A company may reinvest earnings instead of paying out dividends. These earnings do not necessarily sit in a retained earnings account, but are used to improve the business and make it more profitable. This could even include paying off debt. Retained earnings is found in the Shareholder’s Equity portion of a company’s balance sheet. Despite the fact that earnings have not been dispensed to them in the form of dividends or share buybacks, shareholders will see the value of their stock appreciate when earnings are retained and used to grow the business. Continue reading...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
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...
Capital Loss refers to a loss realized when a security is sold for less than it was purchased for. In stock trading, if an investor purchases stock ABC for $30 / share, and then sells the stock a few months later for $22 / share, they have realized an $8 / share capital loss. At the end of every year, as per U.S. tax policy, capital losses can be used to offset capital gains, so as to help an investor reduce their tax burden. A common year-end strategic approach is to “harvest” capital losses in an effort to offset any capital gains made from trading that year. Continue reading...
The Cost of Capital is the hurdle over which a business must get to generate positive cash flow. It is what it will cost companies to get capital from investors. Companies sometimes use debts or equities to finance their business operations. The service paid on debt and the operating expenses are lines over which the revenue must get to be saved as retained earnings or distributed as dividends. The yield expected by investors on debt is the cost of capital for the company taking on those loans. Continue reading...
As of 2014, global GDP was $77 trillion. The total market capitalization of all world stock markets is approximately $70 trillion, and about a fourth of that amount is the U.S. market. The U.S. economy is the largest by GDP, which for 'fiscal year' (FY) 2016 was approximately $19 trillion. The total value of notional derivatives fell to $18.1 trillion. How Many Dollars do We Have in Circulation? What is Currency in Circulation? Continue reading...
Tier 1 Capital are the core asset holdings of a bank. They are disclosed, liquid, risk-averse assets, and are used by regulators to evaluate a bank's compliance with capital requirements. Banks lend out about as much money as they can in general. They must have capital on hand to absorb losses and remain solvent. The Basel Accord is an international agreement dealing with capital reserve requirements for banks, enacted after the meltdown of 2008. Continue reading...
In the world of finance, private equity is a relatively new industry whereby private companies finance other businesses through direct investment, often in exchange for equity in the company and in some cases, decision-making capabilities. Private equity companies generally use capital of the principals or of high net worth investors to strategically invest in growing companies that need growth capital or seed capital to expand operations. Continue reading...