Free Financial Information

Archive for October, 2010

Selling Options On Stocks

If you have educated yourself a bit about stock options and understand what it means to go long puts and calls, you also owe it to yourself to understand selling options, also known as “writing” options. The question that comes to mind when people see the value in having covered calls and puts in their portfolio is: what is the difference between writing an option contract against stock that I am buying or shorting, versus simply buying or shorting that stock? It is an excellent question and the answer is surprisingly simple. Selling Options On Stocks

Let us say that you buy 100 shares of XYZ stock at $76 per share for $7600. At the same time you write one XYZ call with a strike price of 80, whose expiration is a few months away. For this you are paid a premium of let’s say, two dollars, or a credit of $200 (two dollars times the 100 shares of XYZ that the call represents). Here is what you gain by doing this rather than simply buying the stock: you have lowered your cost basis for the position. That is just a fancy way of saying that the price of getting into the position for you is actually not $7600, rather it’s $7400 because of the $200 that you received for writing or selling the call.

If the stock is lower than 80 by the time the option expires, you won’t be called on to deliver 100 shares of XYZ (because it would never make sense for the buyer of the call to choose to exercise his right to buy the shares at 80, if the current stock price is cheaper). In this case the option will expire worthless and you will keep the $200 premium. The stock might take a serious downturn during this time, which will work against you since you own the stock, but the $200 premium amount that you received for writing the option will benefit your position by that amount, and down the road could make the difference between winning or losing on this trade. You can see that this is a nice benefit for you, for simply having written the call against the stock you bought. But what is the downside of writing this option? Selling Options On Stocks

Well, what happens if the stock moves up? In fact, let’s say that it goes to 85 before the option expires. If the stock is over 80 you could theoretically be called on to deliver 100 shares of XYZ at 80 at any point before the option expires. You will most certainly be called on to deliver the shares by expiration day if the stock is over 80 on that day. So in this case, at expiry the call is exercised and you are forced to sell your shares at 80. Now, having bought at 76, you have at least made a profit, but your profit is only two-thirds of what it would have been had you not written a call in this case ($85-$76 = $9 if you had not written the call, versus $80-$74 =$6 since you did write the call). And what if the stock had run to $90? Then, being forced to sell at 80 means you would forfeit $10 a share.

This simple example illustrates specifically what you gain and lose by writing a covered option against stock that you buy or short, versus simply buying or shorting it. The premium amount you received constitutes a nice insurance policy against a downturn. But make no mistake: if you are right about buying the stock in the first place, you have put a cap on your potential gains by writing a covered call against it.

Selling options is often touted as a good way to make income, simply writing calls and puts against stock that you already own or are short, respectively. But if one were to write options against every stock in his portfolio, the “home runs”, the big winners that happen from time to time and certainly enhance the overall performance of your portfolio, would no longer occur. Consider very carefully the likelihood that a position you take might become a very profitable one, and write options accordingly. Selling Options On Stocks

What is financial planner?

 

A financial planner is a professional who helps a person deal with his/her financial issues. A financial planner helps a person in areas such as personal financial planning, investment planning, risk management and insurance as also his/her cash flow management.

About the financial planner

A personal financial Planner is entrusted with the job of evaluating the performance of companies or that of a portfolio of securities and providing valuable guidance to individuals regarding the suitability of investments. In other words, a financial Planner is responsible for asset management and financial planning. Analysis and forecasting as well as budget and grant preparation and accounting. The incumbent will prepare periodic budget vs. actual analyses, will monitor and analyze research grant spending and plans for future spending, and will prepare financial reports for funding agencies

Financial Planner Career Overview:

 

A Financial Planner advises individuals on setting personal financial goals and strategies. Many work independently or in small firms, though larger financial services firms either are adding Financial Planners to their staffs or are insisting that their Financial Advisors (or Financial Consultants) also become certified as Financial Planners

 

Education:

 

A Bachelor’s Degree is expected for a Financial Planner. Coursework in finance, accounting and/or economics is helpful, though not required. Strong quantitative and analytic skills are essential. An MBA may be valuable in the hiring process, depending on the firm.

 

Certification:

 

Requirements to function as a Financial Planner vary by state. Even in jurisdictions where it is not mandated by law, passing the exam to become a Certified Financial Planner (CFP) is highly advisable. The CFP designation increases credibility and marketability, both to employers and to clients.

 

Generally SalaryRange:

 

As per the Princeton Review, average salaries for Financial Planners can range from $20,000 starting to $40,000 for those with 5 years’ experience, to $90,000 for those with 10-15 years’ experience

 

Responsibilities & Duties of a professional Financial Planner:

Under the direction of the Chief Technology Officer, this position provides planning, guidance, and oversight of the IT department’s budget development, license and asset management, legal and contractual adherence, performance monitoring and improvement, operational and financial reporting, and internal financial controls. The position serves as a high-level advisor on a broad range of financial and management matters for the department. The position directly supervises clerical staff, and provides indirect guidance to staff department-wide. This is a “hands-on” supervisory position in a diverse and fast-paced environment. What are the duties of a financial planner? Duties and responsibilities of a financial planner are as follows

 

A Financial Planner helps clients create personal budgets, control expenditures, set goals for saving and implement strategies for accumulating wealth. He or she may have working relationships with Financial Advisors, Investment Managers and/or Mutual Fund Companies, utilizing these specialists for the actual investment of their clients’ funds. The job requires keeping current about developments in financial products, tax laws and strategies for personal financial management, particularly with respect to retirement plans and estates. Success also requires sales ability, both in the acquisition of new clients and in the development of new ideas to improve the financial situation of existing clients.

 

 

A financial planner studies the different aspects of the financial picture of his/her client and provides a suitable financial solution. Some financial planners deal with the various facets of personal finance, while others specialize in fields like risk management or retirement planning.

 

The job of a financial planner can be described by means of a 6-step process given by the ISO.

 

• The first step is of setting financial goals with the client.

• The second step includes the gathering of relevant financial information from the client. The •Third step is of analyzing the gathered information, which is followed by the creation of a financial plan.

•The last two steps include tasks such as implementing the plan’s strategies and monitoring the implementation of the plan. Financial planning is one of the most speedily growing industries as it deals with the management of the most important means of living, which is money

 

In Details:

The primary responsibilities of this role are to provide the financial information and associated analysis necessary to manage and optimize company manufacturing performance. This is a global role and reports to the Commercial Finance Director of the company with dotted lines to two other senior corporate officers. The selected candidate must be willing to proactively engage with senior managers to constructively challenge them in the development of their plans and to assist them in managing performance to deliver these plans. Specific responsibilities include

 

A. Budgeting, Forecasting and Planning

1. Coordinate the production of a zero-based, bottom-up Annual Budget and long range company plan for the various manufacturing locations

2. co-ordinate three in-year re-forecasts to the same level of detail as the annual budget

3. Ensure all manufacturing locations update monthly full year forecasts

4. Ensure that the numbers produced by the Global FP&A team are recognized throughout the organization as the ultimate reference point

 

B. Performance Management

1. Work with global functional leaders of Commercial Finance, Operations, Supply Chain and IT/MIS to identify.

2. Continuously monitor and improve the quality of the Period Management Accounts (PMA) report in order to ensure that relevant, actionable information is headlined.

3. Coordinate the monthly PMA review process, ensuring insightful commentary and analysis is delivered in standardized form, from all manufacturing locations

4. Provide monthly analysis and commentary on the company’s operations consolidated financial and commercial performance, for distribution to senior management, in the form of a monthly performance pack

 

C. Decision Support

 

1. Driving appropriate financial disciplines, developing financial capabilities and

Providing training, coaching and mentoring of finance skills to non-finance management

2. Contributing to the development of appropriate management information systems and reporting

 

The FP&A manager must establish a collaborative working relation with his/her peers and other members of the Global Finance Team, comprising other members of the Commercial Finance team, Group Financial Control; regulatory, legal, fiscal and socio-economic developments.

At a glance:

01. Approves payments, purchase authorizations and other financial transactions to ensure compliance with staff rules, financial rules and implementing instruments/authority.

02. Supervises the preparation of the end of month accounts before forwarding them to

Headquarters;

03. In close coordination with Field/Sub Offices/Programmed Section, maintains a system to monitor and forecast cash requirements to meet administrative and project expenditures. Establishes monthly cash requirements for the office and requests timely replenishments from Headquarters.

04. Constantly reviews banking arrangements to ensure timely transfer of funds and minimize exchange loses and bank charges;

05. advises the head of office on all budgetary and financial matters;

06. Briefs new staff members or staff assigned to the Field on finance matters;

07. In close coordination with Field Offices, coordinate replies to finance related audit comments

08. Normally supervises and coordinates the work of GL staff;

09. Undertakes other duties as required.

10. Performs other duties/projects as assigned/required

 

 

 

Conclusion: To perform this job successfully, an individual must be able to perform each essential duty satisfactorily. The requirements listed below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions. Previous experience accounting for grants and contracts (Government, Foundations and Private) is required. Must be self motivated with the ability to work independently and to deal with complex accounting issues with little supervision Familiarity with government grant guidelines

 

Bankruptcy is the last thing that anybody wants to go through. It tears your credit apart, cause’s public humiliation, and it generally means you have to start over financially. If there was any possible way of avoiding bankruptcy many people would take it in a heartbeat. The good news is that there are many ways of avoiding bankruptcy it just depends on what stage of financial ruin you are in.

The most important thing you can do if you are facing any type of financial crisis is to start a budget. A budget is an organized process of determining where your money is going. To start this budget, list your financial spending patterns and obligations. You begin to track exactly where your money is going in an organized way so that you can see the consistency in your spending habits. Once you have control over your financial spending habits you can than begin to save or pay off your debt. If you are in an extremely dire financial situation begin to use that extra discretionary income for paying off debts.

The second tip is you paying down your debts. Start a budget and begin to pay your debts down starting with the smallest debt first. If you have two debts that you owe the same amount of money, than go off of which one has the highest interest rate. It does not matter what the interest rates are on your different debts, the smallest must be your first priority in terms of paying it off.

Conventional wisdom might at first glance be, that you should pay down the debt with the highest interest rate first, but if you pay down the smallest debt first you can then use that old minimum payment and apply it to your next debt, this is what Dave Ramsey calls the “Debt Snowball. ” You get compounding payments which helps you build momentum and pay off the rest of your debts. This strategy gives you the confidence that you need to be successful against such a daunting task.

Einstein said “The definition of insanity is doing the same thing over and over again expecting a different result. ” If you go back to the old patterns of spending and managing your money you will end up right back where you started. Getting out of a financial coma takes a long time but if you set goals and establish good habits you too can become debt free.

All public companies either have begun or will soon begin a process required of reviewing their internal control over financial reporting; I have tried to expose the definition each of the every related important part (What Is Risk Assessment? – What is assessing control risk? – How do assess control risk?) of this article for easy understand of novice

What Is Risk Assessment?

An entity’s risk assessment for financial reporting purposes is its identification, analysis, and management of risks pertaining to financial statement  preparation. Accordingly, risk assessment may consider the possibility of executed transactions that remain unrecorded.

The following internal and external events relevant to the risk of preparing financial statements with generally accepted accounting principles (GAAP)

 

1. Changes in operating environment, including competitive pressures

2. New personnel that have a different perspective on internal control

3. Rapid growth that can result in a breakdown in controls

4. New technology in information systems and production processes new lines, products, or activities

5. Corporate restructuring that might result in changes in supervision and segregation of job functions & foreign operations

6. Accounting pronouncements requiring adoption of new accounting principles

 

What is assessing control risk?

The assessment of control risk is a process of evaluating the effectiveness of a client’s internal controls in preventing or detecting material misstatements in the financial statements.

 

How do assess control risk?

If the auditor concludes, based on his or her understanding of internal control, that controls are likely to be ineffective or that evaluation of their effectiveness would be inefficient, then the auditor may assess control risk at the maximum level for some or all financial statement assertions.

 

The risk assessment process related to financial reporting is approved by the Audit Committee on an annual basis. The financial reporting risks related to significant accounts in the consolidated financial statements are identified based on a top-down, risk based approach. Based on the risk assessment, the Group has established minimum requirements for the conduct and documentation of IT and manual control activities to mitigate identified significant financial reporting risks.

 

 

Financial statements such as the balance sheet, income statement and cash flow statement provide information about an entity’s financial position, performance, and changes in financial position. Financial statements contain information used to evaluate and monitor the Bank’s performance, goals, and compliance with established policies, Procedures, accounting standards and regulatory requirements.

 

 

As part of this process, the accounting information reported by all of the companies in the Group is reviewed both by controllers with regional links and in-depth knowledge of the individual companies, and by accounting experts. The most important companies in the Group also have their own controllers with extensive commercial and/or accounting knowledge

 

The institution’s internal controls governing financial reporting should ensure that its financial information possesses the following characteristics:

1) Relevance – To be relevant, information should be presented timely in order to be of Use in decision-making, this is most helpful to decision-makers in evaluating past, present and future correcting assessments.

2) Reliability – Information should be free from material errors and bias.

3) Comparability – Information should be presented consistently over time in accordance with applicable accounting principles and standards so that “comparability” exists when different companies apply the same accounting standards and principles in their reporting of information

4) Understandability – Information should be easily comprehensible for users with reasonable knowledge of business, economics and accounting.

Both of the internal and external (independent) audit functions and key roles in the maintenance of strong financial reporting controls. External auditors are primarily concerned with the financial institution’s ability to record, process, summarize and report financial data consistent with assertions in the financial statements. Internal auditors are also concerned with controls over the effectiveness, economy, and efficiency of management decision-making processes that may not relate to a financial statement audit but which nevertheless affect financial reporting.

Conclusion: financial reporting operations function is responsible for compiling and distributing financial information to executive/line management, and the board of directors. This function is also responsible for generating required quarterly and annual financial reports to be publicly issued, reporting to the Office of Finance for System combined reporting purposes, and for reporting financial and risk information to regulators.

 

 

 

 

 

Managing your hard earned income in a smart way is very essential to have a secure future. But maintaining personal finance is not an easy task. It needs lots of planning and time of an individual. To make efficient plan you need various details like your bank statements, credit card statements, mortgage details etc. Usually people make use of pen and paper to make their budget. But with the expansion of technology people have designed personal finance planner that allows an individual to mange their money smartly. This planner is a tool that helps people to calculate their personal budget easily. It is very easy to enter your financial details and work out your money saver budget. It makes whole planning process simpler and quick. You just need to do little bit of data entry to get your financial statement. With the help of personal finance software any individual can manage its finances, investments and due bills easily. Through this software you will enjoy various things like:”    Easily make a budget that helps you to pay your various bills and still save lots of bucks. “    Make various categorizes of your spending”    Personal financial management software also helps you to check your bank, credit card and investment accounts. “    Helps you to pay your bills through electronic mode”    Calculate the monetary value of an individual”    Helps in showing the value through graphic representation. “    Provide stock report that helps you in understanding the market”    Offer all tax related information”    Remind you the due dates of your various bills. “    Helps you to calculate the perfect loan deal according to your spending style. This incredible software not only helps you in handling your financial matters but also advise you regarding different plans available in the market. Online personal finance provides you the most ideal way to get your personal account at your fingertips.

The stock market is a wonderful place to play with your money. A good investment can change your finances so drastically; you will have a hard time recognizing it yourself.

At the same time, a small mistake can actually cost you more than you are willing to risk. The problem is if you do not know which stocks to look for and how to approach these while limiting your risk, you would not be able to get considerable profits.

Natalia Osorio Editor of the “Best Stock Trading” website — http://www. BestStockTradingUsa. com — pointed out;

“…The best way of going about this is to watch out for stock market reports. The stock market report contains technical and fundamental analysis used by brokers and professional investors. They use this to interpret the direction and valuation of equity markets or stocks.

The report provides a synopsis of the stock market from different points-of-view. They contain charts and texts of daily data of the performance of stocks in the market allowing traders to evaluate their stock portfolio…”

They provide long-term views on certain stocks, predictions on how stocks will perform over the course of a day, weeks or even a year. They also provide reports on certain factors that will affect the performance of these stocks.

Stock market reports are provided by a lot of sources. Brokers provide their clients special reports of certain stocks currently in the market. This allows their clients to make decisions with regards to then buying and selling of stocks.

Certain brokerage services also provide these reports for subscription. Most of these contain stock picks for active trading or long-term investments. Other tips offered are entry and exit strategies, stock market commentaries, analysis, trading and investigation education.

Analysis of the stock market is also provided in business programs in television, cable, and newsprint as well as online portals.

Business programs in cable provide the most current and up-to-date information on stock performance. Reports are made on gainers and losers throughout the trading hours.

Online portals providing financial reports and stock market analysis are also good sources of stock performance information.

“…Much of the information you will need over the course of your trading experience will come from stock market reports. So it is best to choose a good source of these reports for yourself. Reputable institutions will provide you the best information in the market.

Keeping yourself well-informed with stock market reports will provide you the best chance of making the most out of your trading. It will give you a more definite and clear view on the stock market and enable you to make intelligent decisions with minimal risk…” N. Osorio added.

Further Information About The Best Stock Trading Course And Additional Resources  By Visiting; http://www. BestStockTradingUsa. com

http://www. commercialfinance. org. au

HOW TO HELP YOUR FINANCE APPLICATION SUCCEED -THE THREE CRITICAL FACTORS

These days, whether you are borrowing $500,000 for your first Propery Development or

Refinancing a $50,000,000 Equity Line of Credit, it’s all about a few critical factors in determining the Funding Application outcomes. Understanding these will give you a much improved chance of obtaining commercial funding.

RISK: It may well be a great Project, but if there are delays, cost increases, lower Sale prices, how will the Lender recover their money?

REWARD: See above. Lenders actually lend money to make a profit. Sounds obvious, but many borrowers forget this at their peril.

EQUITY: If you can demonstrate you have a significant amount of your own funds invested in the Project it always helps in getting to the front of the queue. After all, if the Lender wanted to build anything from a Rainforest Retreat in the jungle to an Apartment Complex in Adelaide using 80%, 90%, or 100% of borrowed funds , they could do it themselves.

SUMMARY: Various weighting factors & averages are applied to all the above. Knowing how to present this information is a key element, and can add much to your chances of success.

http://www. commercialfinance. org. au

FINANCE BROKERS! *We have an excellent program to assist you*

Finance Broker Support   (“ABR” program)

Commercial Finance Comparison Lenders offers a full service back-office and deal management solution for professional finance brokers ( i. e. professionals engaged in regularly arranging finance on behalf of clients, for reward ).

The principle behind this service offering is that a professional finance broker is able to focus on obtaining and maintaining clients / relationships, while Commercial Finance Lenders handles the “admin” or “packaging” and “follow-up” elements of an application.

Professional finance brokers interested in this service are invited to join the Finance Broker Support program as an Authorised Business Referrer ( “ABR” ), and instantly receive the benefits of our complete back-office support structure. Our ABR network is growing to be one of the largest in the country – and the value of being part of a winning team under a recognised brand is

becoming more and more critical for any independent broker or arranger of finance wanting to survive in this changing economic climate!

How does one go about submitting finance applications through Commercial Finance Lenders as an Authorised Business Referrer ( “ABR” )?

Simply follow the three steps below, and Commercial Finance Lenders would be delighted to assist with your clients’ applications:

1. Apply with us to Register as an “Authorised Business Referrer”, and you will receive contact from our office within one business day;

2. We may require some basic information ( profile / brief CV + registration / MFAA information ), and upon receipt / approval will activate your ABR registration. Registration is free and instant (upon activation );

3. Submit applications on behalf of clients – Simply log in ( if you haven’t already ) and complete the very basic one page finance application / information form.

How does the submission of client transactions / applications work in practice? Commercial Finance Lenders simply requires an ABR to log in and complete + submit the basic one page application / information form; We ask the ABR only to forward us a signed mandate ( generated automatically when the deal / application is logged ), and any documentation they may already have in respect of the client / deal.

Thereafter, we are happy to liaise with the client ( i. e. the person requiring finance ), provide advice, collect all required documentation for submission to appropriate financiers / capital providers, and manage the sign-up / closing of the transaction. We are able to advise clients at the outset ( i. e. upon initial receipt of the application and supporting documentation ) as to the prospects of success of their application.

In cases for example where we are aware of circumstances ( from experience ) that mean a client’s application is highly unlikely to be successful, we are able to save the client the time and trouble of submission and follow up. We are often also able to suggest alternative structures of products which may in the circumstances accomplish the same result for the client.

All communications with the client are typically copied to the ABR, and the ABR is sent regular weekly updates on the progress of all transactions / submissions; Should the ABR prefer us not to deal with the client ( i. e. for all communication to flow solely through the ABR ), this can be accommodated, but the ABR needs to make specific note of this when submitting the application to Commercial Finance Lenders. We do caution however that this tends to slow down the process, and we find this defeats a great deal of the benefit to the ABR from our offering ( i. e. the

ABR still needs to be actively involved in the packaging / submission of applications ).

What information / documentation is necessary from my client, in order for an application to be submitted by Commercial Finance Lenders? Although each financial product or capital structure to be arranged may have a unique or specialised ‘recipe’ of required documentation, most applications or capital structures will require the submission of at least the following basic five items of standard documentation, eg: full personal & company A & L , Project Cashflow, Business Plan, completed Questionaire & Application.

What benefits are there for a professional finance broker in joining our ABR Programme?

Independent or even affiliated finance brokers who join Commercial Finance Lenders as ABR’s, receive the following advantages: Credit markets and financiers have become very conservative, given the global credit crisis and volatility in the world’s financial markets.

Approval rates for applications for most forms of finance have halved ( or worse ), and now more than ever an application for finance needs to be diligently and skilfully prepared / packaged in order to stand a chance of being approved; Our team is specifically skilled and experienced in this aspect, and is able to seamlessly add this value to any application referred through Commercial

Finance Lenders.

Commercial Finance Lenders & associated Partners has contractual relationships to provide business to more than 30 various financial institutions and capital providers, many of whom may be more aggressive or have a specific appetite for a particular type of finance.

We are uniquely able to analyse any application, and submit it to the most appropriate financier or capital provider ( and often are able to submit to multiple financiers ). This ensures the best possible chance of a successful application for your client. Due to the volume of applications submitted by Commercial Finance Lenders to financiers, we are usually able to obtain better service and turnarounds than our ABRs or their clients may be able to alone. In this way, your clients benefit from our aggregated input to banks / institutions and clients’ applications are taken seriously.

In addition, in this market we find that Banks and Financiers are not prepared to accept referred applications, unless a broker has a very significant deal flow, and they have pulled / cancelled referral contracts with all but the largest volume referrers.

What fees or commission can I earn as an Authorised Business Referrer?

The ABR business model is very simple – 50% of the commission or fee actually received by Commercial Finance Lenders in respect of a successful transaction or application, is shared with the ABR who referred the transaction or application.

Higher percentages are shared with the ABR in circumstances where monthly finance volumes exceed certain thresholds;

It should be noted however that further terms and conditions may apply and are governed by specific contractual agreement to be entered into between Commercial Finance Lenders and the ABR.

Does my client pay more if the deal / application is referred through the ABR Program?

No – Commercial Finance Lenders shares its income with the ABR, and the client does not pay any more by virtue of being introduced by an ABR;

What does it cost my client to have Commercial Finance Lenders assist with a finance

application?

We work purely on risk – i. e. there is no fee or commission earned by Commercial Finance Lenders (or therefore by an ABR ) unless an application is successful in receiving an offer.

In respect of a number of the more complex finance applications ( such as Commercial Property Finance ), we may charge a service / funding fee in the order of 1. 5% to 2. 5% ( excluding GST ) of the principal value originated. This would however be communicated prior to submission to financiers ( after initial evaluation by us of the application ), and it would naturally be up to the client to accept or reject our proposed fee – in any event, this fee would be the same as would be charged on personal application by the client.

It should be noted that any fee raised by Commercial Finance Lenders on this basis is completely separate from fees levied by the financiers, who may well charge their own raising or documentation fee.

DON’T DELAY -TOLLFREE CALL TODAY!

In Australia 1300 776 703

http://www. commercialfinance. org. au

Facing the Information Security Hole in 2009:

The unacknowledged threat to our homeland and financial security

Every few days there is yet another breach of information security. And each breach seems to be The Biggest Ever, until the next one is announced.

It is now widely acknowledged by security experts from the federal government on down that the problem of data security breaches will get worse as the financial debacle worsens and companies cut spending and workers. Finally, there is growing awareness of one of the primary concerns of our team: it is inevitable that this compromised data will be used for terrorism.

As we talk with people interested in this issue, including security gurus, corporate governance and regulatory experts, privacy advocates, directors and officers, corporate lawyers, managers, and plaintiffs and class-action attorneys, we get a lot of questions about this cutting-edge subject. The answers help explain why the failure to secure information is a lurking national and global security threat, and the next shareholder derivative, director and officer liability, regulatory, consumer product safety, and class-action issue.

Why is an information security breach a potential national and global homeland security issue?

LW: Think about what data thieves do with stolen information. Data thieves drain your financial accounts, use your debit and credit cards fraudulently, use your identity and credit to open new accounts, create forged employment documents and other legal paperwork, and use your stolen identity to commit crimes and evade law enforcement. It is inevitable that some of this stolen information will be used to finance terrorism, and to create forged identities allowing terrorists to cross borders or access critical systems. This is what makes the current situation worse than even a global Enron and WorldCom fraud situation. Enron was, quote unquote, only about losing dollars. In the current meltdown, we are also losing data, on a massive scale that we have not even begun to grasp.

You said that an information security breach also creates potential class action, consumer product liability, shareholder derivative, D and O liability, and regulatory exposure. Explain.

LW: When companies have sensitive information and systems, they have certain obligations to protect that information. Those obligations are based on a variety of international, federal, and state laws; regulatory requirements and guidelines from government agencies; statements and representations made to shareholders, customers, consumers, and regulators; and agreements with customers, consumers, and other companies with which they do business.

When companies do not meet the requirements for information security, whether that shortcoming is willful or negligent, they have failed in their obligations to many stakeholders. Also, many of the statements made to these many stakeholders are Simply Not True.

You can think of a similar situation with an airline that has multiple safety requirements, and that represents to many stakeholders that it does certain things to meet these safety requirements. If that airline fails to meet the safety standards, whether through deliberate circumventing of the safety standards, or through carelessness, that company has a big problem with law enforcement, regulators, customers, shareholders, and class action plaintiffs. The individuals who flout those safety controls also have a big problem as far as their personal liability. That company and those individuals have an even bigger problem if the plane actually crashes.

I think of an information security breach as a plane that has crashed.

What are the implications for investors?

LW: The implications for investors include a loss of shareholder value if the company has an information security breach. The companies themselves acknowledge, including in industry standards and in company disclosures filed with the SEC, that a data security breach affects the brand, requires huge financial resources for incident response, remediation, audit, and legal expenditures, and increases insurance costs. So an information security breach obviously means that, despite spending hundreds of millions trying to manage security and risk, the system failed somewhere. The follow-on implications depend on whether the company met its own security obligations, or whether the company failed to meet those obligations.

If the company blew right on by the controls, it means that, in essence, the company did not tell the truth to the many stakeholders involved. Misrepresentation on these issues may mean that insurance coverage is voided, that legal and regulatory requirements, including Sarbanes-Oxley, were not met, and that the exposure of the company and the individuals who ignored the safety requirements is much larger than if the company had appropriately met its security obligations. This is a situation ripe for regulatory actions, shareholder derivative suits, claims against individual directors, officers, and managers, consumer and shareholder class-action suits, and criminal sanctions.

Why is the consumer the one on the hook when their personal and financial information is breached?

LW: My experience is that, regrettably, right now the financial industry tries to push all risk, and the consequences of an information security breach, onto the individual consumer, or onto the other companies with which it does business. I believe that to be wrong – if the financial company failed to meet its requirements, it bears at least part of the blame – the individual data thief, does not, of course, get off the hook.

Also, if it failed to meet its security requirements, the financial company should bear the costs of recovering from the breach, rather than passing that cost and inconvenience on to the consumer or customer.

I also believe that a financial company that does not meet security standards has a very dubious position in trying to impose unreasonable interest rates, late fees and other penalties, and aggressive collection practices on its customers.

I’ve heard a lot about criminal hackers who break into systems, or criminal data thieves who steal, for example, a laptop or a flash drive. Is that the kind of information security gap you’re talking about?

LW: Not exactly. The piece of the problem that I am describing, based on real-life experience, is how many in the financial industry ignore or bypass the safety standards, with the companies still claiming that they have done everything they possibly can, and are not responsible when there is an information security breach.

It’s easy for companies to blame the mean old computer hackers who break into the systems and steal the data. But that’s only part of the problem. Yes, the data thieves have committed criminal acts, and it’s appropriate that data thieves be held responsible for their actions.

The companies also like to blame careless vendors who provide unreliable products or services – that is a problem, as well.

But the financial companies also have multiple obligations to do their part to protect the information and systems. The financial industry itself acknowledges the obligation of the companies to conduct appropriate due diligence and security reviews before allowing other companies or individuals to access this data.

For financial companies to claim that they’re doing the very best they can is like a storage company that tells its customers that it has a secure fence, security alarms, and 24-hour on-site guards, but has a break-in because the guard left to go the neighborhood pub, and left the gate open and the alarm off. If your stuff is stolen, the individual burglar is at fault, but the company and the security-violating guard are also in trouble.

Aren’t the financial companies that have this data and systems legally required to ensure its security?

LW: Yes, the financial companies are legally required to protect this information. There are many laws and regulations that impose these requirements. (The particular laws and regulations will vary, according to the industry, the type of company, and the type of information. ) But the gap that I’m describing arises because many companies, and other stakeholders, assume that the companies are meeting the safety standards because they spend a lot of shareholder money on security.

The companies themselves, not to mention the regulators and the other parties concerned, do not understand that these gaps exist, or how to find and fix them. It has not been well explained because, until very recently, almost nobody connected with the financial industry had any appetite for refusing to greenlight risky deals – they concentrated on volume and speed of the deal transactions. This approach has created the ‘credit default swap’ of sensitive information.

How does this gap happen?

LW: Many of these gaps happen in the deal-making and deal-managing process. The financial industry is well aware of the many laws, regulations, and safety standards, and has been for years. The industry trade groups, and the companies themselves, specify that the safety reviews are supposed to be completed before any deal is done, if that deal involves any access to sensitive systems and data. Think of this as a requirement in the aviation industry that safety checks are supposed to be completed before a plane takes off. That does not mean that the crew does not keep an eye on things during the flight, but the plane is not supposed to leave the ground until it’s been checked and cleared by experts.

Now, what happens a lot in the financial industry is that a project is pushed along, and a deal is approved, giving another company access to sensitive data, before the safety reviews are completed and the shortcomings addressed. That is like putting a plane in the air before completing the safety checks, for no reason other than ‘we need to meet a schedule’ or ‘the safety checks take too much time’.

The deal-making and contract function should be one of the strongest and most effective control points for the industry – it is the last best chance to meet these safety standards before the ‘deal plane’ takes off. Unfortunately, because the financial industry has focused on volume and speed of deals, it is, in my experience, one of the weakest, with the deals frequently done by teams who do not understand the safety standards, or even the verbiage of the contracts.

Many in the financial industry treated this due diligence and deal function as a paperpushing drill to be done as cheaply and quickly as possible. That’s like having a plane checked out by an inspector who not only is not qualified to verify aircraft safety, but literally does not know what the words on the safety checklist mean.

How do you know about this?

LW: I managed deals, involving sensitive systems and data, for three international financial organizations. The subsidiaries of these global organizations included banks, mortgage companies, insurance, financial advisors, and credit cards. I also have many colleagues with experience in other global financial companies. This is an enormous and industry-wide problem that demands attention.

Well, if you worked in the financial industry, and now you’re saying the industry is not doing its job, aren’t you changing sides?

LW: I have always worked to secure sensitive information and systems, including in my work with three large international financial companies. That work involved knowing how to find and fix these problems, which was not a common skill in an industry that was paid on volume and speed of its deals. Sometimes it also involved refusing to greenlight projects until the appropriate security protections were in place. While that work was much appreciated by the control teams, like information security, compliance, and corporate governance experts, it was sometimes not popular with teams that wanted to rush projects through without taking time for the necessary precautions.

So I now work to educate the multiple stakeholders that this is a huge security hole, but it’s fixable – I’ve done it.

Why do you care so much about this? What’s in it for you?

LW: As it turns out, my entire career, beginning with my first U. S. Army job in Military Intelligence, has been about the protection and appropriate distribution of sensitive data. In my units, people were prepared to die to protect highly sensitive systems, the compromise of which could cause grave harm to our security and our people. It was unbelievable to me that some in the financial industry failed to protect sensitive information, just because they found it inconvenient, or because extra time and due diligence on a project might delay a promotion or payment of a bonus.

Given a choice between signing off on reckless manager decisions, or protecting our sensitive information, which means protecting our security, our customers and our shareholders, I have to side with protecting this data.

When you describe these gaps and how they happen, is this real-world information?

LW: The descriptions of these gaps are based on real-world, hands-on experience, not theory. I am not interested in enabling new data thieves; I want to help educate, so that the security holes can be found and fixed before there’s a security breach. If I know of specific weaknesses in a company’s system, I believe that it’s appropriate to first notify that company so that they can take proactive protective measures, whether with our team or with someone else. But even when I publicly discuss typical scenarios at an extrapolated level without naming the company, these examples are based on facts that I and my colleagues have witnessed first-hand.

What advice can you give companies that aren’t sure whether they are exposed?

LW: Many companies think that they have everything covered, because they have internal or external auditors, or big consulting companies, or other teams that have been trying for years to address security. But my colleagues and I have identified these gaps, even in some of the largest companies in the world that spend enormous amounts of shareholder money on security. In fact, the problem is probably worse in a larger company, because it’s more difficult for various teams to coordinate information and react quickly to address gaps. I can attest that we have identified significant security gaps that had been missed for years, even a decade or longer, by the internal and external teams at some of the largest companies in the industry.

What advice can you give companies that are sure they have this problem handled?

LW: Firstly, many financial companies assume that, because they spend a lot of time and money on security, they must have it covered. That assumption may prove fatal.

For companies that choose to assume that they have this covered, even after this widespread but unrecognized risk has been explained, my only advice is: Don’t have a breach.

Don’t have an unhappy worker with a flash drive; don’t have a contractor or subcontractor who wants to use this data for harmful purposes; don’t have your data being accessed by anyone that you don’t know; don’t have anyone working in your data centers or accessing them remotely unless you know about and monitor it; don’t have any gaps in any of the products or services anywhere in your data chain. Don’t make any mistakes in what you say to consumers, customers, regulators, investors, or companies with whom you do business.

If you’re still sure you have it covered – Don’t Have A Breach.

The author gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and Information-Security-Resources. com.

It truly is possible you’ve got heard about consolidating trends affecting the insurance plan brokers in the uk and it seems there will be future consolidation of brokers, from the years ahead. While some forms of organization insurance policy markets have seen a lower in market place share, others have seen their sector share boost. What does this mean to people that must insure their company belongings? First of all, it indicates you may desire to consider a much larger carrier which is pursuing an ambitious growth strategy simply because people is going to be the ones that happen to be far more apt to become competitive in pricing.

It is important to note that 99% of UK businesses are modest corporations, with practically 5 million businesses operating in the united kingdom. Whilst accident and well being premiums have declined much more than 7% inside the past couple of years, on account of the career marketplace, the common liability and enterprise property insurance plan markets have increased. This suggests smaller corporations agree it is important to protect your business constructing, contents and assets from all kinds of losses, in particular during tougher economic times. Your organization livelihood is your most essential asset to protect, no matter if the economy and task markets are doing well, or not.

According to recent analysis statistics, growing the amounts of top quality income would be the primary reason behind some of the consolidation that’s happening among the insurance carriers or brokers. This combining of smaller business enterprise insurers means that the much larger agencies will probably be one of the most competitive with premium rates. They may be the ‘consolidators’ which are after this growth in sector share, causing the formation of larger companies.

One particular of the most fascinating facts for modest enterprises to look at about the rising traits in the insurance carrier market will be the addition of online insurance plan purchasing since of your World wide web. It was estimated in 2008 that 1 third in the businesses had been prepared to buy their insurance policies safety online and that number has been increasing steadily. Though it’s a lot more frequent for your much less complicated insurance coverage items to be purchased on-line, such as motor or liability policies, it truly is growing to be clear that online business enterprise protection products offer you an benefit, as a result of pricing.

In other words, enterprise owners which can be looking for the most cost-effective business insurance policy policies may perhaps be paying for them on the web and will be shopping around for the greatest top quality prices additional usually. These larger carriers are familiar with this variety of buying arrangement, generating it far more inexpensive and less difficult to complete online. This saves the necessity of private sales advertising and marketing and those that don’t consider the Web will think about investing in over the telephone, a minimum of. This is an critical trend for every single modest organization owner to think about.

Creating critical, informed decisions is achievable with the facts that’s readily available on the Web. If you might be budget-conscious, yet want adequate cover for your organization property, the much larger consolidators in the commercial insurance plan industry understand that online purchasers are price-sensitive, so they’re ready to offer lower rates. Should you recognize the tendencies in the uk organization insurance policies sector, you will see that carriers are turning out to be much larger mainly because they provide on the internet ease and comfort, besides the best affordability.

In this world, getting finance news is must for every one’s. Those who are in this industry, have to keep themselves updated always about the latest happenings in the finance market. And also for those, who just want to have an extra knowledge about the most happening in this field in the market, they should be well updated about the updates and latest finance news regarding financial conditions in the market.

Therefore, to cater the need of these kinds of people, many new sources such as Magazines, journals, books, newspaper, news programs has been launched in the market. All of them offer the finance news easily. Usually such magazines and books involve huge subscription fees which may not be every time affordable by all. One more option is to use the new born technologies and go for internet to search finance news for your topic of interest. There are numerous finance websites are available in the online market which provide you free online finance news. These websites offer information about current topics and changes in the financial stabilities.

Moreover, they also offer the views and reviews from the experts in the industry along with the new schemes of capital management and investments. Well, these websites offer information in the form of articles, blogs, press release and content which have been written by expert’s writer who have an adequate knowledge about finance and who live, walk and talk with great finance experts. Furthermore, these latest finance news website also so great helpful for students or other who want to make their career in the field finance. For such a great offers, you are simply required to login on the online medium that offers you desirable information without any hassle. However, you cans also bookmark this online finance news so that you can easily get the updates of finance.

 

Having sound Personal Finance Budgeting has many benefits. Budgeting properly will help you plan for and reach your financial goals and dreams as well as eliminate financial stress.

 

Financial budgeting is a necessary administrative task that if done well can help keep away debt anxiety, overwhelm as let you know exactly where you are so you know what you need to do to make your balance sheet look more positive.

 

If you don’t like budgeting you can always use personal finance software that enables you to make budgeting quick, fun and easy.

 

Figuring out how to budget your personal finances successfully is an essential and important tool to removing financial stress then.

 

Budgeting to tips to help you reach your goals.

 

1.             Round up every financial statement you have. This includes bank statements, investment accounts, recent utility bills and any information regarding a source of income or expense and record all of your areas of money coming in.

 

2.             Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement or college savings and everything you spend money on.

 

3.             Break expenses into two categories:

 

•             Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They included expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on.

 

•             Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out and gifts to name a few.

 

4.             Total your monthly income and monthly expenses. If your end result shows more income than expenses you are off to a good start. This means you can prioritize this excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate that debt faster. Also, make necessary adjustments to expenses.

 

5.             Review your budget monthly. It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.

 

Of course if you use personal finance software you will find this task as simple as entering in the figure into a pre made spreadsheet with all the categories listed for you. This eliminates thinking on your behalf and will save you heaps of time.

 

Using software, especially for someone who doesn’t have much knowledge about intricacies of accounting and finance, will be beneficial for you in the following ways:

 

• Speed: All you have to do is to enter the data about your income and expenditure and it will sort out your expenses and create plans for your future personal finance. Good software will even calculate your taxes.

 

• Bill payments: Some programs are integrated with the internet and your bank so that it will pay your bills automatically. This is the best way to pay your bills on time and avoid late fees or discontinuation of services.

 

Remember a stable financial future starts with good personal finance budgeting. If you are like most people who hate the thought of being trapped within a budget get yourself a good financial software program that will make the exercise more enjoyable.

 

 

 

Discover more about personal finance budgeting here.

Scientific works in the theories of finances and credit, according to the specification of the research object, are characterized to be many-sided and many-leveled. The definition of totality of the economical relations formed in the process of formation, distribution and usage of finances, as money sources is widely spread. For example, in “the general theory of finances” there are two definitions of finances:

There are significant opportunities in Finance Functions within Police Forces to be transformed from a silo based culture that focuses largely on transactional activities to a process and metric based culture equally focusing on transactional processing, management information and strategic requirements. This transformation can deliver large cost savings, service improvement and better quality, faster processing.

Car buying has grown simpler by the time due to growth of car finance schemes. Financing your car appropriately takes into account your financial conditions and repayment capacity before giving you a car finance loan. Car financing is practical method to buy a car. Your can become a car owner in less time and own your kind of car at your kind of interest rates. With so many car finance options, there is one for every one.

100 percent financing – Many finance companies offer 100 percent financing for the cost of software and maintenance contracts, which requires no down payment. Because customers don’t have to come up with a down payment, they can make a purchase immediately, rather than hold up the sale with a “wait and see” mentality that often accompanies a dip into cash reserves. It also allows your customers to invest more capital in revenue-generating activities.

Several specialized mortgage finance institutions offer mortgage finance products to home buyers. These savings and loan mortgage finance institutions were also called thrift associations because lenders take in deposits of their savers and use the money to make mortgage finance and loan products.

One of the most misunderstood concepts about leasing or buying a new car with a loan is how the financing really works. We’ll say it again later, but the key concept to understand is that dealers do not finance car leases and loans. Repeat: New-car dealers do not finance cars. However, dealers can affect what you pay for financing.

Accounts Receivable Financing- “Don’t Worry, Be Happy” explores the issues of notification vs non-notification accounts receivable financing, why some businesses fear that their customers may learn that they are using factoring services, and why worrying about these concerns is usually not justified. Financing a small business can be most time consuming activity for a business owner. It can be the most important part of growing a business, but one must be careful not to allow it to consume the business. Finance is the relationship between cash, risk and value. Manage each well and you will have healthy finance mix for your business.

Financing a car is a very important process and today with the availability of numerous car finance brokers it has become an easy option to get secure car loans. Today these car finance brokers are playing a vital role in assisting car buyers as well. In this article, know more about various important factors that you should keep in mind while making a selection of a car finance broker.

Are you having a financial business website? Are you happy with the return of your investment in developing the website? I mean to say is the site focused to showcase your business? If the case is otherwise, you are in need of one of the best finance website templates. There are many excellent finance web templates available in the template shops. The matter of success hides inside your wise decision.

Bad credit computer financing is often taken as something that does not have much range of products to offer. But reading about bad credit computer financing will open you eyes to the fact that the options with bad credit computer financing are no less. Acquaintance with your own credit status will definitely give you a chance to get a bad credit computer financing at rate of interest that your credit status warrants. Help yourself with bad credit computer financing with doing the right research.

Let’s take a look at the facts: Housing prices are rising at a clip of 10-15% per year, tuition costs are rising by an average of 10% each fall, and energy costs – well, the average rise in prices depends on the week you happen to be looking at, but double-digit increases have been the norm for the past few years. And now, the really depressing fact: Average wage increases have hovered between a measly 3 and 4 percent for the past three years. Now what, you ask, does any of this have to do with car financing?

Sometimes, even car dealers that work with bad credit can give you a really hard time about getting approved for car loan. This can be really frustrating because you feel like you’ve been to where you need to go to get approved and you still get declined for car finance. What gives? Should you use a buy here pay here dealership or try to find other car lots that accept bad credit? It can seem like there is nowhere to turn.

The good news is that even though car dealers that supposedly accept bad credit, turned you down is that there are places that you can go on the Internet that will approve you for an auto loan based upon your monthly income.

Your payment is approved based on what you make each month at your job and these types of lenders will work with you. Rather than just seeing you as a number, they take more into account than just your credit score. This is a big relief for a lot of people that have had a hard time getting approved and have been declined car finance.

The reason that many car dealers that deal with bad credit they turn you down, is that even though they may specialize in people with bad credit, they made simply not have the lenders needed. There are so many different types of auto finance lenders that it can make your head spin. With the way that the economy has been going lately, more and more subprime auto finance companies are doing less and less business with car dealerships. You can get a much better deal and much better terms arranging your financing online with a legitimate car loan company.

Top traders and investors have different opinions, concerning the buy-and-hold strategy. Basically, this strategy dictates that once you buy a stock you like, it is held for years or even decades, no matter what. The belief is that staying fully invested all the time will give you profits in the long run. This includes hanging onto your stocks through major bear market cycles.  After the 1929 stock market crash, it took 27 years for the market to climb back to its 1929 high. The NASDAQ currently is not even close to getting back to its 2000 high, after the crash that began that same year. We are at 10 years and counting. Talk about a wait and hope game. I believe the buy-and-hold strategy is pure insanity, unless you can buy fundamentally strong stocks at, or near the end of, a major bear market, when valuations are low. Almost all stocks fall during a bear market, but only some of them recover after a long period of time.  Here are some random gems of trading knowledge.  You are better off owning the wrong stock at the right time, than the right stock at the wrong time.  There are times when you should be out of the market completely.  A stop-loss order is a tool that can help you become successful. This also includes the “trailing” stop-loss order.  It is important that your stock has enough following to make a string of new highs.  When volume rises substantially, somebody knows something. If price rises, along with volume, that could be considered a buy signal. Let volume and price go up some before you buy. These are the two best confirmations.  When most people are bearish, most people are probably wrong. When most people are bullish, they might be right sometimes.  When a stock stays in a very narrow trading range for a long time, and then comes out of it on the up-side, you can be pretty sure the stock has been under accumulation. This is quite bullish.  When a general market movement to cover begins, prices tend to go up very rapidly. This is called a “climax run”. Get out immediately and protect your profits.  It is important to follow a trend, but you should always be watching for a reversal. The charts will give you a clear signal with price and volume analysis.  If a stock price goes up, but volume stays low, do not buy. When both price and volume rise together, that is your signal to buy.  If the general stock market falls below its 200 day moving average, it is probably wise to sell your stocks. The market is trying to tell you something.  Markets tend to go up just when nearly everybody seems to agree they must go down.  Always cut your losses short, and let your profits run.  Buy stocks as they are making new highs, and attracting institutional attention. Do not buy when they are down at the bottom.  

Over the past few days, there have been several stories written about Warren Buffett’s $14 billion bet on global stock markets. I believe these stories are all in reference to this excerpt form Berkshire Hathaway’s annual report:”Berkshire is also subject to equity price risk with respect to certain long duration equity index put contracts. Berkshire’s maximum exposure with respect to such contracts is approximately $14 billion at December 31, 2005. These contracts generally expire 15 to 20 years from inception. Outstanding contracts at December 31, 2005, have been written on four major equity indexes including three foreign. Berkshire’s potential exposure with respect to these contracts is directly correlated to the movement of the underlying stock index between contract inception date and expiration. Thus, if the overall value at December 31, 2005 of the underlying indices decline 30%, Berkshire would incur a pre-tax loss of approximately $900 million. “It’s impossible to evaluate what exactly this means for Berkshire or what it tells us about Buffett’s thinking without knowing more details. But, there are a few things I’d suggest you consider when reading the news reports. First, the $14 billion headline number makes this bet look larger than it really is. According to the above disclosure, a 30% decline in the underlying indices would only create a $900 million pre-tax loss. One article stated that a decline in the indexes to zero was highly unlikely given historical trends. It’s a lot more than highly unlikely. But, since we don’t know the details of Berkshire’s exposure, we can’t evaluate the real risk of a very large loss. A lot of these news stories have called Berkshire’s “long duration equity index put contracts” a bet on global stock markets. A few individuals have been quoted as saying Buffett has become bullish long-term. Buffett’s always been optimistic about the very long-term insofar as he recognizes how better things are today than they have been at any other time in history, and how that is likely to remain true for some time. Despite Buffett’s concerns about nuclear war, he doesn’t see a return to the Dark Ages and those kinds of anemic returns on capital. That’s important to keep in mind, because I’m not sure this bet is much more than that. If you assume returns on equity will be similar to those achieved in the years since industrialization began, and you assume central governments will continue to cause inflation, a long duration equity index put contract isn’t much of a stretch. Equity will earn returns, much of those returns will be retained by the businesses, and inflation will increase (nominal) stock prices regardless of whether the underlying businesses’ assets are increasing or remaining stable. So, I’m not sure this is a bullish sign. In fact, it may be a bearish sign, because it suggests Buffett can’t find individual equities to buy, three of the four indexes are foreign, and someone wants to be protected against very large losses in a diversified group of holdings. Remember, someone is paying for this protection. In my opinion, it’s not the kind of protection investors need. It’s long-term protection on an index. I suppose I can see why a pension fund might want this (to increase exposure to equities), but it seems like exactly the sort of thing an insurance company can make money selling. There’s fear of a very large loss, and a lot of factors that are hard to see that will tend to make that loss pretty unlikely. We don’t know what premiums Berkshire is receiving, so we really can’t evaluate these contracts. If someone writes hurricane insurance it doesn’t mean they think hurricanes are unlikely, it just means they think someone is dumb enough to pay more than the protection is worth. Knowing the odds of a decline in global stock markets isn’t enough to evaluate Berkshire’s contracts, because we don’t know the price. I’m not enamored with current valuations in the U. S. , but looking out a couple decades it’s not all doom and gloom. Markets tend to overshoot in both directions, but there’s usually someone sane enough to buy when stocks get cheap enough. What’s remarkable about the way investors move stock prices isn’t the magnitude of the truly major moves (up or down); it’s the frequency of meaningful moves when there’s no meaningful changes in underlying values. Think about the price range of an average stock in an average year – that’s the really irrational part of investor behavior. I wouldn’t want to have anything to do with a one-year contract on a single stock. That’s a very different situation.

CONTENTS

GIFTS

WRINTING FOR THE INTERNET

SCAMS LISTED

HIJACKERS

VANCATION

INTERENT AUCTIONS

LIGHTSIDE

MODEM DIALLING

MML’S

SCARY

IDENTITY THIEF

WHOLESALE, DROP SHIP

Writing for the Internet is very different, then writing a research or term paper.   You cater to a specific market; people who do not have the time to spend reading a 1500 word article and find only one or two helpful tips. Information that will be easy to understand and people will be able to relate with.

Good English, or fancy technical writing that people would have to consult a dictionary just to grasp your thoughts, are of no help to a person who is marketing on the Internet.   You have to create functional articles that will be easy to understand and people will be able to relate with.

People are looking for how to, where to find information that will be helpful in their everyday marketing. They want to find it on one spot if possible and not spend hours looking for it.

Have a list of your contents, keep your writing to short paragraphs intended for easy reading, this will make it helpful for those who don’t really have the time and are just scanning for information that is helpful.

Such knowledge should be useful to them and will make them interested in reading your future articles as well as your other products and services.

The odd good joke in the middle of your article helps to break the steady reading of information, and gives the person a chance to have a good laugh too.

HIGHJACKERSHave you had your homepage and all your settings changed?You can waste a lot of time trying to figure out what has gone wrong, even having to make a service call. It can be a headache. Hijacking may not be as scary as a virus, but it still has its downfalls. If you ever get caught in a hijack, there are some pretty simple ways to fix them. To fix the search hijack, open Internet Explorer and go to Tools, Options, Programs tab. You will see listing of some of your Internet services.   In the bottom left hand corner, there is a button that says “Reset Web Settings. ” Click that and the registry keys will be renewed. Click OK when you’re finished. Protect yourself from spoof (fake) emails and Web sites. Take the Spoof Tutorial to learn about eBay Toolbar with Account Guard, which warns you when you are on a known spoof site. For more safe buying tips, please visit the Safety Centrehttp:// pages. ebay. ca/securitycentre/buying_safely. html

Help On Vacation Scam

Individuals’ e-mail/or social networking accounts being compromised and used to swindle consumers out of thousands of dollars. Portraying to be the victim, the hacker uses the victim’s account to send a notice to their contacts. The notice claims the victim is in immediate need of money due to being robbed of their credit cards, passport, money, and cell phone; leaving them stranded in Vancouver or some other location.

Some claim they only have a few days to pay their hotel bill and promise to reimburse upon their return home. A sense of urgency to help their friend/contact may cause the recipient to fail to validate the claim, increasing the likelihood of them falling for this scam.

If you receive a similar notice and are not sure it is a scam, you should always verify the information before sending any money.

If you have been a victim of this type of scam or any other Cyber crime, you can report it to the IC3 website at: www. IC3. gov.

I have to admit I fell for a similar scam, only it happen at my house.   I answered the door and found a nice looking well dressed young man, who explained he was embarrassed, but found himself in a tight bind.   He had been visiting one of his relatives who lived on the same street as me.   He left their house and his car broke down a few blocks away.    He walked back to his relative’s house but they had gone out. He had to go to the airport to pick up a sister, but was short $35. 00 for a used battery.

Could I please lend him the $35. 00 for the battery, and after he picked up his sister he would either bring the money back that evening or get his uncle who lives on my block to bring the cash over.   You guessed right.   He didn’t bring the money back, and he didn’t have an uncle who lived on my street.   His scam was he would find out the name of one of your neighbours, make sure they were not home, and then went door to door with his scam.

LIGHTSIDEDuring World War 2, a soldier arrived at the city but found all hotel rooms taken. He begged the desk clerk for anything.   The hotel clerk said he had a double, there was a navy guy in it, but persons in rooms next to him said he snored so loud it was hard to sleep. The soldier agreed to take it.   When the soldier came down for breakfasts the manager asked, “How did you sleep”?  “Great” replied the soldier. “no problem with the other guy snoring all night”? Asked the manger. “No I shut him up in no time” replied the soldier. “How did you manage that?” asked the manager. “Well he was in bed snoring away when I walked into the room, so I gave him a kiss on the check” explained the soldier.   “Then I whispered in his ear ‘goodnight beautiful’, and he sat up all night watching me. ” Multilevel Marketing Plans/ Pyramids

Consumers say that they’ve bought into plans and programs, but their customers are other distributors, not the general public. Some multi-level marketing programs are actually illegal pyramid schemes. When products or services are sold only to distributors like you, there’s no way to make money.

SCARYA new threat to your computer comes in new malware that can infect your computer. It hides until you access specific files or web sites. It can steal passwords, files, and then delete any trace of itself. Brian Denehy, security assurance engineer at Cyber Trust, states majority of new malware uses some type of stealth in an attempt to remain undetected before, during and after an attack. Spyware is loosely defined as, “any program, which gathers information (about you) through an Internet connection — without your knowledge. ” Spyware can gather information about your email address, keystrokes, browser cookies, passwords, credit card numbers, and can send advertisements — even if you’re not connected to the Internet!

Consumers can protect themselves by:

If paying online use a service like PayPal. The minute any charge is recorded on your account you will get a notice from PayPal. Paying with a credit card, bank, it may take up to a month for you to get your statement which gives the con time to clean out your account, use up your credit card limit.

Use strong passwords for all financial accounts and change them regularly.

Obtain and review your annual credit report for fraudulent activity.

SCAREWARE              Most of the pop-ups telling you your computer is infected are scams. They’re among the fastest-growing types of Internet fraud.   It’s just a way to try and sell you a product, mostly junk.  

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The Effects of Financing Deficit on Leverage Choice of Quoted Firms In A Developing Economy: The Nigerian Experience

                   ONWUMERE J. U. J Ph. D

                   OKOYEUZU CHINWE

 

 

ABSTRACT:   This paper examines time-series patterns of external financing decisions consistent with the pecking order theory. Emerging  markets provide an excellent  laboratory to test the  explanatory power of financing deficit given the under developed markets for corporate control. The adverse selection problem of external financing automatically leads to the standard pecking order in which debt dominates equity. we run a regression with a firm’s change in debt as the  dependent variable and its financing  deficit as explanatory variable.   we control for other determinants of debt issuance. Controlling for other determinants of debt issuance helps us to see whether the adverse selection model  falsely omits critical determinants of leverage. This allows a nesting of the conventional determinants of leverage from the trade-off theory within an adverse selection model. Our empirical results indicate that the financing deficit alone accounts for 40% of the variation in leverage  and that no single variable is as potent as the financing deficit in explaining the variations in leverage  over the period.     We predict that publicly traded Nigerian firms fund  a much larger proportion of their financing deficit with net external debt

 

 

 

 

 

    INTRODUCTION

 

The basic pecking order theory predicts that leverage is a decreasing function of profitability. Adverse selection problem is the basis for the theory and since liquid assets/ retained earnings do not have any adverse selection problem, they constitute the best source of funds from insiders’ perspective.

Accordingly, the firm will fund all projects using retained earnings if possible. If there is an inadequate amount of retained earnings, then debt financing will be used. This argument leads to the standard pecking order in which debt dominates equity. Frank and Goyal (2003) assume that the adverse selection   problem of external financing automatically leads to the standard pecking order in which debt  dominates equity .

            ∆Dit  = a + bpo  DEFit  +    Eit                      

We run a pool panel regression where ∆Dit  represents net debt issues and   DEFit     represents  financing deficit.

Following the argument of Halov and Heider (2005), that the standard Pecking order is a special case only when there is no asymmetric information about risk, we control for other determinants of debt issuance. The basic trade-off theory states that the level of leverage is determined by trading off the tax benefit of debt against the costs of financial distress. Controlling for other determinants of debt issuance helps us to see whether the adverse selection model falsely omits critical determinants of leverage. This allows a nesting of the conventional determinants of leverage from the trade-off theory within an adverse selection model. The specification in a nested model  enables us to determine how the financing deficit performs when combined with conventional factors. The pecking order theory implies that the financing deficit ought to wipe out the effects of other variables. If the financing deficit is simply one factor among many that firms trade-off, then what is left is a generalized version of the trade-off theory. The pecking order theory financial behaviour is driven by adverse selection costs and the theory should perform best among firms that face particularly several adverse selection problems.   Small high growth firms are often thought of as firms with large information asymmetric . if internal financing is not adequate, then debt financing will be used.   Thus, for a firm in normal operations, equity will not be used and the financing deficit will match up net debt issues.

The remainder of the paper is organized as follows. section 11 provides an overview of capital structure theories. Section 111 describes the methodology. The empirical analyses of deficit are presented in section 1V. section V concludes our work.

 

SECTION 11

REVIEW OF RELEVANT LITERATURE

In finance capital structure refers to the way a corporation finances its assets through some combination of equity and debt or hybrid securities. The key division in capital structure is between debt and equity. The proportion of debt funding is measured by leverage. There are different factors that affect a firm’s capital structure, and a firm should attempt to determine what its optimal or best mix of financing.

The pecking order predicts changes in mature firm’s debt ratios. These companies’ debt ratios increase when the firms have financial deficits and declines when they have surpluses. By implication, a firm may never have a preference for external finances as long as it is able to meet its investment needs via internal equity funds. But in the presence of financial deficit as mostly the practical case, the need for external finance becomes pressing.

The pecking order theory is formally proposed in Myers (1984) and Myers and Majluf (1984). in the theoretical framework of Myers and majluf, investors are willing to buy risky securities only at a discount because of the information asymmetry between managers and outside investors. Expecting this problem, managers prefer internally generated funds . when external funds have to be raised, firms prefer straight debt, and then a convertible debt, with external equity issued as last resort.

Despite extensive investigations into how firms determine their capital structures, the capital structure puzzle prevails. One of the difficulties researchers face in these studies is that a firm may deviate from its target leverage ratio. these deviations arise because operating  and financial decisions push leverage above or below the firm’s target and transaction costs and market conditions may prevent immediate corrections. This financing deficit is attributed to factors that cause a firm to deviate from its target capital structure.

Shyam-sunder and Myers (1999), provide an influential empirical test of the pecking theory against the tradeoff theory. Using a sample of 157 firms, that had traded continuously from 1971 to 1987, they find that the basic pecking order model which predicts external debt financing driven by the financing deficit, has much greater explanatory power than the static trade off model. They argue that firm’s need for external financing and their internally generated funds may have time-series properties that lead to mean reversion of the debt ratio when firms follow a pecking order financing.

In recent years,Frank and Goyal (2003)find that the financing deficit is positively related to changes in leverage which indicates pecking order financing behaviour. In other words, managers prefer issuing debts to issuing equity when firms tend to make a financial decision by taking external funds. If asymmetric information makes major equity issues or retirements rare, this behaviour is nearly inevitable. The pecking order suggests that managers try to time issues when shares are fairly priced or overpriced. Investors understand this, and interpret a decision to issue stock as bad news. That explains why stock price usually fall when a stock issues is announced. The pecking order theory stresses the value of financial slack. Without sufficient slack, the firm may be caught at the bottom of the pecking order and be forced to choose between issuing undervalued shares, borrowing and risking financial distress, or passing up valuable investment opportunities. Financial slack is most valuable to firms with plenty of positive –NPV growth opportunities. This is another reason why growth companies usually aspire to be conservative in capital structures. Heaton documents some benefits and costs of free cash flow (Heaton, 2002:40-41).

Ho, et al (2006) shows that a firm’s ability to reap growth opportunities from research and development (R&D) investments depends on its size, leverage, and the industry concentration. The authors shed further important insights on the size- leverage interaction. They reveal that large firm’s advantages over small firms disappear as their leverage increases. In general, the pecking order should work well for small young nonpayer of dividend since they face more asymmetric information

 

SECTION 111

METHODOLOGY            A cross section of 60 firms was investigated. Data was obtained from annual financial reports and securities and exchange commission over a ten year period (1996-2005) A cross section of 60 firms was investigated. Data was obtained from annual financial reports and securities and exchange commission over a ten year period (1996-2005)

(The financing deficit variable)

The basic pecking order theory predicts that leverage is a decreasing function of profitability. Adverse selection problem is the basis for the theory and since liquid assets/ retained earnings do not have any adverse selection problem, they constitute the best source of funds from insiders’ perspective.

Accordingly, the firm will fund all projects using retained earnings if possible. If there is an inadequate amount of retained earnings, then debt financing will be used. This argument leads to the standard pecking order in which debt dominates equity. Frank and Goyal (2003) run the following pooled panel regression

      ∆Dit  = a + bpo  DEFit  +    Eit                                         … (3. 1)

 

Where ∆Dit represents net debt issues and DEFit  represents financing deficit. They argue that there is a support for the standard pecking order if  a = 0 and b = 1.

∆Dit  =net debt issued in year t(∆Di =long-term debt issuance-long-term debt reduction)

DEFit =Divt/+ It + ∆wt- ct……. . (11)

Divt= cash dividends in year t.

It= net investment in year t(simply put, changes in fixed assets and long term investments).

∆wt = change in working capital in year t

Ct =cash flow after interest and taxes.

According to theory, the specification in equation (1) is defined in levels. When actually estimating equation (1),it is conventional to scale the variables by assets or by sales. Ayla Kayhan et al,(2007). The pecking order theory does not require such scaling. Of course, in an algebraic equality, if the right-hand side and the left-hand side are divided by the same value, the equality remains intact. however, in a regression, the estimated coefficient can be seriously affected if the scaling is by a variable that is correlated with the variables in the equation. Scaling is most often justified as a method of controlling for differences in firm size. When this variable is positive the firm invests more than it internally generates. When it is negative, the firm generates more cash than it invests; in other words, the firm has positive free cash flow. The interpretation of the pecking order hypothesis, described in Shyam-sunder and Myers(1999) and Frank and Goyal(2003),is that since debt is likely to be marginal source of financing; firms with high financial deficits are likely to increase their debt ratios

Following the argument of Halov and Heider (2005), that the standard Pecking order is a special case only when there is no asymmetric information about risk, we control for other determinants of debt issuance. The basic trade-off theory states that the level of leverage is determined by trading off the tax benefit of debt against the costs of financial distress. Controlling for other determinants of debt issuance helps us to see whether the adverse selection model [that is,(3. 1)]  falsely omits critical determinants of leverage. This allows a nesting of the conventional determinants of leverage from the trade-off theory within an adverse selection model. Following Frank and Goyal   (2003) and Halov and Heider (2005), the set of regressions becomes:

∆Dit   = ao bpo DEFit   + bc    ∆Cit  + bv ∆Vit  + bπ ∆πit  + bs ∆LOGS +   Eit                                                    

                                                                       …(3. 2).

 

          The logic of (3. 2) is simple. The pecking order theory is a competitor to other mainstream empirical models of corporate   leverage. The specification in a nested model as in (3. 2) above enables us to determine how the financing deficit performs when combined with conventional factors. The pecking order theory implies that the financing deficit ought to wipe out the effects of other variables. If the financing deficit is simply one factor among many that firms trade-off, then what is left is a generalized version of the trade-off theory.

  Thus, for a firm in normal operations, equity will not be used and the financing deficit will match up net debt issues.

The pecking order in terms of the relative explanatory power of the financing deficit in observed capital structures can be stated thus:

ßpo =  ßs  =    ßr   =   ßc =    ßp            

ßpo >  ßs  v, c, p        = (Financing deficit dominates).

 

Our version of the regression analysis follows five stages thus

Į t     =        α +  ßpo DEFt        

Į t     =        α +  ßpo DEFt   =   ßs St  +  ßvVt

Į t     =        α +  ßpo DEFt   =   ßs St  +  ßvVt   +   ßcCt

Į t     =        α +  ßs St   =   ßv Vt  +  ßcCt   +   ßp      pt

Į t     =        α +  ßpo DEFt   =   ßs St  +  ßvVt   +   ßcCt   + ßp pt

Where       Į t       =        Market leverage at time t

                 DEFt =         Financing deficit at time t

       St       =        Proxy for size at time t

       Vt       =        Growth opportunities at time t

       Ct       =        Tangibility of assets at time t

       pt       =        Profitability at time t 

 

Our model of target leverage was computed thus:

Į*t       =     Į t      +    DEFt

 

SECTION   IV

Presentation And Analysis

 

TABLE 4. 1a: EMPIRICAL RESULTS ON THE STANDARD PECKING ORDER

Constant

Deficit

R2

Adjusted R2

Std. Error of Estimate

F

DW

0. 20

0. 98

0. 40

0. 03

5. 32

1. 11

(4. 29)+

(2. 31)++

0. 32

 

 

 

 

F        represents F  Ratio, while DW Dursin-Watson.

t         values are in brackets     n = 10

+        signifies one percent (0. 01) significance

++      signifies five percent (0. 05) significance.

The pecking order hypothesis can be stated statistically as

H1: a = 0      (pecking order holds)

          Hi:  a ≠ 0      (pecking order does not hold)

And

Ho: b = 1      (pecking order holds)

          H1: b ≠ 0      (pecking order does not hold)

Table 4. 1a indicates that the constant a is statistically different from zero. However, the slope coefficient b is close to one in support of the pecking order. The coefficient of determination indicates that the deficit explains forty percent (40%) of the variation in market leverage, our proxy for net borrowing.

It is important to stress that the variables used above were scaled by assets in line with empirical method. Scaling is most often justified as a method of controlling for differences in firm size.

The pecking order test implicitly makes different exogeneity assumptions and uses slightly different information set than is conventional in empirical research on leverage and leverage-adjusting behaviour. The conventional set of explanatory factors for leverage is the conventional set for a reason. The variables have survived many tests. As explained in our literature review, these variables also have conventional interpretations. Excluding such variables from consideration may (potentially) be a significant omission. More so, the result above indicates an unexplained variation in leverage of about sixty percent. Including such variable further poses a tough test for the pecking order theory.

Our version of the regression analysis follows five stages thus:

lt = a +bpo DEFt               ……………………………. .                   (as in 4. 1)

lt = a +b po  DEFt +bsSt  + BvVt    ……………………. .                    (4. 2)

lt = a +bpo  DEFτ +bsSt +  BvVt  + bcCt…………………                (4. 3)

lt = a +bsSt  + bvVt +bcCt + bππt …………………. .              (4. 4)

lt = a +bpoDEFt + bsSt +bvVt + bcCt + bππt ……. . …. .                    (4. 5)

 

Where         lt        =        market leverage at time t.

DEFt  =        financing deficit at time t.

St       =        Proxy for size at time t.

 Vt      =        Growth opportunities at time t.

Ct       =        tangibility of assets at time t.

πt       =        profitability at time t.

 

Our empirical results are tabulated in 4. 5b below.

Table 4. 1b:  RESULTS ON CONVENTIONAL LEVERAGE REGRESSION WITH FINANCING DEFICIT IN NESTED MODELS.

Regression Equation

Constant

DEF

Size

(S)

Growth

(V)

Collateral

(C)

Profit

(π)

R2

F

DW

4. 4

0. 20

(4. 29)+

0. 98

(2. 31)++

 

 

 

 

0. 40

5. 32

1. 11

4. 5

0. 36

(5. 90)+

0. 73

(2. 44)++

-0. 13

(-1. 26)

-0. 23

(-2. 47)++

 

 

0. 70

8. 08

1. 45

4. 6

0. 40

(9. 04)+

0. 53

(2. 43)+++

-0. 19

(-2. 55)++

-0. 30

(-4. 35)+

-0. 06

(-2. 78)++

 

0. 86

14. 81

1. 93

4. 7

0. 45

(7. 47)+

 

-0. 18

(-1. 66)

-0. 34

(-3. 26)++

-0. 08

(-2. 58)++

-0. 01

(-0. 42)

0. 70

6. 36

2. 27

4. 8

0. 39

(7. 44)+

0. 52

(2. 12)+++

-0. 19

(-2. 23)++

-0. 31

(-3. 78)++

-0. 06

(-2. 50)++

-0. 01

(-0. 15)

0. 83

9. 53

1. 88

n  =   10

+        Significant at one percent (0. 01)

++      Significant of five percent (0. 05)

+++    Significant at ten percent (0. 10) 

Confirming predictions shared by the trade-off model and the standard pecking order model, firms with more growth opportunities have less market leverage. Confirming the pecking order model but contradicting the trade-off model, more profitable firms are less levered. However, the profitability coefficient is statistically insignificant.

          On the explanatory power of deficit on observed debt ratios, table 4. 1b indicates its dominance over the remaining conventional variables both by the partial derivatives and the coefficient of determination (R2 ).

Again, the financing deficit alone accounts for 40 percent of the variation in leverage while size and growth (put together) make up the balance of 30 percent. Collateral, our proxy for tangibility of assets explains 16 percent of the variations in leverage while the explanatory power of the regression once profitability is added. Table 4. 1b indicates that no single variable is as potent as the financing deficit in explaining the variations in leverage over the period. A one percent increase in financing deficit leads to a . 73% increase in market leverage. A one percent increase in size leads to a . 19% decline in market leverage. A one percent increase in growth opportunities leads to a . 3% decline in market leverage. A one percent rise in tangible assets leads to a decrease of . 06% in leverage while a one percent rise in profitability leads to a decline of . 01% in leverage. Though the profitability coefficient is consistent with the pecking order theory, it is not significant at all. This casts doubt on the plausibility of the pecking order. However, the statistically significant deficit coefficient that dominates other coefficients at all levels indicates that the pecking order is a strong theory in the Nigerian corporate environment. Empirical research along this line includes Graham and Harvey (2001), Fama and French (2002). Halov and Heider (2005).

To test for the degree of multicollinearity amongst the explanatory variables, the table below hereby presents our intercorrelation matrix.   

TABLE 4. 1c: INTERCORRELATION MATRIX OF MARKET LEVERAGE (L) WITH   DEFICIT, SIZE, GROWTH, COLLATERAL AND PROFITABILITY.

 

L S V C Π

DEF

PPMCC.        L.

1. 00

 

 

 

 

 

                   S

0. 63

1. 00

 

 

 

 

                   V

-0. 76

-0. 92

1. 00

 

 

 

                   C

                   π 

-0. 28

0. 49

0. 02

0. 75

-0. 14

-0. 77

1. 00

0. 12

 

1. 00

 

                  DEF

0. 63

0. 32

-0. 31

-0. 28

0. 13

1. 00

Sig (I-tailed) L

.

 

 

 

 

 

                                        S             

 

0. 03

 

.

 

 

 

 

                     V

0. 01

0. 00

 

 

 

 

                    C

0. 21

0. 48

0. 35

 

 

 

                      π    

0. 08

0. 01

-0. 01

0. 37

.

 

                   DEF

0. 03

0. 18

-0. 20

0. 22

0. 36

1. 00

 

 

 

SECTION V

SUMMARY/CONCLUSION.

 

DEBT AND THE FINANCING DEFICIT

          We now look at the analysis of the capital structure decision from a different point of view, the pecking order theory of Myers and Majluf (1984) and Myers (1984). As can be recalled, Myers and Majluf analyzed a firm with assets – in – place and a growth opportunity requiring additional financing. They assumed perfect financial markets, except that investors do not know the true worth of either the existing assets or the new opportunity. Therefore, investors cannot precisely value the securities issued to finance the new investment; If the firm announces an issue of common stock. This is good news for investors if it reveals a growth opportunity with positive net present value. It is bad news if managers believe the assets –in-place are overvalued by investors and decide to try to issue overvalued shares. (Issuing shares at too low a price transfers value from existing shareholders to new investors if the new shares are overvalued, the transfer goes the other way). The interested reader is referred to Myers (2001), Fama and French (2002) and the references cited in these papers for excellent exposition.

          The pecking order theory predicts that the firm will fund all projects using internal equity if possible (Information asymmetries are assumed relevant only for external financing). If internal finance is not adequate, then debt financing will be used. Thus, for a firm in normal operations, equity will not be used and the financing deficit will match the net debt issues.

          The empirical specification for the test of the standard pecking order is given as

          lit = a + bpo D

 

 

CONCLUSION. A statistically significant deficit coefficient that dominates other coefficients in a nested regression model indicates that no single variable is as potent as the financing deficit in explaining the variation in leverage over the period of the financing deficit provides a strong support for the standard pecking order. The result is well in line with the empirical findings of Titman and Wessels(1988)our result was a strong confirmation of the pecking order in the financing behaviours of Nigeria quoted firms.

 

 

 

REFERENCES

 

 

Fama, E. F. and K. R. French (2002a) “Testing trade-off and pecking order predictions About Dividends and Debt,” Review of financial studies,  15, (1):1-33.

Frank, M. Z and V. K Goyal (2003) “Testing the Pecking Order Theory of Capital Structure,” Journal of Financial Economics, 67: 217-248.

Graham, J. R and C. R Harvey (2001)”The Theory and Practice of Corporate Finance: Evidence from the Field, ” Journal of financial Economics,  60, ( 2-3)May: 187-243.

 

Halov, N. and F. Heider (2005) “Capital Structure, risk and Asymmetric Information, “Working Paper NYU Stern School of Business. (December 1st, 2005).

Heaton, J. B. (2002) “Management, Optimism and Corporate Finance, “Financial Management,  31(2 )(summer) :33-45.

 

Ho, Y. K, M. Tjahjapranata and C. M Yap (2006) “Size, Leverage, Concentration, and R&D Investment in Generating Growth Opportunities”, Journal of Business  79, ( 2):851-876.

 

Myers, S. C. (1984) “The Capital structure puzzle”, Journal of Finance, 39, July,  575 – 592.

Myers, S. C. and N. S. Majluf (1984) “Corporate Financing and

Investment Decisions When Firms Have Information Investors Do Not Have”, Journal of Financial Economics,  13, June, 187 – 222.

 

 

 

Titman, S. and R. Wessels (1988) “The Determinants of Capital Structure Choice, ” Journal of Finance,  43, (1): 1-19

 

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Financial literacy is important at any age in life.   Knowing how to spend and save money is a necessary expertise, especially in today’s turbulent economy.   As college students, many of us have student loans, credit and debit cards.   These economic resources, if used recklessly, can lead down a dead-end road called debt.   Financial literacy must come about now more than ever before.   The current economic conditions are frightening, and require attention immediately. The economy has reached a nerve-racking low for the first time since the 1980s.   Today people are saving less, spending more, and incurring debt at faster rates than ever before.   The American public’s lack of financial knowledge is one of the factors that have significantly contributed to the current state of the economy.   Financial education may be foreign territory to some, but its magnitude can no longer go overlooked.   The means to achieving financial knowledge is not a difficult one.   Yes, certain obstacles stand in the way, but it is nothing that cannot be accomplished.

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            In the past Presidential election, the economy was the top concern of the voters and the candidates.   Voters overwhelmingly chose the best man they believed would progress the nation in the right direction.   President Obama realized that the turbulent stock market has impacted everyone.   It has severely hit hardworking American’s 401Ks.  401Ks are individual retirement savings.  This creates a significant problem because so many households arrive close to retirement with little or no wealth.   He plans to take “immediate action to rescue the banking industry, stock market, and housing crisis.   He also calls for current tax code revisions to make it easier for American taxpayers to understand, plans to initiate a five-star rating system so every credit card consumer comprehends the risk associated with every credit card, and ensure that consumers understand the concepts and terms of the various loans and mortgages.   These strategies make it easier for the public to understand financial concepts, and hopefully lay a foundation towards financial literacy.  

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            Both candidates realized and acknowledged that the economy desperately requires repairs. When the economy suffers, the people do to.   The vicious cycle continues.   When times are good, Americans have jobs, earn an income, save money, and energize the economy.   When times are bad the opposite occurs.   Unemployment is high, workers earn less, save little, and the economy suffers.   With times being bad, the public feels the effects.   Change must happen, and one of the most empowering changes we can make is for people to obtain financial literacy.  

            In more recent years, Congress and state legislatures have acknowledged the importance of financial education in public schools.   Now several states have mandatory financial literacy programs.   Some of these educational programs include the Jump$tart Coalition.   They reported that some 31 states have approximately 156 pending bills before legislative bodies addressing financial literacy.   Another group helping to tackle financial education is the National Endowment for Financial Education.   Financial education is not only needed at the high school level, but learning the basics as early as Kindergarten has been proven effective.   The more exposure children and teens have to the information and resources, the better chance students have of absorbing and implementing the knowledge.  

Schools have put financial education on their low list of priorities.   However, trouble arises because parents at home do not provide this education either.   Parents themselves are not financial experts.   In fact, they lack vital financial knowledge as well.   According to a 2000 Jump$tart survey, it shows that young adults who spend time discussing finances with parents are no more financially literate than those who spend little time doing so.   How can children and teens receive the necessary financial education to ensure that they can make financially sound decisions?  The answer lies within the state and national governments. Programs such as the Jump$tart Coalition and the NEFE provide as much education and financial services as possible.   However, more government funding is needed to ensure that these services are available in the future.   President- elect Obama was mum about where such funding would come from.   He did place a funding emphasis at the state level.   National policy must set mandatory financial education classes at each level of schooling and provide some funding; states should be accountable for funding as well.   If the American population does not achieve financial literacy, the economic pattern of expansion and recession continues to circulate, as history has proven.  

            Endless surveys have been conducted to show the public just how little financial literacy the population has.   And somehow they provide us with the same message, that Americans lack financial education.   Each survey, given by various groups, provides questions in four general areas: income, money management, spending and credit, and saving and investing.   The samples for the survey have been drawn form a listed provided by the United States Department of Education.   Surveys are distributed in non-business related classes.   Overall, surveys are given to high school students because it is generally the last time students are compelled to learn a subject matter they may have no interest in.   Also, a large student body makes it easy to administer the survey to large group, which provides feedback.

The financial industry has become more and more complex in recent years.   It continues to reshape as financial markets change.   People need to become financial literate, but no matter how much education one receives, motivation ultimately determines a person success.   Despite the importance of financial literacy, surveys demonstrate that American youth and adults do not possess the basic knowledge needed to make good financial choices.   Why? Motivation plays a leading role in individual behavior.   Having the motivation to learn and retain the knowledge results in achievement.   Lacking motivation often results in failure.   Motivational variables significantly increase a person’s ability to explain differences in financial literacy.

             Motivation and education go hand and hand together.   To become educated, an individual must be motivated.   Therefore, the financial industry has to be motivated to provide the proper information to consumers.  The role of information in everyday lives plays an important role, especially consumer information.   Various products provided certain information.   Nutrition labels aid consumer decisions to buy certain food items, as do the consumer reports for the safety of motor vehicles. However, disclosures for financial products do not have that same affect.   Labels and disclosures on financial products and services provide information and provide regulatory compliance and liability protection for financial product and service providers.   Where they seem to come up short is increasing the awareness and knowledge of financial products and service features.   Perhaps the wrong information is on the label, or we ask if the labels are used by consumers in making financial decisions.   Obviously, different people make decisions differently, and prior research has demonstrated differential processing effects between novice and expert consumers.   A novice consumer might jump into a financial decision too quickly and irrationally, without reading the information, and end up making a costly mistake.   Some may not even know what a disclosure is.  

            Financial products and services have a certain level of risk associated with them.   Even if that requires all financial products to have different labels or disclosures, then so be it.   Too many consumers have no idea what they are getting themselves into when they sign the names to financial documents.   A perfect example of the lack of information reveled and the absence of financial understanding would be the current situation over sub-prime mortgages.  

            Like the importance of information beginning known and communicated to the public, the importance of motivation (when it comes to financial choices), is key to making an effective preference.   Motivated consumers make more educated decisions.   They seek knowledge, weigh the advantages and disadvantages, and chose a well-educated option.   When a good economic decision is made, consumers know what they are facing.   Another valuable aspect of making an educated choice is when consumers know when it is time to ask for help.   The financial industry has numerous professionals who can advise large and crucial economic decisions.   For individuals already facing economic hardships, various counselors can create a course of action to improve the situation.   Pre-purchasing counseling programs for homeowners before buying a house would decrease delinquency rates.   Today, for just about any financial need, experts exist.   These trained professionals can assist people for just about any financial situation.  

            Several factors impact financial literacy.   The lack of financial education, the withholding of needed information, and personal motivation all influence financial literacy.   America’s little familiarity with even basic economic concepts has seriously impacted our economy for the worst.   The concept of financial education and literacy is not new.   Since the early twentieth century, the idea of learning basic financial information existed.   A piggy bank served as the symbol of saving money, but if only life was that simple.   In the 1920s the notion of purchasing items on credit became the social norm.   No one knew how it worked, or its lasting impact and influence over society.

            We may only be college students, but our financial actions now factor into the rest of our lives.   In just a few short years, we will receive our diploma.   Currently, our economy is experiencing a recession.   Jobs are few to come by, and our futures could be limited in opportunities.   The future from here on out, is ours for the taking.   Possessing vital economic literacy is the key that can open the door to opportunities.  The past should no longer impact the future.   Find that inner motivation and make the steps towards achieving financial success.   Make informed financial decisions and the future will be bright.   When the public is financially educated, motivated, and inform, the key to great achievement is in our hands.    

All of the accounting information developed within a business is available to management. However, much of the company’s financial accounting information also is used by decisioi makers outside of the organization. These outsiders include investors, financial analysts, investment advisors, creditors (lenders), labor unions, government agencies, and the public. Each of these groups either supplies money to the business or has some other interest in the financial health of the organization. A labor union, for example, needs information about i company’s financial strength and profitability before negotiating a new labor contract.

 

Supplying general-purpose financial information about a business to people outside the organization is termed financial reporting. In the United States and most other Cartier Replica industrialized countries, large “publicly owned” business organizations are required by law to make much of their accounting information public, that is, available to everyone. These countries also have enacted laws to ensure that the public information provided by these organizations is reasonably complete and reliable.

 

Small businesses are not required to provide general-purpose financial information to persons outside the organization. In fact, many small businesses do not make such information available. However, banks and other creditors often insist upon receiving this information as a condition for making loans to the business.

 

The principal means of reporting general-purpose financial information to persons outside a business organization is a set of accounting reports called financial statements. The persons receiving these reports are termed the users of the financial statements.

A set of financial statements consists of four related accounting reports that summarize in a few pages the financial resources, obligations, profitability, and cash transactions of a business. A complete set of financial statements includes:

 

• A balance sheet,  showing at a specific date the financial position of the company by indicating the resources that it owns, the debts that it owes, and the amount of the owner’s equity (investment) in the business.

 

• An income statement,  indicating the profitability of the business over the preceding year (or other period).

 

• A statement of owner’s equity,   explaining certain changes in the amount of the owner’s equity (investment) in the business.    (In businesses which are organized as corporations, the statement of owner’s equity is replaced by a statement of retained earnings).

 

• A statement of cash flows, summarizing the cash receipts and cash payments of the business over the same time period covered by the income statement.

In addition,   a complete set of financial statements includes several pages of notes, containing additional information which accountants believe is useful in the interpretation of the financial statements.

 

The basic purpose of financial statements is to assist users in evaluating the financial position, profitability, and future prospects of a business. In the United States, the annual (and quarterly) financial statements of all publicly owned corporations are public information.

 

In deciding where to invest their resources, investors and creditors often compare the financial statements of many different companies. For such comparisons to be valid the financial statements of these different companies must be reasonably comparable — that is, they must present similar information in a similar format. To achieve this goal, financial statements are prepared in conformity with a set of “ground rules” called generally accepted accounting principles (GAAP).

 

What assurance do outsiders have that the financial statements issued by management provide a complete and reliable picture of the company’s financial position and operating results? In large part, this assurance is provided by an audit of the company’s financial statements, performed by a firm of certified public accountants (CPAs). These auditors are experts in the field of financial reporting and are independent of the company issuing the financial statements.

 

An audit is an investigation of a company’s financial statements, designed to determine the “fairness” of these statements. Accountants and auditors use the term fair in Breitling Replica describing financial statements which are reliable and complete, conform to generally accepted accounting principles, and are not misleading.

 

As part of the audit, the CPAs investigate the quality of the company’s system of internal control count or observe many of the company’s assets, and gather evidence both from within ;he business and from outside sources. Based upon this careful investigation, the CPA firm represses its professional opinion as to the fairness of the financial statements. This opinion, ;alled the auditors’ reports, accompanies the financial statements distributed to persons outside he business organization.

 

Auditors do not guarantee the accuracy of financial statements;  they only express their ixpert opinion as to the fairness of the statements. However, CPA firms stake their reputations m the thoroughness of their audits and dependability of their audit reports. Over many years, udited financial statements have established an impressive track record of reliability.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

People who depend on monthly salary for the expenses, are often in search of money, when the month is advanced by a week or two. Not only need an emergency meeting of the loan, but the credit must go to them immediately or object may be lost. Instant Payday Loans are specially designed to provide a loan immediately and without any obstacle in the way of a loan applicant. Instant Payday Loans are classified as immediate as the sum is paid into the borrower’s bank account within 24 hours after applying it. How is it? The instantaneous availability is made possible when the loan is applied online because it allows rapid processing of the loan application. Online loan application you are asked to fill out some basic information about the ‘amount of loan, purpose of the loan and your monthly income and employment, etc. Second, there are no guarantees in the instant payday loans, and then lost time for valuation of collateral is recorded for the immediate approval of loan. Instant payday loans are loans for short-term rate for a period of one or two weeks until the borrower is betting his pay later. Just when your salary arrives, the borrower repays the loan. Instant payday loans are mainly unsecured loans that nobody wants to offer property as security for one or two weeks and for such a small quantity. Still have a different perspective, some banks may take a post-check of the loan, plus financing costs and to recover the account until today. Creditors may also monthly income, bank statements and proof of employment, if necessary. Because of the unsecured loans instant troubleshooting are offered at interest rates higher. Very short recovery period is also one of the reasons interest rates higher. You can borrow only a limited amount is limited by the salary of design and the history of credit you have. A person with a good credit history certainly has a better credit institutions. But the suppliers Instant payday loan, do not hesitate to provide loans to people bad credit because they know that, because of rising interest rates and high fees of the creditor, the debtor often prefer to default to repay the loan. Compare offers instant payday loan lenders for various different interest rates before settling for suitable accommodation. Sure to repay the loan in time to avoid the higher interest and fee payments. The loan allows you to improve your credit score when paid vacation time.

Cyrus Haden is writer of Payday Loans without credit check. For any payday loans without credit check,poor credit payday loans queries visit http://www. paydayloanswithoutcreditcheck. co. uk/

In an express way type of day with work, kids, house chores, spouse chores, pets, activities and email all needing attention, amazing women still find time to read. Its not a lot of time. Most women don’t have time to read War and Peace or the long winding novels they did during carefree days, but do find stitches of time sewn into the fabric of a day for at least a few hundred words. Women’s magazines were made for just such times. Containing articles, essays and photojournalism, these magazines add a little edification to already full days. Because time is precious the secret is to pick the best magazines to fill the void with things the reader really wants to see or know. The best way to do that is judge by the three A’s. AgeThe first thing magazines do to define themselves is select the age of the target group they are writing about. Age determines language use, writing style, topic selection, the types of advertisements and cover art. There are age appropriate magazines across the spectrum of life time. From Tiger Beat, the guilty pleasure of pre-teen girls with star crushes, to Modern Maturity for women who have lived long enough to know those crushes never last, there is a magazine or two written just for the age. While age may not determine all the reader’s interests – a 60 year old can just as easily have a crush on Orlando Bloom as a high school freshman – the lexicon, usage and style should be something the reader is most comfortable with. AudienceBefore subscribing, it might be best to buy a copy or two of the magazine off the rack and see if the audience it was written for is a match to your taste and style. Audience adaptation is what magazine writing is all about. Each publication uses a profile to determine the types of women who will best enjoy the article. Just because a magazine covers the same topic does not mean it was written for the same audience. For women who are a little more formal and have dinner parties where well dressed people sit at a long wooden table with napkins in their lap while using their indoor voice, Martha Stewart’s Living may be just the magazine they need. For others who serve chips, dips and finger food to friends who eat while standing around a music filled room or sitting on the kitchen counter Rachel Ray Everyday is more likely to give better tips. Like shoes and car seat covers, magazines should be a good fit. AppealIn the sniplets of time women have to enjoy themselves with an article or two the key question becomes, “what topic appeals too you?” Some women are life-long learners who want to read about new developments, world issues and travel essays. The New Yorker would be good for them. Others are business oriented and want to make the most of their family finances or get support for women in business from others who are also in the mix and they might enjoy Pink a magazine for women in business. Many simply want to escape and be entertained and there is no shortage of offerings for them from Entertainment Weekly to People. There are plenty of choices out there for whatever may best enhance a woman’s life and time. Magazines are not written to take away someone’s time. They are published to make it meaningful and enjoyable. They actually add to life. By selecting a magazine that fulfills the three A’s of your life your reading can always be the best of times.

Operating your money and personal finances is not difficult with just a basic understanding of the world of finance. Overcoming emotional stress in stressful occasions with this guide to personal finances, budgeting money, managing personal finances, using personal budget software or seeking finance help online is a critical action. Our financial guide offers great value in enabling you in all areas of money.

 

Most people don’t think of themselves or their lives as a business. But from birth to passing, you are in business for yourself, the business of you. How you choose to run your business is up to you. The same guidelines that apply to running a successful business also apply to leading a victorious life, both financially with your money and emotionally. Stress about money can affect your emotions negatively as well as your health.

 

Let me give you four important points of our guide from Personal Finances Online Help. com, to managing personal finances successfully.

 

•             Take extra effort in removing any emotion like dept anxiety or overwhelm from financial obligations worry over mounting bills and income. Removing emotional responses from your personal finance budgeting will be a work in progress, and you should always remain on guard for over active emotions. Taking emotion out of dealing with your finances will help you come up with positive solutions and solve problems more effectively.

 

•             Managing your personal finances on a regular basis rather than letting the admin tasks mount up is critical. That way you stay on top of where you are at, can change things, and make better decisions ahead of time rather than always being in reaction mode or putting out fires. Avoid decisions that would lead to bankruptcy like over leveraging your loans or taking on financial commitments you don’t know how you can pay back.

 

•             Devote yourself to developing greater skill sets like budgeting, planning and even using budgeting software. Managing personal finances like a business is about seizing control of your destiny, both with your finances and your life. Try to be like the great business leaders and attack your future with vigor and enthusiasm. Supervising your finances in this way, with boldness and a belief in their importance can have amazing results.

 

•             Don’t be withdrawn to use software to support you with your personal budgeting is a good idea because it contains spreadsheets that have everything in one place. You can see very quickly where your current state it, budget better, plan better, not to mention the time it will save you putting your own spreadsheet together.

 

The most effective personal finance software provides sufficient user-friendly features, allowing users to manage every aspect of their finances, including accounts, investments, future plans and taxes. Software will provide up to date information on tax laws and stock reviews to help you make knowledgeable decisions.

 

Bare in mind that proper budgeting of your personal finances is the beginning of good and sound financial management. There are lots of sites online and budgeting software can help you. Of course, this will not be possible without first your determination to manage your financial obligations without getting stressed about it.

 

 

Find our Complete Guide to managing your money and the business of you at Personal Finances Online Help .

Penny stocks generally are those stocks whose shares trade for less than $5 through over-the-counter services for example the OTC Bulletin Board or Pink Sheets. Some might call it as cheap stocks sold on standard securities exchanges whereas others might think about a penny stock having value less than $1. Typical characteristic of penny stocks are that they are equity shares of small companies trading in lesser volumes so these shares can be hard to sell.

 

Penny Stocks are known as Risky Investments

 

Penny stocks are considered as high-risk investments since brokerage firms are made to send documents to prospective buyers telling the risks of penny stocks. Penny stocks are extremely unsteady as they belong to small companies who offer inadequate information about them. Another reason for their instability could be that penny stock prices vary very quickly.

 

Penny Stocks are susceptible to Market Tampering

 

Another worry that penny stock investors must be aware is of the likelihood of fraud and price inflation in the penny stock market. Prices of stocks are determined with the supply and demand of these stocks. Larger stocks with larger volume might not have great impact on share price. An individual with considerable resources can inflate share prices by buying up shares and this would attract attention in the market and prompt more buying, at this point of time the original buyer would spend huge amount in buying and make more profits while latecomers lose a large portion of their investment. Due to poor information, an investor may also spread favorable rumors, misinformation, and hype to prop up share prices before a sale.

 

Introduction: Information, Risks, and Capital

 

Financial intermediation is a critical factor for growth and social inclusion. One of its core functions is to mobilize financial resources from surplus agents and channel them to those with deficits. It thus allows investor entrepreneurs to expand economic activity and employment opportunities. It also enables household consumers, micro- and small entrepreneurs to expand their own welfare and earnings opportunities, and seek to smooth their lifetime outlays. In all cases, financial intermediation drives economic growth and contributes to social inclusion, provided it is conducted in a sound and efficient way. [1]

A financial intermediary’s ability to process information on risks and returns of investment opportunities will have a bearing on the soundness and efficiency of its resource mobilization and reallocation function. Conventional financial services (CFSs) process information through institutions or markets, and have generally evolved from the former to the latter. In both cases, markets and agents provide alternative ways of processing information on risks and returns of investment opportunities. In the first form, the intermediary raises capital to set up business to collect generally liquid deposits from surplus agents and reallocates these resources, now in his trust, to ones with deficits in generally less liquid assets. In the second form, surplus agents buy directly financial assets that represent a debt of a deficit agent or an ownership share in its business. In either approach, both categories of agents engage in transactions on the basis of trust and of expectations about the degree of liquidity that would provide the option to re-contract at a reasonable cost. [2] In the case of banks, the trust can be seen as based on proprietary information. In the case of markets, the information is more commoditized and widely available. [3]

Efficiently processed information can support the efficient allocation of capital. It can help a financial intermediary to better define the capital it would need to achieve the returns sought, while maintaining its ability to face the financial consequences of unexpected events that may endanger its stability. Banks engage in gathering and processing information on clients and markets, which allows them to manage different risks by unbundling them and reallocating the components. By performing these services soundly and efficiently, banks can manage to calibrate their capital requirements and receive diversified income streams. Thus a bank’s investors and customers can gain comfort as to its reliability in allowing them to access liquidity and maintain stability. In parallel with banks, financial markets can also convey the same sense of access to liquidity and stability based on disclosed and broadly available information on market participants. Markets can provide deficit and surplus agents a direct role in processing information to facilitate the unbundling and reallocation of risks and the efficient use of capital. Thus, banks and markets compete and complement each other in financial intermediation. The competition puts pressure on individual agents to use capital at their disposal efficiently, and results in a system-wide improved allocation of capital resources. [4]

Institutions offering Islamic financial services (IIFSs) also process information on risks and returns of investment opportunities while complying with Shari’ah principles. [5] Thus, in principle, they can be expected to increase competition in financial information processing by inducing better risk management and capital use. Such competition can be expected over time to lead to an efficient use of capital at the level of each financial agent, whether they practice conventional or Islamic finance, and in aggregate, system-wide across all modes of financial intermediation. Efficient use of capital is thus a challenge which competition imposes on all financial intermediaries, whether offering Islamic financial services or conventional financial services. At the same time, Islamic financial intermediation needs to comply with Shari’ah principles, notably those of risk sharing and materiality of financial transactions. Shari’ah compliance, social responsibility, and the discipline of competition compound IIFSs’ challenge to process information efficiently in order to manage the risks they may face and use their capital endowments. Thus, by their very nature and the environment in which they generally operate, IIFSs need to be well equipped with the information and skills that can allow them to identify their capital resources and use them efficiently.

            This chapter argues for the need for Islamic financial services to strengthen risk management practices in the process of defining their own capital requirements in accordance with their loss tolerance. It suggests that IIFSs could invest in the collection of loss information and adoption of loss data management systems. IIFSs would benefit from implementing risk management methodologies and adapting their staffing skills accordingly. The chapter starts in Section 2 by outlining views on the relationship between risk management and capital for financial intermediation. It then overviews risk categories as an initial step in risk management in Section 3. Section 4 discusses regulatory and economic capital, introducing risk occurrence frequency as a distribution probability. Section 5 concludes with suggestions on steps that may help with risk management and improve the competitiveness of IIFSs.

 

2.          Bank Capital and Risk Management

 

Bank capital may be considered as consisting of (a) equity capital and (b) certain non-deposit liabilities or debt capital (see Section 4). It is both a means of funding earnings-generating assets and a stability cushion. From the perspective of efficiency and returns, capital is part of a bank’s funding that can be applied directly to the purchase of earning assets, as well as being used as a basis for leverage to raise other funds for expanding assets with the net benefit accruing to shareholders. From a perspective of stability, bank capital is a cushion for absorbing shocks of business losses and maintaining solvency, with benefits accruing to depositors and other stakeholders. Both financial intermediaries and regulators are sensitive to the dual role of capital, as a means of funding earnings-generating assets and as a cushion for dealing with unanticipated events. Financial intermediaries may tend to be more focused on the former role and regulators on the latter.

A bank’s capital structure decision relates to the ratio of capital to deposits and to the ratio of debt capital to equity capital. Its performance, in terms of return on equity capital, will be influenced by its ability to calibrate the level of capital it requires. Through efficient risk management, it can reach a sense of which capital structure can best help it to: (a) achieve profitability while maintaining stability; (b) reassure markets as to the quality of its business conduct; and (c) have a constructive dialogue with regulators.

Efficient use of capital will help IIFSs to achieve profitability and stability. Allocating capital resources to low-performing or excessively risky assets is bound to drag down performance, endanger stability, or both. Equally, leaving capital idle entails at best forgoing earnings opportunities. For instance, overly cautious approaches that lead financial intermediaries to maintain larger amounts of capital than warranted by their risk profile may not allow them either to obtain the full potential of their capital or to contribute effectively to the development of the communities they serve. At the other end of the spectrum, a financial intermediary overly eager to achieve returns may allocate resources to highly risky assets that offer high returns but endanger stability. Explicit risk management practices can help in the selection of assets to which capital and other resources are applied and calibrate the level of capital that best suits business objectives and stability tolerance.

The size and composition of the resources that capital enables financial intermediaries to raise are likely to affect their profitability and stability. In a frictionless world where full information is available and markets are complete, the value of a firm would be independent of its capital structure, and so the focus should be on capital level and not structure. [6] Under such circumstances, the method by which a financial intermediary raises its required funds would be irrelevant. However, financial intermediaries do not operate in a frictionless world; they face imperfections such as costs of bankruptcy and financial distress, transaction costs, asymmetric information, or taxes. They also operate within the framework of a governing regulation possibly with a deposit insurance scheme that is expected to provide a safety net. In fact, one may contend that these market imperfections are the very reason for the successful existence of banks as financial intermediaries. Accordingly, not only a financial intermediary’s level of capital but also its structure is likely to bear on its market valuation, its business conduct, and its stability. Effective risk management strategies should contribute to a financial intermediary’s ability to assess not only the level of capital it would need in relation to assets and deposits, but also the extent to which its structure affects its value.

Market discipline contributes to responsible corporate behavior. Markets’ reactions to perceptions of a financial intermediary’s business conduct and capital strength may be unforgiving. It is thus in the interest of financial intermediaries to develop approaches to defining capital resource requirements that take into account the institutional environment in which they operate. The market’s perception of market imperfections is likely to influence views on the appropriate level of capital and the capital adequacy of financial intermediaries. For example, the availability of a safety net may lead market participants to be less demanding as to the need for capital in relation to bank assets. Conversely, anticipation of high costs of financial distress to depositors and other stakeholders may induce market participants to require the holding of more capital proportionally to assets. Similarly, wherever the institutional environment is weak and contract enforcement is uncertain and costly, markets may expect financial intermediaries to adapt the capital they hold.

The management of capital structure should in principle mitigate the risk of bank failures. When comparing a highly leveraged bank and a bank that is well capitalized, the leveraged bank will likely experience a greater loss of value during times of financial distress when the asset quality deteriorates, due to the increased risk of bankruptcy. To cope with downturns, in most countries banks hold a minimum amount of capital, based on the risk embedded in their asset holding. Accordingly, banks with relatively risky assets would hold a higher amount of capital than those banks with less risky assets. However, fearing the harshness of market discipline, many banks maintain a higher level of capital than the minimum required to allay the perception that they may be undercapitalized and avoid the losses this may induce, as witnessed in the 1980s. The key capital adequacy ratio provides an assessment of just how adequately the capital cushions such fluctuations in the bank’s earnings and supports higher assets growth.

Finally, efficient risk management should allow financial intermediaries to have a constructive dialogue with regulators. It would help them to articulate their views with respect to capital needs. The regulators’ rationale for regulating capital stems from the perception of the public-good nature of bank services, their potential macroeconomic growth and stability impact, and experience with costly bank failures. According to some estimates, such costs have varied between 3% and 55% of GDP. [7] Thus, regulators’ concerns with possible systemic risk resulting from the contagion effects of bank runs lead them to seek to mitigate risks of financial distress with regulatory requirements on banks’ capital. [8] Regulators’ concerns may be compounded by the presence of deposit insurance schemes. The moral hazard that may result from deposit insurance may lead to additional regulatory requirements such as linking the level of insurance premia to the risk embedded in assets and captured in associated risk weights. Indeed, deposit insurance may induce banks to lever up capital by expanding their own funding with liabilities, thus placing more risk on their capital and increasing their vulnerability. Efficient risk management practices would allow banks to improve their dialogue with the regulator and convey more convincingly their views on their soundness and capital requirements.

Regulators would generally also be concerned with the overall impact on the economy of the resources raised by the financial system under their purview. From an economy-wide perspective, banks may be viewed as firms’ competitors in raising capital on financial markets. The outcome of this competition has a bearing on economic performance and financial stability, and points to a cost–benefit tradeoff in holding capital. For instance, Gersbach (2007) suggests that a benefit of bank capital is the equity acting as a buffer against future losses, thereby reducing excessive risk taking of the banks. At the same time, raising bank capital may lead to a crowding out of industrial firms, limiting their access to equity and other market funding and also impacting their access to funding from banks and its cost. Furthermore, raising equity on markets may increase the cost of banks’ resources, inducing them to seek to invest in higher-yielding but more risky assets and thereby increasing their risk exposure. Thus, while potentially providing a cushion against unforeseen events, a higher level of equity may actually induce more risk taking, notably through raising the cost of funds to banks and their clients. Efficient risk management can provide inputs to both banks and regulators to better calibrate capital needs and deal with the foregoing type of tradeoff.

The level of a financial intermediary’s capital may also have a bearing on its ability to provide liquidity. The financial intermediary provides liquidity by funding assets that may be less liquid than the deposit resources it collects. There is a view that requirements for higher levels of capital may have a negative impact on liquidity creation. [9] On the liability side, a higher capital requirement may lead to a corresponding reduction in the level of deposits, thus constraining the ability to provide liquidity. Also, higher capital requirements may induce financial intermediaries to be more restrained in extending financing, thus constraining their ability to provide liquidity. However, according to another view, higher capital would allow the financial intermediary to create more liquidity since its risk-absorptive capacity would be improved. [10] In this regard, an empirical study concluded that for larger banks capital has a statistically significant positive net effect on liquidity creation, while for small banks this effect is negative. [11] Accordingly, each financial intermediary would need to evaluate carefully the level and composition of the capital it needs, since the latter plays a significant role in its ability to function as a liquidity provider. Equally, regulators would need to pay attention to the impact which capital requirement would have on the funding of the economy.

IIFS’s risk management arrangements will bear on their ability to calibrate capital to their business objectives and risk tolerance, to deal with market discipline, and to maintain a dialogue with regulators. The IIFS’s characteristic of mobilizing funds in the form of risk-sharing investment accounts in place of conventional deposits, together with the materiality[12] of financing transactions, may alter the overall risk of the balance sheet and, consequently, the assessment of their capital requirements. Indeed, risk-sharing “deposits” would in principle reduce the need for a safety cushion to weather adverse investment outcomes. Similarly, the materiality of investments is likely to modify the extent of their risk and have a bearing on the assessment for the overall need for capital; asset-based modes of finance may be less risky and profit-sharing modes more risky, than conventional interest-bearing modes. Nevertheless, IIFSs would operate within a regulatory framework that is likely to impose on them capital requirements with a view to promoting stability and limiting contagion risks. However, besides regulatory and market demands for IIFSs to hold capital, IIFSs need to put in place risk management assessments for their own purposes of returns and stability in accordance with the requirements of Shari’ah, their own mission statements, and the protection of their stakeholders.

 

[1] See Honohan (2004) and Levine (2004).

[2] Sir John Hicks identifies such liquidity as one of the main factors behind the Industrial Revolution.

[3] Actually, a deposit can be viewed as a purchase of a debt asset issued by the intermediary and redeemable at its face value.

[4] The institution–market competition is reflected in the trends of their relative market shares of total financial assets. For example, in the United States, between 1960 and the early 1990s, commercial banks’ share of total financial intermediaries’ assets fell from around 40% to less than 30%. See Edwards (1996).

[5] They do respond to a latent demand for financial services that do not breach Shari’ah principles. Accordingly, they have the potential to contribute to financial deepening, economic growth, and social inclusion. See also Burghardt and Fuss (2004).

[6] Modigliani and Miller (1958).

[7] See Klingebiel and Laeven (2007).

[8] Views differ on the need for and extent of regulation, as well as on the usefulness of deposit insurance; see Barth, Caprio, and Levine (2007).

[9] Diamond and Rajan (2006).

[10] Allen and Gale (2007).

[11] Berger and Bouwman (2005).

[12] By the “materiality” of financing transactions is meant that, in such transactions, capital must be “materialized” in the form of an asset or asset services (as in Murabaha credit sales, Salam and Istisna’a financing, or Ijarah leasing), or of a business venture (Musharakah or Mudarabah). Capital in the form of money is not entitled to any return, as this would be interest (riba).  

Introduction: Information, Risks, and Capital

 

Financial intermediation is a critical factor for growth and social inclusion. One of its core functions is to mobilize financial resources from surplus agents and channel them to those with deficits. It thus allows investor entrepreneurs to expand economic activity and employment opportunities. It also enables household consumers, micro- and small entrepreneurs to expand their own welfare and earnings opportunities, and seek to smooth their lifetime outlays. In all cases, financial intermediation drives economic growth and contributes to social inclusion, provided it is conducted in a sound and efficient way. [1]

A financial intermediary’s ability to process information on risks and returns of investment opportunities will have a bearing on the soundness and efficiency of its resource mobilization and reallocation function. Conventional financial services (CFSs) process information through institutions or markets, and have generally evolved from the former to the latter. In both cases, markets and agents provide alternative ways of processing information on risks and returns of investment opportunities. In the first form, the intermediary raises capital to set up business to collect generally liquid deposits from surplus agents and reallocates these resources, now in his trust, to ones with deficits in generally less liquid assets. In the second form, surplus agents buy directly financial assets that represent a debt of a deficit agent or an ownership share in its business. In either approach, both categories of agents engage in transactions on the basis of trust and of expectations about the degree of liquidity that would provide the option to re-contract at a reasonable cost. [2] In the case of banks, the trust can be seen as based on proprietary information. In the case of markets, the information is more commoditized and widely available. [3]

Efficiently processed information can support the efficient allocation of capital. It can help a financial intermediary to better define the capital it would need to achieve the returns sought, while maintaining its ability to face the financial consequences of unexpected events that may endanger its stability. Banks engage in gathering and processing information on clients and markets, which allows them to manage different risks by unbundling them and reallocating the components. By performing these services soundly and efficiently, banks can manage to calibrate their capital requirements and receive diversified income streams. Thus a bank’s investors and customers can gain comfort as to its reliability in allowing them to access liquidity and maintain stability. In parallel with banks, financial markets can also convey the same sense of access to liquidity and stability based on disclosed and broadly available information on market participants. Markets can provide deficit and surplus agents a direct role in processing information to facilitate the unbundling and reallocation of risks and the efficient use of capital. Thus, banks and markets compete and complement each other in financial intermediation. The competition puts pressure on individual agents to use capital at their disposal efficiently, and results in a system-wide improved allocation of capital resources. [4]

Institutions offering Islamic financial services (IIFSs) also process information on risks and returns of investment opportunities while complying with Shari’ah principles. [5] Thus, in principle, they can be expected to increase competition in financial information processing by inducing better risk management and capital use. Such competition can be expected over time to lead to an efficient use of capital at the level of each financial agent, whether they practice conventional or Islamic finance, and in aggregate, system-wide across all modes of financial intermediation. Efficient use of capital is thus a challenge which competition imposes on all financial intermediaries, whether offering Islamic financial services or conventional financial services. At the same time, Islamic financial intermediation needs to comply with Shari’ah principles, notably those of risk sharing and materiality of financial transactions. Shari’ah compliance, social responsibility, and the discipline of competition compound IIFSs’ challenge to process information efficiently in order to manage the risks they may face and use their capital endowments. Thus, by their very nature and the environment in which they generally operate, IIFSs need to be well equipped with the information and skills that can allow them to identify their capital resources and use them efficiently.

            This chapter argues for the need for Islamic financial services to strengthen risk management practices in the process of defining their own capital requirements in accordance with their loss tolerance. It suggests that IIFSs could invest in the collection of loss information and adoption of loss data management systems. IIFSs would benefit from implementing risk management methodologies and adapting their staffing skills accordingly. The chapter starts in Section 2 by outlining views on the relationship between risk management and capital for financial intermediation. It then overviews risk categories as an initial step in risk management in Section 3. Section 4 discusses regulatory and economic capital, introducing risk occurrence frequency as a distribution probability. Section 5 concludes with suggestions on steps that may help with risk management and improve the competitiveness of IIFSs.

 

2.          Bank Capital and Risk Management

 

Bank capital may be considered as consisting of (a) equity capital and (b) certain non-deposit liabilities or debt capital (see Section 4). It is both a means of funding earnings-generating assets and a stability cushion. From the perspective of efficiency and returns, capital is part of a bank’s funding that can be applied directly to the purchase of earning assets, as well as being used as a basis for leverage to raise other funds for expanding assets with the net benefit accruing to shareholders. From a perspective of stability, bank capital is a cushion for absorbing shocks of business losses and maintaining solvency, with benefits accruing to depositors and other stakeholders. Both financial intermediaries and regulators are sensitive to the dual role of capital, as a means of funding earnings-generating assets and as a cushion for dealing with unanticipated events. Financial intermediaries may tend to be more focused on the former role and regulators on the latter.

A bank’s capital structure decision relates to the ratio of capital to deposits and to the ratio of debt capital to equity capital. Its performance, in terms of return on equity capital, will be influenced by its ability to calibrate the level of capital it requires. Through efficient risk management, it can reach a sense of which capital structure can best help it to: (a) achieve profitability while maintaining stability; (b) reassure markets as to the quality of its business conduct; and (c) have a constructive dialogue with regulators.

Efficient use of capital will help IIFSs to achieve profitability and stability. Allocating capital resources to low-performing or excessively risky assets is bound to drag down performance, endanger stability, or both. Equally, leaving capital idle entails at best forgoing earnings opportunities. For instance, overly cautious approaches that lead financial intermediaries to maintain larger amounts of capital than warranted by their risk profile may not allow them either to obtain the full potential of their capital or to contribute effectively to the development of the communities they serve. At the other end of the spectrum, a financial intermediary overly eager to achieve returns may allocate resources to highly risky assets that offer high returns but endanger stability. Explicit risk management practices can help in the selection of assets to which capital and other resources are applied and calibrate the level of capital that best suits business objectives and stability tolerance.

The size and composition of the resources that capital enables financial intermediaries to raise are likely to affect their profitability and stability. In a frictionless world where full information is available and markets are complete, the value of a firm would be independent of its capital structure, and so the focus should be on capital level and not structure. [6] Under such circumstances, the method by which a financial intermediary raises its required funds would be irrelevant. However, financial intermediaries do not operate in a frictionless world; they face imperfections such as costs of bankruptcy and financial distress, transaction costs, asymmetric information, or taxes. They also operate within the framework of a governing regulation possibly with a deposit insurance scheme that is expected to provide a safety net. In fact, one may contend that these market imperfections are the very reason for the successful existence of banks as financial intermediaries. Accordingly, not only a financial intermediary’s level of capital but also its structure is likely to bear on its market valuation, its business conduct, and its stability. Effective risk management strategies should contribute to a financial intermediary’s ability to assess not only the level of capital it would need in relation to assets and deposits, but also the extent to which its structure affects its value.

Market discipline contributes to responsible corporate behavior. Markets’ reactions to perceptions of a financial intermediary’s business conduct and capital strength may be unforgiving. It is thus in the interest of financial intermediaries to develop approaches to defining capital resource requirements that take into account the institutional environment in which they operate. The market’s perception of market imperfections is likely to influence views on the appropriate level of capital and the capital adequacy of financial intermediaries. For example, the availability of a safety net may lead market participants to be less demanding as to the need for capital in relation to bank assets. Conversely, anticipation of high costs of financial distress to depositors and other stakeholders may induce market participants to require the holding of more capital proportionally to assets. Similarly, wherever the institutional environment is weak and contract enforcement is uncertain and costly, markets may expect financial intermediaries to adapt the capital they hold.

The management of capital structure should in principle mitigate the risk of bank failures. When comparing a highly leveraged bank and a bank that is well capitalized, the leveraged bank will likely experience a greater loss of value during times of financial distress when the asset quality deteriorates, due to the increased risk of bankruptcy. To cope with downturns, in most countries banks hold a minimum amount of capital, based on the risk embedded in their asset holding. Accordingly, banks with relatively risky assets would hold a higher amount of capital than those banks with less risky assets. However, fearing the harshness of market discipline, many banks maintain a higher level of capital than the minimum required to allay the perception that they may be undercapitalized and avoid the losses this may induce, as witnessed in the 1980s. The key capital adequacy ratio provides an assessment of just how adequately the capital cushions such fluctuations in the bank’s earnings and supports higher assets growth.

Finally, efficient risk management should allow financial intermediaries to have a constructive dialogue with regulators. It would help them to articulate their views with respect to capital needs. The regulators’ rationale for regulating capital stems from the perception of the public-good nature of bank services, their potential macroeconomic growth and stability impact, and experience with costly bank failures. According to some estimates, such costs have varied between 3% and 55% of GDP. [7] Thus, regulators’ concerns with possible systemic risk resulting from the contagion effects of bank runs lead them to seek to mitigate risks of financial distress with regulatory requirements on banks’ capital. [8] Regulators’ concerns may be compounded by the presence of deposit insurance schemes. The moral hazard that may result from deposit insurance may lead to additional regulatory requirements such as linking the level of insurance premia to the risk embedded in assets and captured in associated risk weights. Indeed, deposit insurance may induce banks to lever up capital by expanding their own funding with liabilities, thus placing more risk on their capital and increasing their vulnerability. Efficient risk management practices would allow banks to improve their dialogue with the regulator and convey more convincingly their views on their soundness and capital requirements.

Regulators would generally also be concerned with the overall impact on the economy of the resources raised by the financial system under their purview. From an economy-wide perspective, banks may be viewed as firms’ competitors in raising capital on financial markets. The outcome of this competition has a bearing on economic performance and financial stability, and points to a cost–benefit tradeoff in holding capital. For instance, Gersbach (2007) suggests that a benefit of bank capital is the equity acting as a buffer against future losses, thereby reducing excessive risk taking of the banks. At the same time, raising bank capital may lead to a crowding out of industrial firms, limiting their access to equity and other market funding and also impacting their access to funding from banks and its cost. Furthermore, raising equity on markets may increase the cost of banks’ resources, inducing them to seek to invest in higher-yielding but more risky assets and thereby increasing their risk exposure. Thus, while potentially providing a cushion against unforeseen events, a higher level of equity may actually induce more risk taking, notably through raising the cost of funds to banks and their clients. Efficient risk management can provide inputs to both banks and regulators to better calibrate capital needs and deal with the foregoing type of tradeoff.

The level of a financial intermediary’s capital may also have a bearing on its ability to provide liquidity. The financial intermediary provides liquidity by funding assets that may be less liquid than the deposit resources it collects. There is a view that requirements for higher levels of capital may have a negative impact on liquidity creation. [9] On the liability side, a higher capital requirement may lead to a corresponding reduction in the level of deposits, thus constraining the ability to provide liquidity. Also, higher capital requirements may induce financial intermediaries to be more restrained in extending financing, thus constraining their ability to provide liquidity. However, according to another view, higher capital would allow the financial intermediary to create more liquidity since its risk-absorptive capacity would be improved. [10] In this regard, an empirical study concluded that for larger banks capital has a statistically significant positive net effect on liquidity creation, while for small banks this effect is negative. [11] Accordingly, each financial intermediary would need to evaluate carefully the level and composition of the capital it needs, since the latter plays a significant role in its ability to function as a liquidity provider. Equally, regulators would need to pay attention to the impact which capital requirement would have on the funding of the economy.

IIFS’s risk management arrangements will bear on their ability to calibrate capital to their business objectives and risk tolerance, to deal with market discipline, and to maintain a dialogue with regulators. The IIFS’s characteristic of mobilizing funds in the form of risk-sharing investment accounts in place of conventional deposits, together with the materiality[12] of financing transactions, may alter the overall risk of the balance sheet and, consequently, the assessment of their capital requirements. Indeed, risk-sharing “deposits” would in principle reduce the need for a safety cushion to weather adverse investment outcomes. Similarly, the materiality of investments is likely to modify the extent of their risk and have a bearing on the assessment for the overall need for capital; asset-based modes of finance may be less risky and profit-sharing modes more risky, than conventional interest-bearing modes. Nevertheless, IIFSs would operate within a regulatory framework that is likely to impose on them capital requirements with a view to promoting stability and limiting contagion risks. However, besides regulatory and market demands for IIFSs to hold capital, IIFSs need to put in place risk management assessments for their own purposes of returns and stability in accordance with the requirements of Shari’ah, their own mission statements, and the protection of their stakeholders.

 

[1] See Honohan (2004) and Levine (2004).

[2] Sir John Hicks identifies such liquidity as one of the main factors behind the Industrial Revolution.

[3] Actually, a deposit can be viewed as a purchase of a debt asset issued by the intermediary and redeemable at its face value.

[4] The institution–market competition is reflected in the trends of their relative market shares of total financial assets. For example, in the United States, between 1960 and the early 1990s, commercial banks’ share of total financial intermediaries’ assets fell from around 40% to less than 30%. See Edwards (1996).

[5] They do respond to a latent demand for financial services that do not breach Shari’ah principles. Accordingly, they have the potential to contribute to financial deepening, economic growth, and social inclusion. See also Burghardt and Fuss (2004).

[6] Modigliani and Miller (1958).

[7] See Klingebiel and Laeven (2007).

[8] Views differ on the need for and extent of regulation, as well as on the usefulness of deposit insurance; see Barth, Caprio, and Levine (2007).

[9] Diamond and Rajan (2006).

[10] Allen and Gale (2007).

[11] Berger and Bouwman (2005).

[12] By the “materiality” of financing transactions is meant that, in such transactions, capital must be “materialized” in the form of an asset or asset services (as in Murabaha credit sales, Salam and Istisna’a financing, or Ijarah leasing), or of a business venture (Musharakah or Mudarabah). Capital in the form of money is not entitled to any return, as this would be interest (riba).

. . . . . . to be Cont.

Can you get an auto loan with a poor credit score? Yes you can, but where you choose to apply makes a very big difference. While many lenders will turn you away and not offer you any help, there are some that are ready and willing to provide you with an auto loan and help you to get back on the road with a new or late model vehicle. In-house dealer financing is not the answer. Although many people do go that direction when they’ve been turned down by a local dealership. You’ll find that it’s hard to find a good loan company to work with if you have a low credit score. That’s common. However, there are good ones if you just get pointed in the right direction. Special finance programs are available through sources on the internet. Companies that specialize in bad credit auto loans are the best source for getting good terms, without having to pay enormous interest rates. Choosing the right loan company to work with can make a tremendous difference in what you are able to obtain. While there are many lenders that have unfair interest rates and “take it or leave it” types of deals, there are some very reputable places that you can go to get a great deal on financing. Even with bad credit, you can still obtain reasonable terms that you can afford. Too often, people simply settle for the first offer that they are given, and don’t do enough homework or research to make a well-informed decision with regard to auto finance. Taking the time to find and apply with a good lender, can make all the difference in the world. You’ll get better rates, better payment terms and can even eliminate your having to have a down payment.

Aggressive investment in the stocks means investors are taking immense risk in the market. This risk can be in various forms. You make investment in highly unpredictable markets when market fluctuations are beyond any mechanism of fundamental or analytical research. The fall or rise in the stock prices occurs quite opposite to the expectations of investors. Some very daring and experienced investors make money even in these situations.

There is another form of marketing which is aggressive, where you purchase stocks which appear as “gone cases” as per market calculations. But in-spite of all wise counsel, these stocks exhibit high growth and provide handsome dividends. These stocks could also slip down the index as they are already dubbed as spent cases.

Conversely, if you make investment in some highly reputed stocks like Microsoft or Wal-Mart, being aware that they are expensive with no scope of any price increase in immediate future. The buyers of such stocks invest in them to gain access to regular income these companies provide in the form of dividends. The rich dividends paid by these blue chip companies almost negate their high prices of shares which people spend to purchase them.

As the saying goes” the people who take a deeper dive in ocean may walk out with expensive gems or may never come out at all”. Investing aggressively is just not for everyone. Defensive approach

As a defensive approach, many people recommend that the good option for investment is treasury bonds of Government. They reason that as we are purchasing the debt obligation of Government, we will surely be compensated for the amount promised.

A simple investor, more so for a newcomer in this field, should adopt a defensive attitude and should remain very careful while investing in stocks. As cautious and slow approach may not be able to provide him with any remarkable returns in the beginning, but as he learns the tricks of the trade, his returns could appreciate with time. This approach surely testifies to a famous proverb”that slow and steady wins the race”.

As a defensive investor in stocks you should formulate a firm strategy and place a set amount of money each month for investment in the stocks. You can indulge in a research or ask your stock broker as to which stocks would be best for the investment. If you can somehow manage within your current income sources, best options for you would be to go for dividend reinvestment plans.

You must also remember as an investor that high dividend stock shields you when markets are down. This is so because as prices of stocks fall, there is an increase in dividend yield because cash dividend can be larger than the purchase price of shares by a huge percentage. Often the dividend paid by some companies is very high and it attracts large numbers of investors which results in high prices of its stocks even during the slump in the stock markets.

Buying Selling Stock Options

Stock options can be very profitable in the stock market provided you use them right. Whenever you are buying an option you should take some time to consider why you are buying it. Here are some tips to figuring out when the best time to buy an option is.

1. When the Stock is giving you a Technical Signal

Going down to the basics, you need a reason for buying the option to begin with. If you are just buying the option and hoping the stock will suddenly have a huge move in your direction you’ll be disappointed when it doesn’t.

In addition to that you also want to have some consistency in your trading approach. If you are buying options on breakouts stick with that and learn it well before you move onto another form of trading. Buying Selling Stock Options

2. When you have a good risk to reward ratio

You don’t want to be risking 100% of your option contract to make a 20% return. When trading options you really need to look at risk to reward ratio. Most professional traders use a risk to reward ratio of 2 to 1 which means you have a possible reward of $2 for every $1 you risk.

3. When you are trading with the trend

This one factor increases your odds of being correct so much so don’t ignore it. Trends can persist for a while so trading with them and not against them is a smart thing to do.

4. When it will not kill you

You only want to buy an option when you can afford to lose the money. If you are not going to be able to pay the rent money if you lose it, don’t put it into option trading. All money you put into a trade should not be a large amount of your trading account to begin with. Buying Selling Stock Options