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What are Envelopes and Trading Bands?
Moving average envelopes and trading bands help traders filter their decisions to trade. These tools set thresholds on the amount of movement above and below a moving average to trigger a decision to trade (or at least prompt further consideration by the trader). A moving average envelope often takes a moving average line for a security or index and duplicates it, moving one line a certain percentage above and one a certain percentage below (the distance may depend on volatility levels). Price fluctuations in a security then might trigger a decision to sell when the price hits the upper band, or a decision buy when the price hits the lower band. If it crosses the bands it might be seen as a new trend. Continue reading...
How to use Bollinger Bands in trading?
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...
What is Burn Rate?
Burn rate is a term for negative cash flow, or the rate at which a company burns through capital, especially a startup company. Burn rate is used frequently in the world of startups and venture capital. Using a burn rate, investors can see how much longer operations can be sustained with the capital at hand, and this length of time is called a runway. Startups will normally need at least a few months before they start generating enough revenue to have a positive cash flow. Burn rate is normally expressed as the monthly negative cash flow. Continue reading...
What is the Inverted Cup-and-Handle (Bearish) Pattern?
The Inverted Cup-and-Handle (sometimes called Inverted Cup-and-Holder) pattern forms when prices rise then decline to create an upside-down “U”like shape (1, 2, 3, also known as the Cup), followed by a shorter relatively straight price increase that bounces from the right lip (from 3 to 4, creating the Handle). The rising handle forms as a result of mounting buying pressure created when the security retests a low at the right lip of the cup. Once the buyers give up, sellers take over and the security has the potential to decline rapidly. Continue reading...
What is the Capitalization Ratio?
The capitalization ratio measures a company’s leverage, or the amount of long-term debt it holds relative to long-term debt + shareholder equity. Essentially, it is a measure of how capitalized a company is to support operations and growth. Continue reading...
What is Capital Accumulation?
Capital Accumulation is the act of acquiring more assets which will generate more profits or other benefits to the company or economy. Capital accumulation is sometimes discussed in relation to rumors that a company is preparing to acquire another company. This could be the case for one or two reasons. One would be that the company has actually been buying up shares in the target company for some time. Continue reading...
How to use the Cup-and-Handle (Bullish) Pattern in trading
Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the upward breakout price/entry point. To identify an exit, compute the target price for the Cup-and-Handle pattern by adding the pattern’s height (the difference between the highest high and the bottom of the cup) to the price at the right cup lip. The confirmation move is when the security moves past the breakout price above the right cup lip. Continue reading...
What is Capital Structure?
Capital structure gives a framework for a company’s makeup and how it finances its operations, because it includes long and short-term debt plus common and preferred equity. Capital structure is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. Often times, investors will want to look at a company’s debt-to-equity ratio as a telltale of what their capital structure is. The higher the debt-to-equity ratio, the more that particular company is borrowing to finance operations versus using cash flow or assets on hand. Continue reading...
What is a Capital Account?
The Capital Account in a company is where paid-in capital, retained earnings, and treasury stock is accounted for. In macroeconomics, the Capital Account shows the national net change in ownership of assets. In accounting and bookkeeping, the Capital Account tracks the amount of Capital on hand at a company, which is the sum of the paid-in capital, the retained earnings, and the value of the treasury stock. Paid-in capital is the money collected from investors during an IPO or other stock issue. Continue reading...
What is Working Capital?
Working capital is computed by subtracting a business’s current liabilities from its current assets. Current means that the assets and liabilities exist within the current year. The appropriate amount of working capital will vary from business to business. Some businesses have a need for a large amount of working capital, and some can maintain a healthy balance sheet with relatively little working capital. Whatever the situation is for a particular business, the approximate calculation for the amount of working capital that they have to use is arrived at by subtracting current liabilities from current assets. Continue reading...
What is Paid-Up Capital?
Paid-up capital is the money (‘capital’) collected by a company from issuing shares of their stock. In other words, its money raised from issuing and selling stock. Paid-in capital is not money borrowed, but rather money invested in the company by shareholders. A company will generally issue shares of stock with a par value and an offer price, and paid-up capital represents the difference between total dollars invested and par value of the shares. Continue reading...
What is the Capital Market Line?
The Capital Market Line is a complex concept, but put simply, it is a calculation meant to give the investor/analyst a range of potential returns for a portfolio, based on the risk free rate and the standard deviation of the portfolio. The Capital Market Line is a part of the capital asset pricing model (CAPM) that solves for expected return at various levels of risk. It takes into consideration a portfolio’s risk assets and the risk-free rate. Continue reading...
What Does Market Capitalization Mean?
Market Capitalization refers to the total ‘market-size’ of a company, calculated by the number of shares outstanding multiplied by the stock price. Investors should take care not to consider a company’s market capitalization as an accurate reflection of the company’s actual size by assets. Companies with very large market capitalizations can still operate with net losses, Twitter being an example. Continue reading...
What is the Debt to Capital Ratio?
The debt-to-capital ratio is a measure of a company’s leverage that looks at total debt compared to total capital (shareholder equity + debt). This measure of leverage is not a globally accepted accounting practice, therefore it is important for analysts to learn exactly what is being included by the company as their debt and equity in calculating the ratio. Generally speaking, a higher debt to capital ratio indicates that the company is financing more of its operations and needs through the debt markets versus with equity. Comparing debt-to-capital ratios amongst companies within the same sector or industry can be a useful exercise. Continue reading...
What kind of venture capital funds exist?
Different venture capital firms focus on different types of funding. Some are more attuned to late-stage funding for proven companies who still have not gone public, while others prefer to help startups with bright futures. There are large venture capital firms, which might invest in any start-up company, as long as they think that the company has potential. There are also more narrow VC firms specializing only in one or a small number of industries, such as clean energy, or semiconductors. Continue reading...
What is Mutual Fund Classification According to Market Capitalization?
One way of classifying mutual funds is by the market capitalizations of the companies they invest in. Mutual funds can invest in stocks and bonds of foreign corporations, or corporations in the biotechnology industry, or with any other objective they may have. But one way to manage it is by size—to capture market exposure for companies of different sizes. The size of a company is defined by the amount of market capitalization it has, which is the number of shares outstanding multiplied by the share price. Some indexes and funds will adjust market cap rankings to give weight to “free float,” which is the amount of market capitalization that is freely trading, and is not held by other companies, governments, or founding families. Continue reading...
What can I learn about venture capital?
Many people know about venture capitalists that help provide the funding for startup companies in Silicon Valley and other areas. In reality, only a small portion of venture capital is directed at seed money for startups. The rest of it is directed at companies in various phases of growth that need capital to fuel a new expansion or to turn their business around. Venture capital comes from individual investors or venture capital firms who agree to infuse new money into a business in exchange for an equity stake in the business going forward. Continue reading...
What is the minimum investment in a typical venture capital fund?
Minimum investments in venture capital funds tend to be vast sums of money. They tend to be for $1 million or more but can be as low as $250,000. As with hedge funds, the minimum investment is very steep and suitable only for accredited investors and qualified buyers. A typical minimum investment in a VC fund varies between $1 to $5 million, but it can be over $25 million. Most of the investments in venture capital funds are made in terms of commitments: you commit a certain amount of money, and when a venture capital fund finds an appropriate investment, it makes a “call” on you to deposit the money with them, perhaps in increments over a period of several years. Continue reading...
What is Earnings Before Interest Depreciation and Amortization (EBIDA)?
EBIDA is one of the family of earnings metrics which give the analyst, investor, or accountant an opportunity to view earnings, which is synonymous with net income, with a few factors added back into it. In this case, interest payments on debt, depreciation of hard assets on the standard IRS schedules, and amortization of principal debts are all added back into the earnings of the company for the current period. Not to be confused with EBITDA, its more popular counterpart. Continue reading...
What does Capital Gain Mean?
A Capital Gain refers to the profits or gains made from selling a security at a higher price than the original purchase price. In stock trading, if an investor sells a stock for more than they bought it for (or the price inherited), the profit realized is a capital gain. The same applies to gains made in real estate. To note, assets held within tax-deferred accounts, like IRAs and 401(k)s, do not trigger capital gains when sold for profits. It only applies to taxable assets, like stocks held in a brokerage account. The capital gains tax is the tax paid on net capital gains in a given year. Continue reading...