if you send a file to an nfc enabled device with peer to peer sharing enabled the file will be sent immediately nfc technology can be used by advertisers to deliver targeted ads to consumers nfc enabled devices when consumers tap an ad displayed on a device an advertisement can be customized to that person s interests location or other personal information nfc drawbacks and security risksalthough nfc technology offers many advantages it also has some drawbacks and potential risks these incliude because nfc enabled devices rely on battery power they must be charged periodically this could result in users forgetting to charge their devices before placing or receiving payment for a purchase and if a device runs out of power during a transaction the transaction may be interrupted or the transaction may be incomplete or unsuccessful | |
when nfc operates in a peer to peer mode and because nfc enabled devices store personal information these devices are vulnerable to security breaches including cybercrime and digital pickpocketing | hackers and cyber criminals can try to access nfc enabled devices they may develop malicious software that can steal confidential information from these devices furthermore hackers can create tokens that mimic an nfc enabled device and gain access to this sensitive information one of the primary uses for nfc technology today is pay by phone because nfc enabled phones are used frequently to make payments digital pickpockets could use these programs to steal credit card information from unsuspecting customers by intercepting payment information although cybercrime and digital pickpocketing are major vulnerabilities of nfc technology there are steps you can take to protect yourself first make sure that the nfc enabled devices you carry have the latest security features including 128 bit encryption and two factor authentication if you lose a device or suspect it has been compromised immediately change your passwords and disable all sharing and peer to peer sharing features nfc beyond the payment processwith its ever expanding boundaries near field communications have a wide variety of uses beyond simplifying and accelerating the payment process today hundreds of millions of contactless cards and readers worldwide use nfc technology in myriad applications from securing networks and buildings to monitoring inventory and sales preventing auto theft keeping tabs on library books and running unmanned toll booths nfc is behind the cards that we wave over card readers in subway turnstiles and on buses it is present in speakers household appliances and other electronic devices that we monitor and control through our smartphones with just a touch nfc can also set up wifi and bluetooth devices throughout our homes the first use of nfc technology was for contactless payment systems nfc enabled credit and debit cards were introduced in the early 2000s allowing customers to make payments by simply holding their card near a payment terminal nfcs offer near and long term solutionsnear field communications are proving useful in numerous industries and have far reaching implications in 2012 japan airlines otcmkts japsy became the first commercial airline worldwide to allow passengers to tap standard nfc phones to pass through boarding gates in lieu of paper boarding passes the customer experience in airports that use nfc technology is enhanced significantly as nfc can shorten the boarding of a 450 person plane to just 15 minutes a process that normally takes 40 minutes without the use of nfc in the hospitality industry a hotel may manage building and room access centrally in real time without the need for physical delivery of key cards instead you just hold your phone up to the door lock using nfc technology a hotel can send access rights to a guest s room directly to his or her mobile device in advance of their arrival an nfc hospitality application can include other functions too such as booking a room and skipping the check in phase | |
what does nfc do on my phone | enabling nfc on your phone allows you to make touchless payments using your device it also allows you to share or receive information wirelessly interact with rfid enabled cards like transit cards that contain microchips and be used with other enabled devices like room keys and so on | |
should nfc be on or off | because nfc draws battery power and because it could pose potential security risks such as digital pickpocketing nfc should usually be turned off when not in use | |
is nfc dangerous | there is no evidence to suggest that nfc technology is harmful to your health nfc or near field communication is a type of wireless technology that allows devices to exchange data over short distances it operates at a frequency of 13 56 mhz which is considered to be a low power frequency while some studies have shown that long term exposure to certain types of radio frequency rf radiation can have negative health effects the level of rf radiation emitted by nfc technology is so low that it is not considered to be harmful can you be hacked through nfc it is possible for an attacker to hack into a device using nfc technology although the likelihood of this happening these days is relatively low nfc operates over very short distances typically less than four inches so an attacker would need to be in close proximity to the device in order to access it additionally most nfc enabled devices are configured to only establish a connection when the user specifically allows it so an attacker would need to trick the user into initiating the connection however even if an attacker is able to establish an nfc connection with a device they would still need to find a way to exploit a vulnerability in the device s software in order to gain access this is not necessarily an easy task and the level of difficulty would depend on the specific device and its security measures in general it is always a good idea to keep your device up to date with the latest security patches and to be cautious when connecting to unfamiliar devices using nfc the bottom linenfc or near field communication is a type of wireless technology that allows devices to exchange data over short distances it is commonly used for contactless payment systems such as mobile payment apps like apple pay as well as for access control systems like keyless entry to buildings or hotel rooms nfc technology is also often used in marketing allowing businesses to provide customers with information or offers through their nfc enabled smartphones the technology operates at a low power frequency and is not considered to be harmful to human health when using a smartphone or tablet nfc is as safe as any other wireless technology such as wifi or bluetooth however enabling nfc can drain your battery and skillful hackers may be able to hack your device or digital pickpocket you from close range as a result it is often smart to keep the nfc feature turned off while it is not needed | |
what is near money | near money sometimes referred to as quasi money or cash equivalents is a financial economics term describing non cash assets that are highly liquid and easily converted to cash understanding near moneynear money is a term that analysts use to understand and quantify the liquidity and nearness of liquidity for financial assets near money considerations are viewed in a variety of market scenarios understanding near money and the nearness of near moneys is essential in corporate financial statement analysis and money supply management near money can also be important in all types of wealth management as its analysis provides a barometer for cash liquidity cash equivalents conversion and risk near money and near moneys or near monies comprehensively have been influencing financial analysis and economic considerations for decades financial analysts view near money as an important concept for testing liquidity central banks and economists utilize the concept of near money in determining the different levels of the money supply with the nearness of near moneys serving as a factor for classifying assets as either m1 m2 or m3 1near moneys generally refer to all of an entity s near money comprehensively the nearness of near moneys will vary depending on the actual time frames to cash conversion other factors affecting near money may also include transactional fees or penalties involved with withdrawals examples of near money assets include savings accounts certificates of deposit cds foreign currencies money market accounts marketable securities and treasury bills t bills in general near money assets included in near money analysis will vary depending on the type of analysis personal wealth managementin personal wealth management near money can be an important consideration influencing an investor s risk tolerance near money generally includes assets that an investor can easily convert to cash within a few days or months investors who depend heavily on the high liquidity of near money will choose very low risk short term near money options such as high yield savings accounts money market accounts six month cds and t bills which offer low annual returns with little risk of loss investors who have higher cash stockpiles can potentially expand out the nearness of near moneys further to gain higher returns for example two year cds have a longer maturity horizon with a greater expected return and are therefore farther out on the spectrum than a six month cd beyond low risk near money choices investors also have higher risk options such as stocks these investments can be converted to cash through market trading in approximately a few days giving them very short term nearness however the volatility and risk of stock investments can mean investors have less to cash out for an immediate need corporate liquiditythe concept of near money and nearness of near moneys is an integral part of financial statement analysis for businesses it is found in the core of balance sheet liquidity analysis here the nearness of near moneys is exemplified through two essential ratios the quick ratio and the current ratio the quick ratio looks at assets with the shortest nearness usually 90 days these assets include cash equivalents marketable securities and accounts receivable dividing the combination of these quick assets by current liabilities provides the ratio of a company s most liquid assets to its current liabilities often viewed in two ways this ratio shows the value of quick assets per 1 of current liabilities or the coverage level of quick assets to current liabilities in general the higher the quick ratio the more capable a company is of covering its current liabilities with its most liquid assets the current ratio pushes slightly farther out on the nearness spectrum with assets that are less liquid than quick assets but still convertible to cash within one year the current ratio examines a company s liquidity over a one year time horizon by dividing all of a company s current assets by its current liabilities the money supplyeconomists analysis and integrations of money supply techniques expand further on the nearness of near moneys concept by breaking down near money assets into nearness tiers these tiers are classified as m1 m2 and m3 the federal reserve fed generally has three levers it can use to influence money supply these levers are open market operations the federal funds rate and bank reserve requirements adjusting one or all of these levers can affect the money supply and its different tiers thus money supply levels can be important in comprehensive central bank policy analysis | |
when making central bank decisions federal economists will usually consider m1 m2 and m3 implications | in the u s the fed primarily uses m1 and m2 statistics for policy considerations the fed stopped reporting m3 in 2006 2near money is considered part of the m2 money supply 3money vs near moneyin all assessments of near money it can be important to make the distinction between money and near money money includes cash in hand or cash in the bank that can be obtained on demand for use as a medium of transactional exchange near money requires some time to cash conversion individuals and businesses need to have cash money available to meet immediate obligations in central bank analysis m1 is primarily composed of real money near money is not cash but rather assets that can be easily converted to cash the realm of near money assets will vary depending on the type of analysis the nearness of near moneys will also be a factor for consideration when making all types of financial decisions | |
what is near term | the near term is a period of time not far into the future the term is used to describe events that may occur soon in finance the term is often used to explain the timeframe during which an event or change is expected to occur traders will often use the term near term when expecting a price move to happen in the near future or when a trade is taken for only a small amount of time understanding near termfinancial market analysts and traders may use near term in reference to events that may be coming up in the near future such as company earnings or a price move in a stock that is expected soon if an event or a price move is not expected for a while then that event doesn t occur in the near term similarly a day trader or swing trader will typically be taking near term trades those are trades that have a short duration this is in direct contrast to a long term trader who buys assets and holds them for an extended period of time near term investments or trades include buying any asset with the intention of only holding it for a few weeks possibly months or less also a trader may buy options or futures with a near term expiry which makes it a short term trade buying a bond close to maturity makes it a near term bond purchase there is no definitive time frame on what the near term is some may refer to the near term as anything less than a few months a day trader may refer to the near term as the next five or ten minutes in economics the near term may refer to a level of growth in a common indicator such as gross domestic product gdp inflation consumer spending or the cost of labor as an example the federal reserve may monitor the near term level of weekly employment data to gauge whether or not to change interest rate policy at an upcoming meeting it is near term data because it comes out weekly congress may be waiting to receive the monthly trade deficit numbers before deciding whether to pass related economic legislation since the data is released monthly waiting to see what the next one or two data points say would be considered the near term | |
when discussing business the near term may refer to an active or soon to be active period of time the current business quarter could be referred to as the near term since everything that happens in that quarter will occur over the next three months | if a business is getting ready to launch a new product or marketing campaign within the next few months that would also be a near term initiative even though it may have been in the works for months or years near term in trading exampleconsider the following hypothetical scenario it s the start of april and a trader is considering taking a trade in apple aapl in anticipation of its earnings release on april 28 the trader is bullish and wants to have a long position in advance of the earnings release which they believe will be favorable and push the stock price up this trader will hold the position for one week after the earnings release if the news is positive and the stock rises if the news isn t positive and the stock drops on or after the earnings release the trader will get out immediately and take whatever loss or profit they have the trader will wait for an entry point that they like prior to the april 28 earnings release they expect that they should get into the long position by mid april this means that the trade will only last two to three weeks this makes it a near term trade since the earnings release or event the trader is waiting for is also in the near term | |
what is near the money | the phrase near the money refers to an options contract whose strike price is close to the current market price of the corresponding underlying security near the money is synonymous with at the money it is very seldom that the underlying asset s price will be exactly at the strike price so near the money is used and the strike price can be higher or lower than the market price close to the money is an alternative phrase designating the same situation it is very close to being at the money atm but not quite the same a call option is considered in the money itm if its strike price is lower than the market price however if the strike price is higher than the market price it would be out of the money otm a put option s moneyness would work in opposite direction also the option s premiums would need to be accounted for before it can be deemed to be in the money near the money is one of the states of option moneyness along with in the money and out of the money otm understanding near the moneyan options contract is said to be near the money when the strike price or the price at which the option can be exercised and the underlying security s price are close while there is no official figure for close if that difference is usually less than 50 cents the options contract is considered near the money for example an option with a current market value of 20 and a strike price of 19 80 would be considered near the money as the difference between the strike price and the market value is only 20 cents a contract is considered at the money when the strike price is equal to the market price of the underlying security the term near the money is often used to mean the same thing as at the money because it is rare for options prices to be at the money or the same as the strike price of the commodity in question for this reason options trading almost always uses near the money or nearest the money options rather than at the money options at or near the money options contract typically cost more i e they have a higher premium than out of the money options in which the underlying instrument s price is significantly higher or lower than the strike price near the money options contain intrinsic value if they are slightly out of the money but can contain both intrinsic and extrinsic value if they are slightly in the money near the money vs at the moneysince it is so rare for an options price to line up exactly with the strike price for that stock almost all at the money options trades will take place near the money instead most traders attempt to trade options when they are in the money so that they can pay less than the current market price for the stock and make a profit | |
when at the money options have a delta value of 0 5 or 0 5 for put options this means that the option is equally likely to either end up out of the money or in the money by the time the options contract expires near the money options will have a higher or lower delta value depending on how close they are to the strike price | 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 a neckline | the neckline is a level of support or resistance found on a head and shoulders pattern that is used by traders to determine strategic areas to place orders a neckline connects the swing lows which occur following the first two peaks of the head and shoulders topping pattern a move below the neckline signals a breakout of the pattern and indicates that a reversal to the downside of the prior uptrend is underway in the case of a head and shoulders bottoming pattern called an inverse head and shoulders the neckline connects the two swing highs of the pattern and extends out to the right when the price rises above the neckline it signals a breakout of the pattern and a reversal to the upside of the prior downtrend | |
what does a neckline tell you | the neckline is the part of the head and shoulders chart pattern that connects the two reaction lows topping pattern or highs bottoming pattern to form an area of support or resistance the head and shoulders chart pattern is commonly used to predict bullish or bearish reversals | |
when the price breaks below the neckline of a topping pattern it means the prior uptrend is likely over and a downtrend is underway when the price breaks above the neckline of an inverse pattern it means the prior downtrend is likely over and an uptrend is underway | the neckline is a straight line that connects the lows top or highs inverse and is extended out to the right after the head and shoulders form their third peak top if the price drops below the neckline then the pattern is considered complete and a further downside move is expected the neckline s slope may sometimes need to be drawn at an angle rather than horizontal this is because the reaction lows or highs may not always be equal and therefore the line will take on a slope when connecting them if the neckline is severely sloped higher or lower then it is less useful for trading and analytical purposes often the head and shoulders pattern is used in conjunction with other forms of technical analysis that serve as confirmation including other chart patterns or technical indicators for example if the relative strength index rsi or moving average convergence divergence macd indicator was showing bearish divergence heading into the head and shoulders pattern some traders would view that as added confirmation that the price is more likely to head lower after the downside neckline breakout head and shoulders patterna head and shoulders pattern form after an uptrend and is composed of a peak a retracement a higher second peak a retracement a lower third peak and a drop below the neckline some traders enter short or exit long positions when the price drops below the neckline for those entering short a stop loss is often placed above a recent swing high or above the high of the third peak the estimated downside move for the head and shoulders is the height of the pattern which is the difference between the prices of the second peak to the lowest low of the two retracements subtracted from the neckline breakout point this is called the price target there are no guarantees the price will reach that level or that it will stop falling at that level it is just an estimate the same concepts apply to an inverse head and shoulders except in reverse the pattern forms after a downtrend and is composed of a low a move higher a lower low a move up a third higher low and then a rally above the neckline some traders enter long positions or exit short positions when the price rises above the neckline for those entering longs a stop loss is often placed below a recent swing low or below the low of the third low the height of the pattern is added to the neckline breakout point to provide an upside target example of how to use a necklinea head and shoulders pattern is formed in the gbp usd which is the currency exchange rate between the british pound and the u s dollar the head and shoulders pattern is formed by a first peak a second higher peak and then a third lower peak with retracements in between the neckline connects the lows of the retracements and is extended out to the right image by sabrina jiang investopedia 2021following the third peak the price breaks below the neckline signaling further downside may be likely the height of the pattern is subtracted from the neckline breakout point to provide an estimated price target for the move down | |
how do you determine a head and shoulders stock pattern | a head and shoulders pattern can be determined if prices fall below the neckline after the third peak this is considered confirmation that a reversal is in progress and most analysts will predict further declines | |
what does a head and shoulders pattern look like on a stock chart | a head and shoulders pattern consists of three consecutive peaks with the second peak rising above the other two the straight line connecting the two troughs is called the neckline when prices fall below the neckline after the third top the pattern is considered to be confirmed | |
what should i do with a head and shoulders stock | in technical analysis a head and shoulders pattern is considered a bearish sign indicating that the asset may continue to lose value however it is not a foolproof indicator and most analysts will examine other factors for confirmation | |
what does a stock price do after a head and shoulders pattern | stock prices generally fall after a head and shoulders pattern but this is not a certainty technical analysts also examine trading volume relative strength and other metrics to gauge market sentiment | |
how do you trade an inverse head and shoulders | an inverse head and shoulders pattern is the reverse of a head and shoulders pattern it is usually a bullish sign indicating that prices have reached a bottom the conventional move is to go long after the pattern is confirmed in anticipation of new highs 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 the needs approach | the needs approach is a way of determining the appropriate amount of life insurance coverage an individual should purchase this approach is based on the creation of a budget of expenses that will be incurred including funeral expenses estate settlement costs and replacement of a portion of future income to sustain the spouse or dependants understanding the needs approachthe needs approach is a function of two variables | |
when calculating your expenses it is best to overestimate your needs a little for instance the needs approach will consider any outstanding debts and obligations that should be covered such as a mortgage or car payments the needs approach also recognizes that the need for income replacement may gradually decline as children living at home move away or if a spouse remarries | the needs approach contrasts with the human life approach the human life approach calculates the amount of life insurance a family will need based on the financial loss the family would incur if the insured person were to pass away today the human life approach usually takes into account factors such as the insured individual s age gender planned retirement age occupation annual wage and employment benefits as well as the personal and financial information of the spouse and any dependent children types of life insurancelife insurance provides financial protection to surviving dependents in case of the death of an insured as with other forms of insurance life insurance is a contract between an insurer and a policyholder in life insurance the insurer guarantees payment of a death benefit to named beneficiaries various types of life insurance approaches exist including the needs approach and the human life approach whole life term life universal life and variable universal life vul policies are separate types of plans available to individuals and their families whole life also known as traditional or permanent life covers the duration of the life of the insured in addition to providing a death benefit whole life also contains a savings component where cash value may accumulate term life guarantees payment of a death benefit during a specified term unlike whole life after the term expires the policyholder can renew for another term convert to permanent whole life coverage or let the policy terminate universal life is similar to whole life insurance yet it provides an additional investment savings element and low premiums like term life insurance most universal life insurance policies contain a flexible premium option although some require a single premium single lump sum premium or fixed premiums scheduled fixed premiums finally variable universal life or vul is a permanent life policy with a built in savings component which allows for the investment of the cash value like standard universal life the vul premium is flexible | |
what is negative amortization | negative amortization is a financial term referring to an increase in the principal balance of a loan caused by a failure to cover the interest due on that loan for example if the interest payment on a loan is 500 and the borrower only pays 400 then the 100 difference would be added to the loan s principal balance understanding negative amortizationin a typical loan the principal balance is gradually reduced as the borrower makes payments a negative amortization loan is essentially the reverse phenomenon where the principal balance grows when the borrower fails to make payments negative amortizations are featured in some types of mortgage loans such as payment option adjustable rate mortgages arms which let borrowers determine how much of the interest portion of each monthly payment they elect to pay any portion of interest that they opt not to pay is then added to the principal balance of the mortgage another type of mortgage that incorporates negative amortizations is the so called graduated payment mortgage gpm with this model the amortization schedule is structured so that the first payments include only a portion of the interest that will later be charged while these partial payments are being made the missing interest portion will be added back to the principal balance of the loan in later payment periods the monthly payments will include the full interest component causing the principal balance to decline more rapidly although negative amortizations afford flexibility to borrowers they can ultimately prove costly for example in the case of an arm a borrower may choose to delay paying interest for many years although this can help ease the burden of monthly payments in the short term it can expose borrowers to severe future payment shock in the event that interest rates spike later on in this sense the total amount of interest paid by borrowers may ultimately be far greater than if they hadn t relied on negative amortizations to begin with real world example of negative amortizationconsider the following hypothetical example mike a first time home buyer wishes to keep his monthly mortgage payments as low as possible to achieve this he opts for an arm electing to pay only a small portion of the interest on his monthly payments let us assume that mike obtained his mortgage when interest rates were historically low despite this his monthly mortgage payments gobble up a significant percentage of his monthly income even when he takes advantage of the negative amortization offered by the arm although mike s payment plan may help him manage his expenses in the short term it also exposes him to greater long term interest rate risk because if future interest rates rise he may be unable to afford his adjusted monthly payments furthermore because mike s low interest payment strategy is causing his loan balance to decline more slowly than it would otherwise he will have more principal and interest to repay in the future than if he had simply paid the full interest and principal he owed each month negative amortization is alternatively referred to as negam or deferred interest | |
what is negative arbitrage | negative arbitrage is the opportunity lost when bond issuers assume proceeds from debt offerings and then hold that money in escrow for a period of time usually in cash or short term treasury investments until the money is able to be put to use to fund a project or to repay investors negative arbitrage may occur with a new bond issue or following a debt refinancing the opportunity cost occurs when the money is reinvested and the debt issuer earns a rate or return that is lower than what must actually be paid back to debt holders | |
how negative arbitrage works | negative arbitrage occurs when a borrower pays off its debts at a higher interest rate than the rate the borrower earns on the money set aside to repay the debt basically the borrowing cost is more than the lending cost for example to fund the construction of a highway a state government issues 50 million in municipal bonds paying 6 but while the offering is still in process prevailing interest rates in the market fall the proceeds from the bond issuance are subsequently invested in a money market account paying only 4 2 for a period of one year because the prevailing market will not pay a higher rate in this case the issuer loses the equivalent of 1 8 interest that it could have earned or retained the 1 8 results from negative arbitrage which is in fact an opportunity cost the loss incurred by the state translates into less available funds for the highway project for its citizens negative arbitrage and refunding bondsthe concept of negative arbitrage can be shown using the example of refunding bonds if interest rates decrease below the coupon rate on existing callable bonds an issuer is likely to pay off the bond and refinance its debt at the lower interest rate prevalent in the market the proceeds from the new issue the refunding bond will be used to settle the interest and principal payment obligations of the outstanding issue the refunded bond however due to the call protection placed on some bonds which prevents an issuer from redeeming the bonds for a period of time proceeds from the new issue are used to purchase treasury securities held in escrow on the call date after the call protection elapses the treasuries are sold and the proceeds from the sale are used to retire the older bonds | |
what is negative assurance | negative assurance is a determination by an auditor that a particular set of facts is believed to be accurate since no contrary evidence has been found to dispute them negative assurance is normally used by auditors in situations where it is not possible to positively confirm the accuracy of financial reports the goal of negative assurance is to confirm that no evidence of fraud has been found or that any legal accounting practices were found to be violated understanding negative assurancenegative assurance usually arises in the absence of positive assurance a positive assurance of accuracy is considered stronger and means that the auditor has done sufficient work to state that a company s financial statements provide an accurate picture of its true financial condition based on proof positive assurance is required for certain audited financial reports released by public companies since fully auditing a public company in accordance with generally accepted accounting principles gaap is a large undertaking a positive assurance is normally issued only when legally required special considerationsnegative assurance is most often issued when an accountant is asked to review certified financial statements prepared by another accountant in this case since another accountant has already certified the accuracy of the statements a negative assurance is often seen as sufficient to confirm that the statements are free of material misstatements negative assurance opinions are also issued when an accountant is asked to review statements associated with the issuance of securities to issue a negative assurance opinion the accountant must gather audit evidence directly and may not rely on indirect evidence that is evidence provided by a third party the procedures used in the preparation of a negative assurance opinion are not as stringent as those required for a positive assurance opinion it is important to note that negative assurance is not stating that any illegal activity did not occur it is stating that the auditor could not find any instances of illegal activity 1example of negative assurancecompany abc hires an auditing firm to go over its financials from the fiscal year 2019 the auditor assigned to the case looks over all the accounting documents which include general ledgers journals and other various financial documents the auditor does not check every specific entry but does a comb through of all of the relevant information the auditor then interviews employees and management on specific topics after this review the auditor does not find any instances of fraud or any accounting violations the auditor then issues a negative assurance that confirms no issues errors or misstatements were found | |
what does negative assurance mean | negative assurance refers to the level of certainty that something is accurate because no proof to the contrary is present in other words since there is no proof that the information is inaccurate or that deceptive practices e g fraud occurred it is presumed to be accurate | |
what is positive assurance | positive assurance identifies proof of facts during an audit by documenting proof an auditor can affirm no fraud has been committed in the absence of positive assurance negative assurance may be used | |
what does assurance mean in an audit | assurance in auditing refers to the opinions issued by a professional regarding the accuracy and completeness of what s analyzed for example an accountant assuring that financial statements are accurate and valid asserts that they have reviewed the documents using acceptable accounting standards and principles | |
what is a negative bond yield | a negative bond yield is when an investor receives less money at the bond s maturity than the original purchase price for the bond a negative bond yield is an unusual situation in which issuers of debt are paid to borrow in other words the depositors or buyers of bonds are effectively paying the bond issuer a net amount at maturity instead of earning a return through interest income understanding negative bond yieldsbonds are debt instruments typically issued by corporations and governments to raise money investors purchase the bonds at their face value which is the principal amount invested in return investors typically get paid an interest rate called the coupon rate for holding the bond each bond has a maturity date which is when the investor gets paid back the principal amount that was initially invested or the face value of the bond bonds that have been previously issued and sold by investors before the maturity trade on the secondary market called the bond market bond prices rise and fall depending on various economic and monetary conditions in an economy the initial price of a bond is usually its face value which could be 100 or 1 000 per bond however the bond market could price the bond differently depending on a number of factors which could include economic conditions the supply and demand for bonds the length of time until expiration and the credit quality of the issuing entity as a result an investor might not receive the face value of the bond when they sell it typically an investor might buy a bond at a 95 for example and receive the 100 face value at maturity in other words the investor would ve bought the bond at a discount 95 to the face value 100 negative yielding bonds would result in an investor receiving less back at maturity meaning an investor might pay 102 for the bond and get back 100 at maturity however the coupon rate or interest rate paid by the bond also plays into whether the bond is negative yielding bonds trading in the open market can effectively carry a negative bond yield if the price of the bond trades at a sufficient premium remember that a bond s price moves inversely with its yield or interest rate the higher the price of a bond the lower the yield the reason for the inverse relationship between price and yield is due in part to bonds being fixed rate investments investors might sell their bonds if it s expected that interest rates will rise in the coming months and opt for the higher rate bonds later on conversely bond investors might buy bonds driving the prices higher if they believe interest rates will fall in the future because existing fixed rate bonds will have a higher rate or yield in other words when bond prices are rising investors expect lower rates in the market which increases demand for previously issued fixed rate bonds because of their higher yields at some point the price of a bond can increase sufficiently to imply a negative yield for the purchaser | |
why investors buy negative yielding bonds | investors that are interested in buying negative yielding bonds include central banks insurance companies and pension funds as well as retail investors however there are various distinct reasons for the purchase of negative yielding bonds many hedge funds and investment firms that manage mutual funds must meet certain requirements including asset allocation asset allocation means that the investments within the fund must have a portion allocated to bonds to help create a diverse portfolio allocating a portion of a portfolio to bonds is designed to reduce or hedge the risk of loss from other investments such as equities as a result these funds must own bonds even if the financial return is negative bonds are often used to pledge as collateral for financing and as a result need to be held regardless of their price or yield some investors believe they can still make money even with negative yields for example foreign investors might believe the currency s exchange rate will rise which would offset the negative bond yield in other words a foreign investor would convert their investment to a country s currency when buying the government bond and convert the currency back to the investor s local currency when selling the bond the investor would have a gain or loss merely from the currency exchange fluctuation irrespective of the yield and price of the bond investment domestically investors might expect a period of deflation or lower prices in the economy which would allow them to make money by using their savings to buy more goods and services investors might also be interested in negative bond yields if the loss is less than it would be with another investment in times of economic uncertainty many investors rush to buy bonds because they re considered safe haven investments these purchases are called the flight to safety trade in the bond market during such a time investors might accept a negative yielding bond because the negative yield might be far less of a loss than a potential double digit percentage loss in the equity markets for example japanese government bonds jgb are popular safe haven assets for international investors and have at times paid a negative yield example of a negative bond yieldbelow is an example of two bonds one of which earns income while the other is negative yielding by the time of the bond s maturity bond abc has the following financial attributes bond abc was purchased for a premium meaning the price of 105 was higher than its face value of 100 to be paid at maturity at the onset the bond might be considered negative yielding or a loss for the investor however we must include the bond s coupon rate of 5 per year or 5 to the investor so although the investor paid an extra 5 for the bond initially the 20 in coupon payments 5 per year for four years create a 15 net profit or a positive yield bond xyz has the following financial attributes bond xyz was also purchased for a premium meaning the price of 106 was higher than its face value of 100 to be paid at maturity however the bond s coupon rate of 0 per year makes the bond negative yielding in other words if investors hold the bond until maturity they ll lose 6 106 100 the 6 loss translates to a 6 loss in percentage terms and when spread out over the four years it equates to a negative yield of 1 5 6 4 years annually | |
what is negative carry | negative carry is a condition in which the cost of holding an investment or security exceeds the income earned while holding it a negative carry trade or investment is often undesirable to professional portfolio managers because it means the investment is losing money as long as the principal value of the investment remains the same or falls however many investors and professionals regularly enter into such conditions when they anticipate a significant payoff from holding the investment over time negative carry can be contrasted with positive carry | |
how negative carry works | any investment that costs more to hold than it returns in payments can result in negative carry a negative carry investment can be a securities position such as bonds stocks futures or forex positions real estate such as a rental property or even a business even banks can experience negative carry if the income earned from a loan is less than the bank s cost of funds this is also called the negative cost of carry 1this measure does not include any capital gains that might occur when the asset is sold or matures such anticipated gains are often the primary reason negative carry investments of this nature are initiated and held examples of negative carryowning a home is a negative carry investment for most homeowners who live in the home as their primary residence the costs of the interest on a typical mortgage each month are more than the amount that will accrue to the principal for the first half of the mortgage term 2the cost of upkeep on the house is a financial burden as well however because house prices have tended to rise over the years many homeowners experience at least some amount of capital gain by owning the home for at least a few years 3in the professional investment world an investor may borrow money at 6 interest to invest in a bond paying a 4 yield in this case the investor has a negative carry of 2 and is actually spending money to own the bond the only reason for doing so would be that the bond was bought at a discount compared to expected future prices if the bond was purchased at par or above and held to maturity the investor will have a negative return however if the price of the bond increases which occurs when interest rates fall then the investor s capital gains could well outpace the loss in negative carry 4investors in the foreign exchange forex markets can also have a negative carry trade called a negative carry pair borrowing money in a currency with high interest rates and then investing in assets denominated in a lower interest rate currency will create the negative carry however if the value of the higher yielding currency declines relative to the lower yielding currency then the favorable shift in exchange rates can create profits that more than offset the negative carry the negative carry pair in forex trading thus seeks to exploit differences in the exchange rates and interest rates associated with different currencies and is effectively the reverse of the more popular carry trade strategy a trader would only initiate the negative carry trade if they believed that the low interest currency in which they are investing will appreciate relative to the high interest currency in which they are borrowing in that scenario the trader would profit when they reverse out of the initial trade selling the currency they bought in exchange for the currency they borrowed in then repaying their debt and pocketing the gain on the transaction of course this potential gain would need to exceed the cost of the interest payments made throughout the term of the investment in order for the entire transaction to be a success 5special considerationsone reason for purchasing a negative carry investment may be to take advantage of tax benefits for example suppose an investor bought a condominium and rented it out after all expenses were added in the rental income was 50 less than the monthly expenses however because the interest payment was tax deductible the investor saved 150 per month on taxes this allows the investor to hold the condo for enough time to anticipate capital gains since tax laws vary such benefits will not be uniform everywhere and when tax laws change the cost of carry may become greater 6while borrowing to invest is the typical reason for negative carry where the carry cost is the interest short selling can also create a negative carry situation one example would be in a market neutral strategy where a short position in a security is matched against a long position in another 7 | |
what is a negative confirmation | negative confirmation is a letter or document requesting that the recipient should only respond to the sender if there were an issue with the contents of the message or the recipient wanted to opt out of the event that the letter had addressed negative confirmation letters can be used in many types of business situations and are often used in the financial services industry the purpose of the communication is to reduce the number of incoming responses an organization receives in reply to a letter sent to its client base in a negative confirmation or negative consent communication situation the company or entity sending the message only receives responses from no votes as opposed to responses from everybody regardless of their opinion a negative confirmation can be contrasted with a positive confirmation understanding negative confirmationsnegative confirmations are often used by auditors and involve a document sent to a sample of a company s customers asking them to respond only if they find a discrepancy between their books and the account recorded on the financial statements of the company being audited negative confirmation is typically used when the accounting controls of a company have historically had very few errors and are thus considered to be strong the company is asked to double check the numbers and only confirm if there is a discrepancy sending out a negative confirmation as opposed to a positive confirmation which requires a response can save time that would be spent tracking replies and following up with unresponsive recipients the negative confirmation is merely a way for an accountant to make sure both companies are reporting the same numbers examples of negative confirmationsnegative confirmations have many applications that include both accountants and financial services companies negative confirmation letters are often sent out with 401 k plans that have an auto escalation feature with auto escalation the percentage of an employee s paycheck contributed to each pay period is automatically increased every year the intent of this automatically increasing savings rate is to help people save more money for retirement a month or so before the escalation occurs the recordkeeper sends out a negative confirmation or negative consent letter the letter informs the participant that the contribution escalation will occur unless the participant contacts the 401 k recordkeeper and opts out of the increase to maintain their current contribution rate a negative request can also be used to account for sales at a car manufacturer according to the books the manufacturer sold 200 cars to the dealership for a total of 6 million in revenue the negative confirmation letter would state that if the 6 million figure was accurate there s no need to reply however if the revenue amount were only 5 million the manufacturer would need to notify the accountant of the discrepancy in the dealership s books negative confirmations are a professional way of saying don t respond to me unless there is a problem | |
what is negative convexity | negative convexity exists when the shape of a bond s yield curve is concave a bond s convexity is the rate of change of its duration and it is measured as the second derivative of the bond s price with respect to its yield most mortgage bonds are negatively convex and callable bonds usually exhibit negative convexity at lower yields understanding negative convexitya bond s duration refers to the degree to which a bond s price is impacted by the rise and fall of interest rates convexity demonstrates how the duration of a bond changes as the interest rate changes typically when interest rates decrease a bond s price increases however for bonds that have negative convexity prices decrease as interest rates fall for example with a callable bond as interest rates fall the incentive for the issuer to call the bond at par increases therefore its price will not rise as quickly as the price of a non callable bond the price of a callable bond might actually drop as the likelihood that the bond will be called increases this is why the shape of a callable bond s curve of price with respect to yield is concave or negatively convex convexity calculation examplesince duration is an imperfect price change estimator investors analysts and traders calculate a bond s convexity convexity is a useful risk management tool and is used to measure and manage a portfolio s exposure to market risk this helps to increase the accuracy of price movement predictions while the exact formula for convexity is rather complicated an approximation for convexity can be found using the following simplified formula convexity approximation p p 2 x p 0 2 x p 0 x dy 2 | |
where | p bond price when interest rate is decreasedp bond price when interest rate is increasedp 0 bond pricedy change in interest rate in decimal formfor example assume a bond is currently priced at 1 000 if interest rates are decreased by 1 the bond s new price is 1 035 if interest rates are increased by 1 the bond s new price is 970 the approximate convexity would be convexity approximation 1 035 970 2 x 1 000 2 x 1 000 x 0 01 2 5 0 2 25 | |
when applying this to estimate a bond s price using duration a convexity adjustment must be used the formula for the convexity adjustment is | convexity adjustment convexity x 100 x dy 2in this example the convexity adjustment would be convexity adjustment 25 x 100 x 0 01 2 0 25finally using duration and convexity to obtain an estimate of a bond s price for a given change in interest rates an investor can use the following formula bond price change duration x yield change convexity adjustment | |
what is negative correlation | negative correlation is a relationship between two variables in which one variable increases as the other decreases and vice versa in statistics a perfect negative correlation is represented by the value 1 0 while a 0 indicates no correlation and 1 0 indicates a perfect positive correlation a perfect negative correlation means the relationship that exists between two variables is exactly opposite all of the time investopedia ellen lindnerunderstanding negative correlationnegative correlation or inverse correlation indicates that two individual variables have a statistical relationship such that their prices generally move in opposite directions from one another if for instance variables x and y have a negative correlation or are negatively correlated as x increases in value y will decrease similarly if x decreases in value y will increase though this article discusses negative correlation regarding investments negative correlation plays a factor in many facets of business and finance for example negative correlation also has a loose function when considering the learning curve as more time is spent learning something it often takes less time to perform a given task in this example rework or failure decreases as proficiency due to learning increases the degree of correlation between two variables is not static but can swing over a wide range or from positive to negative and vice versa over time negative correlation and the correlation coefficientthe degree to which one variable moves in relation to the other is measured by the correlation coefficient which quantifies the strength of the correlation between two variables for example if variables x and y have a correlation coefficient of 0 1 they have a weak negative correlation but if they have a correlation coefficient of 0 9 they would be regarded as having a strong negative correlation the higher the negative correlation between two variables the closer the correlation coefficient will be to the value 1 by the same token two variables with a perfect positive correlation would have a correlation coefficient of 1 while a correlation coefficient of zero implies that the two variables are uncorrelated and move independently of each other the correlation coefficient usually denoted by r or r can be determined by regression analysis the square of the correlation coefficient generally denoted by r2 or r squared represents the degree or extent to which the variance of one variable is related to the variance of the second variable and is typically expressed in percentage terms for example if a portfolio and its benchmark have a correlation of 0 9 the r squared value would be 0 81 the interpretation of this figure is that 81 of the variation in the portfolio the dependent variable in this case is related to or can be explained by the variation of the benchmark the independent variable negative correlation and portfolio diversificationthe concept of negative correlation is a key one in portfolio construction negative correlation between sectors or geographies enables the creation of diversified portfolios that can better withstand market volatility and smooth out portfolio returns over the long term the building of large and complex portfolios where the correlations are carefully balanced to provide more predictable volatility is generally referred to as the discipline of strategic asset allocation consider the generally historic long term negative correlation between stocks and bonds stocks generally outperform bonds during periods of strong economic performance but as the economy slows down and the central bank reduces interest rates to stimulate the economy bonds may outperform stocks in this example investors often have a strong asset class regardless of how the economy is performing the ultimate goal of diversification is to find assets that are negative correlated this may extend beyond just the asset class as gold etfs may act differently and have different risks than physical gold bars all else being equal a highly diversified portfolio means an investor is holding negatively correlated assets equities and bonds generally have a negative correlation but like other asset classes correlation fluctuates and these two assets become more and less correlated during certain circumstances advantages and disadvantages of negative correlationas mentioned above a negative correlation is useful when attempting to diversify across assets holding assets that move in different directions often reduces portfolio risk of loss in addition to a lower risk of loss investors may experience a lower risk of general volatility different industries may offset each other in the long run by holding both electric car companies and traditional car companies changes to one industry may be offset by opposing changes over time investors may find that pursuing negative correlation is a more engaging way to invest consider only investing in one asset class such as airlines instead by expanding into equities for healthcare providers streaming services or financial services investors may find the research of these new industries more enjoyable considering companies businesses may decide to expand into differentiating goods with a negative correlation to maximize revenue instead of cannibalizing one product line with another two negatively correlated product lines may never compete this may also allow the company to deploy different resources instead of having to rely on a single failure point though a negative correlation may be insightful it may also be misleading if the associated assets are not actually negatively correlated consider the negative correlation between ski lift tickets and shark attacks one may make misleading decisions based on negative correlations in addition be mindful that the correlation of two items today may be widely different tomorrow due to a change of circumstance for portfolio management a negative correlation also indicates that very different assets are being held this may mean an investor is not an expert on an asset they are holding and may be unaware of asset risks for example though farmland may have a negative correlation to equities investors may not have tremendous experience in the agriculture industry last negative correlation in a portfolio means different asset classes are being held to reduce risk in exchange for lower risk investors are willing to sacrifice potentially higher returns by not diversifying for example buying bonds may result in negative correlation but also in lower returns may reduce a portfolio s short term risk of lossmay reduce a portfolio s long term risk of volatilitymay be a more enjoyable strategy to investing for retail investorsmay allow a company to have multiple non competing product linesmay be misleading if data suggests correlation means causationmay expose an investor to asset classes they do not have adequate knowledge ofoften results in lower potential portfolio returns in exchange for greater risk protectionmacroeconomics and negative correlationit should be noted that this investment thesis may not work all of the time as the typical negative correlation between oil prices and airline stocks might occasionally turn positive for example during an economic boom oil prices and airline stocks may both rise conversely during a recession oil prices and airline stocks could slide in tandem | |
when assets that are often negatively correlated move in the same direction this is an example of systematic risk systematic risk can not be diversified away it will exist in financial markets and is the inherent risk present in investing though asset classes may traditionally be negatively correlated macroeconomic conditions may result in asset classes acting similarly due to broader impacts to the market | example of negative correlationexamples of negative correlation are common in the investment world a well known example is the negative correlation between crude oil prices and airline stock prices jet fuel which is derived from crude oil is a large cost input for airlines and has a significant impact on their profitability and earnings if the price of crude oil spikes up it could have a negative impact on airlines earnings and hence on the price of their stocks but if the price of crude oil trends lower this should boost airline profits and therefore their stock prices here s how the existence of this phenomenon can help in the construction of a diversified portfolio as the energy sector has a substantial weight in most equity indices many investors have significant exposure to crude oil prices which are typically quite volatile as the energy sector for obvious reasons has a positive correlation with crude oil prices investing part of one s portfolio in airline stocks would provide a hedge against a decline in oil prices | |
why is correlation important | correlation is important because it is often an indicator of portfolio risk when a collection of securities is negatively correlated they pose less risk because when one security falls in value another often increases investors may also actively seek out greater risk in exchange for greater potential returns using this strategy correlation is important because they may want to maximize correlation to yield the greatest risk and reward | |
how is correlation calculated | correlation is first calculated by finding the covariance of each of the variables then the correlation coefficient is determined by dividing the covariance by the product of the variables standard deviations | |
what are the types of correlation | there are three types of correlation positive negative and no correlation there are also several types of correlation calculation methods including pearson correlation kendall rank correlation spearman correlation and the point biserial correlation | |
is negative correlation better than positive correlation | for some investors negative correlation is better than positive correlation this means that investors are exposed to less risk have the chance to invest in different types of securities and often experience less portfolio volatility for others negative correlation means hedging their investment which minimizes potential gains the bottom linea negative correlation is an event of two variables moving in the opposite direction as one variable increases in value the other decreases this relationship is measured by the correlation coefficient and the concept of negative correlation is central to portfolio diversification theory for most investors negative correlation across portfolio assets is favorable | |
what is a negative covenant | a negative covenant is an agreement that restricts a company from engaging in certain actions think of a negative covenant as a promise not to do something negative covenants are also referred to as restrictive covenants for example a covenant entered into with a public company might limit the amount of dividends the firm can pay its shareholders it could also place a cap on executives salaries a negative covenant may be found in employment agreements and mergers acquisitions m a contracts however these covenants are almost always found in loan or bond documents understanding negative covenants | |
when a bond is issued the features of the bond are included in a document known as the bond deed or trust indenture the trust indenture highlights the responsibilities of an issuer and is overseen by a trustee to protect the interests of investors the trust indenture also stipulates any negative covenants that the issuer must adhere to | for example the negative covenant may restrict the ability of the firm to issue additional debt specifically the borrower may be required to maintain a debt equity ratio of no more than 1 likewise negative pledge clauses in loan contracts restrict the borrower from using the pledged asset as collateral for other loans the lending agreement or indenture in which the negative covenant appears will also provide detailed formulas which may or may not conform to the generally accepted accounting principles gaap to be used to calculate the ratios and limits on negative covenants common restrictions placed on borrowers through negative covenants include preventing a bond issuer from issuing more debt until one or more series of bonds have matured also a borrowing firm may be restricted from paying dividends over a certain amount to shareholders so as not to increase the default risk to bondholders since the more money paid to shareholders the less available funds will be to make interest and principal payment obligations to lenders generally the more negative covenants exist in a bond issue the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors a negative covenant contrasts with a positive covenant which is a clause in a loan agreement that requires the firm to take certain actions for example a positive covenant might require the issuer to disclose audit reports to creditors periodically or to insure its assets adequately while positive or affirmative covenants do not limit the operations of a business negative covenants materially limit a business operations | |
what is the negative directional indicator di | the negative directional indicator di measures the presence of a downtrend and is part of the average directional index adx if di is sloping upward it s a sign that the price downtrend is getting stronger this indicator is nearly always plotted along with the positive directional indicator di image by sabrina jiang investopedia 2021the formula for the negative directional indicator di is di s dm atr where dm negative directional movement dm prior low current low s dm smoothed dm s dm t t 1 4 t dm t t 1 4 t dm 1 4 current dm atr average true range begin aligned text di frac text s dm text atr textbf where text dm text negative directional movement phantom text dm text prior low text current low text s dm text smoothed dm phantom text s dm sum t t 14 t text dm left frac sum t t 14 t text dm 14 right text current dm text atr text average true range end aligned di atrs dm where dm negative directional movement dm prior low current lows dm smoothed dms dm t t 14 t dm 14 t t 14t dm current dmatr average true range | |
what does the negative directional indicator tell you | the di line is used in conjunction with the di line to help show the direction of the trend |
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