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What is a Bond Purchase Agreement?

If a municipality or company decides to issue bonds, they will need to form an alliance with an underwriting entity to help them price and distribute the bonds, and the Purchase Agreement outlines their contract. Underwriters on debt issues are normally large investment banks. They help the issuer, which could be a city government or company, structure the bonds and price them in a way that is suitable to their needs, and also agrees to help them distribute them. Continue reading...

What is a vertical spread?

A Vertical Spread involves the strategy of buying and selling an equal number of options on the same underlying security with the same expiration date, but different strike prices. Vertical Spreads can be both bullish and bearish, depending on your view of the underlying security. If you use calls, you are constructing a Vertical Bull Spread, and if you’re using puts, you’re constructing a Vertical Bear Spread. Continue reading...

What is a Profit?

In its simplest form, a profit is the revenue or income gained from an entity after all expenses/overhead is accounted for. In business, a company deals with a number of expenses - operating expenses (the cost of doing business), fixed costs (overhead), salaries and benefits, legal fees, and so on. If a company’s revenues exceed all of these costs combined, the company is considered profitable. A profit is also known as a company’s bottom line, net earnings, or net profit. Continue reading...

What are Profitability Ratios?

Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...

What is an Operating Profit?

Operating profit is a company’s profit from its business operations, and can be calculated by taking gross profits minus operating expenses. Operating profit is synonymous to operating income, and represents a company’s profitability from its core operations, which excludes earnings from other investments or interests and also does not factor the impact of taxes or interest. Continue reading...

What is Profit Margin?

Profit margin is a profitability ratio that measures, as a percentage, how much a company keeps per sale. Profit margin can be calculated by dividing net income by sales. A higher profit margin means a company keeps high percentage of each dollar sold as profit. For example, a 50% profit margin means that for every dollar earned, a company retains $0.50. It is often helpful for an analyst to look at how a company’s profit margins have changed over time, to measure whether it is becoming more efficient in the sales of goods. Continue reading...

What is Accounting Profit?

Profit is a term that is synonymous with earnings and net income, and it is basically what is left of revenues after expenses. All of these are basically computed the same way: gross revenue minus the cost of goods sold, business expenses, and taxes. Some variations on each of these will choose to look at the numbers before certain expenses, such as taxes. For example, “gross” accounting profit could be defined as revenue minus cost of goods sold, while “operating” profits would also subtract the costs of business expenses and operations, and “net” profits would also subtract taxes. Continue reading...

What is Minimum Margin?

Minimum margin is the minimum amount needed to open a margin account. The custodian or broker typically sets the minimum margin, but it cannot be for any less than the $2,000 required by the NYSE and NASD. What is 'Buying on Margin' and Margin Trading? What is a Margin Account? Continue reading...

What are the Contribution Limits for My Money Purchase/Profit Sharing Plan?

Contributions are generally limited to 25% of employee compensation, but a small addition amount may be contributed for higher-income employees. Money Purchase plans and Profit Sharing plans are funded by employer contributions, and in general these contributions cannot exceed 25% of gross compensation. For a self-employed person or a partner in a pass-through entity, the real percentage of contributions cannot exceed 20% of net profits because self-employment taxes will reduce the amount of profits considered compensation, as will the actual contribution. Continue reading...

What’s a 403(b) Plan?

403(b) are basically just 401(k)s for non-profit organizations. A 403(b) Plan is essentially a 401(k) for publicly-funded institutions such as public schools and universities, certain hospitals, and non-profit organizations. They are sometimes called TSAs, short for Tax-Sheltered Annuity, but this is outdated, and a misnomer since they do not need to use annuity products. The contributions are deducted from the paychecks in the same manner they would be for a 401(k), and the assets grow tax-deferred within the account. A Roth 403(b) is uncommon but sometimes offered. Continue reading...

What is a Money Purchase/Profit Sharing Plan?

Money Purchase plans and Profit Sharing plans are two types of Defined Contribution plans that can be used at a business, together if desired. Both of these are Defined Contribution plans, which means that only the terms of the contributions to the plan are defined in the plan document. This is different than Defined Benefit plans, which specifically define the benefit due to an employee at retirement, which is generally a monthly pension payment. If an employer wants to use both a Money Purchase plan and a Profit Sharing plan, it is possible, but since both of them are Defined Contribution plans, they will be limited in aggregate to the allowable defined contribution limits for employer contributions. Continue reading...

How is a 403(b) Different From a 401(k)?

403(b)s are essentially the same as 401(k)s but there are a few notable differences. A 403(b) is extremely similar to a 401(k); the main difference is the type of employer than can offer each. 403(b)s are offered by public educational institutions, non-profit hospitals, non-profit organizations, religious groups and some government organizations. Due to the negotiating powers of many of those institutions, and their non-profit status, the administrative fees are smaller and they are not subject to some of the administrative oversight imposed on 401(k)s. Most 403(b)s are not subject to ERISA, which means they don’t have to satisfy as many auditing and reporting requirements. Continue reading...

What is a bull put spread?

A bull put spread is used when an investor thinks the price of a security is set to rise modestly. The strategy involves buying one put option on the security while simultaneously selling another put option at a higher strike price. A Bull Put Spread is usually a vertical spread, meaning the two options used have the same expiration date (and different prices). The lower-strike put option is bought and held long, while the higher-strike option is sold short. The short position sold will be at or just below the current market price for the security, and the long position will be at a lower strike price than the short position. Continue reading...

What is Net Operating Profit After Tax?

Net Operating Profit After Tax (NOPAT) is a way to measure profits that excludes the impact of debt financing (via tax benefits and costs). The easiest way to think about Net Operating Profit After Tax is as a company’s profit if it were unleveraged, i.e., if it had no debt. There are costs associated with debt but also tax benefits, so there’s some give and take. The reason an analyst might use NOPAT is to gain a more accurate look at the operating efficiency of a leveraged companies, since it excludes the tax savings many companies get because of existing debt. Continue reading...

What is Profit and Loss (P&L) Statement?

A Profit and Loss Statement, also referred to as an “income statement,” is a corporate statement that summarizes the revenues, costs and expenses incurred by a company during a specific time period, such as a quarter or a fiscal year. The main difference between a P&L statement and a balance sheet is that the P&L is designed to show changes in line items over the period analyzed, versus a balance sheet which simply shows a comprehensive snapshot of a company’s asset and liabilities on a set date. Continue reading...

What is a straddle?

Straddles are options strategies that use both a call and put on the same underlying asset at the same strike price and expiration. The Straddle strategy involves either buying a call and a put with the same strike price and expiration, or selling a call and a put with the same strike price and expiration. The former is known as a Long Straddle, and the latter is known as a Short Straddle. Long straddles profit from significant price movement in either direction on the underlying asset. Continue reading...

What is the Profit Rate for the Head-and-Shoulders Bottom (Bullish) Pattern?

The bullish head and shoulders is the opposite image of a bearish head and shoulders. It has all the same parts—two shoulders, a neckline, and the head. Only instead of the shoulders and head being formed at high points for the stock, they are formed at low points. The investor psychology is the opposite of the bearish pattern. The stock is falling and hits a temporary low to form the left shoulder before a bounce occurs and forms the left side of the neck. The upward momentum is temporary and the next down leg takes the stock lower than the left shoulder and forms the head. Continue reading...

What is the minimum investment in a typical hedge fund?

Hedge funds can require initial investments that are quite large. This may be somewhere between $250,000 to $10,000,000. They will generally only accept Accredited Investors, meaning high net worth individuals that pass SEC standards which exempt the fund from some reporting and disclosure requirements. While the minimum investment varies, most Hedge Funds will accept only so-called accredited investors. Continue reading...

What is Contribution Margin?

Contribution margin measures how efficiently a company can produce a good relative to its variable cost. Goods with high contribution margins are the most profitable. The contribution margin can be helpful in deciding what goods can go on sale and for how much, and it allows management to decipher how to improve efficiency in production while keeping variable costs low. Additionally, if there is a bottleneck in the supply chain for an input that is used to produce two different products, management could use contribution margin to decide which product takes takes priority. Continue reading...

What is an Operating Expense?

Operating expenses are the costs a company incurs as a part of everyday business operations. The goal of most every management team is to figure out how a company can minimize operating expenses while maximizing production and profitability. Operating expenses can involve buying inventory, the cost of running machines, rent, payroll, and so on. What it costs a company to undergo normal business operations and output. It is sometimes referred to as OPEX. Continue reading...