1031 Exchange is a method of deferring capital gains taxes on the sale of real estate held for investment purposes by exchanging proceeds from the sale of such asset, into like-kind property of equal or greater value that is held for investment purposes, as defined in IRC Section 1031.
The 401(k) plan was introduced by law in 1978. The IRS limits the amount an individual can invest into a 401(k). In 2019, the contribution limit was set at $19,000. Withdrawals from a 401(k) account are taxed and are charged with a 10 percent early-withdrawal penalty if drawn upon before a certain retirement age.
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
- Hours Test: at least 50% of hours spent performing services for a QOZB by its employees and independent contractors (and by the employees of independent contractors) are performed within the QOZ, or
- Pay Test: at least 50% of pay allocated to employees and independent contractors are in exchange for services performed in the QOZ, or
- Qualitative Test: the QOZB’s positioning in a QOZ is critical to the generation of at least 50% of the gross income of the trade or business.
An absolute advantage occurs when a company or country is able to produce a good or service more efficiently than competitors. The company is able to use fewer inputs or time to produce the same quality of goods or services as its competitors. This efficiency allows the company to generate more profit per unit of product.
Companies or countries should focus on what they are able to produce efficiently and forego items they can’t produce efficiently. This is a form of specialization. For items that the country can’t produce efficiently, it can import those items from countries that are able to produce such items efficiently.
Absorption is the rate at which rentable space is leased within a market or submarket over a given period of time. Gross absorption measures total square feet
Accounts payable is an accounting term that measures the sum of a firm’s short-term obligations to creditors and/or suppliers. Accounts payable must be paid off in a defined period of time to avoid default and maintain a firm’s credit rating, thus ensuring its access to debt financing in the future.
Accounts receivable (AR) is money owed by customers to a company. Companies extend credit to customers, allowing them to receive a product or service before paying for it. Customers are given credit terms that have a credit limit and a certain number of days that a customer can pay. Terms vary by industry and customer credit worthiness.
Accounts received is a current asset on the balance sheet. It is also part of a company’s working capital. Companies much manage their AR by ensuring efficient collection of payments from customers. Otherwise, customer accounts can get old and uncollectible, causing a write off for bad debts.
Accretive means gradual or incremental growth. But its meaning varies for finance vs. general lexicon. For example, in finance or business, accretive is an increase in the growth of a business due to an acquisition. When company ABC acquires smaller XYZ, ABC’s overall growth may increase. This can be seen in ABC’s earnings per share. This growth is gradual (i.e., years) rather than immediate.
Accretive also refers to growth in zero coupon bonds, which do not pay interest. However, a $1,000 zero coupon bond may be purchased for $500. Over a defined number of years, the bond will grow to $1,000, which is similar to a bond that pays interest.
- Hours Test - if at least 50 percent of services of a business or trade is performed in the QOZ, the QOZB qualifies.
- Pay Test - if at least 50 percent of services are performed in QOZ, calculated by the amounts paid by a QOZB to its employees and independent contractors, the QOZB qualifies.
- Qualitative Test - A qualitative test gauges whether or not the property is responsible and/or critical for generating at least 50 percent of the business’s revenues.
Adjusted basis is the original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions
ADL stands for Activities of Daily Living and is used by insurance companies to determine policy prices. There are six ADLs:
Bathing and cleaning one’s body
Getting dressed by oneself
Mobility/transferring either by walking or using mechanical assistance to get from one place to another
Personal hygiene, including brushing teeth, combing hair, etc
Using the toilet independently
As people age, they require more assistance with daily activities. Eventually, a person may need to be placed in a nursing home. This usually happens when they are unable two perform two or more ADLs without assistance. At age 65 and over, estimates say that half of the people will require a nursing home or some form of care at their own home. Of that group, most long-term care stays will be for under one year. However, one-fifth will stay for more than a year. As the number of people requiring assistance increases, it increases insurance, Medicaid, and Medicare costs.
Determining a person’s ADLs helps insurance companies assess a person’s medical status and the kind of policy that most suits the person. ADLs also help in determining the type of long-term care that may be needed and the appropriate health coverage.
Being able to perform all six ADLs without any assistance means a person can live independently. Once they are not able to perform two out of the six ADLs, physicians or caregivers may determine the person needs long-term care, such as a nursing home. ADLs are important because they allow someone to carry out vital daily tasks without the need for assistance. These tasks include driving, grocery shopping, taking medication, and the use of public transportation, among other needs.
When it comes time to determine the proper long-term care, families often help with these decisions. Options include in-home care, nursing home, or assisted living community. Many choose for in-home care as moving to a different location is a higher impact decision.
|Aggregate demand (AD) is the total demand for all services and finished goods at every price level over a specific time period. Over the long-term, AD is the same as GDP (gross domestic product), as they are calculated the same way. The formula for AD is C + I + G + (X - M), where C = consumer spending, I is capital goods or investment from companies, G is government spending, and X - M is known as a country’s balance of trade (exports minus imports).|
Aggregate supply is the total amount of goods and services that an economy produces during some period at a given price. Price is important because it determines how much companies are willing to produce at that price. The relationship between price and supply (quantity of output) is visually represented by the aggregate supply curve. The period in which aggregate supply is calculated is often one year. This is because changes in supply will lag changes in demand. There are two types of aggregate supply to consider — short-term and long-term. Short-term supply is impacted most by changes in demand, while long-term supply is most impacted by changes in technology and other changes within an industry.
Alternative investment is an investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held
Amortization is paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of
Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.
An angel investor is a high net worth individual who is one of the first investors in a startup. This stage of investing is well before venture capitalists come in and is one of the riskiest stages to invest in. The amount invested by an angel investor is often only a small percentage of their overall net worth.
In exchange for investing, angel investors generally take a sizeable percentage of the company and may set certain conditions on the entrepreneur. Angel investors may sometimes be the only source of capital a startup might receive early on, as banks do not favor risky investments.
The annual percentage yield allows investors to compare investments with different annual percentage rates (APR). It’s a way to do an apples to apples comparison. APY accounts for periodic compounding interest. As interest is added to the account, the next interest payment will be bigger. The longer an investor allows the account to compound interest, the bigger it will be at the end of some predetermined period.
It’s important to point out that APY does not take into account any fees. APR does account for fees. This is another difference between APY and APR.
Antitrust laws prevent companies from taking over an industry sector and thus stifling fair trade within that sector. A single company that dominates a sector without competition is called a monopoly. Generally, monopolies are not good for economies, as they reduce choices and increase prices for consumers.
Antitrust laws also prevent mergers that will result in less choice and competition. One of the most famous antitrust cases is that of Microsoft vs. The United States. Charges of antitrust were brought against Microsoft because of its Internet Explorer web browser, which was installed on Windows PCs by default. The court ruled that Microsoft constituted unlawful monopolization. Microsoft appealed the case and eventually reached a settlement.
After an individual or corporation has its their heard case heard by a trial-level or other lower court, the case can be further appealed or reviewed. That’s where the appellate or appeals court comes in. It is a higher level court at the federal and state levels. There are 13 federal appellate courts and one for each state.
Appellate court does not have a jury. Individuals or corporations with a judgement against them can have the case heard in appellate court. The appellate court will ensure that the law was applied correctly in the original hearing. If the case is overturned, the judgement is dropped, as the appellate court takes precedence over the ruling of the lower court.
Appraisal is an estimate of a property’s fair market value by an authorized person with applicable knowledge and expertise. Appraisals can be used for taxation
Appreciated property is a property that has increased in value over time. This increase can occur for a number of reasons including increased demand or weakening supply,
Arbitrage is a method of risk-free investment in which an investor acquires an asset at a particular price in a certain market and simultaneously sells that asset for a different price in another market. Arbitrage exists as a result of market inefficiency and would not exist if markets were perfectly efficient. As technology has evolved over time, an investor’s ability to generate profits from arbitrage has diminished. Opportunities do still exist when, for example, the price of an asset on the New York Stock Exchange differs at the same moment in time from the price of the asset as it is listed on the London Stock Exchange.
An asset is a resource owned by an individual, corporation or country that controls the item with the expectation that it will produce a benefit or cash flow in the future. Assets are typically reported on a firm’s balance sheet and are bought or created to increase a firm’s value or enhance a firm’s operations.
When a person is charged with a crime, a bail hearing is set. The defendant then has three options leading up to the hearing. 1.) Pay nothing and sit in jail while they wait for the hearing. 2.) Pay the bail in full and do not go to jail while waiting for the hearing. A title to a home can be used in lieu of cash to pay for the bond. 3.) Pay for a bail bond and do not go to jail while waiting for the hearing. The defendant will generally pay 10% of the bail bond. The bail bondsman will also charge fees. The more violent the crime, the higher bail will be set. The U.S. and the Philippines are the only two countries that have bail bonds.
The balance of payments (BOP) for a nation consists of three categories: Current Account, Capital Account, and Finance Account. Transactions between nations create debits and credits in these accounts, depending on which direction transactions are moving (into or out of a country). The current account consists of finished goods. The capital account consists of capital transactions. The finance account records payment flows related to changes in ownership of international financial assets and liabilities such as portfolio investment, direct investment, and reserve assets. The balance of payments should equal zero, which means that the current account = capital account + finance account. Although in practice, that rarely happens. An advantage of the BOP is that it allows countries to identify trends, both negative and positive.
Used in tandem with financial statements such as the income statement and statement of cash flows which illustrate a firm’s performance over a period of time, a balance sheet illustrates the firm’s standing at the beginning and end of said period.
A balanced budget occurs when revenues are equal to or greater than expenses. When a company spends more than it makes, it incurs a net loss. Too many quarters like that and the company can go out of business. A budget is generally considered balanced only after a year of revenue and expense generation. When revenues exceed expenses, a budget surplus occurs. A budget surplus can provide an excess of cash that can then be invested in future projects or stored away for difficult times.
There are two types of banks: commercial banks and investment banks. Commercial banks primarily manage the funds of their customers in checking and/or savings accounts and by issuing loans to individuals and businesses. Investment banks provide services to corporate clients that include underwriting and merger and acquisition activities.
A bank run is created when customers begin withdrawing their money en masse because they believe the bank will fail (i.e., become insolvent). After customers begin withdrawing their money in a panic, it causes more customers to withdraw money. If enough customers withdraw their money, the bank will default. Basically, the bank runs out of money. The FDIC was established in 1933 as a result of bank runs.
Bank runs are not as common in modern times because many customers know that their deposits are insured by the FDIC. This doesn’t mean a bank run can’t occur. Banks don’t keep all of their customer deposits on-site. For security reasons and regulations from the Federal Reserve, only a small percentage of actual deposits are kept in the bank.
Basis, in the context of commercial real estate, is an asset’s basis is the original purchase price or cost of investment property plus any out-of-pocket
A bear market occurs when the stock market falls by 20% from its highs for at least a two month period. As a bear market starts and prices begin tumbling, investors sell into fear, fueling the downturn. The last sustained, large bear market was the Financial Crisis, in which the S&P 500 lost 50% of its value.
Bear markets come in two flavors — cyclical and secular. A cyclical bear market lasts for only a few weeks or even months. A secular bear market lasts for years. During each of the two bear markets, there may be sharp rallies, but they do not last. The market reverts back lower and continues its downward trend.
Beneficiary is any person who is eligible to receive distributions from a trust, will, or life insurance policy.
Blockchain is a type of record-keeping system. Unlike a centralized database, where one entity is the source of record, a blockchain database is distributed. This structure is called a distributed ledger. Within a distributed ledger, the database is pushed to multiple nodes (i.e., machines) within the network. Certain nodes verify each transaction. These verifying nodes must reach a consensus for the transaction to be committed into the ledger and be redistributed. The consensus of transactions is a key element of blockchains. No one authority is able to take control of a blockchain. Blockchains are also the backbone of cryptocurrencies.
Blue chip stocks are considered stable, low-risk investments. They are the largest companies trading in the stock market. The blue chip refers to the blue chips used in poker. They are the highest value chips available. Blue chip stocks pay consistent dividends that increase over time. When the economy is coming out of recession, blue chip stocks are not expected to recover as quickly as small cap stocks but they are also not expected to be as impacted going into recession. Blue chip stocks have been around for years and, in most cases, decades. They include companies such as Coke, IBM, Apple, Microsoft, Google, and Intel.
A board of directors is a governing body within a public company. Some private companies and nonprofit organizations also have a board of directors. The board of directors is a type of checks and balances on major decisions within the company. These decisions include the direction of the company, hiring and firing executives, and acquisitions. It’s important that the board of directors is made up of a diverse group of individuals. If all members are older folks with seniority within the company, they may be biased in their decision-making. It isn’t uncommon for a board of directors to have outside members. Recruiting experienced people from the industry, such as previous CEOs, can add beneficial experience to the board.
Bonds are used by corporations and governments to issue debt. Investors buy these bonds to collect interest that must be paid by the bond issuer. Interest can be variable or fixed. Most bonds have an ending date, which is when the return of principal occurs. Although some bonds are perpetual and have no ending date.
Interest rates are determined by the credit of the bond issuer. Higher credit ratings equal lower interest rates. Bonds are issued to finance the growth of a country or corporation. For corporations that can’t find favorable bank financing, bonds can be a great alternative.
Boot, although not specifically defined (or even mentioned) in IRC Section 1031, is commonly used and refers to the fair market value of cash,
Brand equity is an intelligible asset. It is the amount of trust and credibility that consumers have in a brand. It takes years to build up brand equity. Companies such as Nike, Amazon, and a number of luxury automakers have built up lots of brand equity. When these companies come out with a new product, instead of creating a completely new marketing campaign, they are able to leverage their existing brand equity. This means a more cost-effective marketing campaign can be created. Companies have to be careful to protect their brand equity. What took years to create can easily be destroyed in just a few days with the wrong communication or actions.
In a June 23, 2016 referendum, the U.K. voted to leave the European Union, making it the first EU country to do so. The event became known as Brexit, short for British exit. David Cameron, the then prime minister, resigned the next day. Theresa May, who replaced Cameron, tried three times to negotiate a deal with the EU, but failed on all accounts. The former mayor of London, Boris Johnson, is now prime minister and a Brexit supporter.
As of now, the U.K. remains in the EU, due to multiple extensions. Once the U.K. leaves the EU, and depending on the deal if leaves with, it will no longer be a part of the customs union and single market. Being outside of the EU will lead to increased commerce cost and transit time between the U.K. and EU countries.
Bridge loan is a short-term loan that is used until a person or company secures permanent, longer-term financing or fulfills an existing obligation.
Broker dealer is a person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction.
When a business spends more than it earns, it must use credit or debt to cover the shortfall. When a country spends more than it takes in, it experiences a budget deficit. The country must borrow to make up the shortfall (called a fiscal deficit).
A budget deficit isn’t necessarily a bad thing. Countries that are expanding and expect more revenue in the future as a result will often experience budget deficits. The make up for the deficit, the country will issue bonds. This is similar to an asset backed loan. Of course, loans have interest that must be paid and so do bonds. If a country’s budget deficit gets out of control and it has to continually issue bonds, the country’s credit rating may fall, causing interest payments to increase. This can create spiral where the country is not able to take in enough revenue to meet its ever-increasing interest payments.
A budget surplus occurs when a government is running efficiently. It is generating more revenues than expenses and therefore has money left over. Individuals prefer to call a surplus “savings.” When the economy is doing well, there is less demand for government services since more people are employed.
When a government creates a surplus, whether, at the federal, state, or local level, citizens will often call for taxes to be lowered. Basically, they are saying that the government has a surplus because it charged too much in taxes. A surplus may be put aside as part of a rainy day fund or to pay off debt that was incurred during a budget deficit.
Bull markets are driven by investor optimism and confidence that the price of an asset today will be less than the price of the asset in the future.
There are six stages of a business cycle: expansion, peak, recession, depression, trough, and recovery. The National Bureau of Economic Research (NBER) measures and studies business cycles and defines the start and end dates of business cycles in the United States.
A business model outlines how a business plans to generate a profit. It encompasses the methods for creating revenue, identifies the target market and how to reach them, expenses, type of people the company should hire, and more. The two main components of a business model are pricing and cost. The gap between pricing and cost is profit.
The business model is a roadmap that shows how to put the business together and keep it going. From the business model, various financial projections can be made. This allows startups to attract investors and talent. Without a business model, founders will have a difficult time communicating how their company plans to turn a profit.
Value Proposition And Competitive Advantage
Some other important parts of the business model are the value proposition and competitive advantage. The value proposition is a description of the products or services being offered and why they appeal to the target market. A competitive advantage is what separates the company or its products apart from the competition. Companies with a competitive advantage can create a similar product to that of competitors but at a lower price or create a higher quality product. Either way, the company’s product appeals more to customers than that of competitor products.
Business Models Are Dynamic
Business models are not meant to be static. They must be periodically revised. As the market or technology changes, the business model needs to be updated to reflect shifts or advances, which the company should be able to take advantage of. Otherwise, competitors will seize on changes in the market and outpace the company.
A business plan allows a company to create a written projection of how it will succeed. Because the plan is written out, others involved in the business can understand where the company is going and what is needed to get it there. Additionally, the plan is used for attracting investors, since all investors will want to review a detailed analysis of how the company will become profitable.
The business plan includes several important components — market size, marketing plan, costs, budget, customer profile, competitors, and timeframe to profitability. From the business plan, additional analysis can be performed, making the plan more accurate. Without a business plan, founders will have a difficult time describing their vision to others in detail, attracting investor money, or even getting a loan.
In order to buy on margin, an investor needs to apply for approval from a bank or broker. The degree of buying power an investor has access to is a function of the total dollar amount of purchases the investor can make with cash and securities holdings.
A C-corp is a legal entity separate from its owners and shareholders. For this reason, owners and shareholders are not liable for the C-corp. C-corps create a double taxation situation because the corporation is taxed on its income, and owners/shareholders are taxed on their income at the personal level.
C-corps must hold at least one annual meeting. These annual meetings must be recorded for transparency (for investors). Percentage ownership within the company must also be disclosed. Bylaws must be kept at the company’s location. The corporation must file annual reports and related documents so investors can fully evaluate the performance of the company.
Cap and trade is a term that refers to government regulation programs that cap the emissions of certain chemicals, especially carbon monoxide. Cap and trade is an alternative to a carbon tax. The regulation is meant to be designed in such a way that it doesn’t do adverse damage to the industries being regulated. Part of cap and trade is that it provides companies an incentive to begin switching to cleaner, alternative forms of energy.
Cap and trade involve issuing emissions credits to companies. Those companies that emit dangerous chemicals use up credits. If all of their available credits are used, they are taxed. Those with leftover credits can sell them to other companies. The total number of credits declines over time, pushing companies towards cleaner alternatives.
“Capital” and “money” are commonly interchanged, but the two terms are distinct. Capital is deployed to crate growth and expand a company’s capacity to provide its service or develop its product, while money is a means purchasing and developing a company’s specific source of capital.
Capital budgeting or investment appraisal, as it is sometimes called, is budgeting for large investment projects. These projects include building a new plant, a new product, buying new machinery, or even another company. A capital expenditure (CAPEX) is not an expense. However, CAPEX can be depreciated over several years.
Investments in CAPEX generally take several years before they begin turning a profit. Analysts will determine at what point the investment is expected to generate a profit, and the minimum profit expected by the company, which is called a hurdle rate. When comparing two projects, the discounted cash flow method is used as part of the analysis. Comparing each project’s NPV and internal rate of return, analysts can make a determination about which project the company should decide on.
The capital gains yield of a stock represents the absolute return from time 1 to time 2. It is calculated using the formula: (p2 - p1) / p1, where p1 is the price at time 1 and p2 is the price at time 2. For example, the price of the stock ABC is $100 on day 1. On day 5, it is $105. Its capital gains yield is (105 - 100) / 100 = 0.0105 or a 1.05% gain.
Capital gains yield is often used to find out the return of a stock from the time of purchase to the time of sale. In the above example, the investor would have purchased the stock at $100 and netted a $5 gain in dollar terms, resulting in a 1.05% gain. Capital gains yield doesn’t include stock dividends, which is considered total return.
Capital goods are tools created for a business to use in producing consumer goods. Capital goods have a useful life of over one year and are considered tangible assets. Examples of capital goods include buildings, vehicles, machinery, and equipment.
Because capital goods have a long lifespan, they are depreciated rather than expensed. Depreciation accounts for the loss of the asset’s value each year of its lifetime. Depreciation is taken by determining the capital goods’ lifespan, then taking partial depreciation each year. For example, a capital good with a lifespan of 20 years is depreciated at the rate of 1/20 per year.
Capital markets direct money from investors looking for opportunities to companies seeking funding. Companies can seek two forms of capital — equity or debt. Investors also come in two types — retail and institutional. As well, there are two types of capital markets — primary and secondary. The primary market is where new securities are issued and sold. The secondary market is where existing securities are sold. The most common capital markets are stock exchanges and the bond market. In its most basic form, a capital market is a venue for trading financial instruments.
There are two meanings for capitalization as it relates to accounting and finance. In accounting, capitalization refers to a method by which a firm expenses the costs associated with the acquisition of an asset over the useful life of the asset rather than at the time it is acquired. In finance, capitalization is a measure of a firm’s book value (the sum of its stock, long-term debt, and retained earnings) or its market value (the product of the number of outstanding shares and the stock price).
Carry costs are any expenses the owner must pay on investment property over the course of owning it. These costs usually include utilities, debt service payments, taxes and insurance, among other items.
Cash is legal tender, which is issued by a country’s government. Rather than carrying around goods or something else for trading, cash reduces weight and simplifies transactions. Cash is lightweight and small, which makes transporting it easy. It represents specific values of goods, which makes the exchange of cash for goods straightforward.
Cash is also considered liquid since it can be immediately exchanged for goods or services. On a corporate balance sheet, cash is considered a current asset — meaning, the most liquid asset available to the company. The cash flow statement shows all cash coming in and going out of a company, such as cash used to pay for expenses.
Cash and carry is an arbitrage technique used with a stock or commodity and the associated futures contract. When there is a spread or difference in the stock and futures prices, arbitrage is possible. For example, buying the S&P cash index and shorting the S&P futures contract. The two eventually come back into price alignment, as the cash index rises and the futures drop (or vice versa).
There are risks to this strategy, which are called carry cost. The arbitrageur holds the futures contract until expiration, which also means the storage of the physical asset, such as oil or wheat. This storage of the asset is called carrying the asset. Another carry cost is margin on the futures contract. Non-physical assets such as the S&P 500 do not have to be stored, which means its carry cost is only margin.
Cash reserves, in the context of commercial real estate, is cash and cash equivalents held in short term accounts used to cover things such as
Cash-on-cash return is the ratio of annual before-tax cash flow from an investment to the total amount of cash invested, represented as a percentage.
A central bank regulates the money supply, interest rates, and available credit of a nation or several nations (such as with the European Central Bank). In the United States, the central bank is called the FED. Its chairman is Jerome Powell. The FED is able to control the money supply by buying or selling treasury bonds. It regulates the amount of deposits that commercial banks must have. The FED sets interest rates as well and acts as a lender of last resort. In times of financial distress, the FED engages in activities to ensure liquidity across financial markets. These activities can include involvement in the REPO market, bond market, and even purchasing certain ETFs, as was the case in the 2020 financial crisis.
A certificate of deposit (CD) is a savings certificate issued by a financial institution that has a fixed maturity date and interest rate that restricts the certificate holder’s access to funds from the time of issuance to the specified maturity date. CDs are tools that financial institutions and banks use to generate deposit growth and are typically issued electronically. Financial institutions typically charge a fee if an investor wishes to obtain access to funds prior to the maturity date.
Certificate of Occupancy is a document issued by a local government agency, certifying that a building meets certain requirements and codes that indicate its fitness to house tenants. These requirements differ across building types, as well as cities and states, and are usually required to be met by new developments.
A certified public accountant (CPA) is a designation bestowed upon an individual by the American Institute of Certified Public Accountants (AICPA) when that individual satisfies the educational requirements and passes the CPA exam. In order to be deemed a CPA, an individual must obtain a bachelor’s degree in business administration, finance or accounting, have no fewer than two years of public accounting experience, complete 150 hours of education, and pass a certification examination.
A chamber of commerce is a group of business members that periodically meet to discuss business-related topics. The chamber of commerce often lobbies the local government to form business-favorable regulations and policies. Most cities and states have a chamber of commerce. Although nations and regions within a nation may have a chamber of commerce as well. The chamber of commerce meetings are a great time for local business owners to meet each other and local government members as well.
Chapter 11 bankruptcy is a reorganization of a business’s debts and is not an asset liquidation like a Chapter 7 bankruptcy is. Chapter 11 is the most complex and costly form of bankruptcy. A court decides how a company’s debts will be restructured, although the business or individual has the first chance to propose a reorganization plan. Most companies remain open and operational during Chapter 11.
If the case involves fraud, dishonesty, or gross incompetence, the court will appoint a trustee to run the business. All business decisions must then go through the court.
Charitable remainder unitrust is a “split-interest” structure. It first disperses income to its beneficiaries for a specific period of time. Once this period of time expires, the trust donates the remainder of its assets to charities, which are also beneficiaries of the trust. This structure allows the trustor to save on taxes. A charitable remainder unitrust is a tax-exempt irrevocable trust. An irrevocable trust means it cannot be changed or terminated without the beneficiary’s permission.
Checking accounts typically do not offer high interest rates because of the high level of liquidity it offers to customers. Funds held in a checking account at a chartered banking institution regulated are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,0000 per individual depositor
Closing costs are expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.
Collision insurance is automobile insurance. It covers collisions that are under your control. Collision insurance shouldn’t be confused with comprehensive insurance, which covers acts of God, such as weather-related events or a deer jumping in front of your car. Collision insurance is extra coverage on top of basic insurance coverage.
Collision insurance covers the following incidents: Your car is the only one involved in an accident, collision with another car, collision with an obstacle in the road, and pothole damage. Collision insurance does not cover theft, hail, flood, fire, vandalism, natural disaster, or being struck by an animal.
A commercial bank is where most everyone does their local banking. This is in contrast to an investment bank. Commercial banks offer a range of financial products, including loans, mortgages, checking, savings, CDs, retirement products, credit cards, and more. These banks make their money from lending.
When you open a deposit account such as a saving, checking, or CD, you are basically lending the bank money. As a lender, you expect to be paid interest, which the bank does. Although it is a very small amount. The bank uses your funds as loans to its customers. Because the bank lends at a higher rate than the interest it pays on deposit products, it is able to generate a profit.
Commercialization involves taking a product or service and making it widely available to a broader audience. For businesses, the goal is to create such products for less than they are sold to the public. Product costs include production, distribution, marketing, sales, and customer support.
Commercialization includes three different stages: The ideation stage, the business process stage, and the stakeholder stage. These stages include brainstorming, deciding if there is enough demand for a product at the right price point, and understanding of the company will be able to benefit its stakeholders by selling the product.
Common area maintenance charges are the contribution or fee paid collectively by individual tenants for the maintenance and upkeep of the non-exclusive areas of the premises.
Common stock allows the holder of the stock a percentage share of ownership within a company. Owning shares gives the owner voting power to elect members to the board of directors and vote on other company matters. However, without a significant holding of common stock within a company, the owner’s vote may not have much sway.
Owners of common stock are the last to receive any assets in the event of bankruptcy (liquidation). Debts are first in line, which includes bond and preferred shareholders. If anything is left over, which it usually isn’t, common stock shareholders may receive some compensation. On the positive side, common stock generally outperforms debt instruments such as bonds.
Comparative advantages cannot be explained without understanding opportunity costs, which are measured as the potential benefit an individual misses out on when choosing one course of action over another. On an individual basis, a college degree provides an individual a comparative advantage over not having a college degree, as that credential provides the individual the ability to convince employers that he or she is capable of providing tangible value to a firm.
A competitive advantage is what separates a firm from its competitors in the marketplace and makes it attractive to its customers. There are two types of competitive advantages — comparative and differential.
A comparative advantage is mainly a price difference. While any firm can lower its prices, not all can do so without greatly decreasing profits. Firms that have a comparative advantage are able to produce products more efficiently than their competitors. This results in a lower cost of production, often due to the use of technology. Such firms are able to maintain a higher profit margin than that of their competitors. Because profit margins are higher, these firms have higher returns as well.
A comparative advantage can also be the result of the firm’s location. For example, a firm operating in China is able to take advantage of lower labor costs. A comparative advantage doesn’t mean that a firm creates a better product. Instead, it means a firm creates the same product at a better value (i.e., lower price).
A differential advantage means a firm's products are viewed as higher quality and more unique compared to its competitors. These firms often have a strong brand. They have superior products and can charge premium prices. Apple is a great example of a company that has a differential advantage. It has a well-recognized brand, creates high-quality products, and charges premium prices.
Complementary goods create value when used together but offer little to no value when used alone. An example is hamburger patties and buns. Consumers will often purchase them together. As stand alone products, they don’t offer much value. Additionally, if the price of one complimentary product increases, such as hamburger patties, sales in the other related product (buns) will decrease, along with sales of hamburger patties.
This relationship between the two goods is also referred to as the joint demand nature of the two products. The formal terminology for the relationship is called cross-elasticity. As demand for one of the complementary products increases, so does the demand for the other product and vice versa as demand falls.
There are two types of cross-elasticity for complementary goods — weak and strong. Strong elasticity is as described above, where there is close to a 1-to-1 relationship between the two products. Weak elasticity means that as demand for one product decreases, it doesn’t have as much impact on the other product. For example, if the price of coffee rises and demand falls, it doesn’t affect the demand for creamer, since there are many uses for creamer outside of coffee. Even though coffee and creamer are complementary goods, creamer is a complementary good for many other products.
Complementary goods can also be affected by price changes in competing products. If the price of steak decreases, sales of hamburger patties and buns will both decrease, as they are seen as inferior goods compared to steak.
Complementary goods shouldn’t be confused with substitute goods. Substitute goods are different products or services that satisfy the same consumer need. The iPhone and Samsung phones are different products. If the price for one phone increases, consumers may switch to the other to satisfy their mobile communication needs.
Compound interest is “interest-on-interest”, or the ability of a financial instrument to generate earnings on its earnings.
Condemnation is the seizure of property by a public authority for a public purpose. Condemnation typically occurs when a taxpayer owns property in a place
Conflict theory, as put forth by Karl Marx, says that societies are in constant conflict over competition for limited resources. Marx also believed that the rich and powerful would try to remain that way at the expense of poorer members of society. However, every group/class within a society will work to maximize their own benefits.
As it relates to the financial crisis, banks took on excessive risks because the government turned a blind eye to their activities. They were bailed out by a government that used funds, which it said it previously did not have for social programs, thus benefiting the rich and powerful. The poor received nothing. Marx would say that the financial crisis was inevitable due to conflict theory.
Constructive receipt is direct access to tax-deferred like-kind exchange funds or other property by an exchanger completing a tax-deferred like-kind exchange.
Consumer goods are items purchased by consumers for final consumption. These are goods that have reached the end of the manufacturing process and are not resold. The consumers, rather than another manufacturer, is the final buyer of the good.
Consumer goods are classified as durable (useful for longer than 3 years). These are goods such as refrigerators, ovens, furniture, and cars. Durable goods are considered necessities and purchased regardless of current economic conditions. The other type of consumer good is nondurable (useful for less than 3 years). This also includes pure services (consumed at the same time they are produced). Examples include clothes, food, gasoline, and oil.
The consumer price index (CPI) is a measure of inflation in the U.S. It is based on a basket of goods that are consumed daily by consumers. These goods are compared to their prices from the previous year. Prices of goods in the basket are recorded and weighted by each good’s importance. These prices are then compared to the goods’ average prices from a base year. This comparison results in a percentage increase or decrease, which is the amount that the CPI has gone up or down. A large increase in a short period signifies inflation while a large drop signifies deflation. CPI is also used for adjustments to pensions, Medicare, and the cost of living.
A controller’s position is just under the CFO of a company. The controller is involved in daily accounting, such as preparing reports, budgeting, hiring/firing people in the accounting department, and ensuring compliance. The CFO is part of the executive team, overseas financial strategy, and is often speaking on earnings calls (if the company is public).
In a smaller company, the controller and CFO may be the same position. The controller ultimately handles putting together the financial information that the CFO and other top management use for company strategy.
Core competencies allow an individual or business to stand out from the crowd. Some might call this the company’s secret ingredient or edge. Developing core competencies can take time. Sometimes, through years of trying different things, a company discovers what it is best at. For example, it is able to produce a product at a higher quality and more efficiently than its competitors. Its operational efficiency is a core competency. Core competencies are made up of several components, including people, physical assets, patents, brand equity, and capital.
Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent
A corporate bond is a debt security issued by a company. Investors buy corporate bonds for the stability and consistency of interest payments. Basically, investors are lending the company money for a certain time period. Once a bond expires or reaches maturity, payments cease, and the investor’s capital is returned, which means the loan has been paid back. Interest payments are pre-determined and rates can be fixed or variable. A corporate bond’s interest rate is determined by the company’s creditworthiness. Companies with good credit (i.e., AAA) pay less interest because of the bond’s lower interest rate. Whereas those companies with poor credit (i.e., junk status) pay a high interest rate because they are considered risky.
Corporate culture guides how employees interact and behave with each other and customers. Corporate culture is implied rather than handed out in a pamphlet to new hires. Employees learn the culture by watching other employees. Some aspects of the culture may be explicit such as dress code. When talking to potential new hires, management may express some of the culture such as the company is laid back and people dress in everyday clothes. An aligned culture helps guide teams and is often more successful than a company in disarray, where employees act however they want. Such disarray breaks down communication, leading inefficiencies across the company.
Corporate social responsibility (CSR) is a business model that helps companies be good citizens. Just like individuals want to keep their neighborhood clean, safe, and be good neighbors, CSR applies the same principles to corporations. A company that is dumping waste into rivers or billowing smoke into the atmosphere is not practicing CSR. Companies that take measures to keep the environment clean, ensure women have equal pay, and participates in local community fundraisers are practicing CSR.
CSR is generally a practice of large organizations. For smaller firms, CSR is often too costly. Also, larger corporations have more impact on the environment, society, and their community. CSR is a method for balancing that impact.
A cosigner is a term used to identify an additional source of repayment on a loan. A cosigner can aid a borrower by increasing the amount of principal for which he or she is eligible. A borrower may need a cosigner if he or she has a low income or minimal credit history.
CPM stands for cost per thousand and is a metric used in webpage advertising. In an effort to attract customers, companies will pay for ad space on popular websites that are related to the product they are selling. Advertising companies charge per 1,000 impressions or displays of an ad. CPM-based advertising is used for brand awareness or to advertise specific messages. As an example, an ad company that charges $2 per CPM will earn $200 per client from 100,000 ad impressions.
CPM is related to CTR, which stands for click-through rate. CTR tracks the number of clicks per 1,000 ad impressions. Ad companies will often charge extra based on the number of CTRs. CTR doesn’t necessarily mean success for a client. A customer may not purchase anything after clicking on an ad while another customer may see an ad and decide to purchase days later by phone or by walking into the store.
They say first impressions are everything. This is especially true when applying for a job. A cover letter is your chance to make a great first impression. The cover letter is a summary of you and includes parts of your resume. It’s meant as a conversational piece to show off your best attributes and why you’re the best candidate.
Credit bureaus collect and analyze information related to a consumer's creditworthiness, which includes loans, open/closed accounts, past due payments, work history, public records, and more. There are three main credit bureaus in the United States — Equifax, Experian, and TransUnion, which are all private companies. While these agencies are not government-owned, they are regulated by The Fair Credit Reporting Act, which was passed in 1970. The Act ensures that consumers have accurate credit report information and are able to access their credit reports.
Lenders utilize the information from credit bureaus to make decisions about extending credit to consumers. Their decisions are often coupled with FICO scores. The better an individual’s credit and FICO score, the more likely they are to receive new credit and lower interest rates.
Consumers will have limits on their lines of credit based on their credit score and annual salaries and wages. Credit cards feature higher annual percentage rates (APRs) than other lines of credit because of the lack of collateral associated with the line of credit. Whereas a financial institution may repossess a delinquent borrower’s home or vehicle if repayment stops, a financial institution will have a harder time obtaining recourse on the unsecured personal line of credit.
A credit history is a record of a person’s payments to creditors. This record is called a credit report. A credit report contains the credit profile of a person. This profile includes the number of open and closed accounts, how long accounts have been open, how much is owed on each account, delinquent payment history, and inquiries for new credit. Additionally, bankruptcies, judgments, and collections are included in a credit report.
A FICO score is also an important component of a person’s credit. It sums up someone’s creditworthiness in one score. The higher a person’s FICO or credit score, the more access to credit they will have, and the lower their loan interest rates will be. Credit scores are dynamic and can be improved.
A credit limit is the maximum amount of credit that a financial institution extends to an individual or business. Credit might come in the form of a credit card or line of credit. The amount of credit extended depends on an individual’s creditworthiness. Creditworthiness is a factor of credit history and debt to income ratio, among many other things.
For people with no credit history or those who have poor credit, they can have difficulty when trying to get new credit. Also, interest will generally be higher for such people until they establish or improve their credit. Those with great payment histories, good income, and a low debt to income ratios receive the most credit along with favorable interest rates.
A credit report provides a breakdown of an individual’s credit history and is a measure of that individual’s creditworthiness in the future. Credit bureaus compile credit reports by compiling financial information about an individual’s previous history of repayment and current levels of debt, among other factors. A credit report is a tool that lenders use to assess the risks associated with issuing debt to an individual.
FICO is the most commonly accepted method of credit score. A credit score is a key component of a lender’s decision to extend a line of credit to an individual. Individuals with credit scores below 640 are considered subprime borrowers, while borrowers with credit scores above 700 are considered creditworthy.
Credit tenant is a tenant with the size and financial strength worthy enough of being rated as investment grade by one of the three major credit agencies: Fitch, Moody’s,
Income generated from the activities conducted by a credit union are used to fund projects and services that will benefit the interests of the credit union’s members.
Crude oil, which is a fossil fuel, is a natural resource found within the Earth. It is composed of hydrocarbon deposits and other organic materials. Crude oil must be drilled from the Earth and refined and processed to create petroleum products such as gasoline, diesel, kerosene, and asphalt. Drilling, refinement/processing, and the creation of particular products are what the crude oil industry is built around.
Crude oil isn’t being created as it is a nonrenewable resource. Once it is gone, there will be no more. This means crude oil is a limited resource. It is getting increasingly difficult for the industry to find new deposits of crude oil and bring them to the surface.
Cyclical unemployment is driven by the business/economic cycle. When an economy goes into recession, businesses lay off employees, increasing unemployment. During expansionary periods, businesses hire people to meet demand, decreasing the unemployment level. As an example, a resort experiences high demand when people are employed, since they have discretionary income. But once the economy begins softening and people start getting laid off, consumers save and avoid unnecessary expenses, such as spending at resorts. This decreases demand at the resort, which cuts its expenses by laying off people, driving up unemployment in the process. Other factors that affect employment are seasonal, structural, frictional, and institutional.
The de minimis tax rule is a calculation on discount bonds to determine if profits are taxed as capital gains or ordinary income. The bond must meet a certain price threshold for the rule to be applied. If the discount is less than a quarter-point of the par value from the time of purchase until the maturity of the bond, it is too small to be a market discount for tax purposes. De minimis is a Latin term that means "about minimal things." The de minimis tax rule is generally applicable during an environment of rising interest rates, which causes bond prices to fall, thus creating a discount to par value.
A debenture is an unsecured debt issued by a company or government to raise capital. Because there is no collateral backing the debt, the debentures can be riskier than secured debt. Debentures are valued based on the creditworthiness of the issuer. Debentures, just like bonds, pay interest at set intervals and have a maturity date. The maturity date is often more than 10 years. Some debentures, called convertible debentures, can be converted into equity after a certain period of time. For the flexibility of converting debt to equity, convertible debentures pay a lower interest rate than non-convertible debentures.
Debt consolidation takes existing debts and groups them into one loan. A new loan must be obtained in order to consolidate the existing debts. Debt consolidation only works if the new loan’s interest rate is lower than the average interest rate of the older loans. Because less of each payment is going toward interest, the consolidated loan can be paid off quicker. However, debt consolidation only works if the borrower does not spend the extra money on more consumer goods, thus increasing their overall debt and effectively, nullifying the benefits of debt consolidation.
In the context of commercial real estate, a measure of the cash flow available to pay current debt obligations. It is calculated as the annual
Deed in lieu of foreclosure is a deed instrument in which the mortgagor (borrower) conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid
A deed of trust, like a mortgage, is a security instrument used to finance real estate. A deed of trust transfers legal title in real property to a trustee,
A deferment is a period in which the borrower does not have to make interest or principal payments on a loan. There are no penalties for these missed payments. Deferments are generally agreed to upfront and written into the loan contract. Interest still accrues on the loan during the deferment. Student loans often have a deferment period while the student is in school and for a few months after graduation. Once the deferment period ends, the borrower will begin making regular payments. The borrower does not have to make any lump sum payments as a result of the deferment. Bond issuers can also receive deferments, which allow them to call the bond before maturity.
Deficit spending is a term that describes the conditions under which a government’s expenditures exceed its revenues in a particular fiscal period. Deficit spending increases a government’s debt balance, and is typically financed by the issuance of government bonds. Many economists believe deficit spending to be a fiscal policy tool that can stimulate economic growth.
Experts believe deflation can be caused by a number of factors, but the two predominant causes of deflation are a decline in aggregate demand and increased productivity. Declining aggregate demand will drive the price for goods and services lower as suppliers seek to offer their goods or services at a price that will incentivize consumers to buy. Increasing productivity can also cause deflation. Companies that become more efficient by minimizing production costs have the option to pass on savings to consumers with lower prices than competitors who may not yet have been able to drive the cost of production down.
There are two types of demand: elastic and inelastic. A good or service with elastic demand experiences a sharp decrease in quantity demanded when the price of that good rises. A good or service with inelastic demand does not experience a sharp decrease in quantity demanded when the price of that good rises. Examples of elastic goods are toys or candy, while water and medicine are examples of inelastic goods.
The demand curve is plotted on a graph with the y-axis representing price and the x-axis representing quantity. The curve goes from the top left to the bottom right. The demand curve does not move when only price and quantity are changing. For example, when prices rise, quantity drops, resulting in less demand. Additionally, the demand curve remains static. As prices decrease, quantity increases, resulting in more demand. The demand curve also remains static in this case.
Factors that can move the demand curve include changes in wages, an increase in the population, or a change in consumer preferences. If wages drop, consumers cannot purchase as much. In this case, the demand curve shifts to the left. The same happens if consumer preferences change, and there is less demand for a specific product. The curve will shift right with a population increase or an increase in wages.
A demand schedule allows for efficient price discovery of a product or service. It plots a curve with the Y-axis representing price and the X-axis representing quantity. A table can also be used to display this data.
To understand how this works, let’s say ABC sells widgetX for $5 and widgetY for $6.50. The company is currently generating a profit. With strong demand, ABC decides to increase its prices from $5 to $7 and $6.50 to $10. It finds that customers buy far fewer products at those prices, which decreases the company’s profits. Prices need to come down, so ABC changes them from $7 to $6 and $10 to $8. With the adjusted prices, demand comes back, and so do profits. At this point, supply and demand are equal. This is called the equilibrium price. Now ABC has data that represents what happens at different price points.
Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset
Descriptive statistics are used to describe a data set, whether that be the full data set or a sample. There are two categories of descriptive statistics — measures of central tendency and measures of variability or spread. Measures of central tendency look at the center of a data set while measures of variability look at how the data is dispersed.
Measures of central tendency include mean, median, and mode, which measures the most common patterns within the data. Measures of variability include standard deviation, variance, range, quartiles, absolute deviation, the minimum and maximum variables, and the kurtosis and skewness. Measures of variability help in determining the shape of the distribution.
Direct marketing consists of advertising directly to the individual. Rather than going through traditional, broad marketing channels such as TV, the Internet, or radio, direct marketers send ads to consumers using mail, email, or texts. The ad message is often customized for the consumer, including mentioning them by name. Direct marketers are able to do this by purchasing a list of potential customers or doing lots of research to find customers. To entice the consumer, direct marketers may include a discount coupon. The ad message will also contain some call to action in an attempt to close the sale. Direct marketers are able to gauge the effectiveness of campaigns since they know who each mailer was sent to and if there was a response or not.
Direct taxes are often income taxes, which are paid annually. Direct taxes are paid by both businesses and individuals. Payments go directly to a government entity, such as the IRS, Treasury, state agency, or local municipality.
To understand direct taxes, let’s look at their mirror opposites - indirect taxes. An indirect tax is paid by consumers on goods and services. For example, taxes are paid on groceries but instead of paying a government entity, the consumer pays those taxes to the grocery store. The grocery store must then submit those taxes to the proper government entity. Additionally, a grocery store tax is a flat tax, whereas income taxes are a progressive tax.
Disability insurance provides income to workers who become disabled and are not able to perform their work duties. The insurance is often a percentage of a worker’s income rather than the full amount. Some companies may offer disability insurance to their employees at a significant discount. Disability insurance can also be purchased by individuals, usually at a higher cost.
There are two types of disability insurance — short-term and long-term. Short-term insurance is for coverage between three to six months. Long-term insurance is for coverage greater than six months. The exact coverage period and cost will vary by the insurance company.
Disposable income is the amount of personal income an individual has after taxes. Economists often use disposable income to figure out consumer spending and saving rates. For example, someone with a $100,000 income in the 24% tax bracket has disposable income of $100,000 - $24,000 = $76,000.
Disposable income is often confused with discretionary income. Discretionary income is calculated based on disposable income. Discretionary income is net of living expenses. Using the above example, $76,000 minus $25,000 in living expenses leaves $51,000 in discretionary income. The government uses a slightly different formula to calculate disposable income for wage garnishment purposes. It subtracts health insurance premiums and involuntary retirement plan contributions from gross income.
A dividend represents the distribution of a reward, usually in the form of cash, to a firm’s shareholders paid in exchange for the shareholder’s investment in the company’s equity. A dividend is managed by a company’s board of directors and typically paid from a company’s net profits regularly on a monthly, quarterly or annual basis.
The Dow Jones Industrial Average (DJIA) is a stock index composed of the 30 largest blue chip companies that trade on the NYSE and NASDAQ exchanges. The DOW, as it is sometimes referred to, is the second oldest stock index, behind the Dow Jones Transportation Average. It was created in 1896 by Charles Dow and his partner Charles Schwab. It is meant to represent the broader stock market. When market commentators say the market is up, they are generally referring to the DOW.
If an investor wants to invest in the DOW, he can buy shares of ETFs or mutual funds that track the index. Investors can also buy individual stocks within the DOW, such as Walt Disney Company, Exxon Mobil Corporation, and Microsoft Corporation.
Down payment is a payment used in the context of purchasing an expensive good or service, whereby the payment is the initial upfront portion of the total amount due
Dumping occurs when an exporting nation lowers the price of its product below that of competitors in the importing nation. The goal of dumping is for the exporting nation to gain a competitive foothold in the importing nation. Because the importing nation’s customers can buy the imported product cheaper than other domestic products, the exporting nation creates a competitive advantage.
Dumping is legal under the World Trade Organization unless the importing nation can show that the lower-priced product is hurting domestic producers. Dumping is a type of price discrimination, which is seller (i.e., exporting nation) driven.
There are generally two methods of calculating a bond or debt instrument’s duration. The first method of duration calculation is called Macaulay duration, which accounts for the present value of future bond payments and value at maturity. It is the standard by which markets calculate bond pricing. The second method of duration calculation allows an investor to know how much a bond’s price will fluctuate if the yield to maturity rises or falls by one percent.
The early majority is the third and largest group of a population to adopt new-to-market goods, such as new technologies. This group makes up about 34% of the population. After watching the first two groups, "innovators" and "early adopters", use the new product, the cautious early majority jumps in. They need time to get used to a new product before making the commitment to purchase it.
The early majority is a less affluent and technologically savvy group than "innovators" and "early adopters". While they are not the first to adopt something new, they are ahead of the average person.
Earnest money is a payment made to a seller indicating a buyer’s willingness to enter into an arrangement. Typically, buyers provide earnest money to acknowledge that they are serious about a potential purchase, or that their intent to transact is “in good faith.” For the seller, earnest gives assurance that the buyer won’t backout of negotiations without valid cause. Earnest money does not obligate a buyer to transact, however, as issues with the property may be found later while being appraised or inspected.
Easement is a non-possessory right that allows the holder to occupy or use real property that he or she may not actually own. Easement rights are limited in nature, and are restricted to whatever is “convenient or necessary” to satisfy the purposes of the easement. There are two main types of easements that are common in real property: easements appurtenant and easements in gross.
Economic efficiency is an economic state where all resources have been efficiently allocated to all individuals or entities. In other words, goods have been produced at the lowest cost and delivered in the most efficient manner. Waste and inefficiencies have been eliminated.
Economic efficiency is a zero-sum game. Each resource has a person it can be allocated to. If we assume a 1-1 relation between goods and consumers, taking one good away from someone and giving it to someone else results in a loss for one person and gain for the other (zero goods vs. two goods). However, the net benefit across all goods and consumers is zero.
Economic equilibrium occurs when supply and demand in a market are equal. In other words, the amount of supply is equal to the amount of demand, creating a fair price for products within that market. Equilibrium can become unequal if a business begins running low on products. In this case, supply decreases while demand remains constant. Unless the business raises its prices, supply will continue to decrease, and the business will run out of products to sell, which is ultimately a revenue loss.
When there is too much supply to absorb demand, sales will slow down, inventory will become obsolete, and the business will once again begin losing revenue. To remedy the situation, prices can be lowered, creating more demand, and eventually bringing supply and demand back into equilibrium.
Economic growth is a term used to describe an increase in the production of economic goods and services over time. It is measured by an increase in the market value of goods and services produced as a result of changes in the productive capacity of capital goods, labor force, technology, and human capital.
Economic profit divides profit into two categories: accounting and economic. Accounting profit is a financial profit. Taking the revenue minus explicit cost, you get the accounting profit. Explicit costs are raw materials and labor. Economic cost is the opportunity cost of going with one decision over others. Economic cost looks at what the company had to forego by choosing the path it did.
As an example, a person decides to invest $150,000 in starting a company. It earns $200,000 in its first year. The accounting profit is $50,000. On the other hand, the same person could have got a job as an employee making $110,000. $110,000-$50,000 = $60,000, resulting in a loss of $10,000 ($50,000-$60,000 = -$10,000). The lost $10,000 is the economic profit.
An economic trough occurs after an expansion. Troughs are a regular part of the business cycle. As an economy expands and its GDP grows, it will eventually reach a peak. The economy will then begin to contract as it slides down the backside of the peak and goes into recession. From there, the economy will hit a trough — its lowest point in the cycle. In a trough, the stock market may hit bottom, unemployment is highest, credit is difficult to obtain, and business sales and earnings are at their worst. As the economy pulls out of the trough, expansion begins again.
Economies of scale are competitive cost advantages that firms enjoy when they achieve efficiency in production. The higher the production and the larger the business, the wider the fixed and variable costs can be spread.
In 1952, Nobel Laureate Harry Markowitz created the efficient frontier. It represents a set of optimal portfolios with the highest expected return for a given level of risk. These optimal portfolios are also well-diversified.
Elasticity is a concept used to measure the sensitivity of one variable to change in another variable. Typically used to gauge consumer demand for a good or service, elasticity can be measured by the change in aggregate quantity demanded following a change in price or quality.
Encumbrance is any limitation on the ownership of real property. Similar to a lien, an encumbrance can restrict both the free use and the transferability of the property until removed. Encumbrances include leases and mortgages, but are not always financially related. Encumbrances are non-possessory, holding no interest in the title of real property.
Enterprise resource planning allow firms to integrate all information onto a single platform and promote the sharing of information across various departments. ERP is particularly valuable for corporations that operate across diverse geographies across a country or the globe.
An entrepreneur is someone who creates a company based on an idea. For the entrepreneur to succeed, the company must succeed. Meaning, it must become profitable. Entrepreneurs face many challenges in their endeavor, which include finding startup funds, identifying and selling to a viable customer base, weathering downturns, and competition.
If the business succeeds, jobs will be created and there will be a net increase to the local economy. Depending on how large the business becomes, the contribution to overall GDP can be significant. Entrepreneurship is high-risk but can also be high-reward if the entrepreneur succeeds.
The Environmental Protection Agency (EPA) is a government agency whose mission is to protect human and environmental health. It creates laws and regulations to protect the health of individuals and the environment. When any of its laws are violated, the EPA has the power to impose fines and sanctions.
The EPA is involved in a number of environmentally friendly programs. Some of these include — 1.) The prevention, control, and response to oil spills 2.) Controlling air pollution and forecasting air pollution levels 3.) Encouraging the manufacturing of more fuel-efficient vehicles.
Equity is the value of an asset less the value of all liabilities on that asset. For example, if an investor owned a property with a market value of
Equity Interests are ownership interest in a business entity, from the concept of equity as ownership.
Equity investments are one or more shares in the ownership of a business or corporation that are purchased by investors. In contrast to debt investments, equity investments
An ERP system is a large software system used within enterprises. ERP stands for enterprise resource planning. An ERP allows systems within different units of a company to talk to each other. Rather than having isolated systems within each department, an ERP adds a central store of record, allowing the various company units to pass information to each other. For example, accounting may gather information in real-time from sales, marketing, and procurement, allowing it to generate various reports and forecasts for upper management.
ERP systems can be costly to install and maintain. Often expensive consultants are used for these tasks, as it takes a specialized skill set. These costs can put ERPs out of range for smaller businesses.
Escrow funds are capital held by a neutral entity in an account for the benefit of the parties of a financial arrangement whereby the funds are distributed only after certain
ESports are to gamers what a live football game is to football fans. eSports are not physical games. Instead, they are watched on computers, smartphones, and television screens. For many eSports fans, instead of watching in isolation, they gather at large events and watch together, just like a regular sporting event. Often those playing the games are there as well to add a little more action, provide in-person interviews, feedback, and meet with fans. For eSports fans, these events have the same intensity as a live sporting event.
Exchange period, under IRC Section 1031, is when an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
An exchange rate is a metric that quantifies the value of a country’s currency as it relates to the value of another country’s currency. Most exchange rates are considered floating rates, meaning that the rate rises and falls as a result of changes and developments on the foreign exchange market. An exchange rate tells an individual for example how many euros he or she can obtain in exchange for one U.S. dollar.
Ad valorem means “according to value” in Latin. An ad valorem excise tax is levied on a product or service based on its value. Tax regulators impose ad valorem excise taxes on products and services via a fixed percentage of the price for that good or service.
Exclusive right living is a formal agreement between a seller and a real estate agent, under which the real estate agent has the sole right to sell a specified property.
Exclusive-agency listing is an agreement established between the seller and one real estate agent, where the seller reserves the right to sell the property on his or her own,
An expansion within an economy is a phase of the business cycle that goes from trough to peak. It is defined by at least two consecutive quarters of GDP growth. Expansions can last a few months to over a decade.
During an expansion, life is good. Businesses are ramping back up and hiring people, unemployment is low, money is cheap to borrow, and the stock market is rising. Because borrowing costs are low, businesses and consumers borrow and spend more, fueling the expansion. The Federal Reserve will usually cut interest rates at the beginning of an expansion, reducing interest on savings and driving consumers into the stock market for better returns.
Expense stops, as stated in a commercial lease, mark the extent of operating expenses and taxes a landlord will be responsible for on a tenant-filled property. All expenses past this threshold will be held liable by the active tenant.
The impact that positive net migration to a particular market in the United States has on property values is an example of a positive externality. The impact of an uptick in crime in a particular neighborhood has on the value of homes in that area is an example of a negative externality.
The factor market is also called the input market. It consists of companies that buy raw materials and labor to produce final products that are sold to consumers (output market). Factors are the purchased raw materials and labor. Consumers also participate in the factor market. When a consumer applies for a job, they are a seller, since they are selling their services. The company that hires them is a buyer since the company is buying labor, which is a factor.
Firms leverage these factors to generate economic profits by generating revenues from the sale of a good or service that exceeds the costs of producing or maintaining these factors.
Fannie Mae is the more common alias of The Federal National Mortgage Association (FNMA) is a publicly traded
The federal budget is an itemization of the various expenses the U.S. government must pay to keep the country running on an annual basis. The budget begins on Oct. 1 and ends on Sept. 30 of the following year. Government expenditures that the budget must cover include employee salaries, military, infrastructure maintenance, subsidies, and more.
Government spending is divided into two categories: Mandatory and discretionary. Mandatory spending is designated by law and includes entitlement programs such as Medicare and social security, which consume 37% of the federal budget. Estimates for the budget are created by the Office of Management and Budget. Discretionary spending requires the approval of individuals appropriation bills.
The Federal Deposit Insurance Corporation (FDIC) was created in 1933, during the Great Depression. It was created due to all the bank failures from the 1929 stock market crash. The FDIC is an independent government agency. It insures depositor funds for up to $250,000 per depositor. If a depositor has more than $250,000 to deposit, they can spread funds across multiple banks, never exceeding $250,000 per bank, to get more FDIC protection.
Banks pay for FDIC insurance. Depositors must check that a bank is a member of the FDIC. If not, their funds will not be FDIC insured. As of 2018, there were over 4,700 FDIC insured banks.
The U.S. federal income tax is a tax levied on the income of individuals, corporations, trusts, and other legal entities. The federal income tax is a source of revenue for the federal government. The government uses money from the tax to build and improve the country’s infrastructure, fund entitlement programs, and disaster relief.
The federal income tax is different from local and state taxes. Local taxes create revenue for cities and counties. State taxes do the same at the state level. Local and state taxes are also levied on the income and purchases of individuals and corporations. Not all states have an income tax. There are currently nine that do not.
The Federal Reserve is comprised of the Board of Governors and 12 Federal Reserve Banks in cities around the United States.
An FHA loan is a Federal Housing Administration loan issued by an FHA-approved lender (generally a bank) and is insured by the FHA. FHA loans are issued to low-to-moderate income borrowers. These borrowers are unlikely to get approved by a bank. To help the borrower get a home loan, the FHA steps to reduce some of the bank's risk. The bank ultimately determines if the borrower is qualified for the loan. Down payments on an FHA loan are smaller than those for a conventional mortgage. Borrower credit scores are also lower than those found on conventional mortgages.
Unlike a commodity currency, fiat money is not backed by any physical asset such as gold or silver. Instead, it relies on the faith people have in the currency and the government behind it. The U.S. dollar is a fiat currency and is considered the least risky currency of all the other fiat currencies. The U.S. dollar has become a global safe haven because of the U.S. government’s stability. It is backed by the "full faith and credit" of the U.S. government.
A fiat currency provides a country’s central bank with more control over the money supply — credit supply, liquidity, interest rates, and money velocity. Because central banks can print money, unless there are checks and balances, the situation can get out of control, leading to hyperinflation, as was the case in Zimbabwe and the Weimar Republic of Germany.
FICO is short for Fair Isaac Corporation, the company that created the FICO score. FICO scores are used by lenders to determine an individual's creditworthiness. The score ranges from 350-800, with a higher score being better. The higher an individual’s score, the better rate they will get on a loan, and the more credit they can receive.
A FICO score is made up of five components: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts. Individuals with scores above 650 generally receive good interest rates. Those with scores below 620 will struggle to get loans and good rates on those loans.
Finance is a term that describes the study and system of money, investments and various other financial instruments. Generally, finance is broken into three categories: public finance, corporate finance and personal finance.
Finance charges provide lenders an incentive to provide funds to consumers and businesses. Without the, lenders would receive no compensation for providing liquidity to individuals and businesses.
Financial accounting is the accounting activity performed from business operations. It includes recording, reporting, and summarizing the transactions of a business at specific times and across periods of time. Specifically, financial accounting requires the preparation of the income statement, cash flow statement, and balance sheet. Financial accounting follows the accrual basis accounting system rather than the “cash basis.” In the U.S., financial accounting follows the Generally Accepted Accounting Principles (GAAP). Internationally, it follows International Financial Reporting Standards (IFRS). GAAP and IFRS are compatible, which allows financial accounting between companies in different countries to be compared.
A financial advisor is someone who provides financial advice and guidance to individuals. Financial advisors can provide advice on a broad range of financial topics, including retirement, insurance, investing, and various money matters. Financial advisors must have a valid Series 65 license. Many also carry the Certified Financial Planner (CFP) designation. While financial advisors are not purely portfolio managers, they can help create a portfolio based on a client’s risk tolerance and goals. Financial advisors may also execute orders in the portfolio to keep it aligned with the client’s financial objectives.
Financial institutions are entities such as banks, insurance companies, brokerages, and even auto dealers and the United States Postal Service. Financial institutions engage in the business of financial and monetary transactions. Banks make money by earning more interest loans than the interest paid on deposits. Brokerages make money through investor trading commissions.
Financial institutions are an important component of the economy. Given the importance of their role, they are heavily regulated by the government. Risk and other metrics critical to the proper functioning of these institutions are closely monitoring through these regulations. Part of their importance is because businesses and consumers depend on financial institutions for loans and other financial transactions.
Financial leverage is the use of borrowed funds to acquire an investment. In the context of commercial real estate, this typically involves the use of a mortgage
Financial literacy is the knowledge and ability to successfully manage one’s finances. The lack of financial literacy can be a detriment to a person getting ahead financially. Being financially literate consists of a number of components but generally includes financial planning, budgeting, paying off debt, investing, planning for college, estate planning, and understanding how interest is calculated. Financial literacy is also about our attitude toward money, which ultimately affects our decisions about spending and saving money. Financial literacy can be obtained by reading about personal finance and working with a financial advisor.
A financial plan is a roadmap for an individual to achieve specific financial goals. It is a long-term plan. Financial planning is the process of creating, updating, and following this roadmap. A financial plan can be created by the individual or with a financial planner.
Creating a financial plan involves an analysis of your current financial state. Adding up all of your assets and deducting all your liabilities equals your net worth. A financial plan will often ensure you have enough money for retirement and other needs years from now. For many, it should also increase their net worth. Some elements of a financial plan include retirement, tax strategies, risk management, investment strategies, and estate planning.
The term financial security represents a stake in a publicly-traded company, whether through stocks, bonds, or options. Owning stock in a company means the holder of the stock has an equity stake in the company. Bonds represent a creditor relationship. Options are rights to ownership. Stockholders have voting rights in the company, usually dependent on the number of shares they own. Creditors (bondholders) don’t have voting rights. For giving up their voting rights and any potential appreciation in the company’s value, bondholders are paid a consistent interest on their bonds. Bondholders are also one of the first in line (before stockholders) to be repaid their principal if the company files for bankruptcy.
Financial statements are a uniform set of financial documents that are periodically released throughout the year and provide a view of a company’s financial performance. There are three financial statements. The balance sheet provides a snapshot of assets, liabilities, and equity. The income statement shows a specific period of revenue and income generation. The cash flow statement is also based on a particular timeframe and shows changes in the cash account.
Public companies must follow GAAP (Generally Accepted Accounting Principles) standards, which allows investors to assess the investment viability of a stock. Financial statements also include explanatory notes or footnotes. These go into further details about operations, acquisitions, inventory method, owner’s equity, and other more.
FinTech, which is short for Financial Technology, is the word used to describe new technology that is developed to automate and improve the financial and banking services sectors. Typically delivered through different algorithms and software packages on computers and smartphones, FinTech looks to help corporations, business owners, and consumers facilitate and manage their financial operations and needs.
A government can implement fiscal policy in the form of lower tax rates in order to influence higher levels of consumer spending. It could also promote economic expansion by building infrastructure such as public transportation or highways that will allow individuals and businesses higher levels of connectivity and ability to expand productivity.
The Internal Revenue Service dictates that a fiscal year consists of twelve consecutive months ending on the last day of any month with the exception of December. Thus, a firm can report its financial statements to various regulators and shareholders as of the fiscal year ending February 28.
A fixed asset is property, plant, and equipment that a company has owned for more than a year. These assets are listed on the company’s balance sheet. Unlike inventory, fixed assets are not resold. Fixed assets can be depreciated over their lifetime. How much depreciation is dependent on the kind of asset. For example, a $3,000 investment in equipment that has a three-year lifespan might depreciate at a rate of $1,000 per year. This means the company can expense $1,000 per year, reducing its overall net income and taxes.
A fixed cost is a critical input in a firm’s break-even analysis, which is used to determine pricing and production for the firm’s inputs and products.
A fixed income investment is usually a bond. It is a financial instrument that pays consistent cash flows on the invested principal. These cash flows are known in advance. At maturity, the bond’s principal is paid back to the investor and cash flows cease. Fixed income is not as volatile as equities (i.e., stocks). Preservation of capital is one of the main reasons people invest in fixed income, especially retirees. However, because cash flows are fixed, investor income can be eroded by increasing inflation. Also, there is a risk the bond can be called before maturity, discontinuing its cash flows.
A flexible payment plan allows consumers to purchase a product and pay for it over time. It’s similar to a credit card but is on-the-spot financing. Companies such as Affirm and Paypal Credit allow merchants to offer financing at checkout. Customers are often approved but those with the best credit get the best terms. Sometimes this means no interest for a specific period of time. Consumers with poorer credit will often have to pay high-interest rates (up to 30%). Missing a payment can mean high fees and may even void an interest-free period. Flexible payment plans can often lead to debt. Consumers are using the plan because they don’t have the cash to purchase the product. The alternative is to finance it. However, with a high-interest rate and late fees, payments can become difficult to pay while debt increases.
FAR stands for Floor Area Ratio and is the total usable floor space in a building compared to the building’s lot size. The formula for FAR is (total floor area of building) / (gross lot area). The total building floor space may also be based on permitting. A high FAR means more density. City governments use FAR for zoning.
Usable space varies across buildings. Elevator shafts, stairwells, pillars, and other occupiable spaces do not count as usable space. Developers desire a higher FAR, as it allows for more occupancy per lot. City planners must balance the desire for more usable space with the strains it can put on a city, known as a safe load factor.
A forbearance is a temporary postponement of mortgage payments in hopes of avoiding foreclosure. Foreclosure costs fall onto the lender, making foreclosure an undesirable outcome. Borrowers must demonstrate the need for forbearance. The need might be due to an illness or job loss. The need for forbearance must be demonstrated because loan terms will change. A borrower with a steady job who has always made their mortgage payments is likely to receive a forbearance. Whereas, A borrower with a spotty job history who has missed some mortgage payments may have a more difficult time receiving a forbearance.
Any skipped payments may be moved to the back of the loan or lumped into one payment at the end of the forbearance. The lender and borrower will discuss the new loan terms. Some lenders may allow borrowers to pay only interest during forbearance while others may allow partial interest payments. The remaining interest may result in negative amortization, which means payments for some period were less than the interest over the same period.
Fannie Mae and Freddie Mac offered forbearance to homeowners because of COVID. Late fees are not incurred due to missed payments during a forbearance. Additionally, nothing negative is reported to credit bureaus.
Unlike bank lenders, loan servicers are different since they do not own the loans. They only collect payments from borrowers. This means loan services may be less willing to provide any forbearance, as they are not taking on the same risks as bank lenders.
Foreclosure is the legal process by which the mortgage holder attempts to recover the balance of a loan from a borrower who has defaulted by forcing the sale
Foreign aid is money given to one country (i.e., government) by another, often as military or economic aid. Aid can come in the form of a gift, grant, or loan. Aid can also come from religious organizations, nongovernment organizations (NGOs), and foundations. In 2017, the United States ($34.7B) was the largest giver of foreign aid, followed by Germany ($24B).
A foreign direct investment (FDI) is an investment by a company in one country into a business located in another country. This is different from simply purchasing the stock of a foreign business. The investor instead establishes business relationships with the foreign company or buys assets of the company. There are three types of FDI investments: 1.) vertical — investment in the same type of business or industry, 2.) horizontal — investment in a related but different type of business or industry, 3.) conglomerate — an altogether different type of business.
Form 8824 is a form to be filled out with an exchanger’s tax return in order to report the completion of a 1031 like-kind exchange to the IRS.
Freddie Mac is the more commonly known alias of the Federal Home Loan Mortgage Corporation (FHLMC) which is a publicly traded
In a community with shared resources, such as a town, there are some people who use what they pay for and others who overuse resources. Others pay nothing and still use resources. Those who use more than they’ve paid for are called free riders.
Free trade is a policy that seeks to allow buyers and sellers from economies around the world to trade freely without incurring government tariffs, quotas or subsidies. Free trade is synonymous with “laissez-faire trade” which seeks to eliminate discrimination against imports and exports and allow markets to find equilibrium organically in the absence of government policies. Free trade allows the expansion of an economy’s offering of services and products by allowing the best producer the opportunity to penetrate a market regardless of its national denomination. This allows an economy to expand its product offerings, knowledge, skills and promotes specialization and the division of labor.
Fringe benefits are an additional, often non-monetary compensation for employees. They can be used to help set a company apart from its competition by offering benefits that other companies don’t offer. This differentiation helps in attracting hard-to-find talent.
Some common fringe benefits include health and life insurance. Other benefits can include a gourmet cafeteria (as is the case with Google), 20 weeks paid leave (Microsoft), commuter passes, gym memberships, and more. Fringe benefits help enhance the work environment for employees, making it a more desirable place to work. For this reason, and in addition to attracting talent, fringe benefits help retain and keep employees motivated.
Full employment is an economic state where labor resources are being used most efficiently. It includes the use of the most skilled and unskilled workers. Full employment does not mean that everyone within the economy is employed.
Even in a full employment economy, there are levels of unemployment, which are referred to as natural or cyclical unemployment, which is made up of two components. Frictional unemployment occurs when people are unemployed because they are moving, just starting a job search, or quitting their existing job for a better one. Structural unemployment occurs when people are unemployed because they can’t find work or companies can’t find labor.
With regard to corporate-level investment strategies, fund types can include mutual funds, exchange-traded funds (ETFs) or hedge funds. Different types of funds have different investment theses which attract investors with risk profiles that align strongly with a fund’s strategy.
Game theory is a theoretical framework for understanding and trying to take advantage of social situations. Using game theory, actors that are competing against one another can use game theory to determine an optimal outcome. Game theory works best when actors understand what the other is likely to do. Without knowledge of the other actors, game theory can’t be applied effectively. Game theory also works for pricing competition and product releases, where the various outcomes can be laid out in a matrix format. Game theory was formally created by mathematicians John von Neumann and John Nash, and economist Oskar Morgenstern.
Gross domestic product (GDP) is a broad measure of a nation’s productivity. GDP is defined as the monetary value of all finished goods and services a nation produces within its borders in a specific time period.
A general ledger is a double-entry form of accounting. Each transaction records an entry to a debit and credit account. One side of the general ledger is the sum of debits, while the other side is the sum of credits. The sum of all debits and credits should be equal. The debit side includes entries for assets, expenses, losses, and dividends. The credit side includes liabilities, gains, income, revenues, and equity. As an example of how the ledger works, when paying utilities, a debit is recorded to utilities expense while a credit is recorded to cash. The general ledger is what the company’s financial statements (income statement and balance sheet) derive from.
A general partnership consists of two or more people sharing the ownership of a business (i.e., a jointly-owned business). The individuals are responsible for all business expenses and liabilities. Meaning, they can be held personally liable for the business. Each partner is able to share in the business’ profits as well. Taxes do not flow through a general partnership, which means that each partner is responsible for his/her personal tax liability and that of the general partnership. A general partnership costs less to form than a corporation.
GAAP stands for Generally Accepted Accounting Principles, which is a set of accounting standards, procedures, and rules that public companies must follow. GAAP is issued by the Financial Accounting Standards Board (FASB). GAAP ensures that all publicly traded companies follow the same accounting reporting standards, which makes it easier for investors to compare the financials of different companies.
Some reporting areas covered by GAAP include revenue recognition, balance sheet classification, and materiality. For publicly traded companies, they must use GAAP reporting as mandated by the U.S. Securities and Exchange Commission (SEC).
Gentrification is a process that transforms a neighborhood from low value to high value. Home prices rise as a neighborhood becomes more gentrified. Overall, the neighborhood improves but not without negative side effects. Those residents who were in the neighborhood before gentrification began are often pushed out by rising home prices, rents, and an overall increase in living expenses. As more people with higher-paying jobs move into the neighborhood, the cost of living goes up. New businesses move in as well and traffic often increases. The speed of gentrification can be fast but it depends on the area.
Goodwill = P – (A + L)
Grantee is one to whom the grant is made. The recipient who will be taking title, as named in the legal document used to transfer the real estate.
A federal grant in aid is basically a grant awarded to states, local municipalities, or individuals. These grants are awarded for specific projects. The government places restrictions on how grant money can be spent. The government is able to monitor how grant money is used based on information from grant applications. Grant recipients are required to indicate on their application how the money will be spent. Grants are not loans and therefore do not need to be paid back. Federal grants are funded through income taxes paid to the government. Many grants require recipients to meet certain requirements and, in some cases, demographics. The pursuit of grant money is very competitive.
For businesses, gross income is measured as the firm’s total revenue less its cost of goods sold. It is ultimately a measure of a firm’s profitability, measuring the firm’s ability to derive profit from the production of goods or services prior to servicing other costs related to administrative activities, taxes and other costs of running a business.
Gross margin is a method that investors can use to determine a company’s operating efficiency. Gross margin is the profit that a company keeps from every dollar of revenue. Gross margin is represented as a percentage. The formula for it is:
Gross Margin = Net Sales − COGS
Where net sales are the same as revenue and COGS is the cost of goods sold. Basically, gross margin is the profit remaining after removing direct costs (COGS). Direct costs are those costs that are directly related to creating the product. Salaries and administrative overhead are not direct costs.
When investors use gross margin, they want to compare gross margin across companies to determine which companies are performing the best. Gross margin should only be compared against similar companies or those within the same industry. Each industry has an average gross margin. Investors can compare a company to the industry’s average as a baseline (i.e., is the company doing better or worse than the industry average). Then they can compare to the top-performing companies within the industry. These comparisons provide investors with great insight into the company’s operating efficiency and where it stands against its top competitors.
As an example, assume a company makes $500,000 per year on one product line. It spends $200,000 on supplies and $100,000 on labor to create its products. That’s a total COGS of $300,000. The gross margin for this product line is $500,000 - $300,000 = $200,000 then $200,000/$500,000 = 40%. The company’s gross margin is 40%. If the industry average gross margin is 35%, the company is performing better than half of its peers.
Note that gross margin does not equal profits. Selling/general/administrative costs and taxes still need to be deducted from gross margin to find the profit value.
Gross proceeds are the amount that a seller receives from the sale of an asset. These proceeds include all costs and expenses. Gross proceeds are often not the taxable amount from the sale. Instead, net proceeds are used for that calculation. Net proceeds are the amount after subtracting out fees and expenses. This is the actual amount the seller takes home. Costs and expenses can be a substantial amount of gross proceeds, leading to a smaller amount of net proceeds.
Gross profit is the amount of company income remaining after subtracting the cost of goods sold (COGS). Gross profit appears on the income statement. COGS includes the cost of materials, labor, and other costs related to producing goods. Gross profit is a pre-tax number.
Gross profit can be used to measure a company’s efficiency compared to its competitors. Those with a higher gross profit have lower COGS and can be said to be more efficient. Another way to measure gross profit is gross margin, which is (revenue - COGS)/revenue. Gross margin represents gross profit as a percentage of revenue.
Ground lease is a lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease.
A growth rate is used to determine the future growth of a company or economy. Although it can also be used to calculate historical growth. To calculate the growth rate, use the following formula: [(end value) - (beg. value)] / (beg. value) all times 100. For example, if ABC started the quarter with $5MM and ended with $6MM, its quarterly growth rate would be (6-5)/5 x 100 = 20%. Typically, growth rates are expressed as an annualized value.
The growth rate is just one forecasting tool used amongst many. Companies don’t rely on growth only. Instead, they create a broader picture of growth. However, the growth rate is very important as it signifies if the company’s growth efforts are working or not.
Hard money loan is a type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by
Health insurance is a type of policy that protects an individual from being liable for the total costs of medical and surgical expenses incurred in the event of illness or injury. Employers often include healthcare insurance in benefits packages to attract highly skilled workers. Insurance plans often require policyholders to seek care from a defined network of care providers and dictate that policyholders pay a higher percentage of costs if they obtain care from providers outside that network.
A car manufacturer may hedge its exposure to fluctuations in the price of steel by purchasing a futures contract that will allow it to purchase steel at a fixed price over a specific period of time. This is attractive to the car manufacturer because it is able to project a stable budget over this period of time and reduce its exposure to a spike in the price of steel, which would result in a spike in its cost of production of a vehicle.
A hedge fund is an alternative investment vehicle in which an entity pools together resources in pursuit of alpha, the difference between an active investor’s returns and the market’s returns over a given period of time. Available only to accredited investors because of the lower level of regulation and oversight that other investment vehicles face, hedge funds typically charge a “Two and Twenty” fee structure, which is a two percent charge for the management of assets and a 20 percent charge for profits on the active management of its clients’ assets.
A holding company owns other companies and allows them to perform daily operations with independence. The holding company owns the assets of each company and can step in as needed to make management decisions. Holding companies maintain control through majority voting stock within each company.
Each business may only be partially owned by the holding company. When it is 100% owned, the business is a "wholly-owned subsidiary." Because each business within the holding company is allowed to run its daily operations, management is responsible for that business’s performance.
Holding period is the real or expected period of time which an investment is attributable to a particular investor.
Holding title refers to the legal structure in which title to real property is owned. In the sale of real property, the title must be transferred from the seller to the buyer
Homeowners insurance covers losses and damage to a resident’s home. Coverage includes external and internal losses but will vary depending on the insurance policy. When getting a mortgage, most lenders will require that the resident has homeowner’s insurance. The insurance payment is bundled into the escrow account for the mortgage company and paid with the monthly mortgage payment.
The Department of Housing and Urban Development (HUD) is a government agency that enforces the Fair Housing Act. The Fair Housing Act enforces discrimination in housing based on sex, race, color, national origin, and religion for renters and homeowners alike. HUD is meant to foster community development and homeownership.
HUD is most visible in its assistance to low-income people and those who are disadvantaged with disabilities. Through its enforcement of the Fair Housing Act, HUD ensures that landlords are not able to take advantage of people through false claims of availability, application denial, different terms, or (negative) conditions that are different from those of other tenants.
Though it cannot be measured on a balance sheet or various other financial statements, human capital is critical to a firm’s success. Higher quality human capital will translate to increased productivity and profitability. Firm’s can grow human capital by compensating employee’s fairly and/or offering attractive benefits to workers in exchange for exceptional performance.
Identification period, under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
The income effect is a consumer’s change in spending based on the change in their salary/income and prices of goods. If a consumer’s salary decreases, their spending will decrease. In addition to spending less, the consumer may look for inferior or substitute goods at a lower price. Overall, the net effect is less spending. Also, if a consumer’s salary remains the same but the cost of goods they frequently buy increases, the consumer will look for cheaper alternatives, thus decreasing their overall spending. The opposite effect holds, as well. When a consumer’s salary increases and prices remain the same, they will spend/buy more goods.
An income statement is one of the key financial statements that firms use to quantify the quality of its performance and operations over a stated period of time. Also known as the profit and loss (P&L) statement, the income statement is primarily concerned with a firm’s revenues and expenses during a fiscal period. An income statement provides a snapshot of a firm’s profitability in a particular fiscal period.
The tax code offers individuals and businesses deductions and credits, which mean that most entities do not pay taxes on all income. For example, a taxpayer may earn $70,000 in a year but also be eligible for $15,000 in deductions, which will reduce that taxpayer’s taxable liability to $55,000. Similarly, businesses are able to reduce their tax liabilities by deducting operating and capital expenses.
Independent trustee is a trustee who is not related to the beneficiary of the trust and does not stand to inherit any property under the trust.
An index fund is a mutual fund that mirrors a specific index, such as the S&P 500. In this case, the S&P 500 is called the index funds benchmark. Rather than buying every stock in the S&P 500, an investor can simply purchase an S&P 500 index fund, since index funds contain a similar composition of stocks found in the benchmark index.
Because index funds are passive investments, the investor only needs to buy the fund. They don’t have to worry about managing any of the investments within the fund to match the benchmark. The passive nature of index funds also means their expense ratios are fairly low. Index funds are available to individual brokerage accounts and many retirement accounts.
An indirect tax is paid by the consumer with the purchase of a product. The tax is indirect because the consumer is not paying it directly to the government, as is the case with income taxes. Instead, the consumer pays the tax indirectly as part of their product purchase. Supply chain entities or those selling products collect the tax. It is up to the selling entity to charge the correct amount of tax and submit those taxes to the government. As the price of a product increases, so does the tax paid on it. The tax is levied regardless of income, making it more burdensome to lower-wage earners than those with a higher income.
Contributions to traditional IRAs are tax-deductible, which allows individuals to claim contributions as a deduction on their tax returns. When the individual withdraws these funds from the account during retirement, these funds are taxed at an ordinary income tax rate.
A good or service is inelastic when the demand for it is not affected when its prices go up or down. In contrast, an elastic good that has a 10% price increase may also see a 10% drop in demand. This good is said to have a 1:1 ratio in demand and price movements, or an elasticity of 1 or greater. Inelastic goods have an elasticity of less than 1.
If the price of a good or increases, why would a consumer continue buying that good? Why not buy a different good? Unlike elastic goods, inelastic goods do not have substitutes, so consumers have no choice but to buy at a higher price. Inelastic goods consist of medication, cigarettes, electricity, and gasoline.
Inferior goods are goods which, due either to relative or actual quality, has the demand for itself decrease as the income levels rise. In other words, inferior goods have a lower price compared to similar goods. In some cases, it can also mean the good is inferior quality. People with lower incomes tend to prefer inferior goods because they are more affordable. Examples of inferior goods vs. normal goods are:
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Inflation is a percentage measurement of how quickly the price of goods is increasing. It is measured for each country — although regions within a country can experience different rates of inflation. Most countries target 2-3% annual inflation.
The process of going public allows private investors and company founders the opportunity to realize gains on their initial investment in the firm.
Insurance is a form of a contract or policy in which an individual or corporate entity exchanges payments for financial protection or reimbursement against losses from the insurer.
An insurance premium is the cost of insurance paid by the insured to an insurance company. The insurance company uses premiums to cover any insurance claims. A certain amount of premiums are also invested to earn additional income for the insurance company. How much an insurance company can keep liquid is state-regulated. Insurance premiums are used with a wide variety of insurance, including health, auto, home, and life.
Insurance premiums can be paid in installments, such as monthly, semi-annually, or annually. As long as the customer continues to pay their premiums, they’ll have coverage. Coverage generally starts with the first premium payment and continues as long as there are no lapses in payment.
An insurance rider is an additional coverage to a standard insurance policy. Insurance companies offer riders for customers who need certain coverage that isn’t available through a standard policy. An example is a standard home insurance policy but the customer also wants coverage for earthquakes. Earthquake coverage can be added as an additional feature of the policy.
Riders come at a cost. Depending on what the rider covers, the cost can be high. However, if the customer is unable to self-insure or the value of the rider is worth it than the cost can make sense.
Interest can be expressed in three common ways. Two are related — simple and compound. Simple interest is a rate charged on the principle of the loan. It is calculated as simple = principle x rate x periods. The other is compound interest, which calculates interest on the principle and accumulated interest. It is calculated as compound = simple x [(1 + rate)^ time - 1]. Both can be calculated on loans or savings accounts. Compound interest is used more than simple interest.
The third form of interest is the ownership an investor can take in a company. An investor can buy a certain number of shares in a company in exchange for a percentage of ownership equal to the number of purchased shares.
Interest rate risk is the risk that an investment's value will change due to a change in the level of interest rates. These changes usually have an inverse effect on
The International Monetary Fund (IMF) was created after World War II to promote global economic growth, along with financial stability, encouragement of international trade, and the reduction of poverty. Countries that want to participate in the IMF’s mission need to be a member. There are currently 188 countries that are members of the IMF.
To help mitigate a financial crisis, the IMF makes loans to countries that are experiencing financial difficulty. The IMF also monitors national and global economies. It makes global economic forecasts as well, which are made available in its publication called the World Economic Outlook.
The International Monetary Fund was created in 1945 as part of the Bretton Woods agreement with the mission of promoting global economic growth, financial statement, international trade and reducing poverty across the globe. The IMF currently consists of 189 member countries, each of which have a proportionate number of seats on the executive board by order of the nation’s financial importance. The IMF's mission is “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”
Interpersonal skills generally are defined by the person’s knowledge of social expectations. More simply, they are a measure of a person’s ability to communicate effectively with others and adapt as circumstances change.
Intrapreneur is similar to an entrepreneur except that they work within the confines of a larger company. The intrapreneur has access to the company’s resources and doesn’t have to take the same outsized risks that an entrepreneur does. Companies that want to drive innovation will sometimes allow one person or even a group to work with autonomy as if they are their own company within a company. In this way, they are similar to an entrepreneur. The company is hoping that the unrestricted creativity and lack of influence from the larger company will provide the right environment for the next big thing.
Intrinsic value can have different interpretations for different people. This difference of opinion creates an opportunity for investors. One group of investors might decide that a company’s stock is worth $30 because the CEO was recently put in jail. And so the stock drops from $50 to $30, as those investors sell their shares. However, another group of investors believes the CEO being jailed has little effect on the company, as its financials are still very sound. They believe the stock is still worth $50 and begin buying shares in hopes that the price will increase back to $50.
The above is a type of fundamental quantitative but a subjective one. Discounted cash flow (DCF) is a type of quantitative fundamental analysis that provides a numeric value for a company. However, it doesn’t factor in events such as the CEO going to jail or new competitors entering the market.
Investment banking is an institutional-level banking activity provided to large companies, governments, and other entities. It is separate from commercial banking through regulations, although both may be and often are part of the same bank. Investing banking is not open to retail customers, as it does not take in deposits. Instead, it helps with mergers and acquisitions, the raising of capital, taking companies public (i.e., underwriting), and reorganizations. For these activities, investment banks command high fees.
There are two sides to investment banking — buy and sell. The buy side buys securities for mutual funds, pension funds, and more for money management purposes. The sell side creates and promotes securities to the buy side.
Investment portfolios are built based upon one’s financial goals and risk tolerance. Catering towards diversification and the management of unsystematic risk in a single investment, building a portfolio of investments across various asset classes may help an investor achieve a desired level of risk-adjusted return.
Investment property is a broad term for a real estate property that has been purchased with the intention of earning a return on the investment, either through
The invisible hand is a concept discussed in Adam Smith’s 1776 book titled An Inquiry into the Nature and Causes of the Wealth of Nations. The invisible hand exist in free markets. It’s the unforeseen force that allows product and service prices to find their natural equilibrium. This is in contrast to planned economies or those that are heavily government-regulated.
An example of the invisible hand is a product that a seller prices high and is unable to sell. The seller drops the price until people begin buying. Adam Smith would say the invisible hand is at play here. It also works in the other direction. If a product is priced too low, the manufacturer will sell out unless the price is raised. In both cases, supply and demand find equilibrium.
The Jumpstart Our Business Startups (JOBS) Act was signed into legislation in 2012 by President Barack Obama. It provides companies with less than $1 billion in revenue more access to capital markets. The JOBS Act does this by requiring less regulation or registration with the SEC. The JOBS Act is known for opening up crowd-funding, which has become popular with real estate syndication platforms. The Act allows non-accredited investors to invest in companies that would have previously been restricted to accredited investors. Through the JOBS Act, smaller companies can raise funds from a wider pool of investors (i.e., crowd-funding).
Joint ventures are commonly formed when two businesses want to partner to enter an unfamiliar market. In real estate, a REIT specializing in multifamily development may for a joint venture with an office developer for the purpose of obtaining exposure to the office real estate market.
Keynesian economics is a school of thought pioneered by British economist John Maynard Keynes during the 1930s. During the Great Depression, Keynes said the government should participate more in the economy by spending and lowering taxes. The idea was that the government would be able to offset some of the economic collapse from the Great Depression. Keynes also said the opposite should occur when the economy is booming. The government should step back by reducing its spending, raising interest rates, and increasing taxes. Fiscal and monetary policy, involving the federal government and FED, are the primary tools advocated by Keynes to better manage boom/bust cycles of the economy.
Legal tender is the national currency of a nation. It prohibits the use of any other currency. Legal tender must be accepted by creditors as payment for debt. Only government institutions such as the U.S. Treasury in the United States and the Royal Canadian Mint in Canada can issue legal tender. Specifically, in the United States, Federal Reserve notes and coins are legal tender and marked as such. Some currencies, such as the U.S. Dollar and Euro, can be used as legal tender in other countries.
Liability car insurance is a type of auto insurance that covers people or property harmed by a driver. Liability insurance does not cover the driver. Rather than being sued by someone who the driver causes harm to, liability insurance is meant to provide financial protection for the driver. Some states require liability insurance to drive.
In states that are no-fault insurance, drivers must purchase personal injury protection (PIP). PIP protects the driver and their passengers. In no-fault states, drivers are required first to file a claim with their insurance company, even if they are not at fault in an accident.
There are two components of liability insurance — bodily injury and property damage. Bodily injury covers those that are injured when the driver is at-fault. This includes immediate and ongoing medical expenses, funeral costs, and any legal fees resulting from a lawsuit.
Property damage covers damage to property outside of bodily injury. This includes the other driver’s car, buildings, and other non-human property involved in the accident.
Liability insurance does have limits. Limits are configurable by the policyholder. The higher the limit, the more the policy will cost. One determining factor when choosing a policy limit is the amount of assets that a person wants to protect. If someone has $1 million in assets and chooses a $100,000 liability policy, they are leaving the remaining $900,000 of the assets potentially exposed to a lawsuit from injury or property damage. Regardless of the limit chosen, any expenses over the limit must be covered by the at-fault driver.
Three Types Of Coverage
Liability insurance limits are broken down into three types:
Bodily injury — limit on expenses related to the injury of each person other than the driver. For example, each individual may be covered up to $50,000.
Property damage — limit on expenses related to property damage. As an example, all property involved may be covered up to $25,000.
Bodily injury per accident — this is the total that the insurance company will pay for all individuals involved. Using the above $50,000 per individual, the maximum per accident might be $200,000. However, if there are five people injured and each requires $50,000 in medical expenses, the at-fault driver is responsible for the remaining $50,000.
Life insurance is a contract between an insurance company and a policyholder. The insurance company agrees to provide a death benefit to the policyholder’s named beneficiaries in exchange for a regular payment of a premium.
Limited liability allows investors to purchase shares in a partnership or limited liability company and limit their liability to only the amount invested. If the company fails and owes millions of dollars to creditors, investors are protected. Creditors cannot come after the investors. If shareholders did not have this protection, they would be more unwilling to invest in companies.
Owners of a business can have liability exposure. Owners who start a business may personally guarantee loans made by the business. If the business fails, these owners are liable for paying back the loan. In this scenario, any shareholders remain protected and only lose their investment.
Limited liability company is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
The line of best fit is used to identify the trend on a scatter plot graph. This line is also called a regression line. It can be found by using the least-squares method, which results in a geometric equation for the line. The line of best fit shows a relationship between points in a scatter plot. However, if the various scatter plot data points are too scattered, a trend will not be identifiable, and the line of best fit will be unreliable.
An example of a line of best fit is plotting manager experience (x-axis) to salary (y-axis). As experience increases, so does salary. If 10 different managers at different stages in their careers are plotted, we should see a line that goes from the bottom left to the upper right.
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
Local tenant, also known as a “mom-and-pop", is a small scale company with a narrow footprint typically limited to a single market.
A margin is a term used to describe money borrowed from a brokerage to purchase securities. Investors who “buy on margin” via their brokerage borrow money from the brokerage to purchase securities. Margin is calculated as the difference between the value of securities purchased and held in the investor’s account and the dollar amount of funds lent by the broker to facilitate the purchase.
In a margin account, a margin call can occur when the value of the account drops to a certain level, triggering a margin call. Some traders/investors borrow funds from a broker for investments. The broker loans the funds at a certain interest rate. Borrowing money on margin is called using leverage. Using leverage is a double-edged sword — while it can boost an investor’s returns and can also multiply their losses.
As an example, a trader has $10k in cash and borrows $10k from his broker to take a position in XYZ that is worth $20k. The trader is using 50% margin. XYZ’s stock price proceeds to immediately fall, leaving the trader with an account value of only $12k. The trader has $2k in equity and a $10k loan. However, his broker has a minimum margin requirement of 25%. 25% x $12k = $3k, which means, the trader should have $3k in equity for the position but only has $2k. The trader will receive a $1k margin call to bring his equity back up to 25%.
Marginal benefit is a dollar amount that a consumer is willing to pay for an additional unit of a product or service. Because of marginal benefit, the consumer receives additional satisfaction. A producer may try to create artificial demand by limiting the production of a product or access to a service. Driving up demand means consumers are willing to pay more, increasing the product’s or service’s marginal benefit to consumers. Marginal benefit is related to marginal utility but they are not the same. Marginal benefit is a dollar measurement, while the marginal utility is a use measurement.
While undesirable to hold, marginal land does have some utility in certain cases. It can be used as grazing grounds for livestock. Additionally, land that is considered marginal at one time can be considered desirable at another time if conditions in that market change. For instance, if the cost of growing corn on marginal land at one point in time does not exceed the revenue associated with selling such corn, land is considered marginal. But if conditions change and the price of corn rises, this land once considered marginal now offers some utility and opportunity to profit.
Marginal utility is a subjective concept. It deals with the additional, incremental amount of use someone is getting from a product or service. Trying to quantify an incremental use of a product is nearly impossible. The general idea behind marginal utility is that a person will continue using/consuming a product or service if the additional unit of utility provides additional gain above the product’s or service's additional unit of cost. In other words, the marginal utility is greater than the marginal cost. People will not buy or use a product or service if its marginal utility is less than its marginal cost.
Market analysis is the process of studying certain characteristics and trends of a market to determine its strengths, weaknesses, opportunities and threats.
A market basket is a group of consumer goods and services used to create the consumer price index (CPI). By comparing prices in the CPI from one year to the next, economists can determine if inflation is rising or falling. Market baskets are also used by investors to create indexes and mutual funds from stocks and bonds.
These various market baskets are used by economists, retailers, and investors alike. Retailers use the CPI to predict impulse buys by consumers. As mentioned above, economists create a permanent mix of goods that are bought and sold. Investors create a market basket from bonds, stocks, and even of other indexes, such as the S&P 500.
CPI is a macroeconomic indicator and a reflection of spending patterns. That is why it is useful to retailers. It is not a cost-of-living index. The government uses CPI to adjust monetary policy. Through feedback from consumer surveys, officials are able to put together spending patterns and average prices for items. To provide an accurate representation of the economy, the CPI covers a broad range of goods and services categories. These categories include recreation, apparel, housing, transportation, and education.
In addition to consumer-related goods and services, CPI also includes government fees of public goods such as water and sewage. Any taxes levied on the products and services that are in the CPI are also included.
Market capitalization places a total dollar value on a company based on its outstanding shares. The market cap formula is simple — total outstanding shares multiplied by the current stock price. Market cap allows a company to be compared to competitors within its industry. Investors also use market cap as a measure of risk — a lower market cap can signify more risk.
Market cap is divided into three categories:
Small cap — $300 million to $2 billion
Mid cap — $2 billion and $10 billion
Large cap — Over $10 billion
Large cap companies are considered a low-risk staple of an investment portfolio.
A market failure is created when there is a mismatch between supply and demand. For example, there might not be enough supply to meet demand and vice versa. This mismatch is generally created by external events that are outside of efficient market operations. Some trigger points might be monopolies, government policies, market information breakdowns, and supply chain breakdowns (impairment of input mobility).
An example of a market failure is a rise in minimum wages, which increases operational costs for businesses. Due to this increase, businesses hire fewer people, creating an artificial supply shortage. However, there are still plenty of laborers seeking jobs. There is now a mismatch between supply and demand.
Market share is the percentage of revenues earned by a company within an industry compared to total revenues within the industry. It provides a method of determining a company’s size by revenue compared to similar companies.
A marketing strategy defines how a company will reach potential consumers and hopefully turn them into customers. The market strategy integrates various market components together in a cohesive manner. This includes branding, messaging, product packaging, advertising, and the marketing plan.
The marketing plan is different from the marketing strategy. The marketing strategy is a vision of how the company will present itself to potential and existing customers. The market plan contains details on how to execute that vision. For example, what ads should the company run, and when should specific marketing campaigns begin. The lifespan of the marketing strategy may last across several market plans, as the marketing vision continually evolves with its customers.
A Master of Business Administration (MBA) is a graduate-level college degree. Most MBA programs require some type of entrance exam to enter. MBA programs are generally two years long. An MBA prepares students to analyze the performance of a business and make suggestions on how to improve it.
Many MBA programs specialize in certain areas such as supply chain management, finance, marketing, entrepreneurship, and more. Some programs offer an abroad immersive experience that exposures students to business operations in other countries. Besides full-time programs, there are also part-time programs and executive MBAs, which target those already established in their careers.
The mean is the average of two or more numbers. There are two ways to calculate the mean. Each method is used for different reasons. One way to calculate the mean is called the arithmetic average and the other is the geometric average. The arithmetic average is the simpler calculation. It only requires adding the numbers and dividing the total count of numbers. For example, if you want to find the mean of 3, 5, and 9, you add them to get 17 and divide by 3 (total numbers) to get 5.667.
The geometric mean involves multiplying the numbers and taking the nth root. Using the same three numbers from above, we get 135 after multiplying. Now we take the cube root (i.e., nth root) of 135 to get 5.13. In finance, the geometric mean is used more often since it keeps the dependency from one value to the next. The arithmetic mean treats each number as an independent value.
The median is the middle number in a group of sorted numbers. The numbers can be sorted either way — ascending or descending. Sorting won’t change the median value. The median is a more descriptive representation of a set of numbers than the average. Especially with outliers, which create skew and can distort the mean, the median can be more useful. When there is an odd set of numbers, the median is the middle number. When an even set of numbers is used, we have two middle numbers. In this case, the two middle numbers are added together and divided by two to get the median.
Medicaid is a government-sponsored insurance program that works to assist low-income families and individuals in costs associated with medical care (e.g. doctor visits, hospital stays, long-term medical, custodial care costs). Primarily funded by the federal government, Medicaid operates at the state level and is available only to individuals and families that meet certain criteria that include legal and permanent residency in the United States and low-income generation.
A medium of exchange replaces barter/trading economies. Rather than moving around products for trading, the economy’s consumers use the medium of exchange as a way to conduct various transactions. In a modern economy, the medium of exchange is currency. A medium of exchange must have a standard and stable value. Consumers must also accept and trust that the medium of exchange will retain its value and continue to remain in demand. If the medium of exchange begins to lose its value, consumers will no longer be able to budget or forecast with any accuracy. As well, determining supply and demand will become impossible.
Considered a more settled science than macroeconomics, microeconomics seeks to explain what will happen to supply and demand for a product or products in a particular market when certain conditions change with regard to the pricing and/or supply of a good or service.
Strong patents, brands and licenses are items that allow firms to control and minimize operating expenses, protect market share and make duplication by competitors extremely difficult. Pharmaceutical companies with patents on specific drugs are able to charge premium prices for the products, while suppliers such as Wal-Mart are able to undercut retail competitors by offering the lowest prices on the market because of immense free cash flows and vertically integrated supply chains.
Monetary policy can either be classified as expansionary or contractionary, depending on the regulator’s objectives. Central banks and regulators seek to use tools such as control of money supply and interest rates to influence output, employment and prices.
Criminal organizations will seek to deposit these funds into financial institutions, but can only do so if they can convince the bank that the funds are the product of legal operations. Money laundering in itself is also a crime.
The money market trades in short-term debt instruments. It includes two types of participants — commercial and retail. Commercial participants (or wholesale participants) such as financial institutions, buy short-term debt for its liquidity and returns.
Retail investors don’t buy debt directly but instead buy money market funds. These funds often have higher rates than savings accounts but are still very liquid, which makes them attractive to investors. Retail investors can also open a money market account, which is similar to a savings account but also with higher rates while still maintaining liquidity, although they do have certain restrictions.
A money order is a certified backed by cash and issued by a government or banking institution. They can be purchased at a number of locations for a small fee. A money order is cash on delivery. Some government agencies require particular types of payments that are backed by cash (i.e., cashier’s check and money order). Money orders must be paid with a debit card or cash. Personal checks and credit cards are not valid forms of payment since they are not backed by guaranteed cash and can be canceled after the money order has been purchased.
Money supply is a snapshot of the amount of currency and liquid assets in an economy. Central banks control the money supply. When an economy is growing slowly, its central bank increases the money supply to provide stimulation. When the economy is growing too fast, the central bank will decrease the money supply to slow it down and decrease inflation. The method central banks use to control the money supply is the increase/decrease of interest rates, a part of monetary policy.
Money supply has five different subgroups — M0, MB, M1, M2, and M3. M0 is hard currency in circulation. MB is M0 + hard currency held in bank reserves. M1 is M0 + checking accounts. M1 is a common measure of money supply. M2 is M1 + savings + CDs. M3 includes larger deposits + institutional money market funds + other larger liquid assets.
Monopolistic competition sits between perfect competition and monopoly. There are many competitors and entry into and exit out of the market is easy (no barriers). Products created by firms are similar but through marketing, firms are able to differentiate their products. Because perfect information doesn’t exist in this market, firms are able to earn a profit in the short run.
In the long run, the story is different. Like perfect competition, companies break even over the long run. If one company experiences profit above its competition, more companies will enter the market and drive down prices. If companies begin experiencing losses, competitors will leave the market driving losses back to break even.
A moral hazard is created when two parties enter into an agreement or contract, but there are no consequences for not following the agreement. In a formal business contract, one party may take unnecessary risks in an attempt to generate profits before the contract finalizes.
Mortgage is a legal instrument that pledges the rights of ownership of an asset or property to a lender as security for a loan.
A multinational corporation (MNC) is a company that has a presence in its home country and at least one other country. In the case of large MNCs, its assets, factories, and various facilities are spread across the globe. Being so globally distributed, the company can more efficiently conduct business in multiple countries, allowing it to serve not only those countries but surrounding regions.
For investors, MNCs offer diversification. Should one country experience political unrest or more restrictive regulations/laws, the MNC is able to shift assets and operations to other more favorable areas. A single company operating within an adverse country will have more difficulty under such conditions.
A municipal bond is a debt issued by a government authority, whether that be federal, state, local, or a municipality. Municipal bonds are considered low risk, which means they also pay low interest. These low-interest payments are advantageous to the issuing authority, as it reduces their cost of debt, compared to corporate bonds. The issuing authority uses its bonds to pay for capital expenditures. Non-capital expenditures (i.e., expenses) are paid for with revenue from taxes.
Most municipal bonds are exempt from federal taxes and some are exempt from state taxes. Because of these exemptions, high-income investors buy municipal bonds for their taxable accounts rather than retirement accounts. Municipal bonds are callable, which means the issuing authority can pay off the bond early, decreasing its overall yield.
A natural monopoly is a market that is controlled by one firm. This one firm supplies all consumer demand in the market. There are no other competitors within the market. A natural monopoly creates high barriers to entry and generally operates at a large scale. For those two reasons, competitors are not able to enter the market. By the time any competitors come along, the one firm has already taken virtually all consumer demand, built out an elaborate infrastructure for delivering its services, and has become regulated by the government.
Barriers to entry come in the form of high fixed costs. These costs are a result of the massive infrastructure needed to create a natural monopoly. For example, utility companies such as electric companies must build miles and miles of power lines and substations. Railroads must do the same for rail tracks and train cars. Gas and oil companies must build out pipelines and refineries.
For a natural monopoly to recoup those high fixed costs, it must operate on a large scale. Operating on a large scale doesn’t mean the natural monopoly is the only company supplying some specific service or product. One electric company may supply the northeast region of the U.S. while a different one supplies the northwest. Both are natural monopolies within their own region and are different utility companies that do not compete.
To ensure that natural monopolies do not take advantage of consumers, they are regulated by the government. This is the case for utility companies such as electric and water, railroads, and gas and oil companies. Without competitors to offer choices, the government is the only option to ensure that a quality product at a reasonable price is delivered to consumers.
Just because a company is a natural monopoly doesn’t mean it will be profitable. In fact, many natural monopolies are not. But because the natural monopoly provides an essential service (i.e., electricity or water) and possesses the required infrastructure to deliver that service, the government will often subsidize the firm’s operations. These firms may also sell bonds to help fund operations.
Net income is the total revenue minus total expenses. It represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock
Net worth is a gauge of financial health typically defined as the difference between an individual’s or a business’s assets and liabilities. It is a measure that seeks to quantify the value of an entity’s owned assets, and the abilities of these assets to satisfy all outstanding liabilities. Ultimately, it provides insight into an entity’s financial position at a given point in time.
Nominal GDP (gross domestic product) is a measure of economic production for a country. It includes inflation, which allows nominal GDP to use current prices or the price that products and services are sold for during that year. This is in contrast to real GDP, which does not include inflation, making nominal GDP a higher value than real GDP. Nominal GDP can be compared from quarter to quarter during a single year. To compare GDP across different years, real GDP must be used. To compare GDP across years also requires a base year.
A nonprofit is an organization, also called an NPO, that doesn’t pay taxes on its earnings. The IRS has granted the nonprofit a tax-exempt status because it both furthers a social cause and benefits society. Some nonprofits take in donations to help further their cause. Individuals and businesses donating to a nonprofit do not have to pay taxes on those donations. Financial documents of a nonprofit must be made public so donors can see how money is being used by the organization.
The technical IRS tax code name for a nonprofit is a 501(c)(3). 501(c)(3) status must be requested for the organization to receive its tax-exemption. Additionally, the organization has to maintain compliance through its state.
A nonprofit organization (NPO) does not pay taxes on earnings or donations used to run the business. The IRS grants NPOs a tax exemption status because they provide a social benefit. Those who make donations to an NPO, whether that be from individuals or other businesses, are able to take tax deductions on the donations. NPOs are also called 501(c)(3) organizations, after the section of the tax code that grants them tax-exempt status.
To qualify as an NPO, a business must serve the public. This can be through a service or the sale of products (or both). Financial information about the company must be made public. This allows donors to make informed decisions about whether to contribute money to the organization’s cause or not.
Nonresident aliens are non-citizens of the U.S. They are exempt from a Green Card. Teachers, students, foreign nationals (for tax purposes), and those seeking medical services are common nonresident aliens. Nonresident aliens pay taxes on a trade or business related to the U.S. Resident aliens (qualified persons under the substantial presence test) are those who have been in the U.S. for 31 days or resided in the U.S. for more than 183 days within a 3 year period.
Normal goods have a relation to a person’s income. As income increases, purchases of normal goods also increase but by a lesser amount. This is because the income elasticity of normal goods is between 0 and 1. Elasticity can be calculated by dividing the increase in demand for a good by the increase in wages. For example, a 15% increase in wages results in a 5% increase in the purchase of clothing. The income elasticity is therefore .05/.15 = 0.33.
Normal goods are different from inferior or luxury goods. Inferior goods have an income elasticity of less than 1, while luxury goods have an income elasticity that is greater than 1.
An official settlement account is a type of account that a central bank uses to track its reserve asset transactions with other central banks. Types of transactions include those involving gold, foreign exchange reserves, bank deposits, and special drawing rights among other items.
Instances of oligopoly over the course of history include steel manufacturers, oil companies and wireless carriers. In each of these environments, high costs of entry allow for a select group of producers to dominate a market and obtain significant power in the pricing and production of goods and services.
The organization is a cartel. Created in Baghdad in 1960, founding member nations were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Since its inception, the organization has added nine additional members: Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Congo and Equatorial Guinea.
Fixed operating expenses are the actual costs associated with operating a property that do not vary in the short term. These costs do not change with a property’s occupancy rate.
Variable operating expenses are the actual costs associated with operating a property that vary in relation to a property’s occupancy rate or volume of some activity.
Operations management is a monitoring activity with the goal of increasing operational efficiency. This means cutting out waste while maximizing revenues. As a company creates finished products from materials and labor, operational management monitors this entire process for any inefficiencies. Once inefficiencies are identified, operational managers suggest methods for eliminating them.
Some examples of company activities that operational management is concerned with include plant/factory maintenance, input procurement, inventory and raw materials shipping, inventory control, quality assurance, and equipment maintenance. As you might imagine, an operations manager must understand all facets of the business, along with local and global trends as they relate to the business.
Opportunity cost represents the benefits an individual or business forgoes when it makes one decision in place of another. Opportunity costs are oftentimes unseen in that the consequences of choosing not to pursue one strategy in place of another, but individuals and firms can benefit greatly from working to quantify the cost of not pursuing a particular option.
Ordinary income is the income earned from providing services or the sale of goods. Ordinary income is composed mainly of wages, salaries, commissions and
Organizational structure allows companies to effectively communicate between internal groups and carry out activities necessary to the company’s profitability. An organization can be arranged as centralized or decentralized. In a centralized organization, information flows from the top (management) down (employees who carry out tasks). In a decentralized organization, such as a startup, information flows in many directions. There isn’t a wrong or right answer in choosing a centralized vs. decentralized structure. Younger companies may choose a decentralized structure as it allows them to move more quickly. Generally, as companies mature, they move to a centralized structure.
Having an organizational structure in place is necessary for the efficient operation of a company. Otherwise, communication can devolve into chaos, and ultimately lead to the company’s demise.
Suppose a QOF acquires a property in a QOZ that is worth $20 million, where the actual building is worth $14 million and the land is worth $6 million. In order to meet the substantial improvement requirements, the QOF must add $14 million of basis to the property within a 30-month period in order for the property to be treated as a QOZBP.
Outsourcing is a practice of a firm hiring third-party labor to replace services previously performed in-house. Firms typically use outsourcing to significantly reduce labor costs by enlisting the help of an outside organization that has the capacity to perform the service or production of a good at a materially lower cost. Outsourcing can also help a business to focus more directly on its core operations.
An outstanding check represents a check that hasn’t been cashed or deposited by the recipient or payee. Outstanding checks can have two different states. One state is that the payee has the check but hasn’t deposited or cashed it. The other state is that the check has not yet reached the recipient and is still in the payor’s bank-clearing cycle.
An outstanding check is a liability for the person (i.e., payor) who has written the check. They must make sure that enough money remains in their checking account to cover the check until it is paid. The payee may cash the check immediately or might hold onto it for months. Checks that remain uncashed for long periods of time are called stale checks. Eventually, these checks will become void. This period can range from 60 days to six months.
Sometimes a payee forgets about the check or loses it without notifying the payor. The payor has no control over when the payee will cash or deposit the check. The only thing the payor can do, for a fee, is stop payment on the check. When this happens, the check becomes void. The payee cannot cash or deposit the check once a stop payment has been issued.
The payer’s bank has no way of knowing that a check has been written until the payee deposits or cashes the check. This puts the burden of tracking the check on the payor. Besides the liability it creates, the payor may forget that they wrote the check and spend money allocated for the check. When the payee cashes the check, and their bank tries to pull funds from the payor’s account, the payor will get hit with an overdraft or non-sufficient funds (NSF) fee. The payor must then deposit funds to cover the check. The payor can void these fees using overdraft protection on their checking account.
An overdraft is an issuance of credit to a borrower from a lender at a time when the borrower’s account balance goes to zero. The issuance of an overdraft allows for the account holder to continue to withdraw money despite the absence of sufficient funds to cover the withdrawal. The bank or financial institution charges an interest rate and/or a fee in the event of an overdraft.
Overhead is a business cost that can’t be associated directly to the production of a product or service. It’s a necessary expense of operating a business. Overhead expenses include utilities to operate a building, employee salaries, insurance, rent, administration, and taxes.
Overhead expenses show up on the income statement. Overhead expenses must be factored into product costs when setting a price for a product. The difference between the product price and cost is profit. If overhead expenses are left out of a product’s cost, the result will be a smaller profit or even a loss on the product.
A partial payment is basically an installment payment on an invoice. Through an arrangement with the billing party, a schedule of payments is created. In some cases, half of the invoice is paid on receipt and the other half once a job is completed. Paying the invoice only once a job is complete ensures the terms of the job are met. For longer jobs, a contractor may invoice as they go. This helps to cover the expenses incurred by the contractor.
Payroll taxes come out of an employee’s check. Employees do not have to worry about paying this tax directly since it is withheld by the employer. The employer then pays the tax to the IRS for Federal income, Medicare, and Social Security. Employees can see how much is paid to each category on their check stub. Self-employed individuals still pay payroll taxes in the form of self-employment tax.
Unemployment insurance is also funded by the employer and can be considered part of payroll taxes. When an employee is terminated, they can use the amount of paid unemployment insurance until they find a new job.
A pell grant is a government grant for college/university tuition and educational expenses. Unlike a loan, a pell grant does not need to be repaid. Students must apply each year for a Pell Grant through the Free Application for Federal Student Aid (FAFSA). The Pell Grant award amount is determined by the school.
To figure out how much money a student should receive, the school calculates the gap between expected family contribution (EFC) and the cost of attendance (COA). EFC is the student’s and parent’s income and the parent’s investments and assets. COA includes school tuition, expenses, and room and board. A pell grant is only one method of filling the EFC/COA gap. Other financial assistance may come in the form of government loans and work-study programs.
There are two types of pension retirement plans. The older type is called a defined-benefit plan. In this plan, the employer invests the pension's contributions into low-risk assets. Retirement payments are determined from a formula based on years of service and independent of the retirement fund’s performance. The more modern version is called a defined-contribution plan where employee plan contributions are usually matched by the employer. In these plans, retirement benefits are dependent on the plan’s performance.
Per capita GDP is measured by dividing an economy’s gross domestic product by that economy’s average population in a given year. Per capita GDP is used as a measure of the standard of living in an economy by adjusting for the size of the economy’s population. As developing nations grow, their per capita GDP will converge with the per capita GDP of developed nations.
Percentage rent is rent due in lieu of, or in addition to base rent that is paid to landlords based on tenant sales. A percentage rent clause is nearly exclusive to
Perfect competition is a non-existent market state in which companies sell the same product for the same price and make just enough money to remain in business. All products are sold because there is an exact match in demand for them. Because buyers have perfect information about the products being sold, product and service prices always reflect the current market price.
In the real world, competition is not perfect. In most cases, firms do not produce the exact same product or price it the same as competitors. They are always looking for some small differences to make their product stand apart. This creates differences in prices and demand, leading to imperfect competition. However, such markets are generally liquid and highly competitive, which is about as close to perfect competition as the real world gets.
Personal finance involves learning about how to manage your money efficiently and plan for your financial future. Saving for retirement, paying off debt, saving for a house down payment, buying the right amount of insurance, and more all encompass personal finance. There’s an entire industry of services that also offer personal financial assistance. Specifically, financial advisors help people to accomplish their financial goals. Because people have unique financial situations and goals, financial advisors are still needed. However, an individual can certainly learn to manage their own money and financial future by reading online articles and books on personal finance.
Physical capital is one of the three factors of production used in the production of goods. Physical capital is used to make goods and is also reusable. This is in contrast to raw goods, which become part of the final product and are not reusable. The three factors of production include land/natural resources/real estate, human capital, and physical capital.
Physical capital falls under the category of capital expense. It includes equipment, computers, and machines. Most physical capital is paid for over several years and can be depreciated annually.
A ponzi scheme is a type of investment scam. It is named after Charles Ponzi, who initiated the first ponzi scheme in the 1920s. A ponzi scheme works by having investors invest in what appears to be a legitimate investment opportunity. The scammer promises high returns. As investor money comes in, the scammer uses the investors’ own money to pay for the returns. Because investors are receiving regular payments, they don’t question the legitimacy of the operation. Behind the scenes, the scammer is pocketing/stealing most of the money. Once new investors stop coming into the scheme, the scammer can no longer pay returns to existing investors. At that point, the entire scheme collapses. Most scammers will try to disappear when they see that new investors are not available and they are running out of money to pay returns. Sometimes authorities find out about the ponzi scheme before it collapses. In many cases, though, investors lose out.
A positive correlation represents the relationship between two investments that move together. When one investment is moving up, we can expect the other positively correlated investment to be doing the same. One is not leading the other. They simply have common dependencies that drive their move. Correlation is a numeric value between -1 and 1. -1 means negative correction. These are investments that move opposite each other. 1 represents positively correlated investments. 0 represents investments that move independently of each other. Having a portfolio of zero correlated investments provides diversification. As some investments are moving down, others are flat or moving up.
Companies issue two types of stock - common and preferred. Common stock is what you commonly see quoted on stock exchanges and financial news websites. It is the one most people invest in. Preferred stock is similar to a bond in its behavior, and unlike common stock, does not have voting rights. However, it does pay dividends to its owners before common stock pays and will pay any dividends in arrears.
Present value is expected value, as of the date of valuation, resulting from discounting future amounts.
Price discrimination occurs when a seller charges different prices to different customers for the same product. The seller is trying to get the highest price possible for the product. Price discrimination may occur on an individual customer basis, where each customer is charged a different price. It can also happen when groups of customers are charged different prices.
Groups are based on certain characteristics such as international or domestic, educated or uneducated, employed or unemployed, wealthy or poor. There is no limit to the types of groups a company may define for its customers.
There are three degrees of price discrimination. The first is when a seller tries to get the highest price from each customer. The second is when a discount is offered for bulk purchases. The third is when groups of customers are charged different prices for the same product.
Sellers split customers into groups because group profits are higher than when customers are looked at as one homogenous population. How long the seller is able to keep up price discrimination will depend on the elasticities of the groups or sub-markets (also called market segments). Profits in an inelastic sub-market should not change since those consumers are willing to pay a higher price. This is likely due to the lack of alternatives in the sub-market. It is just the opposite for consumers in an elastic market. Due to alternatives, consumers will find substitutes when prices rise, reducing the seller’s profits in that market.
Those companies that are a monopoly are able to more effectively employ price discrimination. Also, it is important that a seller’s sub-markets do not overlap. Otherwise, customers within one group would be able to sell products at a higher price to other groups (who were charged more for the same product).
Private equity real estate funds are an asset class consisting of equity and debt investments in property. These types of funds usually involve active management from private equity entities, and follow low-risk to high-risk strategies.
Private placement is an offering of securities that is not registered with the Securities and Exchange Commission (SEC) and which are sold not through a
Pro rata is a term that means each person gets their proportionate share of distributions. Pro rata is Latin for "in proportion." As an example, if three people own an investment that pays quarterly distributions, they are all paid based on the amount each has invested. If person A owns 20%, B owns 50%, and C owns 30%, and the next distribution is $1,000, A will receive $200, B $500, and C $300. Pro rata should not be confused with pro forma, which is used with financial statements that are based on assumptions.
Probate court handles the distribution of a deceased person’s assets to beneficiaries in the case that a will is not present. Having a will makes this process much easier for those left behind. Probate court is not needed when a will is available. But in the absence of a will, the state probate court must settle the affairs of the deceased. This can be a time-consuming and frustrating process for the beneficiaries. Probate also settles disputes when a will is left behind, but it is not clear how assets should be divided. Additionally, probate court is involved in conservatorships, guardianships, and committing a mentally ill person to an institution that can help them.
The Producer Price Index (PPI) is released monthly by the Bureau of Labor Statistics (BLS) and tracks changes to the price of end-user products. Unlike the Consumer Price Index (CPI), which tracks cost from the consumer’s view, PPI tracks cost changes from the producer’s view. It represents the average movement in selling prices from domestic production over time.
PPI uses three areas of production classification — crude (raw product), intermediate (manufactured good but not finished), and finished (what the end-user sees and pays for). The BLS tracks nearly 10,000 individual products and product groups, covering sectors such as construction, manufacturing, mining, and agriculture.
Productivity is a measure of production efficiency. Based on the number of labor hours needed to create a product, efficiency can be determined. Productivity efficiency is expressed as output per unit of input. In other words, the amount of product created based on the amount of labor needed. If a company’s productivity is low, it may invest more in technology to bring its productivity up to a competitive level.
Companies use productivity measures to gauge their efficiency, especially against competitors. Productivity can also be used to calculate the efficiency of GDP. As well, productivity can be measured across both sectors and industries.
Profit is defined simply as revenue less expenses. It is the financial benefit a business generates from its revenue after subtracting all expenses, costs and taxes it needs to pay to sustain operations.
Profit margin shows how efficiently a company generates profit for every one dollar of sales. Profit margin is expressed as a percentage. It is calculated by dividing net profit by sales or revenue. For example, a company that has $500,000 in sales and $100,000 in net profits has a profit margin of 100,000 / 500,000 = 20%. Profit margin allows for comparing the efficiency of profit generation between companies within the same industry. Trying to use profit margin to compare companies within different industries will be fairly useless since profit margin does not account for industry differences.
A promissory note is generally issued by a company in exchange for cash (i.e., a loan). It may also be issued by a financial institution. A promissory note is a promise to pay back a loan at a future date. Promissory notes are not as formal as loans and not as informal as IOUs. They sit somewhere in the middle. Terms of the promissory note (interest, due date, principal, signatures, etc.) are worked out between the lender and borrower.
Promissory notes can be sold to other companies. In order to do this, the note must be unconditional and salable. Such notes are also called negotiable instruments.
Property rights give property owners the right to do with their property what they chose. Property can be land, a car, a house, a pet, or a phone. Property can be transferred to another owner, sold, or rented out for a profit. It can also be inherited. Property can be private or public. It can be owned by an individual, business, group, or government.
Industrial property type is one of the four main asset classes of commercial property, which is typically used for the purpose of production, manufacturing, or distribution.
Offices are commercial properties that are primarily used to maintain professional or business offices. Encompassing term that may include
A proportional tax or flat tax uses the same tax rate regardless of income. Sales taxes are considered proportional. For example, an 8% sales tax is applied for someone who earns $20,000 or $1 million. Income is not factored into proportional tax calculations.
Prospectuses typically include a brief summary of the firm’s background and financial performance, number of shares being offered, types of securities being offered and names of banks and/or financial institutions underwriting the offering.
Critics argue that protectionism hurts a nation in the long run by decelerating economic growth and pricing inflation, while proponents of protectionism say it creates jobs by forcing firms and individuals to seek innovative technologies that streamline productive efficiencies and capacities.
The Purchasing Managers’ Index is a number that describes the economic health of the manufacturing and service sectors. PMI values range from 0 to 100. A value below 50 indicates a contraction, while above 50 indicates expansion. Taken over multiple periods, PMI can represent a trend for the two sectors.
PMI is released each month. It provides insights into the economic health of the surveyed countries. In addition to the manufacturing and services sectors, information about sub-indices such as GDP, inflation, exports, capacity utilization, employment and inventories can also be obtained. PMI is considered a leading economic indicator.
Purchasing power is defined in two different ways — one is economical, and the other is investment-related. In economic terms, purchasing power represents the value of goods or services that one unit of currency can buy. Purchasing power is degraded over time by inflation. $20 today buys fewer groceries than $20 five years ago. Additionally, a five year 6% bond bought today doesn’t factor in purchasing power five years from now.
In regards to investments, purchasing is the amount of investments that can be bought on margin. For example, if an investor has $10,000 in their account with a 50% margin, the investor can actually purchase $20,000 worth of investments.
Step 1: An investor with a recently realized capital gains elects to invest this gain into the Qualified Opportunity Fund (QOF), taking stock or a partnership interest in return. By so doing, the investor gets to defer capital gain income.
A qualified client is an investor that is exempt from the provision of the Investment Advisers Act of 1940. This act prohibits private investment funds from charging performance-based fees. A "qualified client" meets at least one of the following parameters:
Dividends come in two different types for tax purposes — ordinary and qualified. Qualified dividends are taxed at a lower rate than ordinary dividends. Ordinary dividends are taxed at the higher regular state and federal income tax rates. Qualified dividends are taxed at 0%, 15%, or 20%, depending on your tax bracket. This difference between qualified and ordinary dividends can mean big savings at tax time. Qualified dividends must meet special requirements set by the IRS.
"Qualified Purchaser" means, under Section 2(a)(51) of the Investment Company Act:
Quantity demanded is an economic measurement of demand for goods or services over a period of time. The price of a product and demand for that product have an inverse relationship, according to the law of demand. As the price of a product decreases, its demand will increase and vice versa. There isn’t a 1:1 relationship between the increase/decrease in the price of a product and the increase/decrease in demand for that product. The change in price that affects demand is called elasticity of demand.
Quantity supplied represents the number of goods and services available at a given price, generally the market price. Changes in supply from changes in price are called elasticity. If the supply does not change when prices change, it is inelastic. Prices can change due to regulations, market forces, or because of price ceilings or floors. When prices increase, suppliers will provide more of a good at a higher price in order to maximize their profits. As demand dries up due to higher prices, the price falls. The result is that suppliers are less willing to create the same volume of goods at a lower price.
Racketeering is a term that describes a broad array of crimes and is typically associated with organized crime.
For example, say the price of Stock A was $100 in January and dropped to $75 by March. The rate of change for Stock A’s price in this 3-month time period would be -25%.
Rate of return is the profit or loss on an investment over a specified period of time expressed as proportion of the investment amount.
Real estate investment is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence or personal use.
Real Estate Investment Trust is a trust or company that owns, finances, or invests in real estate and/or real estate-related assets. REITs provide individuals the ability to invest in
Real Gross Domestic Product (GDP) is the gross domestic output (i.e., economic output) of a country, factoring in the effects of inflation. The flip side of this coin is that nominal GDP doesn’t account for the effects of inflation and thus has a higher value. Real GDP can be thought of as nominal GDP minus inflation. While nominal GDP is used to measure quarters within the same year, real GDP measures output across years.
Real GDP provides a practical method for comparing the quantity and value of goods and services across different years. The Bureau of Economic Analysis (BEA) puts out quarterly numbers for both real and nominal GDP.
Realized gain is the amount of gain that the investor made from the sale of an asset. It is calculated as the net sales price received (sales price of the asset less any
A recession is a macroeconomic term that represents a significant and extended period of declining or stagnant economic performance in a region or country in the world. Investors, businesses, public entities and governments all track various indicators that can predict or signal the onset of a recession.
Reconciliation is an accounting task that compares two records to ensure they match. Any mismatch must be tracked down, as it could mean there was an accounting mistake or potential fraud. For example, comparing receipts against credit card statements is a type of reconciliation. Credit card receipt amounts should match statement amounts. Also, the number of receipts should match the number of credit card transactions on the statement. While manual reconciliation is an option, using accounting software can reduce the work required. Reconciliation is used by individuals with their personal finances and by companies of all sizes.
Recourse is a type of loan that allows the lender to recover against the personal assets of a party in the event of default by the borrower to the extent of the
A regressive tax is one that is applied uniformly to consumers and thus takes a higher percentage of income from low-income earners than high-income earners. It is considered the opposite of a progressive tax, which taxes higher income earners at a higher rate than lower income earners. The United States has a progressive method of taxation with regard to its income tax, but taxes levied on goods at the point of sale are considered regressive because they are applied uniformly, regardless of the individual’s level of income.
Related parties transaction is a business deal or arrangement between two parties who are joined by a personal or other relationship prior to the deal.
A rent payment arrangement is a temporary arrangement for someone to rent a property. The agreement is a contract that lists the terms for renting the property. This includes the monthly amount of rent, the due date for payments each month, deposit, late fees, use of the property, renter expectations, end of agreement expectations, parking, etc. A rental agreement is a legal contract but is different from a lease. A lease is a fixed term for renting a property. There are also high penalties for breaking the lease (i.e., vacating the property before the lease term ends).
Rentable Square Footage equals the usable square footage plus the tenant’s pro rata share of the building common areas, such as
Renters insurance is stand-alone insurance available to renters of apartments, single family homes, duplexes, condos, or townhomes. It protects the insured against property damage, liability, and provides living expenses in the event the structure becomes unlivable. The insurance does not protect the structure, which is what homeowners insurance does and is required by the landlord.
The cost of renter’s insurance is dependent on which possessions the insured is covering and how much liability protection they need. Liability protection covers what the landlord’s insurance does not. The living expense portion is often set by the insurance company and can’t be changed.
Reserve requirements are the amount of money that banks must hold to cover customer deposits and liabilities. The reserve is meant to protect banks against sudden withdrawals. Reserve requirements are set by the Fed’s board of governors. In addition to reserve requirements, the board has two other monetary tools — open market operations and the discount rate.
The reserve requirement amount is adjusted each year. Banks with deposits of less than $16 million are considered to have no reserve requirements. Those with $16 million to $122.3 million in deposits have 3%, and those with over $122.3 million have 10%.
Residual income can be split into three categories — personal income, business income, and equity valuation. Personal residual income, also called excess income or disposable income, is money left over after all bills have been paid. This income can be put into savings or spent on non-essential items.
Having residual income can help in getting a loan. It shows that a person has more than enough money coming in every month to pay their bills. This is likely to lead to a loan approval (assuming the person doesn’t have high debt) if the individual can show that their income and bills will remain consistent. The more residual income a person has, the less likely they are to default on the loan. Choosing candidates with higher residual income reduces default risk for lenders.
In business, residual income is (the net) income generated above the required rate of return for the business. It is excess income after the business has paid all of its bills. Technically, it is the operating profit remaining after all costs of capital has been paid. The cost of capital is incurred to generate revenues for the business.
In this way, residual business income is similar to its personal residual income counterpart. However, businesses may invest money and earn additional income that doesn’t require labor or raw materials. It is only the invested capital that is needed to earn additional income. This type of income is also called passive income.
Some examples of passive income include stocks, bonds, royalties, and real estate. All are considered investments. They are not without risks, however. Companies evaluate whether it is worth taking the risk based on the expected returns.
The equity valuation of residual income is basically the same equation we’ve been using: Net income minus the cost of capital (equity charge). To determine the equity valuation, we must look at what goes into the equity charge. It is the value of equity capital multiplied by the cost of equity (required rate of return on equity).
Retained earnings are earnings reinvested into a company to pay down debt or help it grow. A company may use its retained earnings to grow by investing in various capital projects that show a high probability of success. When a company’s stock price increases, its EPS (earnings per share) also increase. For investors, this is a sign that the company is making efficient use of its retained earnings. If EPS is not increasing, it may be a sign that the company isn’t making the most use of its retained earnings. In that case, investors will expect a dividend, given the lack of appreciation in the stock price. A company with a static or declining stock price that does not pay dividends may find it difficult to attract investors.
Return on equity (ROE) is a percentage-based performance metric designed to determine how well a company is putting the equity investments it has gained to work in order to increase company value. In other words, it reveals if management is providing a good return on equity. It is measured by dividing net income by total company equity, and is best used when compared to the ROE of other firms within the same industry.
ROE is calculated by dividing annual net income by shareholder equity:
ROE = (annual) Net Income / Shareholder’s Equity
Net income is found on the income statement, while equity is found on the balance sheet. Since equity is assets minus debt, ROE shows how well a company is able to turn assets into profits. Another way to look at ROE is how many dollars of profit are you getting back for each dollar of equity put into the company.
Risk adjusted returns is the measure of the return on an investment relative to the expected risk of that investment, over a specific period.
Risk premium is the minimum incremental yield by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to
The rule of 72 is a quick and easy mental calculation that tells you the number of years it will take for an investment to double, given some rate of interest. The calculation is based on compound interest, which calculates accumulated. The rule of 72 can be used on investments and inflation. As an example, an investment earning 8% interest will double in 72/8 = 9 years. For inflation, it tells you the number of years a dollar amount will halve, as inflation eats away at the non-invested savings. For example, 3% inflation means it will take 72/3 = 24 years to halve the value of a specific amount of savings.
The S&P 500 is a stock market index containing 500 US-based large cap companies. Some people consider it a better representation of U.S. companies than the Dow Jones Industrial Average, which has only 30 companies. The S&P 500 is a market-capitalization-weighted. This method gives a higher percentage allocation to companies with the largest market capitalizations. It is also a float-weighted index, which means that companies’ weights are determined by the number of available shares for that company. The S&P 500 is not the only index of its kind as there are many derivative indices available to invest and that track the S&P 500.
Safe harbor is a statutory or regulatory provision that provides protection from a penalty or liability. In the context of a 1031 exchange, safe harbor refers to any one of
Different jurisdictions, counties and municipalities across the United States charge different sales taxes.
Sampling error is a statistical metric that occurs when an analyst does not select a sample representative of the population it was chosen from. When calculations are performed on the sample, they will not coincide with results from a sample that is representative of the population. This problem can be fixed by choosing a larger sample from the population. Sampling error isn’t necessarily a bad thing and is usually present in most samples. There is generally some amount of sampling error since the sample is always only a small part of the population. The smaller the sampling error, the more representative of the population the sample will be.
Savings bonds are issued by the federal government and can be purchased by the public. Savings bonds are considered one of the safest forms of investment since they are backed by the federal government, which has virtually zero chance of defaulting. Because savings bonds are considered very safe, they also pay a low interest-rate. However, people still buy them for savings.
Savings bonds are issued as debt to the government. The interest rate of savings bonds is determined by the market. Like any debt, the government pays interest on savings bonds to the holders of those bonds (i.e., debt). Just like a person with great credit has a high credit score, the savings bonds have one of the highest credit ratings.
Scarcity is a basic economic problem that describes the limited means of producers and suppliers to satisfy unlimited wants of consumers. The concept of scarcity grapples with the fact that every resource has a finite supply, whether that be time, money, water, wood or land. The study of economics is thus ultimately the study of how individuals and entities react to the scarce supplies and allocate resources to combat this limit to generate profit.
The Securities and Exchange Commission (SEC) is responsible for enforcing securities laws created by Congress. The SEC makes sure that any individual or company trying to sell securities fully discloses information about the securities being sold. This gives investors an opportunity to evaluate the security and make an informed decision to invest in it or not.
The SEC was formed in 1934 by Congress as part of the Securities Exchange Act of 1934. The SEC also ensures securities markets function in an orderly manner. As well, it oversees corporate takeovers since any company looking to take over another must register with the SEC.
Securitization is a financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or
As owners in the company, shareholders have certain rights that include the right to review a firm’s books and records, vote on key company matters, receive dividends, attend annual meetings and vote on certain matters.
The sharpe ratio is a measure of investment return against risk. The higher this ratio, the less risk one is taking for return. The sharpe ratio formula is (return - risk free rate) / [standard deviation]. We want to know the risk-adjusted return, which the following gives us: return - risk free rate. Volatility, or risk, is found from the standard deviation. The larger our return (numerator) and the smaller the risk (denominator), the larger our sharpe ratio will be. As risk increases without an equal or greater increase in return, the sharpe ratio will drop, signifying we are taking on more risk for each unit of return. When comparing sharpe ratios across investments, it’s important to compare similar investments.
A shortage is created when the demand for a product is greater than the supply of that product. There are three conditions that can create a shortage:
- Increase in demand — occurs when consumers suddenly demand more of a product. For example, demand for a new automobile that a manufacturer cannot fulfill.
- Decrease in supply — occurs when the supply of a good drops. For example, a virus among pigs means many of them must be euthanized, creating a shortage of pork products.
- Government intervention — a government can impose a cap on prices (i.e., a price ceiling), allowing more people to buy a good than would be realized in a free market.
Types of loans that apply simple interest are auto loans and short-term personal loans. Consumers who pay loans early or on time on a monthly basis benefit from simple interest structure because principal balance shrinks faster under this method of interest calculation.
A simple random sampling is a small sample of a population. The small sample is meant to represent the larger population being sampled. Rather than sampling an entire population, which may be impractical due to the population’s size and time requirements, a small sample of people that are similar to the larger population can be sampled instead. From this small sample, facts can be derived about the larger population.
As an example, upper management wants to survey its 10,000 employees. Rather than send out 10,000 surveys, 500 can be sent to accomplish the same goal. It’s important that the sample takes into consideration any groups within the population. If 50% of the population are male and 50% are female, the sample should represent this same grouping.
An SKU (stock-keeping unit) is a scannable code that keeps track of products in a retail store. It is part of the store’s inventory tracking system. In addition to a scannable barcode, an SKU is also composed of an alpha-numeric set of around 8 characters. The bar code is usually above the set of characters. The SKU contains information about a product’s price and its manufacturer.
Instead of shutting the store down to do an inventory count periodically, employees can use a handheld scanner to scan each item in the store. This information is fed back into the inventory system to reconcile what has been purchased against the remaining (unpurchased) units. The part of the inventory system that deals with SKUs is called a POS (point of sale). In some stores, customers are also able to scan SKUs on their mobile phones for additional information about a product.
When a store item is purchased, it is scanned by the cashier (or by the customer for self-checkout). Once scanned, the item is subtracted from the store’s available inventory. When the inventory for an item gets low, the manager is notified. In more sophisticated inventory systems, a notification will be sent to the vendor, who will then submit a re-order for those specific products.
SKUs can be used with non-tangible items as well, which includes repairs and warranties. For example, an auto repair shop will use an SKU for different types of billable time.
SKUs are also used in marketing. When a customer purchases a certain product or group of products, the store’s inventory system can analyze those purchases. An advertisement for a similar product may be displayed to the customer. This type of informed ad has a higher chance of making a sale than some random ad. Additionally, store managers can see which items are hot sellers vs. those that are not. Depending on the type of POS being used, managers can see this information in real-time.
Individuals over the age of 62 who have paid into the system for 10 years or more qualify for Social Security retirement benefits.
The Social Security Act was introduced by President Franklin D. Roosevelt during the Great Depression in 1935. The government began collecting the tax from workers in 1937 and making payments in 1940.
The Social Security tax, or Old-Age, Survivors, and Disability Insurance (OASDI) Program, which is the official name of social security, is a payroll tax levied against employees and employers. When you look at your next paycheck, you’ll see a deduction for FICA. FICA stands for (FICA) Federal Insurance Contributions Act, which is the fund that Social Security taxes are paid into. Self-employed people also pay into Social Security through self-employment taxes, which are mandated by the Self-Employed Contributions Act (SECA).
The 2020 Social Security tax rate is set at 12.4% and is paid 50/50 between employees and employers. Self-employed people must pay the entire 12.4% Social Security tax.
The solvency of a company demonstrates if the company’s ability to pay its long-term debts. Companies that cannot pay their long-term debts are insolvent. Basically, a company that owes more than it is worth is insolvent. If a company does not have enough cash on hand or from cash flows to meet its long-term obligations, it will likely default on its long-term debts without some outside assistance. If no assistance is provided, the company will have to file for bankruptcy.
The solvency ratio can be used to determine how likely a company is to pay its debts. The ratio = [(net after-tax profit) + depreciation] / (short & long-term liabilities). The ratio is expressed as a percentage. The solvency ratio should only be compared to companies within the same industry.
When a company specializes in one category of products, it is able to focus all of its efforts on making the best product possible. Such a focus can create a competitive advantage for the company and even allow it to command higher prices, leading to higher earnings. Even if the market for a specialized product is small, this group of customers is often willing to pay more for a hard to find product.
Specialization can have disadvantages in the cost of materials and labor. Just as customers are willing to pay more for specialized products, companies may also have to pay more for rare raw materials. Talent (i.e., labor) can be difficult to attract as well as specialized skill sets are generally in demand, leading to higher wages for such employees.
A spin off is the sale of an existing business from a larger business (parent company). The spin off may no longer align with the larger business’s strategy or it may be losing money. Shareholders of the parent company may receive dividends from the spin off. Shareholders may also have the ability to exchange parent company stock for the stock within the spin off at a discount.
Spin offs can perform differently in the marketplace compared to that of the parent company. Usually, the spin off will perform poorly during a weak market and very good in a stronger market. This performance will be reflected in the spin off’s stock price, which can exhibit volatile behavior.
Stagflation is a term used to describe a period of slowing economic growth in which prices are increasing at a rate higher than the growth of the economy. Stagflation was widely recognized during a period in the 1970’s in which the U.S. economy experienced rapid inflation and high levels of unemployment. Previously, stagflation was widely considered by economists to be impossible, because macroeconomic theory long believed that unemployment and inflation were inversely correlated. There are many theories that have spawned since the mid-20th century that seek to identify the root cause of stagflation.
The standard deduction is an IRS tax deduction that is used in place of itemization of expenses (Schedule A). For people who do not have complex tax filings or qualifying expenses, the standard deduction is the preferred tax deduction. Taking the standard deduction will reduce your overall tax bill. The standard deduction amount varies depending on the filing status, age, and whether you are disabled or claimed as a dependent on someone else’s tax return. Not everyone will qualify for the standard deduction, including those who choose not to itemize their expenses.
The standard deviation is a measure of volatility. It is commonly used to measure the volatility of investments (i.e., stocks). Volatility is associated with the riskiness of an investment. The higher an investment’s volatility, the higher its risk and vice versa. Investors generally prefer lower risk (lower volatility) investments. The standard deviation is a statistical measure of dispersion relative to the mean. It can be calculated by taking the square of variance based on each data point relative to the mean. To perform the calculation step-by-step for a stock, add up its returns across a period of time (i.e., monthly returns across 6 months) and divide by the number of observations to get the historical return. Subtract those returns from the average, square them, and add up those results. Now divide that sum by the number of observations minus one. Finally, take the square root of the last result to get the standard deviation.
Statistical significance tries to verify that variables related to an outcome are relevant to that outcome. For example, a finance engineer wants to know if a set of stocks will drop within the next 120 days. His model consists of several variables, such as earnings, technical indicators, and news events. Certain news events show a high correlation with stock price movement. The news event variable is, therefore, statistically significant. Any variable that is statistically significant has a high percentage (i.e., close to one). 95% and 99% are commonly used to show statistical significance.
When analyzing a population, most data analysts will use a sample size. From there, they can determine statistical significance. However, it is important that the sample accurately represents the larger population. Otherwise, any statistical significance findings may be incorrect.
A stock is a security that represents a shareholder’s proportionate ownership in the assets and earnings of the issuing corporation. Stocks are primarily bought and sold on exchanges. In exchange for cash, stockholders obtain a piece of a corporation and a claim to that firm’s assets and earnings.
In today’s market, stockbrokers are critical for retail investors to obtain exposure to the market, because major exchanges such as the New York Stock Exchange (NYSE) require membership to trade on its exchange. Thus, retail investors cannot trade directly through an NYSE window and must hire a broker at a member firm to perform the transaction on their behalf.
Stocks are certificates that entitle the holder of the stock to a proportionate share of ownership in a company. For example, if there are 100 shares of stock available from a company and an investor owns 10 shares, the investor owns 10% of the company. For publicly traded companies, investors hold their shares with a brokerage rather than actual certificates of paper.
Companies do not need to be public to issue shares of stock. Private companies can issue shares as well, although private shares are far less liquid than public shares. Companies generally issue stock to raise money for their business.
The stock market is also a source of capital-raising for private companies seeking to offer shares of their company to the public for the first time in the form of an initial public offering (IPO).
Stock splits might be seen as marketing techniques. When the price of a stock rises to high, it can become unattractive to investors. A lower price stock allows investors to hold a large number of shares. With a high priced stock, investors may be able to hold only a few shares. When a company splits its stock, it creates more shares at a lower price. However, the value of those shares is the same. For example, a $500 stock that splits 1-2 means the price will drop to $250, and each shareholder will have two shares at $250 instead of one at $500. Stocks can also do reverse splits. A $50 stock that splits 2-1 means that for every two shares, investors get one at $100.
A store of value is an asset that does not depreciate. Gold and silver are great examples since their shelf life is basically perpetual. Food and vehicles are not stores of value since they depreciate rapidly and lose value. A store of value is something you can use to exchange for something else now or in the future and expect that it will hold its value. The U.S. dollar is considered a store of value since the amount it is valued at does not change. Treasury bonds are also good stores of value. They are backed by the U.S. government, pay interest, and at maturity, the bondholder receives all of their principal back.
A subsidy is meant to supplement a particular adverse or burdensome economic condition for individuals and businesses. Subsidies may be provided by both governments and businesses. Governments may provide subsidies in the form of tax cuts and unemployment and welfare benefits. A business may subsidize the operations of a newly acquired business until it becomes profitable. Subsidies are meant to be a temporary relief.
Some common subsidies are tax benefits for electric car owners and payments to farmers. Electric car owners receive a tax break due to the low emissions of electric cars, which promote social benefit. Farmers may receive subsidies for not farming specific land because crop yields will result in a loss for the farmer due to depressed prices.
The substitution effect occurs when consumers switch from a more expensive product to a similar, less expensive product. For example, if beef and chicken cost the same price, but beef begins rising in price, consumers will switch to the cheaper chicken. Chicken is a comparable alternative compared to beef and a better value.
Once the demand for beef drops, its price will drop as well. Consumers will then switch back to beef. It’s important to note that the substitution effect only works if consumers’ spending power remains the same. If consumers begin earning more, the substitution effect doesn’t impact their choice as much. Consumers are less likely to stop eating beef, even if the price rises.
A firm must ensure that an investment is suitable for an investor as outlined by Financial Industry Regulatory Authority (FINRA) Rule 2111. Suitability ensures that an investor’s situation matches the particular investment recommended by an investment firm. FINRA has specific rules for determining this match. In general, suitability can be determined from an investor’s profile, which contains information such as the investor’s risk tolerance, investment time frame, and goals. Suitability is not the same as fiduciary standards/requirements.
A sunk cost is money spent on a project that has not provided the desired outcome. For example, a pharmaceutical company spends $25 million in R&D on drug #1. The outcome is not what the company was hoping for. The drug does not cure a particular disease and has negative side effects. The $25 million is already spent and there is no chance of recouping that investment.
The company can spend $10 million more pursuing drug #1 or put the money towards a higher probability outcome for drug #2. The fact that $25 million has already been spent should not factor into the decision. If the company decides to continue with drug #1, in hopes of recouping some of its loss, it will have engaged in what economists call loss aversion.
A political action committee (PAC) is a group of people formed to raise money for a political campaign with the ultimate goal of influencing the election. Super PACs raise unlimited funds for the same reason but can’t donate directly to a campaign. Corporations are not allowed to contribute directly to campaigns but can funnel that money through a PAC to support the campaign. While Super PACs cannot contribute to a campaign, they can spend money in other ways that support the campaign. Once an organization raises $2,600, it is considered a PAC.
Companies monitor their supply chains ultimately to reduce variable costs and expenses at various points throughout the production of a good or service. More mature companies with high levels of working capital can choose to vertically integrate supply chains, which involves the ownership of all levels of the supply chain network involved in the production of a good or service.
A supply curve is a graphical representation of the relationship between the price of a good or service and its supply. There are two variables involved — price on the Y-axis and supply on the X-axis. When the supply curve is sloping from the bottom left to the upper right, supply will increase as price increases. The supply curve can help to show what will happen to the price of a product or service as the level of its supply changes and vice versa. Be aware that price is considered the independent variable. In statistics, the independent variable is on the x-axis instead of the y-axis, but not in economics.
When factors outside of price or supply come into play, a new supply curve must be drawn. This means the supply curve will shift left or right. Some factors that will shift the supply curve include more competition entering into the market or the introduction of more efficient technology for producing goods or services. Both will increase the supply for those goods or services.
For example, if more car repair shops open in the same city, rates will become competitive and it will be difficult for anyone car repair shop to maintain higher rates, much less increase them. This can also happen for soybean farmers. When more farmers enter the market, or new technology is introduced that allows farmers to harvest more soybeans, the supply of soybeans will increase. In both cases, supply increases. This increase in supply shifts the supply curve to the right.
The correlation between the price and supply movement along the curve is called supply elasticity or price elasticity of supply. A one-to-one movement has a supply elasticity of 1. Meaning that if price increases by one unit on the curve and supply does the same, there is a supply elasticity of 1. The supply curve, in that case, is straight (diagonally). If price rises by 5 units and the supply only rises by 1 unit, price elasticity is only 0.2. That curve is closer to horizontal and has higher elastic supply. Lower elastic supply means the curve is closer to vertical.
Supply is the amount of a good or service that is available to consumers. The price a consumer will pay for a good determines how much of the good’s supply is sold. In this way, consumers are able to influence prices through their demand. As consumers buy up the supply of a product without decreasing their demand, the price increases. At some point, price becomes too high, and demand falls.
Equilibrium occurs when supply and demand are equal. From the above example, as the price falls, demand increases. Eventually, the market determines the right price, and fluctuation between supply and demand slows. This is where the market begins to meet equilibrium.
A surplus is the amount of an asset or resource that is unused. For example, an inventory surplus occurs when there is unsold inventory. A budget surplus occurs when there is more income than expenses. An economic surplus has two types — consumer and producer.
A consumer surplus occurs when the price of a good or service drops below the maximum price that a consumer will pay. In that case, the consumer can buy the product with cash left over. A producer surplus occurs when the price of a good that is being sold sells for a higher price than was expected by the producer, allowing the producer to make an excess profit. Note that these two scenarios are mutually exclusive — one’s gain is the other’s loss.
Swaps are most used with interest rates. When two companies with loans have different views on where interest rates are going, they may decide to swap their rates with each other. The swap is often executed by using derivatives contracts. Swaps can be used on commodities, currencies, and debt-equity structures.
SWOT (strengths, weaknesses, opportunities, and threats) is a type of analysis that lets companies take an assessment of their position within an industry. It is a framework that helps companies look both inward and outward.
SWOT is divided into two main areas — internal and external. The internal analysis includes strengths and opportunities, and external analysis includes weaknesses and threats. Companies should try to take advantage of strengths and opportunities while minimizing weaknesses and threats. SWOT is often performed by a group of people rather than a single person. It’s also important that the group feels they can speak freely and without consequences.
Systematic sampling is a method of population sampling for statistical inference. It is a form of random sampling. To perform systematic sampling, a sample size from a population must be determined. Then the nth value can be calculated. For example, if the population size is 10,000 and the target sample size is 100, then every 10,000/100 = 100 participants should be chosen. 100 is the nth value. This means every 100 people within the population should be sampled.
One drawback of systematic sampling is skew. If the population is categorized or grouped, skew can occur in the samples. An example of this is a company with departments of 100 people. If each first person in every 100 samples is a manager of the department, then the sampling will be overweight towards managers.
When performing systematic sampling, the starting point should be chosen at random. From there, the constant interval (i.e., nth value) is used consistently throughout the sampling to choose participants. The main benefit of using systematic sampling is that statisticians don’t have to sample every individual within a population — often an impractical task. Systematic sampling is popular with researchers because it is fast and easy. While only a few participants from the population are selected, systematic sampling provides an accurate representation of the total population.
The starting point of a systematic sampling must be random. Using the example from above, a number between 1-100 can be chosen as the starting point. If 25 is the random number that comes up, then the 25th person in the first 100 block of participants is chosen first. In the next round, the 125th person is chosen since 100 is the nth value. Additionally, a time element can be injected into the process. Perhaps a participant is chosen each 12 hours until all participants have been chosen.
A T-Test is a statistical test mainly used with small groups of data. A T-Test compares the means of data points between two populations. The test checks if the two populations are significantly different. This is accomplished by using a null hypothesis. The T-Test was developed in 1908. Some of the first T-Tests were used to check the quality of stout brewed by the Guinness beer company.
A tax credit reduces the amount of taxes owed to the government. Tax credits shouldn’t be confused with tax deductions and exemptions, which reduce taxable income. Tax credits provide a dollar for dollar reduction in taxes owed, making them more favorable than deductions and exemptions.
Tax credits come in three types — nonrefundable, refundable, and partially refundable. Each type of credit will reduce your taxes. A nonrefundable credit can’t create a refund, while a refundable credit can create a refund. A partially refundable credit allows, in some cases, taking part of the credit as a refund.
Tax deductions help to reduce taxes owed at the end of the year for individuals and companies. Deductions can come in the form of expenses incurred throughout the year or as itemized deductions. If an individual adds up all of their eligible deductions for the year and they don’t equal the standard deduction, the person can elect to take the higher standard deduction.
Some examples of (itemized) deductions include healthcare, mortgage interest, property taxes, and home office and related job expenses. Up to $3,000 in losses on investments can also be used to reduce tax liability. Investment losses from the previous year can be carried forward into the current year for up to $3,000 in total investment losses.
Tax loss harvesting is a tax-saving investment strategy. By selling a losing position, the investor can offset gains, reducing their total tax bill. Tax loss harvesting is usually most effective against short-term gains, which are taxed at ordinary income tax rates. The strategy is best executed near the end of the year when the investor is more likely to know how much gain and loss they will have. From this, they can determine more accurately which stocks to close out at a loss, offsetting winners in the process. While short-term gains can have the most tax impact, tax loss harvesting can also be used with long-term gains.
The Tax Reform Act of 1986 was signed into legislation by President Ronald Regan. It was meant to simplify the tax code and stimulate the economy. The law lowered the maximum rate on ordinary income (earned income) from 50% to 28% while raising it on long-term capital gains (unearned income) from 11% to 15%.
Tax-Optimized Real Estate™ is a proprietary investment process that seeks to maximize an individual investor's long-term after-tax cash flow and total returns on commercial real estate within their risk tolerance and unique tax situation.
Taxable income is calculated as total revenue less total expenses and applicable deductions and exemptions that are allowed in that tax year.
Technical skills are specialized skills that are practical. They can be physical and mental labor or non-physical, such as working at a computer all day. Physical and mental labor may come in the form of an offshore diver who caps underwater oil well leaks. Contrast this to an auto worker on an assembly line who does simple, repetitive tasks. Technical skills are often not repetitive or simple.
Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that
The Dow Jones Industrial Average (DJIA) is an index that tracks 30 publicly-owned companies that trade on the NYSE and NASDAQ. The Dow Jones Industrial Average is one of the oldest indices in the world and is generally accepted as a gauge for the momentum or lack thereof in financial markets. Named after Charles Dow, the DJIA is designed to function as a proxy for the US economy and includes firms such as ExxonMobil, Goldman Sachs and General Electric.
The agency was created in response to public concern with regard to the health of the natural environment and humans. The EPA regulates manufacturing, processing, distribution and use of chemicals and pollutants and enforces its standards via fines, sanctions and other various methods of penalty to actors who violate its terms.
FICA contributions are mandatory. Funds collected as a result of this payroll tax help fund programs such as Social Security and Medicare that pay for current retirees’ and other beneficiaries’ benefits.
Time value of money is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Title company is a company that examines and insures title claims for real estate purposes. The title company verifies legal title to a property through a review of
Countries are constantly importing and exporting goods. But when more is imported than exported, a trade deficit occurs. Trade deficits aren’t bad and can occur for a number of reasons. Countries may import more than they export because the economy is growing so quickly. Also, wealthy individuals in the country may be buying luxury items from other nations.
When a country can’t produce enough for its residents, either because of its fast growth or lack of resources, it imports what’s needed from other nations. This kind of import/export imbalance leads to a trade deficit. After a while, imports and exports come back into alignment. A result of trade deficits is an outflow of domestic currency.
A trade surplus occurs when a country exports more than it imports. A country’s trade balance can be calculated from a simple formula: Total Value of Exports - Total Value of Imports. When a country exports more than it imports, its currency rises in value relative to other currencies. The country also has more control over its currency because less of it is leaving the country.
A trade surplus may eventually work back to equality where imports equal exports and can even result in a trade deficit, where exports are less than imports. This happens because as a country’s currency rises, it costs more for other countries to purchase its products (exports). As demand for the country’s products decreases, so do its exports and currency.
The Tragedy of the Commons is an economic problem where individual use depletes a resource, removing it from use by the general population. Because each individual is concerned only about their benefit from the use of the resource, no one individual is looking out for the welfare of the common resource. There is no investment in the well being or management for the resource’s future. Every individual pursues the use of the resource for their personal gain.
Some solutions to the Tragedy of the Commons include privatization and government intervention. Through privatization of the resource, owners will ensure the resource is taken care of, so it continues to benefit them and potentially others (for a price). Government intervention may place restrictions on the use of the resource to ensure it is not depleted.
Tranche is a slice of the capital stack that reflects an investor’s credit or equity ownership position in a company or project. Different tranches have different cash flows and risks involved, as well as different claims to cash distributions.
A trust fund is created by a grantor and managed by a trustee. The trust fund is a separate entity from the grantor. The trustee is a neutral third-party who manages the trust, including distributing any assets to the beneficiary. The trust can contain almost any asset, including a business, land, stocks, and cash. The trust agreement, created by the grantor, establishes what happens to assets within the trust. The agreement is carried out by the trustee. Trusts are complex and costly to set up and are usually done with the help of an attorney.
Land trust is a fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or
Living trust is an arrangement created during a person’s life, in which the trustee holds legal title to assets for a beneficiary.
Trust, Real Estate is real property owned through a trust rather than by an individual. In this context, the exact legal form of ownership may take a variety of forms
A Turnkey Asset Management Program (TAMP) is a technology platform that handles much of the investment and portfolio management administration that financial advisors, investment advisors, wealth managers, broker-dealers, insurance companies, banks, law firms, and CPA firms must oversee. By outsourcing those tasks to a TAMP, managers free themselves up to focus on their core competencies and being able to meet in person with clients. TAMPs allow people who specialize in particular tasks to focus on those tasks. This keeps managers from being spread too thin.
In the case of a mortgage issuance, an underwriter is tasked with measuring the level of risk a financial institution assumes in agreeing to lend money to a borrower, based on the borrower’s creditworthiness and current ability to repay his or her debts.
Unearned income is generally from passive sources of income and those other than employment (i.e., wages or self-employment). It is called passive income because the recipient of the income doesn’t have to be materially involved in the income source. Some examples of unearned income include interest from savings, bonds, and CDs. Appreciation and dividends from stocks, inheritance, royalties are also forms of unearned income. Unearned income is taxed differently than earned income. It is not subject to payroll taxes or employment taxes such as Social Security and Medicare. Additionally, long-term capital gains (a form of unearned income) is taxed at a lower rate than ordinary income.
The unemployment rate is a measure of the population in the labor force that is without a job as a percentage of the labor force as a whole. Considered a lagging indicator, the unemployment rate will rise or fall in response to improvements or deteriorations in economic conditions. When the economic outlook turns bleak, unemployment may rise. When an economy is growing at a steady rate as a result of consumer and business confidence, the unemployment rate will tend to fall.
A labor union is an organization formed to protect the rights of workers in specific industries. Labor unions unite workers of similar trades to obtain leverage in negotiations with employers over wages, hours, benefits and other working conditions. Unions function like democracies in that leaders and officers are elected by peers to make decisions that are beneficial to the union as a whole.
The USDA or United States Department of Agriculture is a federal government program responsible for the management of food, agriculture, natural resources, rural development, and nutrition. Many Americans know the program for overseeing food safety. The USDA was founded in 1862, a time when 50% of Americans lived on farms.
In addition to food safety, the USDA is broad-reaching and provides services in the following areas:
- Hi-speed Internet access to rural areas
- Disaster assistance to farmers, ranchers, and rural residents
- Soil, water, and other natural resource conservation to landowners
- Wildfire prevention
- Agricultural research and statistics
- Nutrition in foods
It is also responsible for welfare programs such as food assistance for women, infants and children (WIC), and food stamps.
An unsecured loan is one that does not require collateral. Rather than being backed by a physical asset, the loan is only backed by the borrower’s creditworthiness. Because banks are taking on higher risks with an unsecured loan, they charge higher interest rates. These higher interest rates help to offset some of the loan losses that the bank will inevitably experience.
To receive the best-unsecured loan interest rates, borrowers must have a high credit score. Those with lower credit scores can still receive an unsecured loan but may need a cosigner, who will be responsible for the loan if the primary borrower is unable to make payments. Examples of unsecured loans include credit cards, student loans, and personal loans.
Useable square footage is the space that is actually occupied by a tenant, typically equal to the size of the tenant’s suite, without deductions for columns or other
Utility is a measure of how much satisfaction or use a consumer receives from a good or service. As you might imagine, there isn’t really a way to put a number on satisfaction or use, since both are fairly subjective. However, that doesn’t stop economists from trying to do so.
For example, let’s say you buy a car with a sunroof. Your friend buys the same exact car without a sunroof but pays $500 less. Economists will say that you received $500 of utility from the more expensive car. In other words, you received a specific amount of satisfaction for the additional cost.
Another form of utility is a company that provides a public service such as electricity or water.
VA Loans are mortgages issued by private lenders, but partially guaranteed by the Department of Veterans Affairs. To be eligible to apply for a VA Loan one must meet one of the following criteria1:
Vacancy allowance is a line item on a real estate pro forma that accounts for expected vacancy of the property. The specific allowance is dependant on the property type and
Vacancy rate is the percentage of all available units or space in a rental property that are vacant compared to the total supply of units or space at a particular time.
Valuation involves various methods for determining the value of a company and the price of its stock. Valuing a company is called fundamental analysis. Taking into account the company’s assets, profits, sales growth, and other related metrics, one can determine a value for a company. Dividing earnings by the average outstanding common shares of stock provides earnings per share (EPS), which can determine if a stock is over or undervalued, compared to competitors within its industry. Knowing that a company’s stock is overvalued can mean it is an investment to avoid, while one that is undervalued is may be a good investment.
Cost approach valuation is a real estate valuation method that bases a property’s market value off the cost it would take to build an equivalent structure. The cost approach takes into account the cost of land plus the cost of construction, less depreciation. Similar to its counterparts, the cost approach may have other forces that prove it inaccurate. For example, if vacant land is not available to compare against, the professional valuing the property will have to derive an estimate, making the end value less accurate.
Valuation, income approach (direct capitalization) is a real estate appraisal method that values a property by taking net operating income and dividing it by a predetermined capitalization rate. The income valuation method is not suitable for valuing owner-occupied residential properties, as it relies on income produced as a function of the property’s overall value. The income capitalization formula is as follows:
Sales comparison valuation is a real estate appraisal method that estimates a property’s value by comparing it against other properties with similar attributes that have been sold recently. This approach considers all of the individual features of a property, adjusting the value to reflect a sum of all the property’s features. A sales comparison approach may be used to evaluate both commercial and residential property.
A value-added tax is imposed on the gross margin at various points of manufacture and distribution and is assessed at each stage. It is thus a tax on a consumer’s consumption instead of their income.
Variable costs differ from fixed costs, which do not change based on the production of a good or service. An example of a fixed cost is rent, which is a contractual amount to be paid on a regular schedule over a defined period of time.
There are two forms of integration: forward and backward integration. A firm in the business of distribution seeks forward integration by reducing transportation costs, etc., while a firm seeking backward integration is typically in manufacturing and reduces its costs in the process of combining inputs to create value in a finished product.
A W-2 form is a document that an employer provides to its employee used to file taxes with the IRS on an annual basis. Employers are required to send W-2 forms to all employees to whom they pay salaries or wages before January 31 each year, providing the employee enough time to file his or her taxes prior to tax day in April.
War bonds are issued by a government to help finance military activities in times of war. These bonds do not pay interest and have a below-market-rate of return. US Government war bonds were issued at 50-75% of face value with a 10-year maturity. Because of low returns, governments must appeal to its citizens to invest in war bonds.
In 1917, the US Government issued Defense Bonds, also called Liberty Bonds, which were the predecessor to war bonds. These bonds were used to help finance US military activities during World War I. The US Government raised $21.5 billion worth of Liberty bonds. The government was able to raise $180 billion worth of war bonds during World War II.
Warranty deed is a document that may be used to legally transfer property. A warranty deed states that the owner can legally transfer the property and that no other
A withholding tax is a tax held by employers from employee paychecks. The tax is then paid to the government (federal and state). Employees are responsible for calculating their withholding tax. Calculating the withholding tax is sometimes as simple as the employee counting their dependents. Other times, it can be more complex.
If an individual calculates too much withholding tax, they will likely get a refund for that tax year. This is effectively lending the government an interest-free loan. If the withholdings are too low, an individual may incur an underpayment penalty. For those whose income doesn’t come from an employer (i.e., self-employed), they must pay quarterly taxes.
Working capital is the difference between a firm’s current assets (e.g. cash, accounts receivable, inventory) and current liabilities (accounts payable, other liabilities due within one year). Working capital measures a company’s liquidity and efficiency in its operations. Firms with high levels of working capital are in an advantageous position to invest in current operations or expand the capacity of future operations via capital expenditure.
With the adoption of a 31-month working capital safe harbor for Qualified Opportunity Fund investments in Qualified Opportunity Zone Businesses that acquire, develop, or renovate a business property in a QOZ, QOFs now have an ample amount of time to deploy capital responsibly without being disqualified as a QOZB. In order to qualify as a working capital safe harbor, a QOF must have a written plan outlining the projected uses of capital to develop a business in a QOZ or acquire, develop, or renovate a property located in a QOZ.
The World Bank was created in 1944 following the Bretton Woods agreement near the end of World War II at a time when many nations needed financing to rebuild following the conflict.