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what is stock overhang | broadly speaking stock overhang refers to situations where a few shareholders possess a large block of stock shares raising the possibility of a price drop if they sell them all at once stock overhang is most common in situations where employees are compensated with a large number of company shares but it may also apply to the stock holdings owned by large institutional investors | |
what is bearish overhang | bearish overhang refers to a situation in which buyers are reluctant to purchase a certain asset due to the presence of a large block of that asset that would cause prices to fall if the block were sold this usually refers to stock shares but it can also refer to commodities for example during the negotiations over u s iran sanctions some analysts warned of a bearish overhang caused by a potential sell off of the iranian oil supply 2 | |
what is risk overhang | in insurance risk overhang refers to situations where continuous exposure to past transactions can limit an insurer s actions in the present this is usually the case when an insurer has to pass on lucrative opportunities because they cannot take on any more risk | |
what is overhead | overhead refers to the ongoing business expenses not directly attributed to creating a product or service it is important for budgeting purposes but also for determining how much a company must charge for its products or services to make a profit in short overhead is any expense incurred to support the business while not being directly related to a specific product or service investopedia paige mclaughlinunderstanding overheada company must pay overhead on an ongoing basis regardless of how much or how little the company sells for example a service based business with an office has overhead expenses such as rent utilities and insurance that are in addition to direct costs such as labor and supplies of providing its service expenses related to overhead appear on a company s income statement and they directly affect the overall profitability of the business the company must account for overhead expenses to determine its net income also referred to as the bottom line net income is calculated by subtracting all production related and overhead expenses from the company s net revenue also referred to as the top line types of overheadoverhead expenses can be fixed meaning they are the same amount every time or variable meaning they increase or decrease depending on the business s activity level overhead expenses can also be semi variable meaning the company incurs some portion of the expense no matter what and the other portion depends on the level of business activity fixed overhead is overhead costs that remain static for a long period of time and do not change as business activity ebbs and flows regardless of if business is growing or slowing fixed overhead remains the same examples include rent depreciation insurance premiums office personnel salaries and the cost of licenses variable overhead consists of the overhead costs that fluctuate with business activity these are overhead costs that are not static as business activity increases so does variable overhead as business activity slows the variable overhead decreases examples include office equipment shipping and mailing costs marketing legal expenses and maintenance semi variable overhead is a combination of fixed and variable overhead where some costs are incurred regardless of business activity but may also increase if business activity grows examples of semi variable overhead include commissions and utility costs for utilities a base amount is charged and the remainder of the charges are based on usage other categories of overhead may be appropriate depending on the business for example overhead expenses may apply to a variety of operational categories general and administrative overhead traditionally includes costs related to the general management and administration of a company such as the need for accountants human resources and receptionists selling overhead relates to activities involved in marketing and selling the good or service this can include printed materials and television commercials as well as the commissions of sales personnel other categories such as research overhead maintenance overhead manufacturing overhead or transportation overhead also apply examples of overheadsome common examples of overhead costs companies must assume are rent utilities administrative costs insurance and employee perks the costs associated with maintaining the office or manufacturing space companies must have in order to perform their business is an example of overhead this includes rent as well as utilities such as water gas electricity internet and phone service additional costs such as a subscription to virtual meeting platforms like zoom zm also must be factored into a company s overhead administrative costs are often one of the most expensive facets of a company s overhead this can include the cost of stocking the office with the necessary supplies the salaries of office associates and external legal and audit fees administrative costs can range from the supply of toilet paper in the office restroom to hiring an external audit firm to ensure the company complies with industry specific regulations depending on the company businesses are required to hold many different types of insurance in order to operate properly these can include basic property insurance to protect the company s physical assets from fire flood or theft as well as professional liability insurance health insurance for its employees and car insurance for any company owned vehicles while none of these costs are directly related to generating revenue for the company by providing a good or service the business is often legally mandated to purchase these various types of insurance if it wishes to operate within most jurisdictions many larger companies offer a range of benefits to their employees such as keeping their offices stocked with coffee and snacks providing gym discounts hosting company retreats and company cars all of these expenses are considered overhead as they have no direct impact on the business s goods or services special considerationsoverhead is typically a general expense meaning it applies to the company s operations as a whole it is commonly accumulated as a lump sum at which point it may then be allocated to a specific project or department based on certain cost drivers for example using activity based costing a service based business may allocate overhead expenses based on the activities completed within each department such as printing or office supplies | |
why is overhead cost important | overhead cost is important because it is the cost to run your business understanding and managing your overhead well particularly how it relates to your business output will help ensure your business is profitable and to obtain the best margins you can on your sales | |
what are different types of overhead | broadly speaking overhead can be organized into three main types fixed overhead includes expenses that are the same amount consistently over time these can include rent and depreciation on fixed assets variable overhead expenses include costs that may fluctuate over time such as shipping costs semi variable costs are a blend of the two utilities are an example of a semi variable cost | |
how is overhead calculated | since overhead is often considered a general expense it is accumulated as a lump sum this is then allocated to a specific product or service there are a number of different ways of calculating overhead however the general rule is the following overhead rate indirect costs allocation measure the indirect costs are the overhead costs while the allocation measure would include labor hours or direct machine costs which is how the company measures its production the bottom lineoverhead refers to the costs of running a business that are not directly related to producing a good or service these costs can be fixed such as rent or variable such as transport costs they can also be semi variable such as utilities effectively managing your overhead allows you to keep costs low set competitive prices and maximize the most of your revenues | |
what is overhead | overhead refers to the ongoing business expenses not directly attributed to creating a product or service it is important for budgeting purposes but also for determining how much a company must charge for its products or services to make a profit in short overhead is any expense incurred to support the business while not being directly related to a specific product or service investopedia paige mclaughlinunderstanding overheada company must pay overhead on an ongoing basis regardless of how much or how little the company sells for example a service based business with an office has overhead expenses such as rent utilities and insurance that are in addition to direct costs such as labor and supplies of providing its service expenses related to overhead appear on a company s income statement and they directly affect the overall profitability of the business the company must account for overhead expenses to determine its net income also referred to as the bottom line net income is calculated by subtracting all production related and overhead expenses from the company s net revenue also referred to as the top line types of overheadoverhead expenses can be fixed meaning they are the same amount every time or variable meaning they increase or decrease depending on the business s activity level overhead expenses can also be semi variable meaning the company incurs some portion of the expense no matter what and the other portion depends on the level of business activity fixed overhead is overhead costs that remain static for a long period of time and do not change as business activity ebbs and flows regardless of if business is growing or slowing fixed overhead remains the same examples include rent depreciation insurance premiums office personnel salaries and the cost of licenses variable overhead consists of the overhead costs that fluctuate with business activity these are overhead costs that are not static as business activity increases so does variable overhead as business activity slows the variable overhead decreases examples include office equipment shipping and mailing costs marketing legal expenses and maintenance semi variable overhead is a combination of fixed and variable overhead where some costs are incurred regardless of business activity but may also increase if business activity grows examples of semi variable overhead include commissions and utility costs for utilities a base amount is charged and the remainder of the charges are based on usage other categories of overhead may be appropriate depending on the business for example overhead expenses may apply to a variety of operational categories general and administrative overhead traditionally includes costs related to the general management and administration of a company such as the need for accountants human resources and receptionists selling overhead relates to activities involved in marketing and selling the good or service this can include printed materials and television commercials as well as the commissions of sales personnel other categories such as research overhead maintenance overhead manufacturing overhead or transportation overhead also apply examples of overheadsome common examples of overhead costs companies must assume are rent utilities administrative costs insurance and employee perks the costs associated with maintaining the office or manufacturing space companies must have in order to perform their business is an example of overhead this includes rent as well as utilities such as water gas electricity internet and phone service additional costs such as a subscription to virtual meeting platforms like zoom zm also must be factored into a company s overhead administrative costs are often one of the most expensive facets of a company s overhead this can include the cost of stocking the office with the necessary supplies the salaries of office associates and external legal and audit fees administrative costs can range from the supply of toilet paper in the office restroom to hiring an external audit firm to ensure the company complies with industry specific regulations depending on the company businesses are required to hold many different types of insurance in order to operate properly these can include basic property insurance to protect the company s physical assets from fire flood or theft as well as professional liability insurance health insurance for its employees and car insurance for any company owned vehicles while none of these costs are directly related to generating revenue for the company by providing a good or service the business is often legally mandated to purchase these various types of insurance if it wishes to operate within most jurisdictions many larger companies offer a range of benefits to their employees such as keeping their offices stocked with coffee and snacks providing gym discounts hosting company retreats and company cars all of these expenses are considered overhead as they have no direct impact on the business s goods or services special considerationsoverhead is typically a general expense meaning it applies to the company s operations as a whole it is commonly accumulated as a lump sum at which point it may then be allocated to a specific project or department based on certain cost drivers for example using activity based costing a service based business may allocate overhead expenses based on the activities completed within each department such as printing or office supplies | |
why is overhead cost important | overhead cost is important because it is the cost to run your business understanding and managing your overhead well particularly how it relates to your business output will help ensure your business is profitable and to obtain the best margins you can on your sales | |
what are different types of overhead | broadly speaking overhead can be organized into three main types fixed overhead includes expenses that are the same amount consistently over time these can include rent and depreciation on fixed assets variable overhead expenses include costs that may fluctuate over time such as shipping costs semi variable costs are a blend of the two utilities are an example of a semi variable cost | |
how is overhead calculated | since overhead is often considered a general expense it is accumulated as a lump sum this is then allocated to a specific product or service there are a number of different ways of calculating overhead however the general rule is the following overhead rate indirect costs allocation measure the indirect costs are the overhead costs while the allocation measure would include labor hours or direct machine costs which is how the company measures its production the bottom lineoverhead refers to the costs of running a business that are not directly related to producing a good or service these costs can be fixed such as rent or variable such as transport costs they can also be semi variable such as utilities effectively managing your overhead allows you to keep costs low set competitive prices and maximize the most of your revenues | |
what is an overhead ratio | an overhead ratio is a measurement of the operating costs of doing business compared to the company s income a low overhead ratio indicates that a company is minimizing business expenses that are not directly related to production the formula for the overhead ratio isthe overhead ratio is arrived at by dividing operating expenses by the sum of taxable net interest income and operating income that is overhead ratio operating expenses tii operating income where tii taxable interest income begin aligned text overhead ratio frac text operating expenses text tii text operating income textbf where text tii text taxable interest income end aligned overhead ratio tii operating incomeoperating expenses where tii taxable interest income the basics of overhead ratiosa company s overhead expenses are the costs that result from its normal day to day business operations operating expenses might include office rent advertising utilities insurance depreciation or machinery calculations of overhead exclude costs that are directly related to the production of the goods or services that the company produces thus in a toy factory the skilled workers who make the toys and the tools they use to create them are not overhead expenses but employees of the marketing department and the promotional materials they produce are overhead costs | |
how overhead ratios are used | calculating its overhead ratio helps a company evaluate its costs of doing business compared to the income the business is generating in general a company strives to achieve the lowest operating expenses possible without sacrificing the quality or competitiveness of its goods or services a company also may keep track of its overhead ratio in order to compare it to others in its industry or its industry as a whole a higher overhead ratio in comparison to the competition might require some adjustment or at least a rational explanation for example a company might determine that maintaining its headquarters in manhattan or san francisco has caused it to have a higher overhead ratio than a competitor located in omaha or akron cutting expenses has a positive effect on the overhead ratio however a company must balance the effect of these cuts with any potential damage to the products or services it sells | |
what is an overheated economy | an overheated economy is one that has experienced a prolonged period of good economic growth and activity that has led to high levels of inflation triggered by increased consumer wealth understanding an overheated economya sharp rise in prices causes inefficient supply allocations as producers overproduce and create excess production capacity in an attempt to capitalize on the high levels of wealth unfortunately these inefficiencies and inflation will eventually hinder the economy s growth and can often be a precursor to a recession simply put an overheated economy is one that is expanding at a rate that is unsustainable there are two main signs of an overheating economy rising rates of inflation and an unemployment rate that is below the normal rate for an economy rising inflation is typically one of the first signs that an economy is overheating as a result governments and central banks will usually raise interest rates in an attempt to lower the amount of spending and borrowing while central banks can combat rising inflation through interest rate increases they can often come too late because inflation is a lagging indicator it can take a while for changes in policy to reduce the rate between june 2004 and june 2006 the federal reserve board frb increased the interest rate 17 times as a gradual means of slowing america s overheated economy 1 however two years later u s inflation hit 5 6 percent a cycle high this rapid rise in prices was followed by a crippling recession which saw inflation plunged below zero within six months 2the second sign of an overheating economy is an unemployment rate that is below the normal rate for a country full employment should be a good thing but full employment also means higher inflation since everyone has a job meaning productivity is at an all time high and money to spend since world war ii the unemployment rate generally fell below 5 in the years immediately preceding recessions that includes the years leading up to the great recession 3other characteristics of overheated economies include abnormally high levels of consumer confidence followed by a sharp reversal causes of an overheating economythe two main signs outlined above are also causes of an overheating economy other causes of an overheating economy include asset bubbles and external economic shocks an example of the latter are the oil shocks that occurred during much of the 1970s and 1980s they resulted in recessions of varying periods and intensity as america s oil import bill grew to meet increased demand for gasoline 45asset bubbles are an unsustainable increase in prices for certain assets this is a sign of overheating the bursting of the dotcom bubble in 2001 resulted in a recession more recently the 2008 financial crisis was the result of a bubble in real estate mortgages the bubble had wide reaching implications across geographies and resulted in a prolonged recession that spanned multiple geographies example of an overheating economythe great recession during the late 2000s was preceded by an overheating economy the unemployment rate continuously fell until 2007 culminating at a rate of 4 6 below the normal rate in that year 3 meanwhile the interest rate which had been steadily rising peaked at 5 25 in 2006 when ben bernanke became the fed chair and right before the crisis 1 inflation also peaked at 4 3 at the same time 2another sign of a u s economy that was overheating was the real estate asset bubble that burst in 2007 and sent shock waves through the entire u s financial ecosystem compounding these problems was the government s spending during president clinton s years the federal budget had a surplus 6 however president bush s tax cuts converted that surplus into a deficit 7in 2005 the congressional budget office cbo estimated that there would be a budget deficit of 368 billion that year and it would be followed by a deficit of 295 billion the next year in short the u s economy demonstrated the hallmarks of an overheating economy in the years leading up to the recession 8 | |
what is overlapping debt | overlapping debt refers to the financial obligations of one political jurisdiction that also falls partly on a nearby jurisdiction overlapping debt is common in the u s because most states are divided into numerous jurisdictions for different tax purposes such as building a new public school or building a new road understanding overlapping debtmunicipalities issue debt to raise money from the public to fund capital projects that will benefit residents of the region for example if a city or county decides to build a school airport highway or hospital it will typically issue debt to borrow the funds needed to construct such infrastructure two municipal government bodies may have overlapping jurisdictions such as a state and a city or a city and a county the different jurisdictions may each issue debt in the form of municipal bonds and notes when they need to raise money to pay for these major expenses which are intended to serve all the residents of a political jurisdiction | |
when the debt of a municipal authority is shared with another government the debt is referred to as an overlapping debt for example a bond that funds a project in a county school district could be considered overlapping debt to a town located within that school district the town is only responsible for its proportional share of the overlapping debt this proportional share plus the municipality s direct debt together make up the municipality s overall net debt the municipality s overall net debt is an important factor in its ability to obtain future debt financing also taxpayers are responsible for paying their share of the debt from each jurisdiction | overlapping debt is often greater than the direct debt of a municipal government and is determined by the ratio of assessed valuation of taxable property lying within the corporate limits of the municipality to the assessed valuation of each overlapping district having overlapping debt may affect one or both governments ability to repay economic implications of overlapping debteconomic research has shown the practice of having multiple overlapping local authorities that can issue overlapping debt to fund their activities can have significant fiscal effects on local governments empirical analyses have found that overlapping of local jurisdictions that can spend and issue overlapping debt tends to creates a bias toward more total public sector spending other researchers have found that overlapping local fiscal authorities tend to treat the available tax base and total ability to raise funds from the market via bond issuance as common pool resources with associated tragedy of the commons problems 1 this means that the widespread practice of overlapping governmental authorities issuing overlapping debt tends to increase the size and fiscal burden of local government as overlapping authorities compete against one another on a political area to exploit the same tax base various authorities responding to different sets of voters and interest group demands for public spending thus end up overexploiting the tax base in a region while taking on more total debt and spending more on public programs and infrastructure than voters in the region as a whole actually want | |
what is overlay | overlay refers to a management style that harmonizes an investor s separately managed accounts overlay management uses software to track an investor s combined position from separate accounts the overlay system analyzes any portfolio adjustments to ensure the overall portfolio remains in balance and to prevent any inefficient transactions from occurring overlay portfolio management makes sure the investor s strategies are implemented and coordinated successfully overlay portfolio management is often used with the portfolios of institutional investors and ultra high net worth individuals money managers and financial advisors employ it to oversee and track the various investor accounts in their care | |
when an investor has separately managed portfolios assets are placed under the control of different managers this set up can cause inefficiencies if the managers begin making transactions that either increase the risk of the overall portfolio have negative tax effects unbalance the investor s positions or work at cross purposes for example if one of the separately managed account traders purchases an asset and another trader sells it the investor is left with a neutral position and two transaction fees | overlay management seeks to improve the communication between the separate managers allowing for increases in transaction efficiency in traditional separately managed account structures clients capital is delegated to multiple outside managers to invest but in anoverlay system the assets and the ultimate responsibility stay togetherin a unified managed account overlay portfolios should have a stated purpose and specific guidelines to avoid issues arising for instance the overlay manager may determine maximum allocations across an entire portfolio or require that investments are made in a particular asset class as a pamphlet from ostrum formerly natixis asset management charmingly puts it advantages of overlay portfolio managementprofessional asset management and allocationnear automatic rebalancing risk managementtax managementsingle contact for investortime consuming to establishcompliance approval neededongoing communication meetingsaccounts assets all at one firmlimitations of overlay portfolio managementif the different portfolios have complex investment strategies an overlay system may be time consuming to set up gathering documentation from various fund managers and understanding their approach toward portfolio construction and risk management may require numerous meetings to ensure effective coordination not just initially but ongoing also an overlay portfolio typically needs to be approved by various compliance departments before it can be established real world example of overlaymany wealth asset management firms and trust companies offer overlay services to their clients piper jaffray is one such clients who opt for a unified managed account are assigned an overlay portfolio manager who has responsibility for the day to day management of the assets based on the client s stated goals needs preferences risk tolerance etc this manager in turn receives investment advice from other investment managers in the form of a model portfolio a recommendation of specific securities and transactions the overlay portfolio manager decides whether or not to execute these recommendations and to what degree in line with the client s tax situation current asset allocation and degree of aggressiveness | |
what is overleveraged | a business is said to be overleveraged when it is carrying too much debt when compared to its operating cash flows and equity an overleveraged company has difficulty in paying its interest and principal payments and is often unable to pay its operating expenses because of excessive costs due to its debt burden which often leads to a downward financial spiral this results in the company having to borrow more to stay in operation and the problem gets worse this spiral usually ends when a company restructures its debt or files for bankruptcy protection understanding overleverageddebt is helpful when managed correctly and many companies take on debt to grow their business purchase necessary items upgrade their facilities or for many other reasons in fact taking on debt is sometimes preferable to other means of raising capital for example issuing stock taking on debt doesn t give up pieces of ownership of the company and outside participants aren t able to direct how the debt is used as long as a company can manage its debt burden appropriately debt can often help a business become successful it is only when a company stops being able to manage its debt that it causes severe problems overleveraging occurs when a business has borrowed too much money and is unable to pay interest payments principal repayments or maintain payments for its operating expenses due to the debt burden companies that borrow too much and are overleveraged are at the risk of becoming bankrupt if their business does poorly or if the market enters a downturn taking on too much debt places a lot of strain on a company s finances because the cash outflows dedicated to handling the debt burden eat up a significant portion of the company s revenue a less leveraged company can be better positioned to sustain drops in revenue because they do not have the same expensive debt related burden on their cash flow financial leverage can be measured in terms of either the debt to equity ratio or the debt to total assets ratiodisadvantages of being overleveragedthere are many negative impacts on a company when it reaches a state of being overleveraged the following are some of the adverse outcomes companies borrow money for specific reasons whether that be to expand product lines or to purchase equipment to increase sales loans always come with a specific time on when interest and principal payments need to be made if a company that borrows with the expectation of increased revenues but hasn t been able to grow before the debt becomes due can find themselves in a difficult position having to pay back the loan without increased cash flows can be devastating and limit the ability to fund operations and invest in growth if a company is so overleveraged that it ends up in bankruptcy its contractual obligations to banks that it borrowed from come into play this usually entails banks having seniority on a company s assets meaning that if a company cannot pay back its debt banks are able to take ownership of a company s assets to eventually liquidate them for cash and settle the outstanding debt in this manner a company can lose many if not all of its assets before lending money banks conduct thorough credit checks and evaluate the capacity of a company to be able to pay back its debt in a timely fashion if a company is already overleveraged the likelihood of a bank lending out money is very small banks do not want to take on the risk of possibly losing money and if they do take on that risk most likely the interest rate charged will be extremely high making borrowing less than an ideal scenario for a company already struggling with its finances a company that s overleveraged will find it nearly impossible to attract new investors investors that provide liquidity in exchange for an equity stake will find a company that is overleveraged to be a poor investment unless they receive a large equity stake with a framework in place for recovery giving up large equity stakes is not ideal for a company as it loses control over the decision making process | |
what is an overnight position | overnight positions are open trades that have not been closed or liquidated by the end of the normal trading day overnight positions are not held by day traders but are quite common in foreign exchange and futures markets long term investors naturally hold overnight positions on an ongoing basis understanding overnight positionssimply put overnight positions are trading positions that are not closed by the end of the trading day these trades are held overnight for trading the following day overnight positions expose the traders to risk from adverse movements that occur after normal trading closes this risk can be mitigated to varying degrees depending on the markets traded for example in the currency market or spot market any contingent orders such as stop loss and limit orders can be attached to the open position in the currency markets overnight positions represent all open long and short positions that a forex trader possesses as of 5 00 p m est which is the end of the forex trading day overnight trading refers to trades that are placed after an exchange s close and before its open overnight trading hours can vary based on the type of exchange in which an investor seeks to transact alternative markets may include foreign exchange trading and cryptocurrencies each market has standards for overnight trading that must be considered by investors when placing trades during off market hours special considerationsthere are benefits and drawbacks to holding an overnight position in the forex market 5 p m est is considered the end of the trading day although with the advent of technology and the global nature of this arena this market is open 24 hours a day five days a week because a new trading day begins after 5 p m positions opened as late as 4 59 p m est and closed as early as 5 01 p m est are still considered to be overnight positions the overlap of trading hours between exchanges in north america australia asia and european markets makes it possible for a trader to execute a foreign exchange trade through a broker dealer at any time the rollover interest rate on overnight positions affects the trading account as either a credit or a debit in forex a rollover means that a position extends at the end of the trading day without settling most forex trades roll over daily until they close out or settle the rollovers are conducted using either spot next or tom next transactions if a trader entered into a position on monday at 4 59 p m est and closes it on the same monday at 5 03 p m est this will still be considered an overnight position since the position was held past 5 00 p m est and is subject to rollover interest maintaining an overnight positionforex traders will generally take the risk cost of capital leverage changes and strategy into account when deciding to maintain an overnight position the goal of keeping an overnight position is to try to increase profit on the trade by holding it overnight or by minimizing the loss of a losing daytime trade some stock investors believe that maintaining an overnight position is a beneficial strategy while others think purchasing or selling stocks shortly before closing time is a more profitable move those who believe in keeping an overnight position often hold their positions overnight then sell or trade them as close to the opening bell as possible in the morning by trading early stocks and traders are fresh and any potential negative aspects of the previous day s market have cleared the account a day trader often closes all trades before the end of the trading day so as not to hold open positions overnight it is rare that an overnight position can transform a daytime loss into a profit and additionally there is a risk with keeping an open position overnight primarily the market can shift dramatically overnight with the arrival of catastrophic news or other events that can affect the markets this risk is why many investors have a strict daytime trading only policy borrowing costs may occur as an overnight position requires broker leverage to maintain the position most companies report their financial results when markets are closed to enable all investors to receive the information at the same time significant announcements may be made after market hours rather than in the middle of the trading day and can affect overnight positions | |
what is an overnight index swap ois | an index swap is a hedging contract in which one party exchanges a predetermined cash flow with a counterparty on a specified date a debt equity or other price index is used as the agreed exchange for one side of this swap an overnight index swap applies an overnight rate index such as the federal funds rate index swaps are specialized groups of conventional fixed rate swaps with terms that can be set from three months to more than a year | |
how does an overnight index swap ois work | in an overnight index swap the overnight rate is exchanged for a fixed interest rate an overnight index swap uses an overnight rate index such as the federal funds rate as the underlying rate for the floating leg while the fixed leg would be set at a rate agreed upon by both parties the interest of the overnight rate portion of the swap is compounded and paid at reset dates with the fixed leg being accounted for in the swap s value to each party the floating leg s present value pv is determined by either compounding the overnight rate or by taking the geometric average of the rate over a given period overnight index swaps are popular among financial institutions because the overnight index is considered to be a good indicator of the interbank credit markets and less risky than traditional interest rate spreads 1 | |
how to calculate an overnight index swap | eight steps are applied in calculating a bank s dollar benefit from using an overnight index swap | |
what is an overnight index swap | an overnight index swap is a bet on the direction of short term interest rates one party agrees to pay a fixed interest rate while the other party agrees to pay a floating rate based on the overnight index when the overnight index rate is calculated for the relevant time period one party pays the other party the difference between the fixed and floating rates for that period | |
why does anyone undertake an overnight index swap | financial institutions and other large enterprises use the overnight index swap as a hedge against sudden adverse swings in short term interest rates they are effectively protecting their interest rate costs by locking in the short term rate they will pay traders and speculators also use this strategy when they expect a swing in short term interest rates | |
is an overnight index swap a derivative | yes the overnight index swap is a type of derivative contract that is it is based on short term interest rates but does not represent an actual investment in any asset 2the bottom linethe overnight index swap is primarily an interbank process used by financial institutions to hedge against costly changes in the direction of interest rates it is a tool that is also used by hedge fund managers and market speculators to place a bet on short term interest rate movements | |
what is the overnight rate | the overnight rate is the interest rate at which a depository institution generally banks lends or borrows funds from another depository institution in the overnight market in many countries the overnight rate is the interest rate the central bank sets to target monetary policy in most circumstances the overnight rate is the lowest available interest rate and as such it is only available to the most creditworthy institutions investopedia jessica olah | |
how the overnight rate works | the amount of money a bank has fluctuates daily based on its lending activities and its customers withdrawal and deposit activity a bank may experience a shortage or surplus of cash at the end of the business day those banks that experience a surplus often lend money overnight to banks that experience a shortage of funds so as to maintain their reserve requirements the requirements ensure that the banking system remains stable and liquid the overnight rate provides an efficient method for banks to access short term financing from central bank depositories as the overnight rate is influenced by the central bank of a nation it can be used as a good predictor for the movement of short term interest rates for consumers in the broader economy the higher the overnight rate the more expensive it is to borrow money as of may 2022 the federal funds rate sits at a rate of 0 77 an increase from the previous month s rate of 0 33 1in the united states the overnight rate is referred to as the federal funds rate while in canada it is known as the policy interest rate the rate increases when liquidity decreases when loans are more difficult to come by and falls when liquidity increases when loans are more readily available as a result the overnight rate is a good indicator of the health of a country s overall economy and banking system effects of the overnight ratethe overnight rate indirectly affects mortgage rates in that as the overnight rate increases it is more expensive for banks to settle their accounts so to compensate they will raise longer term rates the federal reserve influences the overnight rate in the united states through its open market operations the overnight rate in turn affects employment economic growth and inflation this rate has been as high as 20 in the early 1980s and as low as 0 after the great recession of 2007 08 1 | |
is the bank rate the same as the overnight rate | no the bank rate and the overnight rate are not the same the bank rate is also known as the discount rate which is the rate that banks can borrow from the central bank the overnight rate also known as the federal funds rate is the rate at which banks can borrow from one another | |
why do banks borrow overnight | banks are required by the central bank to keep a minimum amount of reserves to ensure liquidity in the banking sector the reserves of banks fluctuate depending on customer withdrawals and deposits when banks have a shortfall and cannot meet their reserve requirement they will borrow from banks with a surplus to do so | |
what is overnight trading | overnight trading refers to trades that are placed after an exchange s close and before its open overnight trading hours can vary based on the type of exchange on which an investor seeks to conduct trades overnight trading is an extension of after hours trading also known as extended hours trading not all markets have overnight trading understanding overnight tradingovernight trading encompasses a broad range of orders that are placed outside of standard market hours across the financial markets there are various avenues for trading through a variety of exchanges the mainstream markets include stocks and bonds alternative markets include foreign exchange and cryptocurrencies each market has standards for overnight trading that must be considered by investors when placing trades during off market hours for example some over the counter otc products cannot be traded outside of business hours 1 the foreign exchange forex market on the other hand does not close during the week so there is no true overnight trading because it is open at all hours except on weekends outside of normal market hours which for the u s stock exchanges is usually 9 30 a m to 4 p m et liquidity is typically lower 2 this means fewer participants larger bid ask spreads and potentially erratic price moves and high volatility extended hours trading takes place from just after 4 p m through 8 p m et and again from 4 a m through 9 30 a m et overnight trading takes place from 8 p m through 4 a m et forex and overnight tradingthe forex market is the largest market in the financial industry it s where global currencies are traded forex trading can be conducted 24 hours a day five days a week therefore the forex market doesn t technically have overnight trading since it is open all the time during the week many day traders choose to trade currencies for this reason the overlap of business hours between north america australia asia and european markets makes it possible for a trader to execute a forex trade through a broker dealer at any time investopedia sabrina jiangu s stocks and overnight tradingstocks in the u s trade on primary listing exchanges between 9 30 a m and 4 p m et this is when the exchange along with other networks called electronic communication networks ecns facilitate trading trades can also be conducted on ecns for several hours before the primary exchanges open and after they close in pre market and after hours trading in addition certain brokers e g charles schwab robinhood and interactive brokers offer overnight trading when u s stock exchanges are closed and outside of extended hours trading periods from just after 8 p m through approximately 4 a m et when pre market trading begins overnight trades get placed through and filled by ecns 345ecn trading begins at 4 a m and ends at 8 p m et these sessions include extended hours or extended trading outside of normal exchange hours from 4 a m to 9 30 a m and from 4 p m to 8 p m ecns also facilitate overnight trading outside of extended hours from 8 p m to 4 a m et mutual funds and overnight tradingmutual funds are governed by a forward net asset value nav pricing rule that requires all orders placed after the market s close to receive the next day s closing nav price this rule helps to ensure a smooth nav accounting close for mutual funds at the end of each day 6since navs are only calculated once per day a mutual fund investor may see a substantial difference in the closing price from one day to the next for such investors this can provide a greater incentive to place a trade before the current day s market close orders can be placed outside of normal market hours but the transactions aren t processed until a nav is available bond market overnight tradingbonds also trade on exchanges throughout the day however they are only issued on certain exchanges which limits their availability for trading bonds trade through market makers and are listed on a variety of exchanges including bond exchanges at the new york stock exchange nyse and nasdaq on the nyse bonds can be traded from 4 a m to 8 p m et 7example of overnight trading in a stockthe following chart shows an overnight trading session in apple inc stock the nasdaq stock exchange on which aapl is listed closes at 4 p m on high volume after hours trading commences volume for aapl drops off except for a large spike at 5 01 p m the price of the stock trails a bit lower from the closing price with the last transaction occurring at 7 59 p m investopedia sabrina jiangthe following day the first trade occurs at 4 a m at a higher price than the previous night s action volume is relatively light in the pre market and then escalates at the opening of the nasdaq exchange at 9 30 a m apple has relatively active overnight trading compared to many stocks | |
what time does overnight trading start | depending on a broker s trading platform traders may be able to trade overnight from 8 01 p m through 4 a m for foreign exchange trades there s always a market open somewhere so the time period for overnight trading depends on local times mutual funds are only priced once per day so after hours trades aren t processed until a nav is available | |
what is an overnight trading strategy | one overnight trading strategy is to place orders just before the market closes and hold the position until the market opens the next day other traders use overnight trading to take advantage of market changes that occur after the markets close however keep in mind that overnight trading carries additional risks due to decreased volume including lower liquidity and increased volatility so it s important to manage those risks as well as you can | |
is overnight trading profitable | yes overnight trading can be profitable in fact researchers from the university of georgia found that the difference between overnight and intraday returns can be significant both in individual stocks as well as in managed funds this is because in demand stocks traded after hours are often brokered by smaller brokerage houses with lower supply which increases demand and therefore price 8the bottom lineovernight trading takes place after the markets close and once the after hours session ends and before the pre market session opens the following morning whether and when overnight trading is available depends on the securities traded and whether your broker offers such trading through its trading platform traders often use overnight trading and after hours trading to take advantage of news or changes that take place after the market closes make sure that you understand the additional risks of trading after hours if you want to capture additional profit during overnight trades | |
what is an overreaction | an overreaction is an extreme emotional response to new information in finance and investing it is an emotional response to a security such as a stock or other investment which is led either by greed or fear investors overreacting to news cause the security to become either overbought or oversold until it returns to its intrinsic value understanding overreactionsinvestors are not always rational many investors base buy and sell actions on emotional behavior at times easy access to 24 hour information and news can cause unwarranted investor actions instead of pricing all publicly known information perfectly and instantly as the efficient market hypothesis assumes they are often affected by cognitive and emotional biases some of the most influential work in behavioral finance concerns the initial underreaction and subsequent overreaction of prices to new information many funds now use behavioral finance strategies to exploit these biases in their portfolios especially in less efficient markets such as small cap stocks funds that seek to take advantage of overreactions look for companies whose shares have been depressed by bad earnings news but where the news is likely to be temporary low price to book stocks otherwise known as value stocks are an example of such stocks in contrast to overreaction underreaction to new information is more likely to be permanent an underreaction is often caused by anchoring a term that describes people s attachment to old information which is especially strong when that information is critical to a coherent way of explaining the world also known as a hermeneutic held by the investor anchoring ideas such as brick and mortar retail stores are dead can cause investors to overlook undervalued stocks and miss opportunities to make a profit examples of overreactionall asset bubbles are examples of overreaction from the tulip mania in holland in the 17th century to the meteoric rise of cryptocurrencies in 2017 asset bubbles form when the rising price of an asset starts to attract investors as the primary source of return rather than the fundamental returns offered by the asset for stocks the fundamental return is the growth of the company and possibly the dividend offered by the stock the fundamental return of a tulip bulb in the 1600s was the beauty of the flower it produced which is a difficult result to quantify because investors didn t have a good way to measure the desirability of the bulbs price was used as that metric and because the price of bulbs was always going up it created the unfounded belief that the bulbs were intrinsically valuable and a good investment overreaction to the upside holds until the smart money begins to exit the investment at which point the value of the security starts to fall producing an overreaction to the downside in the case of the dotcom bubble of the late 1990s and early 2000s the market correction put many unprofitable businesses out of commission but also lowered the value of good stocks to bargain levels amazon com inc peaked before the dotcom bubble burst at 106 70 on dec 10 1999 before falling to a low of 5 97 in september of 2001 a 94 loss in 2020 the average stock price of amazon was 2 680 86 1 | |
what was the overseas private investment corporation opic | the overseas private investment corporation opic was a u s development finance institution this government agency assisted private businesses that wanted to invest abroad opic encouraged development in emerging markets through private sector investment overseas by assisting corporations to analyze and manage risks while encouraging development in emerging markets this helped the agency advance the country s foreign policy and national security goals opic was consolidated with the u s agency for international development s usaid development credit authority to form the u s international development finance corporation in 2019 1understanding the overseas private investment corporation opic the overseas private investment corporation was established in 1971 as a u s government agency under then president richard nixon 2 it was the country s one and only development finance institution dfi and was based in washington d c dfis are government owned organizations that invest in private sector projects and promote national interests 3as the country s dfi opic helped private sector investment abroad opic backed projects were reinforced and aligned with u s foreign policy they fostered economic and political stability along with free market ideals especially in conflict ridden areas 45its initial portfolio included political risk insurance worth 8 4 billion along with 169 million in loan guarantees that portfolio expanded to more than 20 billion reaching out to more than 160 different developing countries 2 direct loans and guarantees ranged from a few million to 350 million for up to 20 years in underserved areas without easy access to commercial financing 5funding was only provided to companies with a sound business model for which it charged market based fees this allowed the agency to operate without the need for any taxpayer assistance the agency reported that it actually generated money for american taxpayers contributing as much as 3 7 billion toward reducing the national deficit between 2006 and 2016 5according to opic s operating statute the projects it helped could not cause job loss in the united states 4special considerationsas mentioned above opic was consolidated with usaid s development credit authority to form the u s international development finance corporation dfc in 2019 the merger was realized after the passing of the better utilization of investments leading to development act was passed on oct 5 2018 the new entity allows the use of newer and more innovative financial products to help distribute private capital to developing economies 1just like its predecessor dfc aims to advance the interests of american foreign policy and national security as the private sector helps the development of emerging market economies it accomplishes this through political risk insurance and debt financing comprising of direct loans and guarantees of up to 1 billion for up to 25 years it also provides the dfc allows private sector investment in several sectors including energy health care critical infrastructure technology businesses are required to meet specific standards and have an established history in their specific industries 1 | |
what is overshooting | in economics overshooting also known as the exchange rate overshooting hypothesis is a way to think about and explain high levels of volatility in currency exchange rates using the concept of price stickiness understanding overshootingovershooting was introduced to the world by r diger dornbusch a renowned german economist focusing on international economics including monetary policy macroeconomic development growth and international trade dornbusch first introduced the model now widely known as the dornbusch overshooting model in the famous paper expectations and exchange rate dynamics which was published in 1976 in the journal of political economy 1before dornbusch economists generally believed that markets should ideally arrive at equilibrium and stay there some economists had argued that volatility was purely the result of speculators and inefficiencies in the foreign exchange market such as asymmetric information or adjustment obstacles dornbusch rejected this view instead he argued that volatility was more fundamental to the market than this much closer to inherent in the market than to being simply and exclusively the result of inefficiencies more basically dornbusch was arguing that in the short run equilibrium is reached in the financial markets and in the long run the price of goods responds to these changes in the financial markets price stickiness refers to the tendency of some prices to move slowly in response to changes in the market the overshoot model states that exchange rates react strongly to monetary policy while goods prices tend to be sticky the overshooting model argues that the foreign exchange rate will temporarily overreact to changes in monetary policy to compensate for sticky prices of goods in the economy this means that in the short run the equilibrium level will be reached through shifts in financial market prices rather than through shifts in the prices of goods themselves gradually as the prices of goods unstick and adjust to the reality of these financial market prices the financial market including the foreign exchange market also adjusts to this financial reality so initially foreign exchange markets overreact to changes in monetary policy which creates equilibrium in the short term then as the prices of goods gradually respond to these financial market prices the foreign exchange markets temper their reaction and create long term equilibrium thus there will be more volatility in the exchange rate due to overshooting and subsequent corrections than would otherwise be expected special considerationsalthough dornbusch s model was compelling initially it was also regarded as somewhat radical due to its assumption of sticky prices today sticky prices are accepted as fitting with empirical economic observations and dornbusch s overshooting model is widely regarded as the forerunner to modern international economics in fact some have said it marks the birth of modern international macroeconomics 2the overshooting model is considered especially significant because it explained exchange rate volatility during a time when the world was moving from fixed to floating rate exchanges kenneth rogoff during his stint as economic counselor and director of the research department at the international monetary fund imf said dornbusch s paper imposed rational expectations on private actors about exchange rates rational expectations is a way of imposing overall consistency on one s theoretical analysis rogoff wrote on the paper s 25th anniversary 3 | |
what does sticky mean in economics | in economics stickiness refers to the tendency of goods prices to change more slowly than the supply and demand in the market for that good this may be because sellers wish to reduce menu costs by avoiding frequent price changes or because it is difficult to accurately determine how production costs are changing in real time a more formal term for stickiness is nominal rigidity | |
what is overshooting in economics | in economics overshooting refers to the tendency of some prices to overreact to changes in supply and demand this is in contrast to classical economics which posts that prices should eventually reach an equilibrium price overshooting is used to explain why exchange rates tend to be more volatile than goods prices | |
what causes volatility in exchange rates | according to the dornbusch overshoot model exchange rates are volatile because forex markets are highly sensitive to changes in monetary policy while goods prices are more slow to react as a result when monetary policy changes exchange rates will fluctuate until goods prices adjust to the new equilibrium the bottom linethe overshooting model was introduced by economist r diger dornbusch to explain why exchange rates tend to be so volatile this theory states that exchange rates will react strongly to changes in monetary policy until goods prices reach a new equilibrium | |
what is oversold | the term oversold refers to a condition where an asset has traded lower in price and has the potential for a price bounce 1 an oversold condition can last for a long time and therefore being oversold doesn t mean a price rally will come soon or at all many technical indicators identify oversold and overbought levels these indicators base their assessment on where the price is currently trading relative to prior prices fundamentals can also be used to assess whether an asset is potentially oversold and has deviated from its typical value metrics | |
what does oversold tell you | oversold to a fundamental trader means an asset it trading well below its typical value metrics technical analysts are typically referring to an indicator reading when they mention oversold both are valid approaches although the two groups are using different tools to determine whether an asset is oversold fundamentally oversold stocks or any asset are those that investors feel are trading below their true value this could be the result of bad news regarding the company in question a poor outlook for the company going forward an out of favor industry or a sagging overall market traditionally a common indicator of a stock s value has been the p e ratio analysts and traders use publicly reported financial results or earnings estimates to identify the appropriate price for a particular stock if a stock s p e dips to the bottom of its historic range or falls below the average p e of the sector investors may see the stock as undervalued this may present a buying opportunity for long term investing for example a stock that has historically had a p e of 10 to 15 and which is now trading at a p e of five may signal investors to look closer at the company if the company is still strong the stock may be oversold and a good buy candidate careful analysis is needed though as there could be good reasons why investors no longer like the company as much as they once did traders can also use technical indicators to establish oversold levels a technical indicator only looks at the current price relative to prior prices it does not take into account fundamental data george lane s stochastic oscillator which he developed in the 1950s examines recent price movements to identify changes in a stock s momentum and price direction the rsi measures the power behind price movements over a recent period typically 14 days 2a low rsi generally below 30 signals traders that a stock may be oversold essentially the indicator is saying that the price is trading in the lower third of its recent price range this isn t to say the price will bounce immediately many traders wait for the indicator to start heading higher before buying since oversold conditions can last a long time for example a trader may wait for the oversold rsi to move back above 30 before buying this shows that the price was oversold but is now starting to rise some traders use pricing channels like bollinger bands to spot oversold 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 lower band it may be oversold once again traders typically wait until the price starts rising again before buying examples of oversold indicators and fundamentalsimage by sabrina jiang investopedia 2020the chart example shows a price chart with two indicators below it top indicator is an rsi and the one below it is p e on the rsi arrows have been placed where the rsi dropped below 30 and then moved back above it these would be possible buy points based on recovery from an oversold condition some of these signals resulted in the price going higher while others saw the price continue lower for a time the oversold level of the p e will vary by stock since each stock has its own p e range it tends to travel in for this stock buying near a p e of 10 typically presented a good buying opportunity as the price headed higher from there the difference between oversold and overboughtif oversold is when an asset is trading in the lower portion of its recent price range or is trading near lows based on fundamental data then overbought is the opposite an overbought technical indicator reading appears when the price of an asset is trading in the upper portion of its recent price range 1 similarly an overbought fundamental reading appears when the asset is trading at the high end of its fundamental ratios this doesn t mean the asset should be sold it is just an alert to look into what is going on limitations of using oversold readingsoversold is mistakenly viewed by some traders as a buy signal instead it is more of an alert it lets traders know that an asset is trading in the lower portion of its recent price range or is trading at a lower fundamental ratio than it typically does this doesn t mean the asset should be bought many stocks that continue to fall look cheap all the way down this can happen because most oversold readings are based on past performance if investors see a grim future for a stock or other asset it may continue to be sold off even though it looks cheap based on historical standards even if a stock or other asset is a good buy it can remain oversold for a long time before the price starts to move higher this is why many traders watch for oversold readings but then wait for the price to start moving up before buying based on the oversold signal | |
what is oversubscribed | oversubscribed is a term used when the demand for a new issue of stock is greater than the number of shares available when a new issue is oversubscribed underwriters or other financial entities offering the security can adjust the price upward or offer more securities to reflect the higher than anticipated demand an oversubscribed issue can be contrasted with an undersubscribed issue where demand cannot fully meet the available supply of shares understanding oversubscribed issuesan oversubscribed security offering often occurs when the interest for it far exceeds the available supply of the issue over subscription can happen in any market where the available supply of new securities is limited but is most often associated with the sale of newly minted shares in the secondary market via an initial public offering ipo here the demand exceeds the total number of shares issued by the ipo ing company the degree of oversubscription is shown as a multiple such as abc ipo oversubscribed two times a two times multiple means there is effectively twice as much demand for shares as there are available in the scheduled issue share prices are intentionally set at a level that will ideally sell all shares the underwriters of an ipo generally do not want to be left with unpurchased shares in an undersubscribed issue | |
when a broker dealer or market maker has to purchase shares because there are not enough buyers it is known as eating stock | if there is more demand for an ipo than there is supply creating a shortage a higher price can be charged for the securities resulting in more capital raised for the issuer which also means more fees earned for the underwriter however oversubscribed ipo shares are often underpriced to some extent to allow for a post ipo pop and robust trading to continue to generate excitement around the issue companies leave a bit of capital on the table but may still please the internal stockholders by giving them a paper gain even if they are stuck in a lock up period benefits and costs of oversubscribed securities | |
when securities are oversubscribed companies can offer more of the securities raise the price of the security or partake in some combination of the two to meet demand and raise more capital in the process this means that they can raise more capital and at better terms | companies will almost always hold back a significant portion of their shares to allow for future capital needs and management incentives so there is usually a standing reserve of shares that can be added if an ipo is looking to be badly oversubscribed without having to register new securities with regulators more capital is good for a company of course investors however have to pay higher prices and may get priced out of the issue if the price rises above their willingness to pay it may also hurt investors who herd into a hot ipo that drives the initial market price far above fundamentals only to see a collapse in price over the following weeks and months example of an oversubscribed ipoin early 2012 analysts indicated that the long awaited ipo of facebook now meta which initially sought to raise about 10 6 billion by selling around 337 million shares at 28 to 35 per share would generate far more interest from investors such that it might quickly become an oversubscribed ipo as predicted investor interest leading up to the ipo on may 18 2012 produced far more demand for facebook shares than the company was offering 1to take advantage of the oversubscribed ipo and fulfill that surge in investor demand facebook meta provided not only more shares 421 million versus 337 million or 25 more shares to investors but also raised the ipo price range to 34 to 38 per share around a 15 increase in price in effect facebook and its underwriters raised both the supply and price of shares to meet demand and diminish the securities oversubscription for a net increase in value of around 40 from the initial ipo terms as a result facebook raised more capital and carried a higher valuation but investors got the shares that they wanted 2however it quickly became clear that facebook was not at first worth the new ipo price as the stock fell precipitously in its first four months of trading the stock failed to trade above its ipo price until july 31 2013 of course in the years since the stock has performed quite well 3 | |
what is an oversubscription privilege | an oversubscription privilege gets extended to a company s shareholders on the issuance of a rights or warrants offering the privilege allows shareholders to purchase any shares remaining after other shareholders have had an opportunity to purchase them breaking down oversubscription privilegeoversubscription privileges apply to existing shareholders in a rights offering a firm generally offers its existing shareholders the right to purchase a specific number shares at a discount to the current share price within a given time period since companies issue shares to raise money and a failure to sell all new shares in an issuance could leave a firm undercapitalized rights issues sometimes use a form of contingency plan to deal with shareholders who decide not to exercise their right to purchase new shares oversubscription privileges allow shareholders additional rights to purchase a specified proportion of the unexercised shares oversubscription generally describes a situation in which demand outstrips the supply of shares in a new issuance in the case of oversubscription privileges companies presume the oversubscription will occur among the pool of shareholders willing to exercise their right to purchase new shares in many cases this demand stems from shareholders desire to maintain their proportional ownership of a firm s shares along with the voting rights that accompany them rights offerings account for this by issuing rights and oversubscription privileges in proportion to shareholders current holdings shareholder choices during rights issuescompanies use rights issues to raise cash from existing shareholders often to pay off existing debts make a one time large scale capital purchase or solve a cash flow issue a new share issuance causes dilution since the larger number of shares available overall decreases the value of any given share as a proportion of the whole current shareholders seeking to maintain their proportional holdings need to purchase a number of new shares equal to the proportion of shares they own in addition however shareholders need to consider the potential loss of value in their current holdings when deciding whether the discounted price offered for new shares makes sense investors should also investigate the reasons behind a rights issuance before exercising those rights rights issuances can be a sign of financial trouble especially when companies find themselves unable to pay down existing debt however rights offerings do not always indicate a troubled company wise investors will research the situation to ensure they have a full picture of the benefits and risks involved in purchasing the discounted shares offered in a rights issuance in general shareholders offered a rights issuance have three choices they can exercise their rights ignore their rights and take a hit from dilution or in some cases sell the rights to other shareholders or back to an underwriter | |
what is oversupply | oversupply is an excessive amount of a product that is the result of when demand is lower than supply resulting in a surplus understanding oversupplysimply put an oversupply is when there is more product for sale than people are prepared to buy at the current price although the context can vary oversupply results from overproduction and leads to the accumulation of unsalable inventories price levels and oversupply are strongly correlated there are many reasons why oversupply may occur there can be an oversupply of a current product due to people waiting for an improved model in a series such as smartphones from a particular maker oversupply can also occur in situations where the price of the good or service is too high and people are simply not willing to buy it at that price an oversupply may also simply be a case of a producer completely misreading the market demand for a product surplus is a synonym for oversupply | |
when a price is too high the quantity demanded will be less than the quantity supplied and the unsold quantity will increase unless the producer discounts the good or halts production discounting product is the most obvious way to deal with an oversupply and it is often the only way to clear unsold inventory especially if new product is on its way discounting does impact the bottom line of the seller and the producer may have to agree to share that pain with the seller | in commodity markets oversupply is more of a market condition than a problem to be solved for commodities like oil natural gas precious metals meat and so on the production timeline requires a significant lead time and the prices are all market based if for example a number of large scale gas fields begin production at the same time there will be an oversupply of natural gas on the market leading to a lower price during periods of oversupply producers may actually lose money on the units they are selling the interesting thing about some types of commodity oversupply is that it is not a matter of unsold inventory but how much of the commodity can be stored and stockpiled before it eventually sells at whatever price the market will pay because production cannot be easily dialed up and down commodity producers depend on storage to help remove oversupply from the market while production cycles adjust to the lowered longer term demand of course if too much production is curtailed then the market will be undersupplied and more investment will flow into the production side this is one of the many reasons that many commodities have cyclical boom and bust pricing charts oversupply exampleoversupply and its impact on market equilibrium is best understood through an example suppose the price of a computer is 600 at a volume of 1 000 units but buyers demand only 300 units at that price in such a situation sellers are seeking to sell 700 more computers than buyers are willing to purchase the oversupply of 700 units puts the market for computers in disequilibrium since they re not able to sell all the computers for the desired price of 600 sellers consider a price reduction to make the product more attractive to buyers in response to the reduction in the price of the product consumers demand more computers and producers cut production eventually the market will achieve equilibrium price and quantity absent the introduction of other external factors this process may happen quickly for some goods when the prices and quantities that can be offered on the market are relatively flexible the longer it take prices and quantities to adjust on the market the longer the oversupply will persist when prices are sticky due to menu costs or other issues or when the government intervenes to set a price floor then an oversupply of a goods can persist or some time | |
what is overtrading | overtrading refers to the excessive buying and selling of stocks by either a broker or an individual trader both are entirely different situations and have very different implications understanding overtradingan individual trader whether working for themselves or employed on a trading desk by a financial firm will have rules about how much risk they can take including how many trades are appropriate for them to make once they have reached this limit to continue trading is to do so unsoundly while such behavior may be bad for the trader or bad for the firm it is not regulated in any way by outside entities however a broker overtrades when they excessively buy and sell stocks on the investor s behalf purely for the sake of generating commissions overtrading also known as churning is a prohibited practice under securities law investors can observe that their broker has been overtrading when the frequency of their trades becomes counterproductive to their investment objectives driving commission costs consistently higher without observable results over time overtrading can occur for a number of reasons but they all have the same outcome poor performance of the investments at the expense of increased broker fees one reason this practice has been known to occur comes about when brokers are pressured to place newly issued securities underwritten by a firm s investment banking arm for example each broker may receive a 10 bonus if they can secure a certain allotment of a new security to their customers such incentives may not have the investors best interest in mind investors can protect themselves from overtrading or churning through a wrap account a type of account managed for a flat rate rather than charging a commission on every transaction individual traders usually overtrade after they have suffered a significant loss or a number of smaller losses in a long losing streak to recoup their capital or to seek revenge on the market after a string of losing trades they may try harder to make up profits wherever they can usually by increasing the size and frequency of their trades while this practice often results in poor performance of the trader the sec does not regulate this kind of behavior because it is being done on the trader s own account the securities and exchange commission sec defines overtrading churning as excessive buying and selling in a customer s account that the broker controls to generate increased commissions brokers who overtrade may be in breach of sec rule 15c1 7 that governs manipulative and deceptive conduct the financial industry regulatory authority finra governs overtrading under rule 2111 and the new york stock exchange nyse prohibits the practice under rule 408 c investors who believe they are a victim of churning can file a complaint with either the sec or finra types of overtrading among investorsovertrading in one s own account can only be curtailed by self regulation below are some common forms of overtrading that investors may engage in and begin informed about each can lead to better self awareness preventing overtradingthere are a few steps traders can take to help prevent overtrading | |
what is overvalued | an overvalued stock has a current price that is not justified by its earnings outlook known as profit projections or its price earnings p e ratio consequently analysts and other economic experts expect the price to drop eventually overvaluation may result from an uptick in emotional trading or illogical gut driven decision making that artificially inflates the stock s market price overvaluation can also occur due to deterioration in a company s fundamentals and financial strength potential investors strive to avoid overpaying for stocks the most popular valuation metric for publicly traded companies is the p e ratio which analyzes a company s stock price relative to its earnings an overvalued company trades at an unjustifiably rich level compared to its peers understanding overvalued stocksa small group of market theorists believes that the market is perfectly efficient by nature they opine that fundamental analysis of a stock is a pointless exercise because the stock market is all knowing therefore stocks may neither be truly undervalued or overvalued contrarily fundamental analysts are staunch in their belief that there are always opportunities to ferret out undervalued and overvalued stocks because the market is as irrational as its participants overvalued stocks are ideal for investors looking to short a position this entails selling shares to capitalize on an anticipated price declines investors may also legitimately trade overvalued stocks at a premium due to the brand superior management or other factors that increase the value of one company s earnings over another | |
how to find overvalued stocks | relative earnings analysis is the most common way to identify an overvalued stock this metric compares earnings to some comparable market value such as price the most popular comparison is the p e ratio which analyzes a company s stock price relative to its earnings analysts looking for stocks to short may seek overvalued companies with high p e ratios particularly when compared to other companies in the same sector or peer group for example assume a company has a stock price of 100 and earnings per share of 2 the calculation of its p e ratio is determined by dividing the price by the earnings 100 2 50 so in this example the security is trading at 50 times earnings if that same company has a banner year and makes 10 in eps the new p e ratio is 100 divided by 10 or 10 times 100 10 10 most people would consider the company to be overvalued at a p e of 50 but possibly undervalued at 10 real world examplealthough by definition a stock is overvalued only by the opinion of an analyst the motley fool website is never shy about weighing in for example they deemed the pharma giant ely lilly to be overvalued because the company s valuation reached untenable levels following the company s meteoric rise during the tail end of 2019 and early days of 2020 according to the motley fool in january 2020 the company s stock was the second most expensive among its industry peers and eli lilly might find it hard to deliver consistent expected growth | |
what is overweight | an overweight investment is an asset or industry sector that comprises a higher than normal percentage of a portfolio or an index an investor might choose to devote a greater portion of the portfolio to a sector that seems particularly promising or an investor might go overweight on defensive stocks and bonds at a time when prices are volatile overweight and its opposite underweight are also used by analysts and commentators in recommendations to buy or avoid particular investments or sectors for example if federal defense spending is about to be increased or decreased an analyst may recommend that an investor go overweight or underweight on defense related companies in addition many analysts attach an overweight recommendation to a stock that they believe will outperform its sector in the coming months the alternative ratings are equal weight for average performers or underweight for below average performers understanding overweightstrictly speaking overweight refers to an excess amount of an asset in a fund or investment portfolio compared to the benchmark index that it tracks indexes are weighted that is they track the performance of a selection of stocks each of which represents a percentage of the index that varies according to its perceived impact on the whole mutual funds also are weighted and some percentage of the fund may be devoted to cash or to interest bearing bonds in order to reduce overall risk this is why the performances even of index mutual funds may vary fractionally from each other and from the index itself the fund manager s goal is to meet or exceed the index that it is compared to that may be achieved by overweighting or underweighting some parts of the whole beating the trendotherwise there is no firm definition of overweight it is simply a variation from the norm whatever that might be for example the manager of a global technology mutual fund who foresees a downturn ahead might shift some assets going overweight on some of the stablest blue chip companies out there an investor with a diversified portfolio who foresees a downturn might go overweight on interest bearing bonds and dividend paying stocks overweight can also refer in a looser sense to an analyst s opinion that a stock will outperform others in its sector or the market in this sense it is a buy recommendation when an analyst suggests underweighting an asset they are saying it looks less attractive for now than other investment options bucking the normportfolio managers seek to create a balanced portfolio for each investor and personalize it for that individual s risk tolerance a younger investor with a moderate appetite for risk for example might be best served by a portfolio that is 60 in stocks and 40 in bonds if the same investor then opts to move 15 more of the balance into stocks the portfolio would be classified as overweight stocks a portfolio can be overweight in a sector such as energy or in a specific country it may be overweight in a category such as aggressive growth stocks or high dividend yielding stocks in this context the term overweight usually implies that the portfolio is being compared to a predefined standard or a benchmark index overweighting pros and consactively managed funds or portfolios will take an overweight position in particular securities if doing so helps them to achieve greater returns for example the fund manager may raise a security s weight from its normal 15 of the portfolio to 25 in an attempt to increase the returns of the overall portfolio another reason for overweighting a portfolio holding is to hedge or reduce the risk from another overweight position hedging involves taking an offsetting or opposite position to the related security the most common method of hedging is through the derivative market for example if you hold shares of a company currently selling at 20 per share you may purchase a one year expiration put option for that stock at 10 a year later if the stock is selling at more than 10 you let the put expire losing only the price of the purchase should the stock be selling for under 10 you may exercise the put and receive 10 for your shares the danger of overweighting one investment is that it can reduce the overall diversification of their portfolio a reduction in diversification can expose the holding to additional market risk may increase portfolio gains returnshedges against other overweight positionsreduces portfolio diversificationexposes portfolio to more risk overall | |
when research or investment analysts designate a stock overweight it reflects an opinion that the security will outperform its industry its sector or the entire market | an analyst s rating of overweight for a retail stock would suggest that the stock will perform above the average return of the retail industry overall over the next eight to 12 months the alternative weighting recommendations are equal weight or underweight equal weight implies that the security is expected to perform in line with the index while underweight implies that the security is expected to lag the index in question | |
what is overwriting | overwriting is a trading strategy that involves selling options that are believed to be overpriced with the assumption that the options won t get exercised before they expire | |
how overwriting works | overwriting is a speculative strategy that some option writers may employ to collect a premium even when they believe the underlying security is incorrectly valued hoping that they do not get assigned the short options investors may also refer to the strategy as overriding the writer seller of an option has an obligation to deliver their shares to the buyer if the buyer decides to exercise the option while the holder buyer of an option has the right but not the obligation to purchase the seller s shares at a specific price within a specified time overwriting is a technique used by speculative option writers in an attempt to profit from the premiums paid by option buyers for option contracts the writer hopes will expire without being exercised overwriting is considered risky and should only be attempted by investors who have a comprehensive understanding of options and options strategies overwriting can help investors who hold a dividend paying stock to increase their income by collecting the premium they receive from writing an option against the stock they own for example if they currently receive a 3 dividend yield they could increase that yield to effectively more than 10 by overwriting the strategy is most effective when stock prices have had a sharp decline and premiums get overvalued as the higher premiums help offset possible further losses the downside risk to overwriting is that if the stock s price rises sharply the seller loses any profit they would have made above the options strike price to combat this the seller may want to buy the option back although they would most likely need to repurchase it at a higher price than what they sold it for overwriting examplesuppose an investor holds a stock that is trading at 50 they decide to write a 60 call option against it that expires in three months and they receive a 5 premium the buyer will likely exercise the call option if the stock is trading above 60 before the expiry date which limits the seller s profit to 15 a share the difference between 50 and 60 plus the 5 premium on an asset that may continue to rise in value this is why the seller hopes that the call option will expire worthless they get to keep the premium already collected and continue to hold an asset that is on the rise if the stock declines the 5 premium the seller received helps to partially offset any loss incurred | |
what is an own occupation policy | an own occupation insurance policy covers individuals who become disabled and are unable to perform the majority of the occupational duties that they have been trained to perform this type of insurance policy is contingent on the individual being employed at the time the disability occurs own occupation insurance policies are also known as a pure own occupational policy and own occupation disability insurance in some circles doctors will often purchase these policies for protection against injuries | |
when an own occupation policy goes into effect the policyholder and the insurance carrier sign a contract that says the insurance carrier will pay the policyholder a monthly benefit if they become disabled but what determines a disability | the key factor in an own occupation policy is how disabled is defined in an insurance contract because the definition of own occupation is very flexible persons covered under an own occupation policy may find another job and still receive full benefit payments under the own occupation disability insurance definition a policyholder will receive benefits if you are unable to work in your own occupation regardless of whether you find employment in another profession this language will typically look something like this you will be considered disabled if you are unable to perform the material and substantial duties of your occupation even if you are gainfully employed in another occupation the definition of own occupation depends on an important aspect of an insurance policy namely how the insurance contract defines disabled as a status sometimes if a person isn t working at the time they are disabled they will not be able to claim insurance under a conventional own occupation policy however if they are covered under a modified own occupational policy they will be covered under a modified policy the definition of disabled includes persons not working at the time of their disablement these types of insurance policies apply to highly trained individuals such as surgeons example of an own occupation policyconsider mark a surgeon who loves to do home improvement projects when he s not in the operating room one weekend mark s hand slips on a saw and his finger has to be amputated mark won t be able to do surgery anymore but may be able to work in another medical specialty or even a profession outside the medical profession under the own occupation insurance definition mark cannot perform the substantial duties of his occupation as a surgeon if mark had an own occupation disability insurance policy he would receive full benefits regardless of whether he chooses to work in another medical specialty or another profession altogether this is why own occupation policies provide the most flexibility for policyholders and are critically important for doctors to have | |
what is owner earnings run rate | owner earnings run rate is an extrapolated estimate of an owner s earnings free cash flow over a defined period of time typically a year understanding owner earnings run rateowner earnings run rate is a term made up of two separate components owner earnings and run rate to understand how it works it is first necessary to get to the bottom of what each of them mean the run rate is a method for forecasting the future financial performance of a company based on past data let s say a company records revenue of 100 million in its last quarter using this information as a predictor of future performance we could say that it is expected to register sales of 400 million for the year or is operating at a 400 million run rate then there s owner earnings a valuation method favored by investment guru warren buffett net income ni gets a lot of attention from investors yet does not always fully reflect the actual dollar amount that a business has in its coffers to distribute to owners and boost shareholder value that s what owner earnings sets out to achieve buffett stated that the value of a company is simply the total of the net cash flows owner earnings expected to occur over the life of the business minus any reinvestment of earnings in a 1986 berkshire hathaway annual shareholder letter buffett gave some insight into owner earnings and how it should be calculated 1 in other words owner earnings reported earnings depreciation amortization other non cash charges average annual maintenance capex changes in working capital what the resulting figure aims to tell us is the amount of value the company is creating and how much is flowing back to shareholders often it ends up similar to free cash flow fcf the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets advantages and disadvantages of owner earnings run rateowner earnings is an important metric that investors can use to gauge a company s financial health increased owner earnings tend to act as a signal that a company s subsequent earnings will be good therefore assessing an accurate owner earnings run rate could be very important in predicting the company s longer term performance the problem is that the owner earnings run rate is not always reliable namely because it takes for granted that the company s financial performance stays consistent throughout the period for example let s say that after three quarters a company posts owner earnings of 9 million assuming that performance stays consistent the company s owner earnings run rate for the fiscal year fy would be 12 million 3 million per quarter this estimate can be difficult to assess if the company is operating in an industry that experiences seasonality in such cases owner earnings from one period may not be applicable across the entire time period the owner earnings run rate is flawed when applied to companies whose financial performance fluctuates from quarter to quarter run rates do not account for higher sales linked to a new product release a common occurrence among many technology firms or large one time sales either | |
what is owner financing | owner financing is a transaction in which a property s seller finances the purchase directly with the person or entity buying it either in whole or in part this type of arrangement can be advantageous for both sellers and buyers because it eliminates the costs of a bank intermediary owner financing can create much greater risk and responsibilities for the owner however understanding owner financinga buyer might be very interested in purchasing a property but the seller won t budge from a 350 000 asking price the buyer is willing to pay that amount and can put 20 down 70 000 that they gained from the sale of their prior home they would have to finance 280 000 but they can only get approved for a traditional mortgage in the amount of 250 000 the seller might agree to loan them the 30 000 to make up the difference or they might agree to finance the entire 280 000 in either case the buyer would pay the seller monthly principal plus interest on the loan these loans are somewhat common when the buyer and seller are family or friends or are associated in some other way outside the deal in many cases owner financing is for just a short period of time until the buyer is able to refinance to pay the owner in full owner financing situationsthere are often a number of specific situations that arise that cause a buyer and seller to agree to owner financing these situations may include but often aren t limited to the following cases advantages and disadvantages of owner financing for buyers owner financing offers several advantages over traditional lenders borrowers may find it easier to qualify for and to make it through the entire approval process due to more fluid underwriting constraints borrowers may find they are able to put less money down because there is less rigidity in owner financing as compared to corporate lending borrowers may find they have greater flexibility on terms when opting for owner financing because lenders may be resistant to financing certain riskier types of properties owner financing may be the only option a buyer has to secure capital for a purchase traditional lenders often have strict credit score requirements which may scrutinize a buyer s financial history debt to income ratio and employment stability owner financing may not take those into consideration owner financing involves greater risk for sellers compared to traditional lenders this means that buyers often have to pay higher interest rates and make higher loan payments over the life of the loan though there may be some upfront fees that the borrower does not need to pay they may still need to pay more over time some owner financing agreements may include balloon payments which can be challenging for buyers to manage and potentially lead to financial strain or default balloon payments stipulate periodic one time larger payments which helps mitigate risk on the seller s side these types of payments are not as typical with traditional mortgages defaulting on owner financing can result in property loss and damage to the buyer s credit score additionally buyer financing may face uncertain market conditions such as negative equity negative equity may occur where the property s value is lower than the outstanding loan balance making it difficult to sell or refinance at favorable terms may be easier to qualify for compared to traditional loansloan approval processes may be fasterdown payment requirement may be smallermore flexibility in negotiating loan termsmay incur higher interest rate compared to traditional loansmay include a balloon payment clause requiring substantial capital at one timeoften has limited legal protection compared to other types of loansadvantages and disadvantages of owner financing for sellers offering owner financing can open up a broader buyer pool some candidates may be naturally excluded because they can t secure a traditional loan however they may still be able to make a competitive bid and make all appropriate payments in the future owner financing can be especially advantageous in slow real estate markets or unique properties as it attracts more buyers in these cases sellers may be able to command a higher selling price for their property by providing a financing option making the property more accessible as lenders sellers can receive regular principal and interest payments from the buyer this creates a stable and predictable income stream and can be beneficial for sellers seeking reliable cash flow owner financing can expedite the sale process eliminating the need for the buyer to go through the lengthy mortgage approval process which is particularly advantageous in competitive real estate markets this may help buyers close on the property faster taking the property off of the market sooner than if the deal should stall out due to traditional financing sellers who finance property sales face various risks they wouldn t otherwise experience if the buyer used traditional financing the buyer may default delaying payments and putting the seller at risk of not capturing all payments agreed to in the sale if the buyer defaults on the loan the seller may need to go through the foreclosure process to reclaim the property this process can be time consuming emotionally draining and costly though the seller may make more money over time there may be non financial costs to also consider the extended payment schedule of owner financing means sellers receive the purchase price over time rather than in a lump sum this limits their ability to use funds for other purposes or investments in some ways this erodes their purchasing power as money today tends to be more valuable than money received in the future for the same amount may result in more prospective buyersmay yield higher prices due to broader buyer poolssteady income stream of principal and interestsale may be faster due to faster close processesrisk of the buyer defaultingno cash for the property upfrontmay result in foreclosure process should buyer stop making paymentsrequirements for owner financingan owner financing deal should be facilitated through a promissory note the promissory note outlines the terms of the arrangement including but not limited to the interest rate repayment schedule and the consequences of default the owners also typically keep the property title until all the payments have been made to protect themselves against default some do it yourself transactions can be fully managed by the owner but assistance from an attorney is generally advisable to ensure all of the bases are covered paying for a title search can be beneficial as well to establish that the owner seller is in fact in a position to sell the property and that they can eventually release the title in exchange for financing some portion or all of the deal can owner financing be used for commercial properties yes owner financing can be used for commercial properties as well it offers similar benefits to both buyers and sellers in the commercial real estate market | |
are there tax implications for owner financing | both buyers and sellers should be aware of the tax implications of owner financing sellers may need to report interest income while buyers might be eligible for certain tax deductions related to mortgage interest if you are considering entering an owner financing engagement consult your tax advisor can owner financing include a down payment yes owner financing often includes a down payment typically negotiated between the buyer and seller the down payment helps reduce the amount financed and provides security for the seller can owner financing be transferred to a third party in some cases owner financing can be transferred to a third party subject to the terms of the original agreement and approval from the seller the bottom lineowner financing is a real estate arrangement where the property seller acts as the lender offering direct financing to the buyer instead of obtaining a mortgage from a bank the buyer makes regular payments to the seller until the property is fully paid off this alternative financing option can benefit buyers with limited access to traditional mortgages and sellers seeking a broader pool of potential buyers | |
what is an owner occupant | an owner occupant is a resident of a property who holds the title to that property in contrast an absentee owner carries the title to the property but does not live there an absentee landlord is a type of absentee owner understanding the owner occupant designation | |
when applying for a mortgage or refinancing the lender will need to know if the borrower is going to be an owner occupant or an absentee owner some types of loans may be available only to owner occupants and not to investors the application will usually state the borrower intends to occupy the property as his her primary residence or some variation thereof when the borrower will be an owner occupant generally for a property to be owner occupied the owner must move into the residence within 60 days of closing and live there for at least one year 2 | an owner occupant owns a property and resides at the same property while an absentee owner does not live at the owned property buyers do not qualify as owner occupants if they are purchasing property in the name of a trust as a vacation or second home or as the part time home or for a child or relative homeowners usually are not required to notify their lender if they are moving out of an owner occupied home in which they have lived for at least 12 months the intent when applying for and receiving the loan is significant if a buyer tells the lender that they plan to live in a home while knowing that they intend to rent it that is considered occupancy fraud special considerationslenders may offer special programs to buyers who intend to live in a property rather than renovate and sell or lease it for proof such a buyer must sign an owner occupant certification document the owner occupant certification form also known as hud 9548d can be found on the u s department of housing and urban development hud website it must be signed by the property s buyer and real estate agent and filed with the sale contract any submission of a false owner occupant certification on property risks hefty fines of up to 250 000 or imprisonment of up to two years 3there is some flexibility in lending guidelines for borrowers who intend to live in the home but need to move out within 12 months of the loan start date loan documents may specify minimum residency for some programs for example hud offers a 50 discount on hud owned homes to firefighters law enforcement teachers and emergency responders the good neighbor next door program encourages these professionals to move into revitalization areas the hud discount is connected to a three year owner occupancy requirement borrowers who leave before the period ends would owe hud a prorated portion of the discount that they received 1pros and cons of owner occupied investment propertytax savingsaccess to u s department of housing and urban development hud buying assistance programsaccess to hud foreclosurescloser contact with tenantspotentially more expensive insurancepotentially roommates with your tenantsliving in the home that you invest and rent out can help you generate wealth quickly unfortunately it also comes with the reality of either living with your tenants or at the very least having very close contact with your tenants for example if you re in a duplex make sure that you consider your own personality and willingness to live with other people before you make the leap | |
is a second home owner occupied | no a second home does not qualify as owner occupied if an owner decides later to make their second home their primary residence then they could potentially refinance it at that point as their primary residence | |
does a duplex count as owner occupied | as long as you intend to live in part of the duplex as your primary residence a duplex counts as an owner occupied property | |
is a home with an accessory dwelling unit adu owner occupied | yes if you as the owner are living in either the main home or the accessory dwelling unit adu then a home with an adu qualifies as owner occupied the bottom lineowner occupied units give potential investors significant savings and the ability to climb the property ladder at a lower income than if they are just buying a home in which to live the potential for rental income offsetting your own housing costs is attractive but don t forget the significant downside of living with your potential tenants make sure you know what you re getting into before you sign on a deal that will make you a landlord to your roommates | |
what is owners equivalent rent oer | owners equivalent rent oer is the amount of rent that would have to be paid in order to substitute a currently owned house as a rental property this value is also referred to as the rental equivalent in other words oer figures the amount of monthly rent that would be equivalent to the monthly expenses of owning a property e g mortgage taxes etc understanding owners equivalent rentowners equivalent rent is a statistic that is followed by homeowners and tracked by the bureau of labor statistics the data used for calculating owners equivalent rent is obtained through surveys which ask members of a household called a consumer unit the following question if someone were to rent your home today how much do you think it would rent for monthly unfurnished and without utilities oer is a commonly cited measure that provides a gauge for changes in real estate market values if oer is high it may be more worthwhile to buy a home rather than rent it on the other hand if oer is low renting might be a better prospect owners equivalent rent typically changes with movements in the consumer price index oer increases over time and was steadily increasing up until 2022 when the economy was hit with high inflation which saw oer increase at higher rates than before 2022 1evaluating oer | |
when evaluating housing and shelter owners equivalent rent of a primary residence is one of the three components of the shelter category contributing to the consumer price index cpi which measures the average change over time in the prices paid by consumers for a market basket of goods and services | the calculation takes into account rental values owners equivalent rent and lodging away from home these three components are drivers of changes in the total value of shelter collectively these components can be influenced by the real estate market environment overall as well as various monetary factors such as prevailing interest rates property taxes available mortgage products and insurance for instance in april 2023 the shelter component of the consumer price index reported a 0 4 monthly increase and an 8 1 annual increase shelter prices were among the highest increases across the cpi in the previous year with transportation and food away from home having the highest impact in april 2023 the cpi s average increase across all items was 0 4 2in addition to serving as a component of the cpi the bureau of labor statistics also provides data on fluctuations in owners equivalent rent monthly this owners equivalent rent is a percentage change that is published by the bureau of labor statistics to measure the change in implicit rent which is the amount a homeowner would pay to rent or would earn from renting their home in a competitive market 3 | |
how do you calculate owners equivalent rent | owners equivalent rent oer is calculated using a monthly survey of consumers living in a unit the survey poses the question of how much the owner would pay to rent their home rather than own it | |
what is the cpi owners equivalent of rent of residences | the cpi owners equivalent rent oer measures the change in the shelter component of the cpi along with rent of primary residence which both together is a measure of the change consumers experience in shelter costs 4 | |
what is cpi to inflation | the consumer price index cpi measures the rate of change in inflation over time the cpi is based on the prices u s consumers pay for goods and services the percentage change of the cpi over a given period is inflation the bottom lineowners equivalent rent oer is a metric that provides insight into the changes in the real estate market and can help assist consumers in determining whether it is a better time to buy a property or rent a home | |
what is sa d business school sbs | sa d business school sbs is the business school at oxford university sbs offers both programs in finance business and management for undergraduate and graduate students the school also has several graduate and doctorate programs that cover specific aspects of business and finance sbs consistently ranks among the world s top business schools despite being a new player in the arena understanding sa d business school sbs business studies were first introduced at oxford under the oxford centre for management studies in 1965 but it wasn t until 1990 that it officially opened the school of management studies six years later the university founded the sa d school of business at oxford university it is named after wafic rida sa d a philanthropist and businessman who made a 20 million donation to construct a building for the school 12sbs s mission statement is a powerful business school produces powerful ideas and being an integral part of oxford we think expansively the business school which is known simply as sa d or oxford sa d offers 15 different degree programs for undergraduate graduate and doctorate students along with executive diplomas and courses for executive education 2 although the school is integrated with oxford and uses its resources sbs has its own brand and faculty 1sbs is headed by soumitra dutta the dean joined the school in 2022 and has a background in education and management of various business schools he also sits on a number of advisory boards of international schools in canada peru colombia and spain 4wafic sa d is known for being among the world s largest arms dealers he is credited for building saudi arabia s military in the 1980s drawing mainly upon british suppliers known as al yamamah it is said to be the single largest arms deal in history 5programs offered at sa d business school sbs sa d business school offers undergraduate mba graduate and doctorate degree programs these are highlighted in the table below sbs also offers executive diplomas in the following disciplines executive education allows students to take courses on campus online or to design their own custom programs 6the cost to attend sbs depends on the program for instance the tuition for the one year mba beginning september 2023 was listed as 71 440 7 the cost for the executive mba with a september 2023 and january 2024 start was listed as 106 540 8 a student who pursues the nine month msc financial economics degree can expect to pay 52 560 in september 2023 9rankings of sa d business school sbs the economist ranks the school in the 48th spot out of 100 schools as many as 79 of students received job offers within three months of graduating the school s ranking for overall personal development and educational experience was 21st out of 100 while the quality of students and faculty ranked 20th and 39th out of 100 respectively 1according to the financial times sbs took the 25th spot out of 95 schools in europe in 2022 its mba program came in eighth place while the executive mba program came in seventh among european business schools in 2022 10 other key rankings from the financial times include | |
how much does an mba cost to pursue at sa d business school | the cost of pursuing an mba at oxford sa d depends on the type of program while the school doesn t list the tuition and associated costs for the 1 1 mba it does list them for the other two programs pursuing a full year oxford mba as of september 2023 costs 71 440 7 the tuition for the oxford executive mba though is much higher this part time program costs 106 540 and takes 22 or 24 months depending on when you start 8 | |
how did sa d business school get its name | sbs is named after syrian saudi canadian wafic sa d the businessman and philanthropist donated 20 million to facilitate the construction of a building for the business school 12 sa d is the chair of the sa d foundation a charity that works with children in syria jordan lebanon and palestine he also founded sa d holdings a private investment company 12 | |
what do i need to apply to sa d business school | oxford sa d requires prospective students to apply online this includes scanning and uploading any supporting documents including a written statement and two referral letters applicants are required to write the gmat or gre exam for their desired program and must have a minimum grade point average for instance oxford mba applicants must have a minimum gpa of 3 5 4 0 prospective students for this program must have at least two years of work experience shortlisted applicants will be invited for an interview 13the bottom lineoxford is one of the most prestigious universities in the world which is why it s no surprise that there are many students who compete for a spot at the sa d business school it offers a range of programs for undergraduate graduate and doctorate students as well as courses for working executives but studying here does come at a cost the school has a rigorous application process and tuition for some programs can be higher than 100 000 | |
what is p value | in statistics a p value is defined as a number that indicates how likely you are to obtain a value that is at least equal to or more than the actual observation if the null hypothesis is correct the p value serves as an alternative to rejection points to provide the smallest level of significance at which the null hypothesis would be rejected a smaller p value means stronger evidence in favor of the alternative hypothesis p value is often used to promote credibility for studies or reports by government agencies for example the u s census bureau stipulates that any analysis with a p value greater than 0 10 must be accompanied by a statement that the difference is not statistically different from zero the census bureau also has standards in place stipulating which p values are acceptable for various publications 1jessica olah investopediaunderstanding p valuep values are usually found using p value tables or spreadsheets statistical software these calculations are based on the assumed or known probability distribution of the specific statistic tested the sample size which determines the reliability of the observed data directly influences the accuracy of the p value calculation he p value approach to hypothesis testing uses the calculated he p value approach to hypothesis testing uses the calculated p values are calculated from the deviation between the observed value and a chosen reference value given the probability distribution of the statistic with a greater difference between the two values corresponding to a lower p value mathematically the p value is calculated using integral calculus from the area under the probability distribution curve for all values of statistics that are at least as far from the reference value as the observed value is relative to the total area under the probability distribution curve standard deviations which quantify the dispersion of data points from the mean are instrumental in this calculation the calculation for a p value varies based on the type of test performed the three test types describe the location on the probability distribution curve lower tailed test upper tailed test or two tailed test in each case the degrees of freedom play a crucial role in determining the shape of the distribution and thus the calculation of the p value in a nutshell the greater the difference between two observed values the less likely it is that the difference is due to simple random chance and this is reflected by a lower p value the p value approach to hypothesis testingthe p value approach to hypothesis testing uses the calculated probability to determine whether there is evidence to reject the null hypothesis this determination relies heavily on the test statistic which summarizes the information from the sample relevant to the hypothesis being tested the null hypothesis also known as the conjecture is the initial claim about a population or data generating process the alternative hypothesis states whether the population parameter differs from the value of the population parameter stated in the conjecture in practice the significance level is stated in advance to determine how small the p value must be to reject the null hypothesis because different researchers use different levels of significance when examining a question a reader may sometimes have difficulty comparing results from two different tests p values provide a solution to this problem even a low p value is not necessarily proof of statistical significance since there is still a possibility that the observed data are the result of chance only repeated experiments or studies can confirm if a relationship is statistically significant for example suppose a study comparing returns from two particular assets was undertaken by different researchers who used the same data but different significance levels the researchers might come to opposite conclusions regarding whether the assets differ if one researcher used a confidence level of 90 and the other required a confidence level of 95 to reject the null hypothesis and if the p value of the observed difference between the two returns was 0 08 corresponding to a confidence level of 92 then the first researcher would find that the two assets have a difference that is statistically significant while the second would find no statistically significant difference between the returns to avoid this problem the researchers could report the p value of the hypothesis test and allow readers to interpret the statistical significance themselves this is called a p value approach to hypothesis testing independent observers could note the p value and decide for themselves whether that represents a statistically significant difference or not example of p valuean investor claims that their investment portfolio s performance is equivalent to that of the standard poor s s p 500 index to determine this the investor conducts a two tailed test the null hypothesis states that the portfolio s returns are equivalent to the s p 500 s returns over a specified period while the alternative hypothesis states that the portfolio s returns and the s p 500 s returns are not equivalent if the investor conducted a one tailed test the alternative hypothesis would state that the portfolio s returns are either less than or greater than the s p 500 s returns the p value hypothesis test does not necessarily make use of a preselected confidence level at which the investor should reset the null hypothesis that the returns are equivalent instead it provides a measure of how much evidence there is to reject the null hypothesis the smaller the p value the greater the evidence against the null hypothesis thus if the investor finds that the p value is 0 001 there is strong evidence against the null hypothesis and the investor can confidently conclude that the portfolio s returns and the s p 500 s returns are not equivalent although this does not provide an exact threshold as to when the investor should accept or reject the null hypothesis it does have another very practical advantage p value hypothesis testing offers a direct way to compare the relative confidence that the investor can have when choosing among multiple different types of investments or portfolios relative to a benchmark such as the s p 500 for example for two portfolios a and b whose performance differs from the s p 500 with p values of 0 10 and 0 01 respectively the investor can be much more confident that portfolio b with a lower p value will actually show consistently different results | |
is a 0 05 p value significant | a p value less than 0 05 is typically considered to be statistically significant in which case the null hypothesis should be rejected a p value greater than 0 05 means that deviation from the null hypothesis is not statistically significant and the null hypothesis is not rejected | |
what does a p value of 0 001 mean | a p value of 0 001 indicates that if the null hypothesis tested were indeed true then there would be a one in 1 000 chance of observing results at least as extreme this leads the observer to reject the null hypothesis because either a highly rare data result has been observed or the null hypothesis is incorrect | |
how can you use p value to compare 2 different results of a hypothesis test | if you have two different results one with a p value of 0 04 and one with a p value of 0 06 the result with a p value of 0 04 will be considered more statistically significant than the p value of 0 06 beyond this simplified example you could compare a 0 04 p value to a 0 001 p value both are statistically significant but the 0 001 example provides an even stronger case against the null hypothesis than the 0 04 the bottom linethe p value is used to measure the significance of observational data when researchers identify an apparent relationship between two variables there is always a possibility that this correlation might be a coincidence a p value calculation helps determine if the observed relationship could arise as a result of chance | |
what is p value | in statistics a p value is defined as a number that indicates how likely you are to obtain a value that is at least equal to or more than the actual observation if the null hypothesis is correct the p value serves as an alternative to rejection points to provide the smallest level of significance at which the null hypothesis would be rejected a smaller p value means stronger evidence in favor of the alternative hypothesis p value is often used to promote credibility for studies or reports by government agencies for example the u s census bureau stipulates that any analysis with a p value greater than 0 10 must be accompanied by a statement that the difference is not statistically different from zero the census bureau also has standards in place stipulating which p values are acceptable for various publications 1jessica olah investopediaunderstanding p valuep values are usually found using p value tables or spreadsheets statistical software these calculations are based on the assumed or known probability distribution of the specific statistic tested the sample size which determines the reliability of the observed data directly influences the accuracy of the p value calculation he p value approach to hypothesis testing uses the calculated he p value approach to hypothesis testing uses the calculated p values are calculated from the deviation between the observed value and a chosen reference value given the probability distribution of the statistic with a greater difference between the two values corresponding to a lower p value mathematically the p value is calculated using integral calculus from the area under the probability distribution curve for all values of statistics that are at least as far from the reference value as the observed value is relative to the total area under the probability distribution curve standard deviations which quantify the dispersion of data points from the mean are instrumental in this calculation the calculation for a p value varies based on the type of test performed the three test types describe the location on the probability distribution curve lower tailed test upper tailed test or two tailed test in each case the degrees of freedom play a crucial role in determining the shape of the distribution and thus the calculation of the p value in a nutshell the greater the difference between two observed values the less likely it is that the difference is due to simple random chance and this is reflected by a lower p value the p value approach to hypothesis testingthe p value approach to hypothesis testing uses the calculated probability to determine whether there is evidence to reject the null hypothesis this determination relies heavily on the test statistic which summarizes the information from the sample relevant to the hypothesis being tested the null hypothesis also known as the conjecture is the initial claim about a population or data generating process the alternative hypothesis states whether the population parameter differs from the value of the population parameter stated in the conjecture in practice the significance level is stated in advance to determine how small the p value must be to reject the null hypothesis because different researchers use different levels of significance when examining a question a reader may sometimes have difficulty comparing results from two different tests p values provide a solution to this problem even a low p value is not necessarily proof of statistical significance since there is still a possibility that the observed data are the result of chance only repeated experiments or studies can confirm if a relationship is statistically significant for example suppose a study comparing returns from two particular assets was undertaken by different researchers who used the same data but different significance levels the researchers might come to opposite conclusions regarding whether the assets differ if one researcher used a confidence level of 90 and the other required a confidence level of 95 to reject the null hypothesis and if the p value of the observed difference between the two returns was 0 08 corresponding to a confidence level of 92 then the first researcher would find that the two assets have a difference that is statistically significant while the second would find no statistically significant difference between the returns to avoid this problem the researchers could report the p value of the hypothesis test and allow readers to interpret the statistical significance themselves this is called a p value approach to hypothesis testing independent observers could note the p value and decide for themselves whether that represents a statistically significant difference or not example of p valuean investor claims that their investment portfolio s performance is equivalent to that of the standard poor s s p 500 index to determine this the investor conducts a two tailed test the null hypothesis states that the portfolio s returns are equivalent to the s p 500 s returns over a specified period while the alternative hypothesis states that the portfolio s returns and the s p 500 s returns are not equivalent if the investor conducted a one tailed test the alternative hypothesis would state that the portfolio s returns are either less than or greater than the s p 500 s returns the p value hypothesis test does not necessarily make use of a preselected confidence level at which the investor should reset the null hypothesis that the returns are equivalent instead it provides a measure of how much evidence there is to reject the null hypothesis the smaller the p value the greater the evidence against the null hypothesis thus if the investor finds that the p value is 0 001 there is strong evidence against the null hypothesis and the investor can confidently conclude that the portfolio s returns and the s p 500 s returns are not equivalent although this does not provide an exact threshold as to when the investor should accept or reject the null hypothesis it does have another very practical advantage p value hypothesis testing offers a direct way to compare the relative confidence that the investor can have when choosing among multiple different types of investments or portfolios relative to a benchmark such as the s p 500 for example for two portfolios a and b whose performance differs from the s p 500 with p values of 0 10 and 0 01 respectively the investor can be much more confident that portfolio b with a lower p value will actually show consistently different results | |
is a 0 05 p value significant | a p value less than 0 05 is typically considered to be statistically significant in which case the null hypothesis should be rejected a p value greater than 0 05 means that deviation from the null hypothesis is not statistically significant and the null hypothesis is not rejected | |
what does a p value of 0 001 mean | a p value of 0 001 indicates that if the null hypothesis tested were indeed true then there would be a one in 1 000 chance of observing results at least as extreme this leads the observer to reject the null hypothesis because either a highly rare data result has been observed or the null hypothesis is incorrect | |
how can you use p value to compare 2 different results of a hypothesis test | if you have two different results one with a p value of 0 04 and one with a p value of 0 06 the result with a p value of 0 04 will be considered more statistically significant than the p value of 0 06 beyond this simplified example you could compare a 0 04 p value to a 0 001 p value both are statistically significant but the 0 001 example provides an even stronger case against the null hypothesis than the 0 04 the bottom linethe p value is used to measure the significance of observational data when researchers identify an apparent relationship between two variables there is always a possibility that this correlation might be a coincidence a p value calculation helps determine if the observed relationship could arise as a result of chance | |
what is the pac man defense | the pac man defense is a defensive tactic used by a targeted firm in a hostile takeover situation in a pac man defense the target firm then tries to acquire the company that has made a hostile takeover attempt in an attempt to scare off the would be acquirers the takeover target may use any method to acquire the other company including dipping into its war chest for cash to buy a majority stake in the other company understanding the pac man defensein the actual pac man video game the player has several ghosts chasing and trying to eliminate it if the player eats a power pellet they may turn around and eat the ghosts companies may use a similar approach as a means of avoiding a hostile takeover by turning the tables on the acquirer and mounting a bid to take over the raider during the acquiring phase the takeover company may begin a large scale purchase of the target company s stocks to gain control of the company as a counter strategy the target company may begin buying back its shares and purchasing shares of the acquiring company it helps substantially if the targeted company has a war chest so that it has the means to mount a pac man defense a company s war chest is the buffer of cash kept aside for uncertain adverse events such as taking over a company a war chest is typically invested in liquid assets such as treasury bills and bank deposits that are available on demand a smaller or equivalent company may avoid a hostile takeover by using the pac man defense special considerationsfor some companies the pac man defense is one of the few options available when faced with a hostile takeover attempt without getting aggressive and fighting back the company may have no chance of surviving however on the downside the pac man defense can be an expensive strategy that may increase debts for the target company shareholders may suffer losses or lower dividends in future years examples of the pac man defensein 1982 bendix corp attempted to acquire martin marietta by purchasing a controlling amount of its stocks bendix became the owner of the company on paper however martin marietta s management retaliated by selling off its chemical cement and aluminum divisions and borrowing over 1 billion to counter the acquisition the conflict resulted in allied corp acquiring bendix 1in february 1988 after a month long takeover fight that began when e ii holdings inc made an offer for american brands inc american brands bought e ii for 2 7 billion american brands financed the merger through existing lines of credit and a private placement of commercial paper finally in october 2013 jos a bank launched a bid to take over competitor men s wearhouse men s wearhouse rejected the bid and countered with its own offers during negotiations jos a bank bought eddie bauer to gain more control in the marketplace men s wearhouse ended up buying jos a bank for 1 8 billion 2 | |
what is paga | paga is a mobile payment platform that allows its users to transfer money electronically and make payments through their mobile devices paga acts as a mobile wallet where any user equipped with a mobile device can conduct transactional activities using their device paga was founded in nigeria in 2009 by tayo oviosu and publicly launched in 2011 | |
how paga works | paga was introduced in nigeria to take advantage of the cash buildup in the system and to create a means whereby financial services are available to all although the banking sector in nigeria is not easily accessible to everyone the telecommunications industry has been more successful in reaching a large portion of the country s population the collaboration of both the banking and telecom sector has given rise to mobile banking platforms like paga where a user can perform basic financial transactions with the use of a cellphone paga works through a mobile phone application or online through the company s website with paga customers are able to deposit and save money purchase prepaid phone credit pay utility and cable bills and make payments to retailers the partnership between paga and western union also has the added benefit where western money transfers sent to users can be deposited into their paga accounts paga has numerous outlets across the country where its agents act as human atms a paga account holder or nonholder who needs to transfer money would give the agent the recipient s phone number the agent uses their phone to process the transaction and debits the sender s account for the amount to be sent and the transaction fee another option that is exclusive to account holders is the online option in which the account holder can use an internet enabled mobile device to process the transaction himself the paga account can be funded by depositing money with an agent at a bank or by using a debit card online after funds have been deposited and transferred the sender and recipient both receive an sms confirmation which serves as a receipt of the transaction the sms received by the sender confirms the amount of funds debited from the account and a withdrawal code required to access the funds which they would relay to the recipient the recipient uses the withdrawal code at an outlet or a partner bank to withdraw the money sent in addition to basic banking transactions offered through the mobile payments app and website paga has a checkout payment platform that business owners smes and merchants can integrate on their own websites clients of these businesses also have the option of making and receiving payments through paga s mobile services and agent outlets special considerationsthe advent of innovative technology in the financial sector fintech has seen a phenomenon whereby a cash driven economy is rapidly evolving into a digital money economy consumers and businesses are adapting to emerging technologies that are making financial products and services accessible to the general population for low costs however as developed economies are advancing in financial technology platforms and offerings some developing nations are lagging in this regard some rural areas of developing countries don t have easy access to banks and if they do the minimum deposits required by the banks may be unattainable for the residents of the community one of the initiatives of fintech is to achieve financial inclusion globally the concept of financial inclusion seeks to include the unbanked and underbanked population in the digital banking era mobile banking systems such as paga are being implemented to combat financial exclusion requirements for pagain order to prevent fraudulent transactions paga has put certain measures in place to protect its users a user logging into an unrecognized device for example will have to answer a couple of security questions before proceeding again every transaction using paga has to be finalized with a personal pin known only to the user furthermore each user is grouped into three levels level i customers are those who registered with a full name and phone number and are limited to a maximum transfer value of 50 000 or 138 as of dec 2019 per day level ii customers have their names phones addresses and id card information on file and can transfer up to 200 000 or 551 per day finally level iii clients have a maximum transfer limit of 5 000 000 or 13 780 per day and have two references and a credit check on file in addition to the level ii information provided a number of other mobile wallet and payment service platforms are increasingly being implemented in emerging nations that have a high percentage of unbanked groups m pesa mtn mobile money airtel money and orange money are examples of mobile banking applications that are being employed to include all people in the growing digital financial sphere | |
what is paid in capital | paid in capital is the total amount of cash that a company has received in exchange for its common or preferred stock issues in a company balance sheet paid in capital will appear in a line item listed under shareholders equity or stockholders equity it is often shown alongside a line item for additional paid in capital also known as the contributed surplus the figure for paid in capital will include the par value of the shares plus amounts paid in excess of par value paid in capital represents the money raised by the business through selling its equity rather than from ongoing business operations understanding paid in capitalfor sales of common stock paid in capital also referred to as contributed capital consists of a stock s par value plus any amount paid in excess of par value in contrast additional paid in capital refers only to the amount of capital in excess of par value or the premium paid by investors in return for the shares issued to them in modern times most common shares are assigned token par values of a few pennies because of this additional paid in capital tends to be essentially representative of the total paid in capital figure and is sometimes shown by itself on the balance sheet preferred shares sometimes have par values that are more than marginal additional paid in capital can provide a significant part of a young company s resources before earnings start accumulating through multiple profitable years it is an important layer of defense against potential business losses if retained earnings show a deficit short of the retirement of shares the account balance of paid in capital specifically the total par value and the amount of additional paid in capital should remain unchanged as a company carries on its business types of stock affecting paid in capitalthe balance sheet number on paid in capital may reflect transactions in common shares preferred shares treasury stock or some combination of all of these paid in capital is not a day to day revenue stream for a public company and its value does not fluctuate | |
when a public company wants to raise money it may issue a round of common stock shares it sells all of those shares to the public at par plus whatever value the market puts on it from then on the shares fluctuate in value as sellers and buyers determine their value in the open market | a company certainly has a great interest in its stock price from day to day but not because its balance sheet is immediately affected for better or worse a preferred stock issue is another way for a company to raise cash for its business this hybrid of a stock and a bond appeals to investors who want a steady dividend payment and protection of their capital from bankruptcy investors value preferred stock shares for their steady returns not for their price growth which can be minimal they appeal to fewer investors which is why most companies have relatively few shares of preferred stock than common stock in circulation companies may buy back shares from time to time in order to reduce the total number of their shares in circulation this is a popular move among shareholders who are likely to see their shares increase in value the shares bought back are listed within the shareholders equity section at their repurchase price as treasury stock a contra equity account that reduces the total balance of shareholders equity if the treasury stock is sold at above its repurchase price the gain is credited to an account called paid in capital from treasury stock if the treasury stock is sold below its repurchase price the loss reduces the company s retained earnings if the treasury stock is sold at a price equal to its repurchase price the removal of the treasury stock simply restores shareholders equity to its pre buyback level paid in capital from retirement of treasury stockcompanies may opt to remove treasury stock by retiring some treasury shares rather than reissuing them the retirement of treasury stock reduces the balance of paid in capital applicable to the number of retired treasury shares if the initial repurchase price of the treasury stock was lower than the amount of paid in capital related to the number of shares retired then paid in capital from the retirement of treasury stock is credited if the initial repurchase price of the treasury stock was higher than the amount of paid in capital related to the number of shares retired then the loss reduces the company s retained earnings once treasury shares are retired they are canceled and cannot be reissued example of paid in capitalto illustrate say company b issues 2 000 shares of common stock with a par value of 2 per share the market price per share is 20 per share paid in capital is the total amount paid by investors for common or preferred stock therefore the total paid in capital is 40 000 4 000 par value of the shares 36 000 amount of additional capital in excess of par in the shareholders equity section of company b s balance sheet 36 000 is recorded next to the line item paid in capital in excess of par while 4 000 is recorded next to the line item common stock the figures combined equal the total paid in capital paid in capital vs additional paid in capital vs earned capitaleach of these line items in a balance sheet convey a different piece of information to the interested investor or analyst a young company with big expectations might have significantly more paid in capital than earned capital this shows a degree of enthusiasm from investors a mature company should have more earned capital than paid in capital earned capital is an indication of the amount of money that a company is actually taking in for its goods and services | |
how is paid in capital calculated | paid in capital is the total amount received by a company from the issuance of common or preferred stock it is calculated by adding the par value of the issued shares with the amounts received in excess of the shares par value | |
how is paid in capital recorded | paid in capital is recorded on the company s balance sheet under the shareholders equity section it can be called out as its own line item listed as an item next to additional paid in capital or determined by adding the totals from the common or preferred stock and the additional paid in capital lines paid up share capital is also listed in the shareholders equity section paid up share capital is money that the company has already received in payment of any sold shares | |
is paid in capital a debit or a credit | paid in capital appears as a credit that is an increase to the paid in capital section of the balance sheet and as a debit or increase to cash if not distinguished as its own line item there will be a debit to cash for the total amount received and credits to common or preferred stock and additional paid in capital | |
what is the difference between common stock and paid in capital | common stock is a component of paid in capital which is the total amount received from investors for stock on the balance sheet the par value of outstanding shares is recorded to common stock and the excess that is the amount the market price adds to par value is recorded to additional paid in capital the sum of common stock and additional paid in capital represents the paid in capital the bottom linepaid in capital may not be a headline number for a company but it s worth taking note of it as an investor this number indicates the total amount of money that individual investors and institutional investors have staked on a company s success | |
what is paid up additional insurance | paid up additional life insurance can be thought of as small chunks of whole life insurance purchased with dividends from a whole life policy each paid up addition pua has its own death benefit and cash value and also earns dividends this makes them an effective way to increase the cash value and death benefit over time without medical underwriting or increasing the premium payment understanding paid up additional insurancepaid up additions are just that paid up which means that unlike your base policy you don t have to pay premiums on them once purchased keep in mind that these are very small packets of life insurance on their own they wouldn t be worth much but if you use dividends to purchase paid up life insurance over time their value can compound as they also earn dividends which can be used to purchase more paid up insurance the net effect can be a significant increase in the value of the policy not only does that mean a larger death benefit but also a larger cash value another benefit is that paid up additions increase coverage without going through medical underwriting this is not only convenient but especially beneficial if your health has declined since the policy was issued poor health can increase the cost of life insurance or make you ineligible for a policy entirely if you can t increase life insurance coverage through other means having the option to purchase paid up additional life insurance is invaluable and since paid up additional insurance works just like regular insurance you can surrender paid up additions for their cash value or take a loan against them you can only purchase puas in participating whole life policies those that pay dividends however they are one of many ways you can use your dividends other ways include reducing your premium adding to the cash value and receiving a cash check participating whole life insurance policies those that pay dividends are offered by mutual life insurance companies many life insurance companies also offer a paid up additions pua rider which lets you pay extra premium dollars in order to purchase more puas than you could with dividends from the base policy alone this can be a turbocharged way to increase the cash value and death benefit especially since the value of paid up additional life insurance compounds over time as it earns dividends which can purchase even more life insurance a paid up additional insurance rider must be structured into the policy when you purchase it some companies may allow you to add it later but health age and other factors could make that difficult pua riders vary among insurance companies they often have slightly different names such as additional life insurance rider or paid up additions rider or paid up additional life insurance rider they may work differently as well for some the rider is flexible allowing you to contribute between a maximum and minimum amount to the rider each year other companies stipulate that contributions remain at consistent levels or you might lose the rider and need to reapply for it in the future if you take two otherwise identical whole life insurance policies with the same annual premium but one has a pua rider and one doesn t the one with the rider may have a higher guaranteed net cash value sooner than the one without 1 however in most cases the policy with the pua rider will initially have a lower cash value and much lower death benefit it will take many years possibly decades for the two policies to have similar death benefits for this reason whole life insurance with a pua rider should be viewed as a long term strategy to maximize the cash value and death benefit special considerationsonly member owned mutual insurance companies issue dividends dividends are not guaranteed but they are generally issued annually when the company is doing well financially but some standout life insurance companies have a very long history of annual dividend payments and are unlikely to break their records making these companies a good choice for dividends if you don t want to use dividends to purchase paid up additional insurance you can use them instead to lower the premium earn interest reduce loan payments or you can receive a check reduced paid up insurance is different from paid up additional insurance the former is a nonforfeiture option that allows the policy owner to receive a lower amount of fully paid whole life insurance if a policy with cash value lapses 2 the attained age of the insured and the cash value determine the face value of the new policy as a result the death benefit is smaller than that of the lapsed policy example of paid up additional insuranceconsider a 45 year old male who purchases a whole life policy with an annual base premium of 2 000 for a 100 000 death benefit in the first year of the policy he decides to contribute an additional 3 000 to a paid up additions rider the paid up additions will give him an immediate cash value while adding 15 000 to his death benefit if he continues to purchase paid up additions he will continue to increase his cash value and death benefit as time goes on | |
what is paid up capital | paid up capital is the amount of money a company has received from shareholders in exchange for shares of stock paid up capital is created when a company sells its shares on the primary market directly to investors usually through an initial public offering ipo when shares are bought and sold among investors on the secondary market no additional paid up capital is created as proceeds in those transactions go to the selling shareholders not the issuing company investopedia julie bangunderstanding paid up capitalpaid up capital also called paid in capital or contributed capital is arrived at from two funding sources the par value of stock and excess capital each share of stock is issued with a base price called its par typically this value is quite low often less than 1 any amount paid by investors that exceeds the par value is considered additional paid in capital or paid in capital in excess of par in the shareholders equity section of the balance sheet the par value of issued shares is listed as common stock or preferred stock share capital may appear as for example if a company issues 100 shares of common stock with a par value of 1 and sells them for 50 each the shareholders equity of the balance sheet shows paid up capital totaling 5 000 consisting of 100 of common stock and 4 900 of additional paid up capital paid up capital vs authorized capital | |
when a company wants to raise equity it cannot simply sell off pieces of the company to the highest bidder businesses must request permission to issue public shares by filing an application with the agency responsible for the registration of companies in the country of incorporation in the united states companies wanting to go public must register with the securities and exchange commission sec before issuing an initial public offering ipo 1 | the maximum amount of capital a company is given permission to raise via the sale of stock is called its authorized capital typically the amount of authorized capital a company applies for is much higher than its current need this is done so that the company can easily sell additional shares down the road if the need for further equity arises since paid up capital is only generated by the sale of shares the amount of paid up capital can never exceed the authorized capital importance of paid up capitalpaid up capital represents money that is not borrowed a company that is fully paid up has sold all available shares and thus cannot increase its capital unless it borrows money by taking on debt a company could however receive authorization to sell more shares a company s paid up capital figure represents the extent to which it depends on equity financing to fund its operations this figure can be compared with the company s level of debt to assess if it has a healthy balance of financing given its operations business model and prevailing industry standards | |
what is painting the tape | painting the tape is a form of market manipulation whereby market players attempt to influence the price of a security by buying and selling it among themselves to create the appearance of substantial trading activity the goal of painting the tape is to create the illusion of an increased interest in a stock to trick investors into buying shares which would drive the price higher understanding painting the tapepainting the tape is an illegal activity that is prohibited by the securities and exchange commission sec because it creates an artificial price the sec regulates and monitors financial activity in the markets to ensure that trading is done in a fair and orderly manner 1 the term originated in a bygone era when stock prices were largely transmitted on a ticker tape ticker tapes were first used to print the financial details of trades sent via a telegraph the name was derived by the mechanical sound from the printers that printed the narrow strip of paper that contained stock quotes today an electronic version of the ticker tape is used 2 market manipulators know that high trading volumes in a security often attract the attention of investors painting the tape increases volume and attracts investors who then may push the price higher the market manipulators who have painted the tape will then sell their holdings often acquired at much lower prices to investors unaware of the manipulation these investors are left holding the bag once the manipulation ceases and the price of the stock declines steeply two common objectives of painting the tape are to lure unsuspecting investors into a security and to achieve a high closing price for the security manipulators may paint the tape near the market s close in an attempt to boost a stock s price substantially at market close a practice called marking the close closing prices are widely reported in the media and are closely watched by investors since most securities are valued on the basis of their closing prices manipulators use this tactic to achieve higher market value for their holdings example of painting the tapelet s say as an example that xyz trading partners managed money for their clients and provided advice as to what stocks to buy or sell the ceo of the firm was looking to unload a penny stock called abc inc which was trading at 2 per share however the ceo had purchased the stock at 3 and would take a loss if he sold his shares given the current market price as a result the ceo decided to engage in manipulative trading practices to get investors interested in buying the stock the ceo entered into a number of buy trades in abc s stock throughout the day particularly when the stock price was rising the ceo continued his active buying into the close of the trading day the trading activity increased the typical daily trading volume for abc and led to the stock closing at a multi month high of 4 per share as a result investor interest spiked during the next trading day as investors interpreted the rising price as a bullish signal the increase in trading volume attracted even more investors when investment websites showed abc as one of the biggest percentage gainers for the day the stock of abc rose to 6 per share and seeing that his strategy worked the ceo sold all of his shares when the sale trades of abc hit the tape the stock price began to falter other investors who realized the move higher was a false move rushed in to sell their shares the frenzy of selling pushed abc s stock price lower to 1 50 per share many investors were duped into buying abc s stock with no fundamental news to drive it higher and they suffered widespread financial losses as a result in the meantime the ceo of xyz trading partners doubled his investment at the expense of others through his manipulative trading practices including painting the tape | |
what is paper money | paper money is a country s official paper currency that is circulated for the transactions involved in acquiring goods and services the printing of paper money is typically regulated by a country s central bank or treasury in order to keep the flow of funds in line with monetary policy paper money tends to be updated with new versions that contain security features and attempt to make it more difficult for counterfeiters to create illegal copies understanding paper moneythe first recorded use of paper money was purported to be in the country of china during the 7th century a d as a means of reducing the need to carry heavy and cumbersome strings of metallic coins to conduct transactions similar to making a deposit at a modern bank individuals would transfer their coins to a trustworthy party and then receive a note denoting how much money they had deposited the note could then be redeemed for currency at a later date 1example of paper moneyin the u s paper money is considered fiat money this means that it has no actual value except as an accepted medium of exchange before 1971 this was not the case u s banknotes were backed by a certain amount of gold which was dictated by the federal reserve 2the u s dollar has been the dominant reserve currency since the end of world war ii prior to world war ii the british pound was the dominant reserve currency 3there are 17 countries and territories that use the u s dollar as their currency these include ecuador el salvador american samoa guam micronesia panama and zimbabwe there are also many countries that peg their currency to the u s dollar including lebanon hong kong and saudi arabia 4there are also countries that regularly use the u s dollar alongside their own such as mexico canada and costa rica the u s dollar is so widely used that 60 of globally disclosed official foreign reserves were in u s dollars as of 2021 this compares to 21 for the euro 6 for the japanese yen 5 for the british pound and 2 for the chinese renminbi 54the euro is another form of paper money that is used in multiple countries as of 2023 20 of the 27 member states in the european union eu use the euro as their official currency 6special considerationswhile paper money is the most accepted medium of exchange companies often issue shares of their own company to purchase other companies and reward their staff shares are units of ownership in a company that entitle the shareholder to an equal distribution of any profits of all accepted mediums of exchange shares are closest to paper money because they can be exchanged on the open market for cash | |
is paper money fiat money | yes paper money is fiat money fiat money is any money that is considered legal tender paper money and coins are legal tender | |
is crypto fiat money | cryptocurrencies are not fiat money fiat money is determined by a nation s government and the government decides what money can be accepted as legal tender cryptocurrencies are not authorized by most governments as legal tender | |
is money still printed | yes money is still printed as paper money and coins are still used as legal tender throughout the nation the u s bureau of engraving printing is responsible for the design and printing of u s paper money the bottom linewith the advent of credit cards and digital payments paper money is not as commonly used as it once was many establishments in developed cities around the world no longer accept paperless money however paper money is still used extensively in nations and businesses that haven t incorporated digital payments into their infrastructure | |
what is a paper trade | a paper trade is a simulated trade that allows an investor to practice buying and selling without risking real money the term paper trade dates back to a time when aspiring traders practiced trading on paper before risking money in live markets well before online trading platforms became the norm while learning a paper trader records all trades by hand to keep track of hypothetical trading positions portfolios and profits or losses most practice trading now involves the use of an electronic stock market simulator which looks and feels like an actual trading platform |
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