A monopoly is an unhealthy situation in the market in which a single company is the only option in a specific sector or area, which undermines the principals of a free market. In a free market, there is competition which keeps the prices and the quality of products as good as they can be for the consumer. The consumer will therefore receive the most value, and society will be in its best possible position, when the needs and demands of consumers are being addressed by several companies attempting to outdo each other to earn the consumer’s business. Continue reading...
The Fiduciary Standard stipulates that an advisor must place the client’s best interests first. The best way to understand the fiduciary standard is to think in terms of another standard, called the suitability standard. The suitability standard says that a broker/advisor need only recommend investment products that are “suitable” for the client - but those investments do not necessarily have to be in the client’s best interests. Continue reading...
The suitability standard states that a broker-dealer is obliged to, in the very least, make investment recommendations that are suitable for their clients. The SEC defines a broker as someone who acts as an agent for someone else, and a dealer as someone who acts as a principal for their own account. The suitability standard only details that the broker-dealer has to reasonably believe that any recommendations made are suitable for clients (in terms of the client’s financial needs, objectives and unique circumstances) instead of having to place his/her interests below that of the client. An example would be a broker recommending a proprietary bond fund for a client looking for a fixed income solution. Continue reading...
Standard Deviation is a measurement of how far from the average (mean) the majority of a data set lies. Standard Deviation is a measure of variability, and it is on a different scale for each data set being measured; there is no “standard” standard deviation. It is possible to normalize it for comparison to other data sets using measurements like r-squared and the sharpe ratio. The number arrived at when computing standard deviation is going to reveal the distance, in terms of one of the quantifiable variables being observed, from the average, in either a positive or negative direction, within which 68% of the data set falls. Continue reading...
Stagflation is the occurrence of both stagnation, which is slowing growth and production levels, and inflation, which is the increase of the average cost of goods. If production costs rise for some reason, such as higher oil prices, it can cause economic growth to slow down and the supply of goods in the market to drop. This is known as stagnation. The weakened supply of goods in the market and the higher production costs of the goods will cause the retail prices of the good in the market to go up. Continue reading...
The Energy Sector contains companies that are in the business of discovering, processing, or selling (or all 3) natural resources like oil, natural gas, coal, solar and wind. Oil companies dominate the sector and are the largest players. Energy stocks are also cyclical, meaning that they tend to perform better when demand for energy is high (economic expansions). Companies in the Energy sector are also very sensitive to changes in the price of the underlying natural resource, like oil. For example, as the price of oil rapidly declined in 2015, falling by 50+%, the earnings for virtually every energy company collapsed. Continue reading...
Active management is when an investor or money manager attempts to outperform an index or benchmark, using tactical strategies. Many economists and financial professionals believe that the markets are efficient. This means that all available financial information has already been built into the prices of securities, and that you cannot outperform the market by making specific selections of stocks, timing the market, reallocating your assets regularly, following the advice of market pundits, or finding the best portfolio managers. Continue reading...
There are some things to keep in mind when investing in commodities and their ETFs. Most commodities trading revolves around who owns a hard asset and when. ETFs occupy a space in the commodities world that is somewhat unique. An ETF such as the Crude Oil Index does not physically buy millions of barrels of oil and store them. It buys financial instruments which theoretically should reflect the price of oil. Continue reading...
Commodities are more volatile than most assets. The supply-demand dynamics of commodities are continuously changing, and sometimes very rapidly. Different commodities will have different levels of volatility, of course. Some commodities are extremely volatile. For example, natural gas has had a volatility of almost 45% in some periods, and gold has experienced movements of 20-30% per year lately. Crude oil prices fell some 50% in 2015, as a global supply glut was met with weakening demand, particularly from China. Gold is actually on the less-volatile side of the spectrum for commodities. Silver, Nickel, and crude oil tend to be on the upper end of the spectrum along with exotic metals such as platinum and palladium. Continue reading...
Basically synonymous with Normalized EBITDA, Adjusted EBITDA is a non-GAAP method of making earnings valuations a little more standardized between companies. Adjusted Earnings is a valuation that has many moving parts in the form of the interest, taxes, depreciation and amortization that might be included there, in addition to the non-GAAP nature of the methods. EBITDA removes all of those moving parts and looks at the Earnings before any of the other arithmetic interferes, hence the name Earnings Before Interest, Taxes, Depreciation, and Amortization. Continue reading...
Ethereum uses a blockchain that looks very similar to Bitcoin’s until you get into the details. Ethereum is a platform on which transactions can be made using Ether or other tokens which have been made using the protocol, and smart contracts and decentralized applications (Ðapps) can be executed using the distributed computing power of what’s called the Ethereum Virtual Machine. When viewed from different angles, Ethereum is an open-source coding environment, a market upon which to distribute new blockchain-based applications, and a distributed computing machine that processes functions of the blockchain applications across a broad network. Distributed computing itself is not that new, but distributed computing on a blockchain is. Continue reading...
Mortgage suitability is a standard that does not technically exist in a regulatory way at this point, even though some legislators and consumer protection groups have sought such a standard. Some financial services representatives, for instance, operate under a suitability standard that takes the financial situation and goals of the individual into account when making investment recommendations. This protects consumers to the extent that it deters some professionals from taking advantage of the consumer and being possibly subject to fines, sanctions, and suspension or loss of license due to violations of the standard. Continue reading...
A coefficient of Variation is a statistical measure of expected return relative to the amount of risk assumed. It’s also known as “relative standard deviation,” which makes sense since that implies that your expected risk is adjusted based on the expected return. You can easily calculate the Coefficient of Variation by dividing the standard deviation of the security by its expected return. Continue reading...
Also known as Business Combination Accounting, there are specific guidelines and bits of information that must be documented on the books during an acquisition. Acquisition Accounting is a standardized way to account for the assets and liabilities of companies who are part of a merger or acquisition. International Financial Reporting Standards (IFRS) stipulate that even in a merger where a new company is formed, one company must play the role of acquirer and the other of acquiree, but that rule really only applies outside of the US. Continue reading...
Employers make the decision to establish a 40(k), but it has to be good enough for employees to want to participate. An employer is responsible for establishing a 401(k) and for overseeing it as the sponsor and fiduciary. A self-employed individual can also establish an Individual 401(k), which has the same contribution limits and requires none of the testing or auditing of a regular plan. Other options for work-site retirement plans are SIMPLE IRAs, SEP IRAs, and various kinds of profit-sharing and deferred compensation arrangements. Continue reading...
Any professional that you work with for financial planning is going to be compensated for the work they do, but there are different ways they earn their pay. Whether it’s worth it to you is another question. If you have enough knowledge and time on your hands, and your investment portfolio is not very complicated, you may be able to manage it on your own. This can save you some money on financial advisor fees. Continue reading...
A resistance line is the inverse of a support line and represents the glass ceiling through which a security price has difficulty breaking through. Resistance lines are calculated as part of analysis methods which use moving averages and standard deviation, or similar calculations, to put a range of probability on the expected movement of a security price, with the resistance line representing the top of that range. Continue reading...
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...
The Sharpe Ratio is a risk-weighted metric for returns on investment. It measures whether an investment offers a good return for the amount of risk assumed by the investor. The risk/return trade-off is a positive linear relationship in most theoretical depictions – if an investor seeks greater returns, they will have to take on greater risk. For more stability and less risk, an investor will have to sacrifice some potential returns. Continue reading...
Bollinger Bands were developed by famous trader John Bollinger as a technical analysis tool to discern the likely trading range of a security. A Bollinger Band is typically two standard deviations from a moving average line, both above and below the average. Standard deviation is another word for the average volatility of a price over a length of time. It is typical for a trader looking up the historical price chart for a security to compare it to a moving average line. Continue reading...