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how an option cycle works | an option cycle refers to the cycle of months available for a listed option class option cycles are integrated across all of the options and futures markets cycles are regulated by regulatory authorities an investor will typically view available options by option class an option class is a grouping of calls or puts available on a security option classes are separated by calls and puts they are also categorized by strike price and listed sequentially by expiration option cycle assignmentsoptions are assigned to one of three cycles at their listing originally cycles were divided by four months in 1984 regulatory authorities decided that a listed option should have the two front months available for its investors this changed the listing of options to include the first two front months followed by the next two months in the cycle there are three option cycles that a listed option can be assigned to on the public markets note that the options on the january cycle have contracts available in the first month of each quarter january april july and october options assigned to the february cycle use the middle month of each quarter february may august and november options in the march cycle have options available during the last month of each quarter march june september and december investors seeking to invest in an option will find the first two front months followed by the two remaining cycle months this provides the opportunity for investors to trade or hedge for shorter terms as well as buy longer term contracts special considerationsit should be noted that nowadays the cycle is less important for heavily traded stocks and index tracking exchange traded funds because of the publication of weekly options since weekly options are available to be traded an investor that wants to extend their expiration date can roll a quarterly option to any given week of the year it is also important for investors to understand what happens to a cycle when a month passes each cycle will always have the two front months available after a month passes the last two remaining months continue to follow the originally assigned cycle for example in february the cycle one option availability would be february march april july in june the cycle one option availability would be june july october january overall for an investor to understand which cycle an option is trading in it is necessary to look at the third and fourth months generally all options will expire at 4 00 pm eastern time on the third friday of their expiration month less common expiration cyclessome options may have contracts in every month of the year but this is usually reserved for highly liquid underlying securities such as exchange traded funds etfs on the s p 500 and other index funds options such as these are often used to hedge a portfolio and because they represent a basket of stocks the security underlying the option is more stable the strike prices or target prices tend to hold up better as a result so it makes sense to have more and more frequent expiration date possibilities long term equity anticipation securities leaps are options for much longer terms and as such they expire every year in january at least one year after purchase they are otherwise the same as other securities options and are available on thousands of equities and a select group of index funds as either calls or puts the only difference between leaps and regular options is the length of time before they expire | |
what is an options disclosure document odd | the options disclosure document odd is a publication issued by the options clearing corporation occ that serves as an important guide for options traders the comprehensive document formally titled characteristics and risks of standardized options is particularly essential for novice options traders 1options are financial derivatives based on the value of underlying securities such as stocks options give investors the right but not the obligation to buy or sell an underlying asset at an agreed upon price within a specific time frame the odd booklet includes definitions for the most common options trading terms and useful examples illustrating various trading scenarios it provides general disclosures on the risks of trading options both the securities exchange act and the financial industry regulatory authority finra require brokers and brokerage firms to deliver the options disclosure document and its supplements to customers 1understanding the options disclosure document odd founded in 1973 the occ clears transactions for exchange listed options securities futures and over the counter options as the world s largest equity derivatives clearinghouse the occ operates under the jurisdiction of the commodity futures trading commission cftc and the securities and exchange commission sec 4in february 1994 the occ distributed the first edition of the options disclosure document odd chapter headings in the latest version include starting in december 1997 the options clearing corporation began issuing supplements to the odd booklet these supplements provided new information amended previously published information and clarified concepts to accommodate the growing complexity of options products 5the most recent odd update in march 2022 included supplemental material noting index products contracts may have a multiplier other than 100 as established by the listing exchange and included the latest corrections to chapter subtitles in the original 5in march 2022 occ said it will publish future changes to the odd as updates of the entire document rather than supplements 6the total number of contracts cleared by the occ in 2021 this includes equity and index options as well as futures contracts 7requirements for options disclosure document odd because the odd is considered a key publication in helping investors understand the complexities of options trading there are rules to ensure each investor has ready access to the document the sec is responsible for approving supplements to the options disclosure document brokers are required to deliver the odd and supplements to their customers according to rule 9b 1 of the securities exchange act finra has its own rule requiring brokers to supply their customers with the most current odd this must occur by the time the broker approves the customer to trade options 1additionally finra requires brokers to distribute each new odd supplement to customers who have already received the odd firms may mail the odd and supplements to customers or transmit them electronically to those who have consented to electronic delivery 8you can find the latest version of the odd booklet as a pdf download on the options clearing corporation s website special considerationsaside from the basic description of various option types perhaps the most important section of the odd is the principal risks of options positions someone new to the options markets would be wise to carefully read this section which goes over the main risks of each of the option types discussed in the document and provides some examples of how a trader might lose money even a seasoned trader would find the document useful for reminders the section on the risks of owning options starts with this blunt warning an option holder runs the risk of losing the entire amount paid for the option in a relatively short period of time 9the odd goes on to explain other options trading risks including the risks assumed by option writers risks of combination transactions such as option spreads risks occurring from the disruption in the markets of underlying assets and the special risks of index options | |
what is option margin | option margin is the cash or securities an investor must deposit in their account as collateral before writing or selling options margin requirements are established by the federal reserve board in regulation t and vary based on the type of option basics of option marginoption margin requirements are very complex and differ quite a bit from stocks or futures margin requirements in the case of stocks and futures a margin is used as leverage to increase buying power whereas an option margin is used as collateral to secure a position minimum margin requirements for various types of underlying securities are established by finra and the options exchanges brokers may have very different margin requirements since they can add to the minimum requirements set by regulators some option strategies such as covered calls and covered puts have no margin requirement since the underlying stock is used as collateral traders must request options trading authorization when opening a new account often brokers will classify options trading clearance levels depending on the type of strategies employed buying options is typically a level i clearance since it doesn t require margin but selling naked puts may require level ii clearances and a margin account level iii and iv accounts often have lower margin requirements option margin requirements can have a significant impact on the profitability of a trade since it ties up capital complex strategies such as strangles and straddles may involve computing multiple margin requirements traders should determine the margin requirements for a trade before entering into it and make sure that they can meet those requirements if the market turns against them | |
how to avoid option margin requirements | certain option positions do not require margins for example there are no margin requirements for long options whether they are puts or calls in other instances traders can use several different strategies to avoid option margin requirements calculating option margin requirementsthe easiest way to calculate option margin requirements is using the chicago board of options exchange cboe margin calculator that provides exact margin requirements for specific trades traders can also see the minimum requirements in the cboe s margin manual brokerage accounts may have similar tools available to provide an idea of the cost before entering into a trade | |
what is an option pool | an option pool consists of shares of stock reserved for employees of a private company the option pool is a way of attracting talented employees to a startup company if the employees help the company do well enough to go public they will be compensated with stock employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later the initial size of the option pool may decrease with subsequent rounds of funding because of investors ownership demands the creation of an option pool will commonly dilute the founders share in the company because investors angels and venture capitalists often insist on it | |
how option pools are structured | the shares that comprise an option pool typically are drawn from founder stock in the company rather than the shares earmarked for investors this may be 15 25 of the overall outstanding shares and may be determined when the startup receives its earliest funding round as part of the overall terms put in place it is also possible that a company over the course of its development and subsequent funding rounds may establish additional option pools after the initial one is put in place the size of the pool may be dictated or advised by the venture backers to be a portion of the pre money or post money valuation of the company negotiations over the scope of the option pool can affect the startup s overall price for example investors may want an option pool offered post money option to be priced at the pre money valuation which could lower the price for the company other considerationsthe shares disbursed from the option pool may be determined by the roles of the employees as well as when they are hired for example senior management that is brought on board near the founding of the startup may receive a percentage of the entire pool whereas later employees in more junior roles might be granted just fractions of a percent the option pool grants shares that like other types of stock options often require a period of time before they are vested this means the employee will not be able to benefit from these shares possibly for several years by delaying their ability to reap monetary value from their portion of the option pool the belief is that the employee will contribute more to the overall health and growth of the company in order to see the greatest possible gains when the shares vest | |
what is an option premium | an option premium is the current market price of an option contract it is thus the income received by the seller writer of an option contract to another party in the money option premiums are composed of two factors intrinsic and extrinsic value out of the money options premiums consist solely of extrinsic value 1for stock options the premium is quoted as a dollar amount per share and most contracts represent the commitment of 100 shares investopedia jake shiunderstanding option premiuminvestors who write which means to sell in this case calls or puts use option premiums as a source of current income in line with a broader investment strategy to hedge all or a portion of a portfolio option prices quoted on an exchange such as the cboe options exchange cboe are considered premiums as a rule because the options themselves have no underlying value the components of an option premium include its intrinsic value its time value and the implied volatility of the underlying asset as the option nears its expiration date the time value will edge closer and closer to 0 while the intrinsic value will closely represent the difference between the underlying security s price and the strike price of the contract factors of option premiumthe main factors affecting an option s price are the underlying security s price moneyness useful life of the option and implied volatility as the price of the underlying security changes the option premium changes as the underlying security s price increases the premium of a call option increases but the premium of a put option decreases as the underlying security s price decreases the premium of a put option increases and the opposite is true for call options the moneyness affects the option s premium because it indicates how far away the underlying security price is from the specified strike price as an option becomes further in the money the option s premium normally increases conversely the option premium decreases as the option becomes further out of the money for example as an option becomes further out of the money the option premium loses intrinsic value and the value stems primarily from the time value the time until expiration or the useful life affects the time value portion of the option s premium as the option approaches its expiration date the option s premium stems mainly from the intrinsic value for example deep out of the money options that are expiring in one trading day would normally be worth 0 or very close to 0 implied volatility and option priceimplied volatility is derived from the option s price which is plugged into an option s pricing model to indicate how volatile a stock s price may be in the future moreover it affects the extrinsic value portion of option premiums if investors are long options an increase in implied volatility would add to the value this is because the greater the volatility of the underlying asset the more chances the option has of finishing in the money the opposite is true if implied volatility decreases for example assume an investor is long one call option with an annualized implied volatility of 20 therefore if the implied volatility increases to 50 during the option s life the call option premium would appreciate in value an option s vega is its change in premium given a 1 change in implied volatility | |
what is option pricing theory | option pricing theory estimates a value of an options contract by assigning a price known as a premium based on the calculated probability that the contract will finish in the money itm at expiration essentially option pricing theory provides an evaluation of an option s fair value which traders incorporate into their strategies models used to price options account for variables such as current market price strike price volatility interest rate and time to expiration to theoretically value an option some commonly used models to value options are black scholes binomial option pricing and monte carlo simulation understanding option pricing theorythe primary goal of option pricing theory is to calculate the probability that an option will be exercised or be itm at expiration and assign a dollar value to it the underlying asset price e g a stock price exercise price volatility interest rate and time to expiration which is the number of days between the calculation date and the option s exercise date are commonly employed variables that are input into mathematical models to derive an option s theoretical fair value options pricing theory also derives various risk factors or sensitivities based on those inputs which are known as an option s greeks since market conditions are constantly changing the greeks provide traders with a means of determining how sensitive a specific trade is to price fluctuations volatility fluctuations and the passage of time the greater the chances that the option will finish itm and be profitable the greater the value of the option and vice versa the longer that an investor has to exercise the option the greater the likelihood that it will be itm and profitable at expiration this means all else equal longer dated options are more valuable similarly the more volatile the underlying asset the greater the odds that it will expire itm higher interest rates too should translate into higher option prices special considerationsmarketable options require different valuation methods than non marketable options real traded options prices are determined in the open market and as with all assets the value can differ from a theoretical value however having the theoretical value allows traders to assess the likelihood of profiting from trading those options the evolution of the modern day options market is attributed to the 1973 pricing model published by fischer black and myron scholes the black scholes formula is used to derive a theoretical price for financial instruments with a known expiration date however this is not the only model the cox ross and rubinstein binomial option pricing model and monte carlo simulation are also widely used using the black scholes option pricing theorythe original black scholes model required five input variables the strike price of an option the current price of the stock time to expiration the risk free rate of return and volatility direct observation of future volatility is impossible so it must be estimated or implied thus implied volatility is not the same as historical or realized volatility for many options on stocks dividends are often used as a sixth input the black scholes model one of the most highly regarded pricing models assumes stock prices follow a log normal distribution because asset prices cannot be negative other assumptions made by the model are that there are no transaction costs or taxes that the risk free interest rate is constant for all maturities that short selling of securities with the use of proceeds is permitted and that there are no arbitrage opportunities without risk clearly some of these assumptions do not hold true all or even most of the time for example the model also assumes volatility remains constant over the option s lifespan this is unrealistic and normally not the case because volatility fluctuates with the level of supply and demand modifications to options pricing models will therefore include volatility skew which refers to the shape of implied volatilities for options graphed across the range of strike prices for options with the same expiration date the resulting shape often shows a skew or smile where the implied volatility values for options further out of the money otm are higher than for those at the strike price closer to the price of the underlying instrument additionally black scholes assumes that the options being priced are european style executable only at maturity the model does not take into account the execution of american style options which can be exercised at any time before and including the day of expiration on the other hand the binomial or trinomial models can handle both styles of options because they can check for the option s value at every point in time during its life | |
what is an option series | an option series refers to a grouping of options on an underlying security with the same specified strike price and the same expiration month however call and put options are parts of separate series for example a call option series would include the available calls on a specific security at a certain strike price that will expire in the same month understanding option seriessince option series contain calls or puts on the same security at the same price that expire at the same time their prices should be extremely similar for example all january 20 2023 calls on apple with a strike price of 150 should cost about the same amount however options are highly volatile and suffer from liquidity issues which can create opportunities for traders the actual prices observed on options sometimes differ significantly from values given by the black scholes model although there are many deviations of real option prices from their theoretical values most of these opportunities are too small for individual investors to make significant profits an investor will find multiple option series listings within a designated option class an option class refers to the option s designation as either a call or a put generally most options exchanges will list options by class therefore an investor seeking to buy call options on an underlying security would see a long list of call option series listings each with their own individual strike price and expiration similarly an investor seeking put options on an underlying security would first look to the put option class for all of the series listings at different strike prices and expiration dates all option series are also part of option cycles for instance xyz company may have a call option with a strike price of 110 when the option is listed it can be assigned one of three cycles exchange traded options follow their designated cycle with listings available for the first two months followed by the next two months for their cycle if the xyz 110 call is a cycle three then in january it would have the following listings xyz 110 jan xyz 110 feb xyz 110 march xyz 110 june each listing would be considered an individual option series with the four option offerings representing the option cycle most exchange traded option series listings will expire on the third friday of their listed expiration month option series trades on regulated exchanges are supported by a third party which fulfills options contracts when defaults occur thus options investors need not worry too much about counterparty risk with publicly traded options this third party will step in to cover their positions in the event of a potential counterparty default the options clearing corporation occ is perhaps the best known third party that guarantees options special considerationsoption series offer many ways for traders to make money option series contain options contracts which cover 100 shares of the underlying security however options can be traded in larger collections of contracts like stocks and most other goods there are price disparities when buying or selling in bulk versus small amounts arbitrageurs can take advantage of the resulting price difference to profit there are also times when the prices of options drift far from where economic theory says they should be when the market is unstable anomalies like volatility smile become more pronounced and create more chances to make profits by understanding how options are priced traders can take better advantage of deviations in prices within option series | |
what is optionable stock | an optionable stock is one where the shares have the necessary liquidity and volume such that an exchange lists that stock s options for trading in order for a stock to be optionable exchanges mandate that certain criteria be met including a minimum share price number of shares outstanding and minimum unique shareholders among others understanding optionable stocksan optionable stock is one that has options listed and tradable on a market exchange not all companies that trade publicly on stock markets have exchange traded options this is due in part to certain minimum requirements that need to be met such as a minimum share price and minimum amount of outstanding shares currently there are almost 6 000 companies with optionable stocks as well as several hundred more exchange traded funds etfs with listed options 1 a stock being optionable allows investors to purchase options on the underlying stock giving them the right to buy or sell shares of that underlying stock at a set price if a stock is not optionable it is more difficult to hedge positions in that stock which makes it harder to mitigate the risks involved for stocks like these an investor can arrange for an over the counter otc options contract to be written with their broker dealer it is quite easy these days to look up online if a stock has listed options on it or not the easiest way to check whether a stock is optionable is to go to the cboe options exchange website and check whether there are options listed for a particular stock 2requirements for stock to be optionablein order to have options listed for a stock it must meet certain criteria under current cboe rules there are five primary criteria that a company must meet before options on its stock can be traded on the options exchange 3if a company does not meet any one of these criteria options exchanges like the cboe will not allow any options to be traded on the underlying security additionally because of the second condition listed above a company cannot have options traded on it until at least three months after its initial public offering ipo date 3investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
the term option refers to a financial instrument that is based on the value of underlying securities such as stocks indexes and exchange traded funds etfs an options contract offers the buyer the opportunity to buy or sell depending on the type of contract they hold the underlying asset unlike futures the holder is not required to buy or sell the asset if they decide against it | each options contract will have a specific expiration date by which the holder must exercise their option the stated price on an option is known as the strike price options are typically bought and sold through online or retail brokers investopedia michela buttignolunderstanding optionsoptions are versatile financial products these contracts involve a buyer and seller where the buyer pays a premium for the rights granted by the contract call options allow the holder to buy the asset at a stated price within a specific time frame put options on the other hand allow the holder to sell the asset at a stated price within a specific time frame each call option has a bullish buyer and a bearish seller while put options have a bearish buyer and a bullish seller 1traders and investors buy and sell options for several reasons options speculation allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset investors use options to hedge or reduce the risk exposure of their portfolios in some cases the option holder can generate income when they buy call options or become an options writer options are also one of the most direct ways to invest in oil for options traders an option s daily trading volume and open interest are the two key numbers to watch to make the most well informed investment decisions american options can be exercised at any time before their expiration date while european options can only be exercised on the expiration date or the exercise date 2 exercising means utilizing the right to buy or sell the underlying security 1types of optionsa call option gives the holder the right but not the obligation to buy the underlying security at the strike price on or before expiration a call option will therefore become more valuable as the underlying security rises in price calls have a positive delta 3a long call can be used to speculate on the price of the underlying rising since it has unlimited upside potential but the maximum loss is the premium price paid for the option opposite to call options a put gives the holder the right but not the obligation to instead sell the underlying stock at the strike price on or before expiration a long put therefore is a short position in the underlying security since the put gains value as the underlying s price falls they have a negative delta 3 protective puts can be purchased as a sort of insurance providing a price floor for investors to hedge their positions american options can be exercised at any time between the date of purchase and the expiration date european options are different from american options in that they can only be exercised at the end of their lives on their expiration date the distinction between american and european options has nothing to do with geography only with early exercise many options on stock indexes are of the european type because the right to exercise early has some value an american option typically carries a higher premium than an otherwise identical european option this is because the early exercise feature is desirable and commands a premium in the u s most single stock options are american while index options are european 4special considerationsoptions contracts usually represent 100 shares of the underlying security the buyer pays a premium fee for each contract 1 for example if an option has a premium of 35 cents per contract buying one option costs 35 0 35 x 100 35 the premium is partially based on the strike price or the price for buying or selling the security until the expiration date another factor in the premium price is the expiration date just like with that carton of milk in the refrigerator the expiration date indicates the day the option contract must be used the underlying asset will influence the use by date and some options will expire daily weekly monthly and even quarterly for monthly contracts it is usually the third friday 54options spreads are strategies that use various combinations of buying and selling different options for the desired risk return profile spreads are constructed using vanilla options and can take advantage of various scenarios such as high or low volatility environments up or down moves or anything in between spread strategies can be characterized by their payoff or visualizations of their profit loss profile such as bull call spreads or iron condors options risk metrics the greeksthe options market uses the term the greeks to describe the different dimensions of risk involved in taking an options position either in a particular option or a portfolio these variables are called greeks because they are typically associated with greek symbols each risk variable is a result of an imperfect assumption or relationship of the option with another underlying variable traders use different greek values to assess options risk and manage option portfolios 6delta represents the rate of change between the option s price and a 1 change in the underlying asset s price in other words the price sensitivity of the option relative to the underlying delta of a call option has a range between zero and one while the delta of a put option has a range between zero and negative one for example assume an investor is long a call option with a delta of 0 50 therefore if the underlying stock increases by 1 the option s price would theoretically increase by 50 cents 3delta also represents the hedge ratio for creating a delta neutral position for options traders 7 so if you purchase a standard american call option with a 0 40 delta you need to sell 40 shares of stock to be fully hedged net delta for a portfolio of options can also be used to obtain the portfolio s hedge ratio a less common usage of an option s delta is the current probability that it will expire in the money for instance a 0 40 delta call option today has an implied 40 probability of finishing in the money 3theta represents the rate of change between the option price and time or time sensitivity sometimes known as an option s time decay theta indicates the amount an option s price would decrease as the time to expiration decreases all else equal for example assume an investor is long an option with a theta of 0 50 the option s price would decrease by 50 cents every day that passes all else being equal if three trading days pass the option s value would theoretically decrease by 1 50 theta increases when options are at the money and decreases when options are in and out of the money options closer to expiration also have accelerating time decay 8 long calls and long puts usually have negative theta short calls and short puts on the other hand have positive theta by comparison an instrument whose value is not eroded by time such as a stock has zero theta 9gamma represents the rate of change between an option s delta and the underlying asset s price this is called second order second derivative price sensitivity gamma indicates the amount the delta would change given a 1 move in the underlying security let s assume an investor is long one call option on hypothetical stock xyz the call option has a delta of 0 50 and a gamma of 0 10 therefore if stock xyz increases or decreases by 1 the call option s delta would increase or decrease by 0 10 gamma is used to determine the stability of an option s delta higher gamma values indicate that delta could change dramatically in response to even small movements in the underlying s price gamma is higher for options that are at the money and lower for options that are in and out of the money and accelerates in magnitude as expiration approaches gamma values are generally smaller the further away from the date of expiration this means that options with longer expirations are less sensitive to delta changes as expiration approaches gamma values are typically larger as price changes have more impact on gamma 10options traders may opt to not only hedge delta but also gamma in order to be delta gamma neutral meaning that as the underlying price moves the delta will remain close to zero 11vega v represents the rate of change between an option s value and the underlying asset s implied volatility this is the option s sensitivity to volatility vega indicates the amount an option s price changes given a 1 change in implied volatility for example an option with a vega of 0 10 indicates the option s value is expected to change by 10 cents if the implied volatility changes by 1 because increased volatility implies that the underlying instrument is more likely to experience extreme values a rise in volatility correspondingly increases the value of an option conversely a decrease in volatility negatively affects the value of the option 12 vega is at its maximum for at the money options that have longer times until expiration 13those familiar with the greek language will point out that there is no actual greek letter named vega there are various theories about how this symbol which resembles the greek letter nu found its way into stock trading lingo rho p represents the rate of change between an option s value and a 1 change in the interest rate this measures sensitivity to the interest rate for example assume a call option has a rho of 0 05 and a price of 1 25 if interest rates rise by 1 the value of the call option would increase to 1 30 all else being equal the opposite is true for put options rho is greatest for at the money options with long times until expiration 14some other greeks which aren t discussed as often are lambda epsilon vomma vera speed zomma color ultima these greeks are second or third derivatives of the pricing model and affect things like the change in delta with a change in volatility they are increasingly used in options trading strategies as computer software can quickly compute and account for these complex and sometimes esoteric risk factors advantages and disadvantages of optionsas mentioned earlier call options allow the holder to buy an underlying security at the stated strike price by the expiration date called the expiry the holder has no obligation to buy the asset if they do not want to purchase the asset the risk to the buyer is limited to the premium paid fluctuations of the underlying stock have no impact buyers are bullish on a stock and believe the share price will rise above the strike price before the option expires if the investor s bullish outlook is realized and the price increases above the strike price the investor can exercise the option buy the stock at the strike price and immediately sell the stock at the current market price for a profit their profit on this trade is the market share price less the strike share price plus the expense of the option the premium and any brokerage commission to place the orders the result is multiplied by the number of option contracts purchased then multiplied by 100 assuming each contract represents 100 shares if the underlying stock price does not move above the strike price by the expiration date the option expires worthlessly the holder is not required to buy the shares but will lose the premium paid for the call 15selling call options is known as writing a contract the writer receives the premium fee in other words a buyer pays the premium to the writer or seller of an option the maximum profit is the premium received when selling the option an investor who sells a call option is bearish and believes the underlying stock s price will fall or remain relatively close to the option s strike price during the life of the option if the prevailing market share price is at or below the strike price by expiry the option expires worthlessly for the call buyer the option seller pockets the premium as their profit the option is not exercised because the buyer would not buy the stock at the strike price higher than or equal to the prevailing market price however if the market share price is more than the strike price at expiry the seller of the option must sell the shares to an option buyer at that lower strike price in other words the seller must either sell shares from their portfolio holdings or buy the stock at the prevailing market price to sell to the call option buyer the contract writer incurs a loss how large of a loss depends on the cost basis of the shares they must use to cover the option order plus any brokerage order expenses but less any premium they received as you can see the risk to the call writers is far greater than the risk exposure of call buyers the call buyer only loses the premium the writer faces infinite risk because the stock price could continue to rise increasing losses significantly 15put options are investments where the buyer believes the underlying stock s market price will fall below the strike price on or before the expiration date of the option once again the holder can sell shares without the obligation to sell at the stated strike per share price by the stated date since buyers of put options want the stock price to decrease the put option is profitable when the underlying stock s price is below the strike price if the prevailing market price is less than the strike price at expiry the investor can exercise the put they will sell shares at the option s higher strike price should they wish to replace their holding of these shares they may buy them on the open market their profit on this trade is the strike price less the current market price plus expenses the premium and any brokerage commission to place the orders the result would be multiplied by the number of option contracts purchased then multiplied by 100 assuming each contract represents 100 shares the value of holding a put option will increase as the underlying stock price decreases conversely the value of the put option declines as the stock price increases the risk of buying put options is limited to the loss of the premium if the option expires worthlessly 15selling put options is also known as writing a contract a put option writer believes the underlying stock s price will stay the same or increase over the life of the option making them bullish on the shares here the option buyer has the right to make the seller buy shares of the underlying asset at the strike price on expiry if the underlying stock s price closes above the strike price by the expiration date the put option expires worthlessly the writer s maximum profit is the premium the option isn t exercised because the option buyer would not sell the stock at the lower strike share price when the market price is more if the stock s market value falls below the option strike price the writer is obligated to buy shares of the underlying stock at the strike price in other words the put option will be exercised by the option buyer who sells their shares at the strike price as it is higher than the stock s market value the risk for the put option writer happens when the market s price falls below the strike price the seller is forced to purchase shares at the strike price at expiration the writer s loss can be significant depending on how much the shares depreciate 15the writer or seller can either hold on to the shares and hope the stock price rises back above the purchase price or sell the shares and take the loss any loss is offset by the premium received an investor may write put options at a strike price where they see the shares being a good value and would be willing to buy at that price when the price falls and the buyer exercises their option they get the stock at the price they want with the added benefit of receiving the option premium a call option buyer has the right to buy assets at a lower price than the market when the stock s price risesthe put option buyer profits by selling stock at the strike price when the market price is below the strike priceoption sellers receive a premium fee from the buyer for writing an optionthe put option seller may have to buy the asset at the higher strike price than they would normally pay if the market fallsthe call option writer faces infinite risk if the stock s price rises and are forced to buy shares at a high priceoption buyers must pay an upfront premium to the writers of the optionexample of an optionsuppose that microsoft mfst shares trade at 108 per share and you believe they will increase in value you decide to buy a call option to benefit from an increase in the stock s price you purchase one call option with a strike price of 115 for one month in the future for 37 cents per contract your total cash outlay is 37 for the position plus fees and commissions 0 37 x 100 37 if the stock rises to 116 your option will be worth 1 since you could exercise the option to acquire the stock for 115 per share and immediately resell it for 116 per share the profit on the option position would be 170 3 since you paid 37 cents and earned 1 that s much higher than the 7 4 increase in the underlying stock price from 108 to 116 at the time of expiry in other words the profit in dollar terms would be a net of 63 cents or 63 since one option contract represents 100 shares 1 0 37 x 100 63 if the stock fell to 100 your option would expire worthlessly and you would be out 37 premium the upside is that you didn t buy 100 shares at 108 which would have resulted in an 8 per share or 800 total loss as you can see options can help limit your downside risk options trading involves a lot of lingo here are just some of the key terminology to know the meanings of | |
how do options work | options are a type of derivative product that allow investors to speculate on or hedge against the volatility of an underlying stock options are divided into call options which allow buyers to profit if the price of the stock increases and put options in which the buyer profits if the price of the stock declines investors can also go short an option by selling them to other investors shorting or selling a call option would therefore mean profiting if the underlying stock declines while selling a put option would mean profiting if the stock increases in value | |
what are the main advantages of options | options can be very useful as a source of leverage and risk hedging for example a bullish investor who wishes to invest 1 000 in a company could potentially earn a far greater return by purchasing 1 000 worth of call options on that firm as compared to buying 1 000 of that company s shares in this sense the call options provide the investor with a way to leverage their position by increasing their buying power on the other hand if that same investor already has exposure to that same company and wants to reduce that exposure they could hedge their risk by selling put options against that company | |
what are the main disadvantages of options | the main disadvantage of options contracts is that they are complex and difficult to price this is why options are considered to be a security most suitable for experienced professional investors in recent years they have become increasingly popular among retail investors because of their capacity for outsized returns or losses investors should make sure they fully understand the potential implications before entering into any options positions failing to do so can lead to devastating losses | |
how do options differ from futures | both options and futures are types of derivatives contracts that are based on some underlying asset or security the main difference is that options contracts grant the right but not the obligation to buy or sell the underlying in the future futures contracts have this obligation | |
is an options contract an asset | yes an options contract is a derivatives security which is a type of asset the bottom lineoptions are a type of derivative product that allow investors to speculate on or hedge against the volatility of an underlying stock options are divided into call options which allow buyers to profit if the price of the stock increases and put options in which the buyer profits if the price of the stock declines investors can also go short an option by selling them to other investors shorting or selling a call option would therefore mean profiting if the underlying stock declines while selling a put option would mean profiting if the stock increases in value | |
what is options backdating | options backdating is the process of granting an employee stock option eso that is dated before its actual issuance in this way the exercise strike price of the granted option can be set at a lower price than that of the company s stock price at the granting date this process makes the granted option in the money itm and therefore of greater value to the holder the practice of backdating options has been considered unethical and is now the subject of regulatory scrutiny making it far less widespread in recent years understanding options backdatingthe practice of options backdating first occurred when companies were only required to report the issuance of stock options to the sec within two months of the initial grant date companies would simply wait during that period to identify a particular date in which the company s stock price fell to a low and then moved higher within those two months the company would then grant the option but date it at or near this lowest point this back date would become the offcial granted option that would be reported to the sec the act of options backdating became much more difficult after companies were required to report the granting of options to the sec within two business days this adjustment to the filing window came with the sarbanes oxley legislation in 2002 enforcement of options backdating restrictionsafter the two day reporting rule went into effect the sec found numerous companies were still backdating options in violation of the legislation disordered untimely paperwork was cited as the cause in some cases of unintentional backdating initially lax enforcement of the reporting rule was also blamed for allowing many companies to sidestep the rule adjustment that stemmed from sarbanes oxley the sec would go on to investigate and sue companies and related parties that were found to backdate options in some cases as part of fraudulent and deceptive schemes for example the sec filed a civil lawsuit in 2010 against trident microsystems and two former senior executives from the company for stock option backdating violations the legal complaint alleged that from 1993 to 2006 the former ceo and the former chief accounting officer directed the company to engage in schemes to provide undisclosed compensation to executives and certain employees ceo frank c lin was accused of backdating stock option documents to give the appearance that options were granted on earlier dates than issued this scheme was allegedly used to the benefit of officers and employees of the company as well as its directors this included options backdating presented in offer letters to new hires annual and quarterly reports filed by the company did not include the compensation costs that stemmed from the options backdating incidents trident and its former executives agreed to settle the case without admitting or denying the allegations in the sec s complaint 1 | |
what is the options clearing corporation occ | the options clearing corporation occ is an organization that acts as both the issuer and guarantor for options and futures contracts the largest equity derivatives clearing organization in the world it operates under the jurisdiction of the commodities futures trading commission cftc and the u s securities and exchange commission sec the occ should not be confused with the u s treasury s office of the comptroller of the currency which also goes by the acronym occ understanding the options clearing corporation occ the objective of the occ which was founded in 1973 is to instill stability in the equity derivatives market according to its mission statement the occ is a customer driven clearing organization that delivers risk management clearance and settlement services 1under its sec jurisdiction the occ clears transactions for put and call options stock indexes foreign currencies and interest rate composites as a registered derivatives clearing organization dco under cftc jurisdiction it provides clearing and settlement services for transactions in futures products as well as options on futures 1the occ also offers central counterparty clearing and settlement services for securities lending transactions the organization essentially acts as a guarantor to ensure the obligations of the contracts it clears are fulfilled a board of directors b of d populated by representatives from exchanges clearing members and management oversee the occ and most of its revenue comes from clearing fees charged to its members the occ also provides research services and other value added solutions that support and grow the markets that it serves the corporation serves 16 different exchanges including the c2 options exchange chicago board options exchange international securities exchange nasdaq bx options nasdaq phlx nyse american options and nyse arca options 2the occ cleared 9 93 billion contracts in 2021 the industry s highest ever annual volume 3history of the options clearing corporation occ the aftermath of the 2008 financial crisis brought new scrutiny and purpose to the occ changes were made so it could adapt its operations to better address risk federal regulators began to see the occ as an increasingly integral part of the governance and oversight of the markets the heightened attention focused on the organization brought with it some unfavorable assessments by regulators in 2013 the sec criticized the occ s management and planning for the way it handled market wide issues the sec also said the occ s management at that time lacked appropriate supervision in terms of corporate governance the sec further cited numerous conflicts of interest with the management and board of directors which called into question the organization s commitment to regulatory compliance 4this led to the introduction of new executive leadership including the addition of new positions to reinforce the occ s compliance efforts the occ s management and leadership currently consist of a diverse team of people from different parts of the investment world including exchanges clearing members and other directors 5 as of oct 2022 key figures include | |
what is an options contract | an options contract is a financial agreement that grants the buyer the right but not the obligation to buy or sell a particular asset like a stock at a preset price within a given period as financial markets have grown increasingly complex and at times more volatile options have emerged as a potent way to guard against uncertainty and capitalize on price changes in just a couple of decades options with their ability to leverage gains manage risk and strategic flexibility have moved from an esoteric tool for professionals into a mainstream vehicle from individual investors to large institutional players many market participants use options for speculation hedging and generating income the numbers tell the story trading volume in options has increased by about 150 in the past decade and about 15 fold since 2000 the vast increase in options trading has been helped by a massive spike in retail investor interest which peaked at almost 50 of all trading volume during the pandemic and has remained in the low 40s by percentage for most months since 1below we take you through what you need to know about these contracts how they work who trades them and why and the advantages and pitfalls to avoid should you add them to your trading strategy understanding options contractsoptions contracts are valued based on the underlying securities these contracts allow the buyer to buy or sell depending on the type of contract they hold the underlying asset at a price set out in the agreement either within a specific time frame or at the expiration date the underlying assets include currencies stocks indexes interest rates exchange traded funds and more 2the terms of option contracts specify the underlying security the price at which that security can be bought or sold the strike price and the expiration date of the contract for stocks a standard contract covers 100 shares but this number can be adjusted for stock splits special dividends or mergers options are generally used for hedging purposes but can also be employed to speculate on price moves the contracts generally cost a fraction of what the underlying shares would options can provide leverage meaning that the premium allows you to be exposed to a larger position of shares for a fraction of the cost of buying the underlying security in exchange for this right the buyer of the option pays a premium to the party selling the option options strategies are adaptable to various market conditions traders buy or sell options contracts based on whether they are bullish or bearish on the underlying asset and they often use strategies that combine several options and long positions owning the asset outright at once 3types of options contractsthere are two types of options contracts puts and calls both can be bought to speculate to profit on price changes or hedge exposure that is to insure positions you already have or may have they can also be sold to generate income 4in general call options can be bought as a leveraged bet on the appreciation of a stock or index while put options are purchased to profit from price declines the buyer of a call option has the right but not the obligation to buy the number of shares covered in the contract at the strike price put buyers meanwhile have the right but not the obligation to sell the shares at the strike price specified in the contract 2option sellers known as writers are obligated to perform their side of the trade if the buyer decides to execute or assigns the call option and buy the underlying security or execute a put option to sell here s how it occurs | |
when trading volume or volatility is relatively low and the market is trending upward traders often buy one or more calls since call options tend to appreciate in value as the underlying asset s price rises meanwhile traders tend to buy puts when volume or volatility is relatively low and the market is trending downward since puts increase in value when the market declines during market downturns option traders often sell calls while they sell puts when the market is advancing 5 | american options can be exercised any time before the expiration date of the option while european options can only be exercised on the expiration date or the exercise date hedging and speculating with options contractsoptions can be an effective tool for hedging as they allow investors to protect their investments against downside risk while retaining the possibility of upside gain typically hedging involves taking an offsetting position in a related security such as a call or put option suppose you re a portfolio manager focusing on equities you want to protect the portfolio from a potential downturn and might buy put options for the stocks on the portfolio if stock prices fall the put options will increase in value offsetting the losses in the portfolio options are also widely used for speculative purposes because of their inherent leverage since options allow you to control a large amount of a stock or other underlying asset through a relatively small premium they can offer increased speculative prospects suppose you expect a company s stock price will rise and buy call options if the stock price increases beyond the strike price of the options you earn a profit that is a multiple of the initial premium paid on the other hand if an investor believes a stock s price is about to fall they might buy put options a drop in the stock price below the strike price can lead to significant gains relative to the initial premium let s put this idea of leverage into action suppose abc stock trades at 100 per share you think that the price is about to jump in the next month you can do two things now let s fast forward one month and assume the stock price has risen to 120 per share congratulations your analysis was correct if you took the first choice above you would profit 2 000 less fees and taxes 120 100 100 shares in the second scenario the option you bought at the money is now in the money the likely price for the one call you bought would now have risen to 20 per contract 20 x 100 2 000 less the premium paid of 200 for a total gain of 1 800 but say instead you had decided to spend the 10 000 on the same option position and all the variables remained the same the initial 10 000 would have got you 10 000 200 50 option contracts when the price of the underlying rises to 120 per share the options would have likely risen to 20 x 100 2000 per contract you bought 50 contracts and therefore the total price of the position would be 2 000 x 50 100 000 less the cost of the options 200 x 50 10 000 total profit without factoring in fees and taxes 100 000 10 000 90 000 this shows you the potential for profit using the leverage that options trading allows however options are a wasting financial instrument and are therefore subject to increased risk of loss one strategy options traders use is called a protective put this is a popular strategy because it generates income and reduces some risk of being long on the stock alone to execute the plan you buy the underlying asset as you usually would and simultaneously write or sell a call option on those same shares options contracts risks and rewardsoptions trading involves strategies ranging from basic hedging or protective measures to complex speculative ventures while the potential for profit with options can be substantial the risks are significant calls and puts are potent tools to improve or protect a portfolio s performance against losses however they require an excellent understanding of market dynamics and the factors influencing option pricing such as time decay and volatility before participating in options trading you should understand whether the market conditions and underlying securities are favorable in addition consider the time frame involved you should try to match the option s expiration with the expected timing of the asset s price moves finally you need a clear plan for when to sell or exercise the option based on the asset s performance if an option reaches expiration with a strike price higher than the asset s market price it expires worthless or out of the money call options risks and rewardstrading call options can involve high risks there is a potential loss of the entire premium paid if the stock doesn t rise above the strike price by expiration the call option will expire worthless resulting in a total loss of the premium there s also the risk of time decay options are time sensitive instruments the value of call options erodes as the expiration date approaches which can result in losses if the stock s price doesn t rise above the strike price by expiration moreover call options are sensitive to volatility the price of call options can fluctuate widely because of price changes for the underlying stock high volatility can increase premium costs that are not linked to favorable moves in the stock price despite these risks call options have several advantages buying call options gives you more control over a relatively larger amount of stock than just purchasing the stock outright for the same amount this leverage means that returns can be amplified in addition the maximum loss for buying call options is limited to the premium paid no matter how much the underlying stock decreases in price lastly calls can be used for various strategic purposes including speculative gains income via premium collection and as part of more complex options strategies put options risks and rewardsjust like call options put options can expire worthless leading to a total loss of the premium paid this can occur if the stock price remains above the strike price also put options suffer from time decay meaning that they lose value as the expiration date nears particularly if the stock price is not moving as expected in highly volatile markets the cost of puts can go up making them an expensive form of insurance nonetheless there are rewards for employing put options puts provide a way to profit from a decline in the stock price without needing to short the stock which can involve further risks and costs puts can also protect you from declines in other investments in a portfolio by offsetting potential losses in the value of the underlying stocks lastly like calls buying puts has a risk limited to the premium paid offering a predefined risk profile example of an options contractcompany abc s shares trade at 60 and a call writer is looking to sell calls at 65 with a one month expiration if the share price stays below 65 and the options expire the call writer keeps the shares and can collect another premium by writing calls again if however the share price appreciates to a price above 65 the buyer calls the shares from the seller purchasing them at 65 the call buyer can also sell the options if purchasing the shares is not the desired outcome | |
are there other derivatives like options | there are several financial derivatives like options including futures contracts forwards and swaps each of these derivatives has specific characteristics uses and risk profiles like options they are for hedging risks speculating on future movements of their underlying assets and improving portfolio diversification 3 | |
what are some options trading strategies | options trading strategies range from basic to highly complex involving single or multiple and simultaneous options positions including covered calls protective puts bull and bear spreads straddles strangles butterfly spreads and calendar spreads each options strategy comes with its own set of risks and rewards before employing them you should consider your market outlook risk tolerance and investment goals for more on these strategies see investopedia s 10 options strategies every investor should know | |
what is natural hedging | natural hedging is a risk management strategy to mitigate the potential negative effects of price or interest rate changes and other financial risks it involves structuring the portfolio so that gains in one asset can offset losses in another without using derivatives the bottom lineoptions contracts are derivatives that grant the holder the right but not the obligation to buy or sell an underlying asset at a preset price before a specific expiration date these contracts come primarily in two forms call options which provide the right to buy and put options which offer the right to sell the underlying asset by paying a premium you can leverage options to hedge against potential losses speculate on price moves or generate income their flexibility and risk management capabilities make them a valuable tool in financial markets but they also require a thorough understanding of their complex mechanics and inherent risks to be used effectively | |
what is the options industry council oic | options industry council oic refers to a cooperative that helps educate investors and financial advisers about the benefits and risks of exchange traded equity options understanding the options industry council oic the oic was established in 1992 by u s options exchanges and the options clearing corporation occ its mission is to increase awareness and educate investors about exchange traded equity options the oic is sponsored by a variety of corporations including nasdaq inc s international securities exchange ise an exchange traded option is a standardized derivative contract this product is guaranteed trades on an exchange and is settled through a clearinghouse investors trade these contracts by buying or selling a specified amount of a financial asset at a pre determined price which is known as the strike price on or before a pre determined date an option to buy is a call and an option to sell is a put understanding and trading these assets may be complicated in order to provide investors with educational tools and demystify options a group of u s exchanges teamed up with the occ to establish the options industry council the oic serves as an educational resource to promote exchange traded equity options it offers online classes in person seminars online webcasts and podcasts to investors and other traders it also distributes educational materials such as dvds and brochures in addition the organization maintains a website and help desk to promote and assist with options education included in the educational material presented on its website are options basics advanced concepts strategies trading tools calculators and market quotes 1the oic is sponsored by corporations including the oic says its educational tools are free and unbiased 3oic resourcesall the information provided by the oic is fully vetted it goes through the appropriate compliance channels to ensure its accuracy before being presented to investors and financial professionals the experienced instructors seek to address the challenges investors face when they trade options 4the oic s information serves three specialist areas | |
what are options on futures | an option on a futures contract gives the holder the right but not the obligation to buy or sell a specific futures contract at a strike price on or before the option s expiration date these work similarly to stock options but differ in that the underlying security is a futures contract most options on futures such as index options are cash settled they also tend to be european style options which means that these options cannot be exercised early | |
how options on futures work | an option on a futures contract is very similar to a stock option in that it gives the buyer the right but not obligation to buy or sell the underlying asset while creating a potential obligation for the seller of the option to buy or sell the underlying asset if the buyer so desires by exercising that option 1 that means the option on a futures contract or futures option is a derivative security of a derivative security but the pricing and contract specifications of these options does not necessarily add leverage on top of leverage an option on an s p 500 futures contract therefore can be though of as a second derivative of the s p 500 index since the futures are themselves derivatives of the index as such there are more variables to consider as both the option and the futures contract have expiration dates and their own supply and demand profiles time decay also known as theta works on options futures the same as options on other securities so traders must account for this dynamic for call options on futures the holder of the option would enter into the long side of the contract and would buy the underlying asset at the option s strike price for put options the holder of the option would enter into the short side of the contract and would sell the underlying asset at the option s strike price example of options on futuresas an example of how these option contracts work first consider an s p 500 futures contract the most popularly traded s p 500 contract is called the e mini s p 500 and it allows a buyer to control an amount of cash worth 50 times the value of the s p 500 index so if the value of the index were to be 3 000 this e mini contract would control the value of 150 000 in cash if the value of the index increased by one percent to 3030 then the controlled cash would be worth 151 500 the difference here would be a 1 500 increase since the margin requirements to trade this futures contract are 6 300 as of this writing this increase would amount to a 25 gain but rather than tie up 6 300 in cash buying an option on the index would be significantly less expensive for example when the index is priced at 3 000 suppose also that an option with the strike price of 3 010 might be quoted at 17 00 with two weeks before expiration a buyer of this option would not need to put up the 6 300 in margin maintenance but would only have to pay the option price this price is 50 times every dollar spent the same multiplier as the index that means the the price of the option is 850 plus commissions and fees about 85 less money tied up compared to the futures contract so although the option moves with the same degree of leverage 50 for every 1 of the index the leverage in the amount of cash used may be significantly greater were the index to rise to 3030 in a single day as mentioned in a previous example the price of the option could rise from 17 00 to 32 00 this would imply an increase of 750 in value less than the gain on the futures contract alone but compared to the 850 risked it would represent an 88 increase instead of a 25 increase for the same amount of movement on the underlying index in this way depending on which option strike you buy the money traded may or may not be leveraged to a greater extent than with the futures alone further considerations for options on futuresas mentioned there are many moving parts to consider when valuing an option on a futures contract one of them is the fair value of the futures contract compared to cash or the spot price of the underlying asset the difference is called the premium on the futures contract however options allow the owner to control a large amount of the underlying asset with a smaller amount of money thanks to superior margin rules known as span margin this provides additional leverage and profit potential but with the potential for profit comes the potential for loss up to the full amount of the options contract purchased the key difference between futures and stock options is the change in underlying value represented by changes in the stock option price a 1 change in a stock option is equivalent to 1 per share which is uniform for all stocks using the example of e mini s p 500 futures a 1 change in price is worth 50 for each contract bought this amount is not uniform for all futures and futures options markets it is highly dependent on the amount of the commodity index or bond defined by each futures contract and the specifications of that contract | |
what is the options price reporting authority opra | the options price reporting authority opra is a committee of representatives from participating securities exchanges responsible for providing last sale options quotations and information from the participating exchanges serving as a national market system plan opra oversees the process by which participants exchange consolidate and disseminate market data opra s two primary data feeds include trades last sale reports for completed securities transactions and quotes bids and offers for options 1understanding oprathe options price reporting authority opra divides its services into two main areas a basic service for all options except foreign currency derivatives and an fco service for foreign currency options information the organization includes the boston options exchange box cboe options exchange international securities exchange ise philadelphia stock exchange phlx miami international securities exchange nyse arca nyse american and nasdaq bx options 2the quotes taken from each exchange are then combined by opra s feeds to produce a national best bid offer nbbo quote less formally the options price reporting authority serves as an industry led consortium supporting the timely and accurate creation and release of market data particularly for more esoteric financial instruments such as listed options and related securities behind the scenes the work and data provided by the options price reporting authority go a long way in adding market liquidity and other elements driving market efficiency without the data and information provided by opra capital markets would be less developed leading to a higher cost of capital for savers and borrowers reading options quotesoptions have a language all of their own and when you begin to trade options the information may seem overwhelming when looking at an options quote it first may seem like rows of unintelligible numbers but options quotes known as options chains provide valuable information about the security today and where it might be going in the future not all public stocks have options but for those that do the information is presented in real time and in a consistent order as an example of an options chain with quotes provided by opra look at the example below from apple inc the left column shows the option ticker in this case these are all calls with various strike prices expiring in august 2019 then last trade time bid ask last price and change are displaced along with volume and the last price s implied volatility for that option | |
who is the oracle of omaha | the oracle of omaha is a nickname for warren buffett who is arguably one of the greatest investors of all time buffett is the chair and ceo of berkshire hathaway a company that he became the controlling shareholder of in the mid 1960s he is called the oracle of omaha because the investment community very closely follows his investment picks and comments on the market and he lives and works in omaha nebraska 1alison czinkota investopediaunderstanding the oracle of omahawarren buffett is one of the richest men in the world he built his fortune using a simple yet powerful investment strategy his investments are long term positions accomplished by the purchase of fundamentally sound companies that are trading well below their intrinsic value some of his most publicized investments include coca cola gillette and dairy queen as of april 2024 the oracle of omaha is estimated to have a net worth of over 133 billion 45in 2006 warren buffett pledged to give away over 99 of his fortune 6 since then he has donated over 49 billion to charitable causes 1the oracle of omaha s early yearswarren buffett was born in omaha nebraska in 1930 to howard and leila buffett the oracle of omaha s father was a stockbroker which gave him an early introduction to the stock market buffett purchased his first stock at age 11 he bought three shares of cities service preferred for 38 per share and sold them at 40 per share after he sold the stock it advanced to 200 on reflection buffett believes this taught him the virtue of patience 7buffett demonstrated business prowess from his early teens running a paper delivery business and completing his own tax returns the oracle of omaha started a pinball machine business while in high school and went on to sell the business for 1 300 he graduated from the university of nebraska with a business degree 8on may 1 2021 the vice chair of berkshire hathaway charlie munger unofficially announced that warren buffett would be succeeded as ceo by greg abel when the 91 year old buffett eventually steps down abel is ceo of berkshire hathaway energy and vice chair in charge of noninsurance operations 9the oracle of omaha s investment philosophywarren buffett is a value investor and a follower of the benjamin graham school of value investing columbia business school professors benjamin graham and david dodd developed their investing concepts which in 1949 were published in graham s book the intelligent investor 2as a value investor buffett looks to purchase companies that are below their intrinsic worth but have the potential to make money buffett attempts to do this by buying companies that are out of favor with the market he values a company by assessing its fundamentals such as return on equity and profitability 2for example buffett likes a company to have a low debt equity ratio he wants earnings growth generated from shareholders equity as opposed to debt the oracle of omaha s quote it s far better to buy a wonderful company at a fair price than a fair company at a wonderful price sums up his investment philosophy 10 | |
what is an oral contract | an oral contract is a type of business contract that is outlined and agreed to via spoken communication but not written down although it can be difficult to prove the terms of an oral contract in the event of a breach this type of contract is legally binding understanding oral contractsoral contracts are generally considered as valid as written contracts although this depends on the jurisdiction and often the type of contract in some jurisdictions some types of contracts must be written to be considered legally binding for example a contract involving the conveyance of real estate must be written to be legally binding in some cases an oral contract can be considered binding but only if it s evidenced by a written contract this means that once the oral contract has been agreed upon the parties must write down the contract terms other evidence that can be used to bolster the enforceability of an oral contract includes the testimony of witnesses to the creation of the contract | |
when one or both parties act on the contract this too can be construed as evidence that a contract existed furthermore letters memos bills receipts emails and faxes can all be used as evidence to support the enforceability of an oral contract | a famous example of the enforceability of an oral contract occurred in the 1990s when actress kim basinger backed out of her promise to star in jennifer lynch s film boxing helena a jury awarded the producers 8 million in damages basinger appealed the decision and later settled for a lower amount but not before having to file bankruptcy 1 | |
when oral contracts fall apart | oral contracts are best used for simple agreements for example an oral contract to trade a used lawn mower for a used clothes dryer need not require much detail the simpler the contract the lower the chances that the parties involved will need to go to court but more complex contracts such as those for employment typically should involve written contracts complex oral contracts are more likely to fall apart when held up to the scrutiny of a court usually because the parties can t reach an accord over the finer points of the agreement | |
is an oral contract enforceable | generally yes an oral contract is enforceable even though it may be difficult to prove the enforceability of oral contracts also comes down to the jurisdiction in which a contract may be contested and the type of agreement the contract relates to | |
what makes a valid oral contract | a valid oral contract consists of an offer usually a price or a promise for some action to be taken and an acceptance an agreement accepting the offer in exchange for payment or service there need not be more information involved in an oral contract than just the offer and the acceptance of that offer | |
what are the disadvantages of oral contracts | the primary disadvantages of oral contracts are that they are difficult to enforce may lead to confusion and error or the outcome may be inconsistent with what was agreed upon because oral contracts are made through spoken word they can be difficult to enforce in a court of law if one party backs out or does not complete their end of the deal in an acceptable fashion the disadvantage of all oral contracts is the increased level of risk in the contract the bottom linealthough oral contracts are legally binding they can be difficult to prove in front of a judge it is recommended that all contracts be written down and signed by all parties to remove any confusion that could possibly arise later | |
what is the orange book | the orange book is a list of drugs and pharmaceuticals that the u s food and drug administration fda has approved as both safe and effective although it is commonly called the orange book its formal name is approved drug products with therapeutic equivalence evaluations the orange book does not include drugs only approved as safe they must also have been proven to be effective drugs whose safety or efficacy approval has been withdrawn are excluded from the orange book however a drug that is currently subject to regulatory action may still appear in the orange book understanding the orange bookthe fda approves new drugs or existing drugs for new uses following a series of double blind randomized clinical trials early phases of this process involve tests to judge the safety of a compound to make sure it does not cause severe side effects or harm phase 3 trials are conducted on larger samples to prove both safety and efficacy against a placebo 2 if successful the drug will be added to the orange book and approved for use the orange book is available online for free this makes it easy for medical professionals to search for generic equivalents to brand name drugs drug patents and drug exclusivity consumers can also access the orange book online both patients and doctors can see approved uses for drugs and patent expiration dates for name brand drugs a doctor or patient can see if there is a generic equivalent to a brand name drug by doing an active ingredient search for prozac you would search the orange book for fluoxetine hydrochloride to be able to market and sell a generic drug the generic drugmaker must file an abbreviated new drug application anda with the food and drug administration fda the drugmaker must prove that the drug is bioequivalent to the brand name drug if an abbreviated new drug application anda is approved the generic drug will be listed in the orange book 3using the orange bookfor example a search for the prescription antidepressant drug prozac shows that the drug is available in different forms capsules tablets solutions delayed release pellets etc and it is also available in varying dosage strengths this search also reveals that five forms of the drug have been discontinued although in three instances it has been noted that the product was not discontinued or withdrawn for safety or efficacy reasons the capsules were first approved in 1987 and the drug is approved for acute treatment of treatment resistant depression in adults 4the orange book also shows that the drug s active ingredient is fluoxetine hydrochloride which may be generically available at a lower cost 5patent information | |
when a new drug is introduced to the public the food and drug administration fda awards the drugmaker a medical patent that protects the product from competitors for a given period of time orphan drug patents last for seven years while a new chemical entity exclusivity lasts for five years 6 | under the hatch waxman act in order for a generic drug manufacturer to win approval they must certify that they will not launch their generic product until after the expiration of the patent 7the orange book is available as a pdf in print and electronically the electronic version of the orange book is the most up to date because there are updates made daily including generic drug approvals and patent information other information may only be updated monthly such as new drug application approvals ad discontinued products 81patent terms are set by statute currently the term of a new patent is 20 years from the date on which the application for the patent was filed in the united states many other factors can affect the duration of a patent | |
what is an order | an order consists of instructions to a broker or brokerage firm to purchase or sell a security on an investor s behalf an order is the fundamental trading unit of a securities market orders are typically placed over the phone or online through a trading platform although orders may increasingly be placed through automated trading systems and algorithms when an order is placed it follows a process of order execution orders broadly fall into different categories this allows investors to place restrictions on their orders affecting the price and time at which the order can be executed these conditional order instructions can dictate factors such as a particular price level limit at which the order must be executed for how long the order can remain in force or whether an order is triggered or canceled based on another order understanding ordersinvestors utilize a broker to buy or sell an asset using an order type of their choosing when an investor has decided to buy or sell an asset they initiate an order the order provides the broker with instructions on how to proceed orders are used to buy and sell stocks currencies futures commodities options bonds and other assets generally exchanges trade securities through a bid ask process this means that to sell there must be a buyer willing to pay the selling price to buy there must be a seller willing to sell at the buyer s price unless a buyer and seller come together at the same price no transaction occurs the bid is the highest advertised price someone will pay for an asset and the ask is the lowest advertised price at which someone is willing to sell an asset the bid and ask are constantly changing as each bid and offer represents an order as orders are filled these levels will change for example if there is a bid at 25 25 and another at 25 26 when all the orders at 25 26 have been filled the next highest bid is 25 25 this bid ask process is important to keep in mind when placing an order because the type of order selected will impact the price at which the trade is filled when it will be filled or whether it will be filled at all order typeson most markets orders are accepted from both individual and institutional investors most individuals trade through broker dealers which require them to place one of many order types when making a trade markets facilitate different order types that provide for some investing discretion when planning a trade order types can greatly affect the results of a trade when trying to buy for example placing a buy limit at a lower price than what the asset is currently trading at may give the trader a better price if the asset drops in value compared to buying now but putting it too low may mean the price never reaches the limit order and the trader may miss out if the price moves higher a market order instructs the brokerage to complete the order at the best available price 1 market orders are generally always executed unless there is no trading liquidity a limit order is an order to buy or sell a stock at a specific price or better limit orders ensure that a buyer pays only a specific price to purchase a security limit orders can remain in effect until they are executed expire or are canceled 2a limit sell order instructs the broker to sell the asset at a price that is above the current price for long positions this order type is used to take profits when the price has moved higher after buying a stop order instructs the brokerage to sell if an asset reaches a specified price below the current price a stop order can be a market order meaning it takes any price when triggered or it can be a stop limit order wherein it can only execute within a certain price range limit after being triggered 3a buy stop order instructs the broker to buy an asset when it reaches a specified price above the current price 3a day order specifies the timeframe of the order rather than the type of order a day order must be executed during the same trading day that the order is placed a good til canceled gtc order also indicates the timeframe in which the trade must be executed this type of order remains in effect until it is filled or canceled if an order is not a day order or a good til canceled order the trader typically sets an expiry for the order | |
what is the order audit trail system oats | the order audit trail system oats is an automated computer system established by the financial industry regulatory authority finra it is used to record information relating to orders quotes and other related trade data from all equities traded on the national market system nms including over the counter otc stocks this system simplifies an order s progression from the initial receipt of the order to its eventual execution or cancellation for easy tracking or auditing purposes understanding the order audit trail system oats an audit trail is a step by step record by which accounting trade details or other financial data can be traced to its source audit trails are used to verify and track many types of transactions including accounting transactions and trades in brokerage accounts finra established oats to ensure that the time sensitive information relating to the order execution process is recorded accurately this allows finra to monitor the trading practices of member firms which are required to capture and report trade data to oats 1 traders and investors are not required to submit oats data this is the job of the broker or the member firm of finra part of this process is requiring that all member firms synchronize their business computer system and time stamping clocks to avoid errors or issues related to inaccurate times associated with orders if a firm has a hard time recording or submitting all the information that oats requires the firm can hire a third party to submit the data on their behalf this is a special arrangement as oats recording may not be handled by the clearing firm the firm uses the securities and exchange commission sec approved these rules on march 6 1998 1oats reporting proceduresregulations require firms to submit daily electronic oats reports to finra oats reports must be made the same day an order was received or on the day information becomes available to the firm 2 daily electronic oats reports can be made for single or multiple orders information collected on the oats report includes in total there are 21 requirements that must be recorded under rule 7440 3oats data must be preserved for at least three years during the first two years the data must be in an accessible place in case it needs to be reviewed 4cat vs oatsthe consolidated audit trail cat under sec rule 613 is now the required system for tracking trades from start to finish 5according to deloitte cat isn t simply oats on steroids it includes substantial additional requirements such as options data allocations and customer data these new data sets may require firms to rethink their target reporting architectures additionally unlike oats the cat has no exemptions to these reporting requirements 6example of an order audit trail in actionone of the purposes of oats and the cat system is to monitor for suspicious behavior because of the data that is recorded the people undertaking the suspicious activity are easier to find a significant case occurred on may 6 2010 when a day trader spoofed the s p 500 e mini market he used an automated program that started a domino effect of sell orders which led to a flash crash on that day in 2015 the man responsible a london resident was caught and arrested in 2016 he pleaded guilty to spoofing and wire fraud 78while a number of parties were involved in providing testimony and evidence and this case involved futures not stocks it shows the importance of order audit trails and financial oversight the regulators were able to see that navinder singh sarao the man responsible put out huge orders hundreds of times with no intention of being filled on them but rather for the sole purpose of manipulating the market in his preferred direction order audit trail systems whether oats cat or some other regulator requirement provide evidence and information for regulators in such cases | |
what is an order book | the term order book refers to an electronic list of buy and sell orders for a specific security or financial instrument organized by price level an order book lists the number of shares being bid on or offered at each price point or market depth it also identifies the market participants behind the buy and sell orders though some choose to remain anonymous these lists help traders and also improve market transparency because they provide valuable trading information understanding order booksorder books are used by almost every exchange to list the orders for different assets like stocks bonds and currencies even cryptocurrencies like bitcoin these orders can be both manual or electronic although they generally contain the same information the set up may be slightly different depending on the source buy and sell information may appear on the top and bottom or on the left and right side of the screen 1an order book is dynamic meaning it s constantly updated in real time throughout the day exchanges such as nasdaq refer to it as the continuous book orders that specify execution only at market open or market close are maintained separately these are known as the opening order book and closing order book respectively for instance the opening and continuous books are consolidated at the nasdaq market open to create a single opening price the same happens when the market closes when the closing book and continuous book are consolidated to generate a single closing price reading an order bookthere are typically three parts to an order book buy orders sell orders and order history the top of the book is where you ll find the highest bid and lowest ask prices these point to the predominant market and price that need to get an order executed the book is often accompanied by a candlestick chart which provides useful information about the current and past state of the market the order book helps traders make more informed trading decisions they can see which brokerages are buying or selling stock and determine whether market action is being driven by retail investors or by institutions the order book also shows order imbalances that may provide clues to a stock s direction in the very short term for instance a massive imbalance of buy orders versus sell orders may indicate a move higher in the stock due to buying pressure traders can also use the order book to help pinpoint a stock s potential support and resistance levels a cluster of large buy orders at a specific price may indicate a level of support while an abundance of sell orders at or near one price may suggest an area of resistance special considerationsalthough the order book is meant to provide transparency to market participants there are some details that aren t included in the list among these are dark pools these are batches of hidden orders maintained by large players who do not want their trading intentions known to others without dark pools exchanges would see significant price devaluation when information about a big transaction by a large institution is made public before the trade is executed it normally leads to a drop in the price of the security but if information about the transaction is reported after it takes place the impact on the market may be significantly lowered the presence of dark pools reduces the utility of the order book to some extent since there is no way of knowing whether the orders shown on the book are representative of true supply and demand for the stock the term order book can also be used to describe a log of orders a company receives from its customer base example of an order bookorder books continue to collate an increasing amount of information for traders for a fee nasdaq s totalview claims to provide more market information than any other book displaying more than 20 times the liquidity of its legacy level 2 market depth product while this extra information may not be very significant to the average investor it may be useful to day traders and experienced market professionals who rely on the order book to make trading decisions | |
what is an order driven market | an order driven market is a financial market where all buyers and sellers display the prices at which they wish to buy or sell a particular security as well as the amounts of the security desired to be bought or sold this kind of trading environment is the opposite of a quote driven market which only displays bids and asks of designated market makers and specialists for the specific security that is being traded understanding an order driven marketorder driven markets consist of a constant flow of buy and sell orders from market participants there are no designated liquidity providers and the two basic types of orders are market orders and limit orders by comparison in a quote driven market designated market makers provide bids and offers that other market participants may trade on 1the biggest advantage of participating in an order driven market is transparency since the entire order book is displayed for investors who wish to access this information most exchanges charge fees for such information on the other hand an order driven market may not have the same degree of liquidity as a quote driven market since the specialists and market makers in the latter have to transact business at their posted bid and ask prices 2stock exchanges like the new york stock exchange and the nasdaq are seen as hybrid markets a combination of both order driven and quote driven markets in order driven environments where traders can choose between market orders which require liquidity and limit orders which provide liquidity informed trading activities can actually provide a boost to liquidity 1a higher share of informed traders improves liquidity as proxied by the bid ask spread and market resiliency however informed traders have no effect on the price impact of orders compared to market orders limit orders have a smaller price impact by a factor of about four 3order driven trading systems rank buy and sell orders according to price matching the highest ranking orders if possible at the minimum order amount if there is a remaining volume of shares to be bought or sold in a given order trading systems will match the order with the next highest ranked sell or buy order the first rule in the order precedence hierarchy is price priority followed by secondary precedence rules which determine how to rank orders of the same price the first order to arrive at the best price usually has priority over other orders though sometimes trading systems trade displayed quantities before hidden quantities of the same price 4investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is an order imbalance | order imbalance is a situation resulting from an excess of buy or sell orders for a specific security on a trading exchange making it impossible to match the orders of buyers and sellers for securities that are overseen by a market maker or specialist shares may be brought in from a specified reserve to add liquidity temporarily clearing out excess orders from the inventory so that the trading in the security can resume at an orderly level extreme cases of order imbalance may cause suspension of trading until the imbalance is resolved understanding order imbalancesorder imbalances can often occur when major news hits a stock such as an earnings release change in guidance or merger and acquisition activity imbalances can move securities to the upside or downside but most imbalances get worked out within a few minutes or hours in one daily session smaller less liquid securities can have imbalances that last longer than a single trading session because there are fewer shares in the hands of fewer people investors can protect themselves against the volatile price changes that can arise from order imbalances by using limit orders when placing trades rather than market orders a market order is simply one to buy or sell at the best price available at the time while a limit order is one where the investor wants to buy or sell at a specific price special considerationsother incidents that can lead to order imbalances include leaks of information or rumors that have the potential to affect the shares of a public company for example there might be legislation gaining momentum that could affect the company s operations and business model companies that use newer technology and platforms that have outpaced existing laws may be particularly susceptible to this as regulators play catch up and in the process introduce rules that can cut into their profit margins as each trading day draws to a close order imbalances can arise as investors race to lock in shares near the closing price this can especially come into play if the stock price is seen at a discount on that particular trading day investors who want to avoid buying or selling amid such order imbalances might try to time their orders in advance of the wave of buyers and sellers that may come in if there is a notification of an order imbalance with too many buyer orders holders of the stock might seize the opportunity to sell some of their shares and take advantage of the increased demand the expectation is they could see a lucrative return on investment with potentially higher prices conversely buyers might attempt to take advantage of an overabundance of sell orders when prices have been temporarily discounted due to the imbalance investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is an order management system oms | an order management system oms is an electronic system developed to execute securities orders in an efficient and cost effective manner brokers and dealers use an oms when filling orders for various types of securities and can track the progress of each order throughout the system an oms in the financial markets may also be referred to as a trade order management system businesses ecommerce businesses and sellers in particular also use an oms to streamline and automate the sales and fulfillment process from the point of sale to delivery to the customer understanding an order management system oms an oms is a software system that facilitates and manages the execution of trade orders in the financial markets an order must be placed in a trading system to execute a buy or sell order for a security a trading order typically contains the following information an oms executes trades through a software system using the financial information exchange fix protocol fix is an electronic communications protocol used to share international real time exchange information related to the trillions of dollars of securities transactions and markets however communicating transactions can also be done through the use of a custom application programming interface api the fix protocol links hedge funds and investment firms to hundreds of counterparties around the world using the oms special considerationsamong institutional trading desks an oms can be used on both the buy side and the sell side to allow firms to manage the life cycle of their trades and automate and streamline investments across their portfolios for review the buy side is a segment of wall street made up of investing institutions such as mutual funds pension funds and insurance firms that tend to buy large portions of securities for money management purposes the buy side is the opposite of the sell side the sell side involves the creation and selling of securities and the firms that facilitate it this would include corporations selling stock to raise capital investment banks who facilitate that process advisors and broker dealers who sell securities together the buy side and the sell side make up both sides of wall street securities trading omsthere are many products and securities that can be traded or monitored with an oms some of the financial instruments traded by using an oms include typically only exchange members can connect directly to an exchange which means that a sell side oms usually has exchange connectivity whereas a buy side oms is concerned with connecting to sell side firms when an order is executed on the sell side the sell side oms must then update its state and send an execution report to the order s originating firm a trading oms will often route orders to the best exchange in terms of price and execution or will allow a trader to manually route which exchange to send the order to an oms should also allow firms to access information on orders entered into the system including details on all open orders and previously completed orders the oms supports portfolio management by translating intended asset allocation actions into marketable orders for the buy side benefits of a trading omsmany omss offer real time trading solutions which allow users to monitor market prices and execute orders in multiple exchanges across all markets instantaneously by real time price streaming some of the benefits that firms can achieve from an oms include managing orders and asset allocation of portfolios an effective oms is critical in helping with regulatory compliance including real time checks of trades both before and after entry omss help compliance officers with tracking the life cycle of trades to determine if there s any illicit activity or financial fraud as well as any regulatory breaches by an employee of the firm an oms can improve workflow and communication among portfolio managers traders and compliance officers omss are an important development in the financial services industry because of the real time monitoring of positions the ability to prevent regulatory violations the speed and accuracy of trade execution and the significant cost savings that result business omsin addition to trading oms there are several other contexts for order management businesses can use oms to keep track of customer orders from point of sale to delivery and to take care of returns and refunds this is especially useful for businesses that have a high volume of sales or rely on shipping via ecommerce for people who have online stores or conduct ecommerce on sites like amazon or ebay having an oms in place can aid greatly in reducing errors saving time and increasing profitability there are several turnkey oms platforms that easily integrate with these and other online marketplaces therefore choosing an oms will depend on the type size and scope of the business involved costlier systems will also have more features and abilities such as taking order payments in a variety of currencies routing suppliers and warehouses based on location or proximity tracking customer order status and forecasting inventory status to anticipate possible shortages of supply invoicing and returns exchanges | |
why do traders need an oms | an oms helps traders enter and execute orders from the simple to the complex more efficiently this lowers transaction costs helps gain best execution and reduces errors it also reports fills books trades and updates one s positions or portfolio some omss can also automate trading strategies or risk mitigating measures such as stop losses and trailing stops | |
why do businesses need an oms | businesses benefit from an oms by streamlining the order fulfillment process this can manage everything from point of sale to delivery ecommerce sellers can especially benefit from an oms that can automate logistics shipment returns and interface with platforms like amazon ebay or aliexpress | |
what does an order management system do | for businesses an order management system is a digital way of tracking an order from the order entry to its completion an order management system will record all of the information and processes that occur through an order s lifecycle this includes order entry pathways inventory management order completion and after order follow up services | |
what is an order paper | an order paper or order instrument is a negotiable instrument that is payable to a specified person or its assignee an instrument such as an order paper is negotiable only if it is payable to the order of a specified person meaning that it must designate an individual s name to be paid out it is the opposite of a bearer instrument which does not require the designation of an individual to be paid out understanding an order paperan order paper is one that says pay to the order of whereas a bearer instrument says pay to the bearer of when an instrument states pay to the order of it s naming a specific designee who can collect payment on that instrument bearer instruments on the other hand do not name a specific payee anyone who bears the instrument can collect payment on it an order instrument must identify a named payee on the payee line a bearer instrument on the other hand does not include the name of the payee on the instrument and will typically not have a payee line a common example of an order paper is a personal check when a person writes a personal check they name a specific payee on the payee line which is preceded by the phrase pay to the order of only the payee named on this line is entitled to receive payment in the monetary amount specified on the check other order instruments include registered bonds bills of exchange a kind of check without interest and promissory notes a written promise to pay by contrast a 20 bill would be an example of a bearer instrument a 20 bill has no payee line and names no payee anyone who possesses bears the 20 bill can use it to obtain 20 worth of goods or services | |
what makes an order paper | to be considered an order instrument a negotiable instrument must have certain characteristics it must an order instrument must include the phrase pay to the order of named person or entity or to named person or entity or order if the words or order are included on the order instrument the named payee is permitted to designate another party to receive the payment therein ordered endorsing order papers | |
when an order paper is endorsed it becomes a bearer instrument for example when you receive a payment by check and endorse that check your check which was an order paper prior to endorsement becomes a bearer instrument once endorsed anyone who bears or possesses your check can cash it even if they re not the person named on the payee line it s for this reason that consumers are advised to avoid endorsing checks until they are depositing them | however a payee can avoid turning an order paper into a bearer instrument after endorsing it the payee can use a special endorsement which involves signing the instrument over to another payee to do this with a check for example the payee can write the words pay to the order of named person or entity in the endorsement space on the back of the check and then sign it payees can also use a restrictive endorsement to ensure that an endorsed instrument is deposited into a specific account for example | |
what is the order protection rule | the order protection rule is one of the four main provisions of the regulation national market system nms the rule is meant to ensure that investors receive an execution price that is equivalent to what is being quoted on any other exchange where the security is traded the rule eliminates the possibility of orders being traded through which means executed at a suboptimal price 1 the order protection rule requires that each exchange establishes and enforces policies to ensure consistent price quotation for all nms stocks which include those on the major stock exchanges as well as many over the counter otc stocks the order protection rule rule is also known as rule 611 or the trade through rule 2 | |
how the order protection rule works | the order protection rule along with regulation nms as a whole was instituted to make financial markets more liquid and transparent via better access to data in general and improved quote displays and fairness in prices in particular before the regulation was passed in 2005 by the securities and exchange commission sec existing trade through rules did not protect investors at all times this was especially true on limit trades where investors would sometimes get inferior prices to those being quoted on a different exchange the order protection rule aims to protect quotations for a given security across the board so all market participants can receive the best possible execution price for orders that can be executed immediately it requires trading centers to establish maintain and enforce written policies and procedures that are reasonably designed to prevent the execution of trades at prices that are inferior to protected quotations displayed by other trading centers the rule also established the national best bid and offer nbbo requirement that mandates brokers to route orders to venues that offer the most advantageous displayed price 4 the three other provisions of regulation nms are the access rule the sub penny rule and the market data rules criticism of the order protection rulecritiques of the order protection rule s effectiveness have arisen in the years following its enactment those criticisms include the belief that by mandating stocks trade on exchanges that show the best quoted prices the rule contributes to excess fragmentation among trading venues this was implied to have increased the complexity of the market and the connectivity costs to participants in the market making transactions more expensive overall for example trade through restrictions can force market participants to route orders to lit venues they would otherwise not do business with another criticism of the rule is that it may have indirectly led to an increase in dark trading a practice where stock is bought and sold in such a way that it does not materially affect the market this has been attributed to limits imposed on competition among lit venues with choices being made based on their speed and fees instead of stability and liquidity critics have also cited the order protection rule for potentially harming institutional investors who need to make large volume trades but are forced to access small sized quotations this has the effect of tipping off short term proprietary traders to the trading intentions of institutional investors | |
what is an orderly market | an orderly market is any market in which supply and demand are reasonably equal an orderly market is said to be in a state of equilibrium this term can also refer to a site of exchange for goods services or financial securities that are traded in a fair reliable secure accurate and efficient way orderly markets contribute to economic growth understanding an orderly marketorderly markets usually have stable and competitive prices reflecting the true value of the good or service for securities markets a stock exchange s market surveillance team of specialists is the entity in charge of ensuring an orderly market specialists do this by jumping in with their own capital when there are not sufficient buyers or sellers this helps reduce market volatility in a disorderly market there may be market manipulation insider trading and other violations the rules of the exchange prohibit specialists from trading ahead of investors who have placed orders to buy or sell a security at the same price if a market is disorderly investors may lack the confidence to participate the federal reserve also attempts to promote orderly market functioning by ensuring market liquidity examples of an orderly marketif a particular catalyst threatens an orderly market several players can be responsible for confronting this threat and maintaining an orderly market for example on june 23 2016 when the u k voted to leave the european union eu the chief operating officer of the new york stock exchange nyse stacey cunningham pulled an all nighter calming wall street money managers and traders 1the brexit vote referring to the referendum on the u k s decision to exit the eu could have had deleterious effects on the u s equities market but cunningham assured agents and by extension stockholders that nyse s trading model would stabilize and protect the capital of nyse listed companies by design nyse s designated market makers dmms closely monitor the markets and use their own capital to minimize upset and create price efficiency this is especially useful in a volatile market the morning after cunningham s intervention dmms addressed global market uncertainty brought on by the eu political upset by adjusting market open prices to better reflect the actual supply and demand for stocks in their assessment of this market event and their approach to dampening price fluctuation the nyse has claimed they are superior to nasdaq when it comes to maintaining an orderly market in times of global economic uncertainty and stress the emergence of fintech has opened up new conversations regarding the maintenance of orderly markets in 2017 nasdaq hosted the eu parliament the european commission the european securities and markets authority esma and several representatives of national supervisory authorities exchanges and market participants for a discussion on fintech and its role in sustaining fair and orderly markets a takeaway from the discussion was the agreed upon need for additional collaboration and openness between capital market constituents and the fintech industry | |
what are ordinary and necessary expenses o ne | ordinary and necessary expenses are expenses incurred by individuals as the cost of owning a business or carrying on a trade ordinary and necessary expenses are categorized as such for income tax purposes and these expenses are generally considered tax deductible in the year they are incurred 1 these expenses are outlined in section 162 a of the internal revenue code and must pass basic tests of relevance to business as well as necessity 2 however the irs does not publish a compendium of what expenses can be considered ordinary and necessary to the pursuit of running a business or carrying on a trade so it is the responsibility of the taxpayer to make this determination understanding ordinary and necessary expenses o ne this section of the tax code is the source of a large number of deductions by individuals especially in years of transition between jobs or careers typical expenses that can be included in the ordinary and necessary group include a uniform for work or business related software purchased for a home computer 3 startup costs associated with setting up a new business may also be tax deductible but typically must be spread out over several years these costs do not qualify as ordinary and necessary for irs purposes but are instead usually deductible as capital expenses 3 the irs defines an ordinary expense as anything that is common and accepted to a specific trade or business the irs defines a necessary expense as anything that is helpful and appropriate but not indispensable 1 key examples of ordinary and necessary business expenses include in general ordinary expenses refers to those that are commonly and typically used by people in your trade or industry necessary expenses refers to those expenses that are helpful and appropriate necessary expenses must also be ordinary expenses in order to be tax deductible 1 business use of your homebusiness owners may be able to deduct expenses related to the portions of their homes that are allocated toward business use these expenses may include utilities mortgage interest and repairs but for business owners homes to qualify as deductions they must prove their dwelling is their principal place of business even if an individual conducts ancillary business at locations outside of the home furthermore deductions for a home office are based on the percentage of a home that a business owner dedicates to business use consequently individuals who operate out of the home are responsible for making this calculation 4 | |
what is an ordinary annuity | an ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time ordinary annuities may be paid monthly quarterly semi annually or annually the opposite of an ordinary annuity is an annuity due in which payments are made at the beginning of each period a rent payment is an annuity due a mortgage payment is an ordinary annuity neither an ordinary annuity nor an annuity due refers to the financial product known as an annuity though they are related | |
how an ordinary annuity works | an example of an ordinary annuity is the interest payment on a bond these are generally made semiannually regular quarterly dividends from a stock that has maintained a stable payout level for years are another example the present value of an ordinary annuity is largely dependent on the prevailing interest rate because of the time value of money rising interest rates reduce the present value of an ordinary annuity while declining interest rates increase its present value this is because the value of an annuity is based on the return your money could earn elsewhere if you can get a higher interest rate somewhere else the value of the annuity goes down present value of an ordinary annuity examplethe present value formula for an ordinary annuity takes into account three variables they are given these variables the present value of an ordinary annuity is for example if an ordinary annuity pays 50 000 per year for five years and the interest rate is 7 the present value would be an ordinary annuity will have a lower present value than an annuity due all else being equal present value of an annuity due examplean investor with an ordinary annuity receives the payment at the end of the agreed time period an alternative is an annuity due in which the investor receives the payment at the beginning of the period a common example is rent the renter typically pays the landlord in advance for the month ahead this difference in payment timing affects the value of the annuity the formula for an annuity due is as follows if the annuity in the above example was instead an annuity due its present value would be calculated as all else being equal an annuity due is worth more than an ordinary annuity because the money is received earlier | |
is an ordinary annuity better than an annuity due | generally an annuity due is better for the party that is paying and not as good for the recipient the recipient is paying up front for the period ahead with an ordinary annuity the payment is made at the end of the previous period money has a time value the sooner a person gets paid the more the money is worth | |
what is an annuity | the word annuity commonly refers to an insurance product purchased by an individual in return for a lump sum payment or a series of payments to the financial institution the individual receives a steady stream of regular payments the annuity is most often used as a source of retirement income | |
what are the most common types of ordinary annuities | the most common types of ordinary annuities are stock and bond dividends these are paid at the end of each period of the agreement rather than at the beginning of the period in the case of stock dividends this is because the dividends are based on the company s profits for the immediate preceding period the bottom lineordinary annuity is a business term that describes any regular payment that is made at the end of a relevant cycle rather than at its start if you have a dividend paying stock or a bond you have an ordinary annuity | |
what are ordinary dividends | ordinary dividends are a share of a company s profits passed on to the shareholders periodically one of the primary advantages of owning stocks also known as equities is the regular payment of dividend income dividends are considered ordinary by default although there are cases when a dividend may be classified as qualified because it meets specific criteria ordinary dividends are taxed as ordinary income while qualified dividends are taxed at the lower capital gains rate understanding ordinary dividendsdividends earnings fall into two general categories qualified or nonqualified ordinary dividends much of the distinction comes from the company paying the earnings and how the internal revenue service irs views the payments unless a dividend payment is classified as a qualified dividend payment it is taxed as ordinary income to classify as a qualified dividend instead of an ordinary one the earnings must come from an american company or a qualifying foreign company and it must not be listed as an unqualified dividend with the irs also it must meet a required holding period holding periods are ordinary dividends may include a range of other dividends or other earnings you may receive throughout the year these earnings include those paid on real estate investment trusts reit 2 the primary difference between ordinary dividends and qualified dividends is the tax rate the tax rate you pay on ordinary dividend earnings is at the same level as taxes for regular federal income or wages companies that pay these earnings to stockholders on record report all aggregate ordinary dividends in box 1a of form 1099 div 3 mutual fund companies pay and report these dividend payments in the same manner for tax filings you will list these earnings on internal revenue service irs form 1040 schedule b line 5 4tax changes on dividendsthe main differences between ordinary dividends and qualified dividends are the rates at which the gains are taxed through the years these tax rates have changed through several acts of congress in 2003 all american taxpayers received a reduction in their income tax rates the qualified dividend tax rate was also changed from the ordinary income tax rates to lower long term capital gains tax rates the legislation that made it possible was called the jobs and growth tax relief reconciliation act of 2003 jgtrra this bill also reduced the maximum long term capital gains tax rate from 20 to 15 and established a 5 long term capital gains tax rate for taxpayers in the 10 and 15 ordinary income tax brackets 5a couple of years later the tax increase prevention and reconciliation act of 2005 tipra prevented several tax provisions of the 2003 bill from sunsetting or ending until 2010 also for low to middle income taxpayers in the 10 and 15 ordinary income tax bracket it lowered the tax rate again on qualified dividends and long term capital gains from 5 to 0 6the tax relief unemployment insurance reauthorization and job creation act of 2010 extended these earlier provisions for two additional years signed jan 2 2013 7 the american taxpayer relief act of 2012 made qualified dividends a permanent part of the tax code but added a 20 rate on income in a newly created tax bracket in 2013 which became the highest tax bracket 89 all tax brackets may be adjusted for inflation every tax year by the irs 10in 2021 the maximum tax rate for qualified dividends and ordinary dividends is 20 and 37 respectively 1011the 2017 tax cuts and jobs act put through by president trump s administration had little impact on taxes on dividends and capital gains example of ordinary dividendsas a hypothetical example consider the fictitious joe investor he has 100 000 shares of company abc stock which pays a dividend of 0 20 per year in total joe investor receives 100 000 x 0 20 20 000 per year paid in dividends from company abc because company abc does not pay qualified dividends joe investor must pay the regular income tax rate on those dividends instead of the capital gains tax rate | |
what is ordinary income | ordinary income is any income earned by an organization or an individual taxable at marginal tax rates it can include wages salaries tips bonuses commissions rents royalties short term capital gains unqualified dividends and interest income 1individual income vs business incomeordinary income comes in two forms personal income and business income personal ordinary income can be defined as cash inflow subject to the standard marginal income tax rates and defined by the internal revenue service irs for businesses ordinary income is generated from regular day to day business operations excluding any income earned from the sale of long term capital assets such as land or equipment long term capital gains and qualified dividends are taxed differently and not considered to be ordinary income 23marginal tax ratesmarginal rates for tax years 2023 and 2024 that are applied to ordinary income for individuals and married couples are 45examplesordinary income for individuals typically consists of the salaries and wages earned from their employers before taxes a person who holds a customer service job at target and earns 3 000 per month will have a calculated annual ordinary income of 36 000 or 3000 x 12 months this 36 000 is taxed on their year end tax return as gross income if the individual also owned rental property and earned 1 000 a month in rent ordinary income would increase to 48 000 per year 36 000 plus 12 000 deductions can reduce the amount of ordinary income subject to tax 6a company s ordinary income is the pretax profit from selling its products or services retailer target made 109 1 billion in total revenue in its fiscal year fy ending jan 28 2023 7 however those sales cost money to generate the company claimed costs attributable to the production of goods sold cogs were 82 2 billion target also spent 20 6 billion on selling general and administrative expenses sg as factor in depreciation and amortization and ordinary income or operating income totals 3 9 billion the amount of income subject to taxation 8dividends and taxesmost stock dividends on long term investments are subject to a lower rate than ordinary income 2the jobs and growth tax relief reconciliation act of 2003 jgtrra reduced the tax on most dividend income and some capital gains to 15 this change prompted companies to increase or pay dividends instead of holding onto their cash 9in 2017 president donald trump signed the tax cuts and jobs act tcja into law which changed the tax rate on qualified dividends to 0 15 or 20 based on an individual s taxable income and filing status 10 unqualified dividends include those paid out by real estate investment trusts reits income paid on employee stock options esos and dividends paid by tax exempt companies and on savings accounts or money market accounts regular dividends paid out to shareholders of for profit companies usually qualify for taxation at the reduced capital gains rate but investors must adhere to minimum holding periods for common stock a share must be held for more than 60 days during the 121 day holding period that begins 60 days before the ex dividend date for preferred stock the holding period is longer beginning 90 days before the company s ex dividend date 2 | |
what is taxed as ordinary income | most of an individual s income will be taxed at the regular marginal tax rates 1 there are exceptions where income won t be taxed these exceptions include long term capital gains and qualified dividends both taxed at more favorable rates | |
is rent ordinary income | rental income is defined by the irs as any payment for the use or occupation of property and is generally taxed as ordinary income however landlords can deduct certain costs from this income to reduce the figure at which the income is taxed deductible expenses may include mortgage interest property tax repair costs advertising maintenance and cleaning condo fees and homeowners insurance 11 | |
do individuals have to report interest income | most interest is taxed as ordinary income and subject to ordinary income tax rates notable exceptions include interest earned from a series ee or series i bond issued after 1989 to pay qualified higher educational expenses interest on insurance dividends left on deposit with the u s department of veterans affairs and interest on some bonds used to finance government operations however even when it s not taxable interest must be reported 12the bottom lineordinary income is taxed at marginal rates individuals pay taxes on ordinary income such as salaries tips rent and interest businesses earn ordinary income from business operations while supplying goods and services | |
what is an ordinary loss | an ordinary loss is loss realized by a taxpayer when expenses exceed revenues in normal business operations ordinary losses are those losses incurred by a taxpayer which are not capital losses an ordinary loss is fully deductible to offset income thereby reducing the tax owed by a taxpayer understanding ordinary lossordinary losses may stem from many causes including casualty and theft when ordinary losses are more than a taxpayer s gross income during a tax year they become deductible capital and ordinary are two tax rates applicable to specific asset sales and transactions the tax rates are tied to a taxpayer s marginal tax rate net long term capital rates are significantly lower than ordinary rates hence the conventional wisdom that taxpayers prefer capital rates on gains and ordinary rates on losses in 2022 the rates graduated over seven tax brackets from 10 to 37 for ordinary rates and from 0 to 20 of net long term capital rates 12 also taxpayers in the highest tax bracket must pay a 3 8 net investment income tax niit 3ordinary loss vs capital lossan ordinary loss is a metaphoric wastebasket for any loss which is not classified as a capital loss the realization of a capital loss happens when you sell a capital asset such as a stock market investment or property you own for personal use for less than its original cost the recognition of an ordinary loss is when you sell property such as inventory supplies accounts receivables from doing business real estate used as rental property and intellectual property such as musical literary software coding or artistic compositions it is the loss realized by a business owner operating a business that fails to make a profit because expenses exceed revenues the loss recognized from property created or available due to a taxpayer s personal efforts in the course of conducting a trade or business is an ordinary loss as an example you spend 110 writing a musical score that you sell for 100 you have a 10 ordinary loss ordinary loss can stem from other causes as well casualty theft and related party sales realize ordinary loss so do sales of section 1231 property such as real or depreciable goods used in a trade or business which were held for over one year ordinary losses for taxpayerstaxpayers like their deductible loss to be ordinary ordinary loss on the whole offers greater tax savings than a long term capital loss an ordinary loss is mostly fully deductible in the year of the loss whereas capital loss is not an ordinary loss will offset ordinary income on a one to one basis a capital loss is strictly limited to offsetting a capital gain and up to 3 000 of ordinary income the remaining capital loss must be carried over to another year let s say that during the tax year you earned 100 000 and had 80 000 of expenses you bought stocks and bonds and six month later sold the stock for 2 000 more and bonds for 1 000 less than you paid then the stock market tanked when you sold the stock and bonds you bought more than a year ago so that you sold the stock for 14 000 less and the bonds for 3 000 more than you paid let s net your gains and losses to figure your overall gain or loss and whether it is ordinary or capital | |
how much ordinary loss can you claim on taxes | an ordinary loss is fully deductible from taxable income there are no limits on how much can be deducted can you carry over ordinary losses ordinary losses are fully deductible in the year losses were incurred and cannot be carried forward to subsequent years capital losses exceeding the maximum deductible amount can be carried forward into future years | |
what is the difference between an ordinary loss and a capital loss | a capital loss occurs when a capital asset is sold for less than what it cost for example if equipment that cost 10 000 is sold for 8 000 a 2 000 capital loss is incurred an ordinary loss occurs when business expenses exceed business income when non capital assets are sold or for certain non capital transactions | |
what are ordinary shares | ordinary shares also called common shares are stocks sold on a public exchange each share of stock generally gives its owner the right to a single vote at a company shareholders meeting unlike in the case of preferred shares the owner of ordinary shares is not guaranteed a dividend the vast majority of shares sold on all of the u s stock exchanges are ordinary shares understanding ordinary sharesan ordinary share represents a fraction of ownership in the corporation that issues it as an owner the shareholder gets a vote in the company s major decisions decided at its shareholder meetings the shareholder may or may not receive a dividend the company s board of directors decides whether a dividend will be awarded and how much it will be the dividend represents the stock owner s share of the profits of the corporation over the past quarter or year a corporation may also issue preferred shares these are a kind of hybrid of a stock and a bond their owners are guaranteed a set dividend payment the price of the shares may rise or fall but is not as volatile as the common stock price investors in preferred shares are motivated primarily by the steady income from dividends ordinary shareholders have the right to a corporation s residual profits in other words they are entitled to receive dividends if any are available after the company pays dividends on preferred shares this is effectively meaningless the company s directors may well decide to plow all of its spare cash back into the business in which case no residual profits will be available for dividends ordinary shareholders also are entitled to a share of the residual economic value of the company if the business collapses however they are last in line in bankruptcy court after bondholders and preferred shareholders as such ordinary shareholders are on the same footing as unsecured creditors ordinary shareholders take on greater financial risk than preferred shareholders of a corporation but they also may reap greater rewards if a company makes a large profit the creditors and preferred shareholders do not receive more than the fixed amounts to which they are entitled while ordinary shareholders may divide the windfall among themselves the same occurs when companies such as start ups are sold to larger corporations ordinary shareholders usually profit the most in addition to the right to residual profits shareholders are entitled to vote for the company s board members and to receive and approve the company s annual financial statements some preferred shareholders also receive voting rights in many jurisdictions ordinary shares have a stated par value or face value but this is a technicality and is often set at a few pennies per share market forces the value of the underlying business and investor sentiment determine the market price that investors pay for ordinary shares a famous example is berkshire hathaway inc brk a whose class a common shares have a par value of 5 but trade above 325 000 per share as of early september 2020 | |
what is organic growth | organic growth is the growth a company achieves by increasing output and enhancing sales internally this does not include profits or growth attributable to mergers and acquisitions but rather an increase in sales and expansion through the company s own resources organic growth stands in contrast to inorganic growth which is growth related to activities outside a business s own operations investopedia theresa chiechiunderstanding organic growthan organic growth strategy seeks to maximize growth from within there are many ways in which a company can increase sales internally in an organization these strategies typically take the form of optimization reallocation of resources and new product offerings optimization of a business focuses on continuing to improve a business s processes to reduce costs and set appropriate pricing strategies for products or services reallocation of resources involves allocating funds and other materials to the production of best performing products while new product offerings seek to grow a business by introducing new goods and services that will add to profits and overall growth organic growth allows for business owners to maintain control of their company whereas a merger or acquisition would dilute or strip away their control on the other hand organic growth takes longer as it is a slower process to acquire new customers and expand business with existing customers a combination of both organic and inorganic growth is ideal for a company as it diversifies the revenue base without relying solely on current operations to grow market share measuring organic growthcompanies will utilize revenue and earnings growth on a quarterly or yearly basis as the performance metrics by which to gauge organic growth the pursuit of organic sales growth often includes promotions new product lines or improved customer service this type of growth is important because investors want to see that a company in which they are invested in or plan to invest in is capable of earning more than it did the prior year a feat that often reflects in a higher stock price or increased dividend payouts in some industries particularly in retail organic growth is measured as comparable growth or comps in a 13 week period comparable store sales and sometimes same store sales give the revenue growth of existing stores over a selected period of time in other words comps do not factor in growth from new store openings or mergers and acquisitions m a examples of organic growthfirms such as walmart costco and other big box retailers report comps on a quarterly basis to give investors and analysts an idea of their organic growth walmart grew its comp sales by 8 2 in the 52 weeks ending jan 31 2024 a clear example of organic growth that walmart s ceo attributed to a strategic focus on comp sales and ecommerce 1investment analysis of organic growth vs inorganic growthif company a is growing at a rate of 5 and company b is growing at a rate of 25 most investors would opt to invest in company b the assumption is that company a is growing at a slower rate than company b and therefore has a lower rate of return there is however another scenario to consider what if company b grew revenues by 25 because it bought out its competitor for 12 billion in fact the reason company b purchased its competitor is because company b s sales were declining by 5 company b might be growing but there appears to be a lot of risk connected to its growth while company a is growing by 5 without an acquisition or the need to take on more debt perhaps company a is the better investment even though it grew at a much slower rate than company b some investors may be willing to take on the additional risk but others opt for the safer investment in this example company a the safer investment grew revenue by 5 through organic growth the growth required no merger or acquisition and occurred due to an increase in demand for the company s current products company b saw a decrease in revenue by 5 which is a decline in organic growth overall growth increased due to acquisitions by borrowing money company b s growth is completely reliant on acquisitions rather than on its business model which may not be favorable to investors | |
what is an example of organic growth | a typical example of organic growth is a company building new factories or introducing new products in order to expand its market this is in contrast to buying an existing competitor which would be considered inorganic growth | |
what are the advantages of organic growth | organic growth is considered a slower growth strategy although it tends to be more sustainable in the long run organic growth is a gradual strategy where a company seeks to expand marketing increase sales and determine consumer needs although this strategy is relatively slow it allows a company to build momentum with each successful iteration | |
what are the advantages of inorganic growth | inorganic growth is a corporate strategy where a company seeks to expand through mergers or acquisitions of other companies this is faster than organic growth strategies allowing the company to rapidly acquire new consumers or infrastructure the downside is that such acquisitions tend to be costly and are difficult to sustain as a long term strategy the bottom lineorganic growth refers to a set of strategies where a corporation expands its market by introducing new products or targeting additional consumers in contrast with inorganic growth strategies such as mergers this type of growth requires an intimate understanding of consumer desires and how to meet their needs for investors consistent organic growth can be a sign that a company has a strong understanding of its market and customers | |
what is an organic reserve replacement | organic reserve replacement is the supply of oil reserves which an oil company acquires through exploration and production rather than by purchasing a proven reserve recoverable reserves are oil and gas reserves which are economically and technically feasible to extract at the existing price of oil within current economic conditions operating methods and government regulations | |
how organic reserve replacement works | organic reserve replacement is a relevant metric to those needing to evaluate an oil or gas company these evaluations would generally include a review of the reserve replacement ratio the reserve replacement ratio expresses the amount of proved reserves added to a company s reserve base during the year as compared to the amount of oil and gas produced a company s reserve replacement ratio should be at least 100 for the company to be profitable and viable long term investors and industry analysts worry when they see an oil company with a less than 100 reserve replacement ratio lower reserves indicate the company is depleting its reserves and if that trend continues will eventually run out of supply exploration of organic reservessmall and intermediate sized oil and gas companies may use a company that specializes in exploration and production e p to find organic reserves in larger integrated corporations such as exxon and british petroleum an arm of the business may handle these duties the term finding and development f d also refers to the process and costs incurred when a company researches and develops or purchases property to establish commodity reserves in the oil and gas industry exploration finding and developing are know as the upstream functions usually exploration begins in an area with high potential to hold a resource generally due to the local geology and known nearby petroleum deposits a geophysical and geochemical analysis is done using techniques including induced polarization ip surveys drilling assaying seismologic sounding and the use of electrical currents after locating a promising area the company will drill a deep test hole known as an exploratory well to gather more detailed geological data on rock and fluid properties most current exploration today is offshore where a single exploratory well can cost 150 million and the success rate is around one in five it typically takes several years before an exploratory well comes into production organic reserve to determine financial healthduring the exploration or finding and developing stage some companies use the full cost accounting fc approach and capitalize all their operating expenses regardless of whether they found any commercially viable reserves or not this accounting method inflates the balance sheet by treating costs as assets and makes the company look more profitable than it is in comparison the successful efforts se accounting method is more conservative it only allows those expenses associated with successfully locating new oil and natural gas reserves to be capitalized oil quantity is usually measured in barrels and gas uses a cubic feet measurement calculation of a company s costs to find a new source comes from the entire exploration process funds spent to locate the new organic reserve replacement is totaled and then divided by the estimated additional quantity discovered investors looking at the financial strength of oil and gas companies should consider a company s organic replacement when evaluating its reserve replacement ratio the organic replacement portion is a significant part of that formula and can be relevant to those wanting to assess the company s health from an economic standpoint as an essential metric of overall business health and viability the ratio indicates the company s upstream and proactive efforts the results offer a perception of the results gained from expenditures in drilling and exploration and may give insight into future profitability | |
what are organic sales | organic sales are revenues generated from within a company organic sales encompass those streams of revenues that are a direct result of the firm s existing operations as opposed to revenues that have been acquired through the purchase of another company or business unit in the past year the sale or disposal of business lines are also netted out of a total sales figure to derive organic sales measuring organic sales is important because it can show the amount of growth that s the direct result of a company s business plan or sales strategy understanding organic salesorganic sales are the product of the internal processes of a company and are generated solely within the firm organic sales provides management and investors with the level of revenue that was generated from the sale of a company s products and services if a company generates increases in organic sales it s typically referred to as organic growth revenue growth from organic sales is usually measured on a year to year basis but many companies also monitor organic growth from quarter to quarter companies might achieve organic growth of their sales through internal strategies such as acquired sales on the other hand result from a company purchasing another business through an acquisition an acquisition of another company would likely lead to sales and revenue growth for the acquiring company but would typically be referred to as inorganic growth achieving sales growth inorganically can be a benefit to companies that need access to a new market product or service however the integration process of two companies following an acquisition can be time consuming also acquisitions can negatively impact organic sales if the company is in a state of flux due to employee layoffs or consolidation of departments as a result it s important to bifurcate the financial reporting of organic sales and inorganic sales if there s been a recent acquisition for example let s say a car parts manufacturer reports 4 5 sales growth for the year 2 5 of which was contributed by an acquisition of a smaller company that occurred in the reporting year organic sales growth would therefore be 2 0 once an acquisition is fully integrated into a company s existing operations sales from the acquired unit or business would then be counted as organic sales the same principle applies to the sale or disposal of business units which is called a divestiture if a company sells a business segment the full duration of a comparison period must pass before organic sales are equal to total sales benefits of organic salesit s important for investors to be able to separate organic sales from sales that came from an external source organic sales figures will show how much revenue the company is generating from its core operations from period to period a breakdown of total sales into organic and acquired enables improved analysis of all aspects of a company s fundamentals including real world example of organic saleslarge companies in the consumer staples industry have matured to the point where growth through acquisition is an essential component of their business model pepsico inc pep is a global leader in the beverage and snack business and active in trading assets through acquisitions primarily pepsi had recently closed its acquisition of rockstar energy beverages in 2019 however the company s q1 2020 earnings report shows that pepsi reported organic revenue growth of 7 9 compared to q1 of 2019 1by reporting the organic growth without the distortion of revenue from acquisitions investors can determine whether the company s product lines saw sales growth which include pepsi beverages frito lay and quaker foods | |
what is the organisation of eastern caribbean states oecs | the organisation of eastern caribbean states oecs is an intergovernmental organization that promotes economic integration and trade cooperation among its member states in the eastern caribbean understanding the organisation of eastern caribbean states oecs the oecs was founded on june 18 1981 when the original seven members signed the treaty of basseterre in the capital city of st kitts and nevis for which the agreement is named in 2010 this treaty was revised to establish an economic union removing or reducing trade and customs barriers and allowing goods people and capital to move more freely 1the protocol members of the organisation of eastern caribbean states oecs are the associate members of the oecs are as an economic union the oecs is a single market and customs union where goods people and capital are free to move the organization also works to unify monetary policy and policies related to government taxes and revenue in addition to harmonizing their approach toward trade health education the environment agriculture tourism and energy 3eight members share a single currency the eastern caribbean dollar they are anguilla antigua and barbuda commonwealth of dominica grenada montserrat st kitts and nevis saint lucia and st vincent and the grenadines 2 the british virgin islands use the united states dollar while martinique and guadeloupe as overseas departments of france use the euro 45geographically these islands form a near continuous archipelago across the caribbean sea known as the lesser antilles 3benefits of oecs membershipcitizens of protocol members are free to travel and work across borders without restrictions they can do so with a passport though a driver s license national id card voter registration card and social security card are also accepted to live in another protocol member state a person is not required to demonstrate means of support they can live and work in another protocol member state indefinitely 6all protocol member states are also members of the larger grouping the caribbean community and common market caricom and its initiative the caribbean single market and economy csme policies of the oecs are coordinated to align with members participation in the csme 6 anguilla and the british virgin islands are also associate members of caricom 7in addition to the eastern caribbean central bank which governs monetary policy and the eastern caribbean dollar the oecs recognizes two other institutions the eastern caribbean supreme court and the eastern caribbean civil aviation authority in addition the eastern caribbean telecommunications authority is the regulatory body that oversees the telecommunications sector in the region 8 | |
what is the organisation for economic co operation and development oecd | the organisation for economic co operation and development oecd is a group of 37 member countries that discuss and develop economic and social policy 1 2 oecd members are typically democratic countries that support free market economies understanding the organisation for economic co operation and development oecd the oecd is variously referred to as a think tank or a monitoring group its stated goal is to shape policies that foster prosperity equality opportunity and well being for all 1 over the years it has dealt with a range of issues including raising the standard of living in member countries contributing to the expansion of world trade and promoting economic stability the oecd was established on dec 14 1960 by 18 european nations plus the united states and canada 3 it has expanded over time to include members from south america and the asia pacific region it includes most of the world s highly developed economies 2in 1948 in the aftermath of world war ii the organisation for european economic co operation oeec was established to administer the predominantly u s funded marshall plan for post war reconstruction on the continent the group emphasized the importance of working together for economic development with the goal of avoiding any more decades of european warfare 5 the oeec was instrumental in helping the european economic community eec which has since evolved into the european union eu to establish a european free trade area 6in 1961 the oecd articles from the december 1960 convention went into effect and the united states and canada joined the european members of the oeec which changed its name to oecd to reflect the broader membership 3 the organization is headquartered in the chateau de la muette in paris france 4the oecd publishes economic reports statistical databases analyses and forecasts on the outlook for economic growth worldwide reports are variously global regional or national in orientation 7 the group analyzes and reports on the impact of social policy issues such as gender discrimination on economic growth8 and makes policy recommendations designed to foster growth with sensitivity to environmental issues 9 the organization also seeks to eliminate bribery and other financial crime worldwide 10the oecd maintains a so called black list of nations that are considered uncooperative tax havens although there are not any nations currently on the list since by 2009 all nations on the original list had made commitments to implement the oecd standards of transparency 11 the oecd is leading an effort with the group of 20 g20 nations to encourage tax reform worldwide and eliminate tax avoidance by profitable corporations 12 the recommendations presented for the project included an estimate that such avoidance costs the world s economies between 100 billion and 240 billion in tax revenue annually 13 the group also provides consulting assistance and support to nations in central asia and eastern europe that implement market based economic reforms 14 | |
what does oapec mean | the organization of arab petroleum exporting countries oapec is an inter governmental organization based in kuwait oapec fosters cooperation among its 11 member arab oil exporting nations 1understanding oapecoapec was established in 1968 by kuwait libya and saudi arabia its other members include algeria bahrain egypt iraq qatar syria tunisia and the united arab emirates although they have several members in common oapec is a separate and distinct entity from opec the organization of the petroleum exporting countries the 13 nation cartel that plays a pivotal role in determining global petroleum prices oapec sponsors joint ventures for its member countries to promote the effective use of resources and the economic integration of arab countries 23the history of oapeckuwait libya and saudi arabia signed an agreement in beirut on january 9 1968 establishing oapec and agreeing that the organization would be located in the state of kuwait by 1982 the number of members had increased to 11 in 1986 tunisia submitted a request for withdrawal and it was accepted by the ministerial council 1 the structure of oapecoapec s structure is composed of the ministerial council general secretariat and a judicial tribunal the ministerial council is managed by a council of ministers which is responsible for general policy activities and governance the council grants membership to applying countries and approves invitations to meetings that are extended to petroleum exporting countries the council also adopts resolutions and advises on issues approves the draft annual budgets of the general secretariat and the judicial tribunal validates the end of year accounts and appoints the secretary general and assistant secretaries 4the executive bureau supervises the organization in conjunction with the ministerial council the executive bureau prepares the council s agenda amends the regulations applicable to the staff of the general secretariat reviews the organization s budget and comments on council issues that are related to the articles of agreement the executive bureau has one representative from each member country 5the general secretariat manages the organization s activities according to the objectives outlined in the stated in the original oapec agreement and the directives of the ministerial council the secretary general heads the secretariat and is the organization s official spokesman and legal representative 6the judicial tribunal was established by a special protocol signed on may 9 1978 in kuwait the protocol was added to the organization s agreement and became effective on april 20 1980 the first judges of the tribunal were elected on may 6 1981 the protocol mandates that there must be an uneven number of judges of arab citizenship a minimum of seven and a maximum of eleven 7the influence of oapecaccording to gulf news although momentum is not at the pace it was 30 years ago oapec has had a substantial positive influence on the arab oil and gas industry since its inception arab energy and oil consumption has increased 15 fold and 10 fold respectively and oil reserves have increased to 710 billion barrels in 2016 from less than half that number in 1980 in addition gas reserves grew from 15 to 53 trillion cubic meters and arab petrochemicals production has now exceeded 150 million tons a year 8 historically it is worth noting that reserve data from oapec is influenced by the data provided by member nations and the accuracy of that data varies | |
what is the organization of the petroleum exporting countries opec | the term organization of the petroleum exporting countries opec refers to a group of 13 of the world s major oil exporting nations opec was founded in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid 1 opec is a cartel that aims to manage the supply of oil in an effort to set the price of oil on the world market in order to avoid fluctuations that might affect the economies of both producing and purchasing countries 2countries that belong to opec include iran iraq kuwait saudi arabia and venezuela the five founders plus algeria angola congo equatorial guinea gabon libya nigeria and the united arab emirates 3understanding the organization of the petroleum exporting countries opec the organization of the petroleum exporting countries describes itself as a permanent intergovernmental organization the organization is designed to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets this ensures that there is a steady supply for consumers and regular income for petroleum producers 2it is headquartered in vienna austria where the opec secretariat the executive organ carries out opec s day to day business 4 opec was established in baghdad in september 1960 by founding members iran iraq kuwait saudi arabia and venezuela and now has 13 member countries 15the chief executive officer ceo of opec is its secretary general 6 his excellency mohammad sanusi barkindo of nigeria was appointed to the position for a three year term of office on june 2 2016 and was re elected to another three year term in july 2019 78some of the world s greatest oil producing countries such as russia china and the u s do not belong to opec this leaves them free to pursue their own objectives history of the opecas noted above opec was founded in baghdad in 1960 five countries took part in the baghdad conference between sept 10 and 14 that year iran iraq kuwait saudi arabia and venezuela the organization established its secretariat in geneva before finalizing its location in vienna in 1965 three years later opec adopted its declaratory statement of petroleum policy in member countries 1opec s membership expanded to 10 countries in 1969 and was an organization that flew under the radar until arab member countries cut production and banned exports to the united states and the netherlands the embargo was a response to the west s support of israel during the yom kippur war in october 1973 a year later oil prices shot up causing shortages in the u s the embargo was lifted in 1974 9 in 1975 opec had 13 member countries 1in 1976 opec established the opec fund for international development member countries work with developing nations and the international community to provide private and trade sector financing and grants to non member countries 10opec member countriesaccording to its statutes opec membership is open to any country that is a substantial exporter of oil and shares the ideals of the organization after the five founding members opec added 11 additional member countries as of 2019 they are in order of joining as follows ecuador withdrew from the organization on jan 1 2020 qatar terminated its membership on jan 1 2019 and indonesia suspended its membership on nov 30 2016 so as of 2020 the organization consists of 13 states 3opec missionaccording to the opec website the group s mission is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets in order to secure an efficient economic and regular supply of petroleum to consumers a steady income to producers and a fair return on capital for those investing in the petroleum industry 2the organization is committed to finding ways to ensure that oil prices are stabilized in the international market without any major fluctuations doing this helps keep the interests of member nations while ensuring they receive a regular stream of income from an uninterrupted supply of crude oil to other countries 11opec recognizes the founding nations as full members any country that wishes to join and whose application is accepted by the organization is also considered a full member these countries must have significant crude petroleum exports membership to opec is only granted after receiving a vote from at least three quarters of its full members associate memberships are also granted to countries under special conditions 12the percentage of crude oil reserves held by opec countries in 2021 13 | |
how the opec influences oil prices | collectively opec is the largest producer and exporter of crude oil and petroleum products in the world roughly 40 of the world s oil production and 60 of the world s petroleum market come from the group s member countries and they accounted for more than 80 of the world s proven oil reserves in 2021 14having said this it s no surprise that any moves the group makes have a big impact on global energy prices oil prices can drop significantly if they decide to supply more oil to the market on the other hand if opec member countries decide to cut production and curb supplies prices are highly likely to shoot up advantages and disadvantages of the opecthere are several advantages of having a cartel like opec operating in the crude oil industry first it promotes cooperation among member nations helping them alleviate some degree of political hostilities and because the organization s main goal is to stabilize oil production and prices it is able to exert some influence over production from other nations opec s influence on the market has been widely criticized because its member countries hold the vast majority of crude oil reserves the organization has considerable power in these markets 13 as a cartel opec members have a strong incentive to keep oil prices as high as possible while maintaining their shares of the global market promotes cooperation among member nationsexerts influence over production from other nations | |
has considerable power | incentivized to keep oil prices high to maintain global market shareopec challenges and responsesoil prices and opec s role in the international petroleum market are subject to a number of different factors the advent of new technology especially fracking in the united states has had a major effect on worldwide oil prices and has lessened opec s influence on the markets as a result worldwide oil production increased and prices dropped significantly leaving opec in a delicate position opec decided to maintain high production levels and consequently low prices as of mid 2016 in an attempt to push higher cost producers out of the market and regain market share however starting in january 2019 opec reduced output by 1 2 million barrels a day for six months due to a concern that an economic slowdown would create a supply glut extending the agreement for an additional nine months in july 2019 15demand for oil dropped during the global crisis which began in 2020 producers had an overabundance in supply with no place to store it as the world experienced lockdowns cutting down demand this along with a price war between russia and saudi arabia led to a drop in oil prices as a result the organization decided to cut production by 9 7 million barrels per day between may and july 2020 16 oil prices continued to experience volatility leading opec to adjust production levels to 7 2 million barrels per day as of january 2021 17opec faces considerable challenges from innovation and new green technology high oil prices are causing some oil importing countries to look to unconventional and cleaner sources of energy these alternatives such as shale production as an alternative energy source and hybrid and electric cars that reduce the dependence on petroleum products continue to put pressure on the organization opec opec is a group that comprises the 13 member countries of opec and other oil producing countries these countries include azerbaijan bahrain brunei equatorial guinea kazakhstan russia mexico malaysia south sudan sudan and oman 18this group was established in 2016 a time when the economy was seeing significantly low oil prices the purpose was to help bring stability to the global market together opec nations boast 90 of the world s oil reserves 1918 | |
what are the main goals of opec | opec s main goal is to maintain oil prices at a profitable level for its members while keeping the market as free as possible from restrictions the organization ensures its members receive a steady stream of income from an uninterrupted supply of oil 2 | |
what countries are in opec | opec is made up of 13 member nations the five founding members are iran iraq kuwait saudi arabia and venezuela while the other full members include algeria angola congo equatorial guinea gabon libya nigeria and the united arab emirates 3 | |
is the u s part of opec | the united states is not part of opec this means that the country has control over its own production and supply without any interference from the organization who left opec countries that left opec include ecuador which withdrew from the organization in 2020 qatar which terminated its membership in 2019 and indonesia which suspended its membership in 2016 3 | |
what is opec | in december 2016 opec formed an alliance with other oil exporting nations that were not a part of the organization creating an entity that is commonly referred to as opec or opec plus prominent members of opec include russia mexico and kazakhstan working in coordination with additional oil exporting countries makes the organization even more influential when it comes to international energy prices and the global economy 20the bottom lineopec is an organization that controls petroleum production supplies and prices in the global market the group was established in 1960 and is made up of 13 different oil producing companies 1 it holds considerable influence in the marketplace and is often criticized for inflating oil prices to the benefit of its members but it isn t immune to challenges notably geopolitical tensions oversupply and drops in demand and the adoption of new green technologies | |
what is organizational behavior ob | organizational behavior is the academic study of how people interact within groups the principles of ob are applied primarily in attempts to help businesses operate more effectively theresa chiechi investopediaunderstanding organizational behavior ob the study of organizational behavior includes areas of research dedicated to improving job performance increasing job satisfaction promoting innovation and encouraging leadership each has its own recommended actions such as reorganizing groups modifying compensation structures or changing methods of performance evaluation the study of organizational behavior has its roots in the late 1920s when the western electric company launched a now famous series of studies of the behavior of workers at its hawthorne works plant in cicero il 1researchers there set out to determine whether workers could be made to be more productive if their environment was upgraded with better lighting and other design improvements to their surprise the researchers found that the environment was less important than social factors it was more important for example that people got along with their co workers and felt their bosses appreciated them those initial findings inspired a series of wide ranging studies between 1924 and 1933 1 they included the effects on productivity of work breaks isolation and lighting among many other factors the hawthorne effect which describes the way test subjects behavior may change when they know they are being observed is the best known study of organizational behavior researchers are taught to consider whether or not and to what degree the hawthorne effect may skew their findings on human behavior organizational behavior was not fully recognized by the american psychological association as a field of academic study until the 1970s 2 however the hawthorne research is credited for validating organizational behavior as a legitimate field of study and it s the foundation of the human resources hr profession as we now know it the leaders of the hawthorne study had a couple of radical notions they thought they could use the techniques of scientific observation to increase an employee s amount and quality of work and they did not look at workers as interchangeable resources workers they thought were unique in terms of their psychology and potential fit within a company over the following years the concept of organizational behavior widened beginning with world war ii researchers began focusing on logistics and management science studies by the carnegie school in the 1950s and 1960s solidified these rationalist approaches to decision making 3today those and other studies have evolved into modern theories of business structure and decision making the new frontiers of organizational behavior are the cultural components of organizations such as how race class and gender roles affect group building and productivity these studies take into account how identity and background inform decision making organizational behavior is no different than other forms of psychological behavior analysis it simply emphasizes how individuals operate and work together within a business setting learning organizational behavioracademic programs focusing on organizational behavior are found in business schools as well as at schools of social work and psychology these programs draw from the fields of anthropology ethnography and leadership studies and use quantitative qualitative and computer models as methods to explore and test ideas depending on the program one can study specific topics within organizational behavior or broader fields within it specific topics covered include cognition decision making learning motivation negotiation impressions group process stereotyping and power and influence the broader study areas include social systems the dynamics of change markets relationships between organizations and their environments how social movements influence markets and the power of social networks organizational behavior study methodsorganizational behavior can be studied using a variety of methods to collect data surveys are a popular research method in organizational behavior research they involve asking individuals to answer a set of questions often using a likert scale the goal of the survey is to gather quantitative data on attitudes behaviors and perceptions related to a particular topic in a similar manner companies may perform interviews to gather data about individuals experiences attitudes and perceptions companies can also gather data without directly interacting with study subjects observations involve watching individuals in real life settings to gather data on their behaviors interactions and decision making processes meanwhile a company can perform case studies to perform an in depth examination of a particular organization group or individual in situations where there isn t really precedent companies can study organizational behavior by running experiments by manipulating one or more variables at a time to observe the effect on a particular outcome a company can get the best sense of how organizational behavior tweaks change employee disposition organizational behavior data can be quantitative or qualitative organizational behavior and hrorganizational behavior is an especially important aspect to human resources by better understanding how and why individuals perform in a certain way organizations can better recruit retain and deploy workers to achieve its mission the specific aspects of organizational behavior relating to hr are listed below organizational behavior research is used to identify the skills abilities and traits that are essential for a job this information is used to develop job descriptions selection criteria and assessment tools to help hr managers identify the best candidates for a position this is especially true for roles that may have technical aspects but rely heavier on soft skills organizational behavior can be used to design and deliver training and development programs that enhance employees skills these programs can focus on topics such as communication leadership teamwork and diversity and inclusion in addition organizational behavior can be used to be better understand how each individual may uniquely approach a training allowing for more customized approaches based on different styles organizational behavior is used to develop performance management systems that align employee goals with organizational objectives these systems often include performance metrics feedback mechanisms and performance appraisal processes by leveraging organizational behavior a company can better understand how its personnel will work towards common goals and what can be achieved organizational behavior is used to develop strategies to improve employee engagement and motivation these strategies can include recognition and rewards programs employee involvement initiatives and career development opportunities due to the financial incentives of earning a paycheck organizational behavior strives to go beyond incentivizing individuals with a paycheck and understanding ways to enhance the workplace with other interests organizational behavior research is used to develop and maintain a positive organizational culture this includes devising strategies that supports employee well being trust and a shared vision for the future as each individual may act in their own unique manner it is up to organizational behavior to blend personalities integrate backgrounds and bring people together for a common cause organizational behavior vs organizational theoryorganizational behavior and organizational theory are related fields of study but they have some important differences while organizational behavior is concerned with understanding and improving the behavior of individuals organizational theory is concerned with developing and testing theories about how organizations function and how they can be structured effectively organizational theory draws on concepts and theories from economics sociology political science and other social sciences it aims to understand how organizations are structured and how they operate in some aspects organizational behavior can be considered a subset of organizational theory both fields are important for understanding and improving organizational performance and they often overlap in their research topics and methods however organizational theory is often much broader and does not focus on individuals examples of organizational behaviorfindings from organizational behavior research are used by executives and human relations professionals to better understand a business s culture how that culture helps or hinders productivity and employee retention and how to evaluate candidates skills and personality during the hiring process organizational behavior theories inform the real world evaluation and management of groups of people there are several components | |
why is organizational behavior important | organizational behavior describes how people interact with one another inside of an organization such as a business these interactions subsequently influence how the organization itself behaves and how well it performs for businesses organizational behavior is used to streamline efficiency improve productivity and spark innovation to give firms a competitive edge | |
what are the 4 elements of organizational behavior | the four elements of organizational behavior are people structure technology and the external environment by understanding how these elements interact with one another improvements can be made while some factors are more easily controlled by the organization such as its structure or people hired it still must be able to respond to external factors and changes in the economic environment | |
what are the 3 levels of organizational behavior | the first is the individual level which involves organizational psychology and understanding human behavior and incentives the second level is groups which involves social psychology and sociological insights into human interaction and group dynamics the top level is the organizational level where organization theory and sociology come into play to undertake systems level analyses and the study of how firms engage with one another in the marketplace | |
what are some common problems that organizational behavior tries to solve | organizational behavior can be used by managers and consultants to improve the performance of an organization and to address certain key issues that commonly arise these may include a lack of direction or strategic vision for a company difficulty getting employees on board with that vision pacifying workplace conflict or creating a more amenable work environment issues with training employees poor communication or feedback and so on the bottom lineob is the study of human behavior in an organizational setting this includes how individuals interact with each other in addition to how individuals interact with the organization itself ob is a critical part of human resources though it is embedded across a company | |
what is an organizational chart | an organizational chart is a diagram that visually conveys a company s internal structure by detailing the roles responsibilities and relationships between individuals within an entity it is one way to visualize a bureaucracy organizational charts are alternatively referred to as org charts or organization charts understanding organizational chartsorganizational charts either broadly depict an enterprise organization wide or drill down to a specific department or unit organizational charts graphically display an employee s hierarchical status relative to other individuals within the company for example an assistant director will invariably fall directly below a director on the chart indicating that the former reports to the latter organizational charts use simple symbols such as lines squares and circles to connect different job titles that relate to each other regardless of an organization s structure org charts are extraordinarily useful when an entity is contemplating restructuring its workforce or changing its management complex most importantly org charts let employees transparently see how their roles fit into the overall company structure hierarchical organizational chartthis most common model situates the highest ranking individuals atop the chart and positions lower ranking individuals below them organizational hierarchies generally depend on the industry geographical location and company size for example a public company typically shows shareholders in the highest box followed by the following in descending vertical order other job titles that may follow c suite execs include many formal organizations are organized hierarchically and can be shown in chart form these include corporations but also nonprofits governments schools universities and the military as the chart below illustrates there is no single correct way to fashion an organization chart as long as it identifies the officials employees departments and functions of the firm and how they interact with each other other types of organization charts | |
what should an organizational chart show | an organizational chart should visually show what the hierarchical status of a particular employee relative to other individuals within the company for example an assistant director will invariably fall directly below a director on the chart indicating that the former reports to the latter | |
why is an organizational chart important | org charts depict an organization s hierarchy which can clearly identify seniority and lines of authority that ought to be followed it can also show which roles are responsible for what tasks divisions departments or regions this can remove ambiguity and improve communication | |
what are the most commonly used organizational charts | the two types of organizational chart formats that are most often used are hierarchical and flat hierarchical is the most common and it shows the ranking of individuals based on their role in the company in a descending vertical order a flat format also known as a horizontal organizational chart places all individuals on only a few levels or just one level and is indicative of an autonomous decision making ability where this power is equally shared | |
what is organizational economics | organizational economics is a branch of applied economics and new institutional economics that studies the transactions occurring within individual firms as opposed to the transactions that occur within the greater market organizational economists study how economic incentives institutional characteristics and transaction costs influence the choices made within firms and the structure and market performance of firms organizational economics can include theories from several different streams of economic thought these include agency theory transaction cost economics contract or property rights theory theories of the firm strategic management studies and theories of entrepreneurship theory and research in organizational economics often incorporate insights concepts and methods from disciplines other than economics too including psychology and sociology courses in organizational economics are usually taught at the graduate or doctoral level understanding organizational economicsorganizational economics is useful in developing a firm s human resource management policies determining how a firm should be organized analyzing the size scope and boundaries of the firm setting appropriate compensation pay and incentives assessing business risk and making analyzing and improving management decisions popular approaches among organizational economists include organizational economics and the deepwater horizonapplying organizational economics can reveal both the weaknesses of a current management approach and ways to effect change looking at the subfields that comprise this method offers a way to understand the motivations and decisions that lead to operational decisions within an organization for example organizational economics could be used to assess why the 2010 bp oil spill in the gulf of mexico was able to occur and how a similar disaster could be prevented in the future for instance drawing in the agency theory subfield an assessment can be made about the incentives that were in place prior to the 2010 bp oil spill what drove those choices leading up to the incident and whether the agents involved felt compelled to operate under those conditions furthermore there can be an examination of why the principals at bp may or may not have been aware of the issues and motivations at play with the agents on the oil rig under the transactions cost economics subfield an assessment could be made about any transaction costs that might have been made regarding the safe operation of the deepwater horizon oil rig and how those choices may have affected the disaster in this incident information about the safety and risks of the operations were a factor and the transaction costs of communicating the relevant information between bp and the rig operators may have contributed to the disaster applying the property rights theory subfield the necessary incompleteness of the relations within bp and between bp and the contractor operating the rig may have played a role the incompleteness of contracts means that someone has to exercise discretion to decide in matters that are not specified in a contract so residual control and decision rights matter quite a bit how these decision rights were distributed and how that distribution matched up with information and incentives of the various players may have played a role | |
what is an organizational structure | an organizational structure is a system that outlines how certain activities are directed to achieve the goals of an organization these activities can include rules roles and responsibilities the organizational structure also determines how information flows between levels within the company decisions flow from the top down in a centralized structure decision making power is distributed among various levels of the organization in a decentralized structure having an organizational structure in place allows companies to remain efficient and focused understanding an organizational structurebusinesses of all shapes and sizes heavily use organizational structures they define a specific hierarchy within an organization a successful organizational structure defines each employee s job and how it fits within the overall system the organizational structure lays out who does what so the company can meet its objectives this structuring provides a company with a visual representation of how it s shaped and how it can best move forward in achieving its goals organizational structures are normally illustrated in some sort of chart or diagram like a pyramid where the most powerful members of the organization sit at the top and those with the least amount of power are at the bottom not having a formal structure in place can prove difficult for certain organizations employees may have difficulty knowing to whom they should report that can lead to uncertainty as to who is responsible for what in the organization having a structure in place can help with efficiency and provide clarity for everyone at every level an effective organizational structure should result in each department within the organization becoming more focused and productive centralized vs decentralized organizational structuresan organizational structure is either centralized or decentralized organizations have traditionally been structured with centralized leadership and a defined chain of command the military is an organization famous for its highly centralized structure with a long and specific hierarchy of superiors and subordinates there are very clear responsibilities for each role in a centralized organizational system with subordinate roles defaulting to the guidance of their superiors more people play a role in decision making with a decentralized organizational structure mid and lower level managers as well as regular employees have more of a say in what goes on and can help call the shots there s been a rise in decentralized organizations this approach is popular among many technology startups and is viewed as enabling them to remain fast agile and adaptable with everyone able to throw ideas around johnson johnson is renowned for its decentralized structure as a large company with many business units and brands that function in sometimes very different industries each operates autonomously another well known company that gives employees a high level of personal agency is spotify 12decentralized structures are becoming more common and are popular among tech startups built in hierarchies usually still exist in decentralized companies such as the chief operating officer operating at a higher level than an entry level associate teams are empowered to make their own decisions and come to the best conclusion without necessarily getting approval from up top however types of organizational structuresfour types of common organizational structures are typically implemented the first and most common is a functional structure it s also referred to as a bureaucratic organizational structure it breaks up a company based on the specialization of its workforce most small to medium sized businesses implement a functional structure dividing the firm into departments consisting of marketing sales and operations uses a bureaucratic organizational structure this type is common among large companies with many business units it s called the divisional or multidivisional m form structure a company that uses this method structures its leadership team based on the products projects or subsidiaries it operates johnson johnson is a good example of this structure the company has thousands of products and lines of business it structures itself so each business unit operates as its own company with its own president 3divisions may also be designated geographically in addition to specialization a global corporation might have a north american division and a european division team based organizations segregate into close knit teams of employees that serve particular goals and functions similar to divisional or functional structures each team is a unit that contains both leaders and workers however flatarchy also known as a horizontal structure is used among many startups it flattens the hierarchy and chain of command as the name implies it gives its employees a great deal of autonomy companies that use this type of structure have a high speed of implementation firms can also have a matrix structure this is the most confusing and the least used it matrixes employees across different superiors divisions or departments an employee working for a matrixed company may have duties in both sales and customer service circular structures are hierarchical but they re said to be circular because they place higher level employees and managers at the center of the organization with concentric rings expanding outward they contain lower level employees and staff organizing this way is intended to encourage open communication and collaboration among the ranks the network structure organizes contractors and third party vendors to carry out certain key functions it features a relatively small headquarters with geographically dispersed satellite offices along with key functions outsourced to other firms and consultants benefits of organizational structuresputting an organizational structure in place can be very beneficial to a company the structure not only defines a company s hierarchy but it allows the firm to lay out the pay structure for its employees the firm can decide salary grades and ranges for each position by putting the organizational structure in place the structure also makes operations more efficient and much more effective the company can seamlessly perform different operations at once by separating employees and functions into separate departments a very clear organizational structure also informs employees on how best to get their jobs done employees will have to work harder at buying favors or courting those with decision making power in a hierarchical organization employees must take on more initiative and bring creative problem solving to the table in a decentralized organization this can also help set expectations for how employees can track their growth within a company and emphasize a certain set of skills it can help potential employees gauge whether such a company would be a good fit with their interests and work styles | |
what are some types of organizational structures | organizational structures take on many forms examples include functional multi divisional flat and matrix structures as well as circular team based and network structures | |
what are the key elements of an organizational structure | key elements of an organizational structure include how certain activities are directed to achieve the goals of an organization they include rules roles responsibilities and how information flows between levels within the company | |
what is an organizational structure example | a decentralized structure is an example of an organizational structure it gives individuals and teams high degrees of autonomy without requiring a core team to regularly approve business decisions spotify with its squads tribes and guilds and google with its independent companies are loosely run this way 45 | |
what is an organizational structure chart | organizational structures are normally illustrated in some sort of chart or diagram a pyramid could be used in a centralized structure with the most powerful members of the organization sitting at the top and the least powerful at the bottom | |
what is the best organizational structure | there s no one best organizational structure it depends on the nature of the company and the industry in which it operates the bottom lineentire fields of study are based on how to optimize and best structure organizations to be the most effective and productive senior leaders should consider a variety of factors before deciding which type of organization is best for their business including the business s goals industry and culture | |
what is organized labor | organized labor is a strategy of workers joining together to engage in collective bargaining for higher wages job benefits or better working conditions organized labor associations are also known as unions |
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