- Differences of Fiat Money vs. Commodity Money
Fiat money and commodity money represent two distinct forms of currency, each defined by what gives it value. Fiat money is government-issued currency that has no intrinsic value but holds purchasing power because of government decree and public trust in its stability. In contrast, commodity money is backed by a physical good – typically precious… read more…
- Differences of Forward Market vs. Spot Market
The forward market and spot market offer two distinct approaches to trading assets, differing by timing, risk and pricing structure. In a spot market, transactions are settled “on the spot,” meaning buyers and sellers agree on a price, and the asset changes hands almost immediately. On the other hand, the forward market involves agreements to… read more…
- What Is the Extrinsic Value of an Option?
In options trading, the extrinsic value of an option represents the portion of the option’s price that’s based on factors other than the immediate value of exercising it. Also known as “time value,” extrinsic value reflects the potential for the option to become profitable before it expires. For options traders, the extrinsic value of an… read more…
- How to Calculate the Growth Rate of an Investment
The growth rate of an investment shows how much its value increases over time, helping to evaluate performance. A common way to calculate this is by using the compound annual growth rate (CAGR), which averages yearly growth with compounding. This is useful for long-term investments, and knowing this rate could help you determine whether an… read more…
- How Are Zero Coupon Bonds Taxed?
Zero coupon bonds are taxed differently because they don’t pay regular interest. Instead, they’re sold at a discount and reach full value at maturity. Each year, investors must report “imputed interest”—the difference between the purchase price and maturity value—even though they don’t receive cash until maturity. This amount gets taxed as ordinary income. Some, like… read more…
- Does Issuing More Stock Shares Decrease the Cost of Equity?
Investors often consider the impact of a company issuing more stock shares, particularly on the cost of equity. The cost of equity represents the return that investors expect for holding a company’s stock. When a company issues additional shares, it can influence the stock price, investor perception and even the company’s overall financial structure. A… read more…
- How to Choose Investment Objectives for Your Portfolio
Investors need investment objectives to provide a clear direction for their portfolios. These objectives can help align their investments with specific financial goals, risk tolerance and time horizons. Investors use them to select a mix of assets, such as stocks, bonds, or alternative investments, that aims to achieve outcomes like growth, income, or capital preservation.… read more…
- How a Gross Lease Works in Commercial Real Estate Investing
A gross lease in real estate is a commercial lease where the tenant pays fixed rent while the landlord covers most property operating expenses, including taxes, insurance, utilities, and maintenance. This setup offers predictability for tenants and simplifies expense management for landlords. Knowing how a gross lease works helps investors and business owners assess potential… read more…
- What Is Upside Risk and How Does It Work?
Upside risk refers to the potential for an investment or strategy to perform better than expected. Unlike downside risk, which focuses on the likelihood of losses, upside risk highlights the chance that positive outcomes could exceed projections. Investors and financial advisors consider upside risk when analyzing growth opportunities, as it can influence asset allocation, portfolio… read more…
- Fiat Money: Definition, Examples, Pros and Cons
Fiat money refers to a type of currency that holds value because a government declares it as legal tender, rather than being backed by a physical commodity like gold or silver. Most modern economies rely on fiat money, with examples including the U.S. dollar, the euro and the Japanese yen. Its value depends on the… read more…
- Enterprise Value (EV) Formula: What It Is and How to Use It
The enterprise value (EV) formula measures the total value of a company, considering both its equity and debt. It reflects what it would cost to acquire the business, including adjustments for cash and debt, offering a more comprehensive view than market capitalization alone. The enterprise value formula is pretty simple: add a company’s market capitalization… read more…
- Intrinsic Value vs. Extrinsic Value in Options Trading
In options trading, assessing intrinsic and extrinsic value can help determine an option’s price. Intrinsic value shows the profit from immediate exercise, while extrinsic value accounts for factors like time and volatility. Changes in these values with market conditions can reveal potential returns and risks. A financial advisor could also help you identify options that… read more…
- Explaining the Relationship Between Interest Rates and Inflation
The relationship between interest rates and inflation is an important concept for investors to understand because of the widespread impacts it can have on the greater economy. When inflation increases, central banks often respond by raising interest rates to cool down the economy and slow price growth. Changes in interest rates impact everything from borrowing… read more…
- What Does It Mean If a Company Is Maximizing Shareholder Value?
When a company focuses on maximizing shareholder value, it’s actively working to increase the wealth of its shareholders. This could mean boosting profits, increasing dividends or driving up the stock price. For investors, this can indicate the company is committed to providing a strong return on investment. However, there can also be negative impacts of… read more…
- What Short-Term Investments Are Generally Considered Safer?
Short-term investing isn’t inherently safe, but certain investments can provide liquidity, stability and a reasonable return with minimal risk. As the name suggests, these investments typically mature within one to three years, making them most suitable for those who need access to the funds in the near future. Safety, in this context, means a lower… read more…
- Forward P/E vs. Trailing P/E: What’s the Difference?
The forward P/E and trailing P/E ratios can help guide your investment decisions by providing insights into a company’s valuation. Both measure a company’s price-to-earnings (P/E) ratio, but they focus on different periods. The forward P/E looks at projected future earnings, while the trailing P/E uses actual earnings from the past 12 months. Each metric… read more…
- 13 Exit Strategies for Business Owners and Investors
Exit strategies allow business owners and investors to sell or transfer ownership of assets or companies. They can use these strategies when seeking to retire, cash out or shift focus to new ventures. Common owner strategies include selling to a third party, merging with another company or passing the business on to family members. Investors… read more…
- What Investing Strategies Allow You to Bet Against a Stock?
Most stock investment strategies bank on shares increasing in value. Betting against a stock, also known as shorting, involves profiting from a stock’s decline in value. There are a few ways to do this. Short selling involves selling borrowed shares at the current price and aiming to repurchase them later for less. Trading put options… read more…
- What Are Some Examples of Sustainable Investment Strategies?
Sustainable investing, also known as socially responsible investing (SRI) or environmental, social and governance (ESG) investing, may appeal to investors who want their portfolios to reflect their values. These strategies focus on generating financial returns while also making a positive impact on society or the environment. Sustainable investment strategies can include selecting companies with strong… read more…
- How Does Hedge Ratio Work and How Do You Calculate It?
A hedge ratio is a financial metric investors use to measure the level of risk exposure covered by a hedge. This ratio plays a role in managing potential losses by indicating the proportion of a position that is protected against adverse price movements. A hedge ratio may range from 100% to 0%. Investors employ hedge… read more…
- Defensive Interval Ratio (DIR): Formula and How to Calculate
The defensive interval ratio (DIR) is a financial metric that can help investors assess a company’s ability to meet its short-term operating expenses using its liquid assets. Also known as the basic defense interval ratio, DIR measures the number of days a company can sustain its operations without relying on additional cash inflows. Calculated by… read more…
- What’s Considered a Good Dividend Payout Ratio?
A dividend payout ratio reflects the portion of a company’s earnings paid out to shareholders. This number is a key metric for investors who are looking for steady income through dividends. A “good” dividend payout ratio often depends on factors such as the company’s industry, growth stage and overall financial health. Once you know what… read more…
- How Are Qualified Dividends Taxed?
Qualified dividends are taxed at lower rates than ordinary dividends, making them appealing for investors. These earnings are taxed at capital gains rates. To be eligible for lower rates, dividends must come from U.S. corporations or qualified foreign companies, and the investor must meet the holding period requirement. Understanding these tax distinctions around qualified dividends… read more…
- How to Use the Treynor Ratio: Definition and Formula
The Treynor ratio is a tool in portfolio analysis that helps investors assess how well a portfolio compensates them for taking on market risk, also known as systematic risk. This portfolio ratio shows how much return an investor can expect for each unit of market risk. It offers insight into how efficiently a portfolio’s manager… read more…
- What Is the CAPE Ratio (Shiller PE Ratio)?
Cyclically adjusted price-to-earnings (CAPE) ratio, also known as the Shiller PE ratio, is a valuation metric used by investors to assess whether a stock or the broader market is overvalued or undervalued. Unlike the traditional price-to-earnings (PE) ratio, which looks at a company’s current earnings, the CAPE ratio averages earnings over a 10-year period, adjusted… read more…