- 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…
- How to Calculate Total Addressable Market (TAM)
The total addressable market (TAM) represents the total revenue opportunity that’s available for a product or service, assuming it achieves 100% market share. Calculating the TAM allows investors to assess the maximum potential revenue a company could generate in a best case scenario. It can be used to evaluate the growth potential of a company’s… read more…
- Treynor Ratio vs. Sharpe Ratio: A Complete Guide
The Treynor ratio and the Sharpe ratio are financial metrics that use different approaches to evaluate the risk-adjusted returns of an investment portfolio. The Treynor ratio employs beta and measures returns relative to the amount of systematic risk the portfolio carries. The Sharpe ratio looks at standard deviation and accounts for unsystematic risk. Both these… read more…
- What Are Non-Operating Assets?
While most investors focus on operating assets—which are those directly involved in a company’s core business activities—it’s equally important to consider non-operating assets. These are assets that are not essential to the primary operations of a business but impact its bottom line. Examples include excess cash, marketable securities or real estate holdings that are not… read more…
- What Does Mid-Cap Mean in the Stock Market?
In the stock market, the term “mid-cap” is defined by companies with a medium-sized market cap, typically between $2 billion and $10 billion. Mid-cap stocks are often companies that have moved past the volatility of their initial growth stages, but still have room for expansion, making them attractive to those looking to invest in companies… read more…
- Investing in an IRA vs. CD vs. Money Market Account
When comparing options like individual retirement accounts (IRAs), certificates of deposit (CDs) and money market accounts, it’s important to understand how each can fit into your financial strategy. While you cannot directly invest in an IRA itself, you can hold investments like CDs or money market accounts within one. When comparing an IRA vs. CD… read more…
- What Are Non-Marginable Securities?
Non-marginable securities are financial instruments that cannot be purchased on margin, meaning investors must pay the full purchase price without borrowing funds from their brokerage. This restriction is typically due to the inherent risk or volatility associated with these securities, which most commonly include certain stocks, mutual funds and options. The inability to leverage these… read more…
- Authorized Stock: What It Is and Why It’s Important
Authorized stock represents the highest number of shares a corporation is legally allowed to issue, as outlined in its corporate charter. This number sets the ceiling for how many shares can be distributed to shareholders through public offerings, private sales or employee stock options. While not all authorized shares are issued immediately, having a higher… read more…
- Return on Average Assets (ROAA): Definition and How to Calculate
One key metric that offers valuable insights into a company’s financial health is the return on average assets (ROAA). This financial ratio measures how effectively a company uses its assets to generate profits. By calculating ROAA, investors can assess how well a company is using its resources to produce earnings, which is particularly useful when… read more…
- What Is a Pullback in Stock Trading?
A pullback in stock trading refers to a temporary decline in the price of a stock or the overall market after a period of upward momentum. This phenomenon is a natural part of market cycles and can present both challenges and opportunities for investors. While a pullback might initially seem like a cause for concern,… read more…
- How to Invest in ETFs
Exchange-traded funds, or ETFs, offer a way to diversify your portfolio with minimal effort. ETFs are collections of assets that trade on stock exchanges, similar to individual stocks. They offer investors a way to gain exposure to a wide range of markets and sectors without having to buy each individual security. To start investing in… read more…
- Required Rate of Return (RRR): Definition and How to Calculate
Required rate of return (RRR) gives investors a benchmark to determine the minimum acceptable return on an investment considering the risk involved. By calculating RRR, investors can assess whether an investment aligns with their financial goals and risk tolerance. The calculation uses the risk-free rate and the risk premium. This concept is not only in… read more…
- 5 Short-Term Cash Investments to Consider
Short-term cash investments are useful when saving for an upcoming expense and aiming to maximize returns without tying up your money for too long. These investments offer different levels of liquidity and risk, from high-yield savings accounts to money market funds and short-term bonds, each with its own benefits. A financial advisor can help you… read more…
- Pros and Cons of Micro Investing
Micro investing allows investors to start with minimal capital, often using spare change from everyday purchases to build a diversified portfolio over time. Micro investing is both accessible and simple, making it an attractive option for beginners and those with limited funds. However, like any investment strategy, it comes with its own set of advantages… read more…
- What Is a Market Maker and What Do They Do?
A market maker is a firm or individual that helps facilitate the buying and selling of securities by providing liquidity. They do this by being ready to buy and sell at publicly quoted prices, which helps trades occur smoothly. Market makers profit from the spread, the difference between the buy (bid) and sell (ask) prices.… read more…
- How a Liquidity Ratio Works and How It’s Used
One of the key indicators investors use to assess a company’s financial health is the liquidity ratio. This financial metric provides insight into a company’s ability to meet its short-term obligations by comparing a company’s liquid assets to its current liabilities. This is particularly important in times of economic uncertainty, where cash flow can become… read more…
- How to Invest in Micro-Cap Stocks
Investing in micro-cap stocks involves buying shares in companies with relatively small market capitalizations that may not be widely known or covered by major financial analysts. As a result, these investments can offer opportunities for growth potential, albeit with higher volatility and risk as smaller companies are more susceptible to market fluctuations and economic changes.… read more…
- What Is a Liquidity Event?
A liquidity event is a transaction that lets a company’s investors, founders, or employees turn their ownership stakes into cash or liquid assets. This event often happens through acquisitions or public offerings, which can shift a company from private to public ownership. Mergers, where two companies join together into a single entity by combining assets,… read more…
- Random Walk Theory: What It Is and How to Use It
Random walk theory proposes that stock prices move unpredictably, making it impossible to predict future movements based solely on past trends. This financial theory, first popularized by economist Burton Malkiel, argues that price changes are random and follow no discernible pattern. As a result, it challenges the idea that investors can consistently outperform the market… read more…