Monday, December 29, 2008
Forex TIPS
The Forex market is among the most advantageous and profitable in the world, and is worth more than a trillion and a half dollars a day! With all that money going around, it makes sense to get in on the action. There are a few things that you should remember, however, before you invest large sums of money in the enterprise. Here are a few tips to help you on your way.There are not many Forex tips that are more important than that of training and knowledge. While there are many professionals who will be willing to help you on your way, it is important that the final say on the matters will be yours. Hence, when you do invest, know the ins and outs of the market, and take the power into your own hands. Another of tips of Forex is that you invest wisely and take advantage of the technology available to you in the market, since most trades are made online. All you have to do in order to make a trade is go online, and there you will find all the resources that you will need. While you are investing, it may be a good idea to will you children some money, as well.
currency trading
There are numerous currency trading systems for sale online but 95% of them are junk. There are some good ones out there and they can make you great profits, so follow the tips below and find the best currency systems.1. Real Track RecordsThe first point to make is that you should if possible get a system that has a real track record that means real dollars, real trading and audited. This may not ensure future profitability but shows the logic is probably soundly based and that the vendor has had the confidence to trade it.2. Simulated Hypothetical Track RecordsMost currency trading systems don't come with a real track record but with a simulated or hypothetical one and you need to take these for what they are: Designed in hindsight knowing the closing prices - there is nothing wrong with back testing but you must ensure the testing was done correctly.This is the subject of the next point:3. Beware OF Curve FittingOf course it's easy to make profits if you know the forex price data already and many vendors simply make track records up and bend the system to fit the data. When you see a track record with huge gains and low drawdown the likelihood is the vendor has bent the system rulesIt is therefore a good idea to see the system rules - do not try and trade any system you do not know the logic of. A good currency trading will have simple rules and simple logic. If they do and the test is realistic then they can work in real time - if their curve fitted they won't work.Clues to curve fitted systems are:Lots of rules, unique rules for various trading conditions and different rules, for different currencies. Curve fitting is the major reason most forex trading systems lose.Many traders bend the system to fit the data - without realizing but many vendors do it on purpose. This is done to show track records which are simply too good to be true to appeal to the greed of buyers - these people are not traders their normally marketing organizations.Keep in mind if you see a track record which looks to good to be true it probably is.THE KEY TO FOREX SUCCESS...They key to making money with a trading system is to follow it with discipline. This means you MUST understand the logic it is based on to have confidence to trade it through inevitable losing periods, so you need to understand and agree with the logic.If you don't have the discipline to follow your currency trading system, you don't have a system. You will never follow a mechanical trading system unless you have confidence so make learning it part of your forex education.If you follow the above tips and have realistic expectations from your currency trading system, you check the logic and you're happy with the performance and draw down then you can trade it for real and enjoy currency trading success for very little effort.
Carry Trade
What is a Carry Trade
All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Each currency has a different interest rate attached to it determined partly by policy authorities and partly by market demand. When taking a foreign exchange position a trader holds long position one currency and short position in another. Each day, the trader will collect the interest on the long side of their trade and pay the interest on the short side. If the interest rate on the purchased currency is higher than that of the sold currency, the result is a net inflow of interest. If the sold currency’s interest rate is greater than the purchased currency’s rate, the trader must pay the net interest.
Carry Trade As A Strategy
For many years, money managers and banks have utilized the inflow and outflow of yield to collect consistent income in times of low volatility and high risk appetite. Holding only one or two currency pairs would invite considerable idiosyncratic risk (or risk related to those few pairs held); so traders create portfolios of various carry trade pairs to diversify risk from any single pair and isolate exposure to demand for yield. However, even with risk diversified away from any one pair, a carry basket is still exposed to those conditions that render this yield seeking strategy undesirable, such as: high volatility, small interest rate differentials or a general aversion to risk. Therefore, the carry trade will consistently collect an interest income, but there are still situation when the carry trade can face large drawdowns in certain market conditions. As such, a trader needs to decide when it is time to underweight or overweight their carry trade exposure.
How are Rate Expectations calculated:
Forecasting rate decisions is notoriously speculative, yet the market is typically very efficient at predicting rate movements (and many economists and analysts even believe the market prices influences policy decisions). To take advantage of the collective wisdom of the market in forecasting rate decisions, we will use a combination of long and short-term, risk-free interest rate assets to determine the cumulative movement the Bank of Japan will make over the coming 12 months. We have chosen the Bank of Japan as the yen is considered the proxy funding currency for carry trades.
To read this chart, any positive number represents an expected firming in the Japanese benchmark lending rate over the coming year with each point representing one basis point change. When rate expectations rise, the carry differential is expected to contract and carry trades will suffer.
Market participants AND History
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees they then went to 'negotiated' fees, but only for large institutions[citation needed]. However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners
Historian Fernand Braudel suggests that in Cairo in the 11th century, Muslim and Jewish merchants had already set up every form of trade association and had knowledge of many methods of credit and payment, disproving the belief that these were originally invented later by Italians. In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred [2]; the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam. In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, Canada, China (Hongkong), India, UK, Germany, France and Japan.[2]
Trading
Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading". The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock. [1]. The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated. From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant[citation needed]. Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed].
Friday, December 26, 2008
Capitalism
Elements of Capitalism
Elements of capitalism long predate the actual rise of capitalism itself. Private ownership of some means of production has existed at least in a small degree since the invention of agriculture. Market economies have likewise existed since the rise of the first states over 5,000 years ago.[49] Some economic historians (like Peter Temin) argue that the economy of the Early Roman Empire was comparable to the most advanced economies of the world before the Industrial Revolution, namely the economies of 18th century England and 17th century Netherlands. There were markets for every type of good, for land, for cargo ships; there was even an insurance market.[50] Some writers trace back the earliest stages of merchant capitalism even further to the Caliphate during the 9th-12th centuries, where a vigorous monetary market economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent. Innovative new business techniques and forms of business organization were introduced by economists, merchants and traders during this time. Such innovations included trading companies, bills of exchange, contracts, long-distance trade, big businesses, the first forms of partnership (mufawada in Arabic) such as limited partnerships (mudaraba) (mufawada partnership possessed features similar to those of the early medieval family compagnia in Europe),[51] and the concepts of credit, profit, capital (al-mal) and capital accumulation (nama al-mal). Many of these early capitalist ideas were further advanced in medieval Europe from the 13th century onwards.[13][52][53] Some writers see medieval guilds as forerunners of the modern capitalist concern (especially through using apprentices as a kind of paid laborer); but economic activity was bound by customs and controls which, along with the rule of the aristocracy which would expropriate wealth through arbitrary fines, taxes and enforced loans, meant that profits were difficult to accumulate. By the 18th century, however, these barriers to profit were overcome and capitalism became the dominant economic system of the United Kingdom and by the 19th century Western Europe. In the period between the late 15th century and the late 18th century the institution of private property was brought into existence in the full, legal meaning of the term. Important contribution to the theory of property is found in the work of John Locke, who argued that the right to private property is a natural right. During the Industrial Revolution much of Europe underwent a thorough economic transformation associated with the rise of capitalism and levels of wealth and economic output in the Western world have risen dramatically since that period. The Crisis of the 14th Century and the "Pre-History of Capitalism" According to some historians, the modern capitalist system has its origin in the "crisis of the fourteenth century," a conflict between the land-owning aristocracy and the agricultural producers, the serfs. Feudal arrangements inhibited the development of capitalism in a number of ways. Because serfs were forced to produce for lords, they had no interest in technological innovation; because serfs produced to sustain their own families, they had no interest in co-operating with one another. Because lords owned the land, they relied on force to guarantee that they were provided with sufficient food. Because lords were not producing to sell on the market, there was no competitive pressure for them to innovate. Finally, because lords expanded their power and wealth through military means, they spent their wealth on military equipment or on conspicuous consumption that helped foster alliances with other lords; they had no incentive to invest in developing new productive technologies.[54] This arrangement was shaken by the demographic crisis of the fourteenth century. This crisis had several causes: agricultural productivity reached its technological limitations and stopped growing; bad weather led to the Great Famine of 1315-1317; the Black Death in 1348-1350 led to a population crash. These factors led to a decline in agricultural production. In response feudal lords sought to expand agricultural production by expanding their domains through warfare; they therefore demanded more tribute from their serfs to pay for military expenses. In England, many serfs rebelled. Some moved to towns, some purchased land, and some entered into favorable contracts to rent lands, from lords desperate to repopulate their estates.[55] The collapse of the manorial system in England created a class of tenant-farmers with more freedom to market their goods and thus more incentive to invest in new technologies. Lords who did not want to rely on rents could buy out or evict tenant farmers, but then had to hire free-labor to work their estates – giving them an incentive in investing in production.[56] This process was encouraged by the “enclosure movement,” which transferred public lands to large landowners, who used the land to graze sheep rather than produce food. As England’s wool exports grew in the fifteenth century, the process of enclosure accelerated, forcing many tenant-farmers to give up farming and seek wage-labor.[57] According to Karl Marx, the rise of the contractual relationship is inextricably bound to the end of the obligatory relationship between serfs and lords. Marx characterizes this transformation as “the historical process of divorcing the producer from the means of production.”[58] It was this “divorcing” that turned the serf’s land into the lord’s capital. According to Marx, this rearrangement led to a new division of classes: two very different kinds of commodity owners; on the one hand, the owners of money, means of production, means of subsistence, who are eager to valorize the sum of value they have appropriated by buying the labour power of others; on the other hand, free workers, the sellers of their own labor-power, and therefore the sellers of labour. Free workers, in the double sense that they neither form part of the means of production themselves … nor do they own the means of production” that transformed land and even money into what we now call “capital.”[59] Marx labeled this period the "pre-history of capitalism.[60] It was, in effect, feudalism that began to lay some of the foundations necessary for the development of mercantilism, a precursor to capitalism. Feudalism took place mostly in Europe and lasted from the medieval period up through the 16th century. Feudal manors were almost entirely self sufficient, and therefore limited the role of the market. This stifled the growth of capitalism. However, the relatively sudden emergence of new technologies and discoveries, particularly in the industries of agriculture [61] and exploration, revitalized the growth of capitalism. The most important development at the end of Feudalism was the emergence of “the dichotomy between wage earners and capitalist merchants”.[62] With mercantilism, the competitive nature means there are always winners and losers, and this is clearly evident as feudalism transitions into mercantilism.
German Historical School and Austrian School
From the perspective of the German Historical School, capitalism is primarily identified in terms of the organization of production for markets. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus.[31] For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary economy combined with an emphasis on the profit motive. Ludwig von Mises In the late 19th century the German historical school of economics diverged with the emerging Austrian School of economics, led at the time by Carl Menger. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter, a forerunner of the Austrian School of economics, emphasized the "creative destruction" of capitalism — the fact that market economies undergo constant change. At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter, and many contemporary economists influenced by his work, argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change. The Austrian economists Ludwig von Mises and Friedrich Hayek were among the leading defenders of market capitalism against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy. Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within Supply-side economics built on the work of the Austrian School, and particular emphasize Say's Law: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers. Austrian economics has been a major influence on the ideology of libertarianism, which considers laissez-faire capitalism to be the ideal economic system.
Weberian political sociology
In some social sciences, the understanding of the defining characteristics of capitalism has been strongly influenced by 19th century German social theorist Max Weber. Weber considered market exchange, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor.[40] In his book The Protestant Ethic and the Spirit of Capitalism (1904-1905), Weber sought to trace how capitalism transformed these traditional modes of economic activity. For Weber, the 'spirit of capitalism' began with the Puritan understanding of one’s ‘calling’ in life and their laboring for God rather than for men. This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, "Whatever you do, do your work heartily, as for the Lord rather than for men." In the Protestant Ethic Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…” Thus in Weber's opinion, it was with a devotion to God in the workplace and seeking assurance of salvation described as the Protestant work ethic that the Puritans helped form the basis to the modern economic order. This 'spirit' was gradually codified by law; rendering wage-laborers legally 'free' to sell work; encouraging the development of technology aimed at the organization of production on the basis of rational principles; and clarifying the apparent separation of the public and private lives of workers, especially between the home and the workplace. Therefore, unlike Marx, Weber did not see capitalism as primarily the consequence of changes in the means of production.[41] Capitalism, for Weber, was the most advanced economic system ever developed over the course of human history. Weber associated capitalism with the advance of the business corporation, public credit, and the further advance of bureaucracy of the modern world. Although Weber defended capitalism against its socialist critics of the period, he saw its rationalizing tendencies as a possible threat to traditional cultural values and institutions, and a possible 'iron cage' constraining human freedom.[42] This is further seen in his criticism of "specialists without spirit, hedonists without a heart" that were developing, in his opinion, with the fading of the original Puritan 'spirit' associated with capitalism.
Marxian political economy
Karl Marx considered capitalism to be a historically specific mode of production (the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production) in which capitalism has become the dominant mode of production.[31] The capitalist stage of development or "bourgeois society," for Marx, represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist or communist transformation of human society as the end of the series of first aristocratic, then capitalist, and finally working class rule was reached[32][33]. Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market. Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist. This difference in values, he argues, constitutes surplus value, which the capitalists extract and accumulate. In his book Capital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers — all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities.[34] In conjuction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy.[35] For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. However, this argument is intertwined with Marx's version of the labor theory of value asserting that labor is the source of all value, and thus of profit. This theory is contested by most current economists, including some contemporary Marxian economists.[14] One line of subsequent Marxian thinking sees the centrally planned economic systems of existing "communist" societies that were still based on exploitation of labor as "state capitalism."[36] Vladimir Lenin, in Imperialism, the Highest Stage of Capitalism (1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism - which he also called "imperialism" - in order to find new markets and resources, representing the last and highest stage of capitalism.[37] Some 20th century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive.[38] Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity, as when an absolute majority of the population is engaged in non-capitalist economic activity.[39]Capitalism
Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned and controlled rather than publicly or state-owned and controlled. In capitalism, the land, labor, capital and all other resources, are owned, operated and traded by private individuals or corporations for the purpose of profit,[1][2] and where investments, distribution, income, production, pricing and supply of goods, commodities and services are primarily determined by private decision in a mainly market economy.[3][4] A distinguishing feature of capitalism is that each person owns his or her own labor and therefore is allowed to sell the use of it to employers.[1][5] In capitalism, private rights and property relations are protected by the rule of law of a limited regulatory framework.[6][7] In the modern capitalist state, legislative action is confined to defining and enforcing the basic rules of the market,[6][7] though the state may provide some public goods and infrastructure.[8] Laissez-faire, which some consider to be the pure form[9] of capitalism in which the state only exercises minimal control over the economy, has never existed in practice.[10][11][9] Capitalistic economic practices has increasingly became institutionalized in England between the 16th and 19th centuries, although some features of capitalist organization existed in the ancient world, and early forms of merchant capitalism flourished during the Middle Ages.[12][13] Capitalism has been dominant in the Western world since the end of feudalism.[12] From Britain, it gradually spread throughout Europe, across political and cultural frontiers. In the 19th and 20th centuries, capitalism provided the main, but not exclusive, means of industrialization throughout much of the world.[14] In the "capitalist mixed economy", the state intervenes in market activity and provides many services.[15] Because all large economies today have a mixture of private and public ownership and control, some feel that the term "mixed economies" more precisely describes most contemporary economies.[16][17] Other capitalist systems include laissez-faire, in which the state plays a minimal role, and anarcho-capitalism in which the the state is superseded by the market and private enterprise. During the last century capitalism has often been contrasted with centrally planned economies.
Issuing and trading
Like money, financial instruments may be "backed" by state military fiat, credit (i.e. social capital held by banks and their depositors), or commodity resources. Governments generally closely control the supply of it and usually require some "reserve" be held by institutions granting credit. Trading between various national currency instruments is conducted on a money market. Such trading reveals differences in probability of debt collection or store of value
function of that currency, as assigned by traders.
When in forms other than money, financial capital may be traded on bond markets or reinsurance markets with varying degrees of trust in the social capital (not just credits) of bond-issuers, insurers, and others who issue and trade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higher than the standard interest rates paid by banks, or charged by the central bank on its money. Often such instruments are called fixed-income instruments if they have reliable payment schedules associated with the uniform rate of interest. A variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for deferred payment set by the central bank prime rate, increasing it by some fixed percentage. Other instruments, such as citizen entitlements, e.g. "U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide a reliable value stream.
Trading in stock markets or commodity markets is actually trade in underlying assets which are not wholly financial in themselves, although they often move up and down in value in direct response to the trading in more purely financial derivatives. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate leaders, i.e. individual capital, by consumers, i.e. social capital or "brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital and infrastructural capital. Some enterprises issue instruments to specifically track one limited division or brand. "Financial futures", "Short selling" and "financial options" apply to these markets, and are typically pure financial bets on outcomes, rather than being a direct representation of any underlying asset.
Cash
Cash
Reasons for keeping cash
- Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
- The transaction motive refers to the money kept available to pay expenses.
- The precautionary motive refers to the money kept aside for unforeseen expenses.
- The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.
Advantages of sufficient cash
- Current liabilities may be catered for.
- Cash discounts are given for cash payments.
- Production is kept moving.
- Surplus cash may be invested on a short-term basis.
- The business is able to pay its accounts timeously, allowing for easily-obtained credit.
- Liquidity
Stock
Stock
- Purpose of stock control
- Ensures that enough stock is on hand to satisfy demand.
- Protects and monitors theft.
- Safeguards against having to stockpile.
- Allows for control over selling and cost price.
- Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the right quantities.
There are several advantages to the stockpiling, the following are some of the examples:
- Losses due to price fluctuations and stock loss kept to a minimum
- Ensures that goods reach customers timeously; better service
- Saves space and storage cost
- Investment of working capital kept to minimum
- No loss in production due to delays
There are several disadvantages to the stockpiling, the following are some of the examples:
- Obsolescence
- Danger of fire and theft
- Initial working capital investment is very large
- Losses due to price fluctuation
- Rate of stock turnover
This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.
- Determining optimum stock levels
- Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.
- Minimum stock level refers to the point below which the stock level may not go.
- Standard order refers to the amount of stock generally ordered.
- Order level refers to the stock level which calls for an order to be made.
what is Credit ?
Advantages of credit trade
- Usually results in more customers than cash trade.
- Can charge more for goods to cover the risk of bad debt.
- Gain goodwill and loyalty of customers.
- People can buy goods and pay for them at a later date.
- Farmers can buy seeds and implements, and pay for them only after the harvest.
- Stimulates agricultural and industrial production and commerce.
- Can be used as a promotional tool.
- Increase the sales.
Disadvantages of credit trade
- Risk of bad debt.
- High administration expenses.
- People can buy more than they can afford.
- More working capital needed.
- Risk of Bankruptcy.
Forms of credit
- Suppliers credit:
- Credit on ordinary open account
- Installment sales
- Bills of exchange
- Credit cards
- Contractor's credit
- Factoring of debtors
- Cash credit
Factors which influence credit conditions
- Nature of the business's activities
- Financial position
- Product durability
- Length of production process
- Competition and competitors' credit conditions
- Country's economic position
- Conditions at financial institutions
- Discount for early payment
- Debtor's type of business and financial position
Credit collection
Overdue accounts
- Attach a notice of overdue account to statement.
- Send a letter asking for settlement of debt.
- Send a second or third letter if first is ineffectual.
- Threaten legal action.
Effective credit control
- Increases sales
- Reduces bad debts
- Increases profits
- Builds customer loyalty
Sources of information on creditworthiness
- Business references
- Bank references
- Credit agencies
- Chambers of commerce
- Employers
- Credit application forms
Duties of the credit department
- Legal action
- Taking necessary steps to ensure settlement of account
- Knowing the credit policy and procedures for credit control
- Setting credit limits
- Ensuring that statements of account are sent out
- Ensuring that thorough checks are carried out on credit customers
- Keeping records of all amounts owing
- Ensuring that debts are settled promptly
- Timely reporting to the upper level of management for better management.
capital.. continue
Capital market
- Long-term funds are bought and sold:
- Shares
- Debentures
- Long-term loans, often with a mortgage bond as security
- Reserve funds
- Euro Bonds
Money market
- Financial institutions can use short-term savings to lend out in the form of short-term loans:
- Credit on open account
- Bank overdraft
- Short-term loans
- Bills of exchange
- Factoring of debtors
Differences between shares and debentures
- Shareholders are effectively owners; debenture-holders are creditors.
- Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors.
- Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest.
- If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made.
- In case of dissolution of firms debenture holders are paid first as compared to shareholder.
Fixed capital
This is money which is used to purchase assets that will remain permanently in the business and help it to make a profit.
Factors determining fixed capital requirements
- Nature of business
- Size of business
- Stage of development
- Capital invested by the owners
- location of that area
Working capital
This is money which is used to buy stock, pay expenses and finance credit.
Factors determining working capital requirements
- Size of business
- Stage of development
- Time of production
- Rate of stock turnover ratio
- Buying and selling terms
- Seasonal consumption
- Seasonal production
- Seasonal cost
Instruments
A contract regarding any combination of capital assets is called a financial instrument, and may serve as a
Most indigeneous forms of money (wampum, shells, tally sticks and such) and the modern fiat money is only a "symbolic" storage of value and not a real storage of value like commodity money.
Capital vs. money
Liquidity requirements of these vary significantly — leading to a diversity of contracts and financial markets to trade them on. When all four functions are served by one instrument, this is called money, which does not need to be traded on financial markets since the risk of loss of value of money is uniform across the whole society. Where no one form of money is agreed to have reliable value, and barter is undesirable, less liquid or more diverse instruments have served the four functions. This article focuses mostly on financial instruments which are not uniformly affected by native currency inflation and which are not guaranteed by a state.
Own and borrowed capital
Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.
Borrowed capital
This is capital which the business borrows from institutions or people, and includes debentures:
Own capital
This is capital that owners of a business (shareholders and partners, for example) provide:
- Preference shares/hybrid source of finance
- Ordinary preference shares
- Cumulative preference shares
- Participating preference share
- Ordinary shares
- Bonus shares
- Founders' shares
They have preference over the equity shares.Means the Payment made to the shareholders is done by firstly paying to preference shareholder and then to the equity shareholders.
Financial capital
Capital
Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service.
Financial capital vs. real capital
Financial capital refers to the funds provided by lenders (and investors) to businesses to purchase real capital like equipment for producing goods/services. Real capital comprises physical goods that assist in the production of other goods and services, eg. shovels for gravediggers, sewing machines for tailors, or machinery and tooling for factories.
Financial capital is provided by lenders for a price: interest. Also see time value of money for a more detailed description of how financial capital may be analyzed.
Furthermore, financial capital, or economic capital, is any liquid medium or mechanism that represents wealth, or other styles of capital. It is, however, usually purchasing power in the form of money available for the production or purchasing of goods, etcetera. Capital can also be obtained by producing more than what is immediately required and saving the surplus.
Corporate finance
Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.
Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.
Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must:
- Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
- Identify the appropriate strategy: active v. passive – hedging strategy
- Measure the portfolio performance
Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.
Personal finance
Questions in personal finance revolve around
- How much money will be needed by an individual (or by a family), and when?
- Where will this money come from, and how?
- How can people protect themselves against unforeseen personal events, as well as those in the external economy?
- How can family assets best be transferred across generations (bequests and inheritance)?
- How does tax policy (tax subsidies or penalties) affect personal financial decisions?
- How does credit affect an individual's financial standing?
- How can one plan for a secure financial future in an environment of economic instability?
Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.
Personal financial decisions may also involve paying for a loan.
The main techniques and sectors of the financial industry
An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.
Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.
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