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when an examination results in a proposed tax deficiency the first step the irs takes towards amending this deficiency is to issue a 30 day letter to the taxpayer it is known as a 30 day letter because the taxpayer has 30 days to respond before the irs processes the changes made to the return | a notice of deficiency explains any adjustments and how the amount of any deficiency was calculated it explains the taxpayer s options to either agree to the additional tax liability by signing a waiver form 40893 or challenge it in u s tax court 21a notice of deficiency is sometimes referred to as a 90 day letter because it gives the taxpayer 90 days to dispute the tax assessment in the tax court the 90 day period within which a petition may be filed is prescribed by statute and cannot be extended the 90 day period is counted from the date the notice of deficiency is mailed to the taxpayer s last known address the irs is required by law to include the last day a petition may be filed directly on the notice of deficiency until 90 days expire or a tax court decision is final whichever is later the irs is barred from any assessment or collection activity 1it is important to note that a notice of deficiency is not a tax bill however if the taxpayer has not signed a waiver form 4089 agreeing to the changes3 or filed a petition with the tax court within the 90 day period the irs will assess the tax penalties and interest shown on the notice of deficiency and send a bill 2 this is one of the events that precedes and triggers irs collection efforts | |
what is a notice of termination | a notice of termination is what an employer uses to notify an employee as to the end of their employment contract more broadly it may also refer to the formal notification of the end of a contract between two or more parties while a notice of termination usually is provided to an employee for reasons unrelated to their job performance for example because business conditions necessitate layoffs or downsizing it may also be given to an employee for poor job performance or misconduct in certain cases however employers are required to give workers advance notice of mass layoffs or a plant closure especially if they are a member of a union another term for notice of termination document is pink slip or termination letter if your job is terminated but you are under a union contract your employer is legally bound to give you a notice of termination otherwise there is no law that individual companies must provide their at will workers with a notice of termination | |
how a notice of termination works | in the united states employers are not required to give notice to a worker prior to their termination as per the fair labor standards act flsa all american workers are considered at will which means that an employer can terminate employees for any reason without establishing just cause as long as the reason is not illegal such as gender religious or racial discrimination the reasoning is that an employee also has the right to leave a job for any reason at any time in the u s the only notifications legally required to be included in a notice of termination are related to the consolidated omnibus benefits reconciliation act cobra and the worker adjustment and retraining notification act warn a reason for termination need not be stated though it tends to be a best practice if an employee has been fired for cause | |
how a notice of termination works in other countries | in some countries an individual who has been employed for a certain period of time must be provided with a notice of termination for example in canada workers who have been employed with a company continuously for three or more months must be given written notice of termination by their employer along with termination pay or a combination of both | |
how long a notice period depends on the length of service a notice of termination is not due however to an employee who is guilty of disobedience willful misconduct or neglect of duty | special considerations | |
when a party to a contract wants to notify another party or parties of their intent to end their relationship as well as disclose a date for contract expiration they will send a notice of termination simply put it is a formal declaration to another party that you plan to end a contract it acts as a public record of such an action and can help resolve disputes should they arise later | such a notice will contain the terms that permit the termination of an agreement a notice of termination also called a notice of cancellation of contract or contract termination letter serves as a courtesy to other parties and can help preserve relationships | |
what is a notice to creditors | a notice to creditors can be a specific contact with a known creditor or a public notice commonly posted in a local newspaper by a trust or estate s executor as part of the probate of the estate of a decedent the notice serves as the official notification to creditors and debtors of the probate of a deceased individual s estate and the announcement may run for weeks depending on state laws known creditors must be given specific notice the published notice captures all other unknown creditors the executor or executrix in some states known as the personal representative is charged with paying outstanding debts and collecting monies owed to the estate as part of her duties after being appointed by the court | |
how a notice to creditors works | in the united states when a person dies there may be an informal probate process of the deceased s estate the phrase avoiding probate refers to the strategy of arranging for the non probate transfer of assets via trusts joint accounts or by other means such as life insurance some states have an asset threshold allowing small estates to avoid probate but if an interested party objects assets exist that require probate or other issues are evident a probate case will be opened depending on state laws once probate is opened creditors have a limited amount of time from the date they were notified of the testator s death to present any claims against the estate for money owed to them claims that are rejected by the executor can be filed in the court where a probate judge will have the final say on whether or not the claim must be paid even though newspapers have given way to digital and online media they are still a commonly used medium with which to provide notice to outstanding creditors notice in bankruptcy proceedingsa notice to creditors is also filed for bankruptcy proceedings in the event of personal bankruptcy the notice is filed before the first meeting of creditors known as a 341 meeting individuals filing chapter 7 or chapter 13 bankruptcy must attend this meeting with the bankruptcy trustee and creditors may also attend and ask questions 1 | |
what is notional principal amount | the term notional principal amount refers to the predetermined dollar amount or principal on which exchanged interest payments are based notional principal amounts are commonly used between two parties in interest rate swaps the notional principal amount is a theoretical value this means while it is predetermined by parties in the swap that dollar value isn t exchanged rather only the interest rate ever changes hands understanding notional principal amountsan interest rate swap is a contract between two parties who agree to exchange future interest payments for another these payments are based on a certain dollar value known as the notional principal amount treasury regulations defines the notional principal amount as a financial instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts 1as noted above the notional principal never changes hands which is why it is considered notional or theoretical put simply the notional principal is the assumed amount of principal involved in a financial transaction even though it is functionally separated from the transaction this means that the parties involved neither pay nor receive the notional principal amount at any time rather they only exchange interest rate payments this concept can also be applied to the underlying principal value of a debt security in interest rate swaps that s because the rates are actual components of the transaction while the principal is functionally fictitious a notional principal amount need not necessarily be a cash amount it can also be equal to equity holdings or the value of a basket of stocks | |
when calculating bond payments a bond s face value is considered notional when it comes to determining the interest due the payments are a percentage of the face value even if the face value is not available in a true sense the face value cannot be withdrawn and may not even exist in a traditional sense until the bond approaches maturity but it does have an understood value that is required for the performing of relevant calculations | interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate or vice versa to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap special considerationsan interest rate swap involves two parties who lend funds to one another but with different terms the repayment schedule may be for different durations or different interest rates in cases where a transaction involves the same amount of principal the amount being lent and received by each party the principal is notional and does not actually change hands or may not even functionally exist when the underlying asset is an amortizing loan the underlying principal decreases in value over the repayment period these swaps are amortizing swaps interest rate swaps are often used to help shift the risk or return of particular investments up or down one organization might have an asset with a variable interest rate while the other holds an asset with a fixed rate accepted as a zero sum agreement one party may benefit from the arrangement while the other experiences a loss example of notional principal amounthere s a hypothetical example to show how the concept of a notional principal amount works let s say two companies enter into an interest rate swap contract the contract has the following conditions for three years this would be considered a plain vanilla interest rate swap because one party pays interest at a fixed rate on the notional principal amount and the other party pays interest at a floating rate on the same notional principal amount | |
how do interest rate swaps work | an interest rate swap is a financial agreement between two parties it is a forward contract which means both parties pay each other interest at specified intervals in the future these swaps are based on a predetermined dollar value called the notional principal amount this value is theoretical which means that it never changes hands rather the two parties only pay each other the agreed upon interest companies and financial institutions trade interest rate swaps to mitigate risk hedge against loss and manage credit risk | |
what does notional value mean in finance | the term notional value is used to define the total value of an underlying asset in a financial contract put simply it is the face value of a contract s underlying asset this value can be applied to different types of financial contracts including interest rate swaps equity options and foreign currency derivatives traders can calculate the notional value of an asset by multiplying the contract size with the underlying asset s price | |
when you trade interest rates you re essentially betting on whether rates will move up or down if you re an experienced trader consider investing in interest rate futures these financial contracts are a little more complicated than the average security and often involve spread betting to speculate on the movement of interest rates | but if you re a novice investor or not that experienced you can still take advantage of interest rate investing consider etfs that are designed to move with increases in long term interest rates fixed income securities or index investing that mirrors interest rates the bottom linean interest rate swap is a unique type of financial contract it is an agreement between two parties who pay each other interest at regular intervals over the duration of the contract the interest is based on the notional principal amount this is a theoretical dollar value on which the interest rate is based this amount is never actually traded or paid instead the two parties in the contract pay the interest calculated on the notional principal amount to one another | |
what is notional value | notional value is a term often used by derivatives traders to refer to the total value of the underlying asset in a contract it can be the total value of a position how much value a position controls or an agreed upon amount in a contract put simply it is the face value that is used to determine payments on a financial asset this term is used when describing derivative contracts in the options futures forwards and currency markets investopedia julie bangunderstanding notional valuenotional value is the face or total value of a position in a financial instrument such as a derivatives trade it helps distinguish the total value of a trade from the market value or cost of taking the trade there is a clear distinction between the two notional value accounts for the total value of the position while the market value is the price at which that position can be bought or sold in the marketplace notional value can be calculated as follows the notional value of derivative contracts is much higher than the market value due to leverage using borrowed money leverage allows someone to use a small amount of money to theoretically control a much larger amount the amount of leverage used can be calculated by dividing notional value by market value 1l nv mv where l leverage nv notional value mv market value begin aligned text l text nv div text mv textbf where text l text leverage text nv text notional value text mv text market value end aligned l nv mvwhere l leveragenv notional valuemv market value notional value is integral in assessing portfolio risk which can be very useful when determining hedge ratios to offset that risk 2 for example say a fund has a 1 million long exposure to u s equity markets and the fund manager wants to offset that risk using the e mini s p 500 futures contracts they would have to sell an approximately equivalent amount of s p 500 futures contracts to hedge their market exposure risk if the notional value of each e mini s p 500 futures contract is 140 000 the market value is 10 000 hr cer nvrua hr 1 000 000 140 000 7 14 where hr hedge ratio cer cash exposure risk nvrua notional value of related underlying asset begin aligned text hr text cer div text nvrua text hr 1 000 000 div 140 000 7 14 textbf where text hr text hedge ratio text cer text cash exposure risk text nvrua text notional value of related underlying asset end aligned hr cer nvruahr 1 000 000 140 000 7 14where hr hedge ratiocer cash exposure risknvrua notional value of related underlying asset so the fund manager would sell approximately seven e mini s p 500 contracts to effectively hedge their long cash position against market risk the market value would be 70 000 uses in swaps options and foreign currencieswhile notional value can be used in futures and stocks total value of the stock position in the ways discussed above notional value also applies to interest rate swaps total return swaps equity options and foreign currency derivatives in interest rate swaps the notional value is the specified value upon which interest rate payments will be exchanged the notional value in interest rate swaps is used to come up with the amount of interest due typically the notional value on these types of contracts is fixed during the contract s life total return swaps involve a party that pays a floating or fixed rate multiplied by a notional value amount plus the decrease in notional value this is swapped for payments by another party that pays the appreciation of notional value notional value in an option refers to the value that the option controls for example abc trades for 20 with a particular abc call option costing 1 50 one equity option controls 100 underlying shares a trader purchases the option for 1 50 100 150 the notional value of the option is 20 100 2 000 buying the stock option contract would potentially give the trader control over 100 shares of stock for 150 compared with if they purchased the stocks outright for 2 000 the notional value of an equity options contract is the value of the shares controlled rather than the cost of the transaction foreign exchange fx derivatives like forwards and options have two potential notional values however for typical over the counter otc trades in fx derivatives the notional value will be in line with the common quoting convention of the currency pair primary currency secondary currency 3for example if the trade is in gbp usd gbp as the primary currency then the amount of say 10 000 000 will commonly be the notional amount of the trade but if the trade is in usd jpy the notional value would be 10 000 000 using usd as the primary currency if the trade were in aud nzd the notional amount would be in aud and so on depending on the circumstances the initiating counterparty may seek to use the secondary currency as the notional amount instead for example an american fund manager wants to buy usd 10 million worth of british stock priced in gbp when gbp usd is currently trading at 1 3000 in this case the notional amount would be 10 million or 7 692 million it s mostly a matter of convenience for the two counterparties to decide on when initiating a trade example of notional valuea contract has a unique standardized size that can be based on factors such as weight volume or multiplier for example a single comex gold futures contract unit gc is 100 troy ounces and an e mini s p 500 index futures contract has a 50 multiplier 45 the notional value of the former is 100 times the market price of gold while the notional value of the latter is 50 times the market price of the s p 500 index if someone buys an e mini s p 500 contract at 2 800 then that single futures contract is worth 140 000 50 2 800 therefore 140 000 is the notional value of that underlying futures contract however the person buying this contract isn t required to put up 140 000 when taking the trade rather they only need to put up an amount called the initial margin market value which is usually a fraction of the notional amount the leverage used would be the notional amount divided by the price of buying the contract if the price initial margin for one contract was 10 000 then the trader was able to use 140 000 10 000 14 times leverage | |
why is notional value important | the notional value is the amount of an underlying asset that investment managers might seek to hedge against in contrast the market value will fluctuate over time based on market movements which the investor might presumably seek to hedge while the notional amount remains the same | |
what is the difference between notional and market value | notional value refers to the value of the underlying asset say 5 000 worth of stock bought on the open market it s also known as the face value of a holding market value is what the current position is worth in the open market | |
is notional value the same as face value | yes it is the notional value or face value that investors may seek to hedge against as it represents the full value of the underlying asset | |
what value should an investor target to hedge against an asset exposure | investors should focus on the notional or face value to hedge against exposure to an asset for instance say a portfolio manager has 10 million invested in 10 year u s government bonds the manager likely would want to use options and the leverage they provide to cover the entire notional value of the investment in this case 10 million there will be a cost associated with the hedge the cost of the option contracts but it is typically a small fraction of the notional value of the asset | |
what is the effective notional amount of an investment | the effective notional amount is the face value minus the cost of any hedges that have been purchased against it for example an investor seeks to hedge against a long 10 000 stock position in xyz by buying an out of the money put which costs 2 50 per 100 shares or 250 in premium to cover the full 10 000 investment incorporating the cost of the hedge the effective notional amount then becomes 10 000 minus 250 or an effective notional amount of 9 750 the bottom linenotional value or face value is the value of an underlying asset in a derivatives trade so if an investor seeks to hedge against a long position in abc stock via options they may wish to buy a put to protect against downside movements the amount of the put will be based on the notional value of the stock the investor seeks to hedge notional value stays the same as long as it s fully hedged whereas market value is subject to market movements with no downside protection as in the case above notional value serves as the baseline for measuring an investment and whatever hedges may be deployed to protect the underlying investment | |
what is novation | novation is the replacement of one of the parties in an agreement between two parties with the consent of all three parties involved to novate is to replace an old obligation with a new one for example a supplier who wants to relinquish a business customer might find another source for the customer if all three agree the contract can be torn up and replaced with a new contract that differs only in the name of the supplier the old supplier relinquishes all rights and obligations of the contract to the new supplier | |
how novation works | in legal language novation is a transfer of both the benefits and the burdens of a contract to another party contract benefits may be anything for example the benefit could be payments for services the burdens are the obligations taken on to earn the payment in this example the services one party to the contract is willing to forgo the benefits and relinquish the duties canceling a contract can be messy expensive and bad for an entity s reputation arranging for another party to fulfill the contract on the same terms with the agreement of all parties is better business novations are often seen in the construction industry where subcontractors may be juggling several jobs at once contractors may transfer certain jobs to other contractors with the client s consent novations are most frequently used when a business is sold or a corporation is taken over the new owner may want to retain the business s contractual obligations while the other parties want to continue their agreements without interruption novations smooth the transition types of novationsthere are three types of novations novation vs assignmenta novation is an alternative to the procedure known as an assignment in an assignment one person or business transfers rights or property to another person or business but the assignment passes along only the benefits while any obligations remain with the original contract party novations pass along both benefits and potential liabilities to the new party for example a sub lease is an assignment the original rental contract remains in place the landlord can hold the primary leaseholder responsible for damage or non payment by the sub letter novation gives rights and the obligations to the new party and the old one walks away the original contract is nullified in property law novation occurs when a tenant signs a lease over to another party which assumes both the responsibility for the rent and the liability for any subsequent damages to the property as indicated in the original lease generally an assignment and a novation require the approval of all three parties involved a sub lease agreement is usually an assignment not a novation the primary leaseholder remains responsible for non payment or damage novation usesbecause a novation replaces a contract it can be used in any business industry or market where contracts are used in financial markets novations are generally used in credit default swaps options or futures when contracts are transferred to a derivatives market clearinghouse a bilateral transaction is completed through the clearinghouse which functions as an intermediary the sellers transfer the rights to and obligations of their securities to the clearinghouse the clearinghouse in turn sells the securities to the buyers both the transferor the seller and transferee the buyer must agree to the terms of the novation and the remaining party the clearinghouse must consent by a specific deadline if the remaining party doesn t consent the transferor and transferee must book a new trade and go through the process again 1contracts are a part of real estate transactions so novation is a valuable tool in the industry if buyers and sellers enter into a contract novation allows them to change it when issues arise during due diligence inspection or closing commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments federal state and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce contracts are critical components for private or public companies who win a bid to do work for governments if the contractor suddenly can t deliver on the contract or other issues prevent it from completing its task the contractor can ask the government to recognize another party to complete the project 2a novation is not a unilateral contract mechanism all concerned parties may negotiate the terms until a consensus is reached banks use novation to transfer loans or other debts to different lenders this typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one example of novationnovation can occur between any two parties consider the following example maria signed a contract with chris to buy a cryptocurrency for 200 chris has a contract with uni for the same type of cryptocurrency for 200 these debt obligations may be simplified through a novation by agreement of all three parties a novation agreement is drawn with a new contract in which chris transfers the debt and its obligations to maria maria pays uni 200 in crypto chris receives and pays nothing novations also allow for revisions of payment terms as long as the parties involved agree for example say uni decided not to accept crypto but wanted cash instead if maria agrees a novation occurs and new payment terms are entered on a contract | |
what is a novation | in novation one party in a two party agreement gives up all rights and obligations outlined in a contract to a third party as a result the original contract is canceled | |
what is the meaning of novation agreement | in novation the rights and obligations of one party to a two party contract are transferred to a third party with the agreement of all three parties | |
is novation a new contract | yes because the old contract is invalidated or extinguished when the new contract is signed the bottom linein a novation when all parties agree one party in a two party agreement gives up all rights and obligations outlined in a contract to a third party as a result the original contract is canceled novation differs from an assignment where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms the original contract remains in place | |
what is a null hypothesis | a null hypothesis is a type of statistical hypothesis that proposes that no statistical significance exists in a set of given observations hypothesis testing is used to assess the credibility of a hypothesis by using sample data sometimes referred to simply as the null it is represented as h0 the null hypothesis also known as the conjecture is used in quantitative analysis to test theories about markets investing strategies and economies to decide if an idea is true or false alex dos diaz investopediaunderstanding a null hypothesisa gambler may be interested in whether a game of chance is fair if it is then the expected earnings per play come to zero for both players if it is not then the expected earnings are positive for one player and negative for the other to test whether the game is fair the gambler collects earnings data from many repetitions of the game calculates the average earnings from these data then tests the null hypothesis that the expected earnings are not different from zero if the average earnings from the sample data are sufficiently far from zero then the gambler will reject the null hypothesis and conclude the alternative hypothesis namely that the expected earnings per play are different from zero if the average earnings from the sample data are near zero then the gambler will not reject the null hypothesis concluding instead that the difference between the average from the data and zero is explainable by chance alone a null hypothesis can only be rejected not proven the null hypothesis assumes that any kind of difference between the chosen characteristics that you see in a set of data is due to chance for example if the expected earnings for the gambling game are truly equal to zero then any difference between the average earnings in the data and zero is due to chance analysts look to reject the null hypothesis because doing so is a strong conclusion this requires evidence in the form of an observed difference that is too large to be explained solely by chance failing to reject the null hypothesis that the results are explainable by chance alone is a weak conclusion because it allows that while factors other than chance may be at work they may not be strong enough for the statistical test to detect them the alternative hypothesisan important point to note is that we are testing the null hypothesis because there is an element of doubt about its validity whatever information that is against the stated null hypothesis is captured in the alternative alternate hypothesis h1 1for the examples below the alternative hypothesis would be in other words the alternative hypothesis is a direct contradiction of the null hypothesis null hypothesis exampleshere is a simple example a school principal claims that students in her school score an average of seven out of 10 in exams the null hypothesis is that the population mean is 7 0 to test this null hypothesis we record marks of say 30 students sample from the entire student population of the school say 300 and calculate the mean of that sample we can then compare the calculated sample mean to the hypothesized population mean of 7 0 and attempt to reject the null hypothesis the null hypothesis here that the population mean is 7 0 cannot be proved using the sample data it can only be rejected take another example the annual return of a particular mutual fund is claimed to be 8 assume that the mutual fund has been in existence for 20 years the null hypothesis is that the mean return is 8 for the mutual fund we take a random sample of annual returns of the mutual fund for say five years sample and calculate the sample mean we then compare the calculated sample mean to the claimed population mean 8 to test the null hypothesis for the above examples null hypotheses are for the purposes of determining whether to reject the null hypothesis abbreviated h0 said hypothesis is assumed for the sake of argument to be true then the likely range of possible values of the calculated statistic e g the average score on 30 students tests is determined under this presumption e g the range of plausible averages might range from 6 2 to 7 8 if the population mean is 7 0 2if the sample average is outside of this range the null hypothesis is rejected otherwise the difference is said to be explainable by chance alone being within the range that is determined by chance alone 2 | |
how null hypothesis testing is used in investments | as an example related to financial markets assume alice sees that her investment strategy produces higher average returns than simply buying and holding a stock the null hypothesis states that there is no difference between the two average returns and alice is inclined to believe this until she can conclude contradictory results refuting the null hypothesis would require showing statistical significance which can be found by a variety of tests the alternative hypothesis would state that the investment strategy has a higher average return than a traditional buy and hold strategy one tool that can determine the statistical significance of the results is the p value a p value represents the probability that a difference as large or larger than the observed difference between the two average returns could occur solely by chance a p value that is less than or equal to 0 05 often indicates whether there is evidence against the null hypothesis 3 if alice conducts one of these tests such as a test using the normal model resulting in a significant difference between her returns and the buy and hold returns the p value is less than or equal to 0 05 she can then reject the null hypothesis and conclude the alternative hypothesis | |
how is the null hypothesis identified | the analyst or researcher establishes a null hypothesis based on the research question or problem they are trying to answer depending on the question the null may be identified differently for example if the question is simply whether an effect exists e g does x influence y the null hypothesis could be h0 x 0 if the question is instead is x the same as y the h0 would be x y if it is that the effect of x on y is positive h0 would be x 0 if the resulting analysis shows an effect that is statistically significantly different from zero the null can be rejected | |
how is null hypothesis used in finance | in finance a null hypothesis is used in quantitative analysis it tests the premise of an investing strategy the markets or an economy to determine if it is true or false for instance an analyst may want to see if two stocks abc and xyz are closely correlated the null hypothesis would be abc xyz | |
how are statistical hypotheses tested | statistical hypotheses are tested by a four step process the first is for the analyst to state the two hypotheses so that only one can be right the second is to formulate an analysis plan which outlines how the data will be evaluated the third is to carry out the plan and physically analyze the sample data the fourth and final step is to analyze the results and either reject the null hypothesis or claim that the observed differences are explainable by chance alone | |
what is an alternative hypothesis | an alternative hypothesis is a direct contradiction of a null hypothesis this means that if one of the two hypotheses is true the other is false the bottom linea null hypothesis states there is no difference between groups or relationship between variables it is a type of statistical hypothesis and proposes that no statistical significance exists in a set of given observations null means nothing the null hypothesis is used in quantitative analysis to test theories about economies investing strategies and markets to decide if an idea is true or false hypothesis testing assesses the credibility of a hypothesis by using sample data it is represented as h0 and is sometimes simply known as the null | |
what is numeraire | numeraire is an economic term of french origin which acts as a benchmark in comparing the value of similar products or financial instruments the word numeraire translates as money coinage or face value understanding numerairenumeraire is an economic term that represents a unit in which prices are measured a numeraire is usually applied to a single good which becomes the base value for the entire index or market having a numeraire or base value allows for the comparison of the value of goods against one another in essence the numeraire acts as a set standard of value across an exchange an example of a numeraire arises when we look at how currencies were valued under the bretton woods system during the mid 20th century the u s dollar usd was priced at one thirty fifth 1 35th the price of an ounce of gold all other currencies were then priced as either a multiple or a fraction of the dollar in this situation the usd acted as the de facto benchmark or numeraire because it was fixed to the price of gold today the u s dollar remains the numeraire for most commodity prices denominating commodity prices in u s dollars standardizes the price as the usd is the most traded and liquid currency in the world for example companies that engage in oil transactions can easily convert payments or receipts in a timely manner since the price of oil is denominated in usd also by setting oil prices in usd it allows a country to compare the value of oil prices in its own currency for example if a country that is a net importer of oil has a currency that is weakening against the u s dollar it will be paying more for its oil in local currency terms than it did in the past | |
what is numismatics | numismatics is the study of the physical embodiment of various payment media i e currencies the study of numismatics as it applies to coins is often in the research of the production and use of the coins to determine their rarity understanding numismaticsnumismatics differs from historical and economic studies of money numismatists study the physical attributes of the payment media rather than the use and function in an economy the term numismatics is often used interchangeably with the coin collection though it connotes more intensive study than just simply collecting coins it could be said that all numismatists are coin collectors but not all coin collectors are numismatists it is widely believed that numismatics began during the early european renaissance as part of an effort to re discover all things classical the first english usage of the word numismatics was in 1829 stemming from the word adjective numismatic which translates to of coins and stemmed from the french word numismatiques which itself derived from the latin stem numismat numismatists study the physical technology and historical context of coinage and money coins or other tokens that are rare or unique or that have some special history that can be documented are considered most interesting for study and valuable as collectibles specimens that show errors from their production process of striking the coins or printing the notes are especially notable currency valuebecause of their properties and value as collectibles rare units of currency can trade at well above their face value or the commodity value of their physical substance for example some 20th century u s silver quarters with a face value of 25 cents and a silver melt value of a few dollars can trade for tens of thousands of dollars apiece rather than spend these as money at their face value collectors withdraw them from circulation to use as collectibles or investments this is similar to the operation of what economists call gresham s law which states that under legal tender laws bad less valuable money drives good more valuable money out of circulation in the market in the case of rare and collectible coins or other monetary tokens gresham s law operates to an even greater extreme the coins are not only withdrawn for circulation but actually cease to be money in an economic sense numismatic organizationsthere are numerous societies dedicated to the study research and advancement of numismatic sciences for example the american numismatic society founded in new york city in 1858 was created to foster public appreciation of coins medals and currencies the society has since built a collection of more than 800 000 objects the oldest dating back to 2000 bce its numismatic library contains over 100 000 books documents and artifacts other numismatic organizations include history of numismaticsnumismatics refers to the study and analysis of how people use money as well as the collection of various types of money coins and other forms of consideration the history of numismatics dates back centuries however coin collecting likely began at the time currency was invented before the 19th century coin collecting was an individual hobby one most often enjoyed by nobles the religious elite and rulers during the roman empire emperors like caesar augustus collected coins from various places to use as leverage in trade negotiations and to gift to guests guillaume bud s de asse et partibus eius libri quing written in the 16th century was the first book on coins and the first to mention numismatics during the renaissance era there was a coin collecting explosion with europeans fascinated with the materials and collections of prior civilizations of great interest were the coins with engraved images of animals mythical gods and goddesses and rulers italian scholar and poet francesco petrarca or petrarch is regarded as the first renaissance collector of coins and as the catalyst to the numismatic boom of the 14th century over time numismatics increasingly became popular in the 1800s coin collecting organizations such as the new york based american numismatic society formed across the globe with the advent of the internet coin collecting has gained traction attracting a broader audience of enthusiasts potential and skilled numismatics have access to endless information tools and numismatic communities fields of studybecause there are many types of currency coins and notes the field of numismatics has been segmented into various subfields each subfield focuses on a specific type of numismatic collectible some of the most common are notaphily exonumia and scripophily notaphily is the study and collection of paper money notaphily is a combination of the latin word nota meaning paper money and the greek word phily meaning love notaphilists collect paper money including banknotes exonumia is the study and collection of coins including tokens medals and other like objects exonumia is a combination of the greek word exo meaning out of and nummus meaning coin these items are used in place of currency or used to commemorate events and accomplishments exonumia is largely focused on commemorative military medals awarded for contributions in war and military expeditions scripophily is the study of securities such as stocks and bond certificates scripophily combines the greek word for love and the greek word scrip for writing scripophilists generally collect these instruments for their beauty rarity and historical significance because the issuance of stock certificates is largely an antiquated practice this hobby is much harder to engage in than the others subfields | |
how to become a numismatist | a numismatist also known as a coin grader is a professional who collects analysis and assesses the quality of collectible coins currency and other like objects in the united states prospective numismatists must join the american numismatic association ana complete prescribed courses and pass an exam the numismatist program consists of six courses each focusing on different topics upon completion of the courses the candidate must pass a 200 question exam once the requirements are fulfilled the candidate receives a diploma confirming their proficiency in the field of numismatics additional training may be needed to solidify the knowledge and training the ana and other professional organizations provide additional tools and resources numismatic fun facts | |
what is numismatic gold | numismatic gold refers to collectible gold coins that hold more value than the spot or current market price of gold the increased value is largely due to rarity age and other factors | |
what does numismatic value mean | numismatic value is the value a seller receives for the sale of a collectible coin this value is determined by the coin s quality rarity and demand who has the biggest coin collection the smithsonian national numismatic collection is revered as the biggest coin collection in the united states and thought to be the largest in the world as well it features about 1 6 million objects in its collection correction march 10 2023 a previous version of this article incorrectly stated the quantity of objects in the smithsonian s coin collection it has 1 6 million objects not 1 6 objects | |
what is an n v | the term n v refers to an acronym for the dutch phrase naamloze vennootschap an n v is a public limited liability company or an open corporation that sells shares to the public in order to generate income the acronym appears after the company name the same way american and british company names precede the words inc or plc corporations that wish to set up an n v must meet certain thresholds including minimum capital and registration requirements the n v structure is commonly used in dutch or dutch influenced nations including the netherlands belgium and aruba | |
how an n v works | every country has different regulations that outline the process involved with setting up a corporation this includes rules about registration taxation and corporate structures there are certain procedures that companies must abide by in order to go public regardless of the country in which they do business as noted above an n v or naamloze vennootschap is a type of company in the netherlands it is also a common corporate structure in other dutch influenced countries such as aruba belgium suriname the dutch west indies indonesia curacao and st maarten the procedures to set up and operate an n v vary by country this type of corporation generally operates the same way an incorporated company does in the u s or a public limited company does in the united kingdom the company issues stock to individuals and entities who are able to make decisions about the company s future including appointing and changing those who sit on the board of directors bod shareholders may remain anonymous under the structure as the term naamloze vennootschap literally translates to the term nameless venture a minimum of 45 000 in startup capital is required to establish an n v in the netherlands notary services are also needed this professional must draft a notarial deed with the articles of association which highlights the purpose of the corporation and the responsibilities of those involved the company and the names of the directors are then registered at the netherlands chamber of commerce in the dutch commercial register 1here are a few other requirements an n v must follow in the country along with startup capital and notary costs companies are also responsible for accounting registration bookkeeping and annual administration costs special considerationsbusinesses can operate before they are registered under the n v category in the netherlands but its directors are personally liable until registration is complete shares of dutch naamloze vennootschap entities may also be traded on stock exchanges as long as they meet certain requirements for instance the company must shareholders must meet and vote on whether to cease operations as an n v if they decide to do so all debts must be paid off and all dividends must be distributed to shareholders once this is done the n v can officially be shuttered 1note that the information listed above applies to those in the netherlands as mentioned above the requirements to operate an n v generally vary based on the country where they operate for instance the total number of public limited companies in the netherlands as of the first quarter of 2022 1n v vs b v an n v is just one type of structure for companies in different countries another option is the b v or besloten vennootschap in the netherlands this structure is a private limited company and is generally smaller than an n v the corporation tends to be liable for its debts so no onus falls on its directors ownership is also divided into shares which gives shareholders the power to make decisions about the company although it is common for smaller entities to have a single director there is no limit to the number of directors a b v can have which means there can be multiple directors to establish a b v it must advantages and disadvantages of an n v let s take a look at some of the key benefits and drawbacks of setting up an n v keep in mind that this refers to corporate structures in the netherlands unless otherwise indicated some of the key benefits of registering and operating an n v in the netherlands include here are some of the key drawbacks of registering and operating an n v in the netherlands corporate tax rates and tax deductions applyanonymity for shareholdersno outlay of cash is requiredno personal liability for directorshigher amount of startup capital is required compared to b v high capital and share valuation thresholds to go publiccan be easily acquiredreal life example of an n v one of the largest naamloze vennootschaps in the world is exor n v the company s roots trace back to the end of the 19th century but it wasn t until 1927 that it was officially founded by giovanni agnelli as fabbrica italiana automobili torino or fiat 9it is now a holding company with a market capitalization of about 18 2 billion as of jan 20 2022 10 it makes investments in a variety of sectors including reinsurance automobiles agriculture as well as professional sports its business segments include fiat chrysler automobiles partnerre ferrari cnh industrial juventus and the economist among other enterprises 119the company remains largely controlled by the italian agnelli family today 9 | |
what are the differences between an n v and b v | there are several things that set an n v apart from a b v namely their structures sizes and minimum requirements an n v is a public limited company while a b v is a private limited company an n v is reserved for larger entities and they require a greater minimum startup capital requirement of at least 45 000 compared to 0 01 for a b v | |
what does n v stand for | n v stands for naamloze vennootschap which is a public limited company in the netherlands and other dutch influenced countries the term naamloze vennootschap translates to nameless venture | |
what are the characteristics of an n v | all corporations that fall under the n v category are legal entities that must be registered with authorities including those responsible for taxation this kind of company issues shares to shareholders for the purpose of raising capital shareholders are able to remain anonymous and have the power to make decisions about the company | |
what is nyse arca | nyse arca is an electronic securities exchange in the u s on which exchange traded products etps and equities are listed the exchange specializes in etp listings which include exchange traded funds etfs exchange traded notes etns and exchange traded vehicles etvs in addition to placing typical orders nyse arca allows investors and traders to participate in opening and closing auctions in etfs and place midpoint orders that sit between the bid and ask price understanding nyse arcanyse arca is the world s leading etf exchange in terms of volume and listings as of january 2024 the exchange held a commanding 16 5 of the etf market share of exchange volume and listed 62 9 of the 3 380 total etfs in the united states 3with nyse it controls 75 of the 8 1 trillion in total assets under management aum of exchange traded products etps nyse arca also offers the narrowest bid ask spreads and quotes the most time at the best price across all u s etps much like other electronic communications networks ecns nyse arca implements a liquidity fee rebate program to improve overall market depth for example market makers mms are charged a fee to remove liquidity and provided with a rebate for adding it fees and rebates typically hover around 0 003 per share 4nyse arca membershipnyse arca offers three levels of exchange membership for financial firms that want to engage in market making practices on the ecn standard market making requires that members actively maintain a two sided market at all times in the names that they make markets in lead market makers lmms are the primary designated market makers in a given name and are held to more stringent standards and margin requirements the third status etp holder is a financial institution that does not wish to make markets but does want to use the exchange for order routing of exchange traded products for its books or on behalf of its brokerage clients 5as of january 2024 nyse arca membership consists of around 135 member firms 6nyse arca optionsin addition to offering a wide breadth of exchange traded products and other equities the platform also matches orders and allows for crosses of listed options in conjunction with nyse american formerly amex and an open outcry trading floor in san francisco california nyse arca options runs a model similar to its equities and etp using a liquidity focused market maker taker model 7nyse arca and cryptocurrency listed fundsin late 2017 nyse arca submitted an application to the securities and exchange commission sec to list two etfs that track bitcoin futures contracts traded on the cboe options exchange and the chicago mercantile exchange cme the proshares bitcoin etf and the proshares short bitcoin etf 8while the sec has traditionally been reluctant to approve bitcoin etfs due to the cryptocurrency s speculative and unregulated nature in october 2021 trading began on the very first bitcoin etf the proshares bitcoin strategy etf bito 9the sec may have been more receptive to this particular crypto etf because the fund does not invest directly in bitcoin and instead tracks cme bitcoin futures the contracts that speculate on the future price of bitcoin in january 2024 the sec took further steps to allow for bitcoin etf trading by approving 11 spot bitcoin etfs listed on nyse arca cboe bzx and nasdaq 10on may 23 2024 the sec approved nyse cboe and nasdaq applications to list spot ether etfs this is an important step towards the likely offering of spot ether etfs on us exchanges the issuers will also have to get approval before these types of products are eventually listed 11nyse arca historynyse arca was formed in 2006 after the nyse merged with archipelago a leading electronic exchange network created in 1996 archipelago was one of the first ecns to facilitate electronic trading on major u s exchanges such as the nasdaq and american stock exchange amex through the archipelago exchange arcaex ecns allow for automated trading passive order matching after hours trading and instantaneous order execution 12by the mid 2000s archipelago s fast execution speeds and liquidity pools attracted widespread usage from institutional trading firms critics of the merger suggested it would end floor trading that has been in place since the nyse s inception in 1817 however large cap stocks continue to be traded on the nyse using the open outcry method 1314in 2007 nyse completed a merger with euronext the largest european stock exchange which led to the creation of nyse euronext this entity was later acquired by intercontinental exchange ice which became the parent of the nyse arca 1516 | |
what is the difference between nyse and nyse arca | the new york stock exchange nyse is a physical and electronic stock exchange while nyse arca is an electronic communications network ecn used for matching orders | |
which stocks are on nyse arca | nyse arca lists more than 8 000 stocks and exchange traded products this means that virtually every individual stock and etf traded on a u s stock exchange will also be available to trade on nyse arca 17who owns nyse arca nyse arca was formed when the nyse acquired the archipelago ecn in 2006 the intercontinental exchange ice acquired both nyse and nyse arca by 2013 they remained separate and distinct subsidiaries 1819the bottom linenyse arca is a communications network focused on exchange traded products including etfs etns and etvs it is the world s largest etf exchange offering investors access to funds that invest in sectors and track benchmarks | |
what is the nyse composite index | the nyse composite index measures the performance of all common stocks listed on the new york stock exchange including american depositary receipts issued by foreign companies real estate investment trusts and tracking stocks the weights of the index constituents are calculated on the basis of their free float market capitalization the index itself is calculated on the basis of price return and total return which includes dividends 1the breadth of the nyse composite index nya makes it a far better indicator of market performance than narrow indexes that have far fewer components understanding the nyse composite indexthe nyse composite index includes all nyse listed stocks including foreign stocks american depositary receipts real estate investment trusts and tracking stocks the index excludes closed end funds etfs limited partnerships and derivatives 1the two biggest benefits to investors of the nyse composite index are a its quality as all constituents must meet the stringent listing requirements of the exchange and b its global diversification with international companies accounting for about one third of market capitalization 2the nyse composite index is seen as a better stand in for the broader stock market than many of its narrower counterparts due to the number of constituents it has and the global diversity of its holdings | |
how the nyse composite index works | the new york stock exchange launched the composite index in 1966 it was relaunched in 2003 using a new methodology that is more in line with index methodology applied by popular broad based us indexes 1 ice data services is the index sponsor and administrator 1 securities industry automation corp maintained and calculated the index until 2003 when it was relaunched with the help of dow jones indexes under the current methodology the composite index no longer considers a variety of security classes eligible for inclusion closed end funds etfs preferred stocks derivatives shares of beneficial interest trust units and limited partnerships 1 the last trading price of the included securities is applied to calculate the composite index maintenance includes regular monitoring and adjustments made for companies that are added or deleted from the index certain actions by companies such as stock splits and stock dividends may call for simple changes to be made in the composite index to account for common shares outstanding as well as stock prices for the included companies an index divisor adjustment might be required for other types of activity including the issuance of shares which lead to changes in the aggregate free float adjusted market capitalization of the composite index 1 | |
what is obamanomics | obamanomics describes the economic policies of the administration of former president barack obama with the term combining obama and economics the term is commonly associated with the tax policies healthcare reforms and economic stimulus programs enacted by the obama administration in response to the great recession of 2008 understanding obamanomicsas is often the case in politics the precise connotations of obamanomics will depend on the political views of the commentator in question those who favor a more activist role in the economy for the federal government to protect the economic interests of americans may view the term neutrally or even with approval those who prefer less federal involvement in picking winners and losers in the economy and interfering with the economic efficiency of free markets may view the term and the policies it represents unfavorably for supporters of obamanomics the term is often associated with a favorable view of the obama administration s economic stimulus policies examples of these policies include the 2009 passage of the american recovery and reinvestment act arra which was an 831 billion economic stimulus package and the 2009 bailout of the u s automobile industry which was on the verge of collapse at that time 1 many obama supporters view him in heroic terms as one who saved the economy from certain doom by implementing this economic stimulus agenda 23other notable policies associated with obamanomics include the raising of income taxes on high income earners the imposition of a cap or sequester on military and discretionary spending and the passage of the 2010 patient protection and affordable care act aca also known as obamacare to detractors the term obamanomics has connotations of increased government spending taxation and regulation and a dangerous slide toward socialism and a command economy 4 in effect obama s critics view obamanomics as an unwelcome expansion of the role of government in the economy in this manner obamanomics can be contrasted with reaganomics which refers to the economic policies of ex president ronald reagan while obamanomics is associated with an expanded government role reaganomics is associated with lower taxes decreased government spending and fewer regulations 4while some commentators use the term obamanomics in a positive or negative light many use it to simply refer to the economic policies of president obama without any necessarily positive or negative connotations obamanomics and the arrasupporters of obamanomics claim that the dire financial situation of the u s economy that greeted obama when he was elected in 2008 necessitated a strong government response these circumstances included a soaring fiscal deficit collapsing housing market tumbling stock market fears of a banking sector collapse following the bankruptcy of lehman brothers and dramatic job losses obama s signature response to these issues was the quintessential stimulus act the arra which increased government spending by over 800 billion for the decade spanning 2009 through 2019 the arra is an example of keynesian economic theory which includes the concept of government deficit spending as a way to stimulate economic aggregate demand and reduce unemployment through the multiplier effect supporters claimed that the spending was focused on preserving and creating jobs that were threatened by the financial crisis underway at that time while also investing in areas such as health education and civil infrastructure however harvard economist n gregory mankiw and other critics later pointed out that the arra appeared to have had the opposite effect and actually increased unemployment relative to the benchmarks projected by the act s proponents by crowding out private investment and other economic mechanisms 5 | |
what is the obelisk consensus algorithm | obelisk is a blockchain consensus algorithm used by the skycoin ecosystem designed to eliminate the shortcomings of the proof of work pow and proof of stake pos algorithms according to its creators obelisk also reduces the need for mining significantly improves transaction speed and delivers enhanced security understanding the obelisk consensus algorithmblockchains operate globally as self regulated decentralized platforms without any single authority therefore a real time reliable and secure network mechanism is required to ensure the authenticity of the transactions occurring on the network and reach a consensus about the ledger s status this task is performed by the consensus algorithm while the pow and pos systems are the most commonly used consensus algorithms they both have drawbacks for example pow is very energy intensive and pos can promote cryptocurrency hoarding instead of spending obelisk attempts to circumvent the problems of pow and pos by distributing influence over the network according to a concept called a web of trust this concept uses various network nodes and makes consensus decisions depending on the influence score each node creates in obelisk all nodes have a list of nodes that they are subscribed to this creates node density the nodes with the most density have more influence on the network 1in terms of roles and activities performed there are two types of nodes that participate in obelisk block generating nodes and consensus nodes nodes can take either role because they are interchangeable block generating nodes collect new transactions authenticate them package the verified transactions in a new block and broadcast the block to the network 2consensus nodes collect the blocks generated by block generating nodes and put them in a separate container apart from the blockchain it then identifies the block made by the largest number of block generators this block is called the local winner and qualifies to be added to the blockchain each consensus node maintains necessary statistics on local winners as reported by other nodes | |
how is obelisk used | obelisk is used by the skycoin ecosystem skycoin is designed and advertised as an alternative to centralized internet control the intent behind the project is for consumers to control the internet by purchasing or building skyminer machines to run skywire the internet service provider isp alternative from their homes the skywire network built upon the skycoin ecosystem creates a mesh of internet connectivity which removes the requirement for an isp skywire users are rewarded in skycoin and coin hours for providing bandwidth to other users 3 | |
what is a consensus node | in the skycoin network using obelisk consensus a consensus node collects blocks from block generating nodes and determines which block was made by the largest number of block generators that block is added to the blockchain | |
what is poa consensus | proof of authority consensus is a blockchain consensus mechanism where new blocks can only be created for the blockchain by nodes that have proven through authentication that they have the right to create a new block | |
how does blockchain reach consensus | many different consensus algorithms are designed to bring a distributed ledger to a consensus most are constructed to have many transaction validators reach a majority agreement about the state of the blockchain and the transactions taking place the bottom linethe skycoin blockchain uses the obelisk consensus algorithm to validate transactions skycoin is a decentralized internet service provider concept where members host connections and the blockchain network creates a mesh of connections that theoretically reduces the hold isps have on internet access the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info as of the date this article was written the author does not own skycoin | |
what is objective probability | objective probability refers to the chances or the odds that an event will occur based on the analysis of concrete measures rather than hunches or guesswork each measure is a recorded observation a hard fact or part of a long history of collected data the probability estimate is computed using mathematical equations that manipulate the data to determine the likelihood of an independent event occurring an independent event is an event whose outcome is not influenced by prior events subjective probability by contrast may utilize some method of data analysis but also uses guesstimates or intuition to determine the chances of a specific outcome objective vs subjective probabilityobjective probabilities are a more accurate way to determine the probability of a given outcome than subjective probability that s because subjective probability is largely based on human judgment and experiences objective probability on the other hand allows the observer to gain insight from historical data and then assess the likelihood of a given outcome subjective probability allows the observer to gain insight by referencing things they have learned and their own experience rather than being derived solely from hard data and facts subjective probability is largely based on a person s estimate or intuition about a situation and the likely outcome objective probability is based on empirical evidence using statistics experiments and mathematical measurements rather than relying on things like anecdotes personal experience educated guesses or hunches in the financial world using objective probability is particularly important in order to avoid the mistake of making emotional decisions when investing it is true that individual investors often rely on hunches rules of thumb or old wive s tales to justify making the particular investment that too much relies on subjective matters and emotional influence objective probability rids you of the emotional and anecdotal aspects of evaluating outcomes examples of objective probabilityone could determine the objective probability that a coin will land heads up by flipping it 100 times and recording each observation this would likely yield an observation that the coin landed on heads approximately 50 of the time which is an example of a purely objective probability subjective probability varies from person to person objective probability does not an example of subjective probability is when a person who is educated about weather patterns examines things such as barometric pressure wind shear and ocean temperature then predicts the likelihood that a hurricane will head in a certain direction based on their previous experience while the data aids in the decision making the ultimate prediction is based on probabilities that have been guesstimated by the weather forecaster | |
what is obligation | an obligation is the responsibility of a party to meet the terms of a contract or agreement if an obligation is not met the legal system often provides recourse for the injured party understanding obligationobligations are the backbone of our economy trusting that a contract will be adhered to helps create a stable healthy society individuals corporations governments banks and institutions any entity that operates within a society must regularly fulfill their obligations or else face punishment financial obligations represent any outstanding debts or regular payments that a party must make for example if you owe or will owe money to anybody that is one of your financial obligations almost any form of payment or financial security represents a financial obligation coins banknotes shares of stock and bonds are all promises or obligations that you will be credited with the accepted value of the item or gain certain rights or privileges by holding it many formal financial obligations like mortgages student loans or scheduled service payments are set down in written contracts signed by both parties and establish a creditor debtor relationship of obligation money can be construed as a financial obligation mandated by the government as legal tender obliging producers or vendors to sell goods in exchange for currency such as coins and banknotes | |
what is obligatory reinsurance | obligatory reinsurance is a treaty that requires an insurer to automatically send all policies on its books that fall within a set list of criteria to a reinsurer under the terms of an obligatory reinsurance agreement also called an automatic treaty the reinsurer is obliged to accept these policies understanding obligatory reinsurancereinsurance otherwise known as insurance for insurance companies is a practice whereby insurers agree to transfer portions of their risk portfolios to other parties to reduce the likelihood of paying a large obligation stemming from an insurance claim and potentially going bankrupt the insurer or the cedent gives away some of its business to another party the reinsurer who agrees to take on the risk associated with it in exchange for a share of the insurance premium the payment customers are charged for coverage under a given plan some reinsurance agreements are one off transactional deals made on a case by case basis on other occasions a reinsurance treaty might be struck obligating the insurer to automatically send the reinsurer a specific class of policies when such an arrangement is made an insurer is required to cede and a reinsurer required to accept all risks that fall within a predetermined set of criteria each risk is automatically accepted under the terms of the arrangement even if the insurer has yet to notify the reinsurer advantages and disadvantages of obligatory reinsuranceobligatory reinsurance enables the insurer and reinsurer to develop a long term relationship the reinsurer gets a regular stream of business while the insurer automatically covers itself against a class of predetermined risks without having to repeatedly find new buyers for each individual one transferring a book of risks also generally works out to be much cheaper on the flip side automatic acceptance eliminates the option to be picky thereby increasing the threat of insolvency for everyone involved the reinsurer could suddenly find itself inheriting a large chunk of policies and becoming liable to cover more losses than it originally bargained for should those plans result in claims and the reinsurer be unable to foot the bill for them the ceding insurer may become fully responsible again for this portion of risk that it originally underwrote putting it too in a difficult financial position over reliance on reinsurance played a big role in the demise of mission insurance in 1985 1 these dangers mean it s critical that each party does its homework before entering an agreement for obligatory reinsurance the ceding insurer and reinsurer will want to make sure that the other is being managed properly and that their interests align it s also paramount that the terms of the agreement include an accurate description of the type of risks that the treaty covers this is an important step in removing ambiguities that if left unaddressed might require the arrangement to be canceled if the ambiguities are discovered too late it may be difficult to unwind the arrangement since risks may have already been exchanged types of reinsurancethere are two main categories of reinsurance facultative and treaty both may be classified as obligatory if the reinsurance contract mandates all policies that fall within their scope to be transferred facultative coverage protects an insurer for an individual or a specified risk or contract if several risks or contracts need reinsurance each is negotiated separately usually the reinsurer has all rights for accepting or denying a facultative reinsurance proposal that said there is also a hybrid version that gives the primary insurer the option to cede individual risks irrespective of the reinsurer s wishes treaty reinsurance meanwhile is effective for a set time period rather than on a per risk or contract basis the reinsurer covers all or a portion of the risks that the insurer may incur special considerationsreinsurance contracts can be both proportional and non proportional with proportional contracts the reinsurer receives a prorated share of all policy premiums sold by the insurer in exchange for bearing a portion of the losses based on a pre negotiated percentage in the event that claims are made the reinsurer also reimburses the insurer for processing business acquisition and writing costs with a non proportional contract on the other hand the reinsurance company agrees to pay out claims only if they exceed a specified amount known as the priority or retention limit during a certain period of time the priority or retention limit may be based on one type of risk or an entire risk category | |
what is an obligor | an obligor also known as a debtor is a person or entity who is legally or contractually obliged to provide a benefit or payment to another in a financial context the term obligor refers to a bond issuer who is contractually bound to make all principal repayments and interest payments on outstanding debt the recipient of the benefit or payment is known as the obligee understanding obligorsan obligor is a person who is legally bound to pay another person debt holders are the most common types of obligors however in addition to the required repayment of interest and principal many holders of corporate debt are also contractually required to meet other requirements for a bondholder these are called covenants and are outlined in the initial bond issue between the obligor and obligee 1covenants can be either affirmative or negative an affirmative covenant is something that the obligor is required to do such as the need to hit specific performance benchmarks a negative covenant is restrictive in that it stops the obligor from doing something such as restructuring the leadership of the organization 2since these bond issues are contractual obligations obligors may have very little leeway in terms of deferring principal repayments interest payments or circumventing covenants any delay in payment or non payment of interest could be interpreted as a default for the bond issuer an event that can have massive repercussions and long term ramifications for the continuing viability of the business as a result most bond obligors take their debt obligations very seriously defaults by overleveraged obligors do occur from time to time with bonds if a covenant is breached by an obligor the bond may become invalid and require immediate repayment or it can sometimes be converted to equity ownership 3since these bond issues are contractual obligations obligors may have very little leeway in terms of deferring principal repayments interest payments or circumventing covenants any delay in payment or non payment of interest could be interpreted as a default for the bond issuer an event that can have massive repercussions and long term ramifications for the continuing viability of the business as a result most bond obligors take their debt obligations very seriously defaults by overleveraged obligors do occur from time to time an obligor does not have to be a bondholder in family law there are certain cases when a court order is handed down in a divorce settlement for example that requires one of the parents to pay child support to the other parent if a working spouse is told by the courts to pay the non working spouse 500 a month the monthly payment will make them an obligor in situations like this if there are changes to an obligor s financial status or income they may petition the court to reduce their monthly obligation 1otherwise even if the obligor loses their job the payments remain due and cannot be discharged in bankruptcy like other civil judgments if an obligor falls behind on court ordered payments such as child support it can lead to problems such as wage garnishment loss of driver s licenses and other problems it is important that an obligor parent pay what is owed and make an effort to change child support amounts when there is a change in income of either parent | |
is the borrower the obligor | in cases of debt the borrower or the one with the debt is the obligor they have an obligation to pay the lender or bond issuer or the obligee in other cases an obligor may not have a debt to an obligee but they may be responsible for paying them such as in cases of child support who is the obligor in a surety bond with surety bonds or promises to fulfill debts in default there are three parties involved the principal is the obligor the surety is the party that agrees to pay the bond to the obligee if the obligor defaults the obligee is typically a government agency 4 | |
when an obligor of child support dies they may still be responsible for paying child support through their estate depending on the laws of the state where they lived 5 | the bottom lineunderstanding the difference between obligor and obligee will clarify financial responsibilities obligor s owe money to obligees whether it is due to debt or contractual obligations | |
what is obsolescence risk | obsolescence risk is the risk that a process product or technology used or produced by a company for profit will become obsolete and thus no longer competitive in the marketplace this would reduce the profitability of the company obsolescence risk is most significant for technology based companies or companies with products or services based on technological advantages understanding obsolescence riskobsolescence risk is a factor for all companies to some degree and is a necessary side effect of a thriving and innovative economy this risk comes into play for example when a company is deciding how much to invest in new technology will this technology remain superior long enough for the investment to pay off or will it become obsolete so soon that the company loses money obsolescence risk also means that companies wanting to remain competitive and profitable need to be prepared to make large capital expenditures any time a major product service or factor of production becomes obsolete budgeting for obsolescence risk is challenging because it is difficult to predict obsolescence and the exact rate of technological innovation example of obsolescence riska publishing company is an example of one that faces obsolescence risk as computers tablets and smartphones have become more popular and affordable more consumers have started reading magazines newspapers and books on these devices instead of in their print forms for the publishing company to remain competitive it must minimize its investments in the old paper publications and maximize its investments in new technologies even as it makes this shift it must remain alert to new and unimagined technologies that could supplant the currently popular ways of reading and require still more investment the stock market graveyards are littered with dead companies whose products or technology were rendered obsolete examples are the technology companies control data and digital equipment from morgan stanley s 1982 recommended buy list | |
what is obsolete inventory | obsolete inventory is a term that refers to inventory that is at the end of its product life cycle this inventory has not been sold or used for a long period of time and is not expected to be sold in the future this type of inventory has to be written down or written off and can cause large losses for a company obsolete inventory is also referred to as dead inventory or excess inventory understanding obsolete inventoryinventory refers to the goods and materials in a company s possession that are ready to be sold it is one of the most important assets of a business operation as it accounts for a huge percentage of a sales company s revenues in the past if the inventory was held for too long the goods may have reached the end of their product life and become obsolete currently with technology the state of abundance and customers high expectations the product life cycle has become shorter and inventory becomes obsolete much faster obsolete inventory is inventory that a company still has on hand after it should have been sold when inventory can t be sold in the markets it declines significantly in value and could be deemed useless to the company to recognize the fall in value obsolete inventory must be written down or written off in the financial statements in accordance with generally accepted accounting principles gaap a write down occurs if the market value of the inventory falls below the cost reported on the financial statements a write off involves completely taking the inventory off the books when it is identified to have no value and thus cannot be sold risks associated with obsolete inventorythere are a number of reasons why a company doesn t want to hang onto obsolete inventory below is a list of some of those reasons and each company that does carry obsolete inventory may not necessarily experience each downside accounting for obsolete inventorygaap requires companies to establish an inventory reserve account for obsolete inventory on their balance sheets and expense their obsolete inventory as they dispose of it which reduces profits or results in losses companies report inventory obsolescence by debiting an expense account and crediting a contra asset account | |
when an expense account is debited this identifies that the money spent on the inventory now obsolete is an expense a contra asset account is reported on the balance sheet immediately below the asset account to which it relates and it reduces the net reported value of the asset account | examples of expense accounts include cost of goods sold inventory obsolescence accounts and loss on inventory write down a contra asset account may include an allowance for obsolete inventory and an obsolete inventory reserve when the inventory write down is small companies typically charge the cost of goods sold account however when the write down is large it is better to charge the expense to an alternate account financial statement impacts of obsolete inventorysome of this has been discussed in the prior section still let s dig into the specific financial statement implications of booking the entries discussed above and in more depth below first when inventory becomes obsolete it must be written down or written off this adjustment is recognized as a loss on the income statement directly reducing net income the write down or write off is recorded as an expense meaning the loss is recognized in the current period second the balance sheet is affected as the value of inventory under current assets decreases the write down reduces the carrying amount of inventory to its net realizable value which impacts the total asset value reported this reduction in assets can affect various financial ratios such as the current ratio and inventory turnover ratio this can be really important to companies that must meet debt covenants or other reporting metrics for obligations the decline in inventory value also reduces the overall book value of the company third the impact extends to the statement of cash flows specifically in the operating activities section while the write down of inventory does not directly affect cash flow the reduced net income decreases the cash generated from operations when using the indirect method plus if the company decides to dispose of the obsolete inventory at a lower price any cash received will be less than originally anticipated further affecting cash flows from operating activities example of obsolete inventoryfor example a company identifies 8 000 worth of obsolete inventory it then estimates that the inventory can still be sold in the market for 1 500 and proceeds to write down the inventory value since the value of inventory has fallen from 8 000 to 1 500 the difference represents the reduction in value that needs to be reported in the accounting journal that is 8 000 1 500 6 500 accountdebitcreditinventory obsolescence 6 500 | |
what is the occupancy rate | occupancy rate is the ratio of rented or used space to the total amount of available space analysts use occupancy rates when discussing senior housing hospitals bed and breakfasts hotels and rental units among other categories in a call center occupancy rate refers to the amount of time agents spend on calls compared to their total working hours occupancy rates explainedto illustrate an occupancy rate if an apartment building contains 20 units 18 of which have renters it has a 90 occupancy rate similarly a 200 room hotel with guests in 150 rooms has a 75 occupancy rate conversely the vacancy rate is the number of units in a building that are not rented out as compared to the total number of units in the building occupancy rates and real estate investorsoccupancy rates are important to real estate investors because these numbers provide an indication of anticipated cash flows a commercial real estate investor looking for a shopping center to buy is likely not interested in one that only has a 25 occupancy rate meaning that tenants were leasing just 25 of the available storefronts and restaurant space in the mall an investor who buys a property with a relatively low occupancy rate has to spend time and money to find additional tenants and risks not filling the spaces while still facing maintenance costs and property taxes levied on them because of this apartment complexes malls and other facilities with low occupancy rates often sell for less than similar properties with high occupancy rates in some cases a low occupancy rate indicates that something is wrong with the shopping center such as its location or available amenities in other cases low occupancy rates may mean the facility is poorly managed by its existing owners or it is in an undesirable location in other cases a real estate investor may look at the occupancy rates of hotels and other facilities near a property that they are considering to buy these numbers can indicate something about the financial health of the area for example if an investor is thinking about buying a restaurant they may try to find out the occupancy rates of nearby hotels as those numbers affect the pool of potential diners an example of occupancy rates hospitalshospital bed occupancy rates as well as occupancy rates for nursing homes can be useful for examining trends in the facility s growth to avoid overcrowding these facilities manage their occupancy rates they often track occupancy rates for specific departments as well to help assess growth and demand governments and organizations also use aggregate numbers on hospital occupancy levels to make plans regarding public health initiatives | |
what is occupational labor mobility | occupational labor mobility refers to the ability of workers to switch career fields in order to find gainful employment or meet the needs of industry when conditions allow for high degrees of occupational labor mobility it can help maintain strong employment and productivity levels governments may provide occupational retraining to help workers acquire the necessary skills and expedite this process geographical labor mobility on the other hand refers to the level of flexibility and freedom laborers have to physically move from one location to another in order to find gainful employment in their field understanding occupational labor mobilitylabor mobility is the ease with which workers can leave one job for another workers may not be able to pursue new career opportunities in the event of layoffs or termination if their occupational labor mobility is limited this can be true for workers who possess few or specialized skills that are only of use under limited circumstances for example a worker trained to operate a piece of machinery that only exists in one industry can face challenges seeking employment outside of that industry if an experienced worker who has earned a substantial salary attempts to switch career paths they may face a significant financial adjustment this is because alternate jobs they could perform might not make use of their most developed skills leading to a form of underemployment for example an archaeologist may have to find work as a landscaper if no more suitable positions are available such circumstances can lead to workers and professionals taking substantially lower pay than they are accustomed to or have been led to expect in the course of their education and training the ease with which employees can move from a job in one particular occupation to a job in a different occupation determines how quickly an economy can develop this is because technological progress innovation and the creation of new industries and occupations are major components of economic development and also lead to the phenomenon of creative destruction where the new industries and occupations displace older ones labor mobility from obsolete industries and occupations into new ones is a necessary part of this process low occupation labor mobility can slow the adjustment to new conditions as the economy develops and may even contribute to the darker side of progress known as destructive creation an easing of occupational mobility restrictions can do several things ways occupational labor mobility influences productivitythe decrease in the number of manufacturing sector jobs in favor of services focused employment such as software development has diminished the occupational labor mobility for some workers 1the u s automobile industry for example faced ongoing staff cuts as production became more efficient and required fewer workers or was relocated overseas 2 domestic job eliminations left many downsized workers unable to find employment that offered compensation that compared with their previous salary levels workers in other types of manufacturing based careers have also dealt with issues of limited occupational labor mobility as their industries shrank public and private employment training programs have been established to give workers the opportunity to increase their occupational labor mobility by teaching them new skills the focus of such programs is to expand the potential career paths these individuals could succeed in companies can benefit from the existence of such programs because they increase the pool of potential hires for current job openings occupational labor mobility can especially benefit emerging innovation oriented businesses such companies can see their productivity increase when there is a growing population of workers who possess skills that are in demand for instance a startup company could see its development plans stall until it hires enough software coders and programmers to work on its core product | |
what is the occupational safety and health act | the occupational safety and health act is a law passed by the u s congress in 1970 to ensure safe workplace conditions around the country it established the federal occupational safety and health administration osha which sets and enforces workplace health and safety standards understanding the occupational safety and health actsigned into law by president richard nixon in dec 1970 the occupational safety and health act commonly called the osh act was enacted to create safe working conditions by authorizing standard work practices congress found that workplace personal injuries and illnesses contributed to a decline in production and wages plus an increase in medical expenses and disability compensation the act is designed to ensure that workers are protected from hazards that may affect their safety and health such as exposure to toxic chemicals damaging noise thermal stressors and unsanitary conditions to aid states and other u s territories in the adoption of safe and healthful working conditions the act provided for related research education and training most states partially or fully control the occupational health and safety standards for their employees the occupational safety and health act established two major entities the osh act covers most private sector employers and their workers in addition to some public sector employers and workers in the 50 states and certain territories and jurisdictions under federal authority individuals not protected by the law include self employed individuals workers on small family farms and those working in an industry regulated by a separate federal agency on november 4 2021 osha issued an emergency temporary standard that mandates businesses with more than 100 workers to require vaccinations against covid 19 or face regular testing and that businesses offer employees paid time off to get vaccinated | |
what does osha do | the occupational safety and health administration osha acts as the enforcement arm of the occupational safety and health act although the legislation gave osha the authority to create industry specific guidelines it also outlined a general duty clause which applies to all employers in all industries this clause officially section 5 a 1 of the act in effect serves as osha s mandate stipulating that employers must provide a safe environment for their workers the general duty clause of the osh act officially reads each employer 1 shall furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees 2 shall comply with occupational safety and health standards promulgated under this act | |
what is an occurrence policy | an occurrence policy covers claims made for injuries sustained during the life of an insurance policy under these types of contracts the insured party has the right to request compensation for damages that occurred within the timespan that the policy was active even if several years have since passed and the insurance agreement is no longer in force understanding occurrence policiesliability insurance policies generally fall into one of two categories claims made or occurrence the latter offers protection against financial loss on incidents that happened while the policy was in effect regardless of when they re flagged and became apparent in other words it s possible to file a claim later long after the contract has expired provided there s evidence that its cause or triggering event took place during the period the insurance was active occurrence policies cater specifically to events that may cause injury of damage years after they occur for example if an individual is exposed to hazardous chemicals a significant amount of time could pass before they fall ill occurrence coverage will usually cover the employer and the former employee for life years can pass before the injuries or damages become evident and the policyholder is still protected even after stopping insurance or switching to another provider in insurance an occurrence is defined as an accident including continuous or repeated exposure to substantially the same general harmful conditions insurers typically place a cap on the total coverage offered through such a policy one form of cap limits the amount of coverage offered each year but lets the coverage limit reset each year for instance a company that purchases five years of occurrence coverage with an annual cap of 1 million will allow the policyholder to have up to 5 million in total coverage occurrence policies vs claims madeclaims made insurance only pays out if a claim is filed while the policy is active that means if you cancel protection and then ask for compensation you won t be given it unless an extended reporting period erp or tail coverage is purchased business insurance policies are often offered as either a claims made policy or an occurrence policy while the claims made policy provides coverage for claims when the event is reported the occurrence policy provides coverage when the event occurs claims made policies are used to cover the risks associated with business operations such as the potential for mistakes associated with errors and omissions in financial statements they are also applied to cover businesses from claims made by employees including wrongful termination sexual harassment and discrimination allegations this type of liability is referred to as employment practices liability epli and might also cover the actions of directors and officers of the business until the mid 1960s the claims made wording didn t exist and into the early to mid 1970s its use was sporadic the occurrence form now dominates except for most professional and executive liability exposures where claims made policies rule advantages and disadvantages of an occurrence policythe most obvious benefit of an occurrence policy is that it offers long term protection as long as coverage is in place when the incident occurred it s possible to make a claim on that period years into the future another advantage is that occurrence policy costs tend to be fixed premiums generally don t increase unless the risk profile of the insured changes on the downside occurrence policies are understandably more expensive than claims made ones occasionally they can be harder to come by too there s also the risk that a company taking out such a policy underestimates the level of damages it could incur later on down the line forcing it as a result to pay out a chunk from its own pocket | |
what is an ocean bill of lading | an ocean bill of lading is a document required for the transportation of goods overseas across international waters an ocean bill of lading serves as both the carrier s receipt to the shipper and as a collection document or an invoice the contract is a legally binding document between both the shipper and the carrier of the shipment a bill of lading is a legal document or contract between the shipper and carrier which details the type quantity and destination of goods being carried the bill of lading serves as a receipt of shipment when the goods are delivered at the predetermined destination there are different kinds of bills of lading each with unique stipulations and conditions | |
how an ocean bill of lading works | an ocean bill of lading allows the shipper to move goods across international waters this document or contract provides the specifics involving the nature of the shipment including what and how much material is being transported along with where the goods will be shipped other information outlined in the contract includes the value of the goods shipped and the type of packing used during transport the shipper receives the contract when the goods are picked up the document must be signed by both the shipper and the carrier once the shipment is complete the document is given to the receiver upon delivery and receipt the receiver must also sign the contract if a shipper has not sold the goods before they arrive the bill of lading is a blank endorsement considered negotiable and the receiver s line may read to order of there is an additional document known as an inland bill of lading that is required if the goods are to be transported first over land this inland bill only allows the materials to reach the shore while the ocean bill allows the goods to be transported overseas inland bills of lading are required if the shipment needs to travel further in the destination country after it arrives at the dock example of ocean bill of ladingocean bills of lading as mentioned above are used when goods are transported overseas through waterways when a car manufacturer ships vehicles to a dealership overseas it needs an ocean bill of lading to complete the transfer of goods if the vehicles must be transferred further into the destination country so further from the port it must have an inland bill of lading to move the vehicles so a u s based dealership will sign an ocean bill of lading with a japanese carmaker for the transport of vehicles to the united states an additional inland bill of lading is required if the shipment arrives in seattle but is destined for billings montana common types of ocean bills of ladingthere are several different types of ocean bills of lading that are used the straight bill of lading is non negotiable and is marked as such the only person who has a claim to the goods when they reach the destination port is the person named on the bill these bills generally involve parties that have open accounts where the shipper may not require the funds from the receiver up front the non negotiable ocean bill of lading allows the buyer to receive the goods upon showing identification a shipper s order is a negotiable bill of lading and is generally put into place when the shipper wishes to ensure certain terms and conditions are met before the shipment is released to the receiver this is used when the receiver s payment is backed by a letter of credit | |
what is the october effect | the october effect refers to the belief that stocks tend to decline during the month of october it is considered to be more of a psychological expectation than an actual phenomenon as most statistics contradict the theory some investors may be nervous during october because some large historical market crashes occurred during this month along with the september effect which also predicts weaker markets during october actual evidence for the existence of the perceived market anomaly october effect is not very solid indeed october s 100 year stock market history has in fact been net positive that s in spite of being the month of the 1907 panic black tuesday thursday and monday in 1929 and black monday in 1987 when the dow plummeted 22 6 in a single day and remains arguably the worst single day decline in market history on a percentage basis 1understanding the october effectproponents of the october effect one of the most popular of the so called calendar effects argue that october is when some of the greatest crashes in stock market history occurred these include 1929 s black tuesday and black thursday and the 1987 stock market crash 2while statistical evidence doesn t support the phenomenon that stocks trade lower in october the psychological expectations for the october effect still exist the october effect however tends to be overrated despite the moniker this seeming concentration of dark market days is not statistically significant in fact september historically is more often down than october 3 and from a historical perspective october has marked the end of more bear markets than the beginning this makes october an interesting prospect for contrarian buying investors who tend to see a month negatively can create opportunities for others to buy during that month however the end of the october effect if it ever was a market force may be at hand as the month s stock market results have tended to be net positive on average over the past century or more october crashes | |
what is true about october is that it traditionally has been the most volatile month for stocks according to research from lpl financial there are more 1 or larger swings in october in the s p 500 than in any other month in history dating back to 1950 | some of that can be attributed to the fact that october precedes elections in early november in the u s every other year 4september not october has more historical down markets however october also has had its fair share of record stock market crashes some of the events over the decades that have given october the reputation for stock losses include interestingly the catalysts that set off both the 1929 crash and the 1907 panic happened in september or earlier and the market reaction to them was simply delayed in 1907 the panic nearly occurred in march throughout the year the public s confidence in trust companies persistently diminished they were considered risky because of their lack of regulation eventually public skepticism came to a head in october and sparked a run on the trusts 5the 1929 crash arguably began in february when the federal reserve banned margin trading loans and cranked up interest rates 6in contrast to october effect predictions october 2022 was one of the most positive months in u s stock market history with the dow jones up around 12 and the s p 500 up close to 6 7the disappearance of the october effectthe numbers don t support the october effect if we look at all october monthly returns going back more than a century there simply is no data on average to support the claim that october is a losing month not surprisingly some historical events have occurred in the month of october but they most likely have remained in the collective memory because the name black monday sounds ominous markets have also crashed in months other than october many investors today have a better memory of the dotcom crash and the 2008 2009 financial crisis yet none of those days were given the black moniker to bear for their particular month lehman brothers collapse happened on a monday in september and marked a major escalation in the global stakes of the financial crisis but it didn t get reported as a new black monday for whatever reason the news media no longer leads with black days and wall street doesn t seem eager to revive the practice either moreover an increasingly global pool of investors doesn t have the same historical perspective when it comes to the calendar the end of the october effect is perhaps inevitable as in reality a gut feeling mixed with a few random occurrences and a media label created the myth in a way this is unfortunate as it would be ideal for investors if financial disasters panics and crashes occurred in just one month of the year | |
is the october effect real | the data suggest that it isn t but some people seem to believe in it perhaps because many of the events that happened long ago such as the 1987 black monday crash were significant at the time because there is a psychological bias toward predicting a negative outcome for this month there is potential for some investors to be fearful of an october downturn | |
are stocks usually down in october | no since 1928 stocks have on average risen in the month of october by more than 0 6 8 | |
which has been the worst month for stocks historically | that depends on the time period you look at over the past century september has been the worst performing month for stocks losing around 1 on average 3the bottom linethe october effect is the belief that stocks fall on average during the month of october this supposed market anomaly has been cited in reflection of large market crashes that have occurred during this month such as 1987 s black monday however actual evidence for the october effect is scant and in fact october has been a net positive month on average going back a century for example october of 2022 was one of the best performing months in recent stock market history as with other supposed market anomalies the reality is that they probably don t exist as markets do tend to be efficient especially once anomalies are identified and publicly known as such one probably should not use the notion of the october effect to make trading decisions | |
what is an odd lot | an odd lot is an order amount for a security that is less than the normal unit of trading for that particular asset odd lots are considered to be anything less than the standard 100 shares for stocks trading commissions for odd lots are generally higher on a percentage basis than those for standard lots since most brokerage firms have a fixed minimum commission level for undertaking such transactions 1understanding odd lotsodd lots may inadvertently arise in an investor s portfolio through reverse splits or dividend reinvestment plans for example a one for eight reverse split of a security of which the investor holds 200 shares will result in a post split amount of 25 shares while trading commissions for odd lots may still be higher than for standard lots on a percentage basis the popularity of online trading platforms and the consequent plunge in brokerage commissions means that it is no longer as difficult or expensive for investors to dispose of odd lots as it used to be in the past odd lots round lots and mixed lotswhile odd lots can include any number of shares between one and 100 a round lot is any lot of shares that can be evenly divided by 100 2 for example 75 shares would be an odd lot since it is below 100 shares while 300 shares would be counted as a round lot since it can be evenly divided by 100 while round lots are posted on the associated exchange odd lots are not posted as part of the bid ask data further the execution of odd lot trades does not display on various data reporting sources due to the uncommon number of shares involved in the trade odd lot transactions often take longer to complete than those associated with round lots 3mixed lots include lots with over 100 shares but that cannot be evenly divided by 100 for example 147 or 2 999 would both be mixed lots reporting on mixed lots including bid ask data generally only displays the portion that constitutes a round lot for example using the aforementioned mixed lot sizes the 147 shares would report as 100 and the 2 999 shares would report as 2 900 issuing company actions on odd lotssince an odd lot is considered fairly insignificant to larger institutions a company may choose to eliminate any odd holdings from the marketplace this can include buying out the associated shareholder at a premium offering additional shares to the shareholder to create a round lot or engaging in a reverse split designed to result in the odd lot becoming equivalent to less than one share to pay the investor cash for a residual holding | |
what is the odd lot theory | the odd lot theory is a technical analysis hypothesis based on the assumption that the small individual investor is usually wrong and that individual investors are more likely to generate odd lot sales therefore if odd lot sales are up and small investors are selling a stock it is probably a good time to buy and when odd lot purchases are up it may indicate a good time to sell understanding the odd lot theorythe odd lot theory focuses on following activities of individual investors trading in odd lots this hypothesis also assumes that professional investors and traders tend to trade in round lot sizes multiples of 100 shares to improve pricing efficiency in their orders although this thinking was common lore from about 1950 until the end of the century it has since become less popular odd lot tradesodd lot trades are trade orders made by investors that include less than 100 shares in the transaction or are not a multiple of 100 these trade orders generally encompass individual investors that the theory believes are less educated and influential in the market overall round lots are the opposite of odd lots they begin at 100 shares and are divisible by 100 these trade orders are seen to be more compelling as an indicator as they are typically made by professional traders or institutional investors although technical analysts have the ability to follow the volume of odd lot trades through technical analysis charting software programs testing since the 1990s shows that these kinds of trades no longer seem to signify market turns given the information efficiencies of the information age even individual investors may be just as likely to make an informed trade as an institutional trade while the odd lot theory implies that these investors may be more important to follow for trade signals this concept has become less important to analysts over time there are multiple reasons for this the first reason is that individual investors began investing more heavily in mutual funds which pool money into the hands of institutional investors secondly fund managers and individuals alike began using exchange traded funds etfs with large volume being normal for the most popular etf offerings a third reason is the increased automation and computerization of market making firms and the increased technology of high frequency traders together these factors have created an environment where order processing has become far more efficient the greater efficiency of the markets has meant that odd lots are not processed any less effectively than round lot orders testing the odd lot theoryanalysis of the odd lot theory culminating in the 1990s seems to disprove its general effectiveness whether because individual investors are not generally prone to making bad investment decisions or because institutional traders no longer fear making trades in odd lots is not easily determined overall the theory is no longer as valid as many researchers and academics once opined author burton malkiel credited for popularizing random walk theory has stated that the individual investor also known as the odd lotter is generally not as uninformed or as incorrect as had been previously thought 1 | |
what is odious debt | odious debt also known as illegitimate debt is when a country s government changes and the successor government does not want to pay debts incurred by the previous government usually successor governments argue that the previous government misappropriated money it had borrowed and that they should not be held responsible for the previous regime s alleged misdeeds understanding odious debtodious debt is not a concept officially recognized in international law no national or international court or governing body has ever invalidated sovereign obligations on the grounds of odious debt odious debt is clearly at odds with established international law which generally holds successor governments accountable for the debts of regimes that preceded them 1the concept of odious debt is most often raised when the government of a country changes hands violently either through conquest by another country or through internal revolution 2 the new government in such a situation is rarely eager to take on the debts of the vanquished predecessor other than simply wanting to get out of the debt governments may consider debt odious when previous government leaders used borrowed funds in ways that the new government does not agree with sometimes claiming that the borrowed funds did not benefit its citizens and to the contrary may have been used to oppress them indeed it is routine for victors of civil war or international conflict to accuse the regimes they have deposed or conquered of corruption abuse or general malevolence as the saying goes the winners write the history books despite international law the concept of odious debt has been successfully used as a post hoc rationale when the victors of such conflicts are powerful enough to enforce their will on world financial markets and international lenders in reality whether or not the successor regime is held to repayment by the previous government s creditors tends to boil down to a question of who is more powerful new regimes that gain international recognition or the support of major military powers tend to be more successful at repudiating the old debts examples of odious debtthe idea behind odious debt first gained notoriety after the spanish american war the u s government argued that cuba should not be held liable for debts incurred by the spanish colonial regime the colonial rulers of cuba while spain disagreed spain not cuba ultimately was left with the post war debt due to the balance of power between the triumphant colonial power of the u s and the defeated spanish empire bereft of the last of its overseas territories after the war 3odious debt has been raised as an argument by regimes in nicaragua the philippines haiti south africa congo niger croatia iraq and other countries who accuse previous rulers of either personally looting national funds for their own accounts or using the money to restrict liberties and inflict violence on their own citizens in all such cases the actual resolution or restructuring of old debt in the wake of regime changes has followed geopolitical and strategic considerations rather than the proposed doctrine of odious debt for example the apartheid era government of south africa borrowed from international banks and investors to build dams power plants and other infrastructure when the african national congress anc took power in 1994 it inherited these debts many members of the successor government led by president nelson mandela argued that these debts were odious due to the social policies of the prior regime 4however with the collapse of the soviet union in the early 1990s which had heavily supported the anc the new south african government found itself lacking in powerful international allies who would be willing to support repudiation of the existing debt in order to maintain access to international credit markets the new government ended up paying those debts so as not to scare off badly needed foreign investment 4foreign investment and odious debtthe prospect of regime change and the repudiation of the previous regime s contractual obligations presents a direct risk for investors who deal in sovereign debt investors who hold loans or bonds of an existing government run the risk that the funds will not be repaid if the borrower is overthrown or subjugated by another power in particular because the concept of odious debt is generally applied retroactively to debts that were recognized and legal and legitimate at the time but is also applied nearly universally to the losers of international or internecine conflict lenders can only account for this as part of the general risk of the political stability of a borrower this risk is embodied in a premium on the return demanded by investors which tend to be greater when potential successor governments become more likely to be able to make charges of odious debt stick moral arguments and odious debtsome legal scholars argue that for moral reasons these debts should not have to be repaid proponents of the idea of odious debt believe countries doing the lending must have known or should have known of the alleged oppressive conditions upon offering the credit they have held that successor governments should not be liable for odious debt that earlier regimes passed down to them one obvious moral hazard in labeling debt odious after the fact is that successor governments some that may have a lot in common with the ones that preceded them may use odious debt as an excuse to wriggle out of obligations they should pay a potential solution to resolve this moral hazard forwarded by economists michael kremer and seema jayachandran is that the international community could announce that all future contracts with a particular regime are odious 5therefore lending to that regime following such a decree would be internationally recognized at the lender s peril as they would not be repaid if the regime is later toppled this would transform the concept of odious debt from a post hoc rationalization for countries to repudiate their debts into a forward looking weapon of international conflict as an alternative or prelude to open warfare rival powers and coalitions could then use the concept of odious debt to restrict each other s access to capital markets by accusing their opponents of various misdeeds before launching a coup invasion or insurgency | |
what is oex | oex which trades on the chicago board options exchange cboe is the ticker symbol used to identify standard poor s 100 index options understanding oexoex options were the original standard for index options trading on the domestic stock market over time options on the s p 500 spx passed them in popularity to the dismay of oex followers the calculation for the cboe volatility index called the vix changed from using oex options to spx options in 2003 1 traders can watch the old version via the symbol vxo the standard poor s 100 index is a subset of the broader standard poor s 500 index and tracks the performance of the 100 largest stocks by market capitalization in the u s market it is a capitalization weighted index and the stocks are chosen from a broad range of industries thus making the index a proxy for u s corporate performance each component stock is weighted according to the total market value of its outstanding shares therefore the impact of a component s price change is proportional to its market cap or market value which is the share price times the number of shares outstanding 2although it may not be as popular as the s p 500 it remains an important benchmark for many asset managers with money invested in the big blue chip arena the key criteria for the inclusion of a stock in the index include having options available and at least 50 of the stock must be available to the general public to trade 2options tradingoptions give the holder the right but not the obligation to buy or sell the underlying asset at a specific price at or by a specific date in the case of oex options it would be the right to buy or sell the s p 100 index since an index is not a tangible item oex options settle for cash traders use oex options to hedge or speculate on the performance of the large cap segment of the stock market strategies such as vertical spreads and strangles are possible with oex options just as they are with individual stock options for example a money manager holds a portfolio of blue chip stocks but is worried short term market conditions could impact it negatively the manager might hedge by buying an oex put option with a near expiration as insurance in case the market drops suddenly while the portfolio managed may not hold all 100 oex stocks in the same proportions the correlation between the two might be strong enough that the hedge makes sense | |
what is off balance sheet obs | off balance sheet obs items are assets or liabilities that do not appear on a company s balance sheet although not recorded on the balance sheet they are still assets and liabilities of the company investopedia jake shiunderstanding off balance sheet obs off balance sheet items are an important concern for investors when assessing a company s financial health off balance sheet items are often difficult to identify and track within a company s financial statements because they often only appear in the accompanying notes also of concern is some off balance sheet items have the potential to become hidden liabilities for example collateralized debt obligations cdo can become toxic assets assets that can suddenly become almost completely illiquid before investors are aware of the company s financial exposure off balance sheet items are typically those not owned by or are a direct obligation of the company for example when loans are securitized and sold off as investments the secured debt is often kept off the bank s books prior to a change in accounting rules that brought obligations relating to most significant operating leases onto the balance sheet an operating lease was one of the most common off balance items off balance sheet items are not inherently intended to be deceptive or misleading although they can be misused by bad actors to be deceptive certain businesses routinely keep substantial off balance sheet items for example investment management firms are required to keep clients investments and assets off balance sheet for most companies off balance sheet items exist in relation to financing enabling the company to maintain compliance with existing financial covenants off balance sheet items are also used to share the risks and benefits of assets and liabilities with other companies as in the case of joint venture jv projects types of off balance sheet itemsthere are several ways to structure off balance sheet items the following is a short list of some of the most common an obs operating lease is one in which the lessor retains the leased asset on its balance sheet the company leasing the asset only accounts for the monthly rental payments and other fees associated with the rental rather than listing the asset and corresponding liability on its own balance sheet at the end of the lease term the lessee generally has the opportunity to purchase the asset at a drastically reduced price under a leaseback agreement a company can sell an asset such as a piece of property to another entity they may then lease that same property back from the new owner like an operating lease the company only lists the rental expenses on its balance sheet while the asset itself is listed on the balance sheet of the owning business accounts receivable represents a considerable liability for many companies this asset category is reserved for funds that have not yet been received from customers so the possibility of default is high instead of listing this risk laden asset on its own balance sheet companies can essentially sell this asset to another company called a factor which then acquires the risk associated with the asset the factor pays the company a percentage of the total value of all ar upfront and takes care of collection once customers have paid up the factor pays the company the balance due minus a fee for services rendered in this way a business can collect what is owed while outsourcing the risk of default | |
how off balance sheet financing works | an operating lease used in off balance sheet financing obsf is a good example of a common off balance sheet item assume that a company has an established line of credit with a bank whose financial covenant condition stipulates that the company must maintain its debt to assets ratio below a specified level taking on additional debt to finance the purchase of new computer hardware would violate the line of credit covenant by raising the debt to assets ratio above the maximum specified level obsf is controversial and has attracted closer regulatory scrutiny since it was exposed as a key strategy of the ill fated energy giant enron 1the company solves its financing problem by using a subsidiary or special purpose entity spe which purchases the hardware and then leases it to the company through an operating lease while legal ownership is retained by the separate entity the company must only record the lease expense on its financial statements even though it effectively controls the purchased equipment the company does not have to recognize additional debt nor list the equipment as an asset on its balance sheet off balance sheet financing reporting requirementscompanies must follow securities and exchange commission sec and generally accepted accounting principles gaap requirements by disclosing obsf in the notes of their financial statements investors can study these notes and use them to decipher the depth of potential financial issues although as the enron case showed this is not always as straightforward as it seems in feb 2016 the financial accounting standards board fasb the issuer of generally accepted accounting principles changed the rules for lease accounting it took action after establishing that public companies in the united states with operating leases carried over 1 trillion in obsf for leasing obligations according to its findings about 85 of leases were not reported on balance sheets making it difficult for investors to determine companies leasing activities and ability to repay their debts 2this obsf practice was targeted in 2019 when accounting standards update 2016 02 asu 842 came into effect right of use assets and liabilities resulting from leases are now to be recorded on balance sheets according to the fasb a lessee is required to recognize assets and liabilities for leases with lease terms of more than 12 months 3enhanced disclosures in qualitative and quantitative reporting in footnotes of financial statements is also now required additionally obsf for sale and leaseback transactions will not be available example of off balance sheet activitythe enron scandal was one of the first developments to bring the use of off balance sheet entities to the public s attention in enron s case the company would build an asset such as a power plant and immediately claim the projected profit on its books even though it hadn t made one dime from it if the revenue from the power plant was less than the projected amount instead of taking the loss the company would then transfer these assets to an off the books corporation where the loss would go unreported enron once considered one of the most innovative and successful energy companies in the united states collapsed in 2001 amidst revelations of widespread accounting fraud and corruption the company had engaged in complex financial transactions and partnerships many of which were not properly disclosed in its financial statements these off balance sheet entities were used to hide debt and losses giving the appearance of financial health and profitability when in reality enron was facing significant financial troubles 4one of the most notorious off balance sheet entities created by enron was the special purpose entity discussed earlier in this article enron used spes to keep debt off its balance sheet thus presenting a much healthier financial picture to investors and analysts the company transferred assets and liabilities to these entities often through complicated financial maneuvers allowing enron to artificially inflate its reported earnings and hide its true financial condition 5 | |
which accounts do not appear on the balance sheet | certain financial transactions do not appear on the balance sheet if they qualify as off balance sheet transactions these activities are intentionally left off of financial statements though they may cause a company s financial position to be misstated these occur based on the circumstances of the transaction i e a company may not actually own something therefore it does not meet gaap reporting requirements | |
is off balance sheet financing legal | it is legal but the information still must be included in the notes of financial statements per the sec and gaap requirements | |
what is an example of an off balance sheet item | leases are among the most common examples a company leasing an asset lists rent payments and other applicable fees but it does not list the asset and any corresponding liabilities some cases might involve a leaseback agreement in which a company leases an asset after selling that asset to its new owner | |
how do you recognize off balance sheet items | it s important to read any company s balance sheets closely including all notes when seeing common obs items such as leased items or partnerships with factors that handle accounts receivables it s a good idea to look especially closely the bottom lineassets or liabilities not included on a company s balance sheet are known as off balance sheet items reasons they ll be excluded from a balance sheet include a lack of direct ownership or direct obligation while the practice is legal companies still must address these obs items in notes on their balance sheets | |
what is off balance sheet financing obsf | the term off balance sheet obsf financing refers to an accounting practice that involves recording corporate assets or liabilities in such a way that doesn t make them appear on a company s balance sheet the practice is used to keep debt to equity d e and leverage ratios low especially if the inclusion of a large expenditure would break negative debt covenants off balance sheet financing is a legal practice as long as companies follow accounting rules and regulations it becomes illegal if corporate heads use it to hide assets or liabilities from investors and financial regulators 1understanding off balance sheet financing obsf companies with mountains of debt often do whatever they can to ensure that their leverage ratios do not lead their agreements with lenders otherwise known as covenants to be breached by the same token a healthier looking balance sheet is likely to attract more investors to meet these goals they may need to turn to certain accounting strategies like obsf off balance sheet financing is an accounting practice that allows companies to keep certain assets and liabilities off their balance sheets although they may not be present on the sheet they still belong to the business obsf is commonly used by businesses that are highly leveraged especially when taking on more debt means a higher debt to equity ratio the more debt a company has the higher the risk of default for the lender this means charging the company a higher interest rate 1this practice involves omitting certain capital expenditures or assets from the balance sheet this means shifting ownership to other entities like partners or subsidiaries in which the company secures a minority claim as such examples may include joint ventures jv research and development r d partnerships and operating leases some corporations use special purpose vehicles spvs with their own balance sheets to which they transfer these assets and liabilities 1although it sounds sketchy off balance sheet financing is a legitimate and very legal practice as long as companies abide by established accounting rules and regulations companies in the united states are required to abide by generally accepted accounting principles gaap 3 the strategy becomes illegal when it is used to hide financial irregularities as was the case with enron 4although certain transactions may not appear on a company s balance sheet they often show up in accompanying financial statements as an investor it s important to read between the lines as this information may often be buried in other financial forms special considerationsthere are rules and regulations in place to ensure that corporate accounting is fair and accurate as such regulators frown upon obsf as an accounting method and are making it harder for companies to use it demand to make off balance sheet financing more transparent is growing the aim is to help investors make better and more well informed decisions about where to invest their money despite the push companies may still find ways to pretty up their balance sheets going forward 1the key to identifying red flags in obsf is to read financial statements in full as an investor you should keep an eye out for words like partnerships rental or lease expenses and cast a critical eye over them you may also want to contact company management to clarify if obsf agreements are being used and to determine how much they really affect liabilities off balance sheet financing obsf reporting requirementscompanies must follow securities and exchange commission sec and gaap requirements by disclosing obsf in the notes of their financial statements 5 investors can study these notes and use them to decipher the depth of potential financial issues although this isn t always as straightforward as it seems over the years regulators have been seeking to clamp down further on questionable financial reporting of this kind in february 2016 the financial accounting standards board fasb changed the rules for lease accounting it took action after establishing that public companies in the united states with operating leases carried over 1 25 trillion in obsf for leasing obligations 26 according to the international accounting standards ias board roughly 85 of leases were not reported on balance sheets making it difficult for investors to determine leasing activities and companies ability to repay their debts 7the accounting standards update 2016 02 asc 842 came into effect in 2019 right of use assets and liabilities resulting from leases are now to be recorded on balance sheets 2enhanced disclosures in qualitative and quantitative reporting in footnotes of financial statements are also now required additionally obsf for sale and leaseback transactions are available 2types of off balance sheet financing obsf as noted above there are a number of tools companies have at their disposal when it comes to off balance sheet financing operating leases are some of the most popular ways to overcome these issues here s how this process works rather than buying equipment outright a company rents or leases it and then purchases it at a minimal price when the lease period ends choosing this option enabled a company to record only the rental cost for the equipment booking it as an operating expense on the income statement results in lower liabilities on its balance sheet joint ventures and r d partnerships are also commonly used in this type of accounting practice when a company creates a jv or other type of partnership it does not have to show the partnership s liabilities on its balance sheet even if it has a controlling interest in that entity 1example of off balance sheet financing obsf disgraced energy giant enron used a form of off balance sheet financing known as spvs to hide mountains of debt and toxic assets from investors and creditors the company traded its quickly rising stock for cash or notes from the spv the spv used the stock for hedging assets on enron s balance sheet 4 | |
how does off balance sheet financing work | off balance sheet financing is an accounting strategy that companies use to move certain assets liabilities or transactions away from their balance sheets they may do this to attract more investors or when they have a lot of debt but need to borrow more capital to fund their operations companies with higher debt do this to get better financing rates they may move these transactions to other entities like a subsidiary or a special purpose vehicle with its own balance sheet or to a partner in a joint venture these transactions appear on other financial records although it sounds illegal it isn t as long as companies are transparent and follow accounting standards 1 | |
how do you know that a company uses off balance sheet financing | companies are required to be transparent about their accounting practices and demand for more transparency from accounting and financial regulators is increasing for companies to be more forthcoming in the way they account for their financial situations this means they should include notes in all their financial reporting despite this some companies may find other ways to dress up their balance sheets so it s important to look out for wording like partnerships rental or lease expenses 15 | |
what happened with enron s balance sheets | enron was an american energy services and commodity company the corporation hid millions of dollars of debt and losses that it amassed from a series of failed projects and schemes from investors and analysts by using special purpose vehicles and special purpose entities these were all kept off the company s balance sheets thereby misleading board members and investors of these high risk practices investors began losing confidence which trickled down to enron s spvs and spes enron was forced to declare bankruptcy 4 | |
what are off chain transactions cryptocurrency | off chain transactions refer to those transactions occurring on a cryptocurrency network that move the value outside of the blockchain due to their zero low cost off chain transactions are gaining popularity especially among large participants 1off chain transactions can be contrasted with on chain transactions understanding off chain transactionsoff chain transactions can be better understood when compared to on chain transactions an on chain transaction simply called a transaction occurs and is considered valid when the blockchain is modified to reflect the transaction on the public ledger it involves the transaction being validated and authenticated by a suitable number of participants recording the details of the transaction on the suitable block and broadcasting the necessary information to the whole blockchain network which makes it irreversible this kind of transaction can be reversed only after a majority of the network s hashing power comes to an agreement essentially every step linked to an on chain transaction occurs on the blockchain and the blockchain status is modified to reflect the occurrence and validity of the transaction in contrast an off chain transaction takes the value outside of the blockchain it can be executed using multiple methods in the simplest way two parties can even exchange their private keys involving a fixed amount of crypto coins this way the coins never leave the address wallet but the currency receives a new owner off chain 1off chain transactions advantages | |
what are off the run treasuries | off the run treasuries are all treasury bonds and notes issued before the most recently issued bond or note of a particular maturity off the run treasuries can be contrasted with on the run treasuries which refer to the newest issues only off the run treasuries explained | |
when the u s treasury issues securities treasury notes and bonds it does so through an auction process to determine the price at which these debt instruments will be offered based on the bids received and the level of interest shown for the security the u s treasury is able to set a price for its debt securities the new issues presented after the auction is closed are referred to as on the run treasuries once a new treasury security of any maturity is issued the previously issued security with the same maturity becomes the off the run bond or note | for example if the u s treasury newly issued 5 year notes in february these notes are on the run and replace the previously issued 5 year notes which become off the run in march if another batch of 5 year bonds is issued these march notes are on the run treasuries and the february notes are now off the run and so on | |
where to trade off the run treasuries | while on the run treasuries are available to be purchased from treasury direct off the run securities can only be obtained from other investors through the secondary market when treasuries move to the secondary over the counter market they become less frequently traded as investors prefer to go for more liquid securities which are a characteristic of on the run treasuries to encourage investors to purchase these debt securities readily in the market off the run treasuries are typically less expensive and carry a slightly greater yield since off the run treasuries have a higher yield and lower price than on the run treasuries there is a notable yield spread between both offerings one reason for the yield spread is the concept of supply on the run treasuries are typically issued with a fixed supply the high demand for the limited securities pushes up their prices and in turn lowers the yield causing a difference to ensue between the yields for on the run and off the run securities in addition off the run securities are mostly held to maturity in an asset manager s portfolio as there s not much reason to trade them on the other hand when portfolio managers need to shift their exposure to interest rate risk and find arbitrage opportunities they trade on the run treasuries creating liquidity for these securities off the run yield curvesalthough on the run treasury yield can be used to construct an interpolated yield curve which is used to determine the price of debt securities some analysts prefer to use the yield of off the run treasuries to draw the yield curve off the run yields are used in cases where the demand for on the run treasuries are inconsistent thereby causing price distortions caused by the fluctuating current demand by deriving yield curve figures from the off the run treasury rates financial analysts can ensure that temporary fluctuations in demand do not skew the yield curve calculations or the pricing of fixed income investments | |
what is an offensive competitive strategy | an offensive competitive strategy is a type of corporate strategy that consists of actively trying to pursue changes within the industry companies that go on the offensive generally make acquisitions and invest heavily in research and development r d and technology in an effort to stay ahead of the competition they will also challenge competitors by cutting off new or under served markets or by going head to head with them defensive competitive strategies by contrast are meant to counteract offensive competitive strategies understanding offensive competitive strategiesvarious techniques and strategies may be employed either alone or as part of a concerted effort to create an offensive competitive strategy companies may even employ entirely different strategies in different locales or marketplaces for example consider how a global soft drink company may react to a competitor in its mature home market compared to how it would react to a startup competitor in an emerging market such variability can lead to some complex offensive strategies and even the incorporation of some defensive strategies as part of an offensive effort the most extreme offensive competitive strategy is when companies actively look to acquire other firms to fuel growth or limit competition these firms are often regarded as higher risk than those that are defensive because they are more likely to be fully invested or leveraged which could prove problematic in the event of a market slowdown or dislocation a characteristic of all offensive strategies is that they tend to be expensive offensive competitive strategy typesthere are several types of offensive competitive strategies each with its own advantages and disadvantages defensive strategiessome examples of defensive strategies include | |
what is an offer | an offer is a conditional proposal made by a buyer or seller to buy or sell an asset which becomes legally binding if accepted an offer is also defined as the act of offering something for sale or the submission of a bid to buy something | |
how offers work | an offer is a clear proposal to sell or buy a specific product or service under specific conditions offers are made in a manner that a reasonable person would understand acceptance and will result in a binding contract there are many different types of offers each of which has a distinct combination of features ranging from pricing requirements rules and regulations type of asset and the buyer s and seller s motives examples of offersfor example when it comes to real estate purchases and negotiations prospective home buyers will write an offer to the seller and often list the highest price they are willing to pay once this official offer is submitted on a piece of real estate it is considered binding if the seller accepts the offer | |
when it comes to equity and debt offerings the offering price is the price at which publicly issued securities are offered for purchase by the investment bank underwriting the issue when startups decide to ipo or make their initial public offering this offer price is estimated to be at the sweet spot where there are both demands from buyers who are interested and willing to purchase stock investments in the company as well as considerations for the supply of stock available | similarly a tender offer is an offer to buy a company s stock or debt from existing stockholders and bondholders at a specified price and during a set period the term offer is also used to refer to the package an employer or company will make to a potential employee comprising of the full salary healthcare and benefits package and any other incentives such as a sign on bonus or restricted stock units rsus other types of offersthe term offer is a general one used to describe any kind of official bid or listing price in financial transactions as discussed in detail above other kinds of offers include tender offers conditional offers open offers subject offers and entitlement offers | |
what is an offer in compromise | offer in compromise is a program instituted by the internal revenue service irs for taxpayers who cannot pay the taxes they owe or for taxpayers for whom it would create a financial hardship to pay the taxes they owe an offer in compromise allows taxpayers to settle their tax bill for less than the full amount owed 1 | |
when considering whether to allow a taxpayer to settle his bill with an offer in compromise the irs will look at the taxpayer s unique circumstances including their income ability to pay expenses and any assets the taxpayers owes 1 | understanding offer in compromiseoffers in compromise are only available to eligible taxpayers taxpayers can find out if they are eligible for this program by consulting the offer in compromise pre qualifier questionnaire online the questionnaire will ask whether you are in an open bankruptcy proceeding have filled out all the tax returns required of you and whether you have filled out the required tax documents of someone who is self employed or has employed others you will then have to input your zip code state county the total number of people in your household and your total tax debt 2 the next step of the questionnaire concerns your assets the internal revenue service will require you to input your total bank balances the value of any home equity you own the value of any stocks bonds or other financial assets you own and other assets then it will ask you for your income from any jobs you have or from interest or dividend income after giving this information you will be required to list your expenses including rent mortgage and vehicle related expenses if you don t have vehicle related expenses you will be allowed to list expenses for public transportation after filing this information the irs website will determine whether you qualify for an offer in compromise 2 if you or your business are involved in an open bankruptcy proceeding you are not eligible to apply for an offer 3 alternatives to offer in compromiseif it turns out that you are not eligible for an offer in compromise you may still be eligible to pay your taxes through an installment plan under such circumstances the irs will look at your income assets and expenses and determine a monthly payment that you can make until you are current on your tax liability to apply for an installment plan you can use the online payment agreement tool 4 you can also use form 9465 also known as the installment agreement request 5 | |
what is an offering | an offering is the issue or sale of a security by a company it is often used in reference to an initial public offering ipo when a company s stock is made available for purchase by the public but it can also be used in the context of a bond issue an offering is also known as a securities offering investment round or funding round a securities offering whether an ipo or otherwise represents a singular investment or funding round unlike other rounds such as seed rounds or angel rounds however an offering involves selling stocks bonds or other securities to investors to generate capital | |
how an offering works | usually a company will make an offering of stocks or bonds to the public in an attempt to raise capital to invest in expansion or growth there are instances of companies offering stock or bonds because of liquidity issues i e not enough cash to pay the bills but investors should be wary of any offering of this type | |
when a company initiates the ipo process a very specific set of events occurs first an external ipo team is formed consisting of an underwriter lawyers certified public accountants cpas and securities and exchange commission sec experts next information regarding the company is compiled including financial performance and expected future operations this becomes part of the company prospectus which is circulated for review | sometimes companies will issue what is known as a shelf prospectus detailing the terms of multiple types of securities that it expects to offer over the next several years the financial statements are then submitted for official audit and the company files its prospectus with the sec and sets a date for the offering ipos as well as any other type of stock or bond offering can be a risky investment for the individual investor it is tough to predict what the stock will do on its initial day of trading and in the near future there is often little historical data to use to analyze the company also most ipos are for companies that are going through a transitory growth period which means that they are subject to additional uncertainty regarding their future values ipo underwriters work closely with the issuing body to ensure an offering goes well their goal is to ensure that all regulatory requirements are satisfied and they are also responsible for contacting a large network of investment organizations in order to research the offering and gauge interest to set the price the amount of interest received helps an underwriter set the offering price the underwriter also guarantees a specific number of shares will be sold at that initial price and will purchase any surplus secondary offeringsa secondary market offering is a large block of securities offered for public sale that have been previously issued to the public the blocks being offered may have been held by large investors or institutions and the proceeds of the sale go to those holders not the issuing company also called secondary distribution these types of offerings are very different than initial public offerings and don t require nearly the same amount of background work non initial public offerings vs initial public offeringssometimes an established company will make offerings of stock to the public but such an offering will not be the first offering of securities for sale by that company such an offering is known as a non initial public offering or seasoned equity offering | |
what is an offering circular | an offering circular is a type of prospectus provided for a new security listing it is delivered to individuals and brokerage houses who are interested in potentially purchasing the newly issued securities it is often slightly abbreviated from the final long form prospectus but is still required to contain specific information an offering circular should not be confused with a red herring or preliminary prospectus the red herring is issued during the ipo process and is intended to generate interest in the new issue it lacks many of the specifics regarding the new issue the offering circular on the other hand is a more complete document and should be viewed before making a final decision about an investment understanding offering circularsan offering circular allows investors to access information regarding a new issue it provides them with very important information about the security such as financial information about the issuer the objective of the fund or purpose of the funds being raised and other terms of the security issuance the offering circular is a legal document and is a requirement for many but not all new issues offering circulars are required to contain certain pieces of information that are meant to be helpful to a prospective investor in deciding whether or not the investment is suitable for their interests this information includes items such as the issuer of the security the objective of the mutual fund or the purpose of the stock issue the terms of the issue and any additional information that could be helpful to a prospective buyer offering circular vs red herringit is important to distinguish it from the red herring or preliminary prospectus which lacks significant details about the new issue the red herring is a promotional item passed out to potential investors early on in the ipo process to solicit indications of interest and does not include the crucial information that an investor should review before purchasing a security however this important information is included in the offering circular the term red herring is derived from the bold disclaimer in red on the cover page of the preliminary prospectus the disclaimer states that a registration statement relating to the securities being offered has been filed with the sec but has not yet become effective that is the information contained in the prospectus is incomplete and may be changed thus the securities may not be sold and offers to buy may not be accepted before the registration statement becomes effective the red herring does not state a price or issue size |
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