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how no documentation no doc mortgages work | a no documentation mortgage is a loan to buy a home that does not require the income documents required by a typical mortgage these loans are considered higher risk 1typically you must submit proof of income to qualify for a mortgage required documentation may include w2s pay stubs employment letters and or recent tax returns 2 lenders want to see that you can afford payments on the loan so they want proof you have a stable and reliable source of income some mortgages however don t require any proof of income these are called no documentation no doc mortgages no documentation loans or no income verification mortgages with these loans borrowers aren t required to provide a lot of paperwork like the docs mentioned above instead they may only have to provide a declaration that indicates they are able to repay the loan these mortgages are commonly granted to people who don t have a regular income source self employed individuals new immigrants or temporary workers income requirements are just part of the criteria you need to be approved for a mortgage you ll also need to meet other criteria such as a down payment and a good credit score among others no documentation no doc mortgages do not meet the consumer credit protection act requirement to reasonably verify the borrower s financials because they don t require income verification these mortgages tend to be very risky and they tend to be increasingly rare since the 2010 passage of the dodd frank wall street reform and consumer protection act which requires documentation on all types of loans especially mortgages passed in the wake of the financial crisis of 2008 the dodd frank wall street reform and consumer protection act instituted reforms and changes to the banking financial industry many of which focused on the lending business subprime mortgages and other high risk loan products notorious for their high levels of default were considered among the main culprits of the crisis which triggered the two year great recession no doc mortgages since 2010in a sense true no doc mortgages no longer exist now no lender will rely just on your word that you can repay the loan as they did in the housing market boom of the early 2000s this practice is illegal lenders must verify the information you provide using some kind of documentation 3however mortgage lenders can still ease their requirements regarding income documentation in other ways borrowers can still find loans that do not require tax returns or other traditional income verifying documents instead the lender allows you use other items such as bank statements or brokerage statements to show that you can meet your mortgage payments special considerationsno doc mortgages are commonly granted to individuals who don t have a regular source of income including those who are self employed or whose wealth stems from investments or unearned income sources they help house flippers and landlords with multiple expense write offs on their tax returns to buy investment properties without thoroughly documenting their income but lenders granting these loans require borrowers to have excellent credit scores and high cash reserves available to make large down payments the verification of a borrowers employment merely states monthly gross income on the application down payment requirements are also different when it comes to these mortgages at least a 30 down payment is required while other mortgages may be as much as 35 to 50 in comparison most conventional mortgages require a 20 down payment such mortgages also have a maximum 70 loan to value ratio ltv this ratio is calculated as the amount of the mortgage lien divided by the appraised value of the property expressed as a percentage the higher the borrower s down payment on the investment property the easier it is to be approved for the loan this business model holds true for many mortgages because lenders see that the borrower is willing to offer a significant amount of capital this large lump sum payment may mean there is less likelihood that the borrower will default because of their considerable investment types of no document mortgagesno doc mortgages fall into the alt a category of lending products they are considered as falling in between prime and subprime mortgages in terms of risk other types of alt a loans include 4the interest rates for no documentation and other alt a products are usually higher than rates for a traditional mortgage loan many of these limited documentation loans take their security basis from the equity position in a property a mortgage calculator can be a good resource to help you budget for the monthly cost of your payment | |
what is a ninja loan | a ninja loan is a loan that is granted to people who have no job no income and no assets essentially they are mortgages for people who can likely not repay them ninja loans are essentially illegal now as a result of the dodd frack act 5can i get a heloc with no job you can get a home equity line of credit heloc without being employed but you will typically have to prove you have another source of income you may for example have to prove you receive income from your assets or collect pension payments the bottom linethese days lenders must require some documentation to support the information you provide them in the past no doc loans allowed them to provide funds to borrowers who simply declared their income without providing proof some lenders today may have looser lending practices than others but when they provide funds to borrowers without thoroughly vetting their finances they are assuming a risk | |
what is a no load fund | a no load fund is a mutual fund in which shares are sold without a commission or sales charge 1 investment companies typically forgo charging a load if they offer the fund themselves not through a second party like a broker load funds with either front load or back load charge a commission when you buy into the fund or sell your stake also there are level load mutual funds with fees that continue for as long as you re an investor just over 90 of mutual funds don t charge loads compared with over 90 50 years ago and you can avoid these fees often enough even when going through a broker 234while it s best to avoid these fees funds with commissions don t perform better any more than paying one to a car dealer makes it run faster there are other costs for mutual funds to watch understanding a no load fundbecause there is no transaction fee to invest in a no load fund more of the money you put in should be working for you for example if you invest 10 000 in a no load mutual fund all 10 000 will be invested into the fund meanwhile if you invest in a load fund that charges a front end load sales commission of 5 the amount of your stake will only be worth 9 500 if the fund holds a contingent deferred sales charge cdsc an expense paid at the time of selling the fund and the 500 sales commission comes out of the profits of the sale the cdsc declines each year the fund is held should you have a level load mutual fund the 12b 1 fees can be up to 1 of the fund s total assets the deduction for this charge is annual for as long as you own a stake in the fund these might not seem like much at the beginning but 500 upfront could mean if your mutual fund gets say average returns of 10 you ll be out about 3 400 in 20 years when you re set to retire | |
why are there loads | the justification for loads is compensating an intermediary such as a broker financial planner investment advisor or other professionals for their time and expertise in helping you find the mutual fund that s right for you 2 some investors find paying these fees bothersome and no load funds have become so ubiquitous that most fund managers have stopped advertising them as something special that said even no load funds have fees that you have to pay all mutual funds have charges to cover the costs of managing the fund the main one is the expense ratio which is the percentage of assets under management and covers operating and administrative costs the largest portion of this fee is to pay for the work of the fund manager and advisor every investor pays this fee since it comes out of the assets in which each has a stake others like 12b 1 to cover sales and like costs capped at 1 by regulators and redemption charged should you sell your stake within months of investing fees are essential to review against the benefits of a fund too overall though the move to no load funds lower minimum investments and a 60 drop in the average expense ratio since the 1990s has meant that far more of your savings go into your future retirement not the pockets of intermediaries who might add little of value to the fund 4real world examplesthe vanguard group popularized no load funds in the late 1970s converting its 14 funds to no load by going around intermediaries and offering them directly to shareholders 5 its first public index fund now known as vanguard 500 index fund vfiax charges no loads has a minimum investment of 3 000 and an expense ratio of 0 04 a shave off the average index fund ratio of 0 05 in 2023 46 the no load approach was among the reasons vfiax caught on and it holds 1 11 trillion in net assets as of the end of the first quarter of 2024 tracking the s p 500 has given it three five and 10 year returns of 11 44 15 01 and 12 92 respectively t rowe price founded in 1937 began offering its balanced fund rpbax in 1939 and is another of the oldest no load funds this fund provides both potential capital appreciation through stocks and the income stability of bonds it s intended for investors looking for a moderate approach leveraging stocks for higher potential returns while using bonds to mitigate volatility the fund typically allocates about 65 of its assets to stocks and 35 to fixed income securities although these proportions can vary based on economic conditions and the market outlook as of the end of the first quarter of 2024 the fund had an expense ratio of 0 61 and total assets of 4 62 billion 7 at the same time it had trailing returns of 4 38 8 18 and 7 34 for the last three five and 10 years respectively 8 | |
do no load funds guarantee better returns | no no load funds do not guarantee better returns investment performance depends on the fund s management and market conditions that said charging loads hasn t traditionally provided better performance so you re not necessarily losing out on results by seeking out no load funds 5can no load funds invest internationally yes many no load funds invest internationally providing global market exposure without sales charges you can check the financial industry regulatory authority s fund analyzer and review those funds that don t charge loads by checking off your criteria including for funds without loads 9can no load funds be part of retirement accounts yes no load funds are often used in retirement accounts because they are cost efficient and cover a wide variety of sectors and markets the bottom lineno load funds offer a cost effective option by selling shares without commissions or sales charges this approach reduces expenses and allows you to invest more in the fund once relatively rare among mutual funds no load funds now cover over 90 of those offered | |
what is no par value stock | no par value stock is issued without the specification of a par value indicated in a company s articles of incorporation or on its stock certificates most shares issued are classified as no par or low par value stock where prices of the latter are determined by the amount of cash investors are willing to pony up for the stocks on the open market understanding no par value stockcompanies may find it beneficial to issue no par value stock because doing so gives them the flexibility to set higher prices for future public offerings this reduces the downside risk for shareholders if the stock price sharply plummets because of the known fluctuations in pricing associated with the stock market many investors typically do not deem par necessary prior to purchasing a particular investment in addition the production of stocks with a face value may result in legal liabilities regarding the difference between the current going rate and the par value assigned to the stocks making them a less attractive option for issuers | |
when companies issue no par value stock the price may experience natural variations a no par stock s sale price can be determined by the basic principles of supply and demand fluctuating as necessary to meet market conditions without being misrepresented by the face value | some states forbid corporations from issuing no par stock special considerationsif a business releases stock with a low par value of 5 00 per share and 1 000 shares are sold the associated book value of the business can then be listed as 5 000 if the business is generally successful this value may be of no consequence but if the business collapses while currently owing a creditor 3 000 the indebted company may call for a review of the delinquent company s accounting statements which may reveal that the failed business was not fully capitalized this can prompt the owed business to exercise its legal right to require shareholders to contribute to the repayment of the debt no par value stock vs low par value stockno par value stocks are printed with no face value designation while low par value stocks may show an amount lower than 0 01 all the way up to a few dollars many times when a smaller company seeks to lower the number of its shareholders it may choose to issue stocks with a face value of 1 00 this small amount can then function as a line item for accounting purposes | |
what is a no shop clause | a no shop clause is a clause found in an agreement between a seller and a potential buyer that bars the seller from soliciting a purchase proposal from any other party in other words the seller cannot shop the business or asset around once a letter of intent or agreement in principle is entered into between the seller and the potential buyer the letter of intent outlines one party s commitment to do business and or execute a deal with another no shop clauses which are also called no solicitation clauses are usually prescribed by large high profile companies sellers typically agree to these clauses as an act of good faith parties that engage in a no shop clause often include an expiration date in the agreement this means they are only in effect for a short period of time and cannot be set indefinitely understanding the no shop clauseno shop clauses give a potential buyer leverage preventing the seller from looking for another more competitive offer once signed the buyer can take the time necessary to weigh out its options about the deal before agreeing to it or walking away they also prevent potential sellers from being targeted by unsolicited offers which may present a better opportunity no shop clauses are commonly found in mergers and acquisitions m a no shop clauses typically come with short expiry dates so neither party is bound to the deal for an extended period of time a no shop clause is very useful from the potential buyer s point of view because it can prevent the seller of the business or asset from soliciting other offers which may lead to a higher purchase price or bidding war if there are multiple interested parties on the other hand the seller may not want an unduly long no shop period especially if there is a risk that the potential purchaser will walk away from the deal during or upon completion of due diligence buyers in a strong position can demand a no shop clause so as not to drive up valuation or signal a buyer s interest in high stakes transactions anonymity is an influential element in turn a potential seller may agree to a no shop clause as a good faith gesture towards a buyer particularly a buyer with whom a seller wants to engage example of a no shop clausewhile there are many applications for a no shop clause they are fairly common during mergers and acquisitions for example apple may request a no shop clause while evaluating a potential acquisition being apple the seller may agree to a no shop clause in hopes apple s bid is strong or some other potential synergy offering enough value to justify agreeing to the clause in mid 2016 microsoft announced its intent to purchase linkedin both companies agreed to a no shop clause which prevented the professional social networking site to find other offers microsoft included a break up fee to the clause wherein linkedin would be responsible to pay microsoft 725 million if it closed a deal with another buyer the deal was completed in december 2016 exceptions to the no shop clause rulethere are certain cases where a no shop clause may not apply even when both parties sign one a public company has financial responsibilities to their shareholders and as such may wait for the highest bidder possible they may thus be able to reject a no shop clause even if the company s board of directors has signed one with a potential buyer | |
what is a no load fund | a no load fund is a mutual fund in which shares are sold without a commission or sales charge 1 investment companies typically forgo charging a load if they offer the fund themselves not through a second party like a broker load funds with either front load or back load charge a commission when you buy into the fund or sell your stake also there are level load mutual funds with fees that continue for as long as you re an investor just over 90 of mutual funds don t charge loads compared with over 90 50 years ago and you can avoid these fees often enough even when going through a broker 234while it s best to avoid these fees funds with commissions don t perform better any more than paying one to a car dealer makes it run faster there are other costs for mutual funds to watch understanding a no load fundbecause there is no transaction fee to invest in a no load fund more of the money you put in should be working for you for example if you invest 10 000 in a no load mutual fund all 10 000 will be invested into the fund meanwhile if you invest in a load fund that charges a front end load sales commission of 5 the amount of your stake will only be worth 9 500 if the fund holds a contingent deferred sales charge cdsc an expense paid at the time of selling the fund and the 500 sales commission comes out of the profits of the sale the cdsc declines each year the fund is held should you have a level load mutual fund the 12b 1 fees can be up to 1 of the fund s total assets the deduction for this charge is annual for as long as you own a stake in the fund these might not seem like much at the beginning but 500 upfront could mean if your mutual fund gets say average returns of 10 you ll be out about 3 400 in 20 years when you re set to retire | |
why are there loads | the justification for loads is compensating an intermediary such as a broker financial planner investment advisor or other professionals for their time and expertise in helping you find the mutual fund that s right for you 2 some investors find paying these fees bothersome and no load funds have become so ubiquitous that most fund managers have stopped advertising them as something special that said even no load funds have fees that you have to pay all mutual funds have charges to cover the costs of managing the fund the main one is the expense ratio which is the percentage of assets under management and covers operating and administrative costs the largest portion of this fee is to pay for the work of the fund manager and advisor every investor pays this fee since it comes out of the assets in which each has a stake others like 12b 1 to cover sales and like costs capped at 1 by regulators and redemption charged should you sell your stake within months of investing fees are essential to review against the benefits of a fund too overall though the move to no load funds lower minimum investments and a 60 drop in the average expense ratio since the 1990s has meant that far more of your savings go into your future retirement not the pockets of intermediaries who might add little of value to the fund 4real world examplesthe vanguard group popularized no load funds in the late 1970s converting its 14 funds to no load by going around intermediaries and offering them directly to shareholders 5 its first public index fund now known as vanguard 500 index fund vfiax charges no loads has a minimum investment of 3 000 and an expense ratio of 0 04 a shave off the average index fund ratio of 0 05 in 2023 46 the no load approach was among the reasons vfiax caught on and it holds 1 11 trillion in net assets as of the end of the first quarter of 2024 tracking the s p 500 has given it three five and 10 year returns of 11 44 15 01 and 12 92 respectively t rowe price founded in 1937 began offering its balanced fund rpbax in 1939 and is another of the oldest no load funds this fund provides both potential capital appreciation through stocks and the income stability of bonds it s intended for investors looking for a moderate approach leveraging stocks for higher potential returns while using bonds to mitigate volatility the fund typically allocates about 65 of its assets to stocks and 35 to fixed income securities although these proportions can vary based on economic conditions and the market outlook as of the end of the first quarter of 2024 the fund had an expense ratio of 0 61 and total assets of 4 62 billion 7 at the same time it had trailing returns of 4 38 8 18 and 7 34 for the last three five and 10 years respectively 8 | |
do no load funds guarantee better returns | no no load funds do not guarantee better returns investment performance depends on the fund s management and market conditions that said charging loads hasn t traditionally provided better performance so you re not necessarily losing out on results by seeking out no load funds 5can no load funds invest internationally yes many no load funds invest internationally providing global market exposure without sales charges you can check the financial industry regulatory authority s fund analyzer and review those funds that don t charge loads by checking off your criteria including for funds without loads 9can no load funds be part of retirement accounts yes no load funds are often used in retirement accounts because they are cost efficient and cover a wide variety of sectors and markets the bottom lineno load funds offer a cost effective option by selling shares without commissions or sales charges this approach reduces expenses and allows you to invest more in the fund once relatively rare among mutual funds no load funds now cover over 90 of those offered | |
what is noise | in a broad analytical context noise refers to information or activity that confuses or misrepresents genuine underlying trends in the financial markets noise can include small price corrections in the market as well as price fluctuations called volatility that distorts the overall trend however market noise can make it challenging for investors to discern what s driving the trend and whether a trend is changing or merely experiencing short term volatility understanding noisenoise can signify stock market activity caused by program trading dividend payments or other phenomena that is not reflective of overall market sentiment dividends are cash payments that companies pay investors as a reward for owning their shares the concept of noise was formally introduced in a landmark 1986 paper by economist fischer black where he stated that noise ought to be distinguished from information and that a disproportionate amount of trading occurred on the basis of noise rather than evidence 1all trading is somewhat speculative but noise traders are considered to be particularly reactionary relying on trending news apparent surges or declines in prices or word of mouth rather than the fundamental analysis of companies noise and time framestypically the shorter the time frame the more difficult it is to separate the meaningful market movements from the noise the price of a security can vary widely throughout a given day but almost none of this movement represents a fundamental change in the perceived value of the security day traders trade short term movements in a security with the goal of entering and exiting a position within minutes or hours some noise traders attempt to take advantage of market noise by entering buy and sell transactions without the use of fundamental data a longer time frame can provide a clearer picture of a trend for example a stock might swing wildly on earnings news for a few hours however when comparing that price movement to the trend over the past few months the earnings move might be small relative to the overall trend only hindsight provides assurance of the credibility of information and whether the recent news or events will impact the trend when buying and selling stocks at a rapid short term pace it can be difficult to distinguish information from noise causes of noisethere are market fluctuations that occur that usually tend to be noise intraday information typically causes short term price fluctuations more often than not unless it s a major announcement or event the trend usually remains intact once the noise settles down short term volatility or price moves can be the result of program trading which means that a large investment institution has programmed computers to make trades when prices reach a certain level it s also advisable to be on the lookout for artificial bubbles which are often created when many noise traders congregate their purchases around a single company or industry market noise can also lead to corrections or reverse movements of more than ten percent of the value of a security these corrections are typically adjustments to a significant overvaluation of a security or index having a system the alternative to noise tradingmany traders create processes and rules for making trading decisions to help avoid noise these traders establish preset risk and reward parameters meaning they know how much they re willing to risk on a trade as well as when to take profit or unwind the position with a trading plan investors attempt with some precision to determine what would constitute a profitable move in their current position typically investors who do not have a trading process for arriving at a decision are more susceptible to noise trading of course making decisions based on a personal trading strategy doesn t remove susceptibility to misinformation however traders who know what they re looking for are far less likely to be swayed by noise than traders who rely on news or other fluctuations | |
what is a noise trader | noise trader is generally a term used in academic finance studies associated with the efficient markets hypothesis emh the definition is often vaguely stated throughout the literature though it is mainly intended to describe investors who make decisions to buy or sell based on factors they believe to be helpful but in reality will give them no better returns than random choices understanding a noise traderconventional wisdom posits that noise traders are considered to be substantial contributors to high volume trading days because it is thought that these traders are making irrational decisions and responding emotionally however high volume trading days are inevitably driven by institutional investors who are among the most informed and should be making the most well researched investing decisions the category of traders that are stereotyped as noise traders includes novices and those who trade primarily based on technical analysis however those who don t trade the market averages and instead follow trading systems that under perform the market regardless of the factors involved should strictly speaking be lumped into the same category this is the reason that the definition is inconsistent and often unclear in the literature because the definition of what exactly constitutes rational investing is also not a standard definition some professional analysts and academics like to say that noise traders overinflated the price of securities in bullish trading periods and depressed the price of securities in bearish trading for mainstream investors these affects can be known as noise trader risks technical traderstechnical traders are often considered noise traders since their trading strategies are usually unrelated to company fundamentals but this assumes a study of company fundamentals generates better returns than random choices or market averages and this is certainly not the case for all traders and investors who follow company fundamentals the semi strong form of the emh would categorize both technical and fundamental indicators as suspect in generating predictably better than random returns noise traders those who follow unproven signals of any kind form a substantial portion of the market s trading volume on any given day active technical analysts and full time day traders make trades throughout the trading day based on price action indicators and patterns that are derived from daily price series charts however a small portion of these are actually much more successful than random returns or the market averages conventional wisdom would still label these noise traders but that designation is perhaps unwarranted since they clearly are following signals that matter at some level regardless of the validity of their signal those who contribute to an unusually high volume of daily trades can substantially affect a stock s price either positively or negatively and thus are considered to induce noise into market pricing the noise trader agendaedwin burton and sunit shah introduced the concept of the noise trader agenda to help better frame a discussion of noise traders this concept was published in their text titled behavioral finance wiley 2013 and it is further quoted in the cmt association s level i exam book this concept explains a more useful and practical way of thinking about noise traders they explain as follows | |
what is nominal | nominal is a common financial term with several different meanings in the first it means very small or far below the real value or cost in finance this adjective modifies words such as a fee or charge a nominal fee is below the price of the service provided or presumably easy for a consumer to afford or a fee that is small enough that it does not have any meaningful impact on one s finances nominal may also refer to a rate that s been unadjusted for inflation types of nominalsin finance and economics nominal may also refer to an unadjusted rate or the change in value when defining items like the gross domestic product gdp or interest rates nominal points to a figure that is unadjusted for seasonality inflation interest compounding and other modifiers in this use nominal shows the contrast to real economic statistics that do make such adjustments or modifications to results because a nominal figure will deal with the unadjusted value of a study it is best not to use it as a comparative figure consider someone who has 100 in 1950 versus someone with 100 in 2020 although both people may have 100 which is the nominal value the real value is not the same where the nominal value does not factor in inflation the nominal value of an asset can also mean its face value for example a bond with a face value of 1 000 has a nominal value of 1 000 nominal vs realthe term real as opposed to nominal expresses the value of something after making adjustments for various factors in creating a more accurate measure for example the difference between nominal and real gdp is that nominal gdp measures the economic output of a country using current market prices and real gdp takes inflation into account to create a more accurate measure nominal vs real rate of returnthe rate of return ror is the amount an investor earns on an investment while the nominal rate of return reflects the investor s earnings as a percentage of the initial investment the real rate takes inflation into account as a result the real rate gives a more accurate assessment of the actual buying power of the investor s earnings for example imagine you buy a 10 000 stock and sell it the following year for 11 000 your nominal rate of return is 10 however to get a more accurate picture of your actual return this rate needs to be adjusted for inflation as the purchasing power of your money has likely changed over the one year therefore if inflation for that year is 4 the real rate of return is only 6 or the nominal rate of return minus the rate of inflation nominal vs real interest rateslike the difference between nominal and real rates of return the difference between nominal and real interest rates is that the latter is adjusted for inflation 1 for example if an investment is expected to return 7 interest but the inflation rate is 4 then the real interest rate on that investment is only 3 however in terms of interest the nominal rate also contrasts with the annual percentage rate apr and the annual percentage yield apy in the case of apy the nominal or stated rate is the rate the lender advertises and it is the basic interest rate the consumer pays on the loan on the other hand apr takes into account fees and other costs associated with the loan and it calculates the interest rate with those factors in mind for example imagine a borrower takes out a 1 000 loan with a 5 nominal interest rate but they also pay a 100 origination fee during the first year of the loan they face 50 in interest fees however when we factor in the origination fee they pay 150 in fees and interest this total fee sum equates to a 15 apr conversely apy takes both the fees and the effect of compounding into account to give the borrower an even more accurate picture of their interest rate example of nominalas in the example above the nominal value for someone who has 100 in 1950 does not change for someone who has 100 in 2020 what does change is the purchasing power where inflation decreases purchasing power over time assuming an average annual inflation rate of 3 46 from 1950 to 2020 then what 100 would buy in 1950 would cost 1 081 in 2020 thus the real value of 100 in 1950 would be 1 081 in 2020 | |
what is the nominal effective exchange rate neer | the nominal effective exchange rate neer is an unadjusted weighted average rate at which one country s currency exchanges for a basket of multiple foreign currencies the nominal exchange rate is the amount of domestic currency needed to purchase foreign currency in economics the neer is an indicator of a country s international competitiveness in terms of the foreign exchange forex market forex traders sometimes refer to the neer as the trade weighted currency index the neer may be adjusted to compensate for the inflation rate of the home country relative to the inflation rate of its trading partners the resulting figure is the real effective exchange rate reer unlike the relationships in a nominal exchange rate neer is not determined for each currency separately instead one individual number typically an index expresses how a domestic currency s value compares against multiple foreign currencies at once if a domestic currency increases against a basket of other currencies inside a floating exchange rate regime neer is said to appreciate if the domestic currency falls against the basket the neer depreciates | |
what does the nominal effective exchange rate neer tell you | the neer only describes relative value it cannot definitively show whether a currency is strong or gaining strength in real terms it only describes whether a currency is weak or strong or weakening or strengthening compared to foreign currencies as with all exchange rates the neer can help identify which currencies store value more or less effectively exchange rates influence where international actors buy or sell goods neer is used in economic studies and for policy analysis on international trade it is also used by forex traders who engage in currency arbitrage the federal reserve calculates three different neer indices for the united states the broad index the advanced foreign economies afe and the emerging market economies eme 1every neer compares one individual currency against a basket of foreign currencies this basket is chosen based on the domestic country s most important trading partners as well as other major currencies the world s major currencies are the u s dollar the euro the british pound the japanese yen the australian dollar the swiss franc and the canadian dollar the value of foreign currencies in a basket are weighted according to the value of trade with the domestic country this could be export or import value the total value of exports and imports combined or some other measure the weights often relate to the assets and liabilities of different countries a higher neer coefficient above 1 means that the home country s currency is usually worth more than an imported currency and a lower coefficient below 1 means that the home currency is usually worth less than the imported currency there is no international standard for selecting a basket of currencies the organization for economic co operation and development oecd basket is different than the basket for the international monetary fund imf or the federal reserve or bank of japan however many different institutions rely on the international financial statistics ifs published by the imf | |
what is nominal gross domestic product gdp | nominal gross domestic product gdp is gdp evaluated at current market prices it is the total value of all goods and services produced in a given time period less the value of those made during the production process understanding nominal gdpthe economy is a series of interrelated processes that determine how resources are allocated these processes include the production distribution and consumption of goods and services along with other activities these goods and services are required by those living within the economy there are many ways to determine and measure how well the economy is doing economists watch various economic indicators such as unemployment inflation retail sales industrial production and gross domestic product gdp is a metric that measures the health and well being of a nation s economy it s the total value of all goods and services that are produced during a certain period of time less the value of those that are employed during the production process there are different types of gdp including real actual potential and nominal nominal gdp is an assessment of economic production in an economy that includes current prices in its calculation in other words it doesn t strip out inflation or the pace of rising prices which can inflate the growth figure all goods and services counted in nominal gdp are valued at the prices that are actually sold that year the bureau of economic analysis bea measures and reports gdp figures in the united states nominal gdp formulanominal gdp is the total value of goods and services produced within a specific economy there are actually a couple of ways that you can use to calculate nominal gdp the first is the expenditure approach in order to use this method you ll have to know a few values including once you have these figures you can plug them into the following formula you can also use the gdp price deflator method to calculate nominal gdp this approach involves the use of the following formula economists use the prices of goods from a base year as a reference point when comparing gdp from one year to another this price difference is called the gdp price deflator components of nominal gdplet s dive into the four main components of nominal gdp first consumption represents the total expenditure by households on goods and services this includes everything from groceries and clothing to healthcare services and entertainment it s the demand side of the economy and consumer spending patterns can be influenced by things like disposable income and cultural trends investment encompasses spending on capital goods such as machinery equipment and infrastructure when a country spends on investment it has the aim of increasing future production capacity investment also includes expenditures on research and development government spending refers to the expenditure by governments on goods and services this can range from public education and healthcare to defense and infrastructure projects while government spending contributes directly to nominal gdp its impact on the economy can vary depending on the nature of the expenditure for instance investments in education and infrastructure can boost productivity while excessive spending on subsidies or bureaucracy may actually lead to economic inefficiencies if innovators no longer have incentives to innovate last the difference between a country s exports and imports is called net imports when exports exceed imports a country has a trade surplus conversely when imports exceed exports it has a trade deficit net exports reflect a country s competitiveness in international markets as how well a country may leverage global markets for expansion effects of inflation on nominal gdpbecause it is measured in current prices growing nominal gdp from year to year might reflect a rise in prices as opposed to growth in the number of goods and services produced if all prices rise more or less together known as inflation then this will make nominal gdp appear greater inflation is a negative force for economic participants because it diminishes the purchasing power of income and savings both for consumers and investors inflation is most commonly measured using the consumer price index cpi or the producer price index ppi the cpi measures price changes from the buyer s perspective or how they impact the consumer 1 the ppi on the other hand measures the average change in selling prices that are paid to producers in the economy 2 | |
when the overall price level of the economy rises consumers have to spend more to purchase the same amount of goods if an individual s income rises by 10 in a given period but inflation rises by 10 as well then the individual s real income or purchasing power is unchanged the term real in real income merely reflects the income after inflation has been subtracted from the figure | the u s is the world s largest economy followed by china and japan 3usefulness of nominal gdpnominal gdp is incredibly useful in economic analysis it serves as a fundamental measure of economic growth allowing policymakers businesses and investors to track changes in the size and direction of the economy over time governments and central banks use nominal gdp data to formulate and evaluate economic policies policymakers theoretically make more informed decisions regarding fiscal and monetary measures by analyzing nominal gdp activity for example nominal gdp per capita which divides total gdp by the population offers insights into the average income and purchasing power of individuals within a country while it does not capture income distribution or disparities it provides a broad measure of overall prosperity and living standards a government can compare nominal gdp per capita over time to better understand if the average economic well being of its citizens you can also use nominal gdp to compare economic performance across countries it allows analysts to assess relative economic size productivity levels and competitiveness across countries analysts can then leverage other metrics driven by nominal gdp like nominal gdp per capita to compare trends and changes across countries over time last businesses can use nominal gdp data to inform strategic planning market analysis and investment decisions understanding broader economic trends enables companies to anticipate changes in consumer demand adjust pricing strategies and identify growth opportunities for instance companies like omnicom group have referenced nominal gdp as part of their form 10 k annual filing 4limitations of nominal gdpthere are several limitations to using nominal gdp as an economic indicator there are several factors that aren t included in nominal gdp such as another limitation arises when an economy is mired in a recession or a period of negative gdp growth negative nominal gdp growth could be due to a decrease in prices called deflation if prices declined at a greater rate than production growth nominal gdp might reflect an overall negative growth rate in the economy a negative nominal gdp would be signaling a recession when in reality production growth was positive nominal gdp vs real gdpa nation s nominal gdp growth might overstate its growth if inflation is present when we compare gdp growth between two periods using the gdp price deflator for example if prices rose by 1 since the base year the gdp deflator would be 1 01 overall real gdp is a better measure any time the comparison is over multiple years that s why economists prefer to use real gdp over nominal gdp real gdp starts with nominal gdp but it also factors in price changes from one period to another real gdp takes the total output for gdp and divides it by the gdp deflator let s say the current year s nominal gdp output was 2 000 000 while the gdp deflator showed a 1 increase in prices since the base year real gdp would be calculated as 2 000 000 1 01 or 1 980 198 for the year | |
what is nominal interest rate | nominal interest rate refers to the interest rate before taking inflation into account nominal can also refer to the advertised or stated interest rate on a loan without taking into account any fees or compounding of interest investopedia julie bangunderstanding nominal interest ratecentral banks set short term nominal interest rates which form the basis for other interest rates charged by banks and financial institutions nominal interest rates may be held at artificially low levels after a major recession to stimulate economic activity through low real interest rates which encourage consumers to take out loans and spend money 1 however a necessary condition for such stimulus measures is that inflation should not be a present or a near term threat in the united states the federal funds rate the interest rate set by the federal reserve can also be referred to as a nominal rate conversely during inflationary times central banks tend to set nominal rates high unfortunately they may overestimate the inflation level and keep nominal interest rates too high the resulting elevated level of interest rates may have serious economic repercussions as they tend to stall spending nominal rates tend to be high during periods of high inflation nominal interest rates exist in contrast to real interest rates and effective interest rates real interest rates tend to be important to investors and lenders while effective rates are significant for borrowers as well as investors and lenders although the nominal rate is the stated rate associated with a loan it is typically not the rate that the consumer pays rather the consumer pays an effective rate that varies based on fees and the effect of compounding to that end annual percentage rate apr differs from the nominal rate as it takes fees into account and annual percentage yield apy takes both fees and compounding into account the nominal interest rate n for a specified period when the effective interest rate is known can be calculated as n m 1 e 1 m 1 | |
where | however most borrowers typically want to know the effective rate as the nominal rate is often the rate that is stated the formula for effective interest rate e is e 1 n m m 1 | |
where | for example if a loan s stated nominal rate is 8 and it s compounded semi annually then the effective interest rate e would be e 1 08 2 2 1 8 16 treasury inflation protected securities tips allow investors to preserve their savings without losing value to inflation nominal vs real interest ratesunlike the nominal rate the real interest rate takes the inflation rate into account the equation that links nominal and real interest rates can be approximated as nominal rate real interest rate inflation rate or nominal rate inflation rate real interest rate to avoid purchasing power erosion through inflation investors consider the real interest rate rather than the nominal rate one way to estimate the real rate of return in the united states is to observe the interest rates on treasury inflation protected securities tips 2 the difference between the yield on a treasury bond and the yield on tips of the same maturity provides an estimate of inflation expectations in the economy 3for example if the nominal interest rate offered on a three year deposit is 4 and the inflation rate over this period is 3 the investor s real rate of return is 1 on the other hand if the nominal interest rate is 2 in an environment of 3 annual inflation the investor s purchasing power erodes by 1 per year | |
what is the difference between nominal and real interest rates | nominal interest rates do not account for inflation while real interest rates do for example in the united states the federal funds rate the interest rate set by the federal reserve can form the basis for the nominal interest rate being offered the real interest however would be the nominal interest rate minus the inflation rate usually measured by the cpi consumer price index | |
why do investors care more about real interest rates | to avoid purchasing power erosion through inflation investors consider the real interest rate rather than the nominal rate one way to estimate the real rate of return in the united states is to observe the interest rates on treasury inflation protected securities tips the difference between the yield on a treasury bond and the yield on tips of the same maturity provides an estimate of inflation expectations in the economy | |
what is difference between nominal rate and apy | apy annual percentage yield is the effective interest rate which tends to be more relevant to borrowers and lenders the consumer usually the borrower pays an effective rate that varies from the nominal stated rate based on fees and the effect of compounding to that end the effective rate apy is often higher than the nominal rate | |
how do you calculate the effective rate if nominal rate is known | the effective rate which factors in compounding can be calculated from the nominal rate which is often the rate that is stated the formula for effective interest rate e is e 1 n m m 1 where n nominal rate and m number of compounding periods | |
what is the nominal rate of return | the nominal rate of return is the amount of money generated by an investment before factoring in expenses such as taxes investment fees and inflation if an investment generated a 10 return the nominal rate would equal 10 after factoring in inflation during the investment period the actual real return would likely be lower however the nominal rate of return has its merits since it allows investors to compare the performance of an investment irrespective of the different tax rates that might be applied for each investment the formula for the nominal rate of return isnominal rate of return current market value original investment valueoriginal investment value text nominal rate of return frac text current market value text original investment value text original investment value nominal rate of return original investment valuecurrent market value original investment value | |
what does the nominal rate of return tell you | the nominal rate of return helps investors gauge the performance of their portfolio whether it s comprised of stocks bonds or other investments the nominal rate of return strips out outside factors that can affect performance such as taxes and inflation by using the nominal rate of return investors can compare the performance of different investments over different time periods that might have different inflation rates tracking the nominal rate of return for a portfolio or its components helps investors to see how they re managing their investments over time the after tax rate of return of an investment takes the effect of taxation on the investment s returns into account in most cases investors pay different amounts of tax on investments based on the investment how long the investment was held and the investor s tax bracket as a result the two investors may face different after tax rates of return on their investment even if it is the same investment with the same nominal rate of return also different investments will have different tax rates applied to them if an investor is comparing a municipal bond with a corporate bond whereby both bonds have the same nominal rate of return their after tax return is markedly different in most cases municipal bonds are tax exempt while income from corporate bonds is subject to taxation as a result if the irs taxes the corporate bond the rate of return will be significantly less than the rate of return on the municipal bond because the corporate bond is subject to capital gains tax example of a nominal rate of returnlet s say an investor placed 100 000 in a no fee fund to be invested for one year at the end of the year the investment was worth 108 000 given the market price at the end of the same year 108000 100000 100000 0 08 8 frac left 108 000 100 000 right 100 000 0 08 8 100000 108000 100000 0 08 8 the difference between the nominal rate of return and real rate of returna real rate of return is the annual percentage return realized on an investment which is adjusted for changes in prices due to inflation or other external factors adjusting the nominal return to compensate for factors such as inflation allows you to determine how much of your nominal return is a real return conversely the nominal rate of return strips out outside factors that can affect performance such as taxes and inflation limitations of the nominal rate of returnthe nominal rate of return doesn t include inflation or taxes when calculating the performance of an investment for example if an investment earned 10 over one year but inflation was 2 5 for the same period the actual rate of return would be 7 5 or 10 2 5 inflation although the nominal rate return is an important metric when comparing the performance of multiple investments it should be used in tandem with the real rate of return to make sure that investment gains are not being eroded by inflation or rising prices | |
what is a nominal value | nominal value of a security often referred to as face or par value is its redemption price and is normally stated on the front of that security with respect to bonds and stocks it is the stated value of an issued security as opposed to its market value in economics nominal values refer to the unadjusted rate or current price without taking inflation or other factors into account as opposed to real values where adjustments are made for general price level changes over time understanding nominal valuenominal value is a critical component of many bond and preferred stock calculations including interest payments market values discounts premiums and yields nominal value of common stock will usually be much lower than its market value due to supply demand considerations while the nominal value of preferred stock should be more in line with its market value the nominal value of a bond will vary from its market value based on market interest rates nominal and real values also play a vital role in economics whether it takes into account nominal gdp versus real gdp or nominal interest rates versus real interest rates real values factor in the changes in purchasing power while the nominal rate of return reflects an investor s earnings as a percentage of their initial investment the real rate of return takes inflation and the actual buying power of the investor s earnings into account investopedia michela buttignolnominal value of bondsfor bonds the nominal value is the face value which is the amount repaid to the bondholder at maturity corporate municipal and government bonds typically have face values of 1 000 5 000 and 10 000 respectively if a bond s yield to maturity ytm is higher than its nominal interest rate coupon rate then the real value of the bond will be lower than its face nominal value and the bond is said to selling at a discount to par or below par conversely if the ytm is lower than its nominal interest rate then the real value of the bond is higher than its face value and it is said to be selling at a premium to par or above par and if they are the same then the bond is selling at its nominal or par value zero coupon bonds are always sold at a discount to nominal value because the investor does not receive interest until the bond matures the formula for calculating bond market value is bp coupon payments 1 market yield i face value 1 market yield n where bp bond price coupon payments face value coupon rate i each year n number of years begin aligned text bp frac sum text coupon payments 1 text market yield i frac text face value 1 text market yield n textbf where text bp text bond price text coupon payments text face value times text coupon rate i text each year n text number of years end aligned bp 1 market yield i coupon payments 1 market yield nface value where bp bond pricecoupon payments face value coupon ratei each yearn number of years for example a 3 year corporate bond issue with face value of 1000 and a coupon rate of 10 the annual coupon payments would be 100 1000 10 if the market rate ytm is higher than the coupon rate say 12 then the market value of the bond would be selling at a discount to par less than 1000 bond price 100 1 12 100 1 12 2 100 1 12 3 bond price 1000 1 12 3 89 29 79 72 71 18 711 79 951 98 begin aligned text bond price frac 100 1 12 frac 100 1 12 2 frac 100 1 12 3 phantom text bond price frac 1000 1 12 3 89 29 79 72 71 18 711 79 951 98 end aligned bond price bond price 1 12 100 1 12 2 100 1 12 3 100 1 12 3 1000 89 29 79 72 71 18 711 79 951 98 nominal value of stocksthe nominal value of a company s stock or par value is an arbitrary value assigned for balance sheet purposes when the company is issuing share capital and is typically 1 or less it has little to no bearing on the stock s market price for example if a company obtains authorization to raise 5 million and its stock has a par value of 1 it may issue and sell up to 5 million shares of stock the difference between the par and the sale price of stock is called the share premium and may be considerable but it is not technically included in share capital or capped by authorized capital limits so if the stock sells for 10 5 million will be recorded as paid share capital while 45 million will be treated as additional paid in capital preferred stocks are hybrid assets which pay dividends and may be converted to common stock the nominal par value is quite important here as this is the amount used to calculate the dividend for example a company issuing a 5 preferred stock with a par nominal value of 50 would be paying dividends of 2 50 5 50 per share annually the preferred stock s price will depend on the market s assessment of the dividend percentage being offered in this case 5 if the market is satisfied with 5 then the stock will trade around its nominal par value if the dividend percentage is higher or lower than market expectations then the preferred stock s price will trade at a higher or lower price than its nominal value nominal value in economicsin economics nominal value refers to the current monetary value and does not adjust for the effects of inflation this renders nominal value a bit useless when comparing values over time it is for this reason that investors prefer real values which factor in inflation to give a relative comparison that is more accurate and understandable real rate is the nominal rate minus the inflation rate real rate nominal rate inflation rate text real rate text nominal rate text inflation rate real rate nominal rate inflation ratefor example if nominal gross domestic product gdp growth rate is 5 5 for a given year and the related annual inflation rate is 2 then the real gdp growth rate for the year is 3 5 nominal vs real exchange ratesthe nominal exchange rate is the number of units of the domestic currency that can purchase a unit of a given foreign currency the real exchange rate is defined as the ratio of the foreign price level to the domestic price level where the foreign price level is converted into domestic currency units via the current nominal exchange rate in contrast to the nominal exchange rate the real exchange rate is always floating because even in fixed exchange rate regimes the real exchange rate changes as inflation changes | |
what is nominal yield | a bond s nominal yield depicted as a percentage is calculated by dividing total interest paid annually by the face or par value of the bond understanding nominal yieldthe nominal yield is the coupon rate on a bond essentially it is the interest rate that the bond issuer promises to pay bond purchasers this rate is fixed and it applies to the life of the bond sometimes it s also referred to as nominal rate or coupon yield the nominal yield does not always represent the current yield because it s a percentage based on the bond s par value and not the actual price that was paid to buy that bond buyers who pay a premium that s more than the face value for a given bond will receive a lower actual rate of return ror than the nominal yield while investors who pay a discount that s less than the face value will receive a higher actual rate of return it s also worth noting that bonds with high coupon rates tend to get called first when callable because they represent the issuer s greatest liability relative to bonds with lower yields take for example a bond with a face value of 1 000 that pays the bondholder 50 in interest payments annually it would have a nominal yield of 5 50 1000 | |
what determines the nominal yield | bonds are issued by governments for domestic spending purposes or by corporations to raise funds for financing research and development and for capital expenditure capex at the time of issuance an investment banker acts as an intermediary between the bond issuer which might be a corporation and the bond buyer two components combine to determine the nominal yield on a debt instrument the prevailing rate of inflation and the credit risk of the issuer | |
what is a nominated advisor nomad | a nominated advisor nomad is a financial services firm that assists with listing a company on the alternative investment market aim of the london stock exchange lse the alternative investment market is a specialized unit of the lse catering to smaller more risky companies the lse requires that a company seeking a listing on aim have a nomad which the lse itself must approve to carry out the functions once listed on the aim the nomad oversees the company and ensures it follows regulations nomads are thus seen as the regulatory system for the less stringent aim market and are tasked with advising companies both pre ipo and after listing | |
how a nominated advisor nomad works | the alternative investment market aim was established in 1995 by the london stock exchange to enable emerging growth companies to raise capital the aim is considered to be a submarket of the lse well over 3 500 such companies from around the world have taken advantage of the lower listing requirements offered by this alternative exchange however there is a rule that a company must retain the services of a nomad to help guide it through the aim listing process a nomad is a corporate finance advisor usually a boutique investment bank which conducts thorough due diligence for the suitability of an aim applicant for the exchange if satisfied with the company s business model financial and operating track record the competence of executives and directors and intended capital structure the nomad will assist the company in its preparation and application for admission to the aim if the company and nomad are successful in their efforts the nomad will continue to monitor its client this is a requirement of the lse the nomad must act as the regulator ensuring that the company complies with aim rules at all times the nomad also serves an ongoing role of providing advice on business operational or financial strategy companies must retain nomad services to help guide them through the aim listing process nomad qualificationsas of may 2022 there are 27 nomads approved by the lse 1 the following are noted criteria for an entity to be considered a nomad 2along with a nomad companies that want to join the aim should consider retaining a broker an accountant and a legal adviser brokers are also members of the lse and are required to be from the same firm as the nomad brokers are responsible to bring buyers and sellers together accountants are independent of the company and monitor the company s financials the accountant also helps the company prepare all financial documents required of it finally the legal adviser takes care of any verifications of statements as well as provides direction and advice to the company s board members | |
what is a nomination committee | the term nomination committee refers to a committee that acts as part of an organization s corporate governance a nomination committee evaluates a firm s board of directors and examines the skills and characteristics required of board candidates nomination committees may also have other duties which vary from company to company understanding the nomination committeenominating committees serve a very useful and important purpose for different organizations ranging from nonprofits to major corporations also referred to as nominating committees or nominating and governance committees they are often made up of the chair of the board the deputy chair and the chief executive officer ceo there are usually at least two members on each committee although the exact number of people who serve on the committee tends to differ based on the type and size of the organization the length of time each member serves on the committee also varies depending on the nature of the entity the size of a nomination committee varies based on the type of organization these committees are tasked with a series of responsibilities one of their primary duties is to seek out candidates to fill a variety of important positions in a company including its board of directors as well as key management roles the committees review candidates qualifications and ensure they align with the requirements of the company more about this is outlined a little further down committees may also need to review and change policies including corporate governance corporate governance is a system of rules and processes that provides the framework for a company to achieve its objectives put simply corporate governance helps companies stay on track it s an important factor when balancing the interests of a company s many stakeholders including but not limited to shareholders management customers suppliers financiers government and community of users special considerationsas mentioned above the nominating committee often seeks out and appoints the board chair the chair presides over executive committee or board meetings they ensure these meetings run smoothly and remain orderly and they also aim to reach a consensus in board decisions through skilled negotiation tactics the board position is usually distinctly different from that of the ceo the chair of the board position can be either a nonexecutive part time or executive full time position a nomination committee may also support the search for a ceo the ceo is an organization s highest ranking executive they make major corporate decisions ranging from day to day operations to managing company resources and liaise between the board of directors and other executives a company s ceo often has a position on the board as well while the role of the ceo depends on the size culture and industry of the company it is almost always full time this is in contrast with the chair of the board who may be part time in small companies the ceo often takes on a more hands on role making a range of lower level choices such as interviewing and hiring staff but it s different for those in larger fortune 500 companies in these cases the ceo typically deals with macro level strategy and directing overall growth this means the ceo delegates more tasks to other senior managers ceos set the tone and the vision for their organization as such it s important that the nominating committee be deliberate when considering potential candidates | |
what is a nomination committee | the term nomination committee refers to a committee that acts as part of an organization s corporate governance a nomination committee evaluates a firm s board of directors and examines the skills and characteristics required of board candidates nomination committees may also have other duties which vary from company to company understanding the nomination committeenominating committees serve a very useful and important purpose for different organizations ranging from nonprofits to major corporations also referred to as nominating committees or nominating and governance committees they are often made up of the chair of the board the deputy chair and the chief executive officer ceo there are usually at least two members on each committee although the exact number of people who serve on the committee tends to differ based on the type and size of the organization the length of time each member serves on the committee also varies depending on the nature of the entity the size of a nomination committee varies based on the type of organization these committees are tasked with a series of responsibilities one of their primary duties is to seek out candidates to fill a variety of important positions in a company including its board of directors as well as key management roles the committees review candidates qualifications and ensure they align with the requirements of the company more about this is outlined a little further down committees may also need to review and change policies including corporate governance corporate governance is a system of rules and processes that provides the framework for a company to achieve its objectives put simply corporate governance helps companies stay on track it s an important factor when balancing the interests of a company s many stakeholders including but not limited to shareholders management customers suppliers financiers government and community of users special considerationsas mentioned above the nominating committee often seeks out and appoints the board chair the chair presides over executive committee or board meetings they ensure these meetings run smoothly and remain orderly and they also aim to reach a consensus in board decisions through skilled negotiation tactics the board position is usually distinctly different from that of the ceo the chair of the board position can be either a nonexecutive part time or executive full time position a nomination committee may also support the search for a ceo the ceo is an organization s highest ranking executive they make major corporate decisions ranging from day to day operations to managing company resources and liaise between the board of directors and other executives a company s ceo often has a position on the board as well while the role of the ceo depends on the size culture and industry of the company it is almost always full time this is in contrast with the chair of the board who may be part time in small companies the ceo often takes on a more hands on role making a range of lower level choices such as interviewing and hiring staff but it s different for those in larger fortune 500 companies in these cases the ceo typically deals with macro level strategy and directing overall growth this means the ceo delegates more tasks to other senior managers ceos set the tone and the vision for their organization as such it s important that the nominating committee be deliberate when considering potential candidates | |
what is the non accelerating inflation rate of unemployment | the non accelerating inflation rate of unemployment nairu is the specific level of unemployment that is evident in an economy that does not cause inflation to increase in other words if unemployment is at the nairu level inflation is constant nairu often represents the equilibrium between the state of the economy and the labor market 1 2 | |
how nairu works | although there is no formula for calculating a nairu level the federal reserve has historically used statistical models and estimates that the nairu level is somewhere between 5 to 6 unemployment st louis fed estimates for 2005 2030 are between 4 and 5 3 nairu plays a role in the fed s dual mandate objectives of achieving maximum employment and price stability 1for example the fed typically targets an inflation rate of 2 as a medium term level to maintain 4 if prices rise too quickly due to a strong economy and it looks like the fed s inflation target will be exceeded by the inflation rate the fed will tighten monetary policy slowing down the economy and inflation 5understanding nairuaccording to nairu as unemployment rises over a few years inflation should decrease if the economy is performing poorly inflation tends to fall or subside since businesses can t increase prices due to the lack of consumer demand if demand for a product decreases the price of the product falls as fewer consumers want the product resulting in a cut in prices by the business to stimulate demand or buying interest in the product nairu is the level of unemployment that the economy has to rise to before prices begin falling conversely if unemployment falls below the nairu level the economy is doing well inflation should increase if the economy is performing well for many years companies can raise prices to match demand also the demand for products such as housing cars and consumer goods rises and that demand causes inflationary pressures nairu represents the lowest level of unemployment that can exist in an economy before inflation begins to rise 1think of nairu as the tipping point between unemployment and rising or falling prices | |
how nairu came about | in 1958 new zealand born economist william phillips wrote a paper titled the relation between unemployment and the rate of money wage rates in the united kingdom in his paper phillips described the supposed inverse relationship between unemployment levels and the rate of inflation this relationship was referred to as the phillips curve 6 however during the severe recession of 1974 to 1975 inflation and unemployment rates both reached historic levels and people began to doubt the theoretical basis of the phillips curve 78milton friedman and other critics argued that government macroeconomic policies were being driven by a low unemployment target which caused the expectations of inflation to change this led to accelerated inflation rather than reduced unemployment it was then agreed that government economic policies should not be influenced by unemployment levels below a critical level also known as the natural rate of unemployment 9nairu was first introduced in 1975 as the noninflationary rate of unemployment niru by franco modigliani and lucas papademos 10 it was an improvement on milton friedman s concept of the natural rate of unemployment 11the correlation between unemployment and inflationsuppose that the unemployment rate is at 5 and the inflation rate is 2 assuming that both of these values remain the same for a period it can then be said that when unemployment is under 5 it is natural for an inflation rate of over 2 to correspond with it critics cite that it is unlikely for a static rate of unemployment to last for long periods of time because of different levels of factors affecting the workforce and employers such as natural disasters and political instability that can quickly shift this equilibrium the theory states that if the actual unemployment rate is less than the nairu level for a few years inflationary expectations rise so the inflation rate tends to increase if the actual unemployment rate is higher than the nairu level inflationary expectations fall so the inflation rate decreases if both the unemployment rate and the nairu level are equal the inflation rate remains constant nairu vs natural unemploymentnatural unemployment or the natural rate of unemployment is the minimum unemployment rate resulting from real or voluntary economic forces natural unemployment reflects the number of people who are unemployed due to the structure of the labor force such as those replaced by technology or those who lack specific skills to gain employment the term full employment is a misnomer since there are always workers looking for employment including college graduates or those displaced by technological advances in other words there is always some movement of labor throughout the economy the movement of labor in and out of employment whether it s voluntary or not represents natural unemployment nairu has to do with the relationship between unemployment and inflation or rising prices nairu is the specific level of unemployment whereby the economy does not cause inflation to increase limitations of using nairunairu is a study of the historical relationship between unemployment and inflation and represents the specific level of unemployment before prices tend to rise or fall however in the real world the historical correlation between inflation and unemployment can break down also many factors impact unemployment besides inflation for example workers who lack the skills needed to get a job would likely face unemployment while the workers who have the skills are likely to be employed one of the challenges lies in estimating the nairu level for different groups of workers who have different skill sets | |
why can low unemployment be bad for the economy | if inflation falls below ideally 5 to 6 strong consumer demand can cause inflation to rise faster than the federal reserve s ideal rate of 2 | |
what is natural unemployment | an economy will never have 100 employment due to the fact that there will always be a number of people who are unemployed due to structural forces such as loss of jobs to technology or a mismatch between their skills and what the job market seeks also included are those just joining the labor force such as new graduates | |
what is the phillips curve | this supposed inverse relationship between unemployment levels and inflation was first described by new zealand born economist william phillips in 1958 the bottom linein real life the correlation between inflation dropping prices and unemployment can break down but historically the phenomenon has held the level at which the inflation and unemployment are in equilibrium is known as the non accelerating inflation rate of unemployment nairu | |
what is a non accredited investor | a non accredited investor is any investor who does not meet the income or net worth requirements set out by the securities and exchange commission sec the concept of a non accredited investor comes from the various sec acts and regulations that refer to accredited investors an accredited investor can be a bank or a company but is mainly used to distinguish individuals who are considered financially knowledgeable enough to look after their own investing activities without sec protection the current standard for an individual accredited investor is a net worth of more than 1 million excluding the value of their primary residence and an income of more than 200 000 annually or 300 000 combined income with a spouse for each of the past two years with the expectation of the same for the current year 1a non accredited investor therefore is anyone making less than 200 000 annually less than 300 000 including a spouse that also has a total net worth of less than 1 million when their primary residence is excluded understanding non accredited investorsnon accredited investors make up the bulk of investors in the world when people speak of retail investors they often mean non accredited investors basically this term covers everyone who holds less than 1 million in assets aside from the value they may have in their house and earns under 200 000 i e the vast majority of americans according to a 2023 report from the sec accredited investors made up 18 of households in 2022 2the sec does have the ability to change the definition of accredited investor should inflation and other factors result in too much of the general population meeting the standard on aug 26 2020 the u s securities and exchange commission amended the definition of an accredited investor according to the sec s press release the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge experience or certifications in addition to the existing tests for income or net worth the amendments also expand the list of entities that may qualify as accredited investors including by allowing any entity that meets an investments test to qualify 3among other categories the sec now defines accredited investors to include the following individuals who have certain professional certifications designations or credentials individuals who are knowledgeable employees of a private fund and sec and state registered investment advisers 3non accredited investors and private companiesnon accredited investors are limited in their investment choices for their own safety after the speculation around the 1929 crash and the resulting depression the sec was created to protect regular people from getting into investments they couldn t afford or understand the sec uses acts and regulations to set out what a non accredited investor can invest in and what those investments need to provide in terms of documentation and transparency private funds private companies and hedge funds can do things with investor money that mutual funds cannot do simply because they deal primarily with accredited investors the sec assumes that all parties involved know the risks and rewards involved so they have a lighter regulatory touch where these funds are concerned that said these funds must pay close attention to their compliance and make sure their investor counts stay within the rules because they can lose their regulation status for some types of private investment they are only allowed non accredited investors when they are employees or fit a specific exemption other funds and companies can have unrelated non accredited investors but they must keep the number below a certain level this is the case with regulation d which keeps the number of non accredited investors in a private placement below 35 4 | |
what is the difference between accredited and non accredited investors | the difference between accredited and non accredited investors is determined by the sec which classifies investors into these two types of buckets based on net worth and salary accredited investors must have a net worth of more than 1 million excluding the value of their primary residence and an income of more than 200 000 annually or 300 000 combined income with a spouse for each of the past two years with the same expected for the current year whoever does not meet these requirements is a non accredited investor accredited investors are allowed to invest in securities that non accredited investors are not 1 | |
why do investors need to be accredited | investors need to be accredited so that they can invest in riskier assets the goal is really to protect non accredited investors it is assumed that accredited investors have enough financial expertise to analyze the risks and rewards of a riskier investment or at least have the wealth to absorb a significant loss | |
how can non accredited investors invest in private companies | non accredited investors can invest in private companies through equity crowdfunding this is so because the amount needed to invest is usually very small as equity crowdfunding seeks to pool the investments from many investors the bottom linethe sec s classification of investors into accredited and non accredited is intended to protect investors who have lower net worths and salaries and those who may not understand all types of investments particularly riskier ones accredited investors may be able to take more risks simply because they have more money | |
what is a non assessable stock | a non assessable stock is a class of stock in which the issuing company is not allowed to impose levies on its shareholders for additional funds in order to make further investments the maximum liability the purchaser of the stock assumes is equal to the initial purchase price of the shares stocks issued by u s companies and traded on u s exchanges and almost all other exchanges are generally non assessable understanding non assessable stocka non assessable stock is the opposite of an assessable stocks a now defunct type of primary offering assessable stock was the primary type of equity issued in the late 1800s assessable stock was usually sold at a discount and allowed the issuer to gather additional funds from investors after their initial purchase of the stock for example a share of stock with a face value of 20 might be sold for 5 at some point the issuer would serve the investors with an assessment for more funds up to the entire discounted amount in this example 15 if an investor refused to pay the stock returned to the issuing company not surprisingly assessable stock proved to be unpopular most companies switched over to issuing non assessable stock in the early 1900s and the last assessable shares were sold in the 1930s although equity was no longer sold at a discount compared to its share price investors were more confident about buying non assessable stocks because they no longer had to worry about the possibility that the issuer would force them to invest more money in the stock after the initial transaction for any equity offering that is registered with the securities and exchange commission sec it is standard to include the opinion of a law firm that states the shares are duly authorized validly issued fully paid and non assessable the largest investment the purchaser of a non assessable stock has to make is the initial purchase price of the shares the investor may lose the invested amount if the stock price goes to zero however the investor will never be required by the issuing company to make additional investments as a condition of their stock ownership | |
when a stock is non assessable it also means that if the issuing company goes bankrupt the shareholders cannot lose more money than they invested in the first place 1 | example of a non assessable stocknon assessable stocks have the word non assessable printed on their stock certificates this vintage pennsylvania power light company common stock certificate for 20 shares dating from 1973 contains the phrase fully paid and non assessable shares of the common stock without nominal or par value the phrase is common for boilerplate language | |
what is a non amortizing loan | a non amortizing loan is a type of loan for which payments on the principal are made by lump sum as a result the value of the principal does not decrease at all over the life of the loan popular types of non amortizing loans include interest only loans or balloon payment loans understanding non amortizing loana non amortizing loan has no amortization schedule because the principal is paid off in a single lump sum non amortizing loans are an alternative type of lending product as most standard loans involve an amortization schedule that determines the monthly principal and interest paid toward a loan each month non amortizing loans require their principal to be paid back in one lump sum rather than through regular installments and usually feature a short duration and a high interest rate generally non amortizing loans require higher interest rates because they are usually unsecured and offer lower installment payments reducing the cash flow to the lender since they do not have a basic amortization schedule non amortizing loans can be more complex for a lender to structure if any installment payments are made they must be tracked individually and recorded separately from the principal if a balloon payment is made the lender must determine the interest to be collected with the lump sum when the payment is due types of non amortizing loansballoon mortgages interest only loans and deferred interest programs are three general types of loan products that a borrower can look to for non amortizing loan benefits these loans do not require any principal to be paid in installment payments during the life of the loan some loans may require only the interest payment in installments while others defer both the principal and interest these loans are typically for a short duration as the deferred payment results in higher risk for the lender they are also not typically considered qualified loans a status that would allow them to receive certain protections and be resold in the secondary market | |
how do borrowers use non amortizing loans | non amortizing loans are commonly used in land contracts and real estate development financing in these situations borrowers typically have limited immediate collateral that can be used specifically when a residential or commercial building is being built on a tract of land a non amortizing loan provides the borrower with a specific amount of time to build a property after which the borrower can potentially refinance or obtain a takeout loan with better loan terms using the newly built property as the collateral these types of loans proliferated in the era preceding the financial crisis of 2008 when rogue mortgage industry practices became widely used to lure consumers to take on mortgages beyond their affordability special considerationsgenerally non amortizing loans can serve borrowers in special situations these loans give a borrower a specified timeframe within which to repay the principal without the need for monthly installment payments this can help borrowers who plan to save on their own over the life of the loan these products can also target borrowers who have prospects for increasing their monthly income during the loan s timeframe | |
what are nonbank financial companies | nonbank financial companies nbfcs also known as nonbank financial institutions nbfis are financial institutions that offer various banking services but do not have a banking license generally these institutions are not allowed to take traditional demand deposits readily available funds such as those in checking or savings accounts from the public this limitation keeps them outside the scope of conventional oversight from federal and state financial regulators nonbank financial companies fall under the oversight of the dodd frank wall street reform and consumer protection act which describes them as companies predominantly engaged in a financial activity when more than 85 of their consolidated annual gross revenues or consolidated assets are financial in nature 1 examples of nbfcs include investment banks mortgage lenders money market funds insurance companies hedge funds private equity funds and p2p lenders investopedia michela buttignolunderstanding nbfcsnbfcs can offer services such as loans and credit facilities currency exchange retirement planning money markets underwriting and merger activities the dodd frank wall street reform and consumer protection act defines three types of nonbank financial companies foreign nonbank financial companies u s nonbank financial companies and u s nonbank financial companies supervised by the federal reserve board of governors 1foreign nonbank financial companies are incorporated or organized outside the u s and are predominantly engaged in financial activities such as those listed above foreign nonbanks may or may not have branches in the united states 1u s nonbank financial companies like their foreign nonbank counterparts are predominantly engaged in nonbank financial activities but have been incorporated or organized in the united states u s nonbanks are restricted from serving as farm credit system institutions national securities exchanges or any one of several other types of financial institutions 1the main difference between these nonbank financial companies and others is that they fall under the supervision of the federal reserve board of governors this is based on a determination by the board that financial distress or the nature scope size scale concentration interconnectedness or mix of activities at these institutions could threaten the financial stability of the united states 2shadow banks and the 2008 financial crisisnbfcs existed long before the dodd frank act in 2007 they were given the moniker shadow banks by economist paul mcculley at the time the managing director of pacific investment management company llc pimco to describe the expanding matrix of institutions contributing to the then current easy money lending environment which in turn led to the subprime mortgage meltdown and the subsequent 2008 financial crisis 34although the term sounds somewhat sinister many well known brokerages and investment firms were engaging in shadow banking activity investment bankers lehman brothers and bear stearns were two of the most well known nbfcs at the center of the 2008 crisis 5as a result of the ensuing financial crisis traditional banks found themselves under closer regulatory scrutiny which led to a prolonged contraction in their lending activities as the authorities tightened up on the banks the banks in turn tightened up on loan or credit applicants the more stringent requirements gave rise to more people needing other funding sources and hence the growth of nonbank institutions that were able to operate outside the constraints of banking regulations in short in the decade following the financial crisis of 2007 08 nbfcs proliferated in large numbers and varying types playing a key role in meeting the credit demand unmet by traditional banks 6nbfc controversyadvocates of nbfcs argue that these institutions play an important role in meeting the rising demand for credit loans and other financial services customers include both businesses and individuals especially those who might have trouble qualifying under the more stringent standards set by traditional banks not only do nbfcs provide alternate sources of credit proponents say they also offer more efficient ones nbfcs cut out the intermediary the role banks often play to let clients deal with them directly lowering costs fees and rates in a process called disintermediation providing financing and credit is important to keep the money supply liquid and the economy working well alternate source of funding and creditdirect contact with clients eliminating intermediarieshigh yields for investorsliquidity for the financial systemless regulated than banksnon transparent operationssystemic risk to financial system economyeven so critics are troubled by nbfcs lack of accountability to regulators and their ability to operate outside the customary banking rules and regulations 78 in some cases they may face oversight by other authorities such as the federal trade commission ftc the securities and exchange commission sec if they re public companies or the financial industry regulatory authority finra if they re brokerages however in other cases they may be able to operate with a lack of transparency all of this could put an increasing strain on the financial system nbfcs were at the epicenter of the 2008 financial crisis that led to the great recession critics point out that they have increased in numbers since then and therefore represent a greater risk than ever before 6real world example of nbfcsentities ranging from mortgage provider quicken loans to financial services firm fidelity investments qualify as nbfcs however the fastest growing segment of the non bank lending sector has been in peer to peer p2p lending the growth of p2p lending has been facilitated by the power of social networking which brings like minded people from all over the world together p2p lending websites such as lendingclub and prosper are designed to connect prospective borrowers with investors willing to invest their money in loans that can generate high yields p2p borrowers tend to be individuals who could not otherwise qualify for a traditional bank loan or who prefer to do business with non banks investors have the opportunity to build a diversified portfolio of loans by investing small sums across a range of borrowers although p2p lending only represents a small fraction of the total loans issued in the united states precedence research reported that the peer to peer lending market had a size of 26 3 billion in 2023 this market size is expected to continuously grow over the next decade 9 | |
what are examples of nonbank financial companies | there are many types of nbfc some of the most familiar are | |
what is a non cash charge | a non cash charge is a write down or accounting expense that does not involve a cash payment they can represent meaningful changes to a company s financial standing weighing on earnings without affecting short term capital in any way depreciation amortization depletion stock based compensation and asset impairments are common non cash charges that reduce earnings but not cash flows understanding a non cash chargenon cash charges can be found in a company s income statement charges unaccompanied by a cash outflow must be recorded and are necessary for firms that use accrual basis accounting a system used by companies to record their financial transactions irrespective of whether a cash transfer has been made depreciation amortization and depletion are expensed throughout the useful life of an asset that was paid for in cash at an earlier date if a company s profit did not fully reflect the cash outlay for the asset at that time it must be reflected over a set number of subsequent periods these charges are made against accounts on the balance sheet reducing the value of items in that statement non cash charges can also reflect one time accounting losses that are driven by changing balance sheet items such charges are often the result of changes to accounting policy corporate restructuring the changing market value of assets or updated assumptions on realizable future cash flows general electric co s ge 22 billion write down of the value of its struggling power business in october 2018 referred to as a goodwill impairment charge is a great example of a non recurring non cash charge 1 goodwill is added to the balance sheet when an acquisition exceeds the fair value of the acquired entity and it must be impaired in the future if the value of the acquired assets falls below original expectations ge s big accounting charge mainly linked to its 10 6 billion acquisition of france based alstom understandably raised eyebrows 2 3 special considerationsnon cash charges like other types of write downs reduce reported earnings and as a result can weigh on share prices companies often seek to play down the significance of non cash charges particularly one off ones adjusting earnings to exclude their impact from financial figures investors are tasked with determining whether non cash charges are a cause for alarm non cash expenses are often pre flagged and harmless however some may appear out the blue and serve as potential red flags of poor accounting mismanagement and a drastic shift in fortunes | |
what is a non cash item | a non cash item has two different meanings in banking the term is used to describe a negotiable instrument such as a check or bank draft that is deposited but cannot be credited until it clears the issuer s account alternatively in accounting a non cash item refers to an expense listed on an income statement such as capital depreciation investment gains or losses that does not involve a cash payment understanding non cash itemsincome statements a tool used by companies in financial statements to tell investors how much money they made and lost can include several items that affect earnings but not cash flow that s because in accrual accounting companies measure their income by also including transactions that do not involve a cash payment to give a more accurate picture of their current financial condition examples of non cash items include deferred income tax write downs in the value of acquired companies employee stock based compensation as well as depreciation and amortization banks often put a hold of up to several days on a large non cash item such as a check depending upon the customer s account history and what is known about the payor e g if the issuing organization has the financial means to cover the check presented the short period during which both banks have the funds available to them between when the check is presented and the money is withdrawn from the payor s account is called the float depreciation and amortization are perhaps the two most common examples of expenses that reduce taxable income without impacting cash flow companies factor in the deteriorating value of their assets over time in a process known as depreciation for tangibles and amortization for intangibles for example say a manufacturing business called company a forks out 200 000 for a new piece of high tech equipment to help boost production the new machinery is expected to last 10 years so company a s accountants advise spreading the cost over the entire period of its useful life rather than expensing it all in one big hit they also factor in that the equipment has a salvage value the amount it will be worth after 10 years of 30 000 depreciation seeks to match up revenue with its associated expenses dividing 170 000 by 10 means that the equipment purchased will be shown as a non cash item expense of 17 000 per year over the next decade however no money was actually paid out when these annual expenses were recorded so they appear on income statements as a non cash charge special considerationsnon cash items frequently crop up in financial statements yet investors often overlook them and assume all is above board like all areas of financial accounting it sometimes pays to take a more skeptical approach one of the biggest risks associated with non cash items is that they are often based on guesswork influenced by past experiences users of accrual accounting have regularly been found guilty innocently or not of failing to accurately estimate revenues and expenses for example company a s equipment may need to be written off before 10 years or perhaps prove to be useful for longer than expected its estimated salvage value may be wrong too eventually businesses are required to update and report actual expenses which can lead to big surprises | |
what is a non compete agreement | a non compete agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer after the employment period is over these agreements also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment many contracts specify a certain length of time when the employee is barred from working for a competitor after they end employment employers may require employees to sign non compete agreements to keep their place in the market those required to sign these agreements may include employees contractors and consultants on april 23 2024 the federal trade commission ftc issued a final rule banning non compete clauses the rule aims to protect workers freedom to change jobs increase innovation and generate new business the ftc first issued the proposed ban on jan 5 2023 it believes this ban will help an estimated 30 million people | |
what is a non competitive tender | a non competitive tender is an offer to buy united states treasury securities that is made by non institutional investors these smaller investors do not participate in a formal auction for the securities but instead accept the market price set by other participants by contrast competitive tender offers are those made by large institutional buyers who collectively set the price of treasury securities through a dutch auction process | |
how non competitive tenders work | the united states treasury sells trillions of dollars of securities every year the buyers of these securities range from large organizations such as primary dealer banks and foreign governments to individual retail investors rather than negotiating with all of these buyers directly the treasury instead holds regular auctions with certain large buyers and then uses the price set by those auctions to sell securities to smaller investors in 2019 the treasury held 322 auctions through which it issued almost 12 trillion in securities at these auctions large institutional buyers place their bids for the price and amount of treasury securities they wish to purchase the treasury wishing to pay the lowest amount of interest possible on its debts first accepts the bids with the lowest yields and then gradually accepts more expensive offers until it has raised the quantity of funds it requires through this competitive bidding process the treasury determines the fair market value of its securities and then sells additional securities to non institutional buyers at that market price 1 there are several advantages associated with purchasing treasury securities through non competitive tenders using non competitive tenders can allow small investors to purchase securities without paying expensive brokerage fees such as by using the government run treasury direct platform using non competitive tenders can also assure investors that they will receive a fair price on their investment since the price they receive is set by the real trading activity of large institutional buyers the requirements for investing using non competitive tenders are also relatively modest with a minimum offer size of only 10 000 and a maximum of 500 000 example of a non competitive tenderusing the dutch auction process the treasury would begin by offering securities at a very low yield one which it suspects will be too low to attract any bids from the auction participants then they would gradually raise the offered yield until it begins attracting offers and would keep doing so until the total number of bids made has been sufficient to absorb all of the securities the treasury wishes to sell the participants in this auction process would be institutional buyers and their offers would be considered competitive tenders once the treasury has received the desired quantity of tenders all of the auction participants who submitted winning bids will be able to purchase their securities at the higher yield associated with the last successful bid 1 for example if an investor with a successful bid was willing to purchase securities at a yield of only 0 10 and if the last investor to issue a successful bid offered to purchase at a yield of 0 30 then all of the investors with successful bids would be paid the higher yield of 0 30 even if they were initially willing to accept lower yields that final yield 0 30 would then apply to any non competitive tenders offered by non institutional investors in this manner the competitive bidding process of the institutional buyers sets the price received by the smaller buyers who use non competitive tenders | |
what is non controlling interest | a non controlling interest is an ownership position in which a shareholder owns less than 50 of outstanding shares and has no control over decisions it s also known as a minority interest non controlling interests are measured at the net asset value of entities they don t account for potential voting rights most shareholders of public companies would be classified as holding non controlling interests even with a 5 to 10 equity stake that would be considered to be a large holding in a single company a non controlling interest may be contrasted with a controlling or majority interest in a company where the investor does have voting rights and can often affect the course of the company understanding non controlling interestmost shareholders are granted a set of rights when they purchase common stock including the right to a cash dividend if the company has sufficient earnings and declares a dividend shareholders may also have the right to vote on major corporate decisions such as a merger or company sale a corporation can issue different classes of stock each with different shareholder rights there are generally two types of non controlling interests a direct non controlling interest and an indirect non controlling interest a direct non controlling interest receives a proportionate allocation of all pre and post acquisition amounts of recorded equity of a subsidiary an indirect non controlling interest receives a proportionate allocation of a subsidiary s post acquisition amounts only an investor generally can t communicate specific proposals to the board and management unless they control 5 to 10 of the shares they can t propose changes to the board of directors propose changes at shareholder meetings or team with other investors to make their actions more likely to succeed until they control this number of shares such investors are termed activist investors activist investors range widely in style of action and objectives that can range from seeking operational improvements to restructuring to natural environment and social policy financial statements and non controlling interestconsolidation is a set of financial statements that combines the accounting records of several entities into one set of financials these typically include a parent company as the majority owner a subsidiary or a purchased firm and a non controlling interest company the consolidated financials allow investors creditors and company managers to view the three separate entities as if all three firms are one company a consolidation also assumes that a parent and a non controlling interest company jointly purchased the equity of a subsidiary company any transactions between the parent and the subsidiary company or between the parent and the non controlling interest firm are eliminated before the consolidated financial statements are created example of non controlling interestassume that a parent company buys 80 of xyz firm and that a non controlling interest company buys the remaining 20 of this subsidiary the subsidiary s assets and liabilities on the balance sheet are adjusted to fair market value and those values are used on the consolidated financial statements the excess is posted to a goodwill account in the consolidated financial statements if the parent and a non controlling interest pay more than the fair value of the net assets goodwill is an additional expense incurred to buy a company for more than the fair market value goodwill is amortized into an expense account over time after an impairment test this is done under the purchase acquisition accounting method approved by the financial accounting standards board fasb | |
what is net asset value | net asset value nav is the value that remains after all liabilities have been expensed it s typically just one factor considered in the performance of an asset | |
how many shares are necessary to become an activist investor | an activist investor acquires an average of 6 of a company s outstanding shares according to the harvard law school forum on corporate governance less than 5 of outstanding shares awards a minor ownership position but even 5 might be a large holding in a small single company | |
what is goodwill in accounting | goodwill is considered to be an intangible asset the term is commonly used to describe a situation in which company a is willing to pay more than the fair market value of company b s net assets in a bid to acquire company b the bottom linea non controlling interest is a minority interest the shareholder owns less than half the number of outstanding shares this type of shareholding typically awards no control over corporate decisions or votes shareholders with controlling interests have voting rights always consult with a professional if you re unsure about the status of shares of a company in which you re thinking of investing | |
what is a noncovered security | a noncovered security is a designation given by the u s securities and exchange commission sec which means a brokerage is not required to report the cost basis of that security to the irs the adjusted cost basis of non covered securities is only reported to the taxpayer not to the irs noncovered securities are generally small and limited in scope however the income from the sale of a noncovered security may still be taxable in which case the taxpayer would need to report it to the irs on their tax return | |
what is a covered security | in 2008 congress passed legislation which required brokers to report the adjusted cost basis for securities and mutual funds to both the investors and the internal revenue service irs effective tax year 2011 1 since 2011 the cost basis of certain securities has been reported through form 1099 b which indicates whether the capital loss or gain from the sale of the security is short or long term any transaction that occurs on or after this effective year is a covered security and is reported on form 1099 b a covered security is defined as understanding non covered securitynon covered securities refer to any investments purchased before the effective dates listed above 3 the detailed cost basis following the sale of a non covered security is not required to be reported to the irs by a broker however the gross proceeds or redemption value from a sale may still be reported to the irs while a broker will still report the cost basis to the investor or taxpayer it is up to the investor to report this information to the irs through schedule d on form 1040 for any shares sold whether covered or non covered 4 even if the taxpayer does not receive a cost basis report they must still report their adjusted cost basis to the irs the irs considers securities noncovered if they are acquired through a corporate action and if their cost basis is derived from other noncovered securities 3types of noncovered securitiescorporate actions such as stock splits stock dividends and redemptions usually result in additional shares for the investor the additional shares will be classified as noncovered if they were received through noncovered shares 3for example an individual who bought 100 shares in a company in 2010 that split three for one in 2013 will receive an additional 200 shares even though the 200 shares were acquired after 2011 they are considered non covered because they were split from shares acquired before 2011 a dividend reinvestment plan drip allows an investor to reinvest his dividends for additional shares in the same company an investment security that was purchased in 2011 but transferred in the same year to a drip that uses the average cost method of calculating the cost basis for an asset is a non covered security but if the transfer occurred after 2011 it will remain a covered security 5investment sales are divided into covered and non covered securities using form 8949 transactions on non covered securities not reported on form 1099 b are reported on form 8949 where code c box c checked is used for short term holdings and code f box f checked for long term holdings 6 | |
what is cost basis for an investment | cost basis is the original purchase price for an asset and it is used to calculate the profit or loss that a taxpayer gets from selling that asset for investments the cost basis of a security may be adjusted due to stock splits dividends and other corporate actions 7 | |
what if i don t know the cost basis for a stock i sold | the brokerage that you used to purchase the stock should have records of the sale even if you didn t keep those records yourself you should be able to find them through the brokerage website or by calling the company directly the bottom linea noncovered security is an sec designation indicating that a broker does not have to report the cost basis of that security to the irs this is generally for smaller securities securities created from noncovered securities such as stock splits or drip accounts remain noncovered the brokerage still reports the cost basis to the taxpayer and if the taxpayer sells the security the basis and any gains or losses must be reported to the irs on irs form 1040 schedule d irs form 8949 is also used to report investment sales of both covered and noncovered securities | |
what is a non deliverable forward ndf | a non deliverable forward ndf is a cash settled and usually short term forward contract the notional amount is never exchanged hence the name non deliverable two parties agree to take opposite sides of a transaction for a set amount of money at a contracted rate in the case of a currency ndf this means that counterparties settle the difference between contracted ndf price and the prevailing spot price the profit or loss is calculated on the notional amount of the agreement by taking the difference between the agreed upon rate and the spot rate at the time of settlement investopedia laura porterunderstanding non deliverable forwards ndf a non deliverable forward ndf is a two party currency derivatives contract to exchange cash flows between the ndf and prevailing spot rates one party will pay the other the difference resulting from this exchange cash flow ndf rate spot rate notional amountndfs are traded over the counter otc and commonly quoted for time periods from one month up to one year they are most frequently quoted and settled in u s dollars and have become a popular instrument since the 1990s for corporations seeking to hedge exposure to illiquid currencies a non deliverable forward ndf is usually executed offshore meaning outside the home market of the illiquid or untraded currency for example if a country s currency is restricted from moving offshore it won t be possible to settle the transaction in that currency with someone outside the restricted country however the two parties can settle the ndf by converting all profits and losses on the contract to a freely traded currency they can then pay each other the profits losses in that freely traded currency that said non deliverable forwards are not limited to illiquid markets or currencies they can be used by parties looking to hedge or expose themselves to a particular asset but who are not interested in delivering or receiving the underlying product non deliverable forward structureall ndf contracts set out the currency pair notional amount fixing date settlement date and ndf rate and stipulate that the prevailing spot rate on the fixing date be used to conclude the transaction the fixing date is the date at which the difference between the prevailing spot market rate and the agreed upon rate is calculated the settlement date is the date by which the payment of the difference is due to the party receiving payment the settlement of an ndf is closer to that of a forward rate agreement fra than to a traditional forward contract if one party agrees to buy chinese yuan sell dollars and the other agrees to buy u s dollars sell yuan then there is potential for a non deliverable forward between the two parties they agree to a rate of 6 41 on 1 million u s dollars the fixing date will be in one month with settlement due shortly after if in one month the rate is 6 3 the yuan has increased in value relative to the u s dollar the party who bought the yuan is owed money if the rate increased to 6 5 the yuan has decreased in value u s dollar increase so the party who bought u s dollars is owed money ndf currenciesthe largest ndf markets are in the chinese yuan indian rupee south korean won new taiwan dollar brazilian real and russian ruble 1 the largest segment of ndf trading takes place in london with active markets also in new york singapore and hong kong 2the largest segment of ndf trading is done via the u s dollar there are also active markets using the euro the japanese yen and to a lesser extent the british pound and the swiss franc 3 | |
what is a non deliverable swap nds | a non deliverable swap nds is a variation on a currency swap between major and minor currencies that is restricted or not convertible this means that there is no actual delivery of the two currencies involved in the swap unlike a typical currency swap where there is physical exchange of currency flows instead periodic settlement of a nds is done on a cash basis generally in u s dollars the settlement value is based on the difference between the exchange rate specified in the swap contract and the spot rate with one party paying the other the difference a non deliverable swap can be viewed as a series of non deliverable forwards bundled together understanding non deliverable swaps nds non deliverable swaps are used by multi national corporations to mitigate the risk that they may not be allowed to repatriate profits because of currency controls they also use ndss to hedge the risk of abrupt devaluation or depreciation in a restricted currency with little liquidity and to avoid the prohibitive cost of exchanging currencies in the local market financial institutions in nations with exchange restrictions use ndss to hedge their foreign currency loan exposure the key variables in a nds are nds exampleconsider a financial institution let s call it lendex based in argentina that has taken a five year us 10 million loan from a u s lender at a fixed interest rate of 4 per annum payable semi annually lendex has converted the u s dollar into argentine pesos at the current exchange rate of 5 4 for lending to local businesses however it is concerned about the future depreciation of the peso which will make it more expensive to make the interest payments and principal repayment in u s dollars it therefore enters into a currency swap with an overseas counterparty on the following terms the methodology for determining the nds follows the following equation here s how the nds works out in this example on the first fixing date which is two days before the first interest payment settlement date assume the spot exchange rate is 5 7 pesos to the u s dollar since lendex has contracted to buy dollars at a rate of 6 it would have to pay the difference between this contract rate and the spot rate times the notional interest amount to the counterparty this net settlement amount would be in u s dollars and works out to 20 000 i e 5 7 6 0 x 400 000 120 000 6 20 000 on the second fixing date assume the spot exchange rate is 6 5 to the u s dollar in this case because the spot exchange rate is worse than the contracted rate lendex will receive a net payment of 33 333 calculated as 6 5 6 0 x 400 000 200 000 6 33 333 this process continues until the final repayment date a key point to note here is that because this is a non deliverable swap settlements between the counterparties are made in u s dollars and not in argentine pesos | |
what is a non disclosure agreement nda | a non disclosure agreement nda is a legally binding contract that establishes a confidential relationship between two parties one that holds sensitive information and the other that will receive that sensitive information the latter agrees that the information they receive won t be made available to others an nda may also be referred to as a confidentiality agreement non disclosure agreements are common for businesses entering into negotiations with other businesses they allow the parties to share sensitive information without fear that it will end up in the hands of competitors it may be called a mutual non disclosure agreement in this case investopedia tara anandunderstanding non disclosure agreements ndas the nda serves a purpose in a variety of situations ndas are generally required when two companies enter into discussions about doing business together but want to protect their interests and the details of any potential deal the language of the nda forbids all involved from releasing information regarding any business processes or plans of the other party or parties some companies also require that new employees sign ndas if they have access to sensitive information about the company all employees are required to sign an agreement with some companies only select departments or types of employees will be subject to the agreement with other firms ndas may also be used before discussions take place between a company seeking funding and potential investors the nda is meant to prevent competitors from obtaining their trade secrets or business plans in such cases many investors are reluctant to sign ndas however not only will this potentially prevent them from sourcing future deals with other companies but the agreement may be very difficult to enforce in proving wrongdoing most investors simply won t sign the agreement rather than be burdened by a legal contract even after declining an investment opportunity the information that s being protected may include a marketing strategy and sales plan potential customers a manufacturing process or proprietary software the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages if an nda is breached types of ndasndas come in various forms each providing for different rules and purposes consider a situation where two businesses are discussing the possibility of partnering together each company may disclose information about its operations to better inform the other side of its capabilities as part of strategic discussions both parties often agree to not disclose information because each side often receives sensitive information in such arrangements this type of agreement is also referred to as a unilateral nda it usually applies to new employees who have access to sensitive information about the company the employee is the only party signing the agreement and is prevented from sharing confidential information in such cases only one party is bound to confidentiality because they re the only party receiving sensitive information individuals are increasingly asked to sign the opposite of a non disclosure agreement a doctor may require a patient to sign an agreement that the patient s medical details can be shared with an insurer this provides one party with the authority to share personal information and to prevent them from being sued for doing so an nda is a legally binding agreement a violation can lead to legal penalties requirements for an ndandas can be customized for any situation but six major elements are generally considered essential to any non disclosure agreement every non disclosure agreement must specifically designate each party involved the individual receiving the sensitive information can be a specific person all employees of another specific company or any representative of the company it s very important for a company to appropriately define itself in an nda consider companies with complex legal structures the company must appropriately determine which legal entity has ownership of the information a company may simply list any legal entity under a broad ownership umbrella in many cases an nda must state what information is considered to be confidential and this is often among the most difficult pieces to appropriately define a company can t simply assume that proprietary information will be understood by all it s the company s responsibility to identify what information must not be shared the difficulty with defining confidential information is the process of not disclosing such information itself within the nda companies may broadly assign confidentiality to a large group for this reason a company might assess that any information disclosed from or regarding its research and development department may be confidential it may just be easiest to define what s not confidential in some situations a company might state that all information shared with an external party is to be confidential except for specific items that are determined by that company these types of agreements intend to allow a company to catch any exceptions that would have otherwise slipped by a company may sometimes state that no information is confidential or it may simply limit how the external party may use the information that s been given to them a company may be fine disclosing operating processes to another party but that party can t use the information to share with a competitor or replicate it for personal financial benefit many proprietary bits of information simply expire or become less valuable over time especially those relating to research and development consider the early days of apple ios many components of the operating service were unknown and the technology was widely unknown by the market much of that information is now replicated by other companies or adapted into newer technologies what was once sensitive information may have lost its luster companies often define when the information is no longer confidential ndas can be customized to serve any need various industries may have differing requirements and government agencies often have more stringent requirements for keeping sensitive information private an nda may also detail applicable state law or laws that apply to the agreement and which party pays attorney fees in the case of a dispute this may also define the course of action if the agreeing party should fail to comply with the terms information protected with an ndacompanies have endless opportunities to protect themselves with ndas they re generally used to protect information including but not limited to exclusions to ndasndas can t contain specific pieces of information if the information is common knowledge or already in the public domain this includes any information that may be widely known or considered public knowledge although there can be disagreement about how this is defined this also includes information that becomes publicly known at no fault to the recipient of the nda and illegal activity because it s contrary to public policy information that the receiver of the nda already knows before receiving the agreement can t be included in the agreement information that could be determined via independent research or rightfully obtained from a third party can t be defined as confidential either many states have their own nda requirements you should always seek legal counsel before entering into any nda agreement advantages and disadvantages of ndasthe primary benefit of an nda is that sensitive information regarding your company is kept secret this can be anything from research and development r d to possible future patents finances and negotiations signing an nda is a way to protect private information from becoming public nda agreements are also clear they specify what can and can t be disclosed to avoid any confusion ndas can be created at a low cost as they re just a signed piece of paper this is one of the most cost effective ways to maintain private information ndas also outline the consequences of disclosing prohibited information and this should prevent any leaks ndas are a good way to maintain comfort and trust in a relationship as well make sure that confidential information and trade secrets are distinguished from each other when you re entering into a non disclosure agreement the latter usually has an indefinite period of confidentiality one of the primary disadvantages of an nda agreement is that it starts a relationship on the idea of mistrust this can set the tone of the relationship and may not always result in a positive one employee ndas can prevent top tier talent from joining your firm because they know they d be limited in discussing their jobs in the future asking current employees to sign ndas when they re working on special projects might sour their experience of working for the company because they feel less trusted ndas can also result in potential lawsuits if breached and this would become a headache for everyone involved information is kept privateclarity on what information can and cannot be sharedlow cost to createoutlines consequencescan create an atmosphere of mistrustrisk of deterring top tier talent from joining the firmcan sour the relationship with current employeesexample of an ndaapple is one of the most private companies in the world it keeps its technology and future products closely guarded until it s ready to release them the idea is to deter competitors from stealing trade secrets and copying its products because it s been a pioneer in technology for most of its life it also generates buzz as a marketing ploy cnbc reported in january 2021 that carmaker hyundai confirmed in a statement that it was in talks with apple regarding cars this of course raised suspicion that apple was possibly entering the car market or creating a product related to automobiles hyundai then released a follow up statement that removed any mention of apple apple insists on secrecy in all its relationships and it requires that any partner sign an nda apple tells its partners that they can t mention the name apple in any manner and it has threatened partners that have leaked information with monetarily hefty lawsuits | |
what happens if you break a non disclosure agreement | you ll be susceptible to the consequences outlined in the contract if you break an nda it s not usually considered a crime but it can be depending on what was violated such as if the issue is theft of trade secrets an individual will typically be sued if they break an nda and this can result in a monetary fine termination of employment or the return of an asset you may also be sued for intellectual property violations such as copyright infringement or breach of fiduciary duty a court can levy financial damages and associated legal costs | |
how long does an nda last | every nda is unique so each can last a different amount of time common timeframes range from one year to 10 years however depending on the information that s to be kept private an nda can also be indefinite it must not be too open ended or generic for an nda to be enforceable in some states the courts will otherwise throw it out | |
how much does an nda cost | the cost of an nda can vary depending on the complexity of the agreement creating one typically ranges from 175 to 1 500 | |
what is an nda template | an nda template is a non disclosure agreement format that an individual or company can follow to create their own nda the template will have the general legal information and blanks that can be filled in to create a unique nda between two or more parties that applies to their relationship nda templates can be easily found online through an internet search many sites offer nda templates for use the bottom linenon disclosure agreements are low cost easy to create legally binding documents between two or more parties that keep private information confidential they re used by organizations and individuals to protect their businesses or personal information and allow businesses to work together without fear of private information falling into the hands of competitors it s important to be as detailed as possible when you re drafting an nda so all parties know what can and cannot be shared as well as the consequences of leaking information | |
what is a non executive director | the term non executive director refers to a member of a company s board of directors this board member isn t a company employee which means they don t engage in the day to day management of the organization rather most non executive directors act as independent advisors and are involved in policymaking and planning exercises their responsibilities generally include monitoring executive directors and acting in the interest of corporate stakeholders understanding non executive directorsas noted above non executive directors are not company employees they are part of a company s board of directors they are put in place to challenge the direction and performance of a company as well as its existing team since non executive directors do not hold c level or managerial positions they are thought to understand the interests of the company with greater objectivity than the executive directors who may have an agency problem or conflict of interest between management and shareholders or other stakeholders 1also known as external directors independent directors and outside directors non executive directors are often installed on a firm s board for public relations reasons for instance a particular non executive director s community standing a record of philanthropy and prior experience could provide positive exposure and symbolic value for the firm although they aren t employees non executive directors may still be compensated for their time they can be paid through fees cash or equity compensation the amount they are paid depends on the industry the size and scope of the company and the amount of time they spend doing work for the corporation because they come with a lot of experience and connections many non executive directors can be handsomely rewarded for their time non executive directors are equally liable for the success or failure of a business as outlined by statutory requirements and tax laws 23special considerationsas a function of their leadership role non executive directors are required to embody certain key values this includes using their past experience to mentor others during new ventures they are also responsible for keeping the executive directors and the entire board accountable this can be accomplished by helping with and managing a company s they also independently assess the company s performance to ensure the firm s stakeholders are considered before the needs and want of the management or board a non executive director with the right experience may also take a deep look into the financials of the company to verify fiscal responsibility putting necessary controls in place if required all non executive directors are required to commit a significant amount of their time to the oversight of the company they are expected to disclose any other significant time commitments to the board and to inform the board of any changes to their schedules non executive directors must also provide value through leveraging their network of outside contacts that can benefit the company 1in some cases non executive directors may serve in the same role for two or more companies when this happens they must fully disclose their time commitments to both boards and juggle their responsibilities accordingly non executive director vs executive directorit s easy to confuse a non executive director with an executive director but the two are inherently different the former is not an employee 4 but an executive director acts as a leader and manages the day to day operations of the company they work for usually a non profit organization along with managing company matters some of the other responsibilities of an executive director include although the role and responsibilities of an executive director are similar to those of a chief executive officer ceo their salary is normally much lower in some cases many executive directors often work on a voluntary basis and are not compensated 5example of non executive directorhere s an example to demonstrate the roles and responsibilities of non executive directors let s say the former ceo of a successful public technology company assumes the role of a non executive director with a technology startup as part of the board they may be expected to in certain cases non executive directors are well established in their fields as such they may have good connections in their industries in the case of the former tech ceo they would likely have warm relationships with venture capital firms that can help the startup achieve its goals of expansion and growth | |
what is the role of a non executive director | a non executive director is an individual appointed to a company s board of directors they are not employed by the company but act as independent advisors or directors to help the company achieve its goals they are involved in policymaking and planning exercises and routinely monitor the company s executive directors to ensure they act in the interest of corporate stakeholders | |
are non executive directors compensated | most non executive directors are compensated for their time compensation can be through fees equity or cash their compensation can be high because of their experience and connections within their respective industries | |
how do non executive directors differ from executive directors | non executive directors are different from executive directors executive directors normally work for non profits and assume the same responsibilities as a ceo including managing the day to day operations overseeing fundraising boosting membership and sticking to a budget unlike non executive directors many executive directors are not compensated for their time the bottom linewhile non executive directors are not a part of the executive team they are members of the board of directors therefore they are equally liable for the success or failure of the business their duties are very different from the day to day tasks mainly because they aren t actual employees as such they focus more on acting in the interest of shareholders and monitoring executive directors | |
what is a non exempt employee | a few factors make an employee non exempt such as being entitled to overtime pay earning less than 684 a week per federal law and holding executive administrative or professional positions 1non exempt employees are workers who are entitled to earn at least the federal minimum wage and qualify for overtime pay which is calculated as one and a half times their hourly rate for every hour they work above and beyond a standard 40 hour workweek these regulations are created by the federal fair labor standards act flsa 2understanding non exempt employees non exempt is a term referring to employees who earn less than 684 per week non exempt means that the employee is not exempt from the flsa and must be paid overtime the 684 weekly wage resulting in an annual threshold of 35 568 was put into effect on jan 1 2020 it replaced the old weekly wage of 455 1furthermore non exempt employees non exempt employees are expected to dutifully carry out orders without interjecting their own management decisions for this reason non exempt employees tend to dominate job sectors such as construction manufacturing maintenance and other work that involves physical labor or carrying out repetitive tasks assembly line workers are also a key example of non exempt employees if you are unsure of your employment status speak with your human resources representative if you feel like your position is misclassified consider seeking legal counsel non exempt employee distinctions and qualificationsnon exempt employees are typically paid hourly wages unlike exempt employees who generally earn fixed salaries however while non exempt workers must receive overtime pay of one and a half times their hourly wage for all hours worked in excess of a 40 hour workweek exempt employees are not legally entitled to collect overtime pay even if their workweeks radically exceed 40 hours 4under the flsa workers may be considered non exempt if they either earn less than the 684 weekly minimum or have limited scope for self supervision take for example a maintenance worker who s hired to work 40 hours per week at 18 an hour with typical weekly earnings of 720 they easily pass the salary test to be designated as an exempt worker since their weekly income exceeds the 684 threshold 1but this worker is also directly supervised and therefore has a minimal opportunity for independent judgment hence they are ultimately classified as a non exempt employee if this staffer works 50 hours in a single week they would earn their regular 18 hour rate for 40 hours while earning 1 5 times their hourly rate at 27 for each of the 10 extra hours they clocked in 3under the flsa non exempt employees must earn at least the federal minimum hourly wage of 7 25 however many states and some municipalities impose higher minimum wages versus the federal floor in these cases the higher minimum wage overrides the federal rate 5fair labor standards act overviewthe fair labor standards act created the wage and hour division in 1938 this division oversees the administration and enforcement of labor laws that cover almost all private workers and government employees 6though contested in 1941 the united states supreme court upheld the flsa amendments to the original agreement have continually increased employment legislation including increasing the minimum wage from from 0 75 hour to 7 25 hour the flsa also covers overtime pay allowable hours worked maintenance of pay recordkeeping and child labor laws 62the flsa was last updated in september 2019 with the approved ruling going into effect on jan 1 2020 7advantages and disadvantages of non exempt statuswhether it is preferable to be a non exempt employee versus an exempt one largely depends on an individual s priority for work life balance the biggest benefit to being a non exempt employee is arguably the ability to enjoy additional compensation for working long hours although this may be at a lower rate than salaried exempt employees on the other hand an exempt worker may be able to occasionally duck out of work early and still collect a full paycheck that being said non exempt employees also tend to receive more protection under labor laws like the flsa than exempt employees because exempt employees are entitled to their full paycheck they will receive a full salary every workweek even if unforeseen circumstances such as a crisis require exempt employees to work remotely or under new arrangements on the flip side non exempt employees in these circumstances are not entitled to pay if their physical presence is required for their jobs and they are unable to perform their duties either way non exempt employees are required to log their hours for example non exempt employees folding clothes at a retail store will not get paid if the store is either undergoing remodeling or closed on a given week meanwhile retail store managers who are exempt might still get paid nonetheless for the remote work that they do in managing store operations exempt workers are also more likely to receive benefits such as paid time off healthcare coverage and participation in retirement plans however both non exempt and exempt employees are equally eligible for government employment benefits case in point both categories of workers qualify for social security benefits once they retire and both may be eligible to collect weekly unemployment payments should they lose their jobs receive overtime pay often valued at 1 5 times their usual pay ratemay find it easier to find jobs as positions are often lower skilled or more entry leveloften receive greater protection under flsa lawsstill qualify for government benefits just like exempt employees pay is often less as experience and knowledge is typically not as necessary compared to exempt employeesmay receive less than ideal career advancement opportunities due to the nature of the rolenot entitled to pay if their physical presence is required but preventedexamples of non exempt jobsprior to accepting a role ensure whether the position is exempt or non exempt as positions may be classified differently depending on the nature of the role or company in many respects it may be easier to identify exempt positions and determine what positions do not qualify for exemption status examples include but are not limited to if an employee does not meet any of the criteria above noting that not all situations are listed the employee must be treated as non exempt | |
what is the difference between an exempt employee and a non exempt employee | the difference between an exempt employee and a non exempt employee is that non exempt employees are entitled to overtime pay exempt employees on the other hand do not qualify for overtime pay 3 | |
is it better to be an exempt employee or a non exempt employee | whether it is better to be an exempt employee or a non exempt employee depends on a variety of factors such as the type of job and a person s background education and personal situation exempt employees are generally paid higher and receive benefits at their jobs such as retirement plans and health insurance however they are not paid for overtime and therefore may not be compensated appropriately if their job requires long hours can an employee be salaried and non exempt yes an employee can be salaried non exempt meaning that they receive a weekly salary or however the employer chooses to pay and qualify for overtime pay for any hours worked over 40 hours a week non exempt employees do not have to be paid hourly they can be paid in a variety of manners via commission salary hourly etc as long as the compensation meets minimum wage requirements 4the bottom linethe fair labor standards act flsa determines various labor statuses one of those statuses non exempt employee is not exempt from overtime provisions and is entitled to overtime pay for hours worked beyond the standard 40 hours in a workweek these non exempt employees may be paid salary hourly or on another basis | |
what is nonfarm payroll | nonfarm payroll measures the number of workers in the u s except those who work in farming private households non profits and sole proprietorships or self employment as well as those who are active military service members the bureau of labor statistics bls surveys private and government entities throughout the u s to obtain information about their payrolls the nonfarm payroll numbers are reported monthly to the public through the closely followed employment situation summary understanding nonfarm payrollaccording to the bls nonfarm employee classifications account for approximately 80 of workers contributing to gross domestic product gdp 1 besides farm workers other categories excluded from nonfarm payroll numbers are employment situation summarythe employment situation summary is a closely followed monthly report released by the bls on the first friday of the month following data collection the report is created from two comprehensive surveys the household survey and the establishment survey the household survey reports the unemployment rate and details employment demographics the establishment survey segment headlines the number of new nonfarm payroll jobs added to the national economy key components of the household survey include the labor force participation rate estimates an economy s active workforce by the number of people ages 16 and older who are employed or actively seeking employment divided by the total non institutionalized civilian working age population the establishment survey portion of the employment situation report provides details on nonfarm payroll additions and is referred to as the nonfarm payrolls report key components of the establishment survey include nonfarm payroll data and economic analysisthe nonfarm payroll additions and the unemployment rate are headlines of the employment situation report but economists and policymakers use all available data to assess the state of the economy and forecast future levels of economic activity the report contains insights into the labor force that directly impact the economy the stock market the value of the u s dollar the value of treasuries and the price of gold the household survey data reveals trends in the unemployment rate and participation rate that may be associated with demographics the establishment survey report offers valuable information on job changes within sectors or industries | |
how do nonfarm payrolls impact the financial market | the report contains data and statistics regarding the employment situation in the united states which can be used to identify trends in economic growth inflation housing starts and gross domestic product all of which affect the movement of financial markets | |
when are nonfarm payrolls released | the data is commonly released on the first friday of each month at 8 30 am et and reflects the previous month s data | |
is nonfarm payrolls a leading or lagging indicator | the nonfarm payroll report is not a leading indicator but provides a snapshot of incidents that affect the overall economy the bottom linenonfarm payroll refers to the number of jobs in the private sector and government agencies it excludes farm workers private household employees proprietors non profit employees and actively serving military the nonfarm payroll numbers are reported monthly to the public through the closely followed employment situation report which details changes in unemployment by sector and demographic and new jobs added within the economy | |
what are non gaap earnings | non gaap earnings are an alternative accounting method used to measure the earnings of a company many companies report non gaap earnings in addition to their earnings based on generally accepted accounting principles gaap these pro forma figures which exclude one time transactions can sometimes provide a more accurate measure of a company s financial performance from direct business operations however investors need to be wary of a company s potential for misleading reporting which excludes items that have a negative effect on gaap earnings quarter after quarter understanding non gaap earningsto understand non gaap earnings it s important to understand gaap earnings gaap earnings are a common set of standards accepted and used by companies and their accounting departments gaap earnings are used to standardize the financial reporting of publicly traded companies the justification for reporting non gaap earnings is that large one off costs such as asset write downs or organizational restructuring should not be considered normal operational costs because they distort the true financial performance of a company therefore some companies provide an adjusted earnings number that excludes these nonrecurring items commonly used non gaap financial measures include earnings before interest and taxes ebit earnings before interest taxes depreciation and amortization ebitda adjusted revenues free cash flows core earnings and funds from operations | |
when used appropriately these non gaap financial measures can help companies provide a more meaningful picture of the company s performance and value presenting only the financial results of the core business activities can be useful however there are no regulations around non gaap earnings per share eps investors have no way of knowing whether non gaap eps figures are genuine or manipulated in an attempt to deceive the automated news watching trading algorithms into taking action as the results are published in headlines | criticism of non gaap earningsa company s quality of earnings is important so investors need to consider the validity of non gaap exclusions on a case by case basis to avoid being misled studies have shown that adjusted figures are more likely to exclude losses than gains gaap earnings now significantly trail non gaap earnings as companies become addicted to one time adjustments which become meaningless when they happen every quarter merck for example turned a loss of 0 02 per share under gaap into an adjusted profit of 1 11 a share in the fourth quarter of 2017 a 5 650 difference so investors should be careful not to lose sight of gaap earnings standardized accounting rules are in place for consistency and comparability consistent revenue recognition makes reported earnings more reliable for historical comparison and it allows investors to compare the financial results of one company to that of its industry peers and competitors that is why the securities and exchange commission sec requires publicly traded companies to use gaap accounting in the first place u s companies are under increasing pressure from the sec to disclose gaap earnings upfront in their earnings reports before pointing at non gaap earnings the sec has begun taking enforcement actions against improper practices where companies provide greater prominence to non gaap figures than gaap figures technology companies are among the most frequent abusers of non gaap eps because they use a significant amount of stock compensation and have large asset impairments and r d costs | |
what is a non interest bearing current liability nibcl | a non interest bearing current liability nibcl is a category of expenses that an individual or a company must pay off within the calendar year but will not owe interest on taxes that do not include late penalties as well as accounts payable within the credit terms timelines or without late fees are examples of nibcls that can be found on a company s balance sheet nibcls are listed on a balance sheet under the liabilities column in the current liabilities section understanding nibclnon interest bearing current liabilities are relatively straightforward interest bearing currentliabilities such as working capital loans or the current portion due on long term debt can be more complicated in addition to non interest bearing current liabilities a balance sheet may list non interest bearing non current liabilities this indicates a debt that must be paid more than a year in the future but is not accruing interest non interest bearing liabilities that are not due for payment until a later period are listed separately a large number of non interest bearing non current liabilities in a balance sheet is considered to be a warning sign that a company is piling up expenses that it may have trouble paying down the road individuals as well as corporations have non interest bearing current liabilities if a person made up a balance sheet that looked like a corporate financial document costs such as rent and utilities would go under nibcl a mortgage or car payment however would be an interest bearing liability non interest bearing consumer debt is all too rare but a consumer with a good introductory deal on a credit card would be able to record the current balance on the card as a nibcl examples of a consumer s non interest bearing non current liability are someone who leased a new car or furnished a home using one of those no payment for 30 to 180 days deals might log the future payments as non interest bearing non current liabilities another example that is trending now is a fintech product called buy now pay later bnpl that gives consumers offers to buy products and pay them through installments with no interest charged if in line with the terms a bond or a note may be an nibcl if it bears no interest that is some investments in debt pay no interest but are sold at a discount to their face values the investor s profit comes with the return of the original investment at its full face value when the note reaches maturity example of nibclthe kroger co owns a wide range of familiar store names such as dillons pay less supermarkets and ralph s as well as the kroger stores it listed the following under current liabilities on its balance sheet | |
what is non interest income | non interest income is bank and creditor income derived primarily from fees including deposit and transaction fees insufficient funds nsf fees annual fees monthly account service charges inactivity fees check and deposit slip fees and so on credit card issuers also charge penalty fees including late fees and over the limit fees institutions charge fees that generate non interest income as a way of increasing revenue and ensuring liquidity in the event of increased default rates understanding non interest incomeinterest is the cost of borrowing money and is one form of income that banks collect for financial institutions such as banks interest represents operating income which is income from normal business operations the core purpose of a bank s business model is to loan money so its primary source of income is interest and its primary asset is cash that said banks rely heavily on non interest income when interest rates are low when interest rates are high sources of non interest income can be lowered to entice customers to choose one bank over another strategic importance of non interest incomemost businesses that are not banks rely entirely on non interest income financial institutions and banks on the other hand make most of their money from loaning and re loaning money as a result these firms view non interest income as a strategic line item on the income statement this is especially true when interest rates are low since banks profit from the spread between the cost of funds and the average lending rate low interest rates make it difficult for banks to make a profit so they often rely on non interest income to maintain profit margins from a client perspective non interest income sources like fees and penalties are annoying at best for some people these fees can quickly add up and do real financial harm to a budget from an investor s perspective however a bank s ability to dial up non interest income to protect profit margins or even increase margins in good times is a positive the more drivers of income a financial institution has the better it is able to weather adverse economic conditions drivers of non interest incomethe degree to which banks rely on non interest fees to make a profit is a function of the economic environment market interest rates are driven by benchmark rates such as the federal funds rate the fed funds rate or the rate at which banks lend money to one another is determined by the rate at which the federal reserve pays banks interest this rate is referred to as the interest rate on excess reserves ioer as the ioer increases banks can make a higher profit from interest income at a certain point it becomes more advantageous for a bank to use the reduction of fees and charges as a marketing tool to lure new deposits rather than as a way to increase profits once one bank makes this move the market competition on fees begins anew | |
what is a non issuer transaction | a non issuer transaction is a transaction involving a security that is not directly or indirectly executed for the benefit of the issuing company most deals that occur on the secondary market such as stock exchanges involve non issuer transactions secondary offerings or share buybacks that will involve the issuer understanding non issuer transactionsisolated non issuer transactions are exempt from the registration requirements of the securities and exchange commission sec for instance if joe sells 100 shares of xyz stock to his brother this transaction would be exempt from registration requirements however once joe sells those 100 shares to his brother he officially becomes what s known as a non issuer broker dealer non issuers can be described as a person or company that doesn t issue securities or have plans to do so and a broker dealer is a person or firm that buys and sells securities for its own account or on behalf of its customers regulations are much lighter on non issuer broker dealers although these figures are also very limited in what they can do while legally maintaining this status auditors and non issuer broker dealersauditors of a non issuer broker dealer must be registered with the public company accounting oversight board pcaob as of the date of the auditor s report auditors are encouraged to begin the registration process with the pcaob as soon as practicable non public broker dealers are also advised to contact the commission s division of trading and markets to discuss individual circumstances if necessary auditors of non issuer broker dealers must continue to comply with exchange act rule 17a 5 f 3 which states that the auditor shall be independent in accordance with the provisions of 210 2 01 b and c of this chapter however auditors of non issuer broker dealers are not subject to the partner rotation requirements or compensation requirements of 210 201 c 1types of exempted non issuer transactions | |
what are non marginable securities | non marginable securities are not allowed to be purchased on margin at a particular brokerage or financial institution they must be fully funded by the investor s cash most brokerage firms have internal lists of non marginable securities which investors can find online or by contacting their institutions these lists will be adjusted over time to reflect changes in share prices and volatility holdings in non marginable securities do not add to the investor s margin buying power | |
how non marginable securities work | the main goal of keeping some securities away from margin investors is to mitigate risk and control the administrative costs of excessive margin calls on what are usually volatile stocks with uncertain cash flows examples of non marginable securities include recent initial public offerings ipos when a news outlet reports a company is making the first ever offer to sell shares to the public this is known as an ipo over the counter bulletin board stocks and penny stocks which are stocks that generally trade per share for under 5 and are owned by small companies are also non marginable securities by decree of the federal reserve board other securities such as stocks with share prices that are under 5 or that are extremely volatile may be excluded at the discretion of the broker some low volume securities also aren t marginable marginable vs non marginable securitiesmarginable securities are those that can be posted as collateral in a margin account the balance of these securities can count toward the initial margin and maintenance margin requirements margin securities allow you to borrow against them however non marginable securities can t be pledged as collateral in a brokerage margin account the downside of marginable securities is that they can lead to the aforementioned margin calls which can include the unexpected liquidation of securities marginable securities can amplify returns but they may also exacerbate losses example of non marginable securitiescharles schwab sets its margin requirements so that certain securities are not marginable schwab allows most stocks and etfs as marginable securities as long as the share price is 3 or higher as well mutual funds are allowed if they re owned for more than 30 days as are investment grade corporate treasury municipal and government bonds ipos above a certain volatility level are not marginable however ipos are marginable if they are purchased one business day after the ipo on the secondary exchange special considerationsnon marginable securities have a 100 margin requirement but certain stocks have special margin requirements however the stocks with special margin requirements are marginable but they have a higher margin requirement than typical stocks and the minimum required by brokers for example charles schwab typically requires an initial maintenance margin of 30 for certain volatile stocks the initial maintenance margin is higher these stocks include amc entertainment amc which has a special maintenance margin of 100 on long positions and 200 on short positions gamestop gme meanwhile has a unique maintenance margin of 100 on long positions and 300 on short positionsinvestopedia 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 non marketable security | a non marketable security is an asset that is difficult to buy or sell due to the fact that they are not traded on any major secondary market exchanges such securities often forms of debt or fixed income securities are usually only bought and sold through private transactions or in an over the counter otc market for the holder of a non marketable security finding a buyer can be difficult and some non marketable securities cannot be resold at all because government regulations prohibit any resale a non marketable security may be contrasted with a marketable security which is listed on an exchange and easily traded non marketable securities explainedmost non marketable securities are government issued debt instruments common examples of non marketable securities include u s savings bonds rural electrification certificates private shares state and local government securities and federal government series bonds non marketable securities that are prohibited from being resold such as u s savings bonds are required to be held until maturity limited partnership investments are an example of a private security that may be non marketable due to the difficulty of reselling another example is private shares held by an owner of a company that is not publicly traded the fact that these shares are non marketable is not usually an obstacle for the owner unless they wish to relinquish ownership or control of the company the u s government issues both marketable and non marketable debt securities the most widely held marketable securities include u s treasury bills and treasury bonds both of which are freely traded in the u s bond market the rationale behind non marketable securitiesthe primary reason that some debt securities are purposely issued as non marketable is a perceived need to ensure stable ownership of the money the security represents non marketable securities are frequently sold at a discount to their face value and redeemable for face value at maturity the gain for an investor is then the difference between the purchase price of the security and its face value amount difference between marketable and non marketable securitiesmarketable securities are those that are freely traded in a secondary market the principal difference between marketable and non marketable securities revolves around the concepts of market value and intrinsic or book value marketable securities have both a marketable value one which is subject to potentially volatile fluctuation in accordance with the changing levels of demand for the security in the trading marketplace thus marketable securities generally carry a higher level of risk than non marketable securities non marketable securities however are not subject to the demand changes in a secondary trading market and therefore have only their intrinsic value but no market value the intrinsic value of a non marketable security depending on the structure of the security can be considered as either its face value the amount payable upon maturity or its purchase price plus interest | |
what are non member banks | non member banks are banks that are not members of the u s federal reserve system as with member banks non member banks are subject to reserve requirements which they have to maintain by placing a percentage of their deposits at a federal reserve bank although non member banks are not required to purchase stock in their district federal reserve banks they still have access to services offered by the federal reserve such as its discount window on the same terms as member banks | |
how non member banks work | non member banks can only be state chartered since all nationally chartered banks necessarily have to be members of the federal reserve system one reason that state chartered banks may decide to refrain from membership is that regulation can be less onerous some believe under the federal deposit insurance corporation fdic which oversees non member banks rather than the federal reserve banks member banks report to regional federal reserve banks depending on where they are located non member banks are only subject to state laws rather than federal laws so they may opt for less regulated operations in a state like north dakota in addition they are able to keep at least a part of their reserves in interest bearing securities non member banks like members still receive services from the federal reserve system including check clearing electronic funds movements and automated clearing house payments becoming a member is only a matter of submitting an application fulfilling the requirements and going through a waiting period some non member banks deliberate on this decision carefully and engage in the process in measured steps if they believe that being a member is ultimately more beneficial than remaining a non member there are also examples of in extreme cases non member banks deciding to change their status to take advantage of certain benefits of becoming part of the u s federal reserve system examples of non member banksin 2008 some non member banks fled into the arms of the federal reserve system for protection such was the case with investment bank goldman sachs which faced economic uncertainty during the financial crisis in 2008 the investment bank humbly sought and received member status to access the fed s discount window and begin taking government guaranteed deposits from the public in a press release heralding its new status the bank spun it this way we believe that goldman sachs under federal reserve supervision will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources other examples of non member banks include the bank of the west gmac bank and the bank of north dakota | |
what is non negotiable | non negotiable means not open for debate or modification it can refer to the price of a good or security that is firmly established and cannot be adjusted or a part of a contract or deal that is considered a requirement by one or both involved parties additionally the term can relate to a good or security whose ownership is not easily transferable from one party to another understanding non negotiablean item can be considered non negotiable if one party involved in a transaction is not willing to make any changes to a condition that has been set in place this could relate to the price for a particular good or service an element within a contract or a financial product that cannot be exchanged or transferred to a new owner even through the use of secondary markets crossed checks from mexico and other countries are frequently non negotiable negotiable is the opposite of non negotiable when an asking price or contract is referred to as negotiable it means that it is not set in stone and can be adjusted depending on the circumstance likewise instruments of this nature can be exchanged or transferred with ease for example a check would qualify as a negotiable instrument as it can be presented to a financial institution in exchange for actual currency funds in physical currency such as dollar bills are also considered to be negotiable instruments because they can be easily exchanged between parties most securities are negotiable too provided that all proper legal documentation is included examples of non negotiable | |
when an asking price is described as non negotiable it means it is not possible to haggle over it when one party sets a non negotiable price the option to attempt to negotiate has been effectively removed by the first party s unwillingness to participate in such a conversation | for example a homeowner may be unwilling to sell their property unless a buyer offers at least 250 000 if the individual deems the asking price to be non negotiable a bid of 245 000 will be rejected a big company such as walmart inc is less likely to make price concessions than a much smaller retailer because it often can easily find other customers willing to pay what it wants in regards to securities if an asset is referred to as a registered security its price cannot be changed this can apply to savings bonds as they have a specified face value or par and cannot be negotiated to any other value a contract may contain certain non negotiable stipulations for example a job offer might offer scope to negotiate on salary but be rigid about other terms such as the number of days that an employee can take for annual leave moreover in the cases of leases on rental properties the amount due as payment may be considered non negotiable as it is often a fixed price that must be provided by the tenant to the property owner non negotiable securities and products are those that cannot be transferred from one party to the next an example of a non negotiable instrument also referred to as a non marketable instrument would be a government savings bond they can only be redeemed by the owner of the bond and are not allowed to be sold to other parties because they cannot be sold on these products also known as registered securities or non transferable securities are described as illiquid | |
what is a non objecting beneficial owner nobo | a non objecting beneficial owner nobo is a beneficial owner of a company who gives permission to a financial intermediary to release their name and address to the companies or issuers in which they have bought securities this allows companies to contact the beneficial owner directly with various communication related to the business however the sec still maintains that beneficial owners should be contacted via an intermediary such as a broker for proxy materials understanding a non objecting beneficial owner nobo a beneficial owner of a security is someone who has a security held by a financial intermediary this tends to be the individual s broker or in some cases it may be another financial intermediary the person is associated with an objecting beneficial owner obo instructs the financial intermediary who holds the securities to not provide the owner s name and personal information to the company that issued the securities a non objecting beneficial owner nobo agrees to allow their personal information to be released to the company when you set up your account with a broker you will often have the choice as to whether or not you would like your information released to the companies in which you purchase shares companies and issuers request this personal information so that they can contact the shareholder regarding important shareholder communications such as proxies circulars for rights offerings and annual quarterly reports a non objecting beneficial owner will receive these items since they have allowed their information to be released the securities and exchange commission sec outlines the definition of both types of beneficial owners and lays out specific rules on how companies can interact with each type of beneficial owner the sec requires that a broker be the intermediary between a company and a nobo for any proxy information other information may be sent to a nobo directly arguments for and against a non objecting beneficial owner nobo different financial players in the industry have varying reasons to support or object against the sec rules of objecting and non objecting beneficial owner status companies argue against having a distinction and believe that they should be allowed to freely send communication directly to shareholders they believe that having direct communication would reduce costs and allow for increased participation in the company by the shareholders banks and brokers on the other hand prefer to maintain the distinction between beneficial owners they are interested in keeping their customer lists private maintaining the fee income generated through forwarding proxy materials and protecting stock loan revenue objecting beneficial owners obos of course wish to maintain the distinction as well obos would like to keep their holdings and financial strategies private and to avoid undesired solicitations and other spam | |
what is a non operating asset | a non operating asset is a class of assets that are not essential to the ongoing operations of a business but may still generate income or provide a return on investment roi these assets are listed on a company s balance sheet along with its operating assets and they may or may not be broken out separately understanding a non operating assetnon operating assets are also known as redundant assets because they do not support operations and are therefore considered to be redundant and expendable if a company needs to cash them in that said companies hold non operating assets for several reasons for example a company may own a parcel of land assessed at 300 000 in value but has no plans to build on the property for at least five years until it is used the land is considered to be a non operating asset common non operating assets include unallocated cash and marketable securities loans receivable idle equipment and vacant land the correct identification of non operating assets is an important step in the valuation process because these can often be overlooked by analysts and investors furthermore analysis based on a cash flows approach will not capture the value of non operating assets these assets have to be valued separately and added to the operating value of the business non operating assets may be assets related to a closed portion of the business in this case the company can choose to hold onto the assets with the intention of selling or using them in the future for example imagine a business owns several retail locations and it closes one of its locations the business operations in that building have ceased and the company still owns the building because the building is no longer instrumental in the business s day to day operations it is labeled as non operating however the building still holds value that could be tapped into in the future so it is also considered an asset using non operating assets to diversify riskin other cases non operating assets can be used to diversify operational risks for example a business may own some real estate or patents simply as cash investments although these assets are not tied to the business s operations the company may still earn some revenue from them if the business loses money through its operations these non operating assets can provide diversification and act as a financial backup non operating assets and non operating incomenon operating income refers to revenue an organization earns that is not connected to its core operations in some cases non operating income comes from non operating assets to continue with the above example if the business rents out its empty retail location the money it collects in rent is non operating income similarly if a company has investments that are not related to its operations the returns it earns on those investments are classified as non operating income in recent years large corporations realized the risk of being disrupted by rising startups so they created corporate venture capital arms that invest in new ideas that are not necessarily related to their operations where they own assets and generate income as a diversification tool however non operating income does not always come from non operating assets it may also include gains from foreign exchanges or other forms of peripheral income such as a one time gain on investment securities non operating assets may also generate liabilities for the company holding them for example a company holding onto unused land will have liability exposure in the form of taxes due interest owed or lawsuits generated by accidents on that property non operating assets and stock valuationnon operating assets are usually treated separately from operating assets when evaluating a company or its stock the value of non operating assets does count toward the total worth of the company however their value is excluded from financial models that estimate the future growth or profit earning potential of the core business segments although non operating assets may bring revenue into a company they are not used to generate core revenue | |
what is a non operating expense | a non operating expense is a business expense unrelated to core operations the most common types of non operating expenses are interest charges and losses on the disposition of assets accountants sometimes remove non operating expenses and non operating revenues to examine the performance of the core business excluding the effects of financing and other items non operating expenses can be contrasted with operating expenses which relate to the day to day functioning of a business understanding non operating expensenon operating expense like its name implies is an accounting term used to describe expenses that occur outside of a company s day to day activities these types of expenses include monthly charges like interest payments on debt and can also include one time or unusual costs for example a company may categorize any costs incurred from restructuring reorganizing or costs from currency exchange as non operating expenses non operating expenses are recorded at the bottom of a company s income statement the purpose is to allow financial statement users to assess the direct business activities that appear at the top of the income statement alone generating profit from core operations is critical for a company special considerations | |
when looking at a company s income statement from top to bottom operating expenses are the first costs displayed below revenue the company starts the preparation of its income statement with top line revenue cost of goods sold cogs is subtracted from revenue to arrive at gross income | after gross income is calculated operating costs are subtracted to get the company s operating profit or earnings before interest and tax ebit after operating profit has been derived non operating expenses are subtracted from operating profit to arrive at earnings before taxes ebt taxes are then deducted to derive net income non operating expense examplesmost public companies finance their growth with a combination of debt and equity regardless of the allocation any business that has corporate debt also has monthly interest payments this is considered a non operating expense as interest payments don t arise as a result of a business operations but because of the financing of the operations if a company sells a building and it s not in the business of buying and selling real estate the sale of the building is a non operating activity if the building were sold at a loss the loss is considered a non operating expense frequently asked questions | |
what are examples of non operating expenses | interest payments the costs of disposing of property or assets not related to operations restructuring costs inventory write downs lawsuits and other one time charges are common examples of non operating expenses | |
what is non operating income | non operating income is the portion of an organization s income that is derived from activities not related to its core business operations it can include items such as dividend income profits or losses from investments as well as gains or losses incurred by foreign exchange and asset write downs non operating income is also referred to as incidental or peripheral income investopedia zoe hansenunderstanding non operating incomeearnings are perhaps the single most studied number in a company s financial statements because they show profitability compared with analyst estimates and company guidance the problem is that profit in an accounting period can be skewed by things that have little to do with the everyday running of the business for example there are occasions when a company earns a significant one off amount of income from investment securities a wholly owned subsidiary or the sale of a large piece of equipment property or land these types of gains on top of income earned from recurring events outside of the business main line of work can significantly alter a company s earnings and make it difficult for investors to measure how well the firm s operations actually fared during the reported period non operating income vs operating incomedifferentiating what income was generated from the day to day business operations and what income was made from other avenues is important to evaluate a company s real performance that is why firms are required to disclose non operating income separately from operating income operating income is an accounting figure that measures the amount of profit realized from a business s operations after deducting operating expenses such as wages depreciation and cost of goods sold cogs in short it provides information to interested parties about how much revenue was turned into profit through the company s normal and ongoing business activities operating income is recorded on the income statement toward the bottom of the income statement under the operating income line non operating income should appear helping investors to distinguish between the two and recognize what income came from where example of non operating incomethe main operations of retail stores are the purchasing and selling of merchandise which requires a lot of cash on hand and liquid assets sometimes a retailer chooses to invest its idle cash on hand in order to put its money to work if a retail store invests 10 000 in the stock market and in a one month period earns 5 in capital gains the 500 10 000 0 05 would be considered non operating income when a person sets out to analyze this retail company the 500 would be classified as nonoperating or non recurring earnings because it can t be relied on as continuous income over the long term alternatively if a technology company sells or spins off one of its divisions for 400 million in cash and stock the proceeds from the sale are considered non operating income if the technology company earns 1 billion in income in a year it s easy to see that the additional 400 million will increase company earnings by 40 to an investor a sharp bump in earnings like this makes the company look like a very attractive investment however since the sale cannot be replicated or duplicated it can t be considered recurring operating income and should be removed from performance analysis special considerationssometimes companies try to conceal poor operating profit with high non operating income beware of management teams attempting to flag metrics that incorporate inflated separate gains earnings before interest and taxes ebit for example can include income derived from activities not related to the core business and can sometimes be advertised heavily by companies to mask underwhelming operational results often a sharp spike in earnings from one period to the next will be caused by non operating income seek to get to the bottom of where money was generated and to ascertain how much of it if any is linked to the everyday running of the business and is likely to be repeated | |
what is non owner occupied | non owner occupied is a classification used in mortgage origination risk based pricing and housing statistics for one to four unit investment properties the classification means that the owner does not occupy the property the term is not typically used for multifamily rental properties such as apartment buildings understanding non owner occupiedthe accurate classification of property is important for real estate lenders to determine the interest rate that they will charge a borrower and to ensure they are adequately compensated for the risks they take in lending money for a purchase a mortgage on a non owner occupied property might have a slightly higher interest rate than a mortgage on an owner occupied property this is because borrowers of non owner occupied properties are more likely to default on their mortgages 2because of the higher interest rate some unscrupulous borrowers will try to classify a non owner occupied mortgage as an owner occupied mortgage to receive a lower interest rate and save money this is a type of mortgage fraud known as occupancy fraud occupancy fraud occurs when a borrower lies on a mortgage application regarding whether or not the property will be owner occupied if discovered the borrower could face many repercussions including prosecution for bank fraud or a demand from the lender that the entire mortgage balance be repaid immediately in some situations renting an owner occupied property may not be occupancy fraud such as when a homeowner must move elsewhere for a job to avoid unintentionally committing occupancy fraud borrowers should contact their mortgage lenders before renting owner occupied properties to tenants non owner occupied properties and the real estate marketin many cases non owner occupied properties refer to condominiums and other single family homes that are owned and rented out to others non owner occupied properties require insurance coverage before renters can use them furthermore if the property is not rented out to tenants and if it is intentionally vacant with no occupants then a different type of property insurance will be necessary buying and renting out properties for other residential occupants represents a significant part of the overall real estate market those who invest in these properties typically search for properties that need repairs but offer the possibility of attracting tenants if they are refurbished and repositioned on the market this could also apply to different types of vacation properties that are not the primary dwelling of the owner non owner occupied financingthere is a class of financing for non owner occupied properties specifically for renovation purposes a non owner occupied renovation loan is a type of mortgage that the borrower can use to not only acquire the property but also borrow funds that will go toward the renovation of the dwelling in this case the property will not be a turnkey property that the investor can purchase and immediately rent out the value of such a mortgage is typically based on the value of the property after it has been refurbished and renovated 3while there is no minimum repair work that must be done with the funds from this type of mortgage the renovations must be a permanent part of the residence this could include adding a new bathroom replacing a roof new plumbing or paving a new driveway the renovations must also increase the overall value of the property on which the mortgage was taken out cosmetic improvements that increase the appeal of the property are not enough the repairs and refurbishment must create a tangible improvement to the dwelling s market value such mortgages typically can be used by owners with up to four financed non owner occupied properties |
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