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how can i make 1 000 a month from passive income | there are plenty of ways to generate passive income examples include renting out a space such as a bedroom or an entire house investing in securities that pay dividends or interest and selling goods and services online as a side hustle the bottom linepassive income can be derived over time using different means from renting out property and leveraging automated technologies to creating digital content these avenues offer the potential for sustainable financial growth while each method carries its own set of risks and rewards the key to successful passive income lies in initial strategizing and occasional monitoring as we move further into an era where traditional income models are being supplanted by gig and other non traditional forms of work many are finding they need more flexible income streams as they work toward a more secure financial foundation for themselves | |
passive investing is an investment strategy to maximize returns by minimizing buying and selling index investing is one common passive investing strategy whereby investors purchase a representative benchmark such as the s p 500 index and hold it over a long time passive investing can be contrasted with active investing | understanding passive investingpassive investing methods seek to avoid the fees and limited performance that may occur with frequent trading the goal of passive investing is to build wealth gradually also known as a buy and hold strategy passive investing means purchasing a security to own it long term unlike active traders passive investors do not seek to profit from short term price fluctuations or market timing the market posts positive returns over time is the underlying assumption of passive investment strategy passive managers generally believe it is difficult to out think the market so they try to match market or sector performance passive investing attempts to replicate market performance by constructing well diversified portfolios of single stocks which if done individually would require extensive research the introduction of index funds in the 1970s1 made achieving returns in line with the market much easier in the 1990s 2 exchange traded funds or etfs that track major indices such as the spdr s p 500 etf spy simplified the process even further by allowing investors to trade index funds as though they were stocks passive investing benefits and drawbacksmaintaining a well diversified portfolio is important to successful investing and passive investing via indexing is enables investors to achieve diversification index funds spread risk broadly in holding a representative sample of the securities in their target benchmarks index funds track a target benchmark or index rather than seeking winners thus they avoid constantly buying and selling securities as a result they have lower fees and operating expenses than actively managed funds an index fund offers simplicity as an easy way to invest in a chosen market because it seeks to track an index there is no need to select and monitor individual managers or chose among investment themes however passive investing is subject to total market risk index funds track the entire market so when the overall stock market or bond prices fall so do index funds another risk is the lack of flexibility index fund managers usually are prohibited from using defensive measures such as reducing a position in shares even if the manager thinks share prices will decline passively managed index funds face performance constraints as they are designed to provide returns that closely track their benchmark index rather than seek outperformance they rarely beat the return on the index and usually return slightly less due to operating costs some of the key benefits of passive investing are proponents of active investing would say that passive strategies have these weaknesses fees for funds vary actively managed funds typically have higher operating costs than passively managed funds but it is always important to check fees before choosing an investment fund 3to contrast the pros and cons of passive investing active investing also have its benefits and limitations to consider but active strategies have these shortcomings | |
how can you start passive investing | purchasing an index fund is a common passive investment strategy index funds are designed to mirror the activity of a market index such as the russell 2000 index 5 index funds are designed to maximize returns in the long run by purchasing and selling less often than actively managed funds exchange traded funds etfs are another common choice for passive investors etfs can be passively or actively managed index based etfs like index funds track the activity of a securities index 6 | |
what are the costs associated with passive investment | passive investing is often less expensive than active investing because fund managers are not picking stocks or bonds passive funds allow a particular index to guide which securities are traded which means there is not the added expense of research analysts even passively managed funds will charge fees 7 whenever deciding what kind of fund to invest in investigate the associated costs | |
what kind of returns can you expect from passive investing versus active investing | actively investment aims to drive up returns by pursuing frequent trading but these returns are diminished by the fees associated with professional management and frequent buying and selling research shows that few actively managed funds give investors returns above benchmark over long periods of time 8passive investing targets strong returns in the long term by minimizing the amount of buying and selling but it is unlikely to beat the market and result in outsized returns in the short term active investment can bring those bigger returns but it also comes with greater risks than passive investment the bottom linepassive investing has pros and cons when contrasted with active investing this strategy can be come with fewer fees and increased tax efficiency but it can be limited and result in smaller short term returns compared to active investing passive investment can be an attractive option for hands off investors who want to see returns with less risk over a longer period of time | |
what does past due mean | past due refers to a payment that has not been made by its cutoff time at the end of its due date a borrower who is past due will usually face some penalties and can be subject to late fees failure to repay a loan on time usually has negative implications for a borrower s credit status and may cause loan terms to be permanently adjusted understanding past duepast due status can occur on any type of payment that has not been paid by the cutoff time on its specified due date payments past due are usually penalized based on the provisions of a contractual agreement credit agreements are one of the most common situations in which past due payments may occur an individual or business who takes out a loan or obtains any type of credit from a lending institution is expected to repay the loan according to the terms of the loan agreement lending products and loan agreements can vary drastically depending on the type of credit product offering some loans like bullet loans require a lump sum payment with interest after a specified period of time the majority of loan products are on a monthly installment schedule which requires the borrower to pay some principal and interest with each payment lending institutions depend on the expected stream of cash flows outlined in loan agreements and will take penalizing steps when payments are not made on time types of loansloans generally fall into either revolving or non revolving categories non revolving credit offers a lump sum payout to the borrower however payment terms can potentially be diverse with borrowers required to pay only monthly interest or interest and principal after a period of time most non revolving credit loans are on a regular repayment schedule known as an amortization schedule which includes payments of both principal and interest monthly revolving credit is typically always on a monthly payment schedule the borrower is required to make a payment every month on an established date revolving credit though does not always have a regular repayment schedule this means payments can vary each month depending on the balance outstanding this is because revolving credit is an open ended agreement in which the borrower has a specified credit limit that they can access if they choose this makes the lending process continuous with the balance depending on how much or how frequently a borrower takes out the credit lines of credit and credit card accounts are considered revolving credit the borrower can dip into the credit balance available in these accounts anytime but is required to make a specified minimum payment every month by a set due date in this case borrowing and repayment are continuous and ongoing penalties and late feesregardless of the type of loan contract a borrower has entered into they must make the required payments by the required due date a borrower who does not make a required payment by the date due will get hit with some type of penalty keep in mind many lenders have time cutoffs on the due date which the borrower must be aware of when making payments for example some lenders may require payment to be received by 8 00 pm eastern standard time while others may allow payment up until midnight in the borrower s time zone if a loan payment is due by the 10th of the month and is not paid within the specified time constraints the payment will be considered past due late fees are one of the most expensive penalties that can occur for a past due bill late fees vary from lenders and types of obligations for mortgages they can range between 3 to 6 of your monthly mortgage payment for credit cards they are usually 25 for the first late fee but can be more for subsequent late payments 12this becomes a good source of revenue for the lender and also a charge that helps to cover some delinquency risks some lenders may not charge late fees at all this can be a good feature to look out for when applying for new credit when late fees are charged they can be substantial and if they accumulate they can be difficult to pay off if a lender charges no late fees a borrower will still be penalized by credit reporting which can affect their credit score payment history usually accounts for the largest portion of a credit scoring methodology at 35 3most borrowers do not report delinquencies until after 60 days past due but if a payment is missed at any time a lender can report it delinquencies stay on a credit report for seven years this is another reason they can be damaging there is nothing a borrower can do to erase delinquencies unlike paying down credit utilization which is the second most important credit scoring factor 345other considerationsdepending on the policy of a lender the borrower will either immediately be charged a late fee and or will be reported delinquent after missing a required payment some lenders may offer grace periods grace periods can be another feature to look out for when applying for credit or reviewing credit terms if for example there is a grace period of 10 days the borrower would not be charged a late fee until 10 days after the due date cutoff if the payment is still not made by the end of the grace period late fees or additional interest may be applied grace periods may also be modified if a borrower exploits the benefit if there is a pattern of late payments the grace period may be shortened or removed | |
when a borrower who is overdue on their payments receives their next account statement the balance owed will be the current balance plus their overdue balance plus any late charges and interest fees to bring the account up to good standing the borrower must make the required minimum payments including any late fees or they may be further penalized | a lender may also increase the interest rate on the account as a penalty which increases the amount owed lenders can often decrease or increase interest rates depending on payment history 6an individual or business that is 30 days behind schedule on a loan payment may be reported delinquent to the credit bureaus after 180 days of not making payments on an overdue account the debtor may not have the option to pay in installments anymore 4usually by this time the lender will have charged off the loan and sold it to a debt collection agency in a charge off the lender writes off the loan amount as a loss with the loss depending on any salvage value that might be obtained from a sale uncollected debts will still be sought out even after a charge off collection agencies can often be more aggressive and proactive than a lender s collection department also continuing to report damaging information that affects a credit score loans are not the only type of agreement subject to past due penalties other agreements that can involve past due delinquencies include tax obligations mobile phone contracts and lease agreements each contract will have its own provisions for the occurrence of past due payments moreover all types of missed payments can be reported to credit bureaus for credit reporting purposes there can be many options for resolving all kinds of unpaid debts including bankruptcy settlement and debt consolidation loan offers ultimately it s best to take proactive measures to ensure debt is paid on time in order to avoid expensive penalties and costly exit strategies | |
what does 30 days past due mean | thirty days past due means that you haven t made a payment on your loan obligation in 30 days this is the turning point where it may impact your credit history typically if your account is 30 days past due or in some cases 60 you will be reported to the credit bureaus and your credit profile will take a hit the longer the time goes by without payment the worse it is 4can a late payment be forgiven it depends on the lender and the type of loan obligation sometimes late payments can be forgiven for example if you have a credit card and make a late payment but otherwise have had a good track record with the card provider then they may forgive the late payment if you call them up and ask | |
what happens will depend on the type of loan in most cases you will be charged a late fee if you rectify the situation that s as bad as it may get if you keep missing payments then you may have your interest rate increased depending on the loan and the contract you may be reported to the credit bureaus hurting your credit profile and then eventually your account may go to collection agencies | the bottom linemissing the due date of your loan obligation whether that be a student loan credit card or car loan comes with serious consequences that hurt the borrower s finances this happens through late fees higher interest charges or other penalties that can send a borrower spiraling further into debt it s critical to manage your debt responsibly and not be past due on any payments | |
what is a patent | a patent is the granting of a property right by a sovereign authority to an inventor this grant provides the inventor exclusive rights to the patented process design or invention for a designated period in exchange for a comprehensive disclosure of the invention they are a form of incorporeal right government agencies typically handle and approve applications for patents in the united states the u s patent and trademark office uspto which is part of the department of commerce handles applications and grants approvals understanding patentsmost patents are valid for 20 years in the u s from the date the application was filed with the uspto although there are circumstances where exceptions are made to extend a patent s term u s patents are only valid in the united states and u s territories if seeking protection outside of the united states it is important to research the intellectual property rights of other nations and apply for protection with their governing authorities according to the united states code a patent can be granted to types of patentsthere are three types of patents available in the united states utility patents design patents and plant patents each has its own specifications and durations a patent can also be pending indicating that the inventor has begun applying for a patent utility patents or patents for invention issue legal protection to people who invent a new and useful process an article of manufacture a machine or a composition of matter utility patents are the most common type of patent with more than 90 of patents issued by the u s government belonging to this category 2 a utility patent lasts for 20 years from the date of filing as long as maintenance fees are paid 3 maintenance fees are surcharges applied to utility patent applications filed after dec 12 1980 4design patents are patents issued for original new and ornamental designs for manufactured products design patents protect the design or look of something they require the invention to which the design belongs to be original 5 design patents last for 15 years for applications filed on or after may 13 2015 for applications filed before may 13 2015 patents last for 14 years from the date of the filing maintenance fees do not apply to design patents 6plant patents go to anyone who produces discovers and invents a new kind of plant capable of reproduction these patents are granted for 20 years from the date of filing and no maintenance fees apply 6patents provide an incentive for companies or individuals to continue developing innovative products or services without the fear of infringement for example large pharmaceutical companies can spend billions of dollars on research and development without patents their drugs and medicines could be duplicated and sold by companies that didn t research or invest the needed capital for r d in other words patents protect the intellectual property of companies to help their profitability however patents also serve as bragging rights for companies demonstrating their innovativeness | |
how to apply for a patent | before making a formal application an applicant should research the patent and trademark office s database to see if another person or institution has claimed a patent for a similar invention the invention must be different from or an improvement upon a previous design to be considered for a patent applicants need to take care to maintain accurate records of the design process and the steps taken to create the invention enforcing the patent is up to the person or entity that applied for the patent to apply for a patent in the united states the applicant submits specific documents and pays associated fees written documentation includes drawings descriptions and claims of the item to be patented a formal oath or declaration confirming the authenticity of the invention or improvement of an existing invention must be signed and submitted by the inventor after fee payment the application is reviewed and either approved or denied 7patents protect the intellectual property of companies and help ensure their profitability but patents also serve as marketing for a company s innovation patent statisticsthe uspto receives more than 500 000 patent applications per year with just over 300 000 of them granted 2 the agency had over 14 000 employees in 2023 of whom approximately 60 of them were patent examiners while the remaining worked in the legal and technical areas 8in june of 2018 the uspto issued its 10 millionth patent 9 many patents issued go to companies in the technology industry where apple was granted 2 285 in 2022 microsoft and google were also granted patents however ibm typically receives more than any company in the u s ibm was granted over 8 000 patents in 2021 alone 10examples of patentsone of the most notable patents was for the personal computer filed in 1980 by steve jobs and three other employees of apple inc 11king c gillette patented the razor in 1904 it was dubbed a safety razor 12 garrett morgan was granted a patent for the traffic light in 1923 the patent for the television was issued in 1930 to philo taylor farnsworth for the first television system 1314at age 21 farnsworth had created the first electric television image and went on to invent an early model of the electronic microscope 15patents vs trademarks vs copyrightspatents are legal rights issued to inventors to protect their inventions for a certain time usually 20 years 3 they exclude others from reproducing using or profiting from it without the expressed permission of the patent owner the granting authority issues a patent in exchange for permission to publish details about the invention such as how it s made and what it s used for trademarks are legal protections on words phrases designs or marks that identify a specific product or service trademarks are intellectual property that contribute to the image and reputation of the product or service to which it belongs and to the company to which it belongs beyond symbolism a trademark can be incredibly valuable to a company prompting some companies to include them in their valuation trademarks are protected forever as long as it s in use and the holder can defend it examples of trademarks include the golden arch for mcdonald s the nike swoosh and apple s apple 16copyrights are legal protections on creative works of the mind or according to the united states patent and trademark office original works of authorship they include visual art literary works other writings choreography and software copyrights prevent others from reproducing the work without the express permission of the copyright owner like other intellectual property copyrights are granted for a specific time allowing the holder to benefit from its creation copyrights are granted for the maximum period of 70 years from the death of the author for works created on or after jan 1 1978 exceptions apply to works for hire and anonymous works 17copyrights for works for hire or anonymous works are granted for 95 years from their publication or 120 years from creation which occurs first 17patent faqsa patent is a legal right to an invention given to a person or entity without interference from others who wish to replicate use or sell it patents are granted by governing authorities and have a time limit usually 20 years examples of historic patented inventions include common products that we use daily including the telephone dishwasher and lightbulb patents protected until 2033 include boeing s water harvesting system disney s method for reproducing human actions with robots and google s medical response drone 181920the three types of patents are utility patents design patents and plant patents utility patents are issued for inventions that are novel and useful design patents protect the design or image of a product plant patents are issued to applicants for plants that can reproduce patent costs vary according to the type of patent applied for and are based on several other factors such as the type of applicant provisional or nonprovisional status and associated fees search fees examination fees post allowance fees the cost of a patent agent or attorney and more if using the services of an attorney you can expect costs to range from approximately 5 000 to more than 45 000 21utility and plant patents last for 20 years from the date of filing while design patents last for 15 years if filed on or after may 13 2015 or 14 years if filed before may 13 2015 22the bottom linepatents are legal rights granted to inventors for their creations government divisions such as the united states patent and trademark office issue patents and other intellectual property rights to inventors authors and other creators patent rights give exclusive rights to use replicate or sell the protected invention without interference from others who wish to do the same in exchange the issuing authority is granted the right to publish the details of the invention patents are granted for a limited time such as 20 years from the date of filing for plant and utility patents and 14 or 15 years for design patents patents issued in the united states only offer protection within the u s to extend protection in other nations the applicant must apply with the governing authority of that nation 23 | |
what is the protecting americans from tax hikes path act | the protecting americans from tax hikes path act of 2015 was an obama era law that expanded or renewed several tax credits for individuals families and businesses while implementing measures to prevent fraudulent claims for those credits the act remains in force the act primarily affects people who are eligible to receive certain tax credits the path act also renewed about 50 temporary tax breaks for individuals and businesses that had passed their original expiration dates 5understanding the path actthe path act focused on several tax credits for individuals families and businesses it extended some credits permanently and expanded eligibility for others a tax credit in general is more valuable to the taxpayer than a tax deduction a tax deduction merely reduces the person s taxable income a tax credit reduces the amount of taxes owed dollar for dollar 7a tax credit may also be refundable or partially refundable in that case a low income taxpayer might owe little or no taxes and receive a check from the irs for some or all of the credit 7special considerationstax credits are particularly vulnerable to fraud by taxpayers seeking to score credits they aren t eligible for and by con artists preying upon eligible taxpayers this was notably through the child tax credit and the earned income credit the child tax credit ctc program which was substantially expanded to relieve american families of some of the financial burden caused by the covid 19 pandemic delivered payments of up to 300 per month per child to taxpayers below certain income levels through 2021 8the ctc reverted back to pre pandemic levels in 2022 and is adjusted slightly for inflation annually eligible taxpayers automatically received those payments because the irs had the information it needed to identify them but those whose incomes were so low that they didn t have to file were required to sign up for the credit online 9and that fact opened up an opportunity for con artists masquerading as irs agents they approached people by text email phone and social media posing as government representatives to trick personal information out of the unwitting 10the other target for fraud of course was the irs itself tax filers could commit fraud by underreporting their income or inventing dependents to qualify for the credit a second opportunity for attempting to defraud the irs occurred through the earned income tax credit eitc this credit worth 560 to 6 935 a year is available to low and moderate income individuals with larger amounts credited to families with children 11an attempted fraud can occur when someone files a tax return that falsifies the person s earned income the number of children in the family or both the irs warns that people eligible for the child tax credit are being bombarded with calls texts email messages and social media posts from scam artists seeking to steal their money the agency warns taxpayers not to disclose personal or financial information to anyone purporting to be from the irs 10earned income tax credit eitc and additional child tax credit actc there was no change in the tax filing process due to the path act in most cases the irs expects to send refund checks within 21 days 12however if you file an eitc or actc return early in the year the irs will hold your refund check until feb 15 the reason for the delay is to provide the irs with additional time to identify fraudulent claims and to prevent refunds from being paid to identity thieves 13the eitc applies to low income and medium income individuals and families with or without children tax credits depend on the number of children 14 the full actc amount applies to all families that make less than 200 000 400 000 filing jointly and decreases as income increases over that level 15if the eitc or actc doesn t apply to you or if you file taxes after feb 15 the path act does not affect the timing of your refund the eitc has a cap of 560 for childless households in 2022 and 600 in 2023 1416new and extended tax provisions in the path actthe path act renewed many expired tax laws and introduced a few new laws affecting individuals and businesses many tax deductions set to expire such as tuition deductions certain charitable contributions and residential energy credits were extended with retroactive credit 5below are a few path act changes and extensions for individuals and businesses employers may be eligible for a work opportunity tax credit wotc if they hire individuals from specified target groups that have historically faced barriers to employment the path act retroactively extended wotc eligibility to workers hired on or after jan 1 2015 the wotc includes nine categories of workers and an additional category for long term unemployment recipients hired on or after jan 1 2016 1718the path act allows exonerated people to omit any monetary awards related to wrongful incarceration from their reported earned income 19 it also provides wrongfully incarcerated individuals with a window to file refund claims related to restitution or monetary awards including civil damages received and reported in a prior tax year 5 the term path act refund is sometimes applied to this provision the itin is used primarily by taxpayers who cannot obtain a social security number ssn most are foreign citizens who earn income in the u s or from u s sources 20the path act required these taxpayers to get a new itin number if they have one but have not used it in a tax return in the previous three years 3an itin number can be obtained by mailing form w 7 to the irs or visiting an irs office or irs authorized agent 21using an expired itin could result in a refund delay or ineligibility for tax credits tax policy todayas a topic of debate and discussion the path act has long been supplanted by newer legislation some of which deal with the tax credits renewed back in 2015 the fate of the child tax credit is particularly at issue the american rescue plan passed in 2020 to relieve taxpayers harmed economically by the covid 19 pandemic extended the child tax credit to many more american families and increased the size of the payments that provision expired at the end of 2021 22the expanded child tax credit was set to be expanded by the build back better bill which was proposed by president joe biden the house of representatives passed the measure but it stalled in the senate 2324 the expanded credit however didn t appear in the inflation reduction act of 2022 at the federal level which replaced the bbb bill and was signed into law on aug 16 2022 25who qualifies for eitc taxpayers must meet a number of different criteria in order to qualify for the eitc for the 2023 tax year those with no children filing as single head of household or married filing separately face an income limit of 17 640 for those married filing jointly the income limit is 24 210 these income limits increase incrementally depending on the number of qualifying children in addition taxpayers must meet other criteria such as limits on investment income | |
what is the difference between actc and ctc | the actc is simply the refundable portion of the ctc it refers to the amount that can be claimed by families who owe the irs less money than their qualified ctc amount | |
is the path act a good thing | the path act had several provisions that addressed issues for lower income taxpayers and created steps to protect taxpayers from fraudulent activity other provisions addressed separate tax issues that have generally been accepted as positive changes the bottom linethe path act of 2015 was an obama era law that expanded and renewed several tax credits for individuals families and businesses at the same time it implemented safeguards to prevent fraudulent claims for those credits this was a vulnerability that emerged as scammers targeted families to obtain their potential credits and individuals ineligible for them attempted to attain them the act remains in place today | |
what is path dependency | path dependency explains the continued use of a product or practice based on historical preference or use a company may persist in the use of a product or practice even if newer more efficient alternatives are available path dependency occurs because it is often easier or more cost effective to continue along an already set path than to create an entirely new one understanding path dependencyscholars describe path dependence in the context of the historical institutionalist approach to political science the theory behind the approach is that institutions change less than might be expected and constrain advancement the reason for the lack of change is that policymakers make assumptions make cautious decisions and fail to learn from experience path dependency can also be a result of an inability or a reluctance to commit to change because of the cost implications a town that is built around a factory is a good example of path dependence ideally a factory is located at a distance away from residential areas for various reasons however factories are often built first and the workers homes and amenities are built close by it would be far too costly to move an already established factory even though it would better serve the community if it were located on the outskirts of town according to ian greener a contributor to the encyclopedia britannica studies of how technologies become path dependent suggest that supplier and customer preferences lead to a dominant technology even if it might be inferior to an alternative 1the effects of path dependency on businessesindustries follow path dependency if an initial concept method or innovation is adopted as a standard for example the use of fossil fuels as primary energy sources persists in part because a multitude of tertiary industries is intrinsically tied to fossil fuel use the automotive industry continues to manufacture vehicles with gasoline fueled internal combustion engines although the resource s supply is ultimately finite there is a considerable exploration of alternative fuels and power sources however they lack the research time and infrastructure commitment already established for gasoline fueled transportation and machines despite the rising costs and increased scarcity associated with fossil fuels a long term or renewable successor resource that can meet worldwide demand has yet to be developed at scale path dependency can influence strategies within companies sometimes to the detriment of the business for example most companies have a core product or system that establishes their market presence over time rival products and methods might appear in the market that represent more competitive or lucrative opportunities path dependency can contribute to a reluctance or inability to invest in forward thinking innovations the introduction of digital photography for example presented such a challenge to camera film manufacturers palm the defunct maker of early personal digital assistants found itself in comparable circumstances as the growth of the smartphone market eclipsed its devices although palm s technology saw widespread use as a novel way to access mobile computing the company did not adopt new strategies that would help it maintain relevance as smartphones became the dominant mobile devices according to ian greener a contributor to encyclopedia britannica the qwerty keyboard is a result of path dependence because it is still in use despite being suboptimal in terms of typing speed 1 | |
what is the usa patriot act | the patriot act or usa patriot act was passed shortly after the terrorist attacks in the united states that occurred on september 11 2001 and gave law enforcement agencies broader powers to investigate indict and bring terrorists to justice it also led to increased penalties for committing and supporting terrorist crimes an acronym for uniting and strengthening america by providing appropriate tools required to intercept and obstruct terrorism the usa patriot act lowered the threshold for law enforcement to obtain intelligence and information against suspected spies terrorists and other enemies of the united states history of the patriot actthe patriot act the common reference for the usa patriot act was passed by the u s congress and signed into law by president george w bush on oct 26 2001 following the september 11th terrorist attacks against the united states it enhanced previous legislation from april 1996 entitled the antiterrorism and effective death penalty act of 1996 enacted during the clinton administration following the 1995 oklahoma city bombing the patriot act aimed to increase homeland security and expanded tools available to law enforcement and federal agents such as surveillance wiretapping and roving wiretaps to track and investigate terror related crimes obtaining bank records and business financial records to prevent money laundering for terrorism financing improved intelligence sharing between government agencies tougher penalties for convicted terrorists and those who aid them allowing for delayed search warrants preventing aliens involved in terrorist activities to enter the united states 1implications of the patriot actpolice officers fbi agents federal prosecutors and intelligence officials are better able to share information and evidence on individuals and plots thus enhancing their protection of communities 2federal agents may use court orders to obtain business records from hardware stores or chemical plants to determine who may be buying materials to construct bombs bank records can be obtained to determine if an individual or entity is sending money to terrorists or suspect organizations the patriot act widened the use of national security letters issued by the fbi which are issued without a judge s approval to obtain phone records bank records or computer records the patriot act impacts financial professionals and financial institutions with its title iii provision entitled international money laundering abatement and financial anti terrorism act of 2001 targeting parties suspected of terrorism terrorist financing and money laundering 3banks must also investigate accounts owned by political figures suspected of past corruption and there are greater restrictions on the use of internal bank concentration accounts that fail to effectively maintain audit trails 4the bank secrecy act of 1970 bsa the currency and foreign transactions reporting act requires banks to record cash purchases of instruments that have daily aggregate values of 10 000 or more an amount that triggers suspicion of tax evasion and other questionable practices and the patriot act makes concealing more than 10 000 on anyone s physical person an offense punishable by up to five years in prison 5the act expanded the definition of money laundering to include computer crimes the bribing of elected officials and the fraudulent handling of public funds money laundering now encompasses the exportation or importation of controlled munitions not approved by the u s attorney general 6advantages of the patriot actthe patriot act and its merit have been debated since its inception in 2001 and advocates claim the act has made anti terrorism efforts more streamlined efficient and effective according to the department of justice the patriot act has incapacitated at least 3 000 operatives worldwide broken terrorist cells in buffalo detroit seattle portland and northern virginia designated 40 terrorist organizations and frozen at least 136 million in suspected assets around the world 7roving wiretaps allow tracking of international terrorists trained to avoid surveillance the option to delay notifying terrorist suspects of a search warrant gives law enforcement time to identify the criminal s associates and eliminate immediate community threats the patriot act facilitates information sharing and cooperation among government agencies so that they can better connect the dots with more unity through multiple communication channels investigating officers can act quickly before a suspected attack is completed 7increased wiretapping under the patriot act lets investigators listen to conversations that could potentially be threatening to the national security of a country but groups like the american civil liberties union have questioned the risk of abuse of wiretapping american citizens 8disadvantages of the patriot actcivil rights groups have claimed the patriot act violates constitutional rights and allows the government to spy on individuals without due process and search their homes without consent the act enhanced the use of national security letters nsls an administrative subpoena issued by the united states government to gather information like telephone records or bank records for national security purposes however the patriot act does not require information obtained by an nsl to be destroyed even for an innocent citizen 8critics argue that basic rights under the fourth amendment have been compromised by the patriot act as delayed warrants allow officials to enter homes or offices and conduct searches while the occupant is away the business finance and investment communities are affected by heightened documentation requirements and due diligence responsibilities for account holders who conduct international business suspected terrorists have been imprisoned at guantanamo bay cuba and other sites with delayed due process in addition following 9 11 many muslims south asians and arabs and their communities were unfairly targeted and racially profiled due to the passage of the patriot act 9 | |
what is the usa freedom act | to help prevent the patriot act from infringing on the civil liberties of american citizens president barack obama signed the usa freedom act into law on june 2 2015 ending the bulk collection of phone records under section 215 of the patriot act it also required transparency between the united states foreign intelligence surveillance court and the american people but allows the government to track suspected foreign terrorists for 72 hours after they enter the united states 1 | |
what is a sneak and peek search | the patriot act allows federal law enforcement to delay giving notice and conduct secret searches of homes or offices as deemed necessary while the occupant of a home or business is away 8 | |
what is the usa patriot and terrorism reauthorization act | many of the patriot act s requirements were set to expire in 2005 and despite continued civil liberties and privacy concerns president george w bush signed the usa patriot and terrorism reauthorization act on march 9 2006 continuing the use of the provisions already in place 1the bottom linethe usa patriot act commonly known as the patriot act was signed into law by president george w bush on oct 26 2001 following the september 11 terrorist attacks it enhanced the abilities of law enforcement regarding surveillance money laundering for terrorism financing and improved intelligence sharing between government agencies | |
what is a pattern day trader pdt | a pattern day trader pdt is a regulatory designation for those traders or investors who execute four or more day trades over the span of five business days using a margin account the number of day trades must constitute more than 6 of the margin account s total trade activity during that five business day window 1if this occurs the trader s account will be flagged as a pdt by their broker the pdt designation places certain restrictions on further trading this designation is put in place to discourage investors from trading excessively understanding pattern day traders pdts pattern day traders may trade different types of securities including stock options and short sales any type of trade will be accounted for in terms of this designation as long as they occur on the same day pattern day traders can trade amounts up to what is known as their day trading buying power this is generally equal to four times the equity they hold in excess of their maintenance margin or the minimum equity that traders need to keep in their margin account those without the pdt designation can trade only up to two times their amount of excess equity if there is a margin call the pattern day trader will have five business days to answer it their trading will be restricted to that of two times the maintenance margin excess until the call has been met failing to address this issue after five business days will result in a 90 day cash restricted account status or until such time that the issues have been resolved 1note that long and short positions that have been held overnight but sold prior to new purchases of the same security the next day are exempt from the pdt designation 1pattern day trading is limited to stock and equity options trades regulations that govern pattern day tradersthe pdt designation is determined by the financial industry regulatory authority finra it differs from that of a standard day trader by the number of day trades completed in a time frame although both groups have mandatory minimum assets that must be held in their margin accounts a pattern day trader must hold at least 25 000 in their account that amount need not necessarily be cash it can be a combination of cash and eligible securities if the trader s equity in the account drops below 25 000 they will be prohibited at this point from making any further day trades until the balance is brought back up 1finra has established a rule requiring that all pdts have a minimum of 25 000 in their brokerage accounts in a combination of cash and certain securities as a way of reducing risk if the cash equity in the account drops below this 25 000 threshold then the pdt can no longer complete any day trades until the account is back up above that point this is known as the pattern day trader rule or the pdt rule these rules are set forth as an industry standard but individual brokerage firms may have stricter interpretations of them they may also allow their investors to self identify as day traders 1example of pattern day tradingconsider the case of a pattern day trader with 100 000 in assets in her margin account the general requirements for margin accounts stipulate that she would need to have equity or ownership of at least 25 of those assets or 25 000 2 if the trader s equity comes to 30 000 instead that leaves her with 5 000 in excess of her maintenance margin as a pattern day trader she could be eligible to purchase up to four times her maintenance margin excess or 20 000 worth of stock this is double the amount that an average margin account holder with the same balance and equity could trade which is typically two times maintenance margin excess or 10 000 this capacity to make larger trades brings with it the potential for higher returns which can make the strategy of pattern day trading seem appealing for high net worth individuals hnwis however like most practices that have the potential for higher returns the potential for significant losses can be even greater | |
why has my broker flagged me as a pattern day trader | brokers automatically flag pattern day traders these are customers who execute four or more day trades within five business days provided that the number of day trades represents more than 6 of the customer s total trades in a margin account for that same five business day period this rule is a minimum requirement and some broker dealers may use a slightly broader definition in determining whether a customer qualifies as a pattern day trader 1 | |
what is classified as a day trade | day trading refers to buying then selling or selling short then buying the same security on the same day just purchasing a security without selling it later that same day would not be considered a day trade 1 | |
should i be concerned that i ve been flagged as a pattern day trader | not necessarily but you will face certain account restrictions or requirements under financial industry regulatory authority finra rules customers designated pattern day traders by their broker must have at least 25 000 in their accounts and can only trade in margin accounts if the account falls below that requirement then the pattern day trader will not be permitted to day trade until the account is restored to the 25 000 minimum equity level the margin rule applies to day trading in any security including options 1i am not trading as frequently anymore so why is my broker still flagging me in general once your account has been flagged by your broker as a pattern day trader they will continue to regard you as a pattern day trader even if you do not day trade for a while this is because the firm will have a reasonable belief that you are a pattern day trader based on your prior trading activities however if you have decided to reduce or cease your day trading activities you should contact your brokerage to discuss the appropriate coding of your account 1the bottom linethe label of pattern day trader pdt applies to people who carry out four or more day trades in a five business day span using their margin account if your brokerage firm classifies you as a pdt based on your trading activity you become subject to additional requirements such as maintaining equity of at least 25 000 in your margin account if the equity in a pdt s account falls below this amount their broker may prohibit them from trading until the minimum balance is restored | |
what is pay yourself first | pay yourself first is an investor mentality and phrase popular in personal finance and retirement planning that encourages you to save money before you spend it if you direct some of your paycheck to a savings or investment account that is pay yourself before you do anything else with that money your savings will grow however this guidance isn t realistic for everyone building savingsmany personal finance professionals and retirement planners tout the pay yourself first method as an effective way to ensure you contribute to savings month after month regular savings contributions can go a long way toward building a long term nest egg if you are using the pay yourself first method of personal finance you may opt to put your money in a range of savings vehicles depending on your financial objectives the phrase can refer to earmarking a certain percentage of your paycheck to be contributed to your retirement accounts such as a 401 k or an individual retirement account ira alternatively you may put the funds in a cash savings account paying yourself first simply involves building up a retirement account creating an emergency fund or saving for other long term goals such as buying a home if you can manage it paying yourself first will likely reduce your stress as you ll have something saved for retirement and a way to pay for emergencies in cash from your car breaking down to unexpected medical expenses | |
what percentage of americans are saving money | in 2023 over a third 37 of americans could not cover a 400 emergency in cash or its equivalent a federal reserve report found this is the same as it was in 2022 but a bit higher than it was in 2021 32 in 2023 a similar percentage of people believed their retirement savings were on track 34 which was about the same in 2022 31 but lower than it was in 2021 40 1according to bankrate s annual emergency savings report over 27 of respondents had no emergency savings at all and about the same percentage 29 had some savings but less than 3 months worth of living expenses 16 had 3 to 5 months worth of living expenses and 28 had 6 months worth of living expenses or more the breakdown by age reveals that baby boomers had far more emergency savings than other generations almost half 46 of baby boomers had 6 months worth of living expenses or more compared to 25 of gen x 20 of millennials and 11 of gen z 2 | |
what is the average retirement savings by income | the federal reserve board found that in surveys conducted from 2016 2022 the average retirement savings among everyone who responded 35 years old to 64 years old was about 331 000 the number of families who participated in retirement plans increased to the highest level since 2010 for those with incomes in the bottom half the average savings was about 55 000 for those with mid to high incomes the average savings was about 227 000 for those in the top 10 the average savings was about 913 000 3can you use a roth ira as an emergency fund some people may avoid contributing to tax advantaged retirement savings plans because they worry about having no money for emergencies it s important to know however that the contributions you set aside for retirement in a roth ira are in fact accessible if needed though financial planners caution that this should only be done in emergencies because withdrawals take money away from your future the fact is that you can withdraw however much you contributed to the account because you already paid taxes on those funds these withdrawals are tax and penalty free the rules for earnings are different however the earnings in the account the money your contributions made are not accessible unless you have had the account for over five years and if you re younger than age 59 it s considered an early withdrawal and you ll pay a 10 tax penalty to the internal revenue service irs there is an exception to this you can withdraw earnings tax and penalty free if you make what s called a qualified withdrawal for it to be a qualified withdrawal you must have had the account for over five years and the withdrawal must either be due to a disability for a first time home purchase or building rebuilding a first home up to 10 000 or be for a beneficiary after your death and if you re willing to pay taxes on the earnings though you wouldn t if you wait until you re 59 as long as you ve had the account for five years there are several exceptions to the 10 penalty including withdrawals for higher education expenses or for the birth of a child 4 | |
what is payable on death pod | a bank account with a named beneficiary is called a payable on death pod account also known as a totten trust pod is an arrangement between a bank or credit union and a client that designates beneficiaries to receive all of the client s assets the immediate transfer of assets is triggered by the death of the client though morbid these structures are important to understand understanding payable on death pod an individual with an account or a certificate of deposit cd at a bank can designate a beneficiary who will inherit the money that s in the account after their death people who opt for pod accounts do so to keep their money out of probate court in the event that they pass away it is easy to convert an account to a pod account designating a beneficiary is a free service that allows for the transfer of all checking and savings accounts security deposits savings bonds and other deposit certificates the account holder only needs to notify their bank of who the beneficiary should be the bank on its end will give the account owner a beneficiary designation form to fill out the completed form gives the bank authorization to convert the account to a pod the named beneficiary is not entitled to any of the money in the account while the account holder is still alive upon death the beneficiary automatically becomes the owner of the account bypassing the account holder s estate and skipping probate completely in the event that the owner of a pod account dies with unpaid debts and taxes their pod account may be subject to claims by creditors and the government if the account holder lives in a community property state their spouse has a claim to half of the assets in the pod account except the assets that were acquired before marriage or funds that were inherited if the account was jointly owned by more than one person a named beneficiary cannot access the funds until the last owner dies in this case the assets in the account will be turned over to the beneficiaries named by the last surviving owner there are no stipulations on the minimum amount of money that must be available in the account upon death there are also no limitations to a pod account the account holder can spend all the money prior to their death change the beneficiary on the account or close the account completely to lay claim to the funds the beneficiary has to present a government id as proof of identity in addition to a certified copy of the death certificate a payable on death pod account is more powerful than a last will and testament if a pod account has one individual named as the beneficiary and the will of the account holder lists another individual as a beneficiary the pod designated beneficiary prevails the named beneficiary on the pod account is not required to honor the account holder s last will and testament which makes it imperative that the individual ensures to change or cancel the pod beneficiary if they have someone else listed on their will benefits of a pod accounta significant benefit of pod accounts is that an account owner can increase their coverage limit under the federal deposit insurance corp fdic the standard coverage limit for an individual s assets at a particular financial institution including checking and savings accounts money market accounts and cds is 250 000 1since a pod is a type of revocable living trust that has someone else with a beneficiary interest on the account the fdic provides up to 1 250 000 coverage on up to five accounts at a single bank where each account has a different beneficiary each beneficiary cannot be covered for more than 250 000 instead of saving 1 250 000 in one account which will only be insured for up to 250 000 having multiple pod accounts can increase an account holder s coverage by up to five times the standard limit 1as a general rule a pod account can have more than one beneficiary however if the account owner wants each beneficiary to receive unequal portions of the assets in the account they must check that their state laws allow it given that some states only permit an equal distribution of funds in a pod account a pod account is very similar to a transfer on death tod arrangement but deals with a person s bank assets instead of their stocks bonds mutual funds or other investment assets 2 both pod and tod agreements offer a quick means of dispersing assets as both avoid the probate process which can take several months drawbacks of a pod accountthe main drawback of a pod account is that it is not possible to name alternate beneficiaries to your account if the person whom you nominated to receive the proceeds dies before you then the contents of your account are automatically transferred to an estate or will naming multiple beneficiaries to the account can help offset this drawback another drawback of a pod account is when there are taxes and loans to be paid out upon death as part of a bigger estate the executor may find it difficult to settle these expenses using pod accounts finally naming multiple beneficiaries can complicate the process of dividing the proceeds from complex financial instruments such as bonds in some cases the proceeds are a mix of cds and other interest bearing financial instruments divvying up their proceeds requires negotiations and compromises among beneficiaries | |
what is a payable on death pod account | a bank account or certificate of deposit cd with a named beneficiary is called a payable on death pod account people who designate pod accounts do so to avoid probate court when they die | |
what is the point of a pod account | the primary benefit of designating a beneficiary for a bank account such as savings or a cd is to avoid a probate court deciding how to distribute the proceeds to any heirs in the event of the death of the account holder probate court incurs costs that must be paid by the estate of the deceased and often dilute the value of any financial assets that otherwise might be passed to beneficiaries | |
how do you set up a pod account | a bank account or cd can be set up as a pod account by completing forms that designate the beneficiary or beneficiaries upon the death of the account owner this is a simple process that can be accomplished online by completing the beneficiary section that includes the full name address and social security number of the beneficiary the bottom linepod account designations are important to set up for any bank accounts that an individual has to avoid the costs and delays involved with probate court unfortunately many people don t go to the trouble to make beneficiary designations when setting up accounts and their heirs must incur the cost of probate upon the death of the account holder this underscores the need for this element of estate planning | |
what is the payback period | the payback period is the amount of time it takes to recover the cost of an investment simply put it is the length of time an investment reaches a breakeven point people and corporations mainly invest their money to get paid back which is why the payback period is so important in essence the shorter the payback an investment has the more attractive it becomes determining the payback period is useful for anyone and can be done by dividing the initial investment by the average cash flows investopedia tara anandunderstanding the payback periodthe payback period is a method commonly used by investors financial professionals and corporations to calculate investment returns it helps determine how long it takes to recover the initial costs associated with an investment this metric is useful before making any decisions especially when an investor needs to make a snap judgment about an investment venture you can figure out the payback period by using the following formula payback period cost of investment average annual cash flow begin aligned text payback period frac text cost of investment text average annual cash flow end aligned payback period average annual cash flowcost of investment the shorter the payback the more desirable the investment conversely the longer the payback the less desirable it becomes for example if solar panels cost 5 000 to install and the savings are 100 each month it would take 4 2 years to reach the payback period in most cases this is a pretty good payback period as experts say it can take as much as 7 to 10 years for residential homeowners in the united states to break even on their investment 1capital budgeting is a key activity in corporate finance one of the most important concepts every corporate financial analyst must learn is how to value different investments or operational projects to determine the most profitable project or investment to undertake one way corporate financial analysts do this is with the payback period although calculating the payback period is useful in financial and capital budgeting this metric has applications in other industries it can be used by homeowners and businesses to calculate the return on energy efficient technologies such as solar panels and insulation including maintenance and upgrades average cash flows represent the money going into and out of the investment inflows are any items that go into the investment such as deposits dividends or earnings cash outflows include any fees or charges that are subtracted from the balance payback period and capital budgetingthere is one problem with the payback period calculation unlike other methods of capital budgeting the payback period ignores the time value of money tvm this is the idea that money is worth more today than the same amount in the future because of the earning potential of the present money most capital budgeting formulas such as net present value npv internal rate of return irr and discounted cash flow consider the tvm so if you pay an investor tomorrow it must include an opportunity cost the tvm is a concept that assigns a value to this opportunity cost the payback period disregards the time value of money and is determined by counting the number of years it takes to recover the funds invested for example if it takes five years to recover the cost of an investment the payback period is five years this period does not account for what happens after payback occurs therefore it ignores an investment s overall profitability many managers and investors thus prefer to use npv as a tool for making investment decisions the npv is the difference between the present value of cash coming in and the current value of cash going out over a period of time some analysts favor the payback method for its simplicity others like to use it as an additional point of reference in a capital budgeting decision framework example of payback periodhere s a hypothetical example to show how the payback period works assume company a invests 1 million in a project that is expected to save the company 250 000 each year if we divide 1 million by 250 000 we arrive at a payback period of four years for this investment consider another project that costs 200 000 with no associated cash savings that will make the company an incremental 100 000 each year for the next 20 years at 2 million clearly the second project can make the company twice as much money but how long will it take to pay the investment back the answer is found by dividing 200 000 by 100 000 which is two years the second project will take less time to pay back and the company s earnings potential is greater based solely on the payback period method the second project is a better investment if the company wants to prioritize recapturing its capital investment as quickly as possible | |
what is a good payback period | the best payback period is the shortest one possible getting repaid or recovering the initial cost of a project or investment should be achieved as quickly as it allows however not all projects and investments have the same time horizon so the shortest possible payback period needs to be nested within the larger context of that time horizon for example the payback period on a home improvement project can be decades while the payback period on a construction project may be five years or less | |
is the payback period the same thing as the breakeven point | while the two terms are related they are not the same the breakeven point is the price or value that an investment or project must rise to cover the initial costs or outlay the payback period refers to how long it takes to reach that breakeven | |
is a higher payback period better than a lower payback period | a higher payback period means it will take longer for a company to cover its initial investment all else being equal it s usually better for a company to have a lower payback period as this typically represents a less risky investment the quicker a company can recoup its initial investment the less exposure the company has to a potential loss on the endeavor | |
what are some of the downsides of using the payback period | as the equation above shows the payback period calculation is a simple one it does not account for the time value of money the effects of inflation or the complexity of investments that may have unequal cash flow over time the discounted payback period is often used to better account for some of the shortcomings such as using the present value of future cash flows for this reason the simple payback period may be favorable while the discounted payback period might indicate an unfavorable investment | |
when would a company use the payback period for capital budgeting | the payback period is favored when a company is under liquidity constraints because it can show how long it should take to recover the money laid out for the project if short term cash flows are a concern a short payback period may be more attractive than a longer term investment that has a higher npv the bottom linethe payback period is the amount of time it takes to break even on an investment the appropriate timeframe for an investment will vary depending on the type of project or investment and the expectations of those undertaking it investors may use payback in conjunction with return on investment roi to determine whether or not to invest or enter a trade corporations and business managers also use the payback period to evaluate the relative favorability of potential projects in conjunction with tools like irr or npv | |
what is a payday loan | payday loans are short term high interest loans based on your income the principal of the loan is generally equal to a part of your upcoming paycheck 1 payday loans take advantage of the borrower s need for immediate credit by charging a higher than normal interest rate before taking out a payday loan learn your options such as emergency loans investopedia michela buttignolunderstanding a payday loanpayday loans function as unsecured credit as they do not require any collateral they are often considered a form of predatory lending due to their extremely high interest rates hidden fees and the lack of concern on the lender s part regarding whether the borrower can pay back the loan or not 2because of these high costs payday loans often end up being a debt trap for many consumers who find it impossible to claw back out of the burden of debt they ve accumulated from these loans before taking out a payday loan consider other options such as safer personal loan alternatives | |
how payday loans work | payday loan providers will normally require you to show proof of your income usually your pay stubs from your employer they will then lend you a portion of the money that you will be paid you will have to pay the loan back within a short time generally 30 days or less 1payday lenders take on a lot of risk because they don t check your ability to pay back the loan because of this they normally charge very high interest rates for payday loans and they may also charge high fees if you miss your repayments this can be dangerous for borrowers because it can mean that you ll need to borrow more money to cover the cost of the first loan | |
how to get a payday loan | you can apply for payday loans online at various loan providers you can also apply for payday loans at local providers who are generally small lenders with physical stores for a payday loan application you will need a bank account and government id you will also need to provide proof of income which can be done through your work pay stubs the principal of a payday loan is typically a percentage of your income additionally your wages may function as collateral where the lender can automatically receive a portion of your wages in order for the loan to be paid back a credit check and your ability to pay back the loan are not usually considered when applying payday loan interest ratespayday lenders charge very high levels of interest as much as 780 in annual percentage rate apr with an average loan running at nearly 400 most states have usury laws that limit interest charges to anywhere from 5 to 30 however payday lenders fall under exemptions that allow for their high interest 34as these loans qualify for many state lending loopholes borrowers should be wary regulations on these loans are governed by the individual states with 16 states arizona arkansas colorado connecticut georgia maryland massachusetts montana new hampshire new jersey new york north carolina pennsylvania south dakota vermont and west virginia and the district of columbia outlawing payday loans of any kind 3in california for example a payday lender can only lend up to 300 at a time they can also charge a fee of up to 15 of the loan amount with a maximum fee total of 45 although 15 doesn t seem exceptionally high on a 14 day loan it becomes the equivalent of an apr of 460 for a 300 loan 52although the federal truth in lending act requires payday lenders to disclose their finance charges many people overlook the costs most loans are for 30 days or less and help borrowers to meet short term liabilities the loans usually can be rolled over for additional finance charges and many borrowers as high as 80 of them end up as repeat customers 617a number of court cases have been filed against payday lenders as lending laws have been enacted since the 2008 financial crisis to create a more transparent and fair lending market for consumers if you re considering taking out a payday loan then a personal loan calculator can be a vital tool for determining what kind of interest rate you can afford | |
are payday loans legal | efforts to regulate payday lenders were proposed in 2016 under the obama administration and put in place in 2017 when the consumer financial protection bureau cfpb under then director richard cordray passed rules to protect consumers from what cordray referred to as debt traps 8the rules included a mandatory underwriting provision requiring lenders to assess a borrower s ability to repay a loan and still meet everyday living expenses before the loan is made the rules also required lenders to provide written notice before trying to collect from a borrower s bank account and further required that after two unsuccessful attempts to debit an account the lender could not try again without the permission of the borrower 8these rules were first proposed in 2016 and under the biden administration the new leadership at the cfpb established stricter rules for payday lending which became mandatory on june 13 2022 98in feb 2019 the cfpb then under the trump administration and director kathleen l kraninger issued proposed rules to revoke the mandatory underwriting provision and delay implementation of the 2017 rules 10in june 2019 the cfpb issued a final rule delaying the aug 2019 compliance date and on july 7 2020 it issued a final rule revoking the mandatory underwriting provision but leaving in place the limitation of repeated attempts by payday lenders to collect from a borrower s bank account 111213 | |
are payday loans fixed or variable | payday loans are usually meant to be paid off in one lump sum payment when you get your paycheck because of this the interest rate on these loans is fixed in fact many payday lenders don t even express their charges as an interest rate but they instead charge a fixed flat fee that can be anywhere from 10 to 30 per 100 borrowed 2 | |
is a payday loan secured or unsecured | most payday loans are unsecured this means that you do not have to give the lender any collateral or borrow against a valuable item as you do in a pawn shop instead the lender will normally ask you for permission to electronically take money from your bank credit union or prepaid card account alternatively the lender may ask you to write a check for the repayment amount which the lender will cash when the loan is due under federal law lenders cannot condition a payday loan on obtaining authorization from the consumer for preauthorized recurring electronic fund transfers 14 | |
how long do payday loans stay in the system | the records of traditional loans may be kept for six to 10 years by credit bureaus the companies that calculate credit scores which in turn may affect your ability to borrow money in the future payday lenders do not usually report to the credit bureaus even in case of overdue repayments however the payday loan may be filed once it is passed to the collectors after the lender sells the debts 15if you repay your payday loan on time then your credit score shouldn t be affected on the other hand if you default on your loan and your debt is placed in the hands of a collection agency then you will see a dip in your score can payday loan debt be forgiven in practice it s very rare for payday loan debt to be written off this is because payday lenders make significant sums from the interest that they charge on these loans this means that you should try and pay off payday loans as soon as you possibly can if you can t pay back a payday loan the account may be sent to a collection agency which will pursue you for the money and interest that you owe this is not only unpleasant but also can add money to your overall debt and it will damage your credit can you get a payday loan without a bank account yes having a bank account isn t universally required to borrow money but lenders that don t require it generally charge high interest rates this includes many payday lenders payday lenders may ask for a bank account but sometimes a prepaid card account may be enough to qualify because these loans cost so much and may be difficult to repay it s almost always best to avoid them if you can t pay back the loan promptly fees can add up leading to a debt trap that s hard to get out of because of this you should only take out a payday loan if you are absolutely sure that you can pay it back the bottom linepayday loans are designed to cover short term expenses and they can be taken out without collateral or even a bank account the catch is that these loans charge very high fees and interest rates borrowers should be wary of these loans they may be considered predatory lending as they have extremely high interest don t consider a borrower s ability to repay and have hidden provisions that charge borrowers added fees as a result they can create a debt trap for consumers if you re considering a payday loan then you may want to first take a look at alternative emergency loans for bad credit 2 | |
what is a payee | a payee is a party in an exchange of goods or services who receives payment the payee is paid by cash check or another transfer medium by a payer the payer receives goods or services in return the name of the payee is included in the bill of exchange and it usually refers to a natural person or an entity such as a business trust or custodian understanding a payeein any type of transaction there will be a party that provides the goods or services and the party that receives the goods or services to receive goods or services a payer must provide an exchange of value which is most often money to the payee in a banking situation the payee must have an active account that is in good standing through which funds can be transmitted by the payer this is of course if the transaction is not done in cash in the case of a promissory note through which one party promises to pay another party a predetermined sum the party receiving the payment is known as the payee the party making the payment is known as the payer for coupon payments from bonds the party receiving the coupon is the payee and the bond issuer is referred to as the payer payees have the ability to accept or reject amounts being paid to them based on an agreement or contract investment management transactions frequently have payee accounts that receive payments for the benefit of a client s separate account for example in contributing to an individual retirement account ira a customer e g john smith may write a check from their checking account to their investment management company with the payee being the company s name receiving the funds for the benefit of fbo the client this would appear as xyz management fbo john smith the funds will ultimately be deposited into john smith s account as the payee with xyz management being the custodian payees may also be more than one party this typically happens in electronic transfers when a person withdraws money from the payer s account and splits it into a variety of payee allocations depending on the banking institution these types of transactions may have approval requirements for numbers percentages and types of accounts sometimes the payee and payer may be the same party this can occur when a person writes checks makes withdrawals and deposits or electronically transfers funds from one of their accounts to another it is a good practice to ensure that the payer and the payee are in agreement on the amount being transferred between parties to avoid disputes special considerationssocial security and supplemental security income ssi benefit payments are often payable to a representative payee rather than the ultimate beneficiary the person entitled to receive benefits the social security administration ssa may designate a representative payee if it believes the beneficiary can t manage funds on their own the ssa outlines an entire process on how to become a representative payee what the duties are and how the process should be managed and reported a representative payee has rights and powers similar to that of a conventional payee but a representative payee must manage money for the benefit of the actual beneficiary funds must be spent on or saved for only in ways that help the beneficiary in this aspect the representative is acting as the fiduciary to the actual payee representative payees exist to take the burden of money management off the beneficiary s plate an effective representative payee should improve the beneficiary s life if a representative payee is doing something that works against an ultimate beneficiary the social security administration should be immediately notified | |
what is a payment | payment is the transfer of money goods or services in exchange for goods and services in acceptable proportions that have been previously agreed upon by all parties involved a payment can be made in the form of services exchanged cash check wire transfer credit card debit card or cryptocurrencies understanding paymentstoday s monetary system allows for payments to be made with currency currency which has simplified the means of economic transactions provides a convenient medium through which payments can be made and it can also be easily stored before the widespread use of currency and other payment methods barter payments were used in which one product or service was exchanged for another for example if an egg farmer with a large surplus of eggs wanted milk the farmer would need to find a dairy farmer who would be willing to take eggs as payment for milk in this case if a suitable dairy farmer weren t found in time not only would the egg farmer not get the milk but the eggs would spoil becoming worthless currency on the other hand maintains its value over time however bartering is still practiced today when companies want to exchange services between one another payments can be the transfer of anything of value or benefit to the parties an invoice or bill typically precedes a payment payees usually get to choose how they will accept payment however some laws require the payer to accept the country s legal tender up to a prescribed limit payment in another currency often involves additional foreign exchange transaction fees usually around 2 3 of the total payment being made but could be quite a bit higher depending on the bank or card issuer and country of purchase in the u s the payer is the party making a payment while the payee is the party receiving the payment types of paymentspayments are made using various methods throughout history these types of payments have changed and evolved and new payment methods are likely to appear in the future here are the most common types of payments used today today credit cards are widely used for purchases and payments credit cards work by offering its user a line of where where an individual can draw credit up to a certain limit when you attempt to use your credit card your account information is sent to the merchant bank the merchant bank then receives authorization from the credit card network to process the transaction many businesses accept credit cards though many that accept cards charge a fee from the merchant that provides the machine and payments infrastructure as well as their financial institution this fee is often a percentage of the transaction amount and or a flat fee for each payment help an individual build a credit history that can used to make more major purchases in the futurereduce risk as it is easier to carry a single plastic card as opposed to cashproduce revenue opportunities through rewards and airline milesdelay when an individual actually needs to use personal capital to pay for somethingcreate the potential to overextend credit and incur unpayable debtcharge processing fees by many merchants making a purchase more expense than other methodscharge high interest 15 to 25 apy on unpaid balancesimpact a credit report negatively when too many cards are openeddebit cards may look similar to credit cards but their underlying mechanism is entirely different when a debit card is used funds are immediately withdrawn from an individual s account instead of having a line of credit that you can pull from in excess of what you have saved debit card transactions can be declined if you do not have enough money in your account debit cards share many advantages as credit cards as the small piece of plastic is easy to carry widely accepted by many merchants and has varying levels of fraud protection however debit cards often have less promotional opportunities and may result in processing fees if you accidently attempt to overdraw your account help individuals transact easier through atm withdrawals or purchases as many major companiestypically don t have annual fees or transaction costs as long as you have money in your accountdiscourage excess spending by only allowing spending up to account balance | |
doesn t charge interest since all payments are facilitated using the spender s money | often has limited fraud protection up to certain dollar amounts or time periodslimit your spending capabilities to your account balance not allowing for higher amounts of spending for emergency or high need situationscharge overdraft fees through some banks when you attempt to withdrawn more funds than available in your account | |
don t build your credit score as no credit is used | cash is still used for many businesses such as the retail industry coffee shops and convenience stores for example still accept cash payments considering the fees associated with debit and credit cards many retail small businesses prefer cash payments from their customers cash has its own disadvantages as it can be lost stolen or destroyed businesses dealing in large transactions must often incur additional expenses to pay for related security measures such as secured transit or fraud detection eliminate all hidden fees as there are no transaction costs for transacting with cashmanages spending as you can only spend up to whatever physical bills you have in possession assists with budgeting as you can easily visualize how much money you have to spendeliminates the need for access to the internet or technology | |
does not build your credit score as no credit is used | incurs atm fees when withdrawing cash from an atm | |
doesn t keep a record of spending like other digital means do | the contactless payment technology that has emerged in recent years has made payments easier than ever the credit or debit card machine called a point of sale terminal pos can read the customer s banking information through the software application that s installed on the mobile device once the phone reads the information from the pos terminal a signal is generated to inform the customer that the payment has been made for mobile payments to work the payer must have a higher end mobile device with near field communication nfc capability the user then needs to set up their mobile wallet to contain their existing card information the bank that issued your credit card often has to approve the new payment platform and the payee must have capabilities to accept mobile payment allow for very fast transactions a simple tap with your smartphone and authentication is all that is needed promotes financial security through tokenized mobile payment appsfurther promotes security through biometric authentication requirements on mobile devices | |
doesn t require user to carry around additional goods as long as they normally have their phone on them | still an emerging type of payment so it is not always accepted only supported by certain types of mobile phones ties together multiple assets if you lose access to your phone via theft or dead battery you cannot make payments may require payer to use specific app at specific places i e apple stores may only accept apple pay checks have fallen out of favor over the years due to advancements in technology allowing payments to be electronically submitted however there are instances when checks might be helpful such as when the seller wants a guaranteed payment a bank cashier s check or a certified check are two types of checks that banks offer to help sellers receive the money owed from the buyer checks are linked to a payer s bank account each check contains your bank s routing number a nine digit code to identify financial institution as well as your account number when a check is written the payee deposits the check sending the transaction to a clearing unit the clearing unit makes the appropriate changes to each party s account charge low to no fees outside of the cost of the paper check and a stamp to potentially mail payment provide protection as checks must be signed by the recipient who must often also show id prior to cashinggenerate proof of payment via paper trailmay be costly depending on how checkbooks are ordered and securely distributed to the payerresults in longer processing time as funds aren t transferred until the recipient cashes the check | |
are still susceptible to fraud if depositing bank does not require id fraudulent checks only require a single forged signature | wire transfers and ach payments automatic clearing house are typically used for larger or more frequent payments in which a check or credit card wouldn t be appropriate a payment from a manufacturer to a supplier for example would typically be done via wire transfer particularly if it was an international payment an ach payment is often used for direct deposits of payroll for a company s employees though both are transfers of electronic funds achs and wire transfers are different achs only work domestically and often take one or more business days to fully process wires are most often processed same day but have location limitations in addition achs can often be reversed while wire payments are permanent once the transaction is initiated may help payees receive funds faster than other methodscan be set up as an automatic payment for reoccurring transactionsallow for investigation and dispute for fraudulent transactionsrequire the payer to immediately have the funds ready to be disbursedmay not be recoverable for certain types of eftsmay result in higher transaction fees or costsdigital currency or tokens are a more modern approach to facilitating transactions the premise is simple one person in possession of digital currency can send coins or tokens to any address on a blockchain blockchains with smart contract capabilities can interject logic to automatically withdraw or transfer specific amounts based on underlying conditions the widespread use of cryptocurrency is still in its infancy stage especially when compared with other payment systems above however cryptocurrency has the advantage in only needing an internet connection to facilitate a payment as long both parties have a digital wallet on the same network payments can be made | |
do not require use of a bank account facilitation only requires an internet connection | can easily accommodate a payee s preferred digital currency by swapping coins tokens in a centralized or decentralized exchangemay result in very fast payment processing | |
does not have stable value and may result in loss of capital | require moderate technical understanding of how to send funds failure to send correctly may result in loss of funds not as widely of an accepted means of payment compared to other methodsspecial considerationsthe payee may choose to compromise on debt and accept partial payment in lieu of full settlement of the obligation or it may offer a discount at their discretion the payee may also impose a surcharge for example as in a late payment fee or for the use of a certain credit card acceptance of payment by the payee extinguishes a debt or other obligation a creditor cannot unreasonably refuse to accept a payment but payment can be refused in some circumstances such as on a sunday or outside banking hours a payee is usually obligated to acknowledge payment by producing a receipt to the payer which may be regarded as an endorsement on an account as paid in full every company that receives payments must set their payment terms this payment term dictates when payment is due and whether the company offers a discount for early payment loans might use an equated monthly installment emi payment system emi uses fixed payment amounts meant to be submitted on a specific date each month the most common form of payment term is called net 30 where a payment is due 30 days from the receipt of the invoice a company may set the number of days to whatever they want however these terms must often be agreed to in the contract with the payee in addition a payer may offer a discount i e 1 if payment is made within a short period of time i e 10 days this is written as 1 10 net 30 and the company may offer that discount if it is urgent they receive cash in a very basic transactional contract a good or service is provided at the same time immediately proceeding or immediately following payment consider buying an apple at a grocery store you must pay before you can take it out of the store consider a haircut you must pay immediately after the barber styles your hair for more complex agreements that may require delivery of a good or a service to be performed over time consider a real estate developer that charges a 4 fee on a building they are constructing the agreement for the developer fee may call for quarterly payments to the developer based on the percentage of completion of the building another example may be keeping a lawyer on retainer payment must be made on a recurring basis in advance of any services being provided in some contractual situations one party to the contract may require payment upfront before service has been performed or the good has been delivered more often for service agreements the payee that receives payment has an obligation to perform on the contract after payment has been received in addition that payee must follow strict accounting guidance that limits their ability to record revenue until the payment is actually earned | |
what does payment mean | payment is the exchange of something of value as part of an agreement one party makes payment and receives something else of value while the other party receives payment in exchange for providing a good or service the most traditional type of payment was through physical currency but a majority of payment types now leverage technology | |
what are the main types of payments | traditionally cash debit cards credit cards and checks were the main types of payments now more advanced forms of digital payments are becoming more popular this includes online payment services digital currencies and electronic transfers | |
what is a bank payment | a bank payment is a transfer from one bank account to another it is a form of digital payment that leverages technology to transfer currency instead of relying on transferring physical currency or writing a paper check a bank payment can be issued for many reoccurring expenses i e utility bills or sporadic expenses i e grocery bills | |
what is the best form of payment | there is no single best form of payment as each typically has its own advantages and disadvantages more traditional forms for payment like cash don t need technology and are often universally accepted more modern forms of payment have less risk of theft and may be accompanied by payment rewards the bottom linethe world has always entered into agreements where one party pays another the idea of trade and contracts will never go away but the form in which payment is made has and will change over time today instead of trading for cash there are many different ways to make payment that rely on the internet technology or digital platforms | |
what is payment in kind pik | payment in kind pik is the use of a good or service as payment instead of cash payment in kind also refers to a financial instrument that pays interest or dividends to investors of bonds notes or preferred stock with additional securities or equity instead of cash payment in kind securities are attractive to companies preferring not to make cash outlays and they are often used in leveraged buyouts understanding payment in kind pik payment in kind securities are a type of mezzanine financing where they have characteristics indicative of debt and equities they tend to pay a relatively high rate of interest but are considered risky investors who can afford to take above average risks such as private equity investors and hedge fund managers are most likely to invest in payment in kind securities payment in kind notes give the issuer a chance to delay making dividend payments in cash and in return for the delay the issuing company typically agrees to offer a higher rate of return on the note in most cases pik notes compromise a fraction of a company s total outstanding debts and the financier structures these notes so they mature later than the company s other debts this allows the company to focus on repaying traditional debts or debts tied to cash dividends more quickly but it adds additional risk to the financier to cover their risk most financiers stipulate an early payment penalty to maximize their potential earnings the phrase payment in kind also applies to accepting cash alternatives for work or services for example a farmhand who is given free room and board instead of receiving an hourly wage in exchange for helping out on the farm is an example of payment in kind the internal revenue service irs requires people who receive payment in kind income through bartering to report it on their income tax return for example if a plumber accepts a side of beef in exchange for services they should report the fair market value of the beef or their usual fee as income on their income tax return 1the internal revenue service irs refers to payment in kind as bartering income types of payment in kindpayment in kind instruments have evolved to take several different forms agreements may have flexible terms that depend on prevailing macroeconomic conditions or elections by the borrower traditional or true payment in kind agreements explicitly layout the arrangement for cash payments and in kind payments loan terms are predefined and this is the most standard type of payment in kind arrangements in addition to defined dollar amounts timing expectations are also defined in advance pay if you can agreements stipulate that interest is supposed to paid in cash at specific intervals or at a designated cadence if the conditions surrounding interest payments are not satisfied the borrower may opt to make a payment in kind interest payment this pay if you can assessment is often imposed at a higher interest rate and is only triggered if specific covenants or agreements are achieved i e an insufficient amount of capital was on hand at a specific time sometimes called toggle notes or pay if you want pay if you like agreements gives the borrower though sometimes the issuer the discretion to elect the type of payment to make the borrower can often choose between paying in cash in kind or a combination of the two this structure allows a borrower to continue to pay interest on a bond or defer payments until the bond matures should the borrower elect to defer cash payment and instead be assessed payment in kind interest the prevailing interest rate used will be higher certain debt agreements add in a holding company holdco level in which debt payment are reliant on the operating company s stream of cash any debt service or repayments of principal may be contingent on distributions from an operating group that may be subject to conditions of its own because the downstream holding company may not be guaranteed credit support from its parent entity holdco payment in kind agreements are often riskier payment in kind agreements can include shares of stock or equity discounts companies wanted to preserve capital can opt to dilute equity as their form of payment advantages and disadvantages of payment in kindcompanies enter into payment in kind agreements because debt instruments can be used to leverage their existing capital structure companies looking to avoid pressuring their cash flow may engage in these agreements this is especially true for companies with long cash conversion cycles where inventory turnover is slow and capital is often tied up for long periods of time payment in kind agreements may also have flexibility in several respects first payment in kind agreements may give the borrower the option to may payment or in kind payments there may also be flexibility in terms of covenants that require one form of payment over the other though flexibility may be appreciated payment in kind agreements may encourage a company to continually defer payments companies may also not be motivated to meet financial covenants as failing to achieving certain criteria may defer interest payments which the company may find favorable in kind payment assessments are often charged at a higher rate of interest than cash payments though a company may preserve cash it will face higher net charges that often demand more company resources though in kind assessments for example certain hybrid agreements may entitle the lender to purchase securities of the company at a discount again though capital is preserve equity is diluted and management now owns a smaller portion of the company due to the in kind agreement may allow a company to leverage their capital through debtgives a company flexibility over the method of paymentsmay help cash strapped companies still enter into debt agreementsgives a company more control over the potential timing of when payments occurmay incentivize companies to continually defer payment obligationsoften result in higher interest assessmentsmay dilute ownership if interest is paid in equity or equity discountsexample of payment in kindto illustrate how payment in kind notes work imagine a financier offering a struggling company payment in kind notes worth 2 million the notes have a 10 interest rate and mature at the end of a 10 year period each year the note incurs 200 000 in interest however instead of being required to repay that amount or any principal payments the interest is added to the debt in kind meaning more debt as a result by the end of the first year the company owes 2 2 million and that amount continues to grow until the loan matures when the cash is due | |
what is the original meaning of payment in kind pik | the phrase payment in kind also applies to accepting cash alternatives for work or services for example a farmhand who is given free room and board instead of receiving an hourly wage in exchange for helping out on the farm is an example of payment in kind pik is derived from the bartering system that was used before the advent of money as a means of exchange | |
what is payment in kind pik debt | payment in kind also refers to a financial instrument that pays interest or dividends to its investors it s a type of mezzanine financing with characteristics indicative of debt and equities they tend to pay a relatively high rate of interest but are considered risky pik notes give the issuer a chance to delay making dividend payments in cash and return for the delay the issuing company typically agrees to offer a higher rate of return on the note | |
why would pik debt be attractive to some firms | pik securities are attractive to companies preferring not to make cash outlays in most cases pik notes compromise a fraction of a company s total outstanding debts and the financier structures these notes so they mature later than the company s other debts this allows the company to focus on repaying traditional debts or debts tied to cash dividends more quickly pik debt is often used in leveraged buyouts | |
how is payment in kind taxed | the internal revenue service considers bartered exchanges as income the fair market value of goods and services are often taxable as the recipient received a value even though the exchange was not made in cash the bottom linesome payment in kind arrangements call for periodic assessments of interest interest on these debt instruments may be made in cash or a company may be assessed additional debt equity or other non cash charges though payment in kind agreements favor a company not wanting to part with cash the company often faces a steeper interest expense through a higher interest rate when opting for the in kind payment option | |
what is a payout | payouts refer to the expected returns or disbursements from investments or annuities a payout may be expressed as a lump sum or on a periodic basis and as either a percentage of the investment s cost or in a real dollar amount a payout can also refer to the period in which an investment or project is expected to recoup its initial capital investment and become minimally profitable in this case it is short for time to payout term to payout or payout period in terms of financial securities such as annuities and dividends payouts refer to the amounts received at given points in time for example in the case of an annuity payouts are made to the annuitant at regular intervals such as monthly or quarterly payout ratio as a measure of distributionthere are two main ways that companies can distribute earnings to investors dividends and share buybacks with dividends payouts are made by corporations to their investors and can be in the form of cash dividends or stock dividends the payout ratio is the percentage rate of income the company pays out to investors in the form of distributions some payout ratios include both dividends and share buybacks while others only include dividends for example a payout ratio of 20 means the company pays out 20 of company distributions if company a has 10 million in net income it pays out 2 million to shareholders growth companies and newly formed companies tend to have low payout ratios investors in these companies rely more on share price appreciation for returns than dividends and share buybacks the payout ratio is calculated with the following formula the payout ratio can also include share repurchases in which case the formula is as follows the cash amount paid out to dividends can be found on the cash flow statement in the section about cash flows from financing dividends and stock repurchases represent an outflow of cash and are classified as outflows on the cash flow statement capital budgeting payoutsthe term payout may also refer to the capital budgeting tool used to determine the number of years it takes for a project to pay for itself projects that take longer are considered less desirable than projects with a shorter period the payout or payback period is calculated by dividing the initial investment by the cash inflow per period if company a spends 1 million on a project that saves 500 000 a year for the next five years the payout period is calculated by dividing 1 million by 500 000 the answer is two which means the project will pay for itself in two years annuity payoutsan annuity has two phases an accumulation phase and a payout phase during the accumulation phase the annuitant deposits funds into the account so they can grow taxed deferred until they are withdrawn during the payout phase which is often during retirement the annuitant receives payments from the insurance company as income for the retiree these payments are payouts an annuity payout can come in one of two forms as a lump sum payment or as a payment that arrives at regular intervals such as monthly quarterly or annually with a life annuity the payout phase will last until the annuitant dies providing income with periodic payments for the rest of the annuitant s life with a joint and survivor annuity the payouts continue for the duration of the beneficiary s life typically the surviving spouse this is not limited to annuities however if you have a pension you may also have the option to choose between a single life payout and a joint and survivor or joint life payout typically joint life payouts are smaller than single life payouts to account for the number of payments that will last the duration of the life of the beneficiary | |
what is an example of an annuity payout | take a life annuity with an account balance of 2 million a 6 payout rate would distribute 120 000 to the annuitant every year until their death divided into monthly payments this would equal 10 000 per month | |
what is the meaning of payout payment | payout as a noun is a sum of money that someone receives either in a lump sum or on a regular basis it s a payment paying out as a verb is the process of making a payment to a recipient | |
is it payout or pay out | according to merriam webster payout is a noun that means the act of paying out or payoff 1the bottom linea payout is typically what you receive as an investor as a return on your investment it may come in the form of dividends or share buybacks or as a periodic distribution during retirement such as from a pension or an annuity with retirement income you ll have to choose whether you want a single life payout or a joint life payout with the former the payouts stop when the recipient dies with the latter the payments stop when the beneficiary dies a payout may also refer to a budgeting tool that is used to determine how long it will take for a project to pay for itself a payout ratio describes how much income you receive as an investor as a distribution it s something you might want to monitor to assess not just how well your investments are doing but what it will really mean for your bottom line | |
what is the payout ratio | the payout ratio is a financial metric that shows the proportion of earnings a company pays its shareholders in the form of dividends it s expressed as a percentage of the company s total earnings but it can refer to the dividends paid out as a percentage of a company s cash flow in some cases the payout ratio is also known as the dividend payout ratio eliana rodgers investopediaunderstanding the payout ratiothe payout ratio is a key financial metric that s used to determine the sustainability of a company s dividend payment program it s the amount of dividends paid to shareholders relative to the total net income of a company 1the payout ratio is an important metric for determining the sustainability of a company s dividend payment program but other factors should be considered as well the latter may boast greater dividend sustainability even though the former demonstrates a lower absolute payout ratio if company a is a commodity producer and company z is a regulated utility there s no single number that defines an ideal payout ratio because the adequacy largely depends on the sector in which a given company operates companies in defensive industries such as utilities pipelines and telecommunications tend to boast stable earnings and cash flows that can support high payouts over the long haul income driven investors have been advised to look for a ratio in the neighborhood of 60 however even 35 to 55 is considered strong 2companies in cyclical industries typically make less reliable payouts because their profits are vulnerable to macroeconomic fluctuations people spend less of their incomes on new cars entertainment and luxury goods in times of economic hardship companies in these sectors consequently tend to experience earnings peaks and valleys that fall in line with economic cycles example of the payout ratiolet s assume company a has earnings per share of 1 and pays dividends per share of 0 60 the payout ratio would be 60 0 6 1 let s further assume that company z has earnings per share of 2 and dividends per share of 1 50 the payout ratio is 75 1 5 2 in this scenario company a pays out a smaller percentage of its earnings to shareholders as dividends giving it a more sustainable payout ratio than company z payout ratio formulad p r total dividends net income where d p r divided payout ratio or simply payout ratio begin aligned dpr dfrac textit total dividends textit net income textbf where dpr text divided payout ratio or simply payout ratio end aligned dpr net incometotal dividends where dpr divided payout ratio or simply payout ratio some companies pay out all their earnings to shareholders others dole out just a portion and funnel the remaining assets back into their businesses the measure of retained earnings is known as the retention ratio the higher the retention ratio the lower the payout ratio the payout ratio would be 25 000 100 000 25 if a company reports a net income of 100 000 and issues 25 000 in dividends this implies that the company boasts a 75 retention ratio it records the remaining 75 000 of its income for the period in its financial statements as retained earnings this appears in the equity section of the company s balance sheet the following year companies with the best long term records of dividend payments generally have stable payout ratios over many years but a payout ratio greater than 100 suggests that a company is paying out more in dividends than its earnings can support this might be cause for concern regarding sustainability 3 | |
what does the payout ratio tell you | the payout ratio is a key financial metric used to determine the sustainability of a company s dividend payment program it s the amount of dividends paid to shareholders relative to the total net income of a company the higher the payout ratio the more its sustainability is generally in question especially if it s over 100 a low payout ratio can signal that a company is reinvesting the bulk of its earnings into expanding operations companies with the best long term records of dividend payments have historically had stable payout ratios over many years | |
how is the payout ratio calculated | the payout ratio shows the proportion of earnings that a company pays its shareholders in the form of dividends expressed as a percentage of the company s total earnings the calculation is derived by dividing the total dividends being paid out by the net income generated another way to express it is to calculate the dividends per share dps and divide that by the earnings per share eps figure 4 | |
is there an ideal payout ratio | no single number defines an ideal payout ratio because adequacy largely depends on the sector in which a given company operates companies in defensive industries tend to boast stable earnings and cash flows that can support high payouts over the long haul companies in cyclical industries typically make less reliable payouts because their profits are vulnerable to macroeconomic fluctuations the bottom linethe payout ratio is a financial metric that shows the proportion of earnings a company pays its shareholders in the form of dividends it s expressed as a percentage of the company s total earnings and is also known as the dividend payout ratio it s key in determining the sustainability of a company s dividend payment program | |
what is paypal | paypal is a payment platform with a website and a phone app that enables payments through online money transfers paypal customers create an account and connect it to a checking account a credit card or both once identification and payment method are confirmed users can send or receive payments online or make purchases using paypal as the go between millions of small and large retailers accept paypal payments online and in person 1paypal also offers credit and debit cards branded with the paypal name | |
how paypal works | paypal offers payment services for consumers and for merchants who accept paypal merchants use a paypal card reader in brick and mortar stores or enable paypal as a payment option on their websites consumers can pay invoices and transfer money with relative ease cash can be transferred to any email address or phone number whether or not the recipient has a paypal account if they don t have an account they will then be prompted to make one after you send the money users need an email address to sign up for an account and must provide a credit card debit card or bank account to complete the setup your mobile number will also be verified paypal verifies the information to make sure the person setting up the account is the rightful owner before the service can be used shoppers can choose the paypal option to complete purchases online if the retailer has the service transactions are completed within minutes funds may be available immediately for business owners after a sale in some cases some or all of the funds may be held for up to 21 days this is most common for newer sellers without a history 2paypal offers businesses a range of solutions for their day to day operations this includes payment portals for online and in person transactions business management services and credit and financing options business owners must also provide an email address in order to create an account paypal attempts to make online purchases safer by providing a form of payment that does not require the payor or payee to disclose credit card or bank account numbers to the website or store therefore the money is secure privacy is protected paypal feespaypal makes much of its revenue from fees it charges merchants rather than from the consumers who pay with it there is no fee for using paypal to pay for a transaction if the payment is in your home currency there is no fee if you send cash to a friend or relative rather than a business again in your home currency there s no fee for transferring money to and from paypal and your bank account unless you choose an instant transfer other transactions incur fees the paypal branded credit and debit cards are of course free to use but can incur fees for certain things like any other card interest can apply with the credit card as well other fees apply to less routine transactions such as buying and selling cryptocurrencies and receiving charitable donations paypal vs its competitorspaypal holds a 37 8 share of the market for online payments making it the second largest online payments platform as of june 2024 stripe is slightly ahead with a 37 9 market share the next closest competitors authorize net and square point of sale are far behind with 5 6 and 4 1 market share respectively 5that doesn t necessarily mean they re better but it does mean that you ll encounter more merchants using paypal and stripe than other platforms stripe is a payments platform with two headquarters located in san francisco and dublin ireland stripe connect is a newer stripe offshoot this version is designed to serve the needs of small online businesses especially those who want to go global it allows these businesses to accept dozens of credit cards in 135 currencies using stripe as a go between 6a side by side comparison of stripe and paypal by forbes concludes that their services and fees are comparable though paypal may be better and easier for small merchants while stripe can be more easily customized by merchants 7special considerationsalthough paypal is not a bank it is subject to many of the same consumer protection regulations by which banks are governed for example the extent of your liability for an unauthorized transaction is determined by how promptly you notify the bank that unauthorized activity has occurred in your account notifying paypal quickly when you have concerns will help to limit your liability and it is recommended that paypal users check their accounts regularly 89history of paypalan early version of paypal as we know was launched in the late 1990s as a payments system for palm pilot users by a software company called confinity the company later merged with x com an online banking company and officially took the paypal name in 2000 10paypal broke into the mainstream as the preferred payment mechanism for ebay buyers and sellers the auction site decided to acquire paypal in 2002 and made it the site s official payment service while working to expand its reach in 2015 paypal was spun off as an independent company company shares trade on the nasdaq under the ticker symbol pypl throughout its history paypal has acquired other companies that serve different parts of the financial transaction digital money transfer and payments markets some of these acquisitions brought technology enhancements and additional features that were incorporated into the paypal platform as the companies were absorbed paypal purchased braintree owner of the rival service venmo in 2013 11in addition to those two paypal s brands now include xoom zettle hyperwallet honey chargehound paidy and simility 12paypal charges users no fee for a regular transfer but adds a fee for instant transfers 13 | |
is paypal a good choice for a small business | paypal is one of a number of competitors for small business clients but it s a big one its advantages to a merchant include great ease of use and access to a range of additional features that can help you run a small business its disadvantages include relatively high merchant fees compared to some credit card payment services remember some basic services are free to users so merchants bear the burden | |
is paypal a good choice for a consumer | if you re shopping online in the u s paypal is likely to be the only choice at the checkout other than directly using a credit or debit card for payment if you card or bank account is already saved in paypal it might be a bit faster to go with paypal rather than reentering your payment information on the website additionally it can be more secure since you don t have to share payment information with the seller when using paypal also paypal offers protection for buyers who don t receive what they ordered if you re shopping in the real world you have many payment apps to choose from best to compare payment apps for the one that suits you best | |
is paypal safe to use | paypal uses end to end encryption and users have the option to enable two factor authentication to increase the security of their transactions it s as safe as electronic transactions get these days the bottom linepaypal is a big player in the crowded field of payment apps for use online and off its basic services like paying for goods using your checking account and transferring money are free to the user other services come with a fee such as transactions that involve a currency conversion and instant transfers the fees are industry standard merchants who accept paypal pay transaction fees for the service they also get access to a range of related small business services offered by paypal paypal is the dominant payment service for online transactions small business owners should take a look at competitor reviews when considering which of the many available payment apps they should adopt | |
what is payroll | payroll is compensation a business must pay to its employees for a set period or on a given date it s usually managed by the accounting or human resources department of a company but small business payrolls might be handled directly by the owner or an associate payroll is increasingly outsourced to specialized firms that handle paycheck processing employee benefits insurance and accounting tasks such as tax withholding many payroll fintech firms including atomic bitwage finch pinwheel and wagestream are leveraging technology to simplify payroll processes these solutions pay employees with greater convenience and speed and provide digital payroll related documents with innovative technology enabled services that are required by the gig and outsourcing economy payroll can also refer to the list of a company s employees and the amount of compensation due to each of them it s a major expense for most businesses and is almost always deductible the expense can be subtracted from gross income to reduce the company s taxable income payroll can differ from one pay period to another because of overtime sick pay and other variables understanding payrollpayroll is the process of paying a company s employees it includes tracking hours worked calculating employees pay and distributing payments via direct deposit to employee bank accounts or by check companies must also perform accounting functions to record payroll taxes withheld bonuses overtime pay sick time and vacation pay they must put aside and record the amount to be paid to the government for medicare social security and unemployment taxes many companies use software solutions to manage their payroll the employee inputs their hours through an api and their pay is processed and deposited into their bank accounts many medium and large size companies outsource payroll services to streamline the process employers track the number of hours each employee works and relay this information to the payroll service the payroll service calculates the gross amount the employee is owed based on the pay rate and the number of hours or weeks worked during the pay period the service deducts taxes and other withholdings from earnings and then pays the employees special considerationsemployers with gross sales of 500 000 or more per year are subject to the requirements of the fair labor standards act flsa passed in 1938 12 this u s law protects workers from certain unfair pay practices the flsa sets out various labor regulations including minimum wages requirements for overtime pay and limitations on child labor flsa rules specify when workers are considered to be on the clock and when they should be paid overtime 3the law requires that overtime hours over 40 hours per week be paid at one and a half times the regular hourly rate some employees are exempt from the flsa and the act doesn t apply to independent contractors or volunteers because they re not considered employees 3some hourly workers aren t covered by the flsa but they re subject to other regulations railroad workers are governed by the railway labor act and truck drivers fall under the purview of the motor carriers act 45the flsa also sets out how to treat jobs that are primarily compensated by tipping an employer must pay the minimum wage to tipped service workers unless they regularly receive more than 30 per month from gratuities advantages and disadvantages of using professional payroll servicesone major benefit of payroll services is their ability to produce a variety of reports that simplify accounting procedures and help companies ensure that they comply with legal and tax filing requirements the payroll service may also maintain a record of how much vacation or personal time employees have used a business s accounting needs become more complex as it grows larger firms may have to invest in a custom enterprise resource planning erp system for their accounting and payroll functions a drawback is that companies must rely on individuals outside the business for accurate accounting when they outsource their payroll systems the company s on site personnel must deal with upset employees in the event of errors companies might also face tax penalties for errors made by the payroll service another disadvantage is that payroll services are more expensive than running payroll in house the services might charge a set monthly fee or offer different payment structures for varying tiers of service payroll services may not be the best option for small companies with tight operating budgets because of their cost provide access to a variety of reports | |
what is a payroll tax | a payroll tax includes the taxes employees and employers pay on wages tips and salaries for employees taxes are withheld from their paychecks and paid to the government by the employer these taxes include federal state and local income taxes it also includes the employee s share of social security and medicare taxes fica which are paid to the federal government taxes that employers must pay include their share of fica as well as federal and state unemployment taxes the employer s share of payroll taxes is paid directly by the employer and not withheld from employees paychecks understanding payroll taxesfederal payroll taxes include social security and medicare contributions which constitute the federal insurance contributions act fica tax in the united states these are labeled as medfica and fica on pay stubs federal income tax which is also withheld from employee paychecks goes into the general fund of the u s treasury 1most states as well as some cities and counties impose income taxes which are also withheld as payroll taxes in addition employers but not employees also pay federal unemployment taxes for each of their employees 2payroll taxes are collected by federal authorities and some state governments in many countries including the u s these payroll tax deductions are itemized on an employee s pay stub the itemized list notes how much is withheld for federal state and municipal income taxes as well as the amounts collected for medicare and social security payments governments use revenues from payroll taxes to fund specific programs including social security healthcare and workers compensation local governments may collect a small payroll tax to maintain and improve local infrastructure and services including first responders road maintenance and parks 3payroll tax amountsthe premise of social security and medicare is that you pay into them during your working years in order to qualify to withdraw these funds after retiring or under certain medical circumstances an employee pays 7 65 of their pay for medicare and social security 6 2 for social security and 1 45 for medicare an employer also pays the same tax of 7 65 for an employee for a combined total of 15 3 4funds paid to social security taxes go into two trust funds the old age and survivors insurance oasi trust fund which pays retirement and survivor benefits and the disability insurance trust fund for disability benefits the secretary of the treasury the secretary of labor the secretary of health and human services the commissioner of social security and two public trustees manage these trust funds 56the social security tax is 6 2 paid by both the employee and the employer for a total of 12 4 in 2024 income above 168 600 in 2024 is not taxed for social security 74president franklin d roosevelt signed the social security act into law on aug 14 1935 to provide a safety net for the disabled and retirees when the program was conceived high wage earners were exempt from paying into the fund and receiving social security benefits however the u s congress replaced the exemption with a cap that usually increases at the same rate as wages 8910as noted above payroll taxes also go toward medicare these payroll deductions go into one of two separate trust funds the hospital insurance trust fund the hospital insurance trust fund pays for medicare part a and the associated administration fees part a assists in covering hospital care skilled nursing inpatient care and in some cases home care 11most people don t pay a premium for part a hospital insurance since they likely paid into the program during their working years through the payroll tax the tax for medicare is 1 45 for the employer and 1 45 for the employee for a total medicare tax of 2 9 for individuals that earn over 200 000 an additional 0 9 is charged this additional tax only applies to the employee not the employer 4the other medicare trust fund is the supplementary medical insurance trust fund which assists in paying for medicare parts b and d and other medicare program administration costs part b covers laboratory tests and screenings outpatient care x rays ambulance service and many additional costs part d helps with prescription drugs this trust fund is funded through the authorization of congress that allocates funds the premiums from people who are enrolled in part b and d and other sources such as interest earned on the fund s investments 11unemployment taxesemployers bear the primary responsibility for funding unemployment insurance if they lay off employees those employees are entitled to unemployment benefits the rate of unemployment insurance the employer will pay varies by industry state and federal fees some states also require employees to contribute to unemployment and disability insurance self employment taxesself employed individuals including contractors freelance writers musicians and small business owners must remit payroll taxes as well these are sometimes referred to as self employment taxes unlike most salaried workers self employed people don t have employers to remit payroll taxes on their behalf as a result they must cover both the employer and employee portions of the tax on their own 12the self employment tax rate for 2024 is 15 3 including a 12 4 contribution to social security old age survivors and disability insurance the other portion of the tax is a 2 9 payment to medicare with another 0 9 surtax for medicare on earnings that exceed 200 000 13if you are self employed you can deduct the employer portion of fica taxes as a business expense 13payroll taxes vs income taxesthere is a distinction between a payroll tax and an income tax although both are deducted from paychecks payroll taxes are used to fund specific programs income taxes go into the general funds at the u s treasury 1 state income tax if the state levies any goes into the state s treasury everyone pays a flat payroll tax rate up to a yearly cap income taxes however are progressive rates vary based on an individual s earnings | |
what makes up payroll taxes | payroll taxes include all of the taxes on an individual s salary wage bonus commission and tips these taxes are used to pay for social security medicare unemployment government programs and local infrastructure 14 | |
what is the fica tax | the fica tax stands for federal insurance contributions act and is used to pay for social security and medicare the total tax is 15 3 split evenly between an employer and an employee meaning each pays a tax of 7 65 this is made up of the social security tax 6 2 and the medicare tax 1 45 4 | |
does everyone pay a payroll tax | yes for the most part everyone pays a payroll tax which is automatically deducted from one s paycheck the social security and medicare taxes are regressive everyone pays the same amount while income tax is progressive those who make more are taxed at a higher rate if you don t receive a paycheck you must pay estimated taxes equivalent to what would have been withheld from your income the bottom linepayroll taxes are the taxes employees and employers pay on wages tips and salaries these taxes include federal state and local taxes as well as fica taxes which are taxes for social security and medicare these taxes are all taken out of an employee s wages these taxes fund a range of programs including social security healthcare defense spending government salaries and workers compensation local governments may collect a small payroll tax to maintain and improve local infrastructure and services including first responders road maintenance and parks | |
what is the p e 10 ratio | the p e 10 ratio is a valuation measure generally applied to broad equity indices that use real per share earnings over 10 years the p e 10 ratio also uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle the p e 10 ratio is also known as the cyclically adjusted price to earnings cape ratio or the shiller pe ratio understanding the p e 10 ratiothe ratio was popularized by yale university professor robert shiller author of the bestseller irrational exuberance who won the nobel prize in economic sciences in 2013 1 shiller attracted attention after he warned that the frenetic u s stock market rally of the late 1990s would turn out to be a bubble the p e 10 ratio is based on the work of renowned investors benjamin graham and david dodd in their legendary 1934 investment tome security analysis the investors attributed illogical p e ratios to temporary and sometimes extreme fluctuations in the business cycle to smooth a firm s earnings over a period graham and dodd recommended using a multi year average of earnings per share eps such as five seven or 10 years when computing p e ratios 2 | |
how to calculate the p e 10 ratio | the p e 10 ratio is calculated as follows take the annual eps of an equity index such as the s p 500 for the past 10 years adjust these earnings for inflation using the consumer price index cpi that is adjust past earnings to today s dollars take the average of these real eps figures over the 10 years divide the current level of the s p 500 by the 10 year average eps number to get the p e 10 ratio or cape ratio the p e 10 ratio varies a great deal over time according to data first presented in irrational exuberance which was released in march 2000 coinciding with the peak of the dotcom boom and updated to cover the period 1881 to august 2020 the ratio has varied from a low of 4 78 in december 1920 to a high of 44 20 in december 1999 as of august 2020 the historic p e 10 average was 17 1 3 using market data from both estimated 1881 to 1956 and actual 1957 onward earnings reports from the s p index shiller and john campbell found that the lower the cape the higher the investors likely return from equities over the following 20 years a criticism of the p e 10 ratio is that it is not always accurate in signaling market tops or bottoms for example an article in the september 2011 issue of the american association of individual investors journal noted that the cape ratio for the s p 500 was 23 35 in july 2011 4 comparing this ratio to the long term cape average of 16 41 would suggest that the index was more than 40 overvalued at that point the article suggested that the cape ratio provided an overly bearish view of the market since conventional valuation measures like the p e showed the s p 500 trading at a multiple of 16 17 based on reported earnings or 14 84 based on operating earnings 4 although the s p 500 did plunge 16 in one month from mid july to mid august 2011 the index subsequently rose more than 35 from july 2011 to new highs by november 2013 5 | |
what is a peer group | the term peer group refers to a group of individuals or companies that share similar characteristics with one another these characteristics may be age education ethnic background size industry or sector peer groups are known for their influential nature as they are able to shape the decisions of members of the group as such peer groups often contain hierarchies with clear leaders who sit at the top peer groups are often used in analysis in a number of academic and professional fields understanding peer groupsas noted above peer groups contain a number of people or other entities that share one or more similar characteristics peer groups allow individuals to be grouped together by certain defining features such as age income education race and or gender qualities among members for corporate peer groups include size industry sector and or financial position 1peer groups are used in a number of different fields such as finance and marketing as well as sociology they are known for the influence they have among group members they consist of hierarchies which place one or a few individual group members at the top these members can often shape the actions and decisions of the other group members peer group analysis or peer comparison involves an apples to apples comparison this means the constituents of the peer group should be more or less similar to one another comparisons allow professionals to identify trends and anomalies in behavior and outcomes and give them an opportunity to figure out efficiencies and opportunities if not immediately obvious peer groups are sometimes identified by a given company in its 10 k filing and almost always in its proxy filing though the latter can be more expansive in terms of specific business sectors and is used to set executive compensation plans insurance companies compile peer groups to underwrite life or health insurance policies on certain demographics such as age related groups or those who do or don t smoke using peer groupspeer comparison is one of the most widely used and accepted methods of equity analysis used by professional analysts individual investors and professionals because companies in a peer group share similar traits they lend themselves to relative value analysis peer group analysis establishes a valuation for stocks in investment research as long as the group consists of companies similar to the one being researched this is especially key when it comes to business areas and market capitalization investors can use this analysis to spot valuation anomalies for certain stocks 2for example a stock trading at an earnings multiple of 15x compared with a 10x multiple for its peer group may be considered overvalued investors can uncover reasons for the higher earnings multiple and ultimately determine that it is deserved relative valuation among peers in a group can be efficient and effective quickly showing which stocks may be overvalued and which might make good additions to a portfolio while there are other methods to determine when a stock is worth buying such as discounted cash flow or technical analysis peer comparison analysis remains a key tool for uncovering undervalued stocks 3because the data necessary to conduct the analysis is generally public and readily accessible on financial websites it is easy for anybody to begin employing this method of analysis in order to identify opportunities peer group comparisons are also called comparables or comps peer groups are important in advertising and marketing especially in the age of social media leaders in the group or those who are at the top of the hierarchical ladder are commonly known as influencers professionals study peer groups to show how they influence buying patterns and consumer trends for advertising and product development purposes 4advantages and disadvantages of peer groupspeer group analysis helps shape many decisions in the financial and investment worlds there are a number of different benefits to using peer groups especially in investment analysis but just like any other analytical tool there are drawbacks to this form of analysis as well we ve listed some of the most common ones below one of the most obvious benefits of using peer group analysis is that it helps investors and analysts uncover undervalued stocks this is often accomplished by analyzing different metrics including leverage and profitability among others doing so allows the individual to determine companies that should carry higher than average valuations a stock may be considered a buying opportunity if the current valuation is lower than what seems reasonable investors and professionals don t have to go far to get the information they need to perform peer group analysis data is easily available either on company websites or through filings done with the securities and exchange commission sec this means the individual doesn t need to do exhaustive research 2conducting peer comparisons give investors a chance to determine certain anomalies and trends that arise with different companies and in the market in general 5doing a peer comparison isn t as easy as it seems that s because quantitative factors aren t the only considerations in fact there are qualitative issues that must be taken into account this means that the analysis can be fairly subjective peer groups often come with certain biases which can sway an analyst or investor s analysis for example some groups come with survivorship bias this means that the peer group may not contain any companies that underperform this type of analysis therefore doesn t take companies that have gone under or phased out of the group into account 6there may not be very many companies in the peer group when this is the case peer comparison becomes ineffective in order for it to work there needs to get a sizeable group of companies that can be compared to one another 2helps uncover buying opportunities for undervalued securitiesaccessing data is easily available for comparisonallows anomalies and trends to be identifiedmay be subjective because some investors also consider qualitative factors into accountsurvivorship bias doesn t account for members that are phased out of the groupmay not be enough companies in the groupexample of a peer grouppeer groups refer to companies that are in the same industry or sector these are competitors that are roughly the same size peer groups can be found in analyst research reports or an individual company s financial statements lockheed martin is an aerospace defense and security company headquartered in maryland according to the company s 2017 proxy statement its peer group consists of other similar companies as its peers including general dynamics raytheon and northrup grumman it also lists caterpillar ups and 3m 7peer group faqsthere are several different types of peer groups including social groups cliques sports teams etc in investing and finance peers may be grouped by industry or sector consumer staples retail telecoms size usually by market cap financial health profitability capital structure or business factors business models location seasonality peer group analysis is a process involving the comparison of entities that share similar characteristics it is an apples to apples comparison of subjects that are fairly similar to one another this kind of analysis allows for the identification of trends and anomalies in behavior and outcomes a peer group index is one that groups individual companies together into a single benchmark index for instance the s p 500 can be considered a peer group index this index is comprised of 500 of the largest public companies in the united states and is generally considered the best gauge of u s large cap equities a peer group average is considered one of the most effective and efficient ways to determine the valuation of a security put simply investors can use certain metrics drawn from corporate financial statements to assess a certain company s stock price compared to its peers companies are grouped into peer groups for ratio analysis as part of fundamental analysis it allows researchers to determine individual company liquidity efficiencies as well as profitability this is done by examining each company s past and current financial statements and comparing them with one another some of the most popular ratios include price to earnings p e price to book and price to dividend ratios the bottom linepeer groups consist of similar entities that share one or more characteristics in common they serve a very important purpose in many different fields of study they can be one of the most useful tools when it comes to equity analysis for investors and financial professionals anyone can perform peer group comparisons using information that is widely available on corporate websites or through the sec | |
what is a peer to peer p2p economy | a peer to peer p2p economy is a decentralized model whereby two individuals interact to buy sell goods and services directly with each other or produce goods and service together without an intermediary third party or the use of an incorporated entity or business firm in a peer to peer transaction the buyer and the seller transact directly with each other in terms of the delivery of the good or service and the exchange of payment in a peer to peer economy the producer is usually a private individual or independent contractor who owns both their tools or means of production and their finished product understanding a peer to peer p2p economya peer to peer economy is viewed as an alternative to traditional capitalism whereby organized business firms own the means of production and also the finished product firms act as centralized intermediaries selling finished goods and services to customers and hiring labor as necessary to carry out the production process a p2p economy can exist within a capitalist economy open source software which is p2p co exists with retail and commercial software services like uber or airbnb serve as alternatives to taxi and livery services or hotels and inns respectively these companies act as hybrids between traditional capitalist firms and true p2p activity by providing intermediary services including a network to connect buyers and sellers and process payments but using private contractors to deliver services directly to customers in p2p with no third party involved in a transaction there is a greater risk that the provider may fail to deliver that the product will not be of the quality expected or that the buyer may not pay reduced overhead costs and resulting lower prices might defray this extra risk because providers of p2p goods or services own their finished product and means of production the peer to peer economy is similar to the economic production of the pre industrial age when everybody was a self producer a system that was supplanted by more efficient economic systems that provided greater productivity and wealth the internet and the it revolution have made the p2p economy a much more viable system in the modern age and have also spurred investment in service providers who while not directly involved in the production of p2p goods or services act to make p2p transactions more visible safer and efficient the modern state of emerging p2p economies is just the latest example of the internet s value to consumers the emerging internet empowered self producer model of capitalism is now significant and disruptive enough for regulators and companies to have woken up to it that is a sign of its immense potential for such innovative business models in years to come capitalist economy and p2p economyseveral factors influence the advantages of organizing economic activity into capitalist firms versus p2p economy in capitalism workers often do not own the means of production nor do they have any rights to the finished product they have helped make instead they are paid wages in return for their contribution to the firm s output which then sells the product to customers a capitalist system based on third party firms has advantages over a p2p economy in the form of generally increased productivity and efficiency of the production process due to economies of scale management of the transaction costs of coordinating the activities of buyers and sellers specialization and division of labor with respect to managerial ability and entrepreneurial judgment and the transfer of risk and uncertainty from workers and customers onto business owners who have greater resources to absorb potential losses these can represent advantages over a p2p system a p2p system will be less efficient than traditional capitalist firms to the extent that it restricts production to less efficient scale incurs higher informational or other transaction costs limits the division of labor between business managers entrepreneurs workers and customers or limits the efficient distribution of risk and uncertainty this extent is based on the physical technology social institutions and characteristics of the population in an economy the production of some goods and services is more efficient and less costly when they can be produced in large quantities firms in a capitalist economy exist partly to consolidate the capital goods and labor needed to produce at large scale into a single location or operation in order to take advantage of these economies of scale some modern technologies such as 3d printing increase the efficiency of producing certain goods at smaller scales facilitating the adoption of p2p activity in those markets the organization of traditional capitalist firms is largely determined by the transactions costs of the various transactions involved in a given production process gathering sharing and transmitting information about quality quantity and the cost of goods services and productive inputs designing negotiating and enforcing contracts and distributing the control of relationship specific assets are examples of transactions costs that can be reduced by arranging the activities of individuals in an economy into distinct business firms where technology social institutions or population characteristics can help reduce these kind of transactions costs business firms may be less needed and individuals can efficiently transacted business on a p2p basis information technology such as search engines and online marketplace platforms that make it easier for people to gather share and filter data about other buyers and sellers is one obvious avenue for facilitating p2p activity while formal institutions such as a reliable system of contract and tort law that increases the ability of individuals to make and enforce business contracts or antitrust statutes that limit the ability of large firms to exercise market power to demand concessions from smaller counterparties are another a population of buyers and sellers with a higher social preference for trust and fairness may also be less reliant on organizing business firms to overcome transaction costs associated with information asymmetries principal agent problems and hold up over relationship specific assets business firms that act as economic intermediaries economize on the use of managerial skill and entrepreneurial judgement they allow those who have these abilities to specialize in applying them productively and those who do not have them to specialize in other activities as wage or salary paid employees a p2p economy can be more successful where there are technological tools that make it easier for individuals to manage their own business and workload and to reduce the comparative advantage of specializing a population of individuals who for whatever reason happen to have a better degree of management skill or entrepreneurial judgement may be more suited to benefit form a p2p economy future economic conditions are always uncertain and involves risk consumer preferences change natural disasters occur and economies undergo business cycles and recessions business firms in a traditional capitalist economy bear these risks and uncertainties by being responsible for the profit or loss of the business while providing workers with a stable wage and consumers with a consistent product in p2p economic activity without a business firm acting as intermediary individuals bear more of the direct risks of running their own business and directly suffer losses if uncertain economic conditions turn against them social institutions such as a universal basic income single payer healthcare or other social safety nets could allow greater p2p economic activity by increasing individuals ability to bear the risk of being in business for themselves a population of people who are simply more tolerant of uncertainty and willing to take greater risks might also be more likely to be suited to p2p economy | |
what is peer to peer p2p lending | peer to peer p2p lending enables individuals to obtain loans directly from other individuals cutting out the financial institution as the middleman websites that facilitate p2p lending have greatly increased their adoption as an alternative method of financing p2p lending is also known as social lending or crowd lending it has only been around since 2005 but the crowd of competitors already includes prosper lending club upstart and funding circle 1understanding peer to peer lendingp2p lending websites connect borrowers directly to lenders each website sets the rates and the terms and enables the transaction most sites have a wide range of interest rates based on the creditworthiness of the applicant first an investor opens an account with the site and deposits a sum of money to be dispersed in loans the loan applicant posts a financial profile that is assigned a risk category that determines the interest rate the applicant will pay the loan applicant can review offers and accept one some applicants break up their requests into chunks and accept multiple offers the money transfer and the monthly payments are handled through the platform the process can be entirely automated or lenders and borrowers can choose to haggle some sites specialize in particular types of borrowers funding circle for example focuses on small businesses 2 and lending club has a patient solutions category that links doctors who offer financing programs with prospective patients 3history of peer to peer p2p lendingearly on the p2p lending system was seen as offering credit access to people who would be spurned by conventional institutions or a way to consolidate student loan debt at a more favorable interest rate in recent years however p2p lending sites have expanded their reach most now target consumers who want to pay off credit card debt at a lower interest rate home improvement loans and auto financing are also available at p2p lending sites the rates for applicants with good credit are often lower than comparable bank rates while rates for applicants with sketchy credit records may go much higher lendingtree com for example listed personal loan rates from 6 40 to 36 as of dec 4 2023 4 the average credit card interest rate was 21 19 as of dec 7 2023 according to the federal reserve 5for lenders p2p lending is a way to generate interest income on their cash at a rate that exceeds those offered by conventional savings accounts or certificates of deposit cds some p2p sites allow lenders to start with an account balance of as little as 25 special considerationspeople who wish to lend money through a p2p lending site need to consider the possibility that their borrowers will default on their loans just as conventional banks do research on p2p lending platforms has indicated that defaults are much more common than those facing traditional financial institutions sometimes in excess of 10 6by comparison the federal reserve s index of delinquency rates on all loans at all commercial banks shows that rates have fallen from about 3 76 to 1 32 over the ten years prior to dec 2023 7any consumer or investor considering a p2p lending site should also check the transaction fees every site makes money differently but fees and commissions may be charged to the lender the borrower or both like banks the sites may charge loan origination fees late fees and bounced payment fees | |
is peer to peer lending p2p safe | peer to peer lending is riskier than a savings account or certificate of deposit but the interest rates are often much higher this is because people who invest in a peer to peer lending site assume most of the risk which is normally assumed by banks or other financial institutions | |
how big is the market for peer to peer p2p lending | the global peer to peer lending market was worth 134 35 billion in 2022 according to figures from sns insider 8 this figure is projected to reach 705 81 billion by 2030 9 | |
how do you invest in peer to peer lending | the simplest way to invest in peer to peer lending is to make an account on a p2p lending site and begin lending money to borrowers these sites typically let the lender choose the profile of their borrowers so they can choose between high risk high returns or more modest returns alternatively many p2p lending sites are public companies so one can also invest in them by buying their stock the bottom linepeer to peer lending sites offer options for entrepreneurs small businesses and individuals who might not fit the profile of the ideal loan recipient by traditional banking standards while p2p lenders may extend credit more easily it comes with higher fees and interest for borrowers and a higher risk of default for lenders many p2p platforms make it easy to invest or borrow but read the fine print to learn about all the associated fees before signing anything | |
what is pegging | the term pegging refers to the practice of attaching or tying a currency s exchange rate to another country s currency pegging often involves preset ratios which is why it s called a fixed rate pegs are often put in place to provide stability to a nation s currency by linking it to an already stable currency the u s dollar is often used as a currency peg by many nations as it is the world s reserve currency pegging can also refer to the practice of manipulating the price of an underlying asset such as a commodity prior to option expiry understanding peggingwide currency fluctuations can be quite detrimental to international business transactions which is why many countries maintain a currency peg doing so allows them to keep their currencies relatively stable against that of another country pegging to the u s dollar is common as noted above that s because the dollar is the world s reserve currency in europe the swiss franc was pegged to the euro for the better part of the four year period between 2011 and 2015 though this was done more so to curb the strength of the franc from a persistent inflow of capital 1pegging is also a price manipulation strategy used sometimes by options traders as expiration approaches writers options shorts are most commonly associated with the practice of driving up or down the price of the underlying security in an options contract as the expiry date approaches that s because they have a monetary incentive to ensure that the option expires out of the money otm so the buyer does not exercise the option contract the currencies of over 66 countries are pegged to the u s dollar according to avatrade 2currency peggingcurrency risk makes it difficult for companies to manage their finances to minimize currency risk many countries peg an exchange rate to that of the united states which has a large and stable economy but how does it work countries often choose to peg their currencies to a stable one this allows them to keep their currencies stable while allowing their products and services to remain competitive in the export market exchange rates between pegged currencies are fixed for instance the fixed rate for a single u s dollar is 3 67 united arab emirates dirham aed a country s central bank goes into the open market to buy and sell its currency in order to maintain the pegged ratio that has been deemed to provide optimal stability if a country s currency value experiences large fluctuations it becomes even more difficult for foreign companies to operate and generate a profit for example if a u s company operates in brazil the firm has to convert u s dollars into brazilian reals brl to fund the business if the value of brazil s currency changes dramatically compared to the dollar the u s company may incur a loss when it converts back into u s dollars major currency peg breakdowns include the argentine peso to the u s dollar in 2002 the british pound to the german mark in 1992 and the u s dollar to gold in 1971 advantages and disadvantages of peggingthere are some benefits and drawbacks when it comes to pegging we ve highlighted some of the key pros and cons below pegged currencies can expand trade and boost real incomes particularly when currency fluctuations are relatively low and show no long term changes individuals businesses and nations are free to benefit fully from specialization and exchange without any of the associated exchange rate risk and tariffs according to the theory of comparative advantage everyone will be able to spend more time doing what they do best farmers can use pegged exchange rates to simply produce food as best they can rather than spending time and money hedging foreign exchange risk with derivatives similarly technology firms can focus on building better computers perhaps most importantly retailers in both countries can source from the most efficient producers pegged exchange rates make more long term investments possible in the other country with a currency peg fluctuating exchange rates are not constantly disrupting supply chains and changing the value of investments central banks with a currency peg must monitor supply and demand and manage cash flow to avoid spikes in demand or supply these spikes can cause a currency to stray from its pegged price that means these authorities need to hold large foreign exchange reserves to counter excessive buying or selling of its currency currency pegs affect forex trading by artificially stemming volatility countries experience a particular set of problems when a currency is pegged at low exchange rates domestic consumers are deprived of the purchasing power to buy foreign goods suppose the chinese yuan is pegged too low against the u s dollar chinese consumers will have to pay more for imported food and oil lowering their consumption and standard of living but u s farmers and middle east oil producers who would sell them more goods lose business this situation naturally creates trade tensions between the country with an undervalued currency and the rest of the world more problems emerge when a currency is pegged at an overly high rate a country may be unable to defend the peg over time since governments set rates too high domestic consumers will buy too many imports and consume more than they can produce these chronic trade deficits will create downward pressure on the home currency and the government will have to spend foreign exchange reserves to defend the peg the government s reserves will eventually be exhausted and the peg will collapse | |
when a currency peg collapses the country that set the peg too high will suddenly find imports more expensive that means inflation will rise and the nation may also have difficulty paying its debts the other country will find its exporters losing markets and its investors losing money on foreign assets that are no longer worth as much in domestic currency | expands trade and boosts real incomeproducers focus on producing rather than hedging exchange riskbetter chance to make long term investmentsthe power to purchase foreign goods dropscan lead to chronic trade deficitshigher priced imports and rising inflation | |
when a country pegs its currency to the dollar it fixes the exchange at a set predetermined rate the value of the currency is maintained by the country s central bank since the dollar s value is on a floating rate it fluctuates this means that the pegged currency s value rises and drops with the dollar | countries that peg their currency to the dollar do so because the u s dollar is the world s reserve currency and is relatively strong in the international market as such transactions and any international trade that takes place often happens in u s dollars this helps keep a country s pegged currency stable some countries peg to the dollar because it helps keep their currencies and therefore their exports priced competitively others do so because they are reliant on trade such as singapore and malaysia currencies pegged to the dollaras noted above the u s dollar is a popular currency that other countries use to peg their own currencies countries that choose to do so often have different reasons that are based on their own economies here are some of the most notable countries whose currencies are pegged to the greenback along with their rates options peggingthe buyer of a call option pays a premium to obtain the right to buy the stock underlying security at a specified strike price the writer of that call option meanwhile receives the premium and is obligated to sell the stock and expose themselves to the resulting infinite risk potential if the buyer chooses to exercise the option contract for example an investor buys a 50 call option which gives them the right to buy xyz stock at the strike price of 50 by june 30 the writer has already collected the premium from the buyer and would ideally like to see the option expire worthless stock price less than 50 at expiry the buyer wants the price of xyz to rise above the strike price plus the premium paid per share only at this level would it make sense for the buyer to exercise the option if the price is very close to the strike plus premium per share level just before the option s expiry date then the buyer and especially the writer of the call would have an incentive to be active in buying and selling the underlying stock respectively this activity is known as peggingthe converse holds true as well the buyer of a put option pays a premium to obtain the right to sell the stock at the specified strike price while the writer of that put option receives the premium and is obligated to buy the stock and expose themselves to the resulting infinite risk potential if the buyer chooses to exercise the option contract a lesser used definition of pegging occurs mainly in futures markets and entails a commodity exchange linking daily trading limits to the previous day s settlement price so as to control price fluctuations an investor buys a put option on xyz stock with a strike price of 45 that expires on july 31 and pays the required premium the writer receives the premium and the waiting game begins the writer wants the price of the underlying stock to remain above 45 minus the premium paid per share while the buyer wants to see it below that level again if the price of xyz stock is very close to this level then both would be actively selling and buying to try to influence xyz s price to where it would benefit them while this concept of pegging could apply to both it is used predominantly by sellers as they have a bit more incentive to not see the option contract exercised | |
is the yuan pegged to the dollar | the yuan has been pegged to a basket of international currencies which includes the u s dollar since 2005 this allows the country s central bank to maintain full control of the currency by setting a daily rate of parity against the greenback any changes to the rate are restricted meaning they can only fall within 2 of that mark the yuan was pegged solely to the u s dollar before this in 1994 the peg was set at 8 28 yuan to a single u s dollar its major trading partners put pressure on china s leaders to allow it to appreciate against the dollar in 2005 | |
which country has no currency of its own | there are a number of different countries that don t have their own currency for instance 19 member states of the european union use the euro as their currency some countries use the u s dollar exclusively for transactions including zimbabwe ecuador el salvador east timor and the turks and caicos islands among others | |
what is a soft peg versus a hard peg | the foreign exchange market often controls the exchange rate for a specific currency in a soft peg in some cases though the government may choose to act to strengthen or weaken the currency when the need arises hard pegs occur when a government sets the exchange rate for its currency | |
what is a pell grant | a pell grant is a form of need based federal aid for students in college or other post secondary education in contrast with student loans pell grants do not have to be repaid except in rare instances | |
how a pell grant works | to be eligible for a pell grant students and their parents must fill out the government s free application for federal student aid fafsa 1the application which can be completed online asks a series of questions about the student s and parents finances in addition to other relevant information such as whether any of the student s siblings will be in college at the same time schools that the student applies to will receive an electronic copy of the application financial aid officers at those schools use the fafsa to determine how much federal aid to offer the student the school s calculations consider the difference between the expected family contribution efc as calculated by the fafsa and that school s cost of attendance coa 2to bridge the gap between the efc and the coa the school may offer the student a combination of pell grants subsidized and unsubsidized federal loans and paid work study jobs pell grants and subsidized loans are intended for students with exceptional financial need while unsubsidized loans are available to students and parents regardless of financial need colleges typically make these financial aid offers around the same time that they send out their acceptance letters 34only undergraduate students generally qualify for pell grants though there is an exception for some post baccalaureate teacher training programs 5the confusingly named expected family contribution efc has been renamed the student aid index sai to clarify its meaning for the 2023 24 award year efc does not indicate how much the student and their family must pay the college but is used to calculate how much student aid the applicant is eligible to receive 6pell grant maximums and other limitsthe maximum annual pell grant for the 2023 2024 school year is 7 395 there is also a limit on how much you can receive in total 12 terms or roughly six years of funding 4 to keep track the government calculates your lifetime eligibility used leu percentage while you are receiving pell grants 7you can see how much you have left to go by logging into your my aid account on the department of education s federal student aid website your eligibility for pell grants ends when you receive your degree other federal grants for educationwhile the pell grant is the primary subsidy for higher education the federal government also funds several smaller aid programs like pell grants these grants are for students with extreme financial need as determined through the fafsa the awards range from as little as 100 to as much as 4 000 a year fseogs are not available at every school and the schools that do offer them may have a limited amount of money to allocate 8these grants are for students planning to teach high need subjects such as math science foreign languages and special education in low income areas they are worth up to 4 000 per year 9teach grants recipients are required to fulfill service requirements including at least four years of full time teaching if they fail to do so the grant is converted into a direct federal unsubsidized loan that must be repaid 10these grants are available to students who lost a parent or guardian as a member of the u s armed forces serving in iraq or afghanistan after 9 11 and who don t qualify for a pell grant the student must have been under 24 years old or enrolled in college at least part time at the time of the parent or guardian s death the maximum iraq and afghanistan service grant is based on the maximum pell grant for that year but reduced by 5 7 as a result of the budget control act of 2011 1112 | |
how do you stay eligible for pell grants | in order to continue receiving pell grants or other federal financial aid students and their parents must fill out a new fafsa every year students must also show that they are making satisfactory academic progress toward their degree or other education goal such as a certificate satisfactory academic progress is defined by the school and may involve maintaining a minimum grade point average taking a certain number of credits or other requirements students may lose eligibility for pell grants at least temporarily if they default on a student loan 1314 | |
what happens to unused pell grant money | generally your school will first apply the money from your pell grant and other aid such as loans toward your tuition fees and room and board if there s anything left over in your account after that often referred to as a credit balance the school is required to pay it to you within 14 days unless you ve authorized the school to apply it toward your future bills these federal funds are typically disbursed each school term or at least twice a year 515 | |
do you have to pay back pell grants | grants like scholarships generally represent money that doesn t have to be repaid however there are circumstances when you might have to repay some or all of your pell grant those include dropping out of the program of study for which you were awarded the grant changing your attendance from full time to part time or receiving other scholarships or grants that reduce your eligibility for federal aid if any of this happens the school should let you know how much you owe and how to repay it 16who was pell pell grants are named for the late u s senator claiborne de borda pell of rhode island who championed them 17the bottom linepell grants can help undergraduate students with significant financial need pay for college or other post secondary education unlike student loans they do not have to be repaid in most circumstances to apply for a pell grant students and their families need to fill out the free application for federal student aid fafsa 1819 | |
what is penetration pricing | penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering the lower price helps a new product or service penetrate the market and attract customers away from competitors market penetration pricing relies on the strategy of using low prices initially to make a wide number of customers aware of a new product the goal of a price penetration strategy is to entice customers to try a new product and build market share with the hope of keeping the new customers once prices rise back to normal levels penetration pricing examples include an online news website offering one month free for a subscription based service or a bank offering a free checking account for six months understanding penetration pricingpenetration pricing similar to loss leader pricing can be a successful marketing strategy when applied correctly it can often increase both market share and sales volume additionally a higher amount of sales can lead to lower production costs and quick inventory turnover however the key to a successful campaign is keeping the newly acquired customers for example a company might advertise a buy one get one free bogo campaign to attract customers to a store or website once a purchase has been made ideally an email or contact list is created to follow up and offer additional products or services to the new customers at a later date new entrants often use penetration pricing strategy to quickly steal a portion of the market share because its brand is not yet known it must rely on favorable pricing to differentiate itself from other more established market participants once a company has attracted customers via penetration pricing it often changes strategy to create brand loyalty convert customers into long term consumers and drive competitors out of the market penetration pricing may be temporary i e an offer for this weekend only or embedded into the company s long term strategy i e a deal whenever a customer switches from a competitor tips on successful penetration pricingpenetration pricing is just the first step to a long term plan to attract convert and establish relationships with new customers in order for a penetration pricing strategy to work it must often meet the following criteria or adhere to the following guidelines penetration pricing is most effective when there are goods in high demand if there is not a large market for a product it often is less important the price of the good because there are less consumers to capitalize and attempt to retain therefore the most successful penetration pricing strategies rely on broader markets with more exposure where a single penetration pricing strategy can have the greatest effect though easier said than done the goal of a pricing strategy is not to get into a spiraling competition with another company the purpose of penetration pricing is not to simply offer a very low price it is to most effectively take market share price wars can be expensive ineffective and may publicly damage the reputation of a company should the battle ineffectively evolve as the company attracts new customers it is imperative that the company seeks out economies of scale with more customers the company should be able to more efficiently use resources obtain pricing and scale operations for example consider a company ordering raw materials for inventory with more customers and more orders the company should be able to purchase larger quantities and reduce its cost per unit produced one of the worst strategies to employ with penetration pricing is to raise the price back to normal too quickly not only does this open the door for a competitor to swoop in an employ their own penetration pricing strategy but quickly making changes breaks customer trust with the customer on board with the new company the new company must slowly make changes and gradually raise prices to more profitable levels else it will face the risk of losing the long term value though penetration pricing is a short term strategy the ultimate goal is to foster long term loyalty that means honoring existing pricing where applicable understanding limitations on what can be offered and still emphasizing value in product quality and customer service as many telecom companies offer sign up bonuses or one time incentives to switch providers it is then their responsibility to foster the business relationship companies that employed penetration pricing themselves may be exposed to penetration pricing counterstrategies when they finally decide its time to raise prices penetration pricing participantsthere are three primary users of penetration pricing each of which are discussed below most often penetration pricing is used by new competitors entering a market for the very first time these companies do not have an existing presence in the market and are often not known or may be young these companies may have limited resources so they may not be able to deploy capital for aggressive marketing campaigns the ultimate goal of these new companies is to steal market share from market leaders in other cases more established companies may introduce new products to the market although the brand name may be recognized and known the company may not be known for some specific products because the company may have a large stockpile of resources it often is able to sacrifice short term profits in favor of establishing itself in a new market last some companies may use penetration pricing for items that have high price elasticity price elasticity is the relationship between demand and price for a good if a small change in price creates a large change in demand the price is said to highly elastic in these cases a company may very slightly reduce its price to achieve the benefits of the price elasticity penetration pricing may occur every time you use a coupon as a company or product is trying to lure you into paying a lower price in exchange for your business relationship advantages and disadvantages of penetration pricingthe primary advantage of penetration pricing is that is may be one of the quickest ways to convert a customer many customers may not be loyal to a specific brand in these cases it may be easiest to simply offer a lower price to attract their business whether a company is a service company retailer or manufacturer all types of companies can offer penetration pricing strategies companies can successfully use this short term strategy and leverage new customers into long term success companies can capitalize on goodwill earned when their pricing discounts were available and this may foster brand recognition for being one of the low price providers in an industry as long as consumers associate the penetration pricing company as the low cost provider there will always be long term brand equity created via penetration pricing penetration pricing also fosters loyalty because consumers directly benefit from the lower price though some of this loyalty is jeopardized as a company begins to raise its prices in the long term consumers may not directly benefit from conversion tactics quite like they can when companies battle over lower prices penetration pricing may also help naturally foster economies of scale if pricing is aggressive enough a massive amount of customers may be converted as a company has larger order quantities and is able to build greater infrastructure it often experiences less cost per unit due to manufacturing or operational efficiencies though customers are attracted by a very low price it may not be feasible to offer that price forever the new company is trying to eventually make a profit and some penetration pricing strategies result in short term losses a company must be able to temporarily cover its expenses if it is not earning enough from customers during the penetration pricing period once customers are lured there is a significant risk of consumers leaving once prices are increased consider the fact that a consumer lured by penetration pricing may leave because of another penetration pricing strategy a company must be incredibly sensitive to raising prices changing contract agreements and making changes in the long term some consumers may view penetration pricing as an unfavorable marketing tactic a company may get the reputation of having lower quality goods should consumers inappropriately associate low prices with product quality consumers may also see through the strategy and not appreciate the attempt to be bailed by short term marketing tactics as other companies take wind of what is happening they may decide to price match or further reduce their own price in addition many companies now offer price matching and may have a greater warranty or customer service process companies must move delicately as creating an expensive price war often leaves the new company in a less favorable position than before last penetration pricing strategies are not useful as long term strategies they take effort to create then a company needs to change direction again and deploy more resources to create long term value these changing strategies may be burdensome to finance and must be aligned in order to effectively streamline a short term customer into a lifetime purchaser may be one of the fastest ways to convert a customercan be used by a variety of types of companiesmay foster brand recognition as the low price providerdirectly benefit consumersmay foster economies of scalemay result in short term lossesmust be gradually phased out as customers may leave as easily as they were luredmay result in price war which leaves the new company in a worst position than beforenot useful as a long term strategy by itselfpenetration pricing vs skimmingwith pricing penetration companies advertise new products at low prices with modest or nonexistent margins conversely a skimming strategy involves companies marketing products at high prices with relatively high margins a skimming strategy works well for innovative or luxury products where early adopters have low price sensitivity and are willing to pay higher prices effectively producers are skimming the market to maximize profits over time prices will reduce to levels comparable to market prices in order to capture the rest of the market small businesses or those in niche markets can benefit from price skimming when their products or services are differentiated from competitors and when synonymous with quality and a positive brand image real world examplescostco and kroger two major grocery store chains use market penetration pricing for the organic foods they sell traditionally the margin on groceries is minimal however the margin on organic foods tends to be higher kroger and costco use a penetration pricing strategy when they sell organic foods at lower prices the lower costs allow kroger and costco to maintain their profit margins even while undercutting the pricing of their competition cell phone carriers also implement penetration pricing by offering the latest cell phones when a new consumer agrees to a long term service contract for example t mobile and other carriers now offer a free phone when a customer switches to a t mobile plan from a plan with another company 1 the company can t simply survive forever by giving away these phones for free |
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