What does Equity or Security Mean in the context of Capital Markets?
An equity or security generally refers to an individual position owned within a portfolio. An equity generally signifies some level of ownership in a corporation. When a person has ‘equity in a company,’ it generally means they own some portion of it and have a claim on the company’s value. An equity is another way of referring to a stock, which also represents a shareholder’s stake in a company. A security is a broader term, which refers to an instrument of ownership. Stocks are considered securities, but fixed income or debt holdings can also be labeled securities within a portfolio. Continue reading...
What is the Rising Flag (Bullish) Pattern?
The Rising Flag (or Bullish Flag) pattern looks like a flag with a mast. It forms when rising prices experience a consolidation period, and the price moves within a narrow range defined by the parallel lines through points (2, 4) and (3, 5). After the consolidation, the previous trend resumes. This type of formation happens when the price of a pair is expected to move in a rising trend line, but some volatility along the way creates a consolidation period. Continue reading...
What are Accounting Methods?
Accounting Methods are the overarching style of accounting and bookkeeping which determine the practices, procedures, systems, and controls which should be put in place. There are two main methods of accounting that businesses and individuals can use to approach their accounting, and these are known as cash basis and accrual basis. The IRS expects businesses to choose early one which method they will use, and it can be difficult to change accounting styles later on. Continue reading...
What is Return on Net Assets?
Return on Net Assets is a calculation used to determine how well a company performs, relative to its resources. Return on Net Assets gives investors an idea of how well a company uses its resources to generate profits. Net assets includes not only fixed, tangible assets, but also the net working capital of a business. Working capital is defined as Current Assets minus the Current Liabilities of the business. The net profits for a period are divided by the net assets to arrive at the Return on Net Assets. Continue reading...
What are Consolidated Financial Statements?
Consolidated financial statements are required when one company owns a controlling interest in another company. They must adhere to the same accounting principals as a the financial statements for a single company. Some detail tends to be lost if the parent company and subsidiaries have very different operations. If a company owns more than 50% of another company, their financial statements will be consolidated into one, according to GAAP. Up to that point, the interest in another company can be accounted for using cost-method or equity-method accounting. Continue reading...
What is Volatility?
Volatility is a measure of the variance, deviation, or movement of a stock. Volatility is all the extra movement of a stock or other security over and above (and below) a line of averages. Put another way, it is a measure of how many changes in price, and by how much, a security experiences over an amount of time. Computations of Standard Deviation and Variance are measures of the degree of volatility which exists in the movement of a stock. Volatility will also be measured relative to a benchmark index, and the degree to which a security adheres or deviates from the benchmark is called Beta. People will also trade on derivatives of the VIX, which is the volatility index of the S&P 500. Continue reading...
What is Yield to Maturity?
The payments remaining on an interest-paying bond or instrument, plus principal, are totaled up and then annualized, and this annual rate is the yield to maturity. Yield to maturity is a calculation that helps an investor decide if he or she is getting a good deal. If yield to maturity is greater than the coupon rate, the bond is trading a a discount. If yield to maturity is less than the coupon rate, it is selling at a premium. If they are equal the bond is trading at par value. Continue reading...
What is Insider Trading?
Simply put, insider trading is the crime of trading in a company’s stock based on information not available to the general public. According to the efficient market theory, any publicly available information is immediately "priced-in" to a stock, so any article you might find in a news publication is not going to give you a competitive advantage for a stock's future price movements. Insider trading tips give an unfair advantage to the holder of the information, since the market has not had a chance to react to it yet. Of course, insider trading is illegal and several notorious cases have been well-publicized, like that of Martha Stewart. She was jailed. Continue reading...
Should I invest in commodities?
Investing in commodities has lately become accessible to even small retail investors via ETFs. There are now literally hundreds of different commodity ETFs, linked to various individual commodities and baskets (such as agricultural baskets, commodity indices, etc.) These instruments are very complex and sometimes do not reflect the behavior of the underlying commodity. While investing in commodities may significantly diversify your portfolio, it requires profound knowledge of the behavior of the underlying assets. Continue reading...
What is a Debenture?
A debenture is a non-secured loan, meaning that it is not backed by collateral or other assets. In other words, it is a loan backed by general credit. Corporations and governments issue debentures regularly, and an example of a government debenture would be a U.S. Treasury. Continue reading...