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what is an outright futures position | an outright futures position is an unhedged futures trade that is taken on its own and is not part of a larger or more complex trade understanding outright futures positionsan outright futures position is a long or short trade that is not hedged from market risk both the potential gain and the potential risk are greater for outright positions than for positions that are covered or hedged in some way an outright position is one that stands on its own and is not part of a larger or more complex trade a profit is made from a long outright futures position if the price rises following the purchase or from a short trade if the price falls after the short is initiated an outright position is one that is a pure long or short bet on the direction of the futures contract hedging or offsetting that position with another position means it is no longer an outright position outright futures are also called naked futures because they leave the investor exposed to market fluctuations to reduce risk the investor may choose to purchase a protective offsetting option an offsetting position in the futures underlying security or an opposite position in a related market hedging or offsetting the risk means it is no longer an outright futures position an outright futures position is inherently risky because there is no protection against an adverse move most traders do not consider trading liquid futures contracts to be excessively risky especially because in most cases it is easy to cover or to sell the position back to the market most speculative positions in the futures market are outright positions however a declining market for an investor holding a long position in a futures contract still has the potential to deliver significant losses in this case holding a put option against the long futures position could cap losses to a manageable amount the trader s profit potential would be reduced by the premium or cost of the option consider it to be an insurance policy the trader hopes not to use traders selling futures short without a hedge face even greater risk since the upside potential for most futures markets is theoretically unlimited in this case owning a call on the underlying futures contract would limit that risk another alternative to an outright futures position that can sometimes carry less risk is to take a position in a vertical spread trade this caps both profit potential and risk for loss and it would be a good choice for a trader that only expects a limited move in the underlying security or commodity while all the above limit risk they also tend to limit or reduce profit many speculative traders prefer outright futures positions because of their simplicity one position and the ability to generate larger profits when a trade is well timed and takes advantage of an ensuing price move outright futures position exampleassume a trader believes that the s p 500 is going to rise over the next several months it is currently july so the trader buys a december contract of the e mini s p 500 listed on the chicago mercantile exchange cme under the symbol es 1the trader uses a limit order to enter a position at 4321 buying one contract this particular futures contract moves in 0 25 increments with four increments called ticks to each point each tick is worth 12 50 in profit or loss and each point is worth 50 4 x 12 50 this position is a pure directional bet on the price of the futures contract rising the trader is not taking any other positions to offset the risk or magnify the profits associated with the position therefore this is an outright futures position assume that in one month the price of the contract is at 4351 the trader is up 30 points or 1500 50 x 30 points less commissions subsequently the price drops to 4311 the trader is down ten points or 500 50 x 10 points 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 outright option | an outright option is an option that is bought or sold individually this option is not part of a spread trade or other types of options strategy where multiple different options are purchased understanding the outright optionan outright option which can include calls and puts can refer to any basic option purchased on a single underlying security they are the most basic form of options trading outright options trade on an exchange similar to security assets like stocks in the united states there are numerous exchanges listing all types of outright options for investors thus the options market will see activity from both institutional and retail investors alike institutional investors may use options to hedge the risk exposure in their portfolios managed funds may use options as the central focus of their investment objective many leveraged bullish and bearish strategies also rely on the use of options retail investors may choose to use options as an advanced strategy or as a cheaper alternative relative to investing directly in the underlying asset gaining access to options trading is generally more complex and requires additional brokerage permissions most brokerage platforms will require a margin account and a minimum deposit commonly in excess of 2 000 to trade options both institutional and retail investors using outright options will generally focus on either calls or puts calls and puts are typically contracted in 100 share increments this means one option controls 100 shares of the underlying stock option premiums are quoted on a per share basis a 0 50 option will cost 50 to buy 0 50 x 100 shares spreads and exotic options involve more advanced use of option trading instruments and are not considered to be outright options spread strategies involve the use of two or more options contracts in a unit trade exotic option strategies can be constructed in a multitude of ways exotic options can include a contract based on a basket of underlying securities with a variety of different option contract conditions outright call and put optionsan outright option is either a call or put the trader either buys or sells one or the other but not both as a directional bet on where the underlying asset is going or to hedge another non option position the purchase of an option is also called a long option whereas selling one is also called a short option taking on more than one type of option for the same trade doesn t qualify as an outright options trade a long call option gives the buyer the right to buy an underlying security at a specified strike price with an american option the buyer can exercise the option at any time up until the expiration date the strike price is the price at which the buyer can take ownership of the underlying and exercising is taking advantage of that opportunity in exchange for this right the option buyer pays a premium to the option seller the option seller gets to keep the premium but is obliged to sell the underlying security to the call buyer at the strike price if the buyer exercises their option conversely a long put option gives the buyer the right to sell an underlying security at a specified strike price in exchange for this right the put option buyer pays a premium to the option seller the option seller gets to keep the premium but is obliged to buy the underlying from the put buyer at the strike price if the buyer exercises their option call and put options have an expiry date american options can be exercised any time up until expiry while european options can only be exercised at expiration outright option exampleassume an investor is bullish on apple inc aapl and believes that the stock price will appreciate over the next few months if the investor wants to buy an outright option they would purchase a call option the call option gives the call buyer the right to buy apple at a specified price assume the stock is currently trading at 183 20 on may 22 the investor believes that by august the stock could be trading north of 195 looking at the available call options the trader has to choose how they want to proceed they could buy an option that is already in the money for example they could buy the 170 strike price august call for 19 20 ask price this would cost the investor 1 920 19 20 x 100 shares if the stock price does reach 195 the option will be worth approximately 25 netting the option buyer a profit of 580 25 19 20 x 100 shares they could also exercise their option receiving the shares at 170 and then selling them for the current market price which in this case is theoretically 195 the risk is that the trader could lose up to 1 920 if the price of apple stock falls the biggest loss would occur if it fell to 170 or below the trader would lose their full premium although they could sell the option before that happened to recoup some of the option s cost another possibility is to buy a near the money or out of the money call option these cost less but come with their own drawbacks and opportunities assume the trader buys a 185 strike price option for 9 90 ask price this cost them 990 if the stock is trading near 195 at expiry the option should be worth about 10 this nets the trader a profit of 10 which less commissions means they likely lose a bit of money put a different way the trader could exercise the option and take control of the shares at 185 they could then sell them at 195 on the stock market for a profit of 1000 10 x 100 shares but they paid 990 for the option so their net profit is 10 in order to make money on this trade the price will need to rise above 195 before or at expiry if it goes to 200 the trader nets a profit of 510 the option will be worth 15 200 185 but they paid 9 90 for it that leaves 5 10 in profit per share or 510 5 10 x 100 shares the price needs to move up more than in the previous example comparing the two scenarios the first one obviously costs a lot more the first option will be worth something at expiry unless the stock price falls below 170 that means the trader can likely recoup some of the cost of the option even if the price doesn t rise as expected or falls on the other hand the second option will continue to lose value and be worth nothing at expiry if the price of the stock doesn t rise above the 185 strike even if the stock does rise above the strike price the trade may still lose money even if the price reaches its 195 target the price will need to move above 195 in the order for the trader to make money in the second scenario 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 outright option | an outright option is an option that is bought or sold individually this option is not part of a spread trade or other types of options strategy where multiple different options are purchased understanding the outright optionan outright option which can include calls and puts can refer to any basic option purchased on a single underlying security they are the most basic form of options trading outright options trade on an exchange similar to security assets like stocks in the united states there are numerous exchanges listing all types of outright options for investors thus the options market will see activity from both institutional and retail investors alike institutional investors may use options to hedge the risk exposure in their portfolios managed funds may use options as the central focus of their investment objective many leveraged bullish and bearish strategies also rely on the use of options retail investors may choose to use options as an advanced strategy or as a cheaper alternative relative to investing directly in the underlying asset gaining access to options trading is generally more complex and requires additional brokerage permissions most brokerage platforms will require a margin account and a minimum deposit commonly in excess of 2 000 to trade options both institutional and retail investors using outright options will generally focus on either calls or puts calls and puts are typically contracted in 100 share increments this means one option controls 100 shares of the underlying stock option premiums are quoted on a per share basis a 0 50 option will cost 50 to buy 0 50 x 100 shares spreads and exotic options involve more advanced use of option trading instruments and are not considered to be outright options spread strategies involve the use of two or more options contracts in a unit trade exotic option strategies can be constructed in a multitude of ways exotic options can include a contract based on a basket of underlying securities with a variety of different option contract conditions outright call and put optionsan outright option is either a call or put the trader either buys or sells one or the other but not both as a directional bet on where the underlying asset is going or to hedge another non option position the purchase of an option is also called a long option whereas selling one is also called a short option taking on more than one type of option for the same trade doesn t qualify as an outright options trade a long call option gives the buyer the right to buy an underlying security at a specified strike price with an american option the buyer can exercise the option at any time up until the expiration date the strike price is the price at which the buyer can take ownership of the underlying and exercising is taking advantage of that opportunity in exchange for this right the option buyer pays a premium to the option seller the option seller gets to keep the premium but is obliged to sell the underlying security to the call buyer at the strike price if the buyer exercises their option conversely a long put option gives the buyer the right to sell an underlying security at a specified strike price in exchange for this right the put option buyer pays a premium to the option seller the option seller gets to keep the premium but is obliged to buy the underlying from the put buyer at the strike price if the buyer exercises their option call and put options have an expiry date american options can be exercised any time up until expiry while european options can only be exercised at expiration outright option exampleassume an investor is bullish on apple inc aapl and believes that the stock price will appreciate over the next few months if the investor wants to buy an outright option they would purchase a call option the call option gives the call buyer the right to buy apple at a specified price assume the stock is currently trading at 183 20 on may 22 the investor believes that by august the stock could be trading north of 195 looking at the available call options the trader has to choose how they want to proceed they could buy an option that is already in the money for example they could buy the 170 strike price august call for 19 20 ask price this would cost the investor 1 920 19 20 x 100 shares if the stock price does reach 195 the option will be worth approximately 25 netting the option buyer a profit of 580 25 19 20 x 100 shares they could also exercise their option receiving the shares at 170 and then selling them for the current market price which in this case is theoretically 195 the risk is that the trader could lose up to 1 920 if the price of apple stock falls the biggest loss would occur if it fell to 170 or below the trader would lose their full premium although they could sell the option before that happened to recoup some of the option s cost another possibility is to buy a near the money or out of the money call option these cost less but come with their own drawbacks and opportunities assume the trader buys a 185 strike price option for 9 90 ask price this cost them 990 if the stock is trading near 195 at expiry the option should be worth about 10 this nets the trader a profit of 10 which less commissions means they likely lose a bit of money put a different way the trader could exercise the option and take control of the shares at 185 they could then sell them at 195 on the stock market for a profit of 1000 10 x 100 shares but they paid 990 for the option so their net profit is 10 in order to make money on this trade the price will need to rise above 195 before or at expiry if it goes to 200 the trader nets a profit of 510 the option will be worth 15 200 185 but they paid 9 90 for it that leaves 5 10 in profit per share or 510 5 10 x 100 shares the price needs to move up more than in the previous example comparing the two scenarios the first one obviously costs a lot more the first option will be worth something at expiry unless the stock price falls below 170 that means the trader can likely recoup some of the cost of the option even if the price doesn t rise as expected or falls on the other hand the second option will continue to lose value and be worth nothing at expiry if the price of the stock doesn t rise above the 185 strike even if the stock does rise above the strike price the trade may still lose money even if the price reaches its 195 target the price will need to move above 195 in the order for the trader to make money in the second scenario 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 outside director | an outside director is a member of a company s board of directors who is not an employee or stakeholder in the company outside directors are paid an annual retainer fee in the form of cash benefits and or stock options corporate governance standards require public companies to have a certain number or percentage of outside directors on their boards in theory outside directors are more likely to provide unbiased opinions an outside director is also referred to as a non executive director breaking down outside directorin theory outside directors are advantageous for the company because they have less conflict of interest and may see the big picture differently than insiders the downside of outside directors is that since they are less involved with the companies they represent they may have less information upon which to base decisions and fewer incentives to perform also outside directors can face out of pocket liability if a judgment or settlement occurs that is not completely covered by the company or its insurance this occurred in class action suits against enron and worldcom 1 board members with direct ties to the company are called inside directors these can be from the ranks of a company s senior officers or executives as well as any person or entity that beneficially owns more than 10 of a company s voting shares 2 outside directors and the example of enronoutside directors have an important responsibility to uphold their positions with integrity and protect and help grow shareholder wealth in the case of enron as mentioned above many accused the company s outside directors of being negligent in their oversight of enron in 2003 plaintiffs and congress accused enron s outside directors of allowing the company s former ceo andrew s fastow to enter into deals that created a significant conflict of interest with shareholders as he concocted a plan to make the company appear to be on solid financial footing despite the fact that many of its subsidiaries were losing money 3 outside directors and corporate governanceas the enron example showed it s important to set and support clear corporate governance policies to mitigate the risk of such fraud corporate governance is a comprehensive system of rules that control and direct a company these protocol balance the interests of a company s many stakeholders including shareholders management customers suppliers financiers government and the community they also help a company attain its objectives offering action plans and internal controls for performance measurement and corporate disclosure | |
what is an outside reversal | an outside reversal is a price pattern that indicates a potential change in trend on a price chart the two day pattern is observed when a security s high and low prices for the day exceed the high and low of the previous day s trading session outside reversal is also known as either a bullish engulfing after a downward price move or a bearish engulfing pattern after an upward price move when observed on candlestick charts understanding an outside reversal patternoutside reversal is a two day price pattern that shows when a candle or bar on a candlestick or bar chart falls outside of the previous day s candle or bar this chart pattern is commonly employed by technical analysts who seek to identify points in the price action which imply a bullish or bearish reversal of an existing trend an outside reversal pattern is typically one of the more precise candlestick patterns however these patterns require a strict definition to be useful forecasting tools technical analysts and experienced traders prefer to build trading signals using this identification in conjunction with other information such as trend support and resistance or technical studies on occasion traders see volume or support and resistance levels as a way to corroborate the outside reversal for example a stock price that undergoes a bearish outside reversal when it approaches trend line resistance on high bearish volume is considerably more reliable than a stock that is moving sideways and has a bearish outside reversal on lower than average volume bullish outside reversala bullish outside reversal also called a bullish engulfing happens when the second candle is a move higher for instance a stock may make a small move lower on the first day then open even lower than the prior day but rally sharply higher by the end of the second day the indication is that bears had control over the market but then bulls took over and overwhelmed them signifying a change in the prevailing trend in the chart above amazon com inc amzn shares appeared to be consolidating before a bullish outside reversal marked a renewal of the uptrend its stock price continued to rise the subsequent days as the trend reversal took hold bearish outside reversala bearish outside reversal also called a bearish engulfing transpires when the second candle is a move lower for instance a stock may have a small move higher on the first day climb even higher the second day but then sharply decline by the second day s end this demonstrates that the bulls had control over the market before the bears took the reins in a meaningful way signaling a shift in the overall trend the stock price of cisco systems inc csco rose for three consecutive days before a bearish outside reversal share prices plunged the day after the outside reversal as the overall trend did an about face | |
what are outside sales | outside sales refer to the sales of products or services by sales personnel that physically go out into the field to meet with prospective customers outside sales professionals tend to work autonomously outside of a formal office setting or a formal team environment they often travel to meet customers face to face as well as to maintain relationships with existing customers understanding outside salesoutside sales employees also known as field sales tend to work without a formalized schedule which may offer flexibility but may also mean that a salesperson is always on call to meet the demands of a customer this type of work entails maintaining a schedule of client meetings and having to meet and adjust to their demands and changes such as delays and cancellations outside sales professionals also must manage their own travel which may be subjected to unexpected delays or other issues in addition since outside sales professionals must meet face to face with potential customers they have to pay close attention to their appearance and must be prepared to entertain clients and network at all times maintaining an outside sales force can be expensive since companies typically have to compensate outside sales personnel for miles traveled housing food and entertainment in some industries outside sales forces are the norm because customers will not move forward with a purchase solely through inside sales strategies though an outside sales workforce tends to cost more than an inside sales workforce it also tends to out earn an inside sales workforce by 12 to 18 outside sales professionals are often compensated via commission on the business that they bring in as such the dollar amount of the business they bring in must always be weighed against the dollar cost of the nature of their profession outside sales vs inside sales | |
when defining outside sales it is helpful to consider its analog inside sales inside sales professionals tend to work inside an office environment during set hours while utilizing the telephone or a variety of other communications technologies such as email video conferencing social media or screen shares they rarely travel to meet clients if at all however given the significant advancement in technology there is now a trend towards a hybrid inside outside model of employment which only requires outside sales when necessary rather than as an essential function of bringing in business this is particularly beneficial when a company needs to reduce costs | inside sales personnel tend to work within a team with more direct supervision they must be comfortable with cold calling to earn new business and conversant enough to be able to explain a product or service inside out with few or no visual aids or prototypes the widespread adoption of communications technologies has seen inside sales grow by leaps and bounds compared to outside sales one estimate has it that for every one outside sales professional that is hired 10 inside sales people are brought onboard outside sales tends to be more strategic in nature meaning that it can entail meeting with c level decision makers to help them devise and implement business strategies outside sales is more likely to be utilized when selling more complex and expensive goods and services the orders placed from the outside sales process also tend to be larger than those made by way of inside sales inside sales in practice is more of a function of the quantity of interactions over the depth of those interactions | |
what is outsourcing | outsourcing is the business practice of hiring a party outside a company to perform services or create goods that were traditionally performed in house by the company s own employees and staff outsourcing is a practice usually undertaken by companies as a cost cutting measure as such it can affect a wide range of jobs ranging from customer support to manufacturing to the back office outsourcing was first recognized as a business strategy in 1989 and became an integral part of business economics throughout the 1990s 1 the practice of outsourcing is subject to considerable controversy in many countries those opposed argue that it has caused the loss of domestic jobs particularly in the manufacturing sector supporters say it creates an incentive for businesses and companies to allocate resources where they are most effective and that outsourcing helps maintain the nature of free market economies on a global scale investopedia mira norianunderstanding outsourcingoutsourcing can help businesses reduce labor costs significantly when a company uses outsourcing it enlists the help of outside organizations not affiliated with the company to complete certain tasks the outside organizations typically set up different compensation structures with their employees than the outsourcing company enabling them to complete the work for less money this ultimately enables the company that chose to outsource to lower its labor costs businesses can also avoid expenses associated with overhead equipment and technology in addition to cost savings companies can employ an outsourcing strategy to better focus on the core aspects of the business outsourcing non core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself this strategy may also lead to faster turnaround times increased competitiveness within an industry and the cutting of overall operational costs companies use outsourcing to cut labor costs and business expenses but also to enable them to focus on the core aspects of the business examples of outsourcingoutsourcing s biggest advantages are time and cost savings a manufacturer of personal computers might buy internal components for its machines from other companies to save on production costs a law firm might store and back up its files using a cloud computing service provider thus giving it access to digital technology without investing large amounts of money to actually own the technology a small company may decide to outsource bookkeeping duties to an accounting firm as doing so may be cheaper than retaining an in house accountant other companies find outsourcing the functions of human resource departments such as payroll and health insurance as beneficial when used properly outsourcing is an effective strategy to reduce expenses and can even provide a business with a competitive advantage over rivals criticism of outsourcingoutsourcing does have disadvantages signing contracts with other companies may take time and extra effort from a firm s legal team security threats occur if another party has access to a company s confidential information and then that party suffers a data breach a lack of communication between the company and the outsourced provider may occur which could delay the completion of projects special considerationsoutsourcing internationally can help companies benefit from the differences in labor and production costs among countries price dispersion in another country may entice a business to relocate some or all of its operations to the cheaper country in order to increase profitability and stay competitive within an industry many large corporations have eliminated their entire in house customer service call centers outsourcing that function to third party outfits located in lower cost locations | |
what is outsourcing | first seen as a formal business strategy in 1989 outsourcing is the process of hiring third parties to conduct services that were typically performed by the company often outsourcing is used so that a company can focus on its core operations it is also used to cut costs on labor among others while privacy has been a recent area of controversy for outsourcing contractors it has also drawn criticism for its impact on the labor market in domestic economies | |
what is an example of outsourcing | consider a bank that outsources its customer service operations here all customer facing inquiries or complaints with concern to its online banking service would be handled by a third party while choosing to outsource some business operations is often a complex decision the bank determined that it would prove to be the most effective allocation of capital given both consumer demand the specialty of the third party and cost saving attributes | |
what are the disadvantages of outsourcing | the disadvantages of outsourcing include communication difficulties security threats where sensitive data is increasingly at stake and additional legal duties on a broader level outsourcing may have the potential to disrupt a labor force one example that often comes to mind is the manufacturing industry in america where now a large extent of production has moved internationally in turn higher skilled manufacturing jobs such as robotics or precision machines have emerged at a greater scale the bottom linewhile outsourcing can be advantageous to an organization that values time over money some downsides can materialize if the organization needs to retain control outsourcing manufacturing of a simple item like clothing will carry much less risk than outsourcing something complex like rocket fuel or financial modeling businesses looking to outsource need to adequately compare the benefits and risks before moving forward | |
what is an outstanding check | an outstanding check is a check payment that is written by someone but has not been cashed or deposited by the payee the payor is the entity who writes the check while the payee is the person or institution to whom it is written an outstanding check also refers to a check that has been presented to the bank but is still in the bank s check clearing cycle an outstanding check represents a liability for the payor the payor must be sure to keep enough money in the account to cover the amount of the outstanding check until it is cashed which could take weeks or sometimes even months checks that are outstanding for a long period of time are known as stale checks | |
how outstanding checks work | one of the ways of making payment for a transaction is by check a check is a financial instrument that authorizes a bank to transfer funds from the payor s account to the payee s account when the payee deposits the check at a bank it requests the funds from the payor s bank which in turn withdraws the amount from the payor s account and transfers it to the payee s bank when the bank receives the full amount requested it deposits it into the payee s account a check becomes outstanding when the payee doesn t cash or deposit the check this means it doesn t clear the payor s bank account and doesn t appear on the statement at the end of the month since the check is outstanding this means it is still a liability for the payor once the payee deposits the check it is reconciled against the payor s records checks that remain outstanding for long periods of time cannot be cashed as they become void some checks become stale if dated after 60 or 90 days while others become void after six months risks of outstanding checksoutstanding checks aren t necessarily inherently bad however there are some risks and downsides to have checks linger an overdraft occurs when the account holder who wrote a check that is still pending does not have enough money in their account to cover the amount of the check when it is eventually submitted for payment this can result in the account becoming overdrawn at the time the check was written there might have been enough cash however if spending on the account occurs between when the check is written and when the check is deposited the account is at risk for non sufficient funds status outstanding checks also have the risk of being used in fraudulent conduct someone else could be able to change the payee name or the amount if a check is misplaced or stolen before it is taken to the bank all else being equal it is safest if a check is deposited as fast as possible to avoid tampering with the instrument accounting inconsistencies may arise if outstanding checks are not reported and tracked in the appropriate manner because of this keeping correct financial records can be difficult and it may lead to problems during audits or when reconciling finances for example payments may show as being paid but if the cash has not yet been debited from the account there may be inconsistencies worth reconciling last outstanding checks might have an impact on management of the cash flow if a corporation has a substantial number of checks that have not yet been cashed it may create ambiguity over the amount of cash that is available making it difficult to efficiently plan for and manage expenses outstanding checks that remain so for a long period of time are known as stale checks benefits of outstanding checksthere are actually some benefits to have checks outstanding as well though writing checks makes it possible for organizations and individuals to make payments without requiring instantaneous cash or electronic transactions to be completed checks that linger only buy the company more time to gather up enough resources for payment to clear if more time is needed tracking of payments can be accomplished through the use of checks which provide both a paper trail and evidence of payment through the use of the check the sender and the recipient of the payment are able to retain a record of the transaction which includes the date the amount and the payee in this context an outstanding check need not be outstanding for long it may simply be the short period of time between when a check is mailed and when it is received outstanding checks also provide the opportunity for payment delays which can be advantageous when it comes to managing cash flow the person who writes a check that is not immediately presented for payment is able to maintain control over the timing of the withdrawal of funds from their own account if the check is not immediately offered for payment even if the checkwriter has sufficient funds any delay from the depositor simply means higher interest revenue on the capital balance waiting to be drawn down | |
how to avoid outstanding checks | forgotten outstanding checks are a common source of bank overdrafts one way to avoid this occurrence is to maintain a balanced checkbook this can help prevent any unnecessary nsfs if the payee decides to cash the check at a later date you can also call or write to remind the payee that the check is outstanding this may encourage them to deposit or cash the check if they haven t received the payment this may nudge them to notify you to reissue the check with banking activity becoming increasingly electronic another way to avoid writing a check and forgetting about it is to use the checking account s online bill pay service this should provide real time information about the total dollar amount of checks outstanding and the total dollar balance present in the account outstanding business checks | |
when a business writes a check it deducts the amount from the appropriate general ledger cash account if the funds have not been withdrawn or cashed by the payee the company s bank account will be overstated and have a larger balance than the general ledger entry | to reconcile the bank statement so the company s cash account in its financial statements is consistent with the cash in its bank account the company must adjust its balance per bank which refers to the ending cash balance on a bank statement communicating outstanding checks to payeeas businesses have to abide by the unclaimed property laws any checks that have been outstanding for a long time must be remitted to the state as unclaimed property as such there is no incentive to wish for an outstanding check to permanently never be cashed as the payment is subsequently owed to the government for holding it is imperative for an issuer to provide payees with timely communication regarding the issuance of a check as well as any pertinent details as soon as possible this makes it easier to set expectations and gives them the opportunity to plan properly be mindful of post office conditions and potential delays for seasonality weather or staffing issues make sure that payees have access to the right contact information so that they can get in touch with you or your designated representative regarding any questions issues or changes relating to the overdue check check to see that the contact information is correct as checks may go missing simply because of an incorrect mailing address maintain a record of every communication pertaining to outstanding checks and make sure to document all conversation this includes communications such as emails phone calls and any other forms of correspondence in many cases companies send statements for invoices past due always check these against payments made in the system in case checks have been lost not applied correctly or mismanaged | |
what happens if a check is outstanding for too long | if a check remains outstanding for an extended period it may become stale dated and the bank may refuse to honor it the payee should contact the issuer to request a new check if this occurs | |
how do i reconcile outstanding checks with my bank statement | to reconcile outstanding checks with your bank statement compare the checks issued but not yet cleared with the information provided on the statement ensuring that both records align on your reconciliation sheet outstanding checks are often subtracted from your balance per bank because these withdrawals have not yet happened but are simply a timing matter | |
what are the consequences of bouncing an outstanding check | bouncing an outstanding check can lead to financial consequences such as fees imposed by the bank damage to your credit rating and potential legal actions from the payee be mindful of what outstanding checks you ve written before drawing down your bank balance | |
what are some best practices for managing and clearing outstanding checks | best practices for managing and clearing outstanding checks include regular bank statement reconciliation promptly voiding or canceling unused checks and maintaining proper record keeping also always maintain in communication with payees about payments not fully processed the bottom lineoutstanding checks are checks that have been issued but not yet presented for payment or cleared by the bank they represent pending transactions where the funds have not yet been deducted from the issuer s account these checks can pose risks such as overdrawing the account potential fraud accounting discrepancies and delayed financial reporting proper management of outstanding checks involves tracking reconciliation timely communication and ensuring sufficient funds are available to honor the checks when presented for payment | |
what is outward arbitrage | outward arbitrage is a type of arbitrage that multinational american based banks engage in taking advantage of differences in interest rates between the united states and other countries although it is almost always large banks that engage in arbitrage smaller non bank depositors and nonbank borrowers also engage in the practice using much less capital outward arbitrage occurs when interest rates are lower in the united states than abroad and banks will borrow in the united states at a low rate and then lend that money abroad at a higher rate pocketing the difference as profit | |
how outward arbitrage works | outward arbitrage is a key concept in modern finance modern financial theory is based on the idea that pure arbitrage a system whereby an investor or company can take advantage of price differentials to make money without fail doesn t actually happen for sustained periods academic finance suggests that a true arbitrage opportunity would disappear almost instantly as investors enter that market and compete over these easy profits but the real world does not always follow economists models and some arbitrage opportunities do occur in the actual markets as the result of imperfect competition for instance it is not easy for just any bank to scale up to the point that it can take advantage of cross border differences in interest rates due to regulation and imperfect markets for financial services this lack of competition makes it possible for outward arbitrage opportunities to persist for those banks already in the position to leverage significant assets into what they consider to be profitable arbitrage dealings outward arbitrage and the eurodollar marketoutward arbitrage was a phrase coined in the middle of the twentieth century because of the strong demand for savings accounts abroad that were denominated in u s dollars these savings deposits were referred to as eurodollars because all of the foreign dollar denominated accounts were at that point housed in europe today however eurodollars can be purchased in many countries around the world outside of europe the eurodollar market took off after 1974 when the united states lifted capital controls that hampered lending across borders since that time the eurodollar market has become an important source of funding and profits for u s banks due to the lack of requirements for eurodollars having a large supply can be extremely valuable in the outward arbitrage market especially when traditionally leveraged assets like cds experience low liquidity banks can also dip into the eurodollar market to borrow funds to engage in outward arbitrage if the reserve requirements or interest rates are more desirable in the eurodollar market when compared to domestic sources of funding an example of outward arbitragelet s say that a large american bank wants to make money through outward arbitrage let s also assume that the going rate for one year certificates of deposit in the united states is 2 while dollar denominated certificates of deposit are paying 3 in france the large american bank could decide to make money by accepting certificates of deposits in the united states and then taking the proceeds to issue loans in france at a higher rate inward arbitrage is possible when the situation is reversed and interest rates are higher in the united states than abroad outward arbitrage vs inward arbitrageoutward arbitrage differs fundamentally from inward arbitrage inward arbitrage can be considered the opposite side of outward arbitrage when higher rates exist abroad a bank would engage in outward arbitrage when the domestic rates are higher a bank would then borrow the money from the international market depositing it domestically in order to take advantage of the rate discrepancy banks will engage in both outward and inward arbitrage based on the fiscal environment and ability to profit at incredibly low risk due to the near zero tolerance for risk when considering inward arbitrage a certificate of deposit cd is usually the preferred method of fund transfer cds despite their low interest rates when compared to other investment vehicles are some of the safest investments to make when banks engage in arbitrage they are doing so with significant amounts of money therefore the appetite for risk is extremely low | |
what is covered interest arbitrage | covered interest arbitrage is when someone engaging in arbitrage purchased a forward currency contract in order to hedge risk regarding exchange rate fluctuations due to purchasing a forward contract to offset risk the financial gains of covered interest arbitrage transactions tend to be lower than those of outright arbitrage this style of trading usually demands a high volume of trades to be markedly profitable | |
what is an arbitrage transaction | an arbitrage transaction is when someone purchases and sells a product simultaneously usually in separate markets in order to profit from the price differences in that asset s price arbitrage opportunities typically do not last for long once they are discovered due to their fairly risk averse method of ensuring profit arbitrage trades are commonly seen being made with stocks currencies and commodities | |
how is arbitrage related to interest rates | an arbitrage trade can be directly tied to interest rates if for example investment a has an interest rate of 3 and investment b has a rate of 4 the person engaging in arbitrage would purchase a and sell b pocketing the 1 difference interest rates are in a state of constant flux so traders are always looking for interest rate disparities to take advantage of via arbitrage | |
what is the risk in arbitrage trades | one of the most significant risks when engaging in arbitrage trades is a fluctuation of the asset price an interest rate could change and although the percentage change may be minimal arbitrage trades are usually highly leveraged and exposure to such an event could result in a significant loss if there are no willing buyers that is another problem as someone needs to purchase the asset for sale if the trader is going to make a profit 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 outward direct investment odi | an outward direct investment odi is a business strategy in which a domestic firm expands its operations to a foreign country odi can take many different forms depending on the company for example some companies will make a green field investment which is when a parent company creates a subsidiary in a foreign country a merger or acquisition can also occur in a foreign country and so may be considered an outward direct investment finally a company may decide to expand an existing foreign facility as part of an odi strategy employing odi is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad odi is also called outward foreign direct investment or direct investment abroad it can be contrasted with foreign direct investment or fdi which occurs in the opposite funding direction understanding outward direct investment odi the extent of a nation s outward direct investment can be seen as an indication that its economy is mature odi has been shown to increase a country s investment competitiveness and has proven to be crucial for long term sustainable growth american european and japanese firms for example have long made extensive investments outside their domestic markets because of their more rapid growth rates emerging market economies often receive large amounts of odi as china has for the past two decades the international monetary fund lists the top five countries as the united states the netherlands luxembourg china and the united kingdom 1 but even some emerging market countries have begun to make investments abroad odi and chinain 2015 chinese overseas investment exceeded foreign direct investment fdi in china for the first time ever in 2016 china s odi peaked chinese companies invested over 180 billion overseas 2 starting in 2017 odi began a downtrend that has continued in 2018 china s inflow of foreign direct investment fdi exceeded its odi once again making the country a net debtor once again in 2020 china s odi increased to nearly 154 billion from around 137 billion in 2019 34the majority of china s odi is inflows to leasing and business services wholesale retail and it 5 starting in 2016 beijing started tightening its capital controls as a result many of china s overseas projects have been scaled back these restrictive measures were intended to curb capital flight when assets or money rapidly flow out of a country 6 at the same time the domestic economic downturn in china primarily due to the lingering impacts of the trade war with the u s has also hindered chinese odi 7because of sluggish domestic growth investment in foreign assets became less appealing previously foreign investment by chinese firms has been a significant driver of global asset prices mostly as a result of the sale of property and mergers and acquisitions it is important to make a distinction between outward direct investment odi and foreign direct investment fdi fdi occurs when a non resident invests in the shares of a resident company odi occurs when a resident company invests in a non resident country as part of a strategy to expand their business | |
what was the over 55 home sale exemption | the over 55 home sale exemption was a tax law that provided homeowners over age 55 with a one time capital gains exclusion individuals who met the requirements could exclude up to 125 000 of capital gains on the sale of their personal residences the over 55 home sale exemption has not been in effect since 1997 this exclusion was intended to stimulate the real estate market and reward homeowners for the purchase and subsequent sale of their homes it was replaced by other exclusions for everyone who profit from selling their principal residences regardless of age understanding the over 55 home sale exemptionthe over 55 home sale exemption was put into place to give homeowners some relief from the tax implications of selling their homes the exemption no longer exists as it was replaced by new rules when the taxpayer relief act of 1997 was ratified into law this act was one of the largest tax reduction acts to be put into place by the united states government 1under the old rule qualifying taxpayers could avoid making tax payments on the sale of their homes provided it was a primary residence taxpayers who took the over 55 home sale exemption would complete form 2119 with the internal revenue service irs the form was used even if the taxpayer postponed all or part of the gain to another tax year taxpayers were required to report losses that resulted from the sale of their home on form 2119 however according to the irs taxpayers could not deduct the loss from their tax burden 2at the time home sellers had an alternative to the exemption to avoid tax payments sellers could use the proceeds from the sale for the purchase of a more expensive home within a two year window 3qualification of the over 55 exemption | |
when the exemption was in effect there were several criteria for homeowners to qualify the seller or at least one title holder had to be 55 or older on the day the home was sold for married couples just one spouse was required to meet this term that spouse also had to be the titleholder on the date of the title transfer for the exemption to be applied only one exemption was allowed per married couple which would preclude one spouse from claiming the exemption for one sale and the other spouse makes a claim for a later sale | but there was a loophole if a primary home was co owned by two or more unmarried people it was possible for more than one title holder of the appropriate age to qualify for the exemption for the home to qualify the titleholder had to own and use the property as a principal residence for at least three out of the five years immediately prior to selling the house there were personal allowances for time spent away for vacations or medical care 4prior to 1997 in order to receive the exemption the seller or at least one title holder had to be 55 or older on the sale date to qualify for it special considerationsfollowing the passing of the taxpayer relief act of 1997 the new home sale tax burden eased for millions of residential taxpayers regardless of their age the rollovers or once in a lifetime options similar to the over 55 home sale exemption were replaced with new per sale exclusion amounts 5homeowners can qualify to exclude all or part of the gains received from the sale of their main residence from their income the act raised the amount of excludable gain to 250 000 per taxpayer or 500 000 on a joint return filed by a married couple the law also permitted more than one exclusion per taxpayer per lifetime the taxpayer however can not exclude the gain from another home sale during the two year period ending on the sale date 6post 1997 homeowners are required to pass ownership and use tests if they wish to qualify for these exemptions to satisfy the ownership test taxpayers must have owned the home for at least two years the use test on the other hand requires sellers to live in the home as their main residence for at least two years both tests must be satisfied during the five year period up to the date of the sale homeowners who use their homes for business or rental income may also qualify they must pass the homeownership and use tests also 7example of a home owner s exemptionfor example if an individual purchased a property in 2000 and lived there until 2001 the owner then rented the property for the following two years the owner decided to move back once the tenant left and lived there until 2005 the owner then sold the property in this case the owner can still qualify for the exemption because the property was used as a primary residence for at least two of the five years leading up to the sale 6can i file an over 55 home sale exemption prior to the passage of the taxpayer relief act of 1997 qualifying homeowners age 55 or older weren t required to pay taxes on the sale of their primary home when the act passed it stripped the age requirement out of the home sale exemption | |
do seniors get exemptions on the sale of their homes | seniors along with anyone can receive a tax exemption on the amount of money they earn from selling their home if they meet specific criteria such as having owned and lived in their home for two years before they sold | |
what is the taxpayers relief act of 1997 | the taxpayer relief act of 1997 was ratified into law and contained various tax reductions to help stimulate the american economy among the items were reduced tax rates and tax credits like the roth ira and tax credits for children 8 | |
what is over and short | over and short often called cash over short is an accounting term that signals a discrepancy between a company s reported figures from its sales records or receipts and its audited figures the term also is the name of an account in a company s general ledger the cash over short account this term pertains primarily to cash intensive businesses in the retail and banking sectors as well as those that need to handle petty cash if a cashier or bank teller errs by giving too much or too little change for example then the business will have a cash short or cash over position at the end of the day an example of over and shortassume that i work as a cashier at a sporting goods shop i rang up a 95 pair of yoga pants correctly for 95 but i miscounted the cash i received for the pants the customer unwittingly gave me 96 for the purchase an error we both failed to catch the accounting system will show 95 in posted sales but 96 of collected cash the one dollar difference goes to the cash over short account the journal entry for this sale would debit cash for 96 credit sales for 95 and credit cash over short for 1 the opposite is true for transactions that produce cash shortages assume the same situation except that i receive 94 instead of 96 for the sale now cash is debited for 94 the sales account is credited for 95 and cash over and short is debited for 1 | |
what causes cash over short incidents | internal tampering could cause a business to be over and short in its accounting usually however the cause results from simple human error an employee ringing up a sale incorrectly or making another error like miscounting cash can generate a disparity between the sales price of the merchandise the amount collected and the amount recorded in the accounting system the function of a cash over short accounta firm should note instances of cash variances in a single easily accessible account this cash over short account should be classified as an income statement account not an expense account because the recorded errors can increase or decrease a company s profits on its income statement a company may use the data in the cash over short account to determine why cash levels are in discord and try to reduce the number of cash over short occurrences by using better procedures controls and employee training thus this account serves primarily as a detective control an accounting term for a type of internal control that aims to find problems including any instances of fraud within a company s processes | |
what is over hedging | over hedging is a risk management strategy that uses an offsetting position which exceeds the size of the original position being hedged the result may be a net position in the opposite direction of the initial position over hedging may be inadvertent or purposeful understanding over hedging | |
when over hedged the hedge put on is for a greater amount than the underlying position initially held by the one entering into the hedge the over hedged position essentially locks in a price for more goods commodities or securities than is required to protect the position when one is over hedged it impacts the ability to profit from the original position | over hedging in the futures market can be a matter of improperly matching contract size to need for example let s say a natural gas firm entered into a january futures contract to sell 25 000 mm british thermal units mmbtu at 3 50 mmbtu however the firm only has an inventory of 15 000 mmbtu that they re trying to hedge due to the size of the futures contract the firm now has excess futures contracts that amount to 10 000 mmbtu that 10 000 mmbtu in over hedging actually opens up the firm to risk as it becomes a speculative investment if they don t have the underlying deliverable in hand when the contract comes due they would have to go out and get it on the open market for a profit or a loss depending on what the price of natural gas does over that time period any drop in the price of natural gas would be covered by the hedge protecting the company s inventory price and the company would get an additional profit by delivering the excess amount at a higher contract price than what it can purchase on the market an increase in the price of natural gas however would see the company make less than market value on its inventory and then have to spend even more to fulfill the excess by buying it at the higher price over hedging is often done by mistake but for many companies a lack of any hedge is a far bigger risk over hedging versus no hedgingas shown above over hedging can actually create additional risk rather than remove it over hedging is essentially the same thing as under hedging in that both are improper uses of the hedge strategy there are of course situations where a poorly set up hedge is better than no hedge at all in the natural gas scenario above the company locks in its price for its entire inventory and then speculates on market prices by mistake in a down market the over hedging helps the company but the important point is that a lack of a hedge would mean a deep loss on the firm s entire inventory | |
what is an over limit fee | an over limit fee is a penalty charged by credit card companies when cardholders purchases exceed their credit limit previously credit card companies would decline the transaction if the consumer made a purchase over their limit however credit card companies moved to a practice of allowing the transaction to go through but charging a fee this practice has stopped since the passing of the credit card accountability responsibility and disclosure card act in 2009 | |
how an over limit fee works | over limit fees are one of the ways that credit card companies seek to manage their risks since credit cards are an unsecured form of debt credit card companies do not have recourse to any collateral if the cardholder defaults for this reason credit card companies seek to discourage customers from engaging in financially risky behaviors such as spending more than their prescribed credit limit by charging an over limit fee in response to such transactions credit card companies can disincentivize this behavior while also generating additional revenues in the past many credit card companies would automatically enroll customers into programs whereby they could exceed their credit limits and trigger an over limit fee however the passage of the card act in 2009 added new regulations to this process today customers are unable to exceed their credit limits unless they manually opt in to do so 1 paying off your entire credit card balance every month is the most cost effective strategy that avoids not only over limit fees but also high interest rate charges in other words credit card customers can choose to subject themselves to potential over limit fees in exchange for the right to exceed their credit limits at the same time however the card act also imposed limits on the size of the over limit fees themselves today credit card companies are restricted from charging fees greater than the amount by which the customer exceeded their credit limit for example if a customer exceeds their credit limit by 50 then 50 would be the maximum over limit fee permitted by law managing over limit fees | |
when a credit card is issued it comes with a maximum amount that can be utilized this threshold is different for every individual and depends primarily on the customer s credit history | for example person a with a good credit history applies for a credit card and has a maximum spend limit of 10 000 person b on the other hand with poor credit history applies for the same credit card and has a maximum spend limit of 2 000 these limits are in place to minimize the risk of the credit card company it s important to check your credit card statement often to know where your current balance is and how close you are to your threshold over limit fees are charged whenever the balance goes above the threshold regardless of if the increased amount was due to a purchase interest charge late fee or any other fee it is safer to not opt in to be able to exceed your credit limit and be charged a fee this avoids any unwanted costs if you do not opt in and exceed your credit limit then your transaction will be denied this is a good way to avoid fees and to be made aware that you are at your credit limit it s also worth noting that if you do not opt in and your credit card company allows a transaction to go through then they cannot charge you an over limit fee in this instance if you notice a fee on your statement notify your credit card company to remove it | |
how much is an over limit fee | as noted by the card act a credit card company cannot charge you more than the amount you exceeded your limit your card company can also not charge you an over limit fee more than once in one payment cycle if your balance remains over the limit then your card company cannot charge you more than twice consecutively 1as of 2021 the first over limit fee should be no more than 27 and the second fee should be no more than 38 if it occurs within six months of the first 2 that being said since the passing of the card act over limit fees have virtually disappeared for example american express has not charged an over limit fee since 2009 though over limit fees have virtually disappeared there are other penalties that a consumer can incur by constantly exceeding their credit limit these penalties can include increased interest rates a reduction in the credit limit earlier payments higher minimum payments and even a cancellation of the card | |
what is an over line | in the insurance industry the term over line refers to the portion of an insurance company s coverage that exceeds the normal amount of coverage that they provide over line coverage can occur when an insurer underwrites more policies than normal or when a reinsurer accepts a larger amount of liabilities through a reinsurance contract than is typical for that firm | |
how over lines work | insurance companies make money by collecting premiums in exchange for indemnifying their customers against certain risks of course in order to insure these risks insurance companies must ensure that they have sufficient financial capacity to do so the amount of capacity an insurer has depends on its financial strength and excess capital or funds not currently used to cover policy related liabilities an insurer with excess capacity can underwrite new policies and thus bring in more premiums in addition to providing insurance to individual customers insurance companies also provide insurance to one another through reinsurance contracts for example if insurer a has excess capacity that is more money than it needs in order to cover its existing liabilities it can use that capacity to sell additional insurance coverage such as by selling reinsurance to insurer b at times this can lead insurers to have covered a larger overall amount than is typical for their operations this excess level of coverage is referred to as the firm s over line state insurance regulators pay close attention to the amount of liability that insurance companies take on through their underwriting activities insurers are required to report their financial position to state regulators who use these reports to determine whether an insurer is in good financial health or if there is a risk of insolvency for this reason companies with significant levels of over line coverage might attract scrutiny from insurance regulators who may wonder whether the insurer has assumed responsibility for an unsustainable level of risk example of an over lineemma is the manager of an insurance company looking over her company s financial metrics she notes that her firm s financial performance has been unusually strong in the past 12 months leading to an excess of cash reserves she estimates that if the claims on her existing contracts play out in line with projections she will be left with roughly 20 excess capacity to deploy this capital and improve her bottom line emma decides to take on reinsurance contracts accepting the risk held by other insurers in exchange for additional premiums although emma believes that her new contracts are likely to be both profitable and safe the additional reinsurance contracts raise her firm s overall coverage level above its historical average for this reason it is possible that the new over line coverage level will attract the attention of the state insurance regulator requiring emma to explain the change and demonstrate that the new policies are financially sound | |
what is excess and surplus lines insurance | excess and surplus lines insurance which is also called surplus lines insurance or e s insurance covers financial risks that are not commonly covered by standard insurance companies e s insurance covers high risk complicated or unusual risks and falls under the category of property and casualty insurance this type of insurance can by bought by an individual or by a company | |
what is the difference between allied lines and all risk insurance | allied lines refers to property casualty insurance that is closely connected to fire insurance and is often taken out in conjunction with a standard fire insurance policy it is used to cover damage such as tornado windstorm or water damage all risk insurance which is also called open peril covers a variety of risks that are not explicitly left out of the policy | |
what is homeowners insurance | homeowners insurance is a kind of property insurance that that covers damage to a residence as well as furnishings and other property in the home it also provides liability coverage in the case of any accidents that occur in the home or on the property | |
what is over selling | over selling occurs when a salesperson continues their sales pitch after the customer has already decided to make a purchase this mistake can sometimes annoy the customer and could potentially cause the customer to change their mind resulting in the deal falling through over selling also means trying to upsell a customer on more than they need or want this may also have the effect of making the customer unconformable understanding over sellingover selling may be an effort to convince a customer that an extra item would enhance what they are looking to buy or that a more expensive version might be a better option over selling is most common in retail outlets where associates work on a commission basis or through sales linked bonuses the salesperson has an incentive to sell as much as possible regardless of the customers needs car dealerships are often accused of over selling their sales associates sometimes fail to recognize that they can generate significantly more revenue through return customers and referrals than they can by misleading customers into paying for extras that they neither need nor want some associates at car dealerships are willing to sacrifice long term brand equity for short term sales by selling customers on anything and everything disadvantages of over sellingalthough it may be done with good intentions over selling usually does more harm than good great salespeople know when the customer is ready to buy and thus when they should close the sale over selling can have a negative impact on a company s bottom line this is because it can raise doubts in the mind of a buyer often at the precise moment when the customer is looking for a reason to believe that they are making the right choice raising this doubt in the customer s mind because they no longer trust the salesperson could blow the sale over selling gives a buyer a reason to pause and ask themselves if they are paying too much or if the item is more than what they need even if the buyer doesn t backpedal in an over sell situation the salesperson risks creating false expectations that can never be met in which case they could be damaging their credibility as a trusted salesperson there are reasons to believe that the pitfalls associated with over selling have become worse over time this is because buyers are becoming increasingly more informed and better educated with virtually unlimited access to information and alternatives on the internet buyers have likely done their share of research beforehand and may have even made up their mind before ever speaking with a sales professional this access to information has changed the sales dynamic sales representatives are no longer a consumer s only source of information often salespeople would benefit from a soft sell approach or through presenting various options to customers need based selling or adaptive selling is usually a preferable alternative to over selling example of over sellingsuppose there is a college student without a lot of money they need a used cheap and reliable car for getting to and from a part time job they only have 1 500 to spend on the car and they tell the salesperson this upfront immediately the salesperson starts showing them cars priced at 5 000 to 10 000 telling the student they can get easy financing to afford these much better cars the student who already has a bunch of student loans doesn t like the idea of taking on more debt they relay this information to the salesperson who continues to talk about how the low the interest rate is and how filling out the forms will only take a few minutes the student uncomfortable with the overselling leaves and goes to another dealership or to another salesperson who will show them what they are asking for | |
what is the over the counter otc market | the otc market is where securities trade via a broker dealer network instead of on a centralized exchange like the new york stock exchange over the counter trading can involve stocks bonds and derivatives which are financial contracts that derive their value from an underlying asset such as a commodity | |
when companies do not meet the requirements to list on a standard market exchange such as the nyse their securities can be traded otc but subject to some regulation by the securities and exchange commission | investopedia laura porterunderstanding otcstocks that trade via otc are commonly smaller companies that cannot meet the exchange listing requirements of formal exchanges stocks that trade on exchanges are called listed stocks whereas stocks that trade via otc are called unlisted stocks trade transactions occur through otc markets group s market tiers the otcqx otcqb and the pink open market 1types of otc securitiesstocks the equities that trade via otc are often small companies prohibited by the 250 000 cost to list on the nyse and up to 173 500 on the nasdaq 23bonds bonds do not trade on a formal exchange but banks market them through broker dealer networks and they are also considered otc securities derivatives these are private contracts arranged by a broker and can be exotic options forwards futures or other agreements whose value is based on that of an underlying asset like a stock american depositary receipts adrs these are sometimes called adss or bank certificates that represent a specified number of shares of a foreign stock foreign currencies currency that trades on the forex an over the counter currency exchange cryptocurrency digital coins like bitcoin and ethereum trade on the otc market otc markets groupotc markets group operates the otcqx best market the otcqb venture market and the pink open market although otc networks are not formal exchanges such as the nyse they still have eligibility requirements determined by the sec 1otcqx the otcqx does not list stocks that sell for less than five dollars known as penny stocks shell companies or companies going through bankruptcy the otcqx includes only 4 of all otc stocks traded and requires the highest reporting standards and strictest oversight by the sec otcqb often called the venture market with a concentration on developing companies that report their financials to the sec and submit to some oversight pink open market formerly known as pink sheets this is the riskiest level of otc trading with no requirements to report financials or register with the securities and exchange commission some legitimate companies exist on the pink open market however there are many shell companies and companies with no actual business operations listed here although nasdaq operates as a dealer network nasdaq stocks are generally not classified as otc because nasdaq is considered a stock exchange pros and cons of the otc marketbonds adrs and derivatives trade in the otc marketplace however investors face greater risk when investing in speculative otc securities the filing requirements between listing platforms vary and business financials may be hard to locate stocks trading otc are not known for their large volume of trades lower share volume means there may not be a ready buyer when it comes time to trade shares also the spread between the bid and the asking price is usually larger as these stocks tend to be more volatile based on market or economic data the otc marketplace is an alternative for small companies or those who do not want to list or cannot list on the standard exchanges listing on a standard exchange is an expensive and time consuming process and often outside the financial capabilities of many smaller companies otc provides access to securities not available on standard exchanges such as bonds adrs and derivatives fewer regulations on the otc allows the entry of many companies who can not or choose not to list on other exchanges through the trade of low cost penny stock speculative investors can earn significant returns otc stocks have less trade liquidity due to low volume which leads to delays in finalizing the trade and wide bid ask spreads less regulation leads to less available public information the chance of outdated information and the possibility of fraud otc stocks are prone to make volatile moves on the release of market and economic data | |
is the otc market safe | the otc market is generally considered risky due to lenient reporting requirements and lower transparency associated with these securities many stocks that trade otc have a lower share price and may be highly volatile while some stocks in the otc market are eventually listed on the major exchanges other otc stocks fail | |
how does an investor buy a security on the otc market | to buy a security on the otc market investors identify the specific security to purchase and the amount to invest otcqx is one of the marketplaces for otc stocks most brokers that sell exchange listed securities also sell otc securities electronically on a online platform or via a telephone | |
what is an over the counter derivative | an over the counter derivative is any derivative security traded in the otc marketplace a derivative is a financial security whose value is determined by an underlying asset such as a stock or a commodity an owner of a derivative does not own the underlying asset in derivatives such as commodity futures it is possible to take delivery of the physical asset after the derivative contract expires the bottom linethe over the counter otc market helps investors trade securities via a broker dealer network instead of on a centralized exchange like the new york stock exchange although otc networks are not formal exchanges they still have eligibility requirements determined by the sec | |
what was the over the counter bulletin board otcbb | the over the counter bulletin board otcbb was an electronic quotation service provided by the financial industry regulatory authority finra to its subscribing members for over the counter otc trade data for u s stocks unlike other otc platforms otcbb was a quotation only service in 2020 finra announced it was winding down the otcbb as the bulk of otc stock trading occurred on otc markets group s platforms 1 finra officially ceased operations of the otcbb on nov 8 2021 2understanding the over the counter bulletin board otcbb the otcbb offered traders and investors up to the minute quotes last sale prices and volume information for equity securities traded otc all companies listed on this platform had to file current financial statements with the securities and exchange commission sec or another relevant federal regulator the otcbb was created in 1990 after the penny stock reform act of 1990 stipulated that the sec must develop some type of electronic quotation system for stocks that could not be listed on one of the major exchanges 3 stocks that traded otc were traded between individuals and market makers using computers and telephones otc stocks on the otcbb were not part of any major exchanges this was primarily because otc stocks tend to be small and volatile which made meeting listing requirements difficult more importantly from the trading standpoint the bid ask spread is typically larger for these stocks as they typically trade with less frequency than exchange listed stocks 4 only a select few otcbb stocks successfully moved from the otc market to a major exchange the pink sheets are a privately held company while finra provided the otcbb service special considerationsfor those small companies that could not meet the listing requirements to trade their securities on national exchanges the otcbb and nowadays the current offerings of otc markets group offered an important alternative small companies need financing from investors to grow even though their total market value might never rival a mid cap stock investors in turn are attracted to the outsized returns that can still occur on the otc market as some of these firms do find ongoing success and outsized profits while these companies use the otc markets in place of one of the major exchanges investors need to remember that the otcbb and otc markets group are not in fact actual exchanges but quotation services all securities traded otc are in reality traded by a web of market makers who input different quotes and trades through a secure computer network that can only be accessed by those who subscribe phasing out the over the counter bulletin board otcbb as mentioned above pretty much all otc stock quotes and trades are now conducted on otc markets group s platforms including otcqx otcqb and the pink open market finra filed a rule change in 2020 with the sec that outlined its proposal to cease the operations of the otcbb which became effective nov 8 2021 21 the otcqb in particular effectively replaced the otcbb as the main market for trading otc securities that report to a u s regulator as it has no minimum financial standards the otcqb often includes shell companies penny stocks and small foreign issuers otcbb vs pink sheetsthe otcbb and pink sheets are both quotation services for stocks that trade otc the otcbb was operated by finra while the pink sheets are operated by a private company the listing standards are generally laxer for the pink sheets that is some pink sheet stocks might not have been eligible for listing on the otcbb stocks listed on the otcbb were usually registered with the sec except for those not legally required to do so meanwhile stocks on the pink sheets might not file regular reports and might not list with the sec beyond the otcbb and pink sheets there are other quotation services it s also possible to buy stocks not listed on either directly from a broker the lack of filing requirements for pink sheets stocks make them inherently riskier | |
how did you trade in otcbb penny stocks | penny stocks didn t trade on the otcbb penny stocks trade for less than 1 per share but they trade through a brokerage the otcbb helped track prices for penny stocks but did not facilitate penny stock trading | |
which app allowed you to trade on the otcbb | no app allowed you to trade on the otcbb the otcbb was a price quoting service investors traded stocks via brokerage apps that had their prices quoted on the otcbb were otc stocks publicly traded otc stocks were traded without a broker or central exchange as they were generally too small to be listed on a formal exchange some otc stocks were considered publicly traded though some companies on the otc market were private companies | |
what was listed on the otcbb | securities that were listed on the otcbb included those that traded on the otc market such as stocks warrants units and adrs | |
is it safe to buy otc stocks | there are two key risks to trading otc stocks the first is the poor liquidity as they are thinly traded and the second is the lack of reliable information available about the company can i buy otc stocks on robinhood otc stocks are not available on robinhood although the trading app does allow the trading of certain penny stocks correction nov 26 2021 a previous version of this article misstated the company name for otc markets group | |
what is the over the counter exchange of india otcei | the over the counter exchange of india otcei is an electronic stock exchange based in india that consists of small and medium sized firms aiming to gain access to overseas capital markets including electronic exchanges in the u s such as the nasdaq there is no central place of exchange and all trading occurs through electronic networks understanding the over the counter exchange of india otcei the otcei is based in mumbai india and operates solely over a computer network the exchange is recognized by india s securities contract regulation act meaning all listed stocks on the otcei benefit equally as other listed securities on other exchanges in india the exchange was established in 1990 to provide investors and companies with an additional way to trade and issue securities it arose primarily from small companies in india finding it difficult to raise capital through mainstream national stock exchanges because they could not fulfill the stringent requirements to be listed on them the otcei has rules that are not as rigid as the national exchanges allowing small companies to gain access to the capital they need to grow the objective is that once they grow to a certain level and are able to meet the requirements to be listed on the national stock exchanges they will make the switch over and leave the otcei behind thanks to advances in technology that have yielded improvements in electronic trading platforms the differences between traditional exchanges and over the counter otc networks are no longer vast greatly benefiting the small and medium sized companies features of the over the counter exchange of india otcei the otcei has some special features that make it a unique exchange in india as well as a growth catalyst for small to medium sized companies the following are some of its unique features over the counter exchange of india otcei listing requirementsthe otcei makes it easier for small to mid cap sized companies to be listed although there are still some requirements that companies must meet before being allowed to be listed stipulations include acquiring sponsorship from members of the otcei and having two market makers in addition once a company is listed it cannot be delisted for at least three years and a certain percentage of issued equity capital needs to be kept by promoters for a minimum of three years this percentage is 20 over the counter exchange of india otcei transactionsthe transactions on the otcei revolve around the dealers dealers operate in a few capacities the two most important being as a broker and as a market maker as a broker the dealer transacts on behalf of buyers and sellers as a market maker the dealer has to ensure the availability of the shares for transaction purposes as well as to ensure that the price remains reasonable through supply and demand levels in addition to the dealers the otcei also has custodians the custodian or settler is the individual that performs the multitude of administrative tasks necessary for the proper functioning of the otcei these tasks include validating and storing documents as well as facilitating daily clearing transactions finally the last group of players consists of the registrars and transfer agents who are responsible for making sure the correct transfer and allotment of shares take place | |
suppose you manage a company looking to raise capital but don t meet the stringent requirements to list on a major stock exchange or you re an investor seeking to trade more exotic securities not offered on the new york stock exchange nyse or nasdaq where do you turn enter the over the counter otc markets where trading is done electronically | otc markets allow investors to trade stocks bonds derivatives and other financial instruments directly between two parties without the supervision of a formal exchange this freewheeling format provides prospects but also pitfalls compared with exchange based trading apple inc aapl and microsoft corporation msft traded otc as did many long forgotten penny stocks 12in this article we ll examine what otc markets are how they differ from traditional stock exchanges and the advantages and disadvantages for investors we ll explore the key otc market types the companies that tend to trade on them and how these markets are evolving in today s electronic trading environment investopedia jiaqi zhouunderstanding over the counter otc marketsin pharmaceuticals otc is a category of medications that can be bought without a doctor s or pharmacist s guidance otc is something similar in finance since what s sold are securities that haven t passed through the supervision of a formal exchange like the nasdaq or nyse otc markets have a long history dating back to the early days of stock trading in the 17th century before the establishment of formal exchanges most securities were traded over the counter as exchanges became more prevalent in the late 19th and early 20th centuries otc trading remained a significant part of the financial ecosystem they have always had a reputation for where you find the dodgiest deals and enterprises but might also find future profit makers among them since the exchanges take in much of the legitimate investment capital stocks listed on them have far greater liquidity otc securities meanwhile often have very low liquidity which means just a few trades can change their prices fast leading to significant volatility this has made the otc markets a breeding ground for pump and dump schemes and other frauds that have long kept the enforcement division of the u s securities and exchange commission sec busy 2in the u s the national association of securities dealers nasd later the financial industry regulatory authority finra was established in 1939 to regulate the otc market while nasd evolved into an electronic quotation platform in 1971 and subsequently a formal exchange before then the otc stock market operated through a network of market makers who facilitated trades between investors the trading process during this era was cumbersome and inefficient investors had to manually contact multiple market makers by phone to compare prices and find the best deal this made it impossible to establish a fixed stock price at any given time impeding the ability to track price changes and overall market trends these issues supplied obvious openings for less scrupulous market participants traders also looked to the pink sheets now known as otc markets group over a century ago as a paper based system for trading unlisted securities the term pink sheets derived from the pink colored paper on which the bid and ask prices of these securities were printed and circulated in the late 1990s pink sheets transitioned to an electronic quotation system eventually becoming the otc markets group which operates the otcqx otcqb and otc pink platforms today these platforms offer access to shares and other securities for a wide range of companies from well established foreign firms to small emerging companies that don t yet meet the listing requirements of major exchanges the shares for many major foreign companies trade otc in the u s through american depositary receipts adrs these securities represent ownership in the shares of a foreign company they are issued by a u s depositary bank providing u s investors with exposure to foreign companies without the need to directly purchase shares on a foreign exchange while otc markets offer greater flexibility and fewer barriers to entry than traditional exchanges they also come with exceptional risks and challenges finra regulates broker dealers in the u s otc markets 3 nevertheless because otc traded securities are subject to less stringent reporting and disclosure requirements investors may have limited access to reliable information about the companies they are investing in below is a table distinguishing the differences between trading otc and on a regulated exchange otc marketsthere are several otc markets in the u s including the following otc markets provide access to securities not listed on major exchanges including shares of foreign companies this allows investors to diversify their portfolios and gain exposure to international markets and companies that may not be available through traditional exchanges trading foreign shares directly on their local exchanges can be logistically challenging and expensive for individual investors otc markets offer a more convenient and cost effective way to invest in foreign companies since trades are executed in u s dollars during u s trading hours often with lower commissions than trading directly on foreign exchanges for foreign companies cross listing in otc markets like the otcqx can attract a broader base of u s investors potentially increasing trading volume and narrowing bid ask spreads some foreign companies trade otc to avoid the stringent reporting and compliance requirements of listing on major u s exchanges otc markets while regulated generally have less strict listing requirements making them attractive for companies seeking to access u s investors without the burden of sec registration for an exchange listing the number of securities traded in over the counter markets 4otc derivatives are private agreements directly negotiated between the parties without the need for an exchange or other formal intermediaries however a broker may assist in facilitating the trade this direct negotiation allows the terms of the otc derivatives to be tailored to meet the specific risk and return requirements of each counterparty providing a high level of flexibility while otc derivatives offer the advantage of customization they also carry a higher level of credit risk compared with exchange traded derivatives this is because there is no central clearing corporation to guarantee the performance of the contract meaning that each party is exposed to the potential default of their counterparty some common otc derivatives include the following the foreign exchange forex market is the largest and most liquid financial market globally 7 unlike stocks or commodities forex trading occurs only over the counter otc this decentralized nature allows for greater flexibility in transaction sizes however it also exposes traders to counterparty risk as transactions rely on the other party s creditworthiness major markets are open 24 hours a day five days a week and a majority of the trading occurs in financial centers like frankfurt hong kong london new york paris sydney tokyo and zurich this means the forex market begins in tokyo and hong kong when u s trading ends the forex market is volatile with price quotes changing constantly like other otc markets due diligence is needed to avoid fraud endemic to parts of this trading world 8advantages and disadvantages of otc marketsaccess to emerging or smaller companiespotential for higher returnsless stringent requirements for companies to be able to listflexibility in trade termsless regulation and oversighthigher risk volatilityless liquidityless transparency and reliable public informationsusceptibility to market manipulationotc markets offer access to emerging companies that may not meet the listing requirements of major exchanges these smaller growing companies can sometimes provide investors with the potential for higher returns although this comes with higher risk otc markets may also offer more flexibility in trading than traditional exchanges transactions can in some cases be customized to meet the specific needs of the parties involved such as the size of the trade or the settlement terms this flexibility can be particularly worthwhile for institutional investors or those trading large blocks of securities in addition companies traded otc have fewer regulatory and reporting requirements which can make it easier and less expensive when raising capital unlike major exchanges that have strict listing requirements otc markets have minimal standards for companies to meet regulated exchanges require a minimum market capitalization financial stability and corporate governance standards in contrast otc markets have fewer requirements making trading easier for financially unsound or even fraudulent companies 2 here are the major disadvantages investing in otc markets carries significant risks that investors should be aware of before trading there these markets often lack the regulations transparency and liquidity of exchanges examples of trading in over the counter marketslet s start with an example from a company s point of view suppose green penny innovations a promising renewable energy startup is not yet publicly listed on a major stock exchange however institutional investors and high net worth individuals are interested in acquiring company shares mega investments a prominent investment firm contacts brokers specializing in otc securities they inquire about the availability of green penny shares and receive quotes from different market makers one market maker otc securities group offers to sell 50 000 shares at 0 85 per share another market maker global trading solutions offers to sell a smaller block of 10 000 shares at 0 90 per share after evaluating the quotes and considering the company s prospects megafund buys 30 000 shares from otc securities group at 0 85 per share the trade is executed directly between megafund and otc securities group through a private negotiation no public announcement is made about the transaction and the price isn t displayed on any exchange several days later another investor techvision ventures contacts a different broker and expresses interest in buying green penny shares the broker reaches out to various market makers and discovers that the price has increased due to growing investor interest techvision eventually purchases 20 000 shares at 0 95 per share from another market maker suppose you re an investor seeking high returns on your investments so you re willing to dip into the otc markets if you can find the right stock you come across an opportunity called coindeal which promises exceptionally high returns on the premise that one or more technology companies under the virse banner are about to be acquired by a group of wealthy investors you look to be in early on what promises like a big deal just like other storied early investors the promoter of coindeal assures you that even if the returns from coindeal do not materialize he ll repay your investment with 7 annual interest over three years the promoter points to an exclusive and lucrative contract with at t to distribute government funded phones to support this promise he also says he has an app ready for the better business bureau to distribute that will yield substantial revenue enticed by these promises you and thousands of other investors invest in coindeal however when the promised sale doesn t close you discover that the promoter michael glaspie 72 of florida has transferred investor funds to other accounts he d been buying cryptocurrency among other things despite his assurances he wouldn t the case is of course one of many otc frauds targeting retail investors glaspie pleaded guilty in 2023 to defrauding more than 10 000 victims of over 55 million through his coindeal investment scheme 13this case highlights the importance of due diligence and the risks associated with otc investments when considering an otc investment you should do the following | |
how can i invest in otc securities | investing in otc securities is possible through many online discount brokers which typically provide access to otc markets however it s essential to note that not all brokers offer the same level of access or support for otc investments some brokers may limit trading in certain otc securities such as penny stocks or charge higher fees for these transactions some specialized otc brokers focus on specific markets or sectors such as international otc markets or penny stocks these brokers may provide access to a wider range of otc securities but may also charge higher fees or have more stringent account requirements or minimum transaction sizes 14 | |
how are the otc markets regulated | otc markets are regulated by the sec and finra the sec sets the overarching regulatory framework while finra oversees the day to day operations and compliance of broker dealers participating in the otc markets sec regulations include disclosure requirements and other regulations that issuers and broker dealers must follow the sec s rule 15c2 11 plays a critical role in regulating the otc markets by requiring broker dealers to conduct due diligence on the issuers of securities before publishing quotations for those securities 15 the rule mandates that broker dealers gather and review specific information about the issuer ensure that the information is up to date and publicly available and have a reasonable basis for believing that the information is accurate and the sources are reliable finra s responsibilities include monitoring trading activities enforcing compliance and handling disputes broker dealers must follow rule 15c2 11 when initiating or resuming quotations in otc securities which includes submitting form 211 to finra to demonstrate compliance | |
how do you trade on otc markets | most brokerages allow retail investors to trade on otc markets although they may have additional requirements due to the risk of otc trades interactive brokers tradestation and zacks trade are all examples of brokers that offer otc markets the bottom linethe over the counter otc market is a decentralized market where stocks bonds derivatives currencies and so on are traded directly between counterparties while the otc market offers prospects for investors to access a wide range of securities and for smaller companies to raise capital many storied firms have passed through the otc market it also comes with risks the otc market s lack of regulatory oversight and transparency makes it more susceptible to fraud manipulation and other unethical practices for investors considering otc securities it is crucial to conduct thorough due diligence understand the hazards involved and decide on investments with an eye toward your investment goals and risk tolerance seeking the guidance of a qualified financial professional can also help you navigate the complexities of these markets | |
what is the overall liquidity ratio | the overall liquidity ratio is the measurement of a company s capacity to pay its outstanding liabilities with its assets on hand the overall liquidity ratio is calculated by dividing total assets by the difference between its total liabilities and conditional reserves this ratio is used in the insurance industry as well as in the analysis of financial institutions | |
how the overall liquidity ratio is used | regulators use financial metrics like the overall liquidity ratio to determine whether an insurer bank or other company is financially healthy and solvent enough to cover its liabilities financial and insurance companies use the cash that their activities generate to obtain a return a bank for example may use funds received from customer deposits to provide mortgages and other loans the balance of customer deposits that are left over may be kept as cash or may be invested in liquid assets insurance companies receive money in the form of premium payments by policyholders and they in turn are liable for the coverage benefits they guarantee by underwriting policies depending on the duration of the policy the liability can last anywhere from a few months to a few years liabilities that come due within the following twelve month period are considered to be current liabilities the amount of money that a financial institution or insurer has to keep readily available to cover its liabilities is determined by regulators regulators examine liquidity ratios to determine whether the company is complying with its legal requirements the formula to calculate the overall liquidity ratio is total assets total liabilities conditional reserves in this calculation conditional reserves refer to rainy day funds held by insurance companies to help cover unanticipated expenses during times of financial stress understanding the overall liquidity ratioa low overall liquidity ratio could indicate that the financial institution or insurance company is in financial trouble whether from poor operational management poor risk management or poor investment management in order to comply with legal requirements and guarantee sufficient funds to cover its liabilities most lenders and insurers try to improve their overall liquidity ratio however a high overall liquidity ratio isn t necessarily good either especially if current assets represent a high percentage of the company s total assets a large proportion of current assets means that the company may not be investing sufficiently to earn a high return on assets but it may instead be focusing solely on liquidity overall liquidity ratio vs quick ratio vs current ratioother liquidity metrics include the quick ratio and current ratio liquidity ratios show if a company can meet its short term obligations for debt and other liabilities the current ratio reflects the business s ability to create the cash needed to pay their debts analysts look to the quick ratio to see if the company is using liquid assets to meet these debts the current ratio compares a company s total current assets to its current obligations the quick ratio compares a company s assets that are readily available for use including cash short term investments government bonds and unaffiliated investments to its current obligations short term liabilities due within the upcoming 12 month period the quick ratio is more conservative than the current ratio because it doesn t take into account current assets such as inventory which are harder to quickly turn into usable cash | |
what is overall turnover | overall turnover is a synonym for a company s total revenues it is a term that is most commonly used in europe and asia for example a european or asian company s press release that announces overall turnover increased 20 last year simply means that gross revenues or total sales increased by that percentage | |
how overall turnover works | in the united states companies use revenue or sales to describe turnover if the overall inventory turnover for an american manufacturing company is 10 it means that the company as a whole generated 10 in revenues for every 1 of assets overall turnover in the north american context may also refer to certain metrics such as labor turnover or asset turnover for an organization as a whole as opposed to measuring them for a specific division or business unit in addition to tracking trends in the level and evolution of a company s overall turnover analysts bankers and investors also use net turnover overall turnover minus the costs of sales e g tax discounts and other costs figures in a number of financial ratio calculations to assess a company s health efficiency in using assets and generating profits and compare its performance relative to peers the usefulness of certain ratios varies by industry but some of the key ratios include asset and receivables turnover ratios and cash turnover ratios the asset turnover ratio divides a company s net turnover by its average level of assets during the year this is a profitability ratio that measures the company s ability to use its assets to generate sales receivables turnover is calculated by dividing net turnover by the company s average level of accounts receivables this measures how quickly a company collects payments from its customers cash turnover ratio compares a compares turnover to its working capital current assets minus current liabilities to gauge how well a company can finance its current operations turnover and financial reporting | |
how companies report their turnover figures and how reliable they are to investors and analysts is regularly debated most of the concerns relate to when and how revenue is recognized and reported | the financial accounting standards board fasb and its european counterpart the international accounting standards board iasb issued new revenue recognition standards for addressing how companies account for revenue turnover from contracts the changes are designed to make it easier to compare revenue figures reported on financial statements across companies the standard took effect in 2018 1 | |
what is an overallotment | an overallotment is an option commonly available to underwriters that allows the sale of additional shares that a company plans to issue in an initial public offering or secondary follow on offering an overallotment option allows underwriters to issue as many as 15 more shares than originally planned the option can be exercised within 30 days of the offering and it does not have to be exercised on the same day it is also called a greenshoe option overallotment explainedthe underwriters of such an offering may elect to exercise the overallotment option when demand for shares is high and shares are trading above the offering price this scenario allows the issuing company to raise additional capital other times the purpose of issuing extra shares is to stabilize the price of the stock and prevent it from going below the offering price if the stock price drops below the offering price the underwriters can buy back some of the shares for less than they were sold for decreasing the supply and hopefully increasing the price if the stock rises above the offering price the overallotment agreement allows the underwriters to buy back the excess shares at the offering price so that they don t lose money example of an overallotmentin march 2017 snap inc offered 200 million shares at 17 00 per share in a much anticipated ipo shortly after placing the original 200 million shares the underwriters exercised their overallotment option to push another 30 million shares in the market 1 | |
what is overbought | overbought is a term used when a security is believed to be trading at a level above its intrinsic or fair value overbought generally describes recent or short term movement in the price of the security and reflects an expectation that the market will correct the price in the near future this belief is often the result of technical analysis of the security s price history but fundamentals may also be employed a stock that is overbought may be a good candidate for sale the opposite of overbought is oversold where a security is thought to be trading below its intrinsic value overbought explainedoverbought refers to a security which has been subject to a persistent upward pressure and that technical analysis suggests is due for a correction the bullish trend may be due to positive news regarding the underlying company industry or market in general buying pressure can feed on itself and lead to continued bullishness beyond what many traders consider reasonable when this is the case traders refer to the asset as overbought and many will bet on a reversal in price traditionally the standard indicator of a stock s value has been the price earnings ratio p e analysts and companies have used either publicly reported results or earnings estimates to identify the appropriate price for a particular stock if a stock s p e rises above that of its sector or a relevant index investors may see it as overvalued and pass on buying for the time being this is a form of fundamental analysis which uses macroeconomic and industry factors to determine a reasonable price for a stock the rise of technical analysis has allowed traders to focus on indicators of a stock to forecast price these indicators measure the recent price volume and momentum traders use technical tools to identify stocks that have become overvalued in recent trading and refer to these equities as overbought some traders use pricing channels like bollinger bands to spot overbought areas on a chart bollinger bands are positioned at a multiple of a stock s standard deviation above and below an exponential moving average when the price reaches the upper band it may be overbought | |
how to identify overbought stocks with rsi | technical analysis has provided traders with increasingly sophisticated calculations to identify overbought stocks george lane s stochastic oscillator which he developed in the 1950s examines recent price movements to identify imminent changes in a stock s momentum and pricing trend this oscillator laid the foundation for the technical indicator which has become the primary indicator of an overbought stock the relative strength index rsi the rsi measures the power behind price movements over a recent period typically 14 days using the following formula rsi 1 0 0 1 0 0 1 rs text rsi 100 100 left 1 text rs right rsi 100 100 1 rs rs represents the ratio of average upward movement to downward movement over a specified period of time a high rsi generally above 70 signals traders that a stock may be overbought and that the market should correct with downward pressure in the near term many traders use pricing channels like bollinger bands to confirm the signal that the rsi generates on a chart bollinger bands lie one standard deviation above and below the exponential moving average of a stock s recent price analysts that identify a stock with a high rsi and a price that is edging toward the high end of its upper bollinger band will likely consider it to be overbought example of overbought conditions using rsihere s an example of a chart with a high rsi reading that suggests overbought conditions in the above chart the oversold rsi conditions below 30 predicted a rebound in the stock price in october the overbought rsi conditions above 70 in february could indicate that the stock will consolidate or move lower in the near term | |
what is overcapitalization | the term overcapitalization refers to a situation wherein the value of a company s capital is worth more than its total assets put simply there is more debt and equity compared to the value of its assets | |
when a company is overcapitalized its market value is less than its total capitalized value or its current value an overcapitalized company may end up paying more in interest and dividend payments than it can sustain in the long term being overcapitalized means that a company s capital management strategies are running inefficiently placing it in a poor financial position | understanding overcapitalizationcapitalization is a term used in corporate finance to describe the total amount of debt and equity held by a company as such it defines the total amount of money that is invested in the company itself this includes both stocks and bonds companies can be either undercapitalized or overcapitalized here we focus on the latter but we go over what it means to be undercapitalized a little further down being overcapitalized means that a corporation s issued capital exceeds its operational needs the heavy debt burden and associated interest payments that an overcapitalized entity carries can be a strain on profits and reduce the amount of retained funds that the company has to invest in research and development r d or other projects raising capital may be difficult as a company s stock may lose value in the market as a whole being overcapitalized puts a strain on a company s earning potential there are several reasons why companies may find themselves in a position where they are overcapitalized some of the most common causes of overcapitalization include companies may also find themselves at risk of becoming overcapitalized when they either mismanage or underutilize the capital they have an overcapitalized company has several options available to correct the situation some of these options include if none of these options is viable then the company may want to seek out a merger or be acquired by another entity overcapitalization isn t just used in corporate finance it s also commonly used in the insurance industry when used in this context the supply of available policies exceeds consumer demand this situation creates a soft market and causes insurance premiums to decline until the market stabilizes policies purchased when premiums are low can reduce an insurance company s profitability special considerationsalthough it may seem detrimental to a business there is one advantage to being overcapitalized when a company finds itself in this situation it may have excess capital or cash on its balance sheet this cash can earn a nominal rate of return ror and increase the company s liquidity the excess capital also means that the company has a higher valuation and can claim a higher price in the event of an acquisition or merger additional capital can also be used to fund capital expenditures such as r d projects here s another way to look at overcapitalization when a company raises capital well above certain limits it may become overcapitalized again this isn t good for the company as its capitalized value is higher than its market worth overcapitalization vs undercapitalizationthe opposite of overcapitalization is undercapitalization just like overcapitalization being undercapitalized is not where any company wants to be undercapitalization occurs when a company has neither sufficient cash flow nor access to the credit it requires to finance its operations the company may not be able to issue stock on the public markets because the company does not meet the requirements or because the filing expenses are too high essentially the company cannot raise capital to fund itself its daily operations or any expansion projects undercapitalization most commonly occurs in companies with high startup costs too much debt and insufficient cash flow undercapitalization can ultimately lead to bankruptcy example of overcapitalizationhere s a hypothetical example of how overcapitalization works assume that construction firm company abc earns 200 000 and has a required rate of return of 20 the fairly capitalized capital is 1 000 000 or 200 000 20 instead of 1 000 000 company abc decides to use 1 200 000 as its capital the rate of earnings in this case becomes 17 or 200 000 1 200 000 100 due to overcapitalization the rate of return has dropped from 20 to 17 | |
how does overcapitalization work | overcapitalization happens when a company s debt and equity values are higher than those of its total assets this means that its market value is less than its capitalized value companies that are overcapitalized may have trouble getting more financing or may be subject to higher interest rates they may also have to pay more in dividends than they can sustain over the long run | |
what causes a company to become overcapitalized | a number of factors can lead to a company becoming overcapitalized a company may become overcapitalized if it buys assets that are priced too high or acquires assets that don t fit into its operations other reasons include poor corporate management higher than expected startup costs which often appear as assets on the balance sheet and a change in the business environment underutilizing funds can also lead to overcapitalization | |
what is market capitalization | market capitalization refers to the total dollar value of a company s outstanding shares you can easily calculate this figure by multiplying the price of one share by the total number of shares outstanding the bottom lineovercapitalization is when a company s capital is worth more than its total assets it has more debt and equity than the value of its assets an overcapitalized company has a market value less than its total capitalized value or current value and may end up paying more in interest and dividend payments than it can sustain in the long term | |
what is an overcast | an overcast is a type of forecasting error that occurs when an estimated metric such as future cash flows performance levels or production is forecast too high overcasting thus is when the estimated value turns out to be above the realized or actual value overcasting can be contrasted with undercasting which is when a forecast is made too low understanding overcastan overcast is caused by a variety of forecasting factors the main factor that results in overcasting is using the wrong inputs for example when estimating the net income of a company for next year one may overcast the amount if you underestimate costs or overestimate sales overcasting and undercastingan overcast or undercast is not realized until after the end of the estimated period although it can usually apply to the forecast of budget items such as sales and costs these errors are also found when estimating other items uncertainties and items that require estimates are areas where analysts and those building forecasts must use judgment the assumptions used can prove to be wrong or unforeseen circumstances may arise which leads to overcasting or undercasting overcasting could be indicative of aggressive estimates or aggressive accounting consistent overcasting should be investigated company employees could be overpromising to please upper management or the company might be hoping to keep current shareholders and might be trying to attract additional shareholders with aggressive forecasts an undercast is the opposite of an overcast in which a forecaster has underestimated a certain performance metric either due to incorrect inputs or unforeseen events example of overcastingif company abc expects to generate 10 million in sales for the year but ends up only bringing in 8 million an overcast of 2 million happened this could happen for a variety of reasons if during the budget building or forecasting process the company overestimates its average selling price for units with all else equal it can lead to an overcast as well if it overestimates the expected number of units sold this can lead to an overcast if the same company expects to generate 1 million in net income but generates 800 000 that s also an overcast the reasons for an overcast of net income can be plentiful they could include overestimating sales or underestimating costs such as employee expenses inventory purchases or marketing costs the idea of overcasting or undercasting can extend beyond company budgets to other forecasts such as the number of products or parts a plant can manufacture in a week if a plant forecasts it can create 13 000 parts in a week but it puts out 12 900 there was an overcast it can also apply to an investor s portfolio if an investor expects to collect 1 000 per year in dividends but due to a dividend cut they collect 750 a 250 dividend income overcast happened | |
what is over collateralization | over collateralization oc is the provision of collateral that is worth more than enough to cover potential losses in cases of default for example a business owner seeking a loan could offer property or equipment worth 10 or 20 more than the amount being borrowed over collateralization may be used by companies issuing bonds for the same reason in the financial services industry over collateralization is used to offset the risk in products such as mortgage backed securities in this case additional assets are added to the security to cushion any capital losses due to defaults on the individual loans that are packaged in the security in any case the purpose of over collateralization is to increase the credit rating or the credit profile of the borrower or the issuer of securities by reducing the risk to the investor | |
how over collateralization oc works | securitization is the practice of transforming a collection of assets such as loans into an investment or security ordinary bank loans such as home mortgages are sold by the banks that issue them to financial institutions that then package them for resale as securitized investments in any case these are not liquid assets but interest producing debts in financial terminology they are asset backed securities abs almost any kind of debt may be securitized include residential or commercial mortgages student loans car loans and credit card debt a key step in the securitization of products is determining the appropriate level of credit enhancement this refers to risk reduction to improve the credit profile of the structured financial products a higher credit profile leads to a higher credit rating which is key to finding buyers for securitized assets investors in any securitized product face a risk of default on the underlying assets credit enhancement can be thought of as a financial cushion that allows the securities to absorb losses from defaults on the underlying loans the rule of thumb for the amount of over collateralization needed in order to improve a credit profile over collateralization is one technique that may be used for credit enhancement in this case the issuer backs a loan with assets or collateral which has a value that is in excess of the loan that limits the credit risk for the creditor and enhances the credit rating assigned to the loan 1over collateralization is achieved when the value of assets in the pool is greater than the amount of the asset backed security abs so even if some of the payments from the underlying loans are late or go into default the principal and interest payments on the asset backed security can still be made from the excess collateral as a rule of thumb the value underlying a pool of assets is often 10 to 20 greater than the price of the issued security for example the principal amount of a mortgage backed security issue might be 100 million while the principal value of the mortgages underlying the issue might be 120 million 2 | |
what is the collateralization ratio | the collateralization ratio is the collateral value of the loan divided by the value of the loan loans that are over collateralized will have a value greater than 1 loans that are under collateralized will have a value lower than 1 | |
what is an under collateralized loan | an under collateralized loan is when a loan s collateral is less than its value many loans are under collateralized when the lender requires collateral but that is a risk to the lender if the borrower defaults on an under collateralized loan the lender may not be able to recoup the full amount owed | |
when a loan has more collateral or backing than the value of the loan the risk to the lender is virtually eliminated that s because if the borrower defaults the lender can easily recoup the lost value by using the collateral which will more than cover losses | the bottom linean over collateralized loan is a loan that is backed by more collateral than it is worth while in many cases it is ideal to provide lower collateral so you do not put the collateral at risk overcollateralizing a loan may be necessary in some cases such as if you want to secure better terms | |
what is an overdraft | an overdraft occurs when there isn t enough money in an account to cover a transaction or withdrawal but the bank allows the transaction anyway essentially it s an extension of credit from the financial institution that is granted when an account reaches zero the overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal investopedia madelyn goodnightunderstanding overdraftswith an overdraft account a bank is covering payments a customer has made that would otherwise be rejected or in the case of actual physical checks would bounce and be returned without payment basically an overdraft means that the bank allows customers to borrow a set amount of money there is interest on the loan and there is typically a fee per overdraft at some banks an overdraft fee can run upwards of 37 1as with any loan the borrower pays interest on the outstanding balance of an overdraft loan often the interest on the loan is lower than the interest on credit cards making the overdraft a better short term option in an emergency 2 in many cases there are additional fees for using overdraft protection that reduce the amount available to cover your checks such as insufficient funds fees per check or withdrawal while banks can charge overdraft fees they can t change the order of a customer s transactions to collect more overdraft fees in 2010 wells fargo was fined 203 million for the predatory practice of structuring customer withdrawals in a way that maximized overdraft fees 3in 2023 the consumer financial protection bureau cfpb found some financial institutions charged unfair overdraft fees by authorizing an atm or debit transaction made when the customer had a positive balance but later charging an overdraft fee because intervening transactions went through before the debit settled the cfpb found customers couldn t reasonably avoid these surprise fees it told the banks and credit unions to stop charging overdraft fees in these situations and a number of them have come up with plans to refund customers who were charged the fees in the past 4special considerationsyour bank can opt to use its own funds to cover your overdraft 5 another option is to link the overdraft to a credit card if the bank uses its own funds to cover your overdraft it typically won t affect your credit score 6 when a credit card is used for overdraft protection it s possible that you can increase your debt to the point where it could affect your credit score however this won t show up as a problem with overdrafts on your checking accounts if you don t pay your overdrafts back in a predetermined amount of time your bank can turn over your account to a collection agency this collection action can affect your credit score and get reported to the three main credit agencies equifax experian and transunion it depends on how the account is reported to the agencies as to whether it shows up as a problem with an overdraft on a checking account if an overdrawn account isn t paid off in time the bank may turn the debt over to a collection agency overdraft protectionsome but not all banks will pay overdrafts automatically as a courtesy to the customer while charging fees of course overdraft protection provides the customer with a further tool to prevent embarrassing shortfalls that reflect poorly on your ability to pay usually it works by linking your checking account to a savings account other checking account or a line of credit if there s a shortfall this source gets tapped for the funds ensuring that you won t have a check returned or a transaction transfer declined it also avoids triggering a non sufficient funds nsf charge the dollar amount of overdraft protection varies by account and by bank often the customer needs to specifically request it there are a variety of pros and cons to using overdraft protection but one thing to bear in mind is that banks aren t providing the service out of the goodness of their hearts they usually charge a fee for it as such customers should be sure to rely on overdraft protection sparingly and only in an emergency if the overdraft protection is used excessively the financial institution can remove the protection from the account | |
what is an overdraft fee | an overdraft is a loan provided by a bank that allows a customer to pay for bills and other expenses when the account reaches zero for a fee the bank provides a loan to the client in the event of an unexpected charge or insufficient account balance typically these accounts will charge a one time funds fee and interest on the outstanding balance | |
how does overdraft protection work | under overdraft protection if a client s checking account enters a negative balance they will be able to access a predetermined loan provided by the bank and be charged a fee in many cases overdraft protection is used to prevent a check from bouncing and the embarrassment that this may cause additionally it may prevent a non sufficient fund fee but in many cases each will type of fee will be roughly the same amount | |
what are the pros and cons of overdrafts | the pros of overdraft involve providing coverage when an account unexpectedly has insufficient funds avoiding embarrassment and returned check charges from merchants or creditors but it s important to weigh the costs overdraft protection often comes with a significant fee and interest which if not paid off in a timely manner can add an additional burden to the account holder according to the cfpb customers who had overdraft protection in fact often paid more in fees than those without it 7the bottom linean overdraft is a temporary loan that allows bank customers to continue paying bills or withdrawing money even after their accounts are empty this can be useful in emergencies especially if the bank offers overdraft protection however overdrawing an account incurs additional penalties or interest and should be avoided if possible | |
what is overdraft protection | overdraft protection is an optional service that prevents the rejection of charges to a bank account primarily checks atm transactions debit card charges that are in excess of the available funds in the account overdraft protection sometimes called cash reserve checking is used most frequently as a cushion for checking accounts but it also can be applied to savings accounts with overdraft protection even if the account has insufficient funds the bank will cover the shortfall so that the transaction goes through when a customer signs up for overdraft protection they designate a backup account for the bank to use as the source to cover any overdrafts usually a linked savings account credit card or line of credit however the bank charges the customer for this service in a few ways e g overdraft fees to process any transactions that overdraw the account | |
how overdraft protection works | without overdraft protection transactions that have insufficient funds to cover them are returned unpaid that is checks bounce and debit transactions are refused which can be expensive and disruptive for the customer most banks charge hefty overdraft and non sufficient funds nsf fees between 30 and 35 per transaction on average for accounts that do not have sufficient funds what s more not only can the bank refuse payment and charge the account holder but a penalty or fee may also be charged by the merchant for the failed transaction 1to avoid overdraft and nsf fees customers who choose overdraft protection link their checking accounts to credit cards savings accounts or other lines of credit that kick in whenever they withdraw more than the current balance this amounts to an automatic pre approved loan or transfer every time the customer with insufficient funds writes a check makes a wire transfer swipes a debit card or asks an atm for a sum in excess of the balance as soon as the overdraft protection service is triggered the linked account is charged a transfer fee to move funds to cover the shortfall the account holder may also be charged either an additional fee every month that overdraft protection is used or a fixed monthly fee for continuous protection if you bounce a check you can incur a variety of charges or in extreme cases your bank can close your account which also impacts your ability to open a new checking account example of overdraft protectionif a renter with overdraft protection writes an 800 check on an account with a balance of 650 the overdraft protection from their linked account kicks in as soon as the check is cashed and the check clears instead of bouncing due to insufficient funds the bank charges a transfer fee of 15 for approving a transaction that exceeds available funds the renter will now have a balance of 635 650 15 in the account as well as a charge of 800 to pay off on the linked credit card line of credit or savings account in the absence of overdraft protection it is not uncommon for banks to charge multiple overdraft or nsf fees per day for example a consumer might make successive purchases without realizing that the amount in their account is insufficient to cover the charges if a checking account goes negative for more than a few days many banks also charge an extended overdraft fee it s important to note that even if you have overdraft protection banks can still charge this additional fee special considerationslines of credit for overdraft protection can range from 250 to 5 000 and above and of course customers incur interest charges and transaction fees for using these lines if a credit card is used as the backup account the amount is treated as a cash advance which can be an expensive form of overdraft protection not only do cash advances have no grace period but they also have high interest rates and high fees usually 10 flat fees or 5 of the advance whichever is greater a linked savings account is probably the least expensive backup account for overdraft protection but the backup must hold enough money to cover the shortfall in the first account trends in overdraft protectionoverdraft fees have always been among the most controversial bank fees according to a bankrate com survey of 245 banks and thrifts in 25 large u s markets the average overdraft fee declined to a 13 year low of 29 80 which is down 11 over last year s record high of 33 58 2in the wake of the 2020 pandemic public debate accelerated a trend toward eliminating overdraft fees altogether for example the u s senate held hearings on how and why banks charge fees for insufficient funds and criticized bank ceos for refusing to halt overdraft fees during the pandemic 2more evidence of this trend includes a 2022 american banker report that as big banks made headlines for reducing or eliminating overdraft fees even credit unions felt pressure from regulators and digital bank competitors to do the same 3 | |
is there a limit on overdraft fees | federal laws do not specify maximums that banks can charge for overdrafts but banks are required to disclose any fees when the account is established and they are required to give customers advance notice of any fee increase 4can banks refuse to cover overdrafts banks are not required to offer overdraft protection and even when they do and a customer opts in they retain the right to pay or not pay a particular overdraft transaction that might fall outside the rules of the agreement 5 | |
is overdraft protection mandatory | overdraft protection is optional it is only the service that is automatic for bank customers who choose to opt in for overdraft protection on their checking or savings accounts 6 | |
what is overextension | the term overextension refers to a situation in finance in which an individual or corporation has more debt than they can handle and repay consumers who must use more than a third of their net income to repay debt are generally considered to be overextended they may need to consolidate their debts into a single loan granting more credit to overextended consumers or companies can be a great risk to lenders being overextended also represents excessive leverage in a trader or investor s account equity and their buying power for securities understanding overextensionbeing overextended can mean several different things in finance as noted above it is most commonly used to describe an individual or company s financial situation when they have more debt than they can afford to repay entities that use at least one third of the money they make to repay debt are considered overextended 1 for instance someone who makes 30 000 a year and pays 10 000 to satisfy their debt load is overextended the same principle applies to companies that have more debt than earned income credit debt and overextension are tricky to model financially because they can have a snowball effect where conditions pile onto one another conventional linear models do not account for the nonlinear exponential nature of credit risk often once strong credit issuers or borrowers can rapidly deteriorate to weak credits as murphy s law works against an individual or business anything that can go wrong will go wrong in many cases consumers may have to turn to additional debt to take control of their finances this often comes through debt consolidation which involves paying off individual debts by taking on a larger loan 2 doing so ensures that the borrower only has one large payment to make rather than many smaller ones however companies may have to find new ways to raise capital such as issuing new shares of equity rather than taking on more debt as mentioned earlier overextension is also used to describe excess leverage in trader and investors account equity and buying power 3 overextension of this kind can greatly amplify losses in a bear market and force the trader to meet steep margin calls the inability to do this can result in forced liquidation of securities and the freezing of the account being overextended generally doesn t include mortgage debt special considerationsthe idea of overextension varies based on the financial characteristics of a borrower wealthy individuals and cash rich businesses can take on proportionally more debt than weaker borrowers without overextending themselves becoming overextended can be out of the control of a firm s management for example during a steep economic downturn such as a recession a company s financial condition can materially deteriorate largely out of the company s control during tough economic times it is not uncommon for a once healthy business to become overextended as conditions move out of its favor this can happen to entire sectors even during robust economic climates for instance traditional brick and mortar retailers have struggled to adjust to online and e commerce competition despite record growth in many segments of the economy | |
what is overfitting | overfitting is a modeling error in statistics that occurs when a function is too closely aligned to a limited set of data points as a result the model is useful in reference only to its initial data set and not to any other data sets overfitting the model generally takes the form of making an overly complex model to explain idiosyncrasies in the data under study in reality the data often studied has some degree of error or random noise within it thus attempting to make the model conform too closely to slightly inaccurate data can infect the model with substantial errors and reduce its predictive power understanding overfittingfor instance a common problem is using computer algorithms to search extensive databases of historical market data in order to find patterns given enough study it is often possible to develop elaborate theorems that appear to predict returns in the stock market with close accuracy however when applied to data outside of the sample such theorems may likely prove to be merely the overfitting of a model to what were in reality just chance occurrences in all cases it is important to test a model against data that is outside of the sample used to develop it | |
how to prevent overfitting | ways to prevent overfitting include cross validation in which the data being used for training the model is chopped into folds or partitions and the model is run for each fold then the overall error estimate is averaged other methods include ensembling predictions are combined from at least two separate models data augmentation in which the available data set is made to look diverse and data simplification in which the model is streamlined to avoid overfitting financial professionals must always be aware of the dangers of overfitting or underfitting a model based on limited data the ideal model should be balanced overfitting in machine learningoverfitting is also a factor in machine learning it might emerge when a machine has been taught to scan for specific data one way but when the same process is applied to a new set of data the results are incorrect this is because of errors in the model that was built as it likely shows low bias and high variance the model may have had redundant or overlapping features resulting in it becoming needlessly complicated and therefore ineffective overfitting vs underfittinga model that is overfitted may be too complicated making it ineffective but a model can also be underfitted meaning it is too simple with too few features and too little data to build an effective model an overfit model has low bias and high variance while an underfit model is the opposite it has high bias and low variance adding more features to a too simple model can help limit bias overfitting examplefor example a university that is seeing a college dropout rate that is higher than what it would like decides it wants to create a model to predict the likelihood that an applicant will make it all the way through to graduation to do this the university trains a model from a dataset of 5 000 applicants and their outcomes it then runs the model on the original dataset the group of 5 000 applicants and the model predicts the outcome with 98 accuracy but to test its accuracy they also run the model on a second dataset 5 000 more applicants however this time the model is only 50 accurate as the model was too closely fit to a narrow data subset in this case the first 5 000 applications | |
what is an overfunded pension plan | an overfunded pension plan is a company retirement plan that has more assets than liabilities in other words there is a surplus amount of money needed to cover current and future monthly benefits to retirees although accounting standards allow the company to record the surplus as net income it cannot be paid out to corporation shareholders like other income as it is reserved for current and future retirees understanding an overfunded pension plana pension plan is a type of defined benefit plan in which employers contribute money on behalf of their employees based on a formula that considers the employee s salary and length of employment the funds in many pensions are invested in individual securities such as stocks and a basket of securities such as mutual funds many pension funds are also invested in bonds which are debt instruments that typically pay interest payments during the life of the bond the goal is to have the pension fund grow as a result of investment gains and any interest earned from the securities the growth in the fund s investment earnings is extremely important since the majority of the monthly benefits paid out to an employee are usually from these earnings while employer contributions make up a smaller portion of the monthly benefits over time pension plans can become overfunded as a result of long periods of stock market increases as a result of an overfunded pension there are more than enough funds to pay both current and future monthly benefits to employees however it s usually more common for a pension plan to be underfunded as investment shortfalls tend to be more common an underfunded pension is when there are not enough funds in the plan to cover current or future pension benefits | |
how well a pension plan is funded is determined by calculating the plan s funding ratio the funding ratio is the result of dividing the total assets in a plan by the amount of benefits that are due to be paid out a pension plan that has a funding ratio of less than 100 means that it doesn t have enough funds to cover future liabilities or monthly benefits a pension that s overfunded would have a funding ratio of more than 100 percent | however just because a funding ratio is below 100 doesn t necessarily mean the pension is in trouble or in danger of not fulfilling its financial commitments typically a pension that has a funding ratio of 80 or more is considered stable these plans enjoyed surpluses during the dot com bubble and the years preceding the great recession but failed to benefit from the bull market of the past decade most pension funds are technically underfunded in 2022 the average funding ratio was 77 8 1 in 2023 the average funding ratio was 78 1 2benefits of an overfunded pension planthe funding level of a pension plan is an indication of the health of the plan and the likelihood that the company will be able to pay the monthly retirement benefits when employees retire if the pension plan is more than 100 funded it s an overfunded plan and that s a good thing for beneficiaries it means the company has already saved more than enough money to pay projected retirement benefits for current workers and retirees with excess funds the pension plan can have greater flexibility in its investment strategy it may have the opportunity to invest in a broader range of assets or pursue higher return investments potentially increasing overall returns knowing that the pension plan is well funded can boost employee morale and confidence in the organization employees may feel more secure about their retirement benefits contributing to a positive workplace atmosphere in a very indirect way you may be able to make the case that prospective employees or applicants are more likely to be willing to join the company as opposed to knowing the company s pension plan is underfunded limitations and downsides to overfundedexcessive funding in a pension plan can lead to unfavorable tax consequences for organizations when a pension plan is significantly overfunded there may be limitations on the deductibility of contributions affecting the tax benefits associated with pension funding overfunded pension plans may sometimes draw regulatory scrutiny particularly if there are suspicions of mismanagement or improper use of surplus funds regulatory bodies may choose to more closely monitor overfunded pension funds to ensure compliance with laws and regulations organizations must always adhere to reporting requirements accurately and maintain transparency in fund management these requirements may be slightly heightened to show any surplus is being handled according to regulatory standards there s also a psychological risk with overfunded plans and employee expectations the awareness of a significant surplus in a pension plan can raise employee expectations for increased benefits or additional perks managing these expectations is crucial to prevent dissatisfaction among employees as they may question why benefits can t be higher | |
how pension plan benefits are estimated | estimating the amount of money a company will need to pay its pension obligations is not a simple undertaking an actuary is a professional that uses mathematical and statistical analysis to measure risks and financial obligations for companies in the future actuaries create mathematical models to try to predict how long employees and their spouses will live future salary growth at what age employees will retire and the amount of money a company will earn from investing its pension savings the resulting estimate is the amount of money the company should have saved in the pension fund 3actuaries calculate the amount of contributions a company must pay into a pension based on the benefits the participants receive or are promised and the estimated growth of the plan s investments these contributions are tax deductible to the employer 4 | |
how much money the plan ends up with at the end of the year depends on the amount they paid out to participants and the investment growth that was earned on the money as such shifts in the market can cause a fund to be either underfunded or overfunded | pension plan reporting requirementspension reporting laws vary by country and jurisdiction these laws don t necessarily discriminate against plans that are overfunded however those plans may receive more scrutiny because of their status here are some reporting related requirements to be mindful of erisa is a comprehensive federal law that sets standards and regulations for private sector employee benefit plans including pension plans it was enacted in 1974 under erisa plan administrators are obligated to provide participants with detailed information about various aspects of the pension plan typically communicated through two key documents summary plan description and summary annual report 5form 5500 is a mandatory annual filing that plan administrators must submit to the u s department of labor this form serves as a comprehensive report on the financial condition investments and operations of the pension plan larger plans are also subject to an additional requirement of an annual audit meaning plans that are overfunded may find themselves facing additional requirements 6the pbgc is a federal agency that provides insurance protection to participants in private sector defined benefit pension plans plans covered by pbgc insurance are subject to reporting requirements to the pbgc pension plans must report certain events to the pbgc 7the irs plays a crucial role in overseeing the tax aspects of pension plans in addition to filing with the dol pension plans are required to file form 5500 with the irs this filing includes information relevant to tax compliance and is separate from the dol filing plan administrators are also required to provide regular statements to participants and any amendments to the pension plan or significant changes in plan status must be reported to the irs 8special considerationsin some cases defined benefit plans can become overfunded in the hundreds of thousands or even millions of dollars regrettably overfunding is of no use while in the plan beyond the sense of security it may provide beneficiaries an overfunded pension plan will not result in increased participant benefits and cannot be used by the business or its owners as mentioned above it s important for participants to understand that an overfunded plan won t correlate to higher benefits maintaining an overfunded status in the long term requires ongoing management and monitoring as the plan s funding status may quickly change changes in demographics workforce dynamics or economic conditions can impact the status and investing macroeconomic factors may cause the plan to lose funds via its investment choices | |
what are the tax implications of having an overfunded pension plan | the tax implications of having an overfunded pension plan revolve around limitations on the deductibility of contributions and potential tax consequences on investment earnings excessive funding may lead to restrictions on the tax benefits associated with pension contributions additionally the investment earnings generated by the surplus assets may be subject to tax | |
what risks are associated with overfunded pension plans | overfunded pension plans can face risks particularly in terms of investments one risk is the temptation to pursue riskier investments to maximize returns on surplus funds as there may be less of an impact for losses | |
what role do interest rate changes play in overfunded pension plans | interest rate changes play a significant role in the management of overfunded pension plans the present value of future pension obligations is often calculated based on interest rates changes in interest rates can impact the calculation of pension liabilities potentially leading to shifts in the funding status of the plan | |
what constraints exist regarding the flexibility in using surplus funds in pension plans | while overfunded pension plans provide flexibility constraints exist regarding the use of surplus funds legal and contractual obligations may impose restrictions on how surplus assets can be utilized for example there may be limitations on distributing surplus funds to shareholders or repurposing them for non pension related purposes the bottom linean overfunded pension plan occurs when the assets held by the plan exceed its present and future liabilities while providing financial stability and investment flexibility it introduces challenges such as tax implications regulatory scrutiny and the need for careful management to align with legal and fiduciary responsibilities | |
what is overhang | overhang is a measure of the potential dilution of stock shares due to possible awards of stock based compensation it is usually represented as a percentage and is calculated as stock options granted plus the remaining options to be granted divided by the total shares outstanding so ro tso understanding overhangthere is no rule of thumb for determining how much overhang is harmful to common shareholders but generally speaking the higher the number the greater the risk the options overhang decreases after a public offering because the number of shares outstanding increases if a company has a very high options overhang it must generate even higher levels of growth and profits to compensate for the overhang s dilutive effects on earnings per share eps and therefore investor returns this in turn can lead managers to take on more risk pay out less in dividends and take on more debt all of which can result in greater volatility in the company s stock price companies with high levels of employee stock ownership on the other hand tend to have stronger financial performance pay higher dividends and see less stock price volatility | |
how to calculate overhang | the simplest way to calculate options overhang is to add up existing and future option issues divided by the total number of stock outstanding for example suppose a company has already issued 50 000 options and has plans to distribute 50 000 more assuming that the company has 1 million shares outstanding then the total overhang is 50 000 50 000 1 000 000 10 used in the broad sense market overhang can refer to any situation where investors hold back from an asset due to uncertainties about the near future special considerationsaccording to a 2020 study by executive compensation consultant f w cook co small cap companies grant a significantly higher percentage of their stock options to executives as compared to large cap companies technology companies also have the lowest share of awards granted to senior management while the retail and industrial sectors have the highest 1because an options overhang can have a negative effect on the price of a stock entrepreneurs and company management generally devise hr strategies to mitigate its impact performance based options are one such strategy the chances are lower that an employee will exercise performance based options versus traditional stock options that are not tied to performance and are almost certain to be exercised once their vesting period is over | |
what is the definition of overhang | in the broadest definition market overhang refers to a situation where customers or investors wait for future events rather than buying a certain product or stock this is usually because of uncertainties or fears regarding that stock s near term future |
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