What are General Market ETFs?
General market ETFs seek to capture the movements of the market as a whole by tracking major market indices. General Market ETFs track the performance of major market indices such as the S&P 500 (SPY), the Dow Jones Industrial Average (DJIA), and NASDAQ-100 (QQQQ). Most funds that track indexes do so by purchasing shares of all the publicly traded companies within an index, usually proportionally weighted by the market cap of the company (but there are other popular weighting methods). Continue reading...
What is Underwriting?
Underwriting is the process through which risks are accepted by an institution. Underwriting is the assessment of risk or the acceptance of risk after such assessment by a company or bank. Underwriters in insurance companies will assess a risk prior to the company accepting the risk; once the risk has been accepted the company bears the burden of covering the potential losses associated with the risk. The company is paid a premium for accepting the risk. 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 are Accounting Controls?
Internal control systems and procedures can ensure the accuracy and reliability of financial accounts at a business. Accounting controls are meant to ensure that the numbers being put onto the books are accurate. Internal controls are the practices that employees are trained to do, and may be audited on, which general involve some oversight or double-checking to filter out mistakes. This not only prevents mistakes, but also malfeasance, embezzlement and fraud. Accounting done wrong can result in criminal penalties, bankruptcy, and tax problems. Continue reading...
What is a Balloon Payment?
A balloon payment is a lump sum due at the end of a balloon loan term. In a balloon loan arrangement, the payment schedule does not amortize the entire amount of the loan, but instead allows for lower installment payments by holding a lump-sum payment until the end of the term. These terms are usually relatively short, such as 5 years, and often these arrangements are taken by individuals or consumers who plan on refinancing before the balloon payment comes due. Continue reading...
What is a Callable Bond?
A callable bond, also known as a “redeemable bond,” is one where the issuer has the ability to pay off the debt prior to its maturity date, with certain conditions. Which the issuer has the right to redeem prior to its maturity date, under certain conditions. The primary reason that an issuer would choose to “call” a bond is that interest rates have declined since the bond was issued. By calling the bond, the issuer generally has to opportunity to refinance that debt at a lower rate. Once called, the issuer will notify the creditor and pay off the debt, typically with a slight premium added to close the deal. Continue reading...
What Does 'Buy to Cover' Mean?
‘Buy to Cover’ is a term that applies when an investor buys shares of a security that they had previously sold short. When an investor sells a security short, it means they are selling shares they do not actually own, in hopes that the price of the stock falls. If the price does fall, an investor could then ‘buy to cover’ at a lower price and then return the shares to the broker that lent them, thus realizing the profit in the price difference. Continue reading...
What is a derivative?
A derivative is a security which monetizes the risk or volatility associated with a reference asset. Derivatives derive their value from speculation surrounding an underlying or reference asset. The reference asset could be another security, an interest rate, or an index, for example, but there are also derivatives based on future weather patterns. Derivatives come in many forms; examples include options, swaps, and futures. Some derivatives trade on exchanges and some are Over-the-Counter (OTC). Derivatives might be used for speculation or hedging. Continue reading...
What is the role of asset allocation in my investments?
The single best control mechanism over the performance of your investments is the maintenance of an asset allocation strategy. When testing various methods of predicting and controlling returns in a portfolio, researchers found that having and maintaining an asset allocation strategy was the method that reaped the most predictable returns – with 80-90% accuracy. Asset allocation is the distribution of various asset classes and investments into a portfolio mix in a deliberate way to gain specific amounts of exposure to each investment. It is a practice used to diversify and manage risk. Asset Allocation is a dynamic process; it’s not something you do once and forget about. Continue reading...
Will my target mutual funds miss their targets?
Surprisingly, target funds seem to be doing their jobs well enough, despite their ‘one-size-fits-all’ style. There are many target date mutual funds that have appeared in the past 5-10 years, which are supposed to simplify your investment decisions. These target funds are nothing more than carefully selected asset allocations, based on historical models and a client’s time horizon. For example, Target Retirement 2018 will probably consist of 70% Fixed Income Funds, and 30% of Equity Funds, and Target Retirement 2028 will probably consist of 50% Fixed Income Funds and 50% Equity Funds, etc. Continue reading...