A market maker is a broker-dealer firm or a registered individual that will hold a certain number of shares of a security in order to facilitate trading. There could be as many as 50 market makers for one particular security, and they compete for customer order flows by displaying buy and sell quotations for a guaranteed number of shares. The market maker spread refers to the difference between the amount a market maker is willing to pay for a security and the amount that the other party is willing to sell it. Continue reading...
The difference between the Bid and Ask prices on a stock or other security are known as the Spread. Designated market makers are traders whose job it is to make a market for securities, by offering to buy or sell shares, and thus creating liquidity, often at the same time. Their money is made on the spread. In highly liquid markets, the spread will shrink. So if everyone is buying and selling the same stock one day, there may be virtually no spread between the Bid and the Ask price, and this is seen as efficient. Continue reading...
Mark to Market (MTM) is an accounting method meant to price an asset by its most recent market price. An example would be mutual funds, whose “NAV” price is a mark to market price of how much the mutual fund closed for at the end of a trading session. The mark to market accounting method has some pros and cons. On the pro side, if an asset is very liquid, then MTM will provide an accurate reflection of its current value. Continue reading...
Market research is the process of evaluating a possible opportunity for entering into a market with a new product or company, or for evaluating the effectiveness of a product or company in a market that they are already invested in. Market research can also be important for decisions regarding mergers and acquisitions. It may involve surveys and market study groups. Sometimes a company will conduct its own market research, but often third-party companies are hired for the task. These companies may specialize in sampling and surveying methods for consumer groups, and/or statistical analysis of a business model or product’s chance of success in a given market. Companies may look to such analysts if they are considering a merger or acquisition, or of launching a new product. Continue reading...
Market efficiency describes the degree to which relevant information is integrated into the price of a security. With the prevalence of information technology today, markets are considered highly efficient; most investors have access to the same information with prices and industry news, updated instantaneously. The Efficient Market Hypothesis stems from this idea. Efficient markets are said to have all relevant information priced-in to the securities almost immediately. High trading volume also makes a market more efficient, as there is a high degree of liquidity for buyers and sellers, and the spread between bid and ask prices narrows. Continue reading...
Traders can enter time-specific trade orders in the form of opening or closing orders, which are only to be executed as close to the opening or closing price as possible. Market-on-open orders are looking to buy or sell immediately after the market opens, at the opening price. Market-on-open orders are instructions for a broker or floor trader (even though we don’t see those much anymore these days) to buy or sell shares at opening price of the stock being traded. Continue reading...
Also called net operating margin, return on sales can indicate how well a company makes use of its sales revenue. By dividing Operating Profit by Net Sales, we can arrive at the Return on Sales. Essentially what we’ve done is broken down profits on a per sales basis. We can see what percentage of sales ends up as profit, or, on the other side of the coin, how much profit is generated per unit of sales. This can be useful for a comparison of companies of different sizes, because it excludes their assets, capital structures, taxes, and interest. Continue reading...
Total Return is the measure of all appreciation and interest as well as dividends and other distributions from an investment. Often computations of return will only consider appreciation, and it can be an easy mistake to make when looking at performance data at times. When a stock pays significant and consistent dividends, it needs to be factored in to the computation of total return. This adds a significant compounding effect to the investment’s overall performance, but if you just looked at the sheets that said it had a 4% return and a 2% dividend yield, you would be missing the most important part. Total return can be calculated for different kinds of investments or an entire portfolio, and is often done on an annual basis once all distributions have been made. Continue reading...
Market Saturation is the point at which there are few consumers that are still interested in buying a product because those who were ever likely to already have done so. Saturation can be said to exist for all similar products in a market. This may call for different strategies which could keep a company going. One is that products can be made to wear out after a certain amount of time and need replacement. Another is that the business can shift its focus to subscription or service-based income. Continue reading...
Dollar cost averaging (DCA) is a method of hedging against the risk of investing a lump sum at high market prices. With DCA, the investor deploys money at set intervals, hoping to get the best average price per share. If you use the same amount of money to buy shares at set intervals, you will acquire more shares when the market is down, and fewer shares when the market is up, so theoretically you would have acquired more of the advantageously-priced shares overall and will be in a better position in the long run. Continue reading...
Market share is the percentage of the total amount of similar products sold in a marketplace that are constituted by a particular product or the products of a particular company. This sometimes used synonymously with the term Market Penetration. Most industries have many competitors offering essentially the same services and products; in fact that is a sign of a healthy capitalistic marketplace. The market share of a company is the proportion of the total sales in that industry that belong to their company. Continue reading...
Return on Equity refers to the return on shareholder’s equity, which is like looking at the compounding effects of profits. Shareholder’s equity, in the standard accounting equation, is the amount of assets and retained earnings in a company over and above the company’s liabilities. Return on Equity is a ratio which divides the net income of a company by the total shareholder’s equity in a company, which is effectively looking at the profitability of the profits of a company. Continue reading...
Return on Assets, or ROA, is an efficiency ratio which quantifies how much profit a company can generate with the assets it has. Return on Assets is a ratio of the net income of a company divided by the amount of assets it has on the books. It can also be synonymous with Return on Investment (ROI), at least at a corporate level. Theoretically this gives analysts an idea of how much profit a company could generate by buying more equipment or other assets, or how efficiently they use the assets in which they have invested. Comparing companies in a specific industry to their peers with ratios such as this one can be illuminating. Continue reading...
Return on Investment (ROI) is a ratio used to compare the net income of a project or investment to the amount invested. Return on Investment is a ratio that can be applied in many contexts, and this makes it a very popular way to compare the cost and benefits of many types of investments, for individuals or businesses. It is often interpreted as a percentage, to express the total gain over and above the amount invested as a percentage of the original amount. Continue reading...
Market exposure is the degree to which an investor is participating in the risks and returns of the market as a whole or a particular sector. Exposure can have a positive or negative connotation, but, as they say, “nothing ventured, nothing gained.” Market exposure allows an investor to participate in the potential upside of the market, but can also subject the investor to the inherent risks. Some people save money religiously but are not likely to retire the way they want to because they aren’t willing to let their money be risked in the market. Continue reading...
The concept of an efficient market is more applicable today than it was when it was conceived, a truly efficient market is nearly impossible. The Efficient Market Hypothesis states that random new information will affect the value of securities, and that new information disseminates so quickly among rational investors that it is futile to try to beat the “market portfolio.” Thirty years ago, this was more of a theory than an observable phenomenon, and plenty of inefficiencies in the dissemination of information and the pricing of securities could be pointed out. Continue reading...
Market risk is the chance that an investment will not maintain its value when it is dependent on the many factors that influence the health of the economy and the stock market. Investors must be aware that investing money in a stock or mutual fund is to tie the fate of that money to the fate of the company or companies that they have invested in. The other side of the coin, of course, is the potential for gains. The potential gains of an investment are the premium that is paid to an investor in exchange for allowing a company or mutual fund to take risks with the investor’s money. Continue reading...
Real rate of return is a notion that takes factors such as inflation and taxation into account before reporting a realized rate of interest on an investment. Economic theorist Irving Fisher first popularized the idea that there is a difference between a nominal interest rate and a real interest rate. Consider a bond that pays a steady coupon rate of 2% for the next 10 years. If inflation is more than 2%, the real rate of return on that investment is negative. If the investor got taxed on the nominal gains, the real rate of return is pushed further into negative territory. Continue reading...
Required Rate of Return is the return that investors will expect to earn on their money, given the risk and costs involved. Required Rate of Return is determined by the market for a particular security or asset at a given time. Issuers of fixed or variable coupon bonds must look at the rates offered by their peer institutions with similar credit ratings. Investors will require a certain rate of return if they are going to invest their money, and this is where the RRR gets its name. The calculations which help an issuer to arrive at the RRR will include the current risk-free rate (10 year treasury bond rate), liquidity, inflation, and so on. Continue reading...
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...