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is penetration pricing ethical | yes penetration pricing is a valid strategy is that is used to temporarily offer lower prices to attract a customer there is nothing unethical or illegal about it though there are very strong considerations a company must make once a customer has been attracted for example once a new customer has agreed to a long term contract it is the company s responsibility to honor that agree even it is unprofitable and not bait and switch the customer | |
when would a company use penetration pricing | a company uses penetration pricing when it does not have a presence in a given market whether it is a brand new company or an old company introducing a new product most penetration pricing strategies occur when new products are introduced and a company wants to steal market share from existing companies | |
what types of products are most successful with penetration pricing | the most elastic goods are often the most successful with penetration pricing these goods often have the largest changes in demand with very subtle changes in price goods such as internet cable banking services groceries airline tickets or hospitality services are often easier to use penetration prices with as small changes in price may more easily swing demand the bottom linepenetration pricing is the short term strategy to lure customers from competitors by offering lower prices though these prices may not be profitable in the long term a company s hope is they can convert the customer into a long term relationship that ultimately yields a profit per consumer | |
what is a pennant | in technical analysis a pennant is a type of continuation pattern it s formed when there is a large movement in a security known as the flagpole then the flagpole is followed by a consolidation period with converging trend lines the pennant followed by a breakout movement in the same direction as the initial large movement which represents the second half of the flagpole understanding pennantspennants which are similar to flags in terms of structure have converging trend lines during their consolidation period and last from one to three weeks the volume at each period of the pennant is also important the initial move must be met with large volume while the pennant should have weakening volume followed by a large increase in volume during the breakout here s an example of what a pennant looks like in the image above the flagpole represents the previous trend higher the period of consolidation forms a pennant pattern and traders watch for a breakout from the upper trend line of the symmetrical triangle many traders look to enter new long or short positions following a breakout from the pennant chart pattern for example a trader may see that a bullish pennant is forming and place a limit buy order just above the pennant s upper trendline when the security breaks out the trader may look for above average volume to confirm that pattern and hold the position until it reaches its price target the price target for pennants is often established by applying the initial flagpole s height to the point at which the price breaks out from the pennant for instance if a stock rises from 5 00 to 10 00 in a sharp rally consolidates to around 8 50 and then breaks out from the pennant at 9 00 a trader might look for a 14 00 price target on the position or 5 00 plus 9 00 the stop loss level is often set at the lowest point of the pennant pattern since a breakdown from these levels would invalidate the pattern and could mark the beginning of a longer term reversal most traders use pennants in conjunction with other chart patterns or technical indicators that serve as confirmation 1 for example traders may watch for relative strength index rsi levels to moderate during the consolidation phase and reach oversold levels which opens the door for a potential move higher in other cases the consolidation may occur near trendline resistance levels where a breakout could create a new support level limitations of pennant chart patternpennant trading comes with several downsides that trades should be aware of one common mistake is premature entries into the market some traders may initiate positions too early trying to anticipate the breakout before it actually occurs this impatience can lead to entering trades during the consolidation phase which increasing the risk of false signals another pitfall in pennant trading involves neglecting broader market context traders may focus only on the pennant pattern without considering external factors that could impact the trade for example think about broader economic events may impact more than just one security equities may tip their hand and show where they may be headed but events out of the company s control may oppose the expected price movement the last downside to consider is the problme of overlooking risk failing to set appropriate stop loss orders or neglecting position sizing can expose traders to excessive or unnecessary risk traders should establish clear risk reward ratios and diversify their portfolios to mitigate risks associated with individual trades technical patterns can be influenced by a number of factors even if an indicator is forming be mindful of how other external factors can influence the pattern s formation failed pennant formationsthere are several reasons why a pennant pattern might fail one common reason is a lack of confirmation from other technical indicators as mentioned in the last section traders often make the mistake of solely relying on the pennant pattern without considering additional signals from indicators such as volume momentum oscillators or trend lines for example low volume during the pennant formation can be a red flag this is because this means weak market participation and a higher likelihood of the pattern failing to produce the anticipated price movement another reason for failed pennant patterns is external market events or news that override the technical signals provided by the pattern unexpected announcements geopolitical events or economic data releases can quickly change market sentiment rendering the pennant pattern obsolete also mentioned above there may be broader market considerations that cause pennant formations to fail to form psychology of pennant formationstraders may choose to trade pennant formations because pennants align with the trader s psychology in either case understanding the psychological factors behind pennant patterns can provide valuable insights for traders seeking to make informed decisions the formation of pennant patterns in price charts reflective the ebb and flow of investor sentiment and the tug of war between bulls and bears pennants are typically seen as a manifestation of a temporary pause or consolidation in the market and the psychological dynamics during this phase contribute to the pattern s formation one key psychological factor driving pennant patterns is the concept of market indecision after a significant price movement whether up or down traders and investors may take a moment to think thorough their positions this period of consolidation represents a temporary equilibrium where buyers and sellers are in a state of uncertainty by being attuned to the emotional dynamics driving pennant formations traders can enhance their ability to navigate these patterns and capitalize on the subsequent price movements example of a pennantlet s take a look at a real life example of a pennant in the above example the stock creates a pennant when it breaks out experiences a period of consolidation and then breaks out higher the upper trend line resistance trend line of the pennant also corresponds to reaction highs traders could have watched for a breakout from these levels as a buying opportunity and profited from the subsequent breakout flags vs pennantspennants and flag patterns are often confused for each other as they look alike but they have distinct characteristics that traders need to understand to make accurate technical analyses pennants are characterized by converging trendlines that form a small symmetrical triangle the converging lines indicate a temporary consolidation or pause in the market before a potential continuation of the existing trend the price movement within a pennant usually has low volatility and the breakout from the pattern is typically accompanied by a surge in trading volume on the other hand flags exhibit a more rectangular shape it may also sometimes resemble a small parallel channel the parallel trendlines in a flag pattern indicate a brief consolidation with the price moving in a channel against the prevailing trend like pennants flags are typically seen as a continuation pattern and the breakout direction is expected to align with the existing trend to most easily spot the difference between a pennant and a flag take a look at the slope of the trendlines pennants have trendlines that converge and form a symmetrical triangle while flags have parallel trendlines that creating a rectangular shape if you re not sure which is which take a look at the slopes of each | |
how do bullish pennant patterns differ from bearish pennants | bullish pennant patterns occur after an uptrend and indicate a potential continuation of the upward movement bearish pennant patterns occur after a downtrend and suggest a potential continuation of the downward movement can pennant formations signal both continuation and reversal patterns pennant formations are primarily considered continuation patterns signaling a brief pause before the resumption of the existing trend however in certain contexts they may also act as reversal patterns | |
what are common entry points for trading pennant breakouts | common entry points for trading pennant breakouts are typically just above the upper trendline for bullish pennants and just below the lower trendline for bearish pennants the bottom linepennant formations are short term continuation patterns identified on price charts they re characterized by a small symmetrical triangle created by converging trendlines traders often use pennant formations to anticipate breakout points with the height of the initial strong move providing an estimate for potential price targets | |
what is a penny stock | a penny stock typically refers to the stock of a small company that trades for less than 5 per share though some penny stocks trade on large exchanges such as the new york stock exchange nyse most trade via over the counter otc transactions through the electronic otc bulletin board otcbb or through the privately owned otc markets group there is no trading floor for otc transactions quotations are also all done electronically investopedia ryan oakleyunderstanding penny stocksin the past penny stocks were considered any stocks that traded for less than one dollar per share the u s securities and exchange commission sec has modified the definition to include all shares trading below five dollars the sec is an independent federal government agency responsible for protecting investors by maintaining the proper and orderly functioning of the securities markets penny stocks are usually associated with small companies with a lack of liquidity meaning that there are few ready buyers in the marketplace as a result investors may find it difficult to sell stock since there may not be enough buyers because of the low liquidity investors might have difficulty finding a price that accurately reflects the market due to their lack of liquidity wide bid ask spreads or price quotes and small company sizes penny stocks are generally considered highly speculative in other words investors could lose a sizable amount or all of their investment penny stock volatilitypenny stocks often represent growing companies with limited cash and resources since these are primarily small companies penny stocks are most suitable for investors who have a high tolerance for risk typically penny stocks have a higher level of volatility resulting in a higher potential for reward and thus a higher level of inherent risk investors may lose their entire investment on a penny stock or more than their investment if they buy on margin which means the investor borrowed funds from a bank or broker to purchase the shares investors should consider the heightened risks associated with penny stocks for example an investor should have a stop loss order predetermined before entering a trade and know what price level to exit if the market moves against them stop loss orders set a price limit that once reached will trigger an automatic sale of the securities although penny stocks can have explosive gains it is essential to have realistic expectations and understand that penny stocks are high risk investments with low trading volumes advantages and disadvantages of penny stocksdue to their low volume penny stocks tend to be more volatile than established equities this means high opportunities for both gains and losses and investors should be careful to understand both the risks and benefits penny stocks do provide some small businesses with a way to access funding from the public these companies may use this platform as a starting block to move into a larger marketplace also since they sell at such low prices there is room for significant upside some companies such as amazon amzn originated as penny stocks but later grew into sizable blue chip companies a blue chip is a nationally recognized well established and financially sound company blue chips generally sell high quality widely accepted products and services blue chip companies typically have a history of weathering downturns and operate profitably in the face of adverse economic conditions which helps to contribute to their long record of stable and reliable growth however some factors exacerbate the risk associated with investing in or trading penny stocks these securities are usually riskier than more established companies | |
when considering options for potential investments it s important to have enough information to make an informed decision for some penny stocks information on corporate performance can be very difficult to find when this is the case the information that is available about them may not come from credible sources | stocks traded on the otcbb carry the ob suffix to their symbol these companies file financial statements with the sec however companies listed on the pink sheets are not required to file with the sec as such these businesses do not receive the same public scrutiny or regulation as the stocks represented on the nyse the nasdaq and other markets stocks on the otcbb and pink sheets do not have to fulfill minimum standard requirements to remain available for sale through otc exchanges once a company can no longer maintain its listing position on one of the major exchanges the company can move to one of the smaller otc listing exchanges minimum standards can act as a safety cushion for some investors when a company is not subject to higher standards investing in that company becomes much riskier many of the companies considered to be penny stocks could be newly formed and some could be approaching bankruptcy these companies will generally have poor track records or no track record at all as you can imagine this lack of historical information makes it difficult to determine a stock s potential stocks that trade infrequently do not have much liquidity as a result it is possible that investors won t be able to sell the stock once it is acquired the investors might need to lower their price until it is considered attractive to another buyer low liquidity levels also provide opportunities for some traders to manipulate stock prices the pump and dump scheme is a popular trading scam to lure investors into buying a stock large amounts of a penny stock are purchased followed by a period when the stock is hyped up or pumped up once other investors rush to buy the stock the scammers sell their shares once the market realizes there was no fundamental reason for the stock to rise investors rush to sell and can take on heavy losses offer a place for small companies to gain access public funding in some cases penny stocks may provide a method to gain access to larger marketplace listing with a lower price penny stocks allow for significant upside in share appreciation penny stocks lack a liquid market with few buyers perhaps even after their price has increased there is limited information available on the company s financial record penny stocks have a high probability of fraud and bankruptcy of the underlying company tips for investing in penny stockswhile penny stocks are volatile there are some cautions that an investor can take to reduce their downside risk one is to conduct proper due diligence since penny stocks tend to trade in venues with lower entry requirements investors should take extra care to read the company s statements and ensure that the company is financially sound it is also important to rely on reputable stockbrokers while there are scams to watch out for most of them are promoted by dubious emails and cold calls a reputable broker should be able to provide high quality written research to back up any investment claims finally as with any speculative investment never put in more money than you can afford to lose while you may make a profit by day trading the returns are much more steady with established large cap equities can you make money on penny stocks despite the risks penny stocks can be profitable for a cautious or thorough investor the key is to avoid certain fallacies that are common among speculative investments such as the belief that they have the opportunity to make large gains while this is true they are equally likely to score large losses another important fallacy to avoid is the low price fallacy which holds that low priced securities are inherently cheaper than higher priced ones however this does not account for factors like market capitalization or liquidity even if a certain stock doubles in price it may be impossible to sell a large number of stocks without causing price slippage signs of scamsthough there is no fool proof strategy for knowing which penny stocks are fraudulent the sec recommends that investors heed the following warning signs in a company s record sec trading suspensions large assets but small revenues financial statements containing unusual items in the footnotes odd auditing issues and large insider ownership 1real world example of penny stock scamscalifornia resident zirk de maison created nearly half of a dozen shell companies and offered them as penny stocks to investors between 2008 and 2013 according to the federal bureau of investigation fbi de maison told investors that the companies engaged in a variety of businesses such as gold mining and diamond trading when in fact they did nothing he sold the stocks in boiler rooms offices where brokers use high pressure tactics to push people into buying stocks by promising large profits in 2015 de maison and seven other perpetrators were found guilty of securities fraud and sentenced to federal prison 2 | |
how is a penny stock created | small companies and startups typically issue stock as a means of raising capital to grow the business although the process is lengthy issuing stock is often one of the quickest and most effective ways for a startup company to obtain capital a penny stock like any other publicly traded stock is created through a process called an initial public offering or ipo to be listed on the otcbb the company must first file a registration statement with the sec or file stating the offering qualifies for an exemption from registration it must also check state securities laws in the locations it plans to sell the stock once approved the company may begin the process of soliciting orders from investors finally the company can apply to have the stock listed on a larger exchange or it can trade on the over the counter market as with other new offerings the first step is hiring an underwriter usually an attorney or investment bank specializing in securities offerings the company s offering either needs to be registered with the sec according to regulation a of the securities act of 1933 or file under regulation d if exempt if the company is required to register form 1 a the registration statement must be filed with the sec along with the company s financial statements and proposed sales materials the financial statements need to remain available for the public to review and timely reports must be filed with the sec to maintain the public offering once approved by the sec orders for shares may be solicited from the public by accompanying sales materials and disclosures such as a prospectus after initial orders are collected and the stock is sold to investors a registered offering can begin trading in the secondary market by listing on an exchange like the nyse nasdaq or trade over the counter many penny stocks wind up trading via otc due to the strict requirements for listing on larger exchanges sometimes companies make an additional secondary market offering after the ipo which dilutes the existing shares but gives the company access to more investors and increased capital furthermore it is mandatory that the companies continue to publicly provide updated financial statements to keep investors informed and continue to be quoted on the over the counter bulletin board regulations for penny stockspenny stocks are considered highly speculative investments to protect investors the sec and financial industry regulatory authority finra have rules to regulate the trading of penny stocks all broker dealers must comply with section 15 h of the securities exchange act of 1934 and the accompanying rules to be eligible to handle penny stock transactions 3after hours tradingpenny stocks can be traded after hours and since many significant market movements can happen after exchanges close penny stocks are subject to volatile fluctuations after hours if penny stock investors execute buy or sell trades after hours they may be able to sell shares for very high prices or purchase shares for very low prices however even the best penny stocks are subject to low liquidity and inferior reporting also if a penny stock does spike after hours an investor looking to sell the stock might have a hard time finding a buyer penny stocks infrequently trade even more so after market hours which can make it difficult to buy and sell after hours | |
when is it not a penny stock | multiple events can trigger the transition of a penny stock to a regular stock the company can issue new securities in an offering that is registered with the sec or it can register an existing class of securities with the regulatory body both types of transactions automatically require the firm to adhere to periodic reporting including disclosures to investors about its business activities financial conditions and company management unless there is an exemption these filings also mandate 10 q quarterly reports the annual form 10 k and periodic form 8 k reports which detail unexpected and significant events in some instances there are additional conditions that will require a company to file reports with the sec reports must be filed if a company has either at least 2 000 investors more than 500 investors that can t be categorized as accredited investors and possesses more than us 10 million in assets usually companies with no more than 10 million in assets and fewer than 2 000 recorded shareholders don t have to adhere to reporting guidelines under the sec 9 interestingly enough some companies opt for transparency by filing the same types of reports that other perhaps more reputable firms are required to do example of a penny stockmost penny stocks don t trade on major market exchanges however there are some large companies based on market capitalization that trade below 5 per share on the main exchanges like the nasdaq one example of a penny stock listed on the nasdaq is catalyst pharmaceuticals inc cprx a small biopharmaceutical company based in coral gables florida as of jan 7 2021 the stock price is 3 55 per share in the last 12 months the share price has fluctuated between 2 and 5 on aug 10 2020 the stock closed at 4 26 however the next day the price fell to 3 34 a drop of nearly 22 10although there can be sizable gains in trading penny stocks there are also equal or larger risks of losing a significant amount of an investment in a short period | |
where do you buy penny stocks | penny stocks are traded on the otc bulletin board otcbb or the otc markets group they are also available to trade through a brokerage account such as fidelity or charles schwab | |
how do you buy penny stocks on fidelity | you can buy penny stocks on fidelity by searching for companies that trade for less than 5 per share note that those trading penny stocks must first submit a form acknowledging that they understand the risks of penny stock trading 11 | |
how do you find penny stocks on robinhood | you can find penny stocks on robinhood using the search function and setting a filter for only those companies trading for less than 5 per share note that since robinhood does not charge commissions penny stock trades can be potentially more profitable than a commission based broker the bottom linepenny stocks refer to shares in companies with a low price and low trading volume because these markets have low liquidity there is also high volatility this means more opportunities for large profits or losses | |
what is a pension plan | a pension plan is an employee benefit that commits the employer to making regular contributions to a pool of money set aside to fund payments to eligible employees after they retire in the united states traditional pension plans known as defined benefit plans have become increasingly rare and are being replaced by defined contribution plans that are less costly to employers such as the 401 k retirement savings plan | |
what is per capita | per capita is a latin term that translates to by head per capita means the average per person and is often used in place of per person in statistical observances the phrase can be used for almost any kind of population description but is common when discussing economic data this could include a country s tara anand investopediaunderstanding per capita per capita is a term primarily used in economics and statistics to determine how certain metrics apply to a population it is most often used in reference to metrics of a country and how that metric applies to the population of that country the most common uses of per capita are gross domestic product gdp per capita and income per capita for national economic indicators such as gross domestic product gdp or gross national product gnp the total figure is certainly of interest however the per capita basis will give the analyst more granular information and allows for better apples to apples comparisons across different countries to calculate per capita take the number you are interested in e g a country s gdp and divide it by the population being analyzed per capita vs medianin contrast to per capita measures median numbers such as those for income provide an arguably more accurate picture of how much the residents of a particular country or area are likely to earn the median income is the income level in the very middle of a list of incomes exactly half of the people considered earn above the median income figure while the other half earn below that number for example real median household income in the united states in 2022 the most recent figures available was 75 149 whereas per capita income was quite lower at 41 261 1per capita expresses the average number for all of the citizens of a particular country or area therefore it can be a misleading number because it includes everyone from infants to older citizens and fails to account for statistical outliers the median income in this instance will take into account any outliers per capita and povertythe world bank issues data on total gdp and gdp per capita but each statistic can provide a conflicting perspective on the economic state of a country and the wealth of its people according to some economists a country s aggregate economic growth or its overall gdp is not what matters when the concern is the poverty level of individuals in a country for example if an outlet reports that the world s gdp grew by 3 it may sound like great news but it would fail to take into consideration that the world s population grew by 1 5 making the gdp number less impressive for countries where the population is not increasing rapidly the difference between gdp per capita growth and total gdp growth is minimal however for countries with rapidly growing populations such as those in africa and south asia reporting gdp growth can be highly misleading because a country can show gdp growth overall but a decline in per capita growth 2 afghanistan has been used as an example where over the past several years the nation s economy has been growing overall but declined on a per capita basis 34example of per capitain economic analysis per capita is also used as an apples to apples comparison between countries as all countries have different populations for example u s gross domestic product gdp was just over 21 5 trillion in 2022 according to the cia world factbook the latest information available from the cia the united states population in the same period was approximately 337 3 million that results in a gdp per capita of 64 600 5china is now the second largest economy with a gdp of around 25 6 trillion in 2022 6 however china has far more people than the united states so the per capita gdp for china is just 18 200 thus using per capita gdp shows that most chinese citizens are still earning far less than the average american despite the country s aggregate output 6 | |
what does per capita mean in latin | in latin per capita means by head or for each head | |
how do you determine per capita figures | to calculate per capita simply divide the figure or value in question by the size of the population | |
what is the world s total gdp per capita | according to the world bank the total world s gdp per capita was 17 500 in 2022 with 8 billion people in the world in 2022 that amounts to a total global gdp of around 139 trillion 7the bottom lineper capita is a way of averaging values on a per person basis to better understand how each individual shares in aggregated figures in economics gdp and income per capita are used to understand a country s average level of prosperity and for making like comparisons across countries you can also use per capita measures of noneconomic data such as alcohol consumption per capita or car crashes per capita | |
what is gdp per capita | gross domestic product gdp per capita is an economic metric that breaks down a country s economic output to a per person allocation economists use gdp per capita to determine the prosperity of countries based on their economic growth gdp per capita is calculated by dividing the gdp of a nation by its population countries with a higher gdp per capita tend to be those that are industrial and developed and have smaller populations compared to others understanding gdp per capitagross domestic product per capita is a global measurement used by economists to gauge the prosperity of nations based on economic growth there are a few ways to analyze a country s wealth and prosperity gdp per capita is the most universal because its components are regularly tracked on a global scale providing ease of calculation and usage income per capita is another measure for global prosperity analysis but it s less broadly used 12the most basic interpretation of gdp per capita shows how much economic production value can be attributed to each individual citizen alternatively gdp per capita translates to a measure of national wealth because gdp market value per person also readily serves as a prosperity measure 1gdp per capita vs gdpgdp itself is the primary measure of a country s economic productivity a country s gdp shows the market value of the goods and services it produces the bureau of economic analysis bea reports gdp every quarter in the united states economists watch this quarterly report closely for the quarter over quarter and annual growth figures that can assist them in analyzing the overall health of the economy economists also use gdp for insight into how their domestic productivity compares to the productivity of other countries legislators use gdp figures when making fiscal policy decisions gdp can also influence central bankers when they re deciding the course of future monetary policy gdp per capita is often analyzed along with gdp it relates to both a country s gdp and its population so it can be important to understand how each factor affects gdp per capita growth 3real gdp per capita in the u s for q1 2024 4implications of gdp per capitagovernments can use gdp per capita to understand how their economies are growing along with their populations gdp per capita analysis on a national level can provide insights into a country s domestic population influence look at each variable s contribution to the per capita figure to understand how an economy is growing or contracting relative to its population there can be several numerical relationships that affect gdp per capita growth can potentially be the result of technological advances that increase productivity with no change in population if a country s gdp per capita is growing while the population level remains stable technology can be a revolutionary factor that helps countries increase their per capita rankings even as population figures are unchanged or decline some countries may have high gdp per capita but a small population this usually means that they ve built a self sufficient economy based on an abundance of special resources a nation may have consistent economic growth but gdp per capita growth will be negative if its population is growing faster than its gdp this isn t a problem for most established economies because even a tepid pace of economic growth can still outpace their population growth rates however countries with existing low levels of gdp per capita such as nations in africa and rapidly increasing populations combined with little gdp growth can experience a steady erosion of living standards 5both gdp and population are factors in the per capita equation so countries with the highest gdp may or may not have the highest gdp per capita global gdp per capita increased by an average of 2 3 in 2022 according to the latest world bank data 6economies such as those of china and india have achieved gdp per capita growth rates well above the global average in the 21st century despite their populations of over a billion people each this is thanks to the financial reforms initiated by china in the late 1970s and by india in the mid 1990s 7countries with the highest gdp per capitathese are the 10 countries with the highest gdp per capita as of april 2024 according to the international monetary fund imf 8many of the countries on this list have relatively small populations luxembourg has one of the smallest with about 674 000 people in 2024 most of these small population countries are energy exporters regional financial centers and export business powerhouses 9countries with the lowest gdp per capitahere are the 10 countries with the lowest gdp per capita as of april 2024 according to the imf 8global growth projectionsthe imf provides a regular outlook on the global growth of gdp this growth can affect the outlook for the growth of gdp per capita the imf expects global gdp growth of 3 2 in 2024 and 2025 due to the resilience of the global economy despite the high interest rate hikes by central banks 10advanced economies are expected to see a slight acceleration in growth from 1 6 in 2023 to 1 7 in 2024 to 1 8 in 2025 while growth rates in advanced economies will be lower than those in developing economies developing economies will see a modest slowdown from 4 3 in 2023 to 4 2 in 2024 and 2025 the estimate of 3 1 global growth in five years is the lowest in decades 10 | |
how is gdp per capita calculated | the calculation formula to determine gdp per capita is a country s gross domestic product divided by its population gdp per capita reflects a nation s standard of living 1 | |
which countries have the highest gdp per capita | the countries with the highest gdp per capita tend to be those that are the most industrialized and developed according to the imf the three countries with the highest gdp per capita as of april 2024 are luxembourg ireland and switzerland 8 | |
what s the difference between gdp per capita and per capita income | gdp per capita is the economic output of a nation per person it s used to measure the prosperity of a nation per capita income is the amount of money earned per person it s used to determine the standard of living and quality of life of a population | |
which country has the lowest gdp per capita | burundi south sudan and malawi have the lowest gdp per capita of the countries for which the imf publishes data 8the bottom linegdp per capita is a popular metric used to measure the average prosperity and well being of a country it takes populations into account unlike some other measures of economic productivity allowing easy comparisons between countries with different populations | |
what is per stirpes | per stirpes latin for by branch is a legal term that may be used for estate planning purposes such as in a last will and testament 1 it designates who will inherit assets if a beneficiary dies before the person who created the will the testator dies with a per stirpes distribution the beneficiary s share of the estate will pass to the beneficiary s heirs or descendants while the term per stirpes is commonly used to refer to an individual s assets under a will it is also sometimes used in beneficiary designations within individual retirement accounts iras | |
how per stirpes works | per stirpes refers to every person descending down a branch of a family tree from another person for example everyone below a parent such as their children grandchildren and great grandchildren is included in a branch per stirpes often appear in wills and retirement accounts to define asset distributions so that each branch of a family tree is treated according to the testator s or account owner s wishes therefore if a beneficiary dies before the person whose will names them does the heirs of that beneficiary would receive the inheritance in an even split this means that children of the beneficiary not spouses are included in a per stirpes distribution per stirpes vs per capitaper capita means by the heads also called share and share alike the term designates that property is divided equally among surviving descendants in the same generation nearest the testator the estate holder names each recipient individually or determines which group receives the assets such as all the estate holder s children or grandchildren or both a deceased beneficiary s share is not set aside but is mingled with the estate and divided among the other beneficiaries for example alejandra has specified that her estate be divided per capita among her three children abigail stephanie and oliver abigail has one child river oliver has two children hanaj and anil if abigail dies her portion of the inheritance would remain with alejandra s other assets and be divided equally among the two remaining children stephanie and oliver river does not inherit anything nor do hanaj and anil if you die without a will your estate goes to your heirs according to the laws of the state where you live per stirpes examplenow consider the same example but this time alejandra s will specifies that her estate be divided per stirpes among her three descendants her children abigail stephanie and oliver again abigail has one child river oliver has two children hanaj and anil if abigail dies her portion of the inheritance would go to river the next person on abigail s branch of the family tree hanaj and anil would not inherit anything criticism of per stirpescreating a will is one of the most important processes a person can go through unfortunately it can also be one of the most stressful and confusing occasionally the use of outdated terms such as per stirpes can create more confusion especially when the term isn t used properly for example some lawyers have allowed their clients to use the phrase to my children per stirpes while this may sound straightforward it is technically incorrect instead the will should read to my descendants per stirpes furthermore different jurisdictions have slightly different definitions of the term this is why it s critical for every lawyer to take the time to ensure that their client doesn t have any incorrect preconceived notions about the meaning of per stirpes | |
which is better per stirpes or per capita | neither one is better in and of itself they simply have different meanings where beneficiaries and inheritance are concerned ultimately the feelings of the testator for their family dynamic should guide the testator s decision of whether per stirpes or per capita is used | |
what is the opposite of per stirpes | per stirpes stipulates that should a beneficiary die before the testator the beneficiary s share of the inheritance goes to their heirs per capita takes the opposite approach the inheritance is divided equally among the testator s beneficiaries | |
how do you write per stirpes in a will | to use per stirpes correctly you should make the gift to a person s descendants as to person s descendants per stirpes in general the person should be one person not a group of people and the word descendants or issue must always appear | |
how many generations does per stirpes cover | per stirpes determines that in the event of an out of order death the inheritance which would have been awarded to the beneficiary that passed away is given to that beneficiary s children thus per stirpes covers the grandchildren of the testator | |
is per stirpes a good idea | per stirpes used more commonly than per capita is a great way to ensure that the descendants of your original beneficiaries are protected in the event of an untimely death the bottom linethe distribution of your assets after your death can be very stressful making sure that your will has very clear terms and that those terms reflect your true intentions can make the process much less difficult for your descendants because some jurisdictions have slightly different definitions of per stirpes it s crucial that you consult with a legal professional such as an estate lawyer when doing your estate planning | |
what is perceived value | in marketing terminology perceived value is customers evaluation of a product or service s merits and its ability to meet their needs and expectations especially compared with its peers marketing professionals try to influence consumers perceived value of a product by describing the attributes that make it superior to the competition understanding perceived valueperceived value comes down to the price that the public is willing to pay for a good or service even a snap decision made in a store aisle involves an analysis of a product s ability to fulfill a need and provide satisfaction compared to other products under different brand names the work of the marketing professional is to enhance the perceived value of the brand they are selling the pricing of products takes perceived value into consideration in some cases the price of a product or service may have more to do with its emotional appeal than with the actual cost of production even a snap decision made in a store aisle involves an analysis of a product s perceived ability to fulfill a need and provide satisfaction types of perceived utility valuemarketers who want to influence the perceived value of a product define its attributes in terms of its utility or the extra benefits and values that the customer expects to get in using it the perceived utility of many products and services may differ widely even among similar or virtually identical products there are five types of utilities that companies aim to create through marketing campaigns for products special considerations of perceived valuea company s brand is meant to communicate a set of expectations associated with its products or services that s why a well established brand can command a higher price than its generic equivalents advil and motrin both contain ibuprofen but both brands are priced higher than generic ibuprofen luxury goods however carry the perception of value to another level with the addition of prestige the highest value of luxury goods is associated not with their utility but with the prestige that owning and using it entails the perceived value of a rolex watch is not based on its functionality but with its image as a mark of personal success and refined taste at the opposite end of the scale some brands are marketed as smart bargains the perceived value of a product may be its low price compared with competitors of equal quality | |
what does perceived value boil down to | perceived value comes down to the price that the public is willing to pay for a good or service | |
how do marketers define perceived value | marketers aiming to influence the perceived value of a product define its attributes in terms of its utility or the extra benefits and values that the customer expects to get in using it | |
why do some brands charge more for the same product or service | a company s well established brand can command a higher price than its generic equivalents because that brand is meant to communicate a set of expectations associated with its products or services the bottom linein marketing parlance perceived value is customers evaluation of the merits of a product or service and its ability to meet their needs and expectations especially in comparison with its peers | |
what is percentage change | percentage change is a simple calculation that s used for many purposes in finance and business such as to assess the relative performance of a stock or other investment over a certain time period here is how to calculate it | |
how percentage changes work | percentage changes can be calculated for any quantity that you measure over time in finance the percentage change formula is often used to track the prices of both large market indexes like the s p 500 or dow jones industrial average and individual securities as well as to compare the fluctuating values of different nations currencies percentage change is also a widely used metric in business such as when a company illustrates its revenue growth year over year yoy in its balance sheet often if there is a significant percentage change the company will try to explain why for example for the third quarter of 2020 starbucks reported a 38 drop in net revenues over the same quarter in 2019 due to adverse impact of covid 19 1 subsequent quarterly reports showed the gradual recovery of starbucks revenues and positive percentage changes in net revenues as the business disruptions caused by covid 19 diminished 2percentage change like many other formulas used in finance can be calculated using spreadsheets such as microsoft excel or google sheets formula and calculation of percentage changeto calculate a percentage increase first determine the difference increase between the two numbers you are comparing 3increase new number original number begin aligned text increase text new number text original number end aligned increase new number original number next divide the increase by the original number and multiply the answer by 100 percentage increase increase original number 100 begin aligned text percentage increase left frac text increase text original number right times100 end aligned percentage increase original numberincrease 100 this expresses the change as a percentage i e the percentage change similarly to calculate a percentage decrease determine the difference decrease between the two numbers you are comparing decrease original number new number begin aligned text decrease text original number text new number end aligned decrease original number new number next divide the decrease by the original number and multiply the answer by 100 percentage decrease decrease original number 100 begin aligned text percentage decrease left frac text decrease text original number right times 100 end aligned percentage decrease original numberdecrease 100 the result expresses the change as a percentage i e the percentage change if you only want to remember one formula use the one for a positive increase if you do the result will be either positive or negative if you use both formulas the result is always positive and that will tell you whether the percentage change is an increase positive or a decrease negative uses of percentage changeinvestors companies and entire industries can benefit from analyzing how prices or other measures rise or fall from one period to the next here are some ways that investors can use percentage change calculations to their advantage example of calculating percentage changeas an example of calculating a percentage change consider grace who bought shares of a stock at 35 per share on jan 1 of last year a year later the stock was worth 45 50 per share by what percentage did grace s share value increase to answer this question first calculate the increase in price between the new and old numbers 45 50 35 10 50 then divide the increase by the original price 10 5 35 0 3 begin aligned frac 10 5 35 0 3 end aligned 3510 5 0 3 finally to get the percentage multiply the answer by 100 or simply move the decimal point two spaces to the right 0 3 100 30 begin aligned 0 3 times100 30 end aligned 0 3 100 30 grace s stock increased by 30 | |
how do i calculate percent change | if you are tracking a price increase use the formula new price old price old price and then multiply that number by 100 conversely if the price decreased use the formula old price new price old price and multiply that number by 100 | |
what is a balance sheet and how does it relate to percentage changes | a balance sheet is a financial statement that companies use to report assets liabilities and shareholder equity balance sheets provide a snapshot of a company s finances for a specific period of time such as a quarter or a fiscal year 4many companies choose to analyze their balance sheet by examining the percentage change in specific account balances from one period to the next for example a company can check its immediate liquidity trend by seeing the percentage change in cash on hand across the last several years | |
how is percentage change used in finance | percentage change is often used by investors to track the increase or decrease in the value of a security over time and then compare that against the performance of a relevant index it is also used to compare the changing values of different national currencies as well as to measure the appreciation of physical assets like real estate the bottom linepercentage change is a simple calculation with many uses in finance and business if investors want a quick read on how a particular investment of theirs is performing comparing its percentage change to that of similar investments over the same time period will provide it | |
what is the percentage of completion method | the percentage of completion method is an accounting method in which the revenues and expenses of long term contracts are recognized as a percentage of the work completed during the period this is in contrast to the completed contract method which defers the reporting of income and expenses until a project is completed the percentage of completion method of accounting is common for the construction industry but companies in other sectors also use the method understanding the percentage of completion methodthe percentage of completion method of accounting requires the reporting of revenues and expenses on a period by period basis as determined by the percentage of the contract that has been fulfilled the current income and expenses are compared with the total estimated costs to determine the tax liability for the year for example a project that is 20 complete in year one and 35 complete in year two would only have the incremental 15 of the revenue recognized in the second year the recognition of income and expenses on this work in progress basis applies to the income statement but the balance sheet is handled the same way as the completed contract method there are two main conditions for the use of the percentage of completion method first collections by the company must be reasonably assured second the company must be able to reasonably estimate costs and the rate of project completion examples of the percentage of completion methodthe percentage of completion accounting method is commonly used by construction firms that are contractors for buildings energy facilities public sector infrastructure and other long term physical projects it has also been used by defense contractors think nuclear submarines or aircraft carriers and software developers whose projects represent a multi year commitment of resources for software developers the product must be a significant custom designed project for a client fluor corporation a global engineering and construction firm provides details about its use of the percentage of completion method in its 10 k filing under note 1 major accounting policies of the notes to the consolidated financial statements an analyst would learn that changes to total estimated contract costs or losses if any are recognized in the period in which they are determined by the company income recognized in excess of billed amounts is booked as a current asset under contract work in progress and billed amounts to clients in excess of income recognized to date are booked as a current liability under advance billings on contracts potential for abuse of the percentage of completion methodpercentage of completion method is vulnerable to abuse by unethical companies those who wish to engage in creative accounting can easily move around income and expenses from one period to another period understating or overstating amounts this game would not be sustainable however as toshiba corp discovered in 2015 the infrastructure unit of the japanese conglomerate understated operating costs by approximately 152 billion yen 1 2 billion between 2008 and 2014 shortly after the scandal broke the ceo was forced to resign and half the board of directors stepped down | |
what is perfect competition | the term perfect competition refers to a theoretical market structure although perfect competition rarely occurs in real world markets it provides a useful model for explaining how supply and demand affect prices and behavior in a market economy under perfect competition there are many buyers and sellers and prices reflect supply and demand companies earn just enough profit to stay in business and no more if they were to earn excess profits other companies would enter the market and drive profits down jessica olah investopedia | |
how perfect competition works | perfect competition is a benchmark or ideal type to which real life market structures can be compared perfect competition is theoretically the opposite of a monopoly in which only a single firm supplies a good or service and that firm can charge whatever price it wants since consumers have no alternatives and it is difficult for would be competitors to enter the marketplace in a perfect competition model there are no monopolies this kind of structure has a number of key characteristics including this can be contrasted with the more realistic imperfect competition which exists whenever a market hypothetical or real violates the abstract tenets of neoclassical pure or perfect competition since all real markets exist outside of the plane of the perfect competition model each can be classified as imperfect the contemporary theory of imperfect versus perfect competition stems from the cambridge tradition of post classical economic thought characteristics of perfect competitiona perfectly competitive market is defined by the following factors there are a large number of buyers and sellers in a perfectly competitive market the sellers are small firms instead of large corporations capable of controlling prices through supply adjustments they sell products with minimal differences in capabilities features and pricing this ensures that buyers cannot distinguish between products based on physical attributes such as size or color or intangible values such as branding a large population of both buyers and sellers ensures that supply and demand remain constant in this market as such buyers can easily substitute products made by one firm for another information about an industry s ecosystem and competition constitutes a significant advantage for example knowledge about component sourcing and supplier pricing can make or break the market for certain companies in certain knowledge and research intensive industries such as pharmaceuticals and technology information about patents and research initiatives at competitors can help companies develop competitive strategies and build a moat around their products the availability of free and perfect information in a perfectly competitive market ensures that each firm can produce its goods or services at exactly the same rate and with the same production techniques as another one in the market governments play a vital role in market formation for products by imposing regulations and price controls they can control the entry and exit of firms into a market by setting up rules to function in the market for example the pharmaceutical industry has to contend with a roster of rules pertaining to the development production and sale of drugs 1in turn these rules require big capital investments in the form of employees such as lawyers and quality assurance personnel and infrastructure such as machinery to manufacture medicines the cumulative costs add up and make it extremely expensive for companies to bring a drug to the market in comparison the technology industry functions with relatively less oversight as compared to its pharma counterpart thus entrepreneurs in this industry can start firms with less to zero capital making it easy for individuals to start a company in the industry such controls do not exist in a perfectly competitive market the entry and exit of firms in such a market are unregulated and this frees them up to spend on labor and capital assets without restrictions and adjust their output in relation to market demands cheap and efficient transportation is another characteristic of perfect competition in this type of market companies do not incur significant costs to transport goods this helps reduce the product s price and cuts back on delays in transporting goods theory vs reality of perfect competitionreal world competition differs from this ideal primarily because of differentiation in production marketing and selling for example the owner of a small organic products shop can advertise extensively about the grain fed to the cows that made the manure that fertilized the non gmo soybeans thereby setting their product apart from competitors this is what s called differentiation the first two criteria homogeneous products and price takers are far from realistic yet for the second two criteria information and mobility the global tech and trade transformation is improving information and resource flexibility while the reality is far from this theoretical model the model is still helpful because of its ability to explain many real life behaviors companies seek to establish brand value through marketing around their differentiation as such they advertise to gain pricing power and market share barriers to entry prohibit perfect competitionmany industries also have significant barriers to entry such as high startup costs as seen in the auto manufacturing industry or strict government regulations as seen in the utility industry which limit the ability of firms to enter and exit such industries and although consumer awareness has increased with the information age there are still few industries where the buyer remains aware of all available products and prices significant obstacles exist that prevent perfect competition from developing in the economy the agricultural industry probably comes closest to exhibiting perfect competition because it is characterized by many small producers with virtually no ability to alter the selling price of their products the commercial buyers of agricultural commodities are generally very well informed and although agricultural production involves some barriers to entry it is not particularly difficult to enter the marketplace as a producer advantages and disadvantages of perfect competitionperfect competition is an idealized framework for a market economy while it provides a convenient model for how an economy works it is not always accurate and has significant departures from the real world economy like with other models the value of a perfect competition framework is only accurate to the extent that it reflects actual conditions one notable feature of perfect competition is low profit margins since all consumers have access to the same products they naturally gravitate towards the lowest prices firms cannot set themselves apart by charging a premium for higher quality products and services for instance it would be impossible for a company like apple aapl to exist in a perfectly competitive market because its phones are more expensive than those of its competitors another is the absence of innovation the prospect of greater market share and setting themselves apart from the competition is an incentive for firms to innovate and make better products but no firm possesses a dominant market share in perfect competition meaning that the long term profitability of their operations is zero another disadvantage is the absence of economies of scale limited to zero profit margins means that companies will have less cash to invest in expanding their production capabilities an expansion of production capabilities could potentially bring down costs for consumers and increase business profit margins but the presence of several small firms cannibalizing the market for the same product prevents this and ensures that the average firm size remains small provides a convenient framework for modeling market activity demonstrates how producers are incentivized to provide lower prices the perfect competition model does not always reflect real world market conditions the model does not account for geographical differences or variations between products the model does not account for how producers benefit from economies of scale | |
do firms profit in perfect competition | profits may be possible for brief periods in perfectly competitive markets but the market s dynamics cancel out the effects of positive or negative profits and bring them toward an equilibrium because there is no information asymmetry in the market other firms will quickly ramp up their production or reduce their manufacturing costs to achieve parity with the firm which made profits the average revenue and marginal revenue for firms in a perfectly competitive market are equal to the product s price to the buyer as a result the perfectly competitive market s equilibrium which had been disrupted earlier will be restored in the long run an adjustment of supply and demand ensures all profits or losses in such markets tend toward zero perfect competition vs monopolythe opposite of perfect competition is a monopoly where a single company controls the supply of a certain product in monopoly conditions consumers cannot go elsewhere if the price is too high they can only decide not to buy the product this means that rather than setting prices by supply and demand the monopolistic firm can simply set a price point that maximizes its profits some types of firms are considered natural monopolies because there is a significant first mover advantage that discourages competitors from entering the market other monopolies may be established through government actions or by cartels such as opec examples of perfect competitionas mentioned earlier perfect competition is a theoretical construct and doesn t actually exist as such it is difficult to find real life examples of perfect competition but there are variants present in everyday society consider the situation at a farmer s market a place characterized by a large number of small sellers and buyers there is typically little differentiation between products and their prices from one farmer s market to another how the produce is grown does not matter unless they are classified as organic and there is very little difference in how they re packaged or branded thus even if one of the farms producing goods for the market goes out of business it will not make a difference to average prices the situation may also be relatively similar in the case of two competing supermarkets which stock their aisles from the same set of companies again there is little to distinguish products from one another between both supermarkets and their pricing remains almost the same another example of perfect competition is the market for unbranded products which features cheaper versions of well known products product knockoffs are generally priced similarly and there is little to differentiate them from one another if one of the firms manufacturing such a product goes out of business it is replaced by another one the development of new markets in the technology industry also resembles perfect competition to a certain degree for example there was a proliferation of sites offering similar services during the early days of social media networks some examples of such sites are sixdegrees com blackplanet com and asianave com none of them had a dominant market share and the sites were mostly free they constituted sellers in the market while consumers of such sites who were mainly young people were the buyers the startup costs for companies in this space were minimal meaning that startups and companies can freely enter and exit these markets technologies such as php and java were largely open source and available to anyone capital costs in the form of real estate and infrastructure were not necessary remember that mark zuckerberg effectively founded facebook from his college dorm | |
what is perfect competition | in economic theory perfect competition occurs when all companies sell identical products market share does not influence price companies are able to enter or exit without barriers buyers have perfect or full information and companies cannot determine prices in other words it is a market that is entirely influenced by market forces it is the opposite of imperfect competition which is a more accurate reflection of a current market structure | |
what is an example of perfect competition | consider a farmers market where each vendor sells the same type of jam there is little differentiation between each of their products as they use the same recipe and they each sell them at an equal price at the same time sellers are few and free to participate in the market without any barrier buyers in this case would be fully knowledgeable of the product s recipe and any other information relevant to the good | |
what is the difference between perfect competition and imperfect competition | while perfect competition is an idealized market structure in which equal and identical products are sold imperfect competition can be found in monopolies and real life examples for instance imperfect competition involves companies competing for market share high barriers to entry and buyers lacking complete information on a product or service unlike perfect competition however this creates the incentive to innovate and produce better products in addition to increased profit margins due to the influence of supply and demand the bottom lineperfect competition describes an imaginary market condition where all consumers have access to the same products and information in this type of economy all firms must offer the lowest price possible or risk being undercut by their competitors although this is only a theoretical model perfect competition is useful for demonstrating how economic actors behave in a free market | |
what is a performance bond | a performance bond is a financial guarantee to one party in a contract against the failure of the other party to meet its obligations it is also referred to as a contract bond a performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects investopedia laura porterunderstanding performance bondsa performance bond is a financial guarantee that the terms of a contract will be honored if one party to a contract cannot complete their obligations the bond is paid out to the other party to compensate for their damages or costs the miller act requires contractors on all federal public works contracts with a value of 100 000 or more to get a performance bond guaranteeing their work 1jobs that require payment and performance bonds go through job or project bidding first as soon as the job or project is awarded to the winning bidder payment and performance bonds are provided as a guarantee for the completion of the project performance bonds are common in construction and real estate development in such situations an owner or investor may require the developer to assure that contractors or project managers procure performance bonds in order to guarantee that the value of the work will not be lost in the case of an unforeseen negative event a performance bond is an agreement between three parties as explained below performance bonds are also used in commodity contracts performance bonds are provided to protect parties from concerns such as contractors being insolvent before finishing the contract when this happens the compensation provided for the party that issued the performance bond may be able to overcome financial difficulties and other damages caused by the insolvency of the contractor a payment bond and a performance bond work hand in hand a payment bond guarantees a party pays all entities such as subcontractors suppliers and laborers involved in a particular project when the project is completed a performance bond ensures the completion of a project setting these two together provides the proper incentives for laborers to provide a quality finish for the client performance bonds are also used in commodity contracts where a seller is asked to provide a bond to reassure the buyer that if the commodity being sold is not in fact delivered the buyer will at least receive compensation for lost costs advantages and disadvantages of a performance bondthe issuance of a performance bond protects a party from monetary losses due to failed or incomplete projects for example a client issues a contractor a performance bond if the contractor is not able to follow the agreed specifications in constructing the building the client is given monetary compensation for the losses and damages the contractor may have caused performance bonds protect the contracting party in the event that their contractor may become insolvent or otherwise unable to meet the terms of a contract if the costs of completing the project overrun their projections the obligee will not be responsible for the additional expenses this reduces the risk for developers or other companies when they engage in large scale construction projects however there are some risks to consider the surety may attempt to argue that the obligee did not comply with all the requirements of the bond in order to deny payment or they may try to get the obligee to settle on a lesser amount moreover it is up to the obligee to calculate the financial cost of a failure by the contractor if the obligee underestimates the cost of non performance they will have to absorb those extra costs on their own protects an obligee from additional costs if work is not completed reduces the risk for developers in construction and other large projects bond issuers may attempt to deny payment if the obligee underestimates the cost of non performance they will have to absorb these extra costs on their own performance bonds add an additional cost to the contractor that may be passed on to the obligee | |
how to get a performance bond | in order to get a performance bond contractors need to apply to a surety for a letter of bondability this non binding letter states the monetary limits that the surety would be willing to provide to bond the contractor based on factors like the contractor s experience and creditworthiness and the size of the proposed project s the bondability letter also confirms that the surety is registered and licensed in the state where the work will be performed and provides contact information although this letter is not legally binding it is a useful way of demonstrating a contractor s qualifications before they have to spend any money in order to become fully bonded the contractor must provide certain financial information to the surety in order to underwrite the bond this will depend on the amount being bonded smaller projects might require only good credit and a clean license history while larger projects may require financial statements balance sheets and several years of tax returns the contractor will also pay the company to provide surety usually a small percentage of the bond amount example of a performance bondsuppose a hypothetical developer is looking for a contractor to construct a new apartment building because of the size of the project they will require their contractor to be bonded this provides the developer with protection if the contractor fails to meet the requirements of their contract the contractor will engage with a bond provider or surety to provide a performance bond for that project in order to get a performance bond the contractor agrees to pay the surety a small percentage of the total bond amount usually between 1 and 4 in exchange the surety promises to pay up to the agreed bond amount if the contractor fails to deliver on its obligations if the contractor does fail to deliver the developer can file a claim with the surety for damages equal to their losses up to the value of the performance bond the surety then investigates to determine the extent of the losses industries that use performance bondsusually performance bonds are provided in the real estate industry these bonds are heavily used in real property construction and development they protect real property owners and investors from low quality work that may be caused by unfortunate events such as bankruptcy or insolvency of the contractor performance bonds are also useful in other industries the buyer of a commodity may ask a seller to provide a performance bond this protects the buyer from any risk that the seller is unable to deliver the commodity for any kind of reason if the commodity is not delivered the buyer receives compensation for losses and damages caused by the non completion of the transaction | |
how much does a performance bond cost | the cost of a performance bond depends on a variety of factors such as the size of the project the creditworthiness of the contractor their license history and the overall financial strength of the bonding party in general the rate falls between 1 and 4 of the total value of the performance bond | |
what is a payment bond | a payment bond is similar to a performance bond but it is used to guarantee payment to the contractors and subcontractors in the event that the principal becomes insolvent or otherwise unable to pay | |
how long does a performance bond last | the time limit for claiming a performance bond will be spelled out in the bond contract however most performance bonds have a duration of twelve months with some lasting for 36 months in addition your bond may be renewable or non renewable the bottom lineperformance bonds are used to ensure satisfactory completion of contracted work if a contractor is unable to deliver on their obligations a performance bond allows the paying party to cover any additional costs due to their failure to deliver these bonds are usually used for large construction or government projects that might take a long time to complete | |
what is a performance budget | a performance budget is one that reflects both the input of resources and the output of services for each unit of an organization the goal is to identify and score relative performance based on goal attainment for specified outcomes this type of budget is commonly used by government bodies and agencies to show the link between taxpayer funds and the outcome of services provided by federal state or local governments understanding a performance budgetthe decision process for performance budgets focuses on outputs or outcomes of services in other words the allocation of funds and resources is based on specific goals agreed upon by budget committees and agency heads of services for instance in schools teachers may earn bonuses or promotions based on aggregate test scores among their students which is supposed to show a high degree of skill and effectiveness although this may not always be the case performance budgets as the theory goes are designed to motivate employees enhancing their commitment to producing positive results a few examples of outcomes that a performance budget could address include all of these would have numerical targets attached to them a performance budget would be developed accordingly to identify those target numbers and a method of evaluating performance performance budgets often rely on quantifying otherwise qualitative or subjective factors so that they can be measured and accounted for advantages and disadvantages of a performance budgetthe advantages in the public sector are an increase in accountability of the local authorities to the taxpayers communication to the public about priorities and quantifying particular goals taxpayers want to know where and how their money is being spent and to what end similarly nonprofit organizations draw up performance budgets to link inputs and outputs for their missions donors to these organizations also want to know what kind of return society is getting from their donations some disadvantages of a performance budget include one prominent disadvantage of performance budgets is that by assigning target scores or numbers that an organization uses as its benchmark for achievement the numbers can be gamed or become the sole focus of one s task for instance teachers looking to earn a certain score may only focus on the factors that comprise that score and overlook or ignore other factors that may be important to teaching but not for the performance budget | |
what is performance management | performance management is a tool that helps managers monitor and evaluate employees work the goal of performance management is to create an environment where people can perform to the best of their abilities and in alignment with the organization s overall goals performance management is widely used in both the private and public sectors | |
how performance management works | a formal performance management program helps managers and employees see eye to eye about expectations goals and career progress including how an individual s work aligns with the company s overall vision it helps direct the funds allocated as a part of the company s performance budget generally speaking performance management views individuals in the context of the broader workplace system in theory companies seek the absolute performance standard even though that is considered to be unattainable performance management programs use traditional tools such as setting and measuring goals objectives and milestones they also aim to define what effective individual performance looks like and develop processes to measure it however instead of using the traditional paradigm of year end reviews performance management turns every interaction with an employee into an occasion to learn managers can use performance management tools to adjust workflow recommend new courses of action and make other decisions that will help employees achieve their objectives in turn this helps the company reach its goals and perform optimally for example the manager of a sales department can give staff members target revenue volumes that they must reach within a set time period in a performance management system along with the numbers the manager would offer guidance gauged to help the salespeople succeed focusing on continuous accountability creates a healthier more transparent work environment and emphasis on regular meetings can improve overall communications because performance management establishes concrete rules everyone has a clearer understanding of the expectations when expectations are clear the workplace is less stressful employees are not trying to impress a manager by doing some random task and managers aren t worried about how to tell employees that they are not performing well if the system is working they probably know it already percentage of workers who very strongly agreed with the statement my manager includes me in goal setting in a september 2022 gallup survey common steps in performance managementalthough off the shelf performance management software packages exist templates are generally customized for a specific organization s needs typically effective performance management programs include certain universal elements such as benefits of performance managementadvocates of performance management maintain that it not only helps organizations attain their goals but makes work more fulfilling for individual employees with the bottom line benefit of improved worker retention for example workers often feel blindsided by negative annual performance reviews while performance management may also incorporate annual reviews the ongoing feedback that managers provide throughout the year should result in fewer unpleasant surprises as the polling firm gallup which conducts worldwide surveys on workplace issues puts it effective performance management requires managers to think of themselves as coaches not bosses and when managers have timely performance related conversations that reflect this principle manager employee interactions feel encouraging engaging and rewarding in ways that annual reviews do not the benefits can also extend outside the organization with studies showing that performance management often produces greater customer satisfaction | |
what is management by objectives vs performance management | somewhat similar to performance management management by objectives mbo is a corporate leadership model that attempts to align employees goals with those of an organization it is often broken down into five basic steps defining objectives communicating those objectives to employees monitoring employees progress evaluating their performance and rewarding their achievements like performance management mbo encourages in theory at least employee participation in goal setting however mbo is frequently criticized as being too rigid and so focused on goals that employees and managers are driven to meet them no matter how they do so according to an article in the january 2003 harvard business review mbo is an approach to performance appraisal that s gone out of fashion for the most part | |
what is the difference between performance management and performance appraisal | in performance management supervisors provide ongoing feedback to employees performance appraisals on the other hand tend to provide feedback looking back over a certain period often a year companies that practice performance management can include an annual performance review as part of their process so the two aren t mutually exclusive | |
what are smart goals | smart goals are part of a goal setting system and philosophy used by many companies and other organizations as well as by individuals following the smart acronym it advocates creating goals that are specific measurable achievable or attainable relevant and time bound the bottom lineperformance management done properly can have benefits for organizations and their employees alike the key is employee involvement and regular productive feedback | |
what is a periodic interest rate | a periodic interest rate is a rate that can be charged on a loan or realized on an investment over a specific period of time lenders typically quote interest rates on an annual basis but the interest compounds more frequently than annually in most cases the periodic interest rate is the annual interest rate divided by the number of compounding periods a greater number of compounding periods allows interest to be earned on or added to interest a greater number of times | |
how a periodic interest rate works | the number of compounding periods directly affects the periodic interest rate of an investment or a loan an investment s periodic rate is 1 if it has an effective annual return of 12 and it compounds every month its periodic interest rate is 0 00033 if you are compounding the daily periodic rate it would be the equivalent of 0 03 the more frequently an investment compounds the more quickly it grows imagine that two options are available on a 1 000 investment under option one the investor receives an 8 annual interest rate and the interest compounds monthly under option two the investor receives an 8 125 interest rate compounded annually by the end of a 10 year period the 1 000 investment under option one grows to 2 219 64 but under option two it grows to 2 184 04 the more frequent compounding of option one yields a greater return even though the interest rate is higher in option two example of a periodic interest ratethe interest on a mortgage is compounded or applied on a monthly basis if the annual interest rate on that mortgage is 8 the periodic interest rate used to calculate the interest assessed in any single month is 0 08 divided by 12 working out to 0 0067 or 0 67 the remaining principal balance of the mortgage loan would have a 0 67 interest rate applied to it each month types of interest ratesthe annual interest rate typically quoted on loans or investments is the nominal interest rate the periodic rate before compounding has been taken into account the effective interest rate is the actual interest rate after the effects of compounding have been included in the calculation you must know a loan s nominal rate and the number of compounding periods to calculate its effective annual interest rate first divide the nominal rate by the number of compounding periods the result is the periodic rate now add this number to 1 and take the sum by the power of the number of compounding interest rates subtract 1 from the product to get the effective interest rate for example if a mortgage compounds monthly and has a nominal annual interest rate of 6 its periodic rate is 0 5 when you convert the percentage to a decimal and add 1 the sum is 1 005 this number to the 12th power is 1 0617 when you subtract 1 from this number the difference is 0 0617 or 6 17 the effective rate is slightly higher than the nominal rate credit card lenders typically calculate interest based on a daily periodic rate the interest rate is multiplied by the amount the borrower owes at the end of each day this interest is then added to that day s balance and the whole process happens again 24 hours later when what the borrower owes is typically more unless they have made a payment because now their balance includes the previous day s interest these lenders often quote an annual percentage rate apr glossing over this daily periodic rate calculation you can identify your daily periodic rate by dividing the apr by 365 although some lenders determine daily periodic rates by dividing by 360 special considerationsome revolving loans offer a grace period from accumulating interest allowing borrowers to pay off their balances by a certain date within the billing cycle without further interest compounding on their balances the date and duration of your grace period if any should be clearly identified in your contract with the lender | |
what is the permanent income hypothesis | the permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long term average income the level of expected long term income then becomes thought of as the level of permanent income that can be safely spent a worker will save only if their current income is higher than the anticipated level of permanent income in order to guard against future declines in income understanding the permanent income hypothesisthe permanent income hypothesis was formulated by the nobel prize winning economist milton friedman in 1957 the hypothesis implies that changes in consumption behavior are not predictable because they are based on individual expectations this has broad implications concerning economic policy 1under this theory even if economic policies are successful in increasing income in the economy the policies may not kick off a multiplier effect in regards to increased consumer spending rather the theory predicts that there will not be an uptick in consumer spending until workers reform expectations about their future incomes milton believed that people will consume based on an estimate of their future income as opposed to what keynesian economics proposed people will consume based on their in the moment after tax income milton s basis was that individuals prefer to smooth their consumption rather than let it bounce around as a result of short term fluctuations in income spending habits under the permanent income hypothesisif a worker is aware that they are likely to receive an income bonus at the end of a particular pay period it is plausible that the worker s spending in advance of that bonus may change in anticipation of the additional earnings however it is also possible that workers may choose to not increase their spending based solely on a short term windfall they may instead make efforts to increase their savings based on the expected boost in income something similar can be said of individuals who are informed that they are to receive an inheritance their personal expenditures could change to take advantage of the anticipated influx of funds but per this theory they may maintain their current spending levels in order to save the supplemental assets or they may seek to invest those supplemental funds to provide long term growth of their money rather than spend it immediately on disposable products and services liquidity and the permanent income hypothesisthe liquidity of the individual can play a role in future income expectations individuals with no assets may already be in the habit of spending without regard to their income current or future changes over time however through incremental salary raises or the assumption of new long term jobs that bring higher sustained pay can lead to changes in permanent income with their expectations elevated employees may allow their expenditures to scale up in turn | |
what is permanent life insurance | permanent life insurance provides coverage for the full lifetime of the insured person while permanent life is more expensive than term insurance permanent policies combine a death benefit with a savings component that earns interest on a tax deferred basis the two primary types of permanent life insurance are whole life and universal life the cash value of whole life insurance grows at a guaranteed rate universal life insurance also contains savings and a death benefit but it features more flexible premium options and its earnings are based on market interest rates variable life and variable universal life also provide expanded options to invest the cash value in mutual funds and other financial instruments once you ve picked the policy that s right for you remember to thoroughly research the firms you re considering to ensure you ll get the best life insurance available understanding permanent life insurancewhile term life insurance only promises to cover you for a certain period of years permanent life insurance lasts your lifetime hence the name as long as the policy owner pays the premiums1 permanent life insurance premiums cover the cost of the policy s death benefit and allow the policy to build cash value the policy owner can borrow funds against that cash value through a policy loan or withdraw cash outright to help meet needs such medical expenses or a child s college education an insurer charges interest on an outstanding cash value loan if the total unpaid interest on a policy loan plus the outstanding loan balance exceeds the amount of a policy s cash value the insurance policy and all coverage will terminate 2permanent life insurance policies enjoy favorable tax treatment cash value generally grows on a tax deferred basis which means the policyholder pays no taxes on earnings as long as the money stays in the policy some money can also be withdrawn from the policy without taxation generally withdrawals up to the total of premiums paid are not taxed 3 taking cash value out of a permanent policy through a withdrawal or outstanding loan will reduce the future death benefit for heirs many term life insurance policies offer the option to convert the coverage to permanent life insurance before the term expires permanent life insurance vs term life insurancedifferent people have different insurance needs at different periods of their lives both whole life and permanent insurance provide a death benefit as long as premiums are kept current while term life insurance is popular for its lower premiums term coverage typically will expire well before the end of your life 4 you can usually extend term coverage once the initial period ends but your premiums will increase term insurance is often used by younger families to provide coverage until they pay off most of their debts and accumulate enough savings to make a large amount of life insurance unnecessary however other people may decide they d prefer the ongoing coverage and savings opportunities provided by a new permanent policy for this reason many term life policies offer the option to convert the coverage to a permanent policy later often without needing to take medical exams or meet other qualification standards the conversion feature could be appealing for someone with medical issues that could make a new policy prohibitively expensive or those with chronic conditions that might eventually require them to draw ongoing expenses from the savings portion while the premiums for permanent life insurance are much more expensive than those for term coverage people who get permanent policies typically have earned enough money by that stage of their lives to afford the increased costs with the added opportunity for savings they can also use it as a tax favorable investment vehicle to cover the needs of lifelong dependents or for estate planning purposes advantages and disadvantages of permanent life insurancethere are pros and cons to purchasing permanent life insurance if you can afford the higher premiums permanent life insurance allows you to provide a death benefit to your beneficiaries without the limitations of term life insurance a permanent life insurance policy allows you to build savings in an account with tax advantages you can also borrow from or withdraw those funds during the lifetime of the policy5 the downsides to purchasing a permanent life insurance policy are the high costs of premiums the risk of not being able to afford to keep up with payments and that taking out the policy s cash policy value reduces the death benefit | |
what is permanent policy life insurance | permanent life insurance is a life insurance policy that doesn t expire until the death of the policy holder it usually comes with a cash value savings component | |
what are the four types of permanent life insurance | the four types of permanent life insurance policies are universal life whole life variable universal life and variable life | |
what is better term or permanent life insurance | both term and permanent life insurance can help you protect your loved ones financially you should buy the one that offers premiums you can afford permanent life lasts longer and has a cash value component but its premiums are usually much higher than term life insurance can you cash out permanent life insurance yes you can cash out permanent life insurance after it has been in force for several years you can take out a loan against your policy withdraw money from the cash value or surrender the policy if you do the latter you may be forced to pay surrender fees and taxes on your withdrawal | |
how long does permanent life insurance last | if you pay the premiums on your policy and do not let the policy lapse or surrender it a permanent life insurance policy will last your lifetime the bottom linepermanent life insurance pays out a guaranteed benefit upon the insured s death most policies contain a cash value savings component that earns interest and grows tax free while the coverage remains in force you can also withdraw or borrow against the cash value while alive however premiums for permanent life coverage are significantly higher than those for term insurance | |
what is a perpetual bond | a perpetual bond also known as a consol bond or perp is a fixed income security with no maturity date this type of bond is often considered a type of equity rather than debt one major drawback to these types of bonds is that they are not redeemable however the major benefit of them is that they pay a steady stream of interest payments forever understanding perpetual bondsperpetual bonds exist within a small niche of the bond market this is mainly due to the fact that there are very few entities that are safe enough for investors to invest in a bond where the principal will never be repaid some of the notable perpetual bonds in existence are those that were issued by the british treasury for world war i and the south sea bubble of 1720 some in the u s believe the federal government should issue perpetual bonds which may help it avoid the refinancing costs associated with bond issues that have maturity dates 1example of a perpetual bondsince perpetual bond payments are similar to stock dividend payments as they both offer some sort of return for an indefinite period of time it is logical that they would be priced the same way the price of a perpetual bond is therefore the fixed interest payment or coupon amount divided by some constant discount rate which represents the speed at which money loses value over time partly due to inflation the discount rate denominator reduces the real value of the nominally fixed coupon amounts over time eventually making this value equal zero as such perpetual bonds even though they have no maturity date and pay interest forever can be assigned a finite value which in turn represents their price formula for the present value of a perpetual bondpresent value d r | |
where | d periodic coupon payment of the bondr discount rate applied to the bondfor example if a perpetual bond pays 10 000 per year in perpetuity and the discount rate is assumed to be 4 the present value would be present value 10 000 0 04 250 000note that the present value of a perpetual bond is highly sensitive to the discount rate assumed since the payment is known as fact for example using the above example with 3 4 5 and 6 discount rates the present values are present value 3 10 000 0 03 333 333present value 4 10 000 0 04 250 000present value 5 10 000 0 05 200 000present value 6 10 000 0 06 166 667 | |
what is a perpetual inventory system | a perpetual inventory system is a computerized system that continuously records inventory changes in real time thereby reducing or eliminating the need for physical inventory checks relying on data provided by electronic point of sale technology it provides a highly detailed view of changes in inventory and immediate reporting on the amount of inventory in stock perpetual inventory systems differ from periodic inventory systems in which a company must instead depend on regularly scheduled physical counts 1matthew collins investopediaunderstanding perpetual inventory systemsperpetual inventory systems may be preferable to older periodic inventory systems because they allow for immediate tracking of sales and inventory levels for individual items which helps to prevent running out of stock 2 a perpetual inventory does not need to be adjusted manually by the company s accountants except to the extent that it deviates from the physical inventory count due to loss breakage or theft system software provides real time updates to inventory through the use of barcode scanners or other computerized records of product acquisition sales and returns as they occur this information is fed into a continually adjusted perpetual database the system allows for integration with other areas including finance and accounting teams this helps ensure adherence to tax and other regulations employees can use perpetual inventory data to provide more accurate customer service regarding availability of products replacement parts and other physical components because perpetual inventory systems lack the ability to account for loss breakage or theft a periodic physical inventory can still be necessary perpetual vs periodic inventory systemsthe differences between perpetual and periodic inventory systems go beyond how the two systems function although that is the main point of distinction 2perpetual inventory systems track sales constantly and immediately with computerized point of sale technology periodic inventory systems only track sales when a physical count is ordered and require a point in time count large companies or those with complex inventories are well suited to a perpetual system smaller companies with limited inventory can often survive with a periodic system the same applies to margin for error which is lower with a perpetual system although a limited uncomplicated inventory may not suffer much with a periodic system the cost of goods sold cogs is an important accounting metric derived by adding the beginning balance of inventory to the cost of inventory purchases and subtracting the cost of the ending inventory with a perpetual inventory system cogs is updated constantly instead of periodically with the alternative physical inventory overall once a perpetual inventory system is in place it takes less effort than a physical system however the startup costs for a perpetual inventory system are greater pros and cons of perpetual inventory systemsproponents of perpetual inventory systems don t always go out of their way to point out the downsides of these systems the chief of which is the lack of accounting for loss breakage or theft on the other hand detractors don t necessarily note that reported stockouts without corresponding sales can signal theft or loss and trigger a physical inventory check faster than with a periodic system when deciding how to maintain control over physical inventory it s prudent to carefully weigh both the pros and cons of any system under consideration 32 | |
when to use a perpetual inventory system | large companies with a high volume of constantly rotating physical inventory to manage should consider implementing a perpetual inventory system the same applies to businesses with multiple locations companies that don t meet those criteria now but anticipate growth in the future may want to consider such a system as well 2other factors that can affect the need for a perpetual inventory system include | |
how to use a perpetual inventory system | to calculate inventory companies need to set up a system where every piece of inventory is entered into the system and deducted from the system as it s sold this requires the use of point of sale terminals barcode scanners and perpetual inventory software to update estimated inventory with every product purchase and sale 2since a perpetual inventory system estimates stock on hand it does not replace a periodic physical inventory at some point a physical inventory should take place businesses that use a perpetual inventory system typically employ cycle counting or the process of physically counting a portion of inventory to use as a baseline to check the accuracy of the perpetual system the intent is to complete a full physical inventory over time 4inventory management refers to the processes involved in ordering raw materials storing and using them to create products and ultimately selling products to an end user there are four main inventory management methods each of these methods has its pros and cons when it comes to use within a perpetual inventory system the use of a perpetual inventory system makes it particularly easy for a company to use the economic order quantity eoq method to purchase inventory eoq is a formula that managers use to decide when to purchase inventory based on the cost to hold inventory as well as the firm s cost to order inventory | |
when a company sells products in a perpetual inventory system the expense account increases and grows the cost of goods sold cogs cogs represents production costs and expenses during a specific period this includes the materials and labor costs but not distribution or sales expenses the formula for cogs appears below 52 | cogs bi p eibi beginning inventoryp purchases for the periodei ending inventorya perpetual inventory system maintains a continuous tally of transactions making the cogs available at any time by contrast a periodic inventory system calculates the cogs only after conducting a physical inventory the advantage of a perpetual system in providing a rolling estimate of cogs is clear a company knows after each transaction how much it cost to produce products sold at that point by updating these data on a continuous basis and integrating them with other business systems the company has actionable information available on a 24 7 basis as a way to respond to increased costs in a timely manner gross profit is the result of subtracting cogs from revenue recall that cogs includes the cost of labor and materials but not sales or distribution costs the formula for gross profit is gross profit revenue cogsthe ability to estimate cogs continuously also provides a company using a perpetual inventory system the ability to estimate gross profit continuously that s because every transaction is recorded in real time under a perpetual inventory system 25examples of inventory costing systemscompanies can choose among several methods to account for the cost of inventory held for sale but the total inventory cost expensed is the same using any method the difference between the methods is the timing of when the inventory cost is recognized and the cost of inventory sold is posted to the cost of sales expense account the first in first out fifo method assumes that the oldest units are sold first while the last in first out lifo method records the newest units as those sold first businesses can simplify the inventory costing process by using a weighted average cost or the total inventory cost divided by the number of units in inventory | |
what s the difference between a perpetual inventory and periodic inventory system | a perpetual inventory system uses point of sale terminals scanners and software to record all transactions in real time and maintain an estimate of inventory on a continuous basis a periodic inventory system requires counting items at various intervals such as weekly monthly quarterly or annually | |
what does cogs stand for | cogs is an acronym for cost of goods sold it plays an integral role in business accounting by providing a point in time estimate of the cost to produce products sold by a company if the company utilizes a perpetual inventory system cogs is available on a continuous basis with a periodic inventory system cogs is calculated at the end of an inventory period | |
what s the difference between fifo and lifo | fifo first in first out refers to an accounting system that assumes the oldest products are sold first followed by newer ones lifo last in first out assumes the most recent products are sold before older ones the bottom linebusinesses increasingly track inventory using a perpetual inventory system vs the older physical count periodic inventory system perpetual systems are costly to implement but less expensive and time consuming over the long haul despite the advantages of a continuously updated estimate of stockage and the interconnectivity of accounting systems a major drawback of perpetual systems is the inability to track lost damaged or stolen items many companies counter this with periodic partial inventory counts which provide a baseline for the perpetual system and are designed to provide a full physical inventory by the end of the period small and medium sized companies or those with small physical inventories continue to use the periodic inventory system though many are opting for low cost perpetual inventory systems large companies companies with multiple locations and those with large physical inventories have largely converted to perpetual systems since they can absorb the high startup costs and realize savings through the minimal use of labor that comes with a perpetual system | |
what does perpetuity mean in finance | a perpetuity is an investment asset that pays a stated return for an infinite amount of time an annuity with no termination date is an example of a perpetuity sadly perpetuities are extremely rare in modern times however the abstract concept of perpetuity lives on in the financial world and the field of economics in finance perpetuity is defined as a continuous stream of identical cash flows with no end the concept of perpetuity is used in several financial theories such as in the dividend discount model ddm investopedia jiaqi zhouunderstanding perpetuityan annuity is a stream of cash flows a retiree for example might invest a sum of cash in an annuity in return for a monthly stream of income for a set number of years or for an indefinite lifespan a perpetuity is a type of annuity that lasts forever the stream of cash flows does not have an end date in finance a perpetuity calculation is used to determine the present value of a company s cash flows when discounted back at a certain rate the british issued bonds known as consols were an example of a financial instrument with perpetual cash flows the bank of england phased these out in 2015 by purchasing a consol from the british government the bondholder was entitled to receive annual interest payments forever 1beginning in 1751 the british consol was a means of passing wealth down through the generations although it may seem illogical an infinite series of cash flows can have a finite present value because of the cumulative time value of money each payment is worth only a fraction of the previous payment specifically the perpetuity formula determines the amount of cash flows in the terminal year of operation when companies are valued they are valued as going concerns meaning they are assumed to continue forever for this reason the terminal year is a perpetuity and analysts use the perpetuity formula to find its value perpetuity present value formulathe formula to calculate the present value of a perpetuity or security with perpetual cash flows is as follows pv c 1 r 1 c 1 r 2 c 1 r 3 c r where pv present value c cash flow r discount rate begin aligned text pv frac c 1 r 1 frac c 1 r 2 frac c 1 r 3 cdots frac c r textbf where text pv text present value c text cash flow r text discount rate end aligned pv 1 r 1c 1 r 2c 1 r 3c rc where pv present valuec cash flowr discount rate the basic method used to calculate a perpetuity is to divide cash flows by some discount rate the formula used to calculate the terminal value in a stream of cash flows for valuation purposes is a bit more complicated it is the estimate of cash flows in year 10 of the company multiplied by one plus the company s long term growth rate and then divided by the difference between the cost of capital and the growth rate simply put the terminal value is some amount of cash flows divided by some discount rate which is the basic formula for a perpetuity example of perpetuity in valuationfor example if a company is projected to make 100 000 in year 10 and the company s cost of capital is 8 with a long term growth rate of 3 the value of the perpetuity is as follows cash flow year 10 1 g r g 100 000 1 03 0 08 0 03 103 000 0 05 2 06 million begin aligned frac text cash flow text year 10 times 1 g r g frac 100 000 times 1 03 0 08 0 03 frac 103 000 0 05 2 06 text million end aligned r gcash flowyear 10 1 g 0 08 0 03 100 000 1 03 0 05 103 000 2 06 million this means that 100 000 paid into a perpetuity assuming a 3 rate of growth with an 8 cost of capital is worth 2 06 million in 10 years now a person must find the value of that 2 06 million today to do this analysts use another formula referred to as the present value of a perpetuity growing perpetuitiesthe net present value of a perpetuity is not as large as it might seem because the time value of money erodes the value of dollars far into the future due to inflation therefore the cash flows received by a fixed perpetuity many years from now can become negligible in terms of future buying power a growing perpetuity adjusts the amount of perpetual payments each period by a given rate helping to maintain buying power over time the present value of a growing perpetuity will therefore be greater than a fixed or non growing perpetuity the higher the growth rate of future payments per period the greater the present value the formula for a growing perpetuity is nearly identical to the standard formula but subtracts the growth rate g from the discount rate r in the denominator note that the rate of growth in a growing perpetuity remains fixed over its infinite life meaning it may or may not cover inflation since the growth rate remains fixed in this formula if we use it to value future cash flows it is also only a rough estimate businesses do not grow at the same rate each year | |
how does perpetuity work in investing | a perpetuity is a financial instrument that offers a stream of cash flows in perpetuity that is without end unlike other bonds perpetuities do not have a fixed maturity date but continue paying interest indefinitely until 2015 the u k offered a government bond called a consol a contraction for consolidated annuities it was structured as a perpetuity the bonds were discontinued in 2015 1 | |
how is a perpetuity valued | at first glance it may seem as though an instrument that offers an infinite stream of cash flows would be almost infinitely valuable but this is not the case mathematically speaking the value of a perpetuity is finite and its value can be determined by discounting its future cash flows to the present using a specified discount rate this procedure known as discounted cash flow dcf analysis is also widely used to value other types of securities such as stocks bonds and real estate investments | |
what is the difference between a perpetuity and an annuity | a perpetuity and an annuity are similar in that both offer a fixed set of cash flows over time the key difference is that annuities have a predetermined end date known as the maturity date whereas perpetuities are intended to last forever importantly both annuities and perpetuities can be valued using dcf analysis | |
how long does a perpetuity last | forever or presumably until the end of the world as we know it the bottom lineperpetuities are investments that make payments indefinitely with no maturity or expiration date they are essentially never ending annuities perpetuities as financial products are quite rare today but the abstract concept of a perpetuity and the calculation of its present value by dividing the cash flow amount by the discount rate remains a key concept in finance | |
what is a perseroan terbatas pt | perseroan terbatas pt is the type of legal entity that a foreign company foreign government or foreign individual must use to run a revenue generating business in indonesia also known as a foreign investment limited liability company a pt is a business entity that allows foreign investors to conduct commercial activities in indonesia any indonesian company that directly receives foreign investments must take the form of a pt a pt may be classified as an open closed domestic foreign individual or a general public pt understanding a perseroan terbatas pt every country has different legal entity types the american equivalent of a perseroan terbatas pt is a limited liability company llc most pts operate similarly to limited liability companies llcs and offer shares to the public shareholders of a pt are legally liable for a company s debts if it files for bankruptcy however investors are only liable only for the amount of their original investment the articles of association of a pt outline share ownership indonesian law governs the types of businesses that can operate as a pt governance and administration of pts are handled on a regional basis and the rules may vary for each region of the country the license requirements for each business will depend on the type of work in which they will be involved while the united states has business entities that operate similarly to an indonesian pt the specific rules and guidelines for a pt adhere to indonesian law regarding business entities countries often define their business in different terms and with various stipulations although a pt mirrors the limited liability company of the united states there are fundamental differences attributed to the governing laws types of perseroan terbatas pts in indonesiathere are a few basic types of pts an open pt is an llc that offers shares to the public typically this type of llc offers ownership shares available for purchase by most investors thus buying and selling stocks is relatively straightforward a closed pt is an llc that offers only private shares and restricts the sale of those shares to specific individuals or groups this limitation is most common for family owned and operated companies a domestic pt is an llc that physically exists and offers its goods or services in indonesia these types of pts must strictly comply with rules governing businesses in the republic of indonesia an individual pt is an llc with shares issued to and owned by only one person this person typically the owner or director of the company has sole authority within this type of business structure a foreign pt is an llc that is incorporated in and subject to the laws of a foreign country when an external company establishes a pt in indonesia the business is also subject to the laws and regulations of indonesia a general public pt is an llc that has a free share type ownership system any entity may own shares of this type of company the structure is similar to an open pt however shares of this type of company can also be listed on the stock exchange requirements for perseroan terbatas pts the indonesian investment coordinating board bkpm is a non ministerial government agency that acts as a go between for the government and private businesses the bkpm is in charge of implementing policy and coordinating foreign direct investment in accordance with the country s regulatory provisions the bkpm is mandated to help increase quality domestic and foreign direct investment to help drive the indonesian economy and promote job growth 1 below are some of the steps required to establish a pt and the length of time it may take to complete each step special considerationsforeigners interested in starting or investing in an indonesian business will need to navigate the country s complex rules regarding foreign investment while a pt is a legal form for foreigners to engage in business setting up a foreign investment company in indonesia can require a significant amount of time and expertise to comply with government regulations and receive final approval not all sectors are open to foreign investment in indonesia some sectors require partial domestic ownership which means the foreign investor will need to work with a local partner if they want to form a pt in some cases establishing a representative office might be a better option for a foreign investment company looking to do business in indonesia this allows the company to explore business opportunities through local networking and market research after performing such due diligence the company will be better informed before taking the next step of forming a perseroan terbatas | |
what is personal consumption expenditures pce | personal consumption expenditures pce also known as consumer spending is a measure of the spending on goods and services by people of the united states according to the bureau of economic analysis bea a u s government agency pce accounts for about two thirds of domestic spending and is a significant driver of gross domestic product gdp 1an estimated total for pce is compiled by the bea to measure and track changes in spending on consumer goods over time this figure can provide an idea of economic strength and how price changes can affect spending 2personal spending and income statistics are released monthly in the bea personal income and outlays report the report also includes the latest calculation for the personal consumption expenditures price index pcepi which measures price changes and provides a view of inflation 3understanding personal consumption expenditures pce consumer spending is an important factor that drives the u s economy and is a key part of gdp that s why it is considered a leading economic indicator pce sheds light on buying habits and savings levels economists and analysts use pce to make projections about future spending and economic growth it gives companies insight into their business needs concerning products and services and can affect hiring and investing the bea uses consumer spending to calculate its inflation gauge the pce price index which is why measuring and tracking pce is important 3personal consumption expenditures have been reported by the bea since 2012 in both current dollars and chained dollars pce is one of the three parts of the bea s monthly personal income and outlays report the pce price indexin addition to reporting the three measurements above the personal income and outlays report includes the pce price index pcepi figures the pcepi measures the prices consumers pay for goods and services and changes in those prices it is considered a gauge of inflation in the u s economy the pce price index is calculated using pce data it may indicate whether prices are inflating or deflating and how consumer spending behavior changes in response 3the pcepi provides two figures the core pcepi can make an underlying inflation trend more visible that s because food and energy prices can obscure it due to their more frequent volatility compared to other prices the bea uses the current dollar value of pce to calculate the pce price index as mentioned pcepi shows price inflation or deflation that occurs from one period to the next like most price indexes the pcepi must incorporate a deflator the pce deflator and real values to determine the amount of periodic price change 4both the pce price index and the core pce price index which again excludes prices for food and energy show how much prices change from one period to another breakdowns of the pcepi show price inflation deflation by category as well 6in 2012 the pce price index became the primary inflation index used by the federal reserve when making monetary policy decisions the fed prefers the pcepi over the comparable consumer price index cpi because the pcepi is also weighted by data acquired through business surveys which tend to be more reliable than the consumer surveys used by the cpi pcepi also uses a formula that allows for changes in consumer behavior and changes that occur in the short term 8these factors result in a more comprehensive measure of inflation the fed depends on the nuances that the pcepi reveals because even minimal inflation can be considered an indicator of a growing economy other measures of inflation tracked by economists include the producer price index ppi and the gross domestic product price index personal consumption expenditures and the pce price index are two different measurements pce measures consumer spending on goods and services while the pcepi measures the prices of those goods and services the bureau of economic analysis calculates the figures for both 31 | |
how pce is measured | the bea reports the total value of personal consumption expenditures collectively every month like most economic breakdowns pce is split between consumer goods and services durable goods and nondurable goods are components of the consumer goods figure durable goods are items that last longer than three years examples include cars electronics appliances and furniture nondurable goods have a life expectancy of under three years these include products like cosmetics gasoline and clothing services are tasks performed for the benefit of the recipient examples of services are legal advice house cleaning and plumbing specifically the categories represented in pce data include the following bea measures consumer spending for the nation and is broken down by state and the district of columbia while it issues the aforementioned monthly report additional details are provided annually 2according to the bea most pce valued by market prices including sales tax comes from household purchases of new goods and services from private businesses it also includes household purchases of new goods and services from the government pce also consists of spending by nonprofit institutions to provide services to households household purchases of used goods and the purchases of goods and services by u s residents in foreign countries pce also includes spending on behalf of households by third parties such as employer paid health insurance and medical care financed through government programs life insurance expenses and pension plan expenses 10advantages and disadvantages of pcepersonal consumption expenditures data provide a view of how the economy is faring this information is important for economic policy purposes and business decision making | |
when people spend without hesitation it usually means that the economy is doing well when they cut back on spending it points to problems in the overall economic picture | pce estimates aggregate spending for a large number of commodities this can provide a view of spending that accounts for more goods and services actually purchased pce data may reflect measurement errors that occur during collection and in source data provided to the bea it may also reflect classification errors after collection in the personal sector and other sectors comprising the national accounts pce is part of the national income and product accounts constructed by the bea prior pce figures are subject to revision every year that can result in different measurements over extended periods some observers feel that this reflects the inability to value personal consumption expenditures accurately provides a view of the economyreports aggregate spending on a broad range of goods and servicesspending changes can indicate a growing economy or economic difficultiesmay reflect data collection errorsmay reflect data classification errors after collectionfigures are estimates and can be revisedrecent pce readingspersonal income was roughly 23 92 trillion in may 2024 this represents an increase of 0 5 from the previous month disposable personal income remained fairly flat from the previous month at just under 17 00 trillion pce grew 0 2 to just over 19 34 trillion the pce price index decreased by less than 0 1 from the previous month 4 | |
what is the importance of the personal consumption expenditures number | the personal consumption expenditures number shows how americans collectively spend their money tracked from month to month it is an indicator of the economy s health overall it also is a key component of the pce price index which tracks inflation or deflation in consumer prices over time | |
what is the difference between the pce price index and the consumer price index | the cpi is compiled monthly by the bureau of labor statistics based on a survey of urban households it measures the price of a basket of household goods and services that most people buy regularly the pce produced monthly by the bureau of economic analysis also records changes in the prices of a basket of goods from month to month 111 | |
what does the pce data show us | the pce data for may 2024 showed an increase in personal consumption expenditures to just over 19 34 trillion from april 2024 this represents an increase of 0 2 from the previous month the pce price index decreased by less than 0 1 from the previous month 4the bottom linepersonal consumption expenditures or pce allows economists consumers and businesses to see how well the economy is faring from month to month it measures how consumers spend their money and whether they save rather than spend it also shows how people change their buying habits when prices change this provides a window into demand for products and services which can help governments and businesses make decisions | |
what is personal finance | personal finance is a term that covers managing your money as well as saving and investing it encompasses budgeting banking insurance mortgages investments and retirement tax and estate planning the term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities individual goals and desires and a plan to fulfill those needs within your financial constraints also impact how you approach the above items to make the most of your income and savings it s essential to become financially savvy it will help you distinguish between good and bad advice and make intelligent financial decisions the importance of personal financepersonal finance is about meeting your personal financial goals these goals could be anything having enough for short term financial needs planning for retirement or saving for your child s college education it depends on your income spending saving investing and personal protection insurance and estate planning not understanding how to manage finances or be financially disciplined has led americans to accumulate enormous debt in february 2024 the federal reserve bank reported household debt had increased by 3 4 trillion since december 2019 prior to the recession in addition the following balances increased from the third quarter of 2023 to the fourth student loans remained unchanged at about 1 6 trillion 1americans are taking on an ever increasing amount of debt to finance purchases making managing personal finances more critical than ever especially when inflation is eating away at purchasing power and prices are rising areas of personal financethe five areas of personal finance are income saving spending investing and protection income is the starting point of personal finance it is the entire amount of cash inflow that you receive and can allocate to expenses savings investments and protection income is all the money you bring in this includes salaries wages dividends and other sources of cash inflow spending is an outflow of cash and typically where the bulk of income goes spending is whatever an individual uses their income to buy this includes rent mortgage groceries hobbies eating out home furnishings home repairs travel and entertainment being able to manage spending is a critical aspect of personal finance individuals must ensure their spending is less than their income otherwise they won t have enough money to cover their expenses or will fall into debt debt can be devastating financially particularly with the high interest rates credit cards charge savings is the income left over after spending everyone should aim to have savings to cover large expenses or emergencies however this means not using all your income which can be difficult regardless of the difficulty everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending somewhere between three and 12 months of expenses beyond that cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time instead cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow such as investments investing involves purchasing assets usually stocks and bonds to earn a return on the money invested investing aims to increase an individual s wealth beyond the amount they invested investing does come with risks as not all assets appreciate and can incur a loss investing can be difficult for those unfamiliar with it it helps to dedicate some time to gain an understanding through readings and studying if you don t have time you might benefit from hiring a professional to help you invest your money protection refers to the methods people take to protect themselves from unexpected events such as illnesses or accidents and as a means to preserve wealth protection includes life and health insurance and estate and retirement planning personal finance servicesseveral financial planning services fall under one or more of the five areas you re likely to find many businesses that provide these services to clients to help them plan and manage their finances these services include personal finance strategiesthe sooner you start financial planning the better but it s never too late to create financial goals to give yourself and your family financial security and freedom here are the best practices and tips for personal finance the 2022 investopedia financial literacy survey surveyed 4 000 adults and found that most americans are concerned about personal finance basics retirement funding and investing in crypto it s all for nothing if you don t know how much you bring home after taxes and withholding so before deciding anything ensure you know exactly how much take home pay you receive a budget is essential to living within your means and saving enough to meet your long term goals the 50 30 20 budgeting method offers a great framework it breaks down like this it s never been easier to manage money thanks to a growing number of smartphone personal budgeting apps that put day to day finances in the palm of your hand here are just two examples it s important to pay yourself first to ensure money is set aside for unexpected expenses such as medical bills a significant car repair day to day expenses if you get laid off and more the ideal safety net is three to 12 months of living expenses financial experts generally recommend putting away 20 of each paycheck every month once you ve filled up your emergency fund don t stop continue funneling the monthly 20 toward other financial goals such as a retirement fund or a down payment on a home it sounds simple enough don t spend more than you earn to keep debt from getting out of hand but of course most people have to borrow from time to time and sometimes going into debt can be advantageous for example if it leads to acquiring an asset taking out a mortgage to buy a house might be one such case still leasing sometimes can be more economical than buying outright whether renting a property leasing a car or even getting a subscription to computer software on the other hand minimizing repayments to interest only for instance can free up income to invest elsewhere or put into retirement savings while you re young when your nest egg gets the maximum benefit from compounding interest some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in auto pay 45student loans account for 1 59 trillion of consumer debt if you have an outstanding student loan you should prioritize it 1 there are myriad loan repayment plans and payment reduction strategies available if you re stuck with a high interest rate paying off the principal faster can make sense flexible federal repayment programs worth checking out include 6credit cards can be major debt traps but it s unrealistic not to own any in the contemporary world furthermore they have applications beyond buying things they are crucial to establishing your credit rating and a great way to track spending which can be a considerable budgeting aid credit needs to be managed correctly meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum that is keep your account balances below 30 of your total available credit 7given the extraordinary reward and incentives offered these days such as cashback it makes sense to charge as many purchases as possible if you can pay your bills in full avoid maxing out credit cards at all costs and always pay bills on time one of the fastest ways to ruin your credit score is to constantly pay bills late or even worse miss payments using a debit card which takes money directly from your bank account is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest credit cards are the primary vehicle through which your credit score is built and maintained so watching credit spending goes hand in hand with monitoring your credit score if you ever want to obtain a lease mortgage or any other type of financing then you ll need a solid credit report there are a variety of credit scores available but the most popular one is the fico score 8factors that determine your fico score include 9fico scores are calculated from 300 to 850 here s how your credit is rated 10to pay bills set up direct debiting where possible so you never miss a payment and subscribe to reporting agencies that provide regular credit score updates in addition you can detect and address mistakes or fraudulent activity by monitoring your credit report federal law allows you to obtain free credit reports once a year from the big three major credit bureaus equifax experian and transunion 11reports can be obtained directly from each agency or you can sign up at annualcreditreport com a federally authorized site sponsored by the big three some credit card providers such as capital one will provide customers with complimentary regular credit score updates but it may not be your fico score instead capital one s creditwise program offers your vantagescore 12due to the covid 19 pandemic the three major credit bureaus are providing free credit reports weekly the program was extended twice in 2022 and it is now permanent 13to protect the assets in your estate and ensure that your wishes are followed when you die be sure you make a will and depending on your needs possibly set up one or more trusts you also should look into insurance and find ways to reduce your premiums if possible auto home life disability and long term care ltc periodically review your policy to ensure it meets your family s needs through life s major milestones other critical documents include a living will and a healthcare power of attorney while not all of these documents directly affect you all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated retirement may seem like a lifetime away but it arrives much sooner than expected experts suggest that most people will need about 80 of their current salary in retirement 14 the younger you start the more you benefit from what advisors call the magic of compounding interest how small amounts grow over time setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax advantaged plan such as an individual retirement account ira a 401 k or a 403 b while your children are young take the time to teach them about the value of money and how to save invest and spend wisely if your employer offers a 401 k or 403 b plan start paying into it immediately especially if your employer matches your contribution by not doing so you re giving up free money take time to learn the difference between a roth 401 k and a traditional 401 k if your company offers both investing is only one part of planning for retirement other strategies include waiting as long as possible before opting to receive social security benefits which is smart for most people and converting a term life insurance policy to permanent life as you age it s natural for you to accumulate many of the same things your parents did a family home or apartment belongings and health issues insurance can be expensive if you wait too long to get it health care long term care insurance life insurance it all increases in cost the older you get additionally you never know what life will send your way if you re the sole breadwinner for the family or you and your partner both work to make ends meet a lot depends on your ability to work insurance can cover most of the hospital bills as you age leaving your hard earned savings in your family s hands medical expenses are one of the leading reasons for debt 15 if something happens to you life insurance can give those you leave behind a buffer zone to deal with the loss and get back on their feet financially due to an overly complex tax code many people leave hundreds or even thousands of dollars sitting on the table every year by maximizing your tax savings you ll free up money that can be invested in your reduction of past debts enjoyment of the present and plans for the future you should start saving receipts and tracking expenditures for all possible tax deductions and tax credits many office supply stores sell helpful tax organizers that have the main categories already labeled after you re organized you ll want to focus on taking advantage of every tax deduction and credit available as well as deciding between the two when necessary in short a tax deduction reduces the amount of income on which you are taxed whereas a tax credit reduces the amount of tax that you owe this means that a 1 000 tax credit will save you much more than a 1 000 deduction 16budgeting and planning can seem full of deprivations make sure you reward yourself now and then whether it s a vacation a purchase or an occasional night on the town you need to enjoy the fruits of your labor doing so gives you a taste of the financial independence you re working so hard for last but not least don t forget to delegate when needed even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks it doesn t mean you should setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant cpa or a financial planner at least once might be a good way to jump start your planning personal finance skillsthe key to getting your finances on the right track is using skills you likely already have it s also about understanding that the principles that contribute to success in business and your career work just as well in personal money management three key skills are finance prioritization assessing the costs and benefits and restraining your spending personal finance educationpersonal money management isn t one of the most popular topics in educational systems many college degrees require some financial education but it isn t geared toward individuals which means that most of us will need to get our personal finance education from our parents if we re lucky or learn it ourselves fortunately you don t have to spend much money to find out how to manage it better you can learn everything you need to know for free online and in library books almost all media publications regularly dole out personal finance advice too reading personal finance blogs is a great way to start learning about personal finance instead of the general advice you ll get in personal finance articles you ll learn exactly which challenges real people face and how they address them mr money mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices 17 centsai helps you navigate myriad financial decisions via first person accounts 18 million mile secrets and the points guy each teach you how to travel for a fraction of the retail price using credit card rewards these sites often link to other blogs so you ll discover more sites as you read 1920of course we can t help tooting our own horn in this category investopedia offers a wealth of free personal finance education you might start with our special sections on budgeting buying a home and planning for retirement or the thousands of other articles in our personal finance section you may need to visit your library in person to get a library card if you don t already have one but after that you can check out personal finance audiobooks and e books online without leaving home some of the following best sellers may be available from your local library i will teach you to be rich the millionaire next door your money or your life and rich dad poor dad personal finance classics such as personal finance for dummies the total money makeover the little book of common sense investing and think and grow rich are also available as audiobooks if you enjoy the structure of lessons and quizzes try one of these free digital personal finance courses personal finance podcasts are a great way to learn how to manage your money if you re short on free time while you re getting ready in the morning exercising driving to work running errands or preparing for bed you can listen to expert advice on becoming more financially secure in addition to the investopedia express with caleb silver you may find these valuable the most important thing is to find resources that work for your learning style and that you find interesting and engaging if one blog book course or podcast is dull or difficult to understand keep trying until you find something that clicks education shouldn t stop once you learn the basics the economy changes and new financial tools like the budgeting apps mentioned earlier are always being developed find resources you enjoy and trust and keep refining your money skills through retirement and beyond | |
what personal finance classes can t teach you | personal finance education is a great idea for consumers especially people starting out who want to learn investing basics or about credit management however understanding the basic concepts is not a guaranteed path to financial sense human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg these three key character traits can help you stay on track one of the most important tenets of personal finance is systematic saving for example say your net earnings are 60 000 per year and your monthly living expenses housing food transportation and the like amount to 3 200 per month there are choices to make surrounding your remaining 1 800 in monthly salary ideally the first step is to establish an emergency fund or perhaps a tax advantaged health savings account hsa to be eligible for a health savings account your health insurance must be a high deductible health plan hdhp 29establishing an emergency fund takes financial discipline without it giving in to the temptation to spend rather than save can have dire consequences in the event of an emergency you may not have the money to pay the expenses leading you to finance them through debt once you have your emergency stash you ll need to develop investing discipline it s not just for institutional money managers who make their living buying and selling stocks average retail investors tend to do better by setting an investment target and abiding by it rather than buying and selling stocks trying to time the market timing can be crucial for instance imagine you re three years out of college have established your emergency fund and want to reward yourself a jet ski costs 3 000 but you want to start investing also investing in growth stocks can wait another year you say i have plenty of time to launch an investment portfolio however putting off investing for one year can have significant consequences the opportunity cost of buying a personal watercraft can be illustrated through the time value of money the 3 000 used to buy the jet ski would have amounted to nearly 49 000 in 40 years at 7 interest a reasonable average annual return for a growth mutual fund over the long haul thus delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65 doing tomorrow what you could do today also extends to debt payment if you were to put the jet ski on your credit card the 3 000 credit card balance would take 222 months 18 5 years to pay off if you only made minimum payments of 75 each month and don t forget the interest you re paying at an 18 annual percentage rate apr it comes to 3 923 over those months so if you were to plunk down the 3 000 to pay the balance rather than let it compound you d see substantial savings nearly 1 000 personal finance matters are business and business should not be personal a difficult but necessary facet of sound financial decision making involves removing emotions from a transaction making impulsive purchases feels good but can significantly impact long term investment goals so can making unwise loans to family members your cousin fred who has already burned your brother and sister will likely not pay you back either the smart thing to do is decline his requests for help you re trying to make ends meet also the key to prudent personal financial management is to separate feelings from reason however when loved ones are experiencing real trouble it pays to help if you can just try not to take it out of your investments and retirement many people have loved ones who always seem to need financial help it is difficult to refuse to help them if you include planning to assist them in real emergencies using your emergency fund it can make the burden easier breaking personal finance rulesthe personal finance realm may have more guidelines and tips to follow than any other although these rules are good to know everyone has their own circumstances here are some rules prudent people especially young adults are never supposed to break but can break if necessary an ideal budget includes saving a portion of your paycheck every month for retirement usually around 10 to 20 however while being fiscally responsible is important and thinking about your future is crucial the general rule of saving a given amount for retirement may not always be the best choice especially for young people just getting started for one thing many young adults and students need to consider paying for their biggest expenses such as a new car home or postsecondary education taking away 10 to 20 of available funds would be a definite setback in making those purchases additionally saving for retirement doesn t make much sense if you have credit cards or interest bearing loans to pay off the 19 interest rate on your visa card probably would negate the returns you get from your balanced mutual fund retirement portfolio five times over finally saving money to travel and experience new places and cultures can be especially rewarding for a young person who s still unsure about their life path the rule of thumb for young investors is that they should have a long term outlook and stick to a buy and hold philosophy this rule is one of the easier ones to justify breaking adapting to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard earned savings shrink short term investing has its advantages at any age common investing logic suggests that because young investors have such a long investment time horizon they should be investing in higher risk ventures after all they have the rest of their lives to recover from any losses that they may suffer however you don t have to take on undue risk in your short to medium term investments if you don t want to the idea of diversification is an important part of creating a strong investment portfolio this includes both the riskiness of individual stocks and their intended investment horizon at the other end of the age spectrum investors near and at retirement are encouraged to cut back to the safest investments even though these may yield less than inflation to preserve capital taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles but at age 60 or 65 you could have 20 30 or even more years to go some growth investments could still make sense for you frequently asked questions | |
what is personal finance | personal finance is the knowledge instruments and techniques used to manage your finances when you understand the principles and concepts behind personal finance you can manage debt savings living expenses and retirement savings | |
what are the 5 main components of personal finance | the five main components are income spending savings investing and protection | |
what is an example of personal finance | one of the key ideas behind personal finance is not to spend more than you make for instance if you make 50 000 a year but spend 65 000 you ll end up with debt that continues to compound because you ll be spending more than you make to pay for past expenses | |
why is personal finance so important | the concepts behind managing your personal finances can guide you in making intelligent financial decisions in addition the decisions you make throughout your life on what to buy sell hold or own can affect how you live when you can no longer work the bottom linepersonal finance is managing your money to cover expenses and save for the future it is a topic that covers a broad array of areas including managing expenses and debt how to save and invest and how to plan for retirement in addition it can include ways to protect yourself with insurance build wealth and ensure wealth is passed on to the people you want it to pass to understanding how to manage your finances is an important life planning tool that can help set you up for a life without debt you gain control of financial stresses and have a way to manage the expensive surprises that life can throw at you | |
what is a personal financial specialist pfs | a personal financial specialist pfs is a certification for certified public accountants cpas that allows them to expand their expertise and offerings to include financial planning and wealth management the american institute of certified public accountants aicpa established the personal financial specialist pfs credential which is reserved for cpas meaning holding a cpa is a prerequisite there are both educational and professional requirements that must be met before earning a pfs however the benefits of holding a pfs are numerous which include expanded employment opportunities with corporations consulting firms and the ability to manage or own a wealth management practice understanding a personal financial specialist pfs a personal financial specialist pfs certification is exclusively granted to cpas according to the aicpa a pfs certification represents a powerful combination of extensive tax expertise comprehensive knowledge of financial planning 1pfs applicants study estate planning retirement planning investing insurance and other areas of personal financial planning individuals with the pfs designation may work for accounting firms consulting firms or manage their own firm earning the personal financial specialist pfs means that individuals have earned the right to use the pfs designation with their names which can improve job opportunities professional reputation and pay personal financial specialist pfs requirementsthere are four major requirements that are necessary to achieve a personal financial specialist designation including a cpa license education a specified level of experience and passing an examination some of those requirements are outlined below candidates must obtain or hold an unrevoked and valid cpa certification that has been issued by a state the candidate must also be a current regular member of the aicpa there are two pathways that candidates can choose from depending on their level of experience the standard and certificate pathways have the following requirements the experienced pathway has the following requirements a reinstatement pathway is also available and includes agreeing to the reinstatement terms according to the pfs credential handbook regardless of the pathway the education and experience must be in any of the 12 areas that make up the personal financial planning pfp body of knowledge the aicpa offers educational courses for personal financial planning covering the topics within those 12 areas however certain approved courses from an accredited university or college may be accepted as substitutes 2the 12 areas that comprise the pfp body of knowledge for the education and experience requirements are listed below also every year pfs professionals must complete 20 hours of continuing professional education annually they must pay a fee of several hundred dollars to continue using the designation 3a personal financial specialist pfs designation offers cpas the ability to stand out from other financial planners while offering clients an expert who can develop a well rounded financial strategy personal financial specialist pfs examthe exam requirement for the pfs is extensive covering the financial planning process and professional responsibilities with topics such as tax retirement investments insurance and estate planning the pfs exam consists of 160 questions half of which are standalone multiple choice while the remainder includes case studies with accompanying multiple choice questions the pfs experience pathway examination includes a total of 60 questions with one part for each of four case studies those who are on the certificate pathway must pass four 100 minute tests 4the aicpa provides a brief video tutorial that features a mock exam session the exam can be taken at one of the testing centers or online with a laptop or through a proctored exam via webcam candidates are allocated five hours to complete it as well as a 30 minute break experience pathway exams take about 100 minutes exempt from the pfs exam are cpas who have passed the certified financial planner cfp or chartered financial consultant chfc exams they are deemed to have met the exam requirement benefits of a personal financial specialist pfs benefits exist for those who hold a pfs certification and clients looking for a financial professional to help them develop a financial plan for the long term professionals have the ability to display their financial expertise by demonstrating their knowledge of financial planning which can help attract new clients the pfs certificate can enhance a professional s reputation and professional brand thus improving career opportunities with the potential of boosting income an added benefit to the pfs is that candidates have knowledge of financial planning but they have extensive tax and corporate finance expertise as a cpa a cpa who holds a pfs can be particularly beneficial for clients who are looking to develop a financial plan that aligns with their long term goals while also receiving the benefit of tax and accounting services another benefit to clients is that they gain access to a professional who is an expert in elder and estate planning and wealth preservation and retirement income pfs vs cfpalthough the personal financial specialist and certified financial planner cfp have many similarities there are distinct differences between the two designations cpas with a pfs certification have a well rounded knowledge of accounting tax financial statements and wealth management however a cfp is considered a type of financial advisor since it is given out by the certified planner board of standards inc as a result there is a fiduciary responsibility that cfp s must adhere to meaning they must provide financial advice that is in the best interest of their clients cfps must follow a strict code of ethics as outlined by the certified planner board of standard s code of ethics similar to a pfs designation to earn a cfp an individual must have 6 000 hours of professional experience and hold a bachelor s degree from an accredited university 5 also both the cfp and pfs certifications allow candidates to waive some of the requirements if they hold a cfa however the cfp does not require candidates to have a prior certification which contrasts with the pfs prerequisite of holding a cpa certification the benefits and employment opportunities of holding a cfp or pfs are numerous and both certifications offer careers in personal financial planning retirement and tax planning while a cfp allows an individual to offer investment planning a pfs allows an individual to offer financial management at a corporate finance level due to the cpa certification | |
what is a personal financial statement | the term personal financial statement refers to a document or spreadsheet that outlines an individual s financial position at a given point in time the statement typically includes general information about the individual such as name and address along with a breakdown of total assets and liabilities the statement can help individuals track their financial goals and wealth and can be used when they apply for credit understanding the personal financial statementfinancial statements can be prepared for either companies or individuals an individual s financial statement is referred to as a personal financial statement and is a simpler version of corporate statements both are tools that can show the financial health of the subject a personal financial statement shows the individual s net worth their assets minus their liabilities which reflects what that person has in cash if they sell all their assets and pay off all their debts if their liabilities are greater than their assets the financial statement indicates a negative net worth if the individual has more assets than liabilities they end up with a positive net worth keeping an updated personal financial statement allows an individual to track how their financial health improves or deteriorates over time these can be invaluable tools when consumers want to change their financial situation or apply for credit such as a loan or a mortgage knowing where they stand financially allows consumers to avoid unnecessary inquiries on their credit reports and the hassles of declined credit applications the statement allows also credit officers to easily gain perspective into the applicant s financial situation in order to make an informed credit decision in many cases the individual or couple may be asked to provide a personal guarantee for part of the loan or they may be required to put up collateral to secure the loan special considerationsa personal financial statement is broken down into assets and liabilities assets include the value of securities and funds held in checking or savings accounts retirement account balances trading accounts and real estate liabilities include any debts the individual may have including personal loans credit cards student loans unpaid taxes and mortgages 1 debts that are jointly owned are also included married couples may create joint personal financial statements by combining their assets and liabilities income and expenses are also included if the statement is used to attain credit or to show someone s overall financial position this can be tracked on a separate sheet or an addendum called the income statement this includes all forms of income and expenses typically expressed in the form of monthly or yearly amounts the following items are not included in a personal financial statement business liabilities are only included in a personal financial statement if an individual provides the creditor with a personal guarantee keep in mind your credit report and credit history are big considerations when it comes to getting new credit and every lender has different requirements for issuing credit so even if you have a positive net worth more assets than liabilities you may still be refused a loan or credit card if you haven t paid your previous debts on time or have too many inquiries on file 2example of a personal financial statementlet s assume that river wants to track their net worth as they move toward retirement they have been paying off debts saving money investing and are getting closer to owning their home each year they update the statement to see the progress they have made here s how they would break it down they would list all their assets 20 000 for a car 200 000 for their house 300 000 in investments and 50 000 in cash and equivalents they also own some highly collectible stamps and art valued at 20 000 that they can list their total assets are therefore 590 000 as for liabilities river owes 5 000 on the car and 50 000 for their house although river makes all of their purchases with a credit card they pay the balance off each month and never carry a balance river cosigned a loan for their daughter and 10 000 remains on that even though it is not river s loan they are still responsible so it is included in the statement river s liabilities are 65 000 | |
what is a personal guarantee | the term personal guarantee refers to an individual s legal promise to repay credit issued to a business for which they serve as an executive or partner providing a personal guarantee means that if the business becomes unable to repay the debt the individual assumes personal responsibility for the balance personal guarantees provide an extra level of protection to credit issuers who want to make sure they will be repaid | |
how personal guarantees work | personal guarantees are used in credit deals to secure funding for businesses they are used by new and small businesses generally for companies that may not be as established or for those with inadequate credit history to qualify for loans and other credit on their own when a personal guarantee is given the principals of the company pledge their own assets and agree to repay a debt from personal capital in case the company defaults in short the business owner or principal becomes a cosigner on the credit application here s how it works lenders may require business owners or executives to provide a personal guarantee in order to access credit if the company is too new or has a bad credit history the business principal includes their own credit history and profile as part of the credit application which forms the primary basis for underwriting when a personal guarantee is used the applicant includes their social security number ssn for a hard credit inquiry as well as details about the individual s personal income this information is in addition to the company s employer identification number ein and financial statements an executive may also pledge their own personal assets checking accounts savings accounts cars and real estate and agree to repay a debt from personal capital in case the company defaults as part of their personal guarantee not only does this make credit more accessible to businesses but it also mitigates the risk to creditors since they have a legal claim to the individual s personal assets it also improves the terms which will be based on the profile of both the business and the individual in the underwriting process small business owners and executives normally make a substantial initial investment using their own capital that s one of the reasons why they offer personal guarantees to get credit because they have a vested interest in the launch and development of their businesses as such businesses may be required to pay creditors monthly installment payments rather than generating a return for equity investors special considerationsalthough well established businesses with significant commercial credit profiles may be able to obtain credit without a personal guarantee they may still use them in their applications credit with a personal guarantee can be a low cost way for a business to obtain funds but if the business isn t able to generate enough revenue and earnings an individual could suffer significant losses remember if a personal guarantee is used the principal is personally liable if a default occurs it gives creditors a legal right to all of an individual s pledged personal assets the new york times report on former president trump s taxes indicates that he took this route personally guaranteeing loans and other debts totaling 421 million by 2018 1 this provided a benefit as well taking responsibility enables a business owner to use those losses to offset current and future taxes they owe having said this business owners should be especially careful when they apply for credit as terms may require a personal guarantee applicants should look for language in the credit application such as you as an individual and the authorizing officer of the company are agreeing to be jointly and severally liable with the company for all charges to the account many private lenders require personal guarantees before they advance any credit to certain types of businesses what many people may not realize is that the small business administration sba also requires principals to offer personal guarantees in order to get an sba loan anyone with an interest in a business of 20 or more must provide the sba with an unconditional personal guarantee 2 these loans are backed by the sba but are issued by the administration s lending partners the small business administration requires a personal guarantee from anyone with an interest of 20 or more in a company types of personal guaranteesthere are two common types of personal guarantees limited and unlimited limited guarantees allow lenders to collect a certain amount of money or a certain percentage of the outstanding balance from a principal or business owner these guarantees are common when there are multiple principals who can pay a certain portion of the debt for instance if a business defaults on its loan the lender can go after each principal for 25 of the balance unlimited guarantees however require that the principal is liable for the full outstanding balance personal guarantees required by the sba are considered unlimited guarantees so if a business can t fulfill its obligations on a loan with a personal guarantee the lender can go after the principal to recoup the full outstanding balance if there aren t enough liquid assets available through checking and other similar accounts the lender can seize other assets such as real estate or vehicles | |
what is a personal identification number pin | a personal identification number pin is a numerical code used in many electronic financial transactions personal identification numbers are usually issued in association with payment cards and may be required to complete a transaction the purpose of a personal identification number pin is to add additional security to the electronic transaction process understanding a personal identification number pin personal identification numbers provide additional security on an account and are most commonly used with debit cards linked to a person s bank account when a person is issued a debit card they are required to choose a unique personal identification number pin that they will need to enter every time they wish to withdraw money from an atm and oftentimes when they make payments at various merchant stores as pins are like passwords they are also used in many other instances such as home security and mobile phones a pin is basically any numerical method used to verify an individual s identity credit cards will verify identity after a user is prompted to enter their identification number the system uses the luhn algorithm to compute and compare the given number to the valid identity the irs often requires an identify protection pin when filing your electronic or paper tax return this pin is a six digit number and can be obtained via the irs website card security and personal identification numbers pins personal identification numbers pins usually range from four to six digits and are generated by the issuing bank through a coding system that makes each pin unique or are chosen by the account holder themself typically a pin is issued to a cardholder by mail separately from the associated card or punched in at a local branch when opening an account in person | |
when choosing a pin it is recommended to choose one that will be difficult to guess but also easy for the account holder to remember short basic pins are advised against such as using 123 or numbers that would be easy to guess in instances of fraud common information such as an account holder s birthday marriage anniversary or social security number it is crucial that account holders be cautious about sharing or disclosing their personal identification number to prevent unwanted access to their bank accounts | electronic transaction processing and personal identification numbers pins electronic transactions with merchants are slightly more complex than standard atm transactions merchant transactions will involve the merchant the merchant acquiring bank the processing network and the issuing bank therefore the use of a pin number can help make transactions more secure by requiring an additional layer of identification from the buyer pins are commonly required as the final step in a payment giving a merchant the approval to process a card for payment a pin is usually only required by the merchant at the point of sale as opposed to being required for online purchases once approval is given to process a card communication is sent to the merchant acquiring bank which facilitates the settlement of the payment once payment communication is designated to the specified processing network the processing network can then contact the cardholder s issuing bank the issuing bank does additional security checks on the transaction to ensure that it is not fraudulent they also confirm that the funds are available in a cardholder s account to cover the payment the issuing bank takes additional security precautions when receiving transaction communication from a merchant in order to ensure the safety of the transaction once confirmed by the issuing bank communication is sent through the processor to the merchant acquiring bank who notifies the merchant and begins settlement on the transaction some pins may disallow the use of certain features such as duplicated digits sequential digits or re using the same pin from before personal identification numbers pins vs passwordalthough both a pin and a password are critical elements related to security there are some important differences between a pin and password a pin is typically a sequence of digits while a password can be longer and contain a combination of letters numbers and symbols a pin is also usually shorter or usually have a more limited length allowed compared to a password with more characters due to length and characters a password is simply more complex it can usually or require use of both upper case letters lower case letters numbers or symbols it may also require a combination of any of the options above therefore a password is more useful to secure access a device an online account or a network that require stronger security a pin is more suitable for a faster and easier access there are potential technical differences between a pin and a password a pin more often is stored locally on a device which operates with less security on the other hand a password may be stored externally on a secure server a password may also more commonly be encrypted hashed or require multi factor authentication to retrieve therefore a password is simply a more securely protected authorization tool tips for setting a strong personal identification numbers pins though a pin should be easy to remember there are certain pitfalls a user should attempt to avoid avoid using obvious combinations such as 0000 as these are the most common pin numbers and are easy to guess consider using a random combination of numbers that you can remember easily but not someone else it s often advised to not use personal information like your birthdate phone number or social security number as these can also be easily guessed or obtained via personal documents sometimes you may have the option of choosing the own length of your pin if this is the case choose a pin that is longer than four digits a longer pin will make it more difficult for someone to guess or hack although there are ways to leverage technology to brute force guess a pin in addition avoid repeating digits or consecutive numbers for example 1212 or 1234 should be avoided if it s an option mix numbers and letters to make it even more secure however make sure that you can easily remember the combination last consider changing your pin regularly if someone is able to guess your pin you may not know that they have been accessing your account by changing your pin regularly you may be incidentally stopping unknown unknown unauthorized access | |
how do i find my pin number | if you ve forgotten your pin number consider contacting your bank you ll likely have to verify your identity but a customer service representative should be able to help you reset your pin | |
do all debit cards have a pin | yes all debit cards require a pin number however be mindful that not all debit card transactions require the use of a pin number the transaction itself your recent purchasing history or the vendor purchasing from may influence the security checks implemented by the issuing bank |
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