Business activity of a company

Annual Report
Document detailing the business activity of a company over the previous year, and containing the three main financial statements:
Income Statement
Cash Flow Statement
Balance Sheet
Annuity
Any investment product that pays on a scheduled basis over a set amount of time. In particular, a retirement investment that offers tax deferral on growth, but not
on contributions.
Asset
Anything on a company's books considered as having a positive monetary value. Assets include holdings of obvious market value (cash, real estate), harder-to-measure value (inventory, aging equipment), and other quantities (pre-paid expenses, goodwill) considered an asset by accounting conventions but possibly having no market value at all. Assets are shown on the balance sheet

Balance Sheet
A document detailing a company's assets and liabilities. The two quantities that have to "balance" or equal each other are (1) assets and (2) the sum of liabilities and shareholders' equity; ie the total amount of assets the company controls is equal to what they own plus what they've borrowed. The balance sheet is interesting to stock investors because it provides details on the actual assets that make up a stock's book value.

The balance sheet shows what a company owns and what it owes; the difference is what the company is "worth", at least on paper. One huge problem is that the fair market value of many assets can be very different from the "book values" shown here. So people looking for "value" stocks need to do more research, beyond the balance sheet.

Balanced Fund

A mutual fund combining bonds (for income) and stocks (for growth). These funds are typically designed for people like young retirees, who want regular income plus enough growth of principal to beat inflation.

Beta
A measure of an investment's volatility, relative to an appropriate asset class. For stocks, the asset class is usually taken to be the S&P 500 index.
The formula is:

beta = [ Cov(r, Km) ] / [ StdDev(Km) ]2
where r is the return rate of the investment;
Km is the return rate of the asset class.

If the asset class is well chosen so that the return fluctuations of the investment and the class are highly correlated, then the formula approximates "the volatility
of the investment divided by the volatility of the class."

Beta is used in modern portfolio theory as a measure of risk; it's specifically used in the Capital Asset Pricing Model. See CAPM and CAPM regression
Book Value
Per-share value of shareholders' equity, excluding goodwill and other intangible assets
CODA
Cash Or Deferred Arrangement. See 401(k).
Call
The repurchase of a bond by its issuer before its date of maturity, without requiring the holder's consent. If a bond is callable, the date and price at which it can be called is specified on the certificate and in the prospectus.
Capital Asset Pricing Model (CAPM)
Equation in modern portfolio theory expressing the idea that securities in the market are priced so that their expected return will compensate investors for their
expected risk. The equation is:
r = Rf + beta x ( Km - Rf )
where
r is the expected return rate on a security;
Rf is the rate of a "risk-free" investment, i.e. cash;
Km is the return rate of the appropriate asset class.

The risk factor beta is calculated in terms of the chosen asset class.

CAPM is used theoretically, to relate securities to the market as a whole, and practically, as the discount rate in discounted cash flow calculations to establish
the fair value of an investment.
CAPM Calculator
Valuation with the Capital Asset Pricing Model uses a variation of discounted cash flows; only instead of giving yourself a "margin of safety" by being conservative in your earnings estimates, you use a varying discount rate that gets bigger to compensate for your investment's riskiness. There are different ways to measure risk; the original CAPM defined risk in terms of volatility, as measured by the investment's beta coefficient. The formula is:
Kc = Rf + beta x ( Km - Rf )
where
Kc is the risk-adjusted discount rate (also known as the Cost of Capital);
Rf is the rate of a "risk-free" investment, i.e. cash;
Km is the return rate of a market benchmark, like the S&P 500.

You can think of Kc as the expected return rate you would require before you would be interested in this particular investment at this particular price. The idea
is that investors require higher levels of expected returns to compensate them for higher expected risk; the CAPM formula is a simple equation to express that idea.

Capital Asset Pricing Model
Bill Sharpe made his first big breakthrough by taking the picture on the previous page and showing how the market must price individual securities in relation to
their asset class (a.k.a. the index, or the "optimal mix" in the picture). The derivation isn't exactly a walk in the park (yikes!), but the result is a simple linear relationship known as the Capital Asset Pricing Model:
r = Rf + beta x ( Km - Rf )
where
r is the expected return rate on a security;
Rf is the rate of a "risk-free" investment, i.e. cash;
Km is the return rate of the appropriate asset class.
Beta measures the volatility of the security, relative to the asset class. The equation is saying that investors require higher levels of expected returns to compensate them for higher expected risk. You can think of the formula as predicting a security's behavior as a function of beta:
CAPM says that if you know a security's beta then you know the value of r that investors expect it to have.

Naturally, somebody has to verify that this simple relationship actually holds true in the market.
Part of the question is how few classes you can get away with: whether you can use a very coarse division into just "stocks" and "bonds", or whether you need to divide much further (into "domestic mid-cap value stocks", and so on). There are also ongoing attempts at "building better betas" that incorporate company debt and other traditional valuation measures, instead of relying solely on past volatility, to measure risk. All of this is a full-time job for academic modern portfolio theorists (and deriding the whole effort is a popular hobby for some traditional stock analysts: how could a magnificent company equal a mediocre one times beta? To them, CAPM seems like a very blunt instrument.)

CAPM has a lot of important consequences. For one thing it turns finding the efficient frontier into a doable task, because you only have to calculate the
covariances of every pair of classes, instead of every pair of everything.

Another consequence is that CAPM implies that investing in individual stocks is pointless, because you can duplicate the reward and risk characteristics of any
security just by using the right mix of cash with the appropriate asset class. This is why followers of MPT avoid stocks, and instead build portfolios out of low cost
index funds.

(One point about that last paragraph. If you are trying to duplicate an expected return that's greater than that of the asset class, you have to hold "negative"
cash, meaning you have to buy the index on margin. This is consistent with the big message of MPT - that trying to beat the index is inherently risky). Next: finding CAPM from linear regression.
Capital Gain
A profit made from buying something (property, shares of stock, etc) and reselling it at a higher price. Capital gains are typically taxed at a lower rate than other
income; capital gains calculator.
Capital Gains Calculator
Capital gains rates are designed to encourage long-term investing. Most people can get a significant advantage from holding stock investments for more than
one year:

Tax Bracket Capital Gain Tax Rate
Short Term Long Term
10% 10% 0%
15% 15%
25% 25% 15%
28% 28%
33% 33%
35% 35%

Short term gains on stock investments are taxed at your regular tax rate; long term gains are taxed at 15% for most tax brackets, and zero for the lowest two.

Here is a simple capital gains calculator, to help you see what effects the current rates will have in your own life. (Before you use it for the first time, you may
want to check out an example with numbers already filled in.)
Capital Gains Calculator -- Example
Suppose you bought some stock at $30 a share, and within one year your stock has rocketed to $50. But you think it's due for a correction, and in fact you think it
may never see $50 again. Should you sell now and take a brutal tax hit, or should you hang on just long enough to take advantage of a lower tax rate? . We'll initialize the calculator with some plausible declining stock prices: $50 a share if you sell now, and $45 if you wait until the "one year plus one day" mark.
You'll probably find that, unless you have a very high federal tax bracket and live in a state with an unusual tax code, it doesn't pay to wait: you'll get the highest
net if you sell now. So this is one case where you have to be careful not to let your eagerness for a tax break lead you to a decision that isn't really in your best
interest.
Capital Gains Tax
Tax assessed on a capital gain. For most people, the capital gains tax rate is currently 15% for an elapsed time between purchase and sale of more than one
year, and your normal tax rate for an elapsed time of 1 year or less.
Capital Spending
Spending on items with a useful life of more than one year. The price of these items affects the "investing" section of the cash flow statement in the year
purchased, and then gets expensed over many years on the income statement via depreciation.
Cash Flow
Usually defined as earnings plus depreciation of intangibles.
More generally, you start with earnings, add depreciation and possibly other expenses back in, and possibly subtract some sources of income out, to arrive at a
number that you think gives a better indication of a company's profitability than earnings does. One example: if the company has acquired another, it is probably depreciating goodwill, making earnings artificially low.

The relevant numbers for analyzing cash flow are available in the cash flow statement. Sometimes cash flow is defined as omitting all depreciation; this
definition would overlook the real expense of any asset gradually getting "used up", and requiring eventual replacement. The "meaningful" cash flow quantity is
free cash flow.
Cash Flow Statement
Financial document detailing the exchange of cash between a business and the outside world. The flow is categorized as:
- flow "in" from Operations (cash the company made by selling goods and services)
- flow "in" from Financing (cash the company raised by selling stocks and bonds)
- flow "out" to Investing (cash the company spent investing in its future growth)

Each of these flows can actually flow both ways. Investors like to see that the company can cover its spending with cash from operations, without having to turn
to financing. The cash flow statement also has to reconcile the net effect of these flows with the difference in its cash holdings at the beginning and end dates
of the reporting period. See a sample cash flow statement.
Cash Flow Statement
The Cash Flow Statement shows how the company is paying for its operations and future growth, by detailing the "flow" of cash between the company and the
outside world; positive numbers represent cash flowing in, negative numbers represent cash flowing out.

Consolidated Financial Statements . Cash Flow Statement

(dollar figures are in thousands) 1997 1996

Earnings $ 1,911 $ 1,374
Non-cash Adjustments:
Depreciation 1,024 783
Other Adjustments to Earnings 43 -16
Net Cash provided from Operations 2,978 2,141

Proceeds from Issuing New Stock 384 247
Payments to Repurchase Stock -396 -278
Stock Dividends Paid -10
Net Cash provided from Financing - 22 - 31

Additions to Property, Plant & Equipment -2,478 -1,987
Net Cash used for Investing -2,478 - 1,987

Change in cash and equivalents during year 478 123
Cash and Equivalents, beginning of year 2,260 2,137
Cash and Equivalents, end of year 2,738 2,260

Notes
The three sections of the cash flow statement - Operations, Financing, and Investing - correspond to the three solid green arrows back in the diagram.

The first two sections show the two ways the company can get cash. Operations means "making" money by selling goods and services; Financing means "raising"
money by issuing stocks and bonds. The third section shows how the company is spending cash, Investing in its future growth. If you're interested in the stock of
this company, you'd like to see that they can pay for the "investing" figure out of the "operations" figure, without having to turn to "financing". (Financing causes
problems: issuing new stocks will lower the value of each individual share; issuing bonds commits them to making interest payments which will punish future
earnings).

This company has a "healthy" cash flow: cash provided by operations is more than sufficient to cover cash used for investing. It's actually even better than that,
because the "financing" number is negative: they're buying back stock shares in order to keep the value high.

By the way, note that the Operations section looks strange because the signs are all backwards; for example, depreciation is an expense, but you're adding it.
What you're doing here is starting with "net" earnings from the income statement and then adjusting it by removing all components that don't entail a flow of
actual money. Depreciation, which is a "paper" expense that's hidden within several of the expense categories on the income statement, has already been taken
out of earnings; by adding it back in, you're removing its effect.
Cash and Equivalents
Actual cash plus investments that are "as good as cash" and can be cashed in within three months; eg checking accounts, CDs, money market accounts,
Treasury bills.
Charge
An expense; typically an unusual expense, as opposed to an ongoing and predictable cost of doing business. Management often uses adjectives like
"non-recurring" and "cashless" to imply that a charge is harmless and that investors shouldn't worry about it.

Here's an example: suppose a retailer has some inventory that hasn't moved in years. This stuff is still carried on the balance sheet as an asset, but its real market
value is basically zero because no one wants it. Suppose that management decides to stop paying to store this stuff, and to just throw it out instead. Dropping this
asset would throw the balance sheet out of balance; so they write a charge on the income statement, which flows through to the bottom of the balance sheet
because it causes retained earnings to decrease. Now everything is in balance and accounted for.

If you were to glance at the annual report, the effect of this maneuver would look terrible: you'd see that assets and earnings both took a hit, and you'd freak out.
So management would make sure to emphasize that this was due to a special, non-recurring, cashless, on-paper charge, and you'd probably stop worrying.

But even though the liquidation itself was probably a smart move, the whole story is not really completely "harmless". Shareholders' equity really was spent at
one time to acquire that stuff, with the expectation that it would bring in revenue; but management let them down, and wasted it. So whenever you see the word
"charge", you should suspect that it represents a real payout of money, and not be too quick to "write it off".
Present Value / Rate of Return
Present Value is like Future Value in reverse: you assume you already know the future
value of your investment,
and want to know what your starting principal will have to be in order to reach your
goal in the desired amount of time.

The formula for present value is simple; just take the formula for future value and
solve for starting principal:

1. PV = FV / (1 + r)Y
(We're now writing PV, for "present value", where we were writing P before. This is sort of the convention. It's still the same
quantity: it's the principal you start out with.)
-----
Sometimes people like to assume that they know both the future value and the present value, and they want to find the interest rate
required to make it happen. Again the formula is simple: solve the future value formula for r:

2. r = (FV / PV)1 / Y - 1
The interest rate is often called the "discount rate" when it's the thing you're solving for, and you're assuming that the future value is a given. It's also known as
the "internal rate of return", the "equivalent rate of return", or the "CAGR" (for "compound annual growth rate").

Solving for either the present value or the interest rate may seem like a pretty backwards way of doing things, but these are very useful techniques. They're
especially nice for comparing all kinds of different strange investments, by making them all look like ordinary compound interest problems. For example:

Example: Suppose you have $1000 to invest, and two characters from down at the barbershop have offered to cut you in on their private money-making
schemes. Peter promises to triple your money in five years. Warren says he'll quadruple your money in seven years. Assuming that you are a big enough twit to
believe either one of these mendacious scoundrels, which is the better deal?

To find the answer, just use equation 2 (or the popup calculator) to get the rate of return for both investments.

Peter Warren
PV $1000 $1000
FV $3000 $4000
Y 5 7
r 24.57% 21.90%

So Peter gets your dough.

Another Example: Abby promises to pay you $5000 in five years. How much should you pay her now for the privilege?

This one is more interesting: it's a present value problem, but you yourself have to decide what discount rate to use. We'll assume you think Abby is about as risky
as the stock market, and use a discount rate of 11%, about what the annualized market return has been over the past many decades. (That's a number we use
throughout the site; other people will recommend using a different number.) So you use equation 1, and get:

PV = $5000 / (1 + 0.11)5 = $2,967

meaning $2,967 is the maximum amount you should be willing to pay her now for her promise of $5,000 later.

These two examples illustrate the two techniques that are used to perform all valuation problems. You find the equivalent rate of return when you want to know
the yield to maturity of a bond at a given market price; and you calculate the present values of future company earnings when you want to know the fair value of
a share of stock.
Compound Annual Growth Rate (CAGR)
Interest rate at which a given present value would "grow" to a given future value in a
given amount of time.
The formula is CAGR = (FV/PV)1/n - 1 where FV is the future value, PV is the
present value, and n is the number of years.

See the interactive graph for an explanation of the formula and some examples, or
the CAGR calculator.
Consolidated Financial Statement
Financial statement combining the activities of a business and its subsidiaries. See balance sheet, cash flow statement, and income statement.
Consumer Confidence
One of two numbers expressing consumers' feelings about the economy and plans to make purchases: the Consumer Confidence Index prepared by The
Conference Board (www.conference-board.org), and the Consumer Sentiment Index prepared by the University of Michigan (www.umich.edu). Both indices are
based on a household survey and reported monthly.
Consumer Spending
Purchase of goods and services by U.S. individuals, accounting for about 2/3 of the GDP. (News commentators like to say that "consumer spending makes up
two-thirds of the economy.") This number includes products of both domestic and foreign origin.
Components of the Gross Domestic Product
If the word on the street during the late 1990s was that the business cycle was dead, the lesson of the early 2000s is that Economics Happens.
Convertible Bond
A bond which the holder may convert to a set number of shares of common stock
Coupon
Annual interest rate paid by a bond, expressed as a percentage of its par value. Compare current yield, yield to maturity.
Currency
The foreign exchange (currency, forex or FX) market is where currency trading takes place. FX transactions typically involve one party purchasing a quantity of
one currency in exchange for paying a quantity of another. The FX market is one of the largest and most liquid financial markets in the world, and includes
trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global
forex and related markets is continuously growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International
Settlement. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

1 Market size and liquidity 2 Market participants 2.1 Banks 2.2 Commercial companies 2.3 Central banks 2.4 Hedge funds 2.5 Investment management firms
2.6 Retail forex brokers 2.7 Other 3 Trading characteristics 4 Factors affecting currency trading 4.1 Economic factors 4.2 Political conditions 4.3 Market
psychology 5 Algorithmic trading in forex 6 Financial instruments 6.1 Spot 6.2 Forward 6.3 Future 6.4 Swap 6.5 Option 6.6 Exchange Traded Fund 7
Speculation 8 References

Market size and liquidity. The foreign exchange market is unique because of its trading volumes, the extreme liquidity of the market, the large number of, and
variety of, traders in the market, its geographical dispersion, its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST
Friday), the variety of factors that affect exchange rates. the low margins of profit compared with other markets of fixed income (but profits can be high due to
very large trading volumes) the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.As such, it has been referred to as the market closest to the ideal perfect
competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[1] average daily turnover in global
foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately
$3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center
for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to
"traditional" turnover, $2.1 trillion was traded in derivatives. Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile
Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of
the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Top 10 currency traders % of overall volume, May 2008 Rank Name Volume
1 Deutsche Bank 21.70%
2 UBS AG 15.80%
3 Barclays Capital 9.12%
4 Citi 7.49%
5 Royal Bank of Scotland 7.30%
6 JPMorgan 4.19%
7 HSBC 4.10%

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing
importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse
selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for
retail traders to trade in the foreign exchange market. Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another,
there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has
increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP The ten most active traders account for
almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with
both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the
price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For
example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency,
which is a standard "lot". These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for
transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e.
0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

Market participants Financial markets Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield
debt Stock market Stock Preferred stock Common stock Registered share Voting share Stock exchange

Foreign exchange market Derivatives market Credit derivative Hybrid security Options Futures Forwards Swaps

Other Markets Commodity market Money market OTC market Real estate market Spot market
--------------------------------------------------------------------------------
Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial
regulation

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market,
which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are
razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-
2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand
a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by
the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are
usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge
funds, and even some of the retail forex-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other
institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004)
In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in
the forex market to align currencies to their economic needs.

Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of
dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees.
Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank
trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies
often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless,
trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact
when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often
have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton
Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high —
that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because
central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times
each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily
overwhelm any central bank.[5] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Hedge funds
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more,
and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange
market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell
several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim
of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management
(AUM), and hence can generate large trades.

Retail forex brokers
There are two types of retail brokers offering the opportunity for speculative trading: retail forex brokers and market makers. Retail traders (individuals) are a small
fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and
NFA might be subject to forex scams[6] [7]. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net
Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail
brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of
interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through
Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Other
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as
Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually
a physical delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[8]. These companies' selling point is usually that
they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that
they generally offer higher-value services.

Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite
Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the
Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.

Trading characteristics Most traded currencies Currency distribution of reported FX market turnover Rank Currency ISO 4217 code
(Symbol) % daily share (April 2007)
1  United States dollar USD ($) 86.3%
2  Euro EUR (€) 37.0%
3  Japanese yen JPY (¥) 16.5%
4  Pound sterling GBP (£) 15.0%
5  Swiss franc CHF (Fr) 6.8%
6  Australian dollar AUD ($) 6.7%
7  Canadian dollar CAD ($) 4.2%
8-9  Swedish krona SEK (kr) 2.8%
8-9  Hong Kong dollar HKD ($) 2.8%
10  Norwegian krone NOK (kr) 2.2%
11  New Zealand dollar NZD ($) 1.9%
12  Mexican peso MXN ($) 1.3%
Other 16.8%
Total 200%

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC)
nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there
is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the
rates are often very close, otherwise they could be exploited by arbitragers instantaneously. Due to London's dominance in the market, a particular currency's
quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and
aspires to the role of a central market clearing mechanism.

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate.
Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American
session and then back to the Asian session, excluding weekends.

Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP
growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is
released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important
advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the
ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is
the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger
currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

EUR/USD: 27 %
USD/JPY: 13 %
GBP/USD (also called sterling or cable): 12 % and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and
sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-
centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and
USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during
2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has
increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Factors affecting currency trading. See also: Exchange rates
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can
be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one
currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as
foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall
into three categories: economic factors, political conditions and market psychology.

Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports,
and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank
influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget
deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a
country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade
deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising.
This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation
rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of
a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more
demand for it there will be.

Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally
responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the
process, affect its currency.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a
higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of
political or economic uncertainty.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical
commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a
particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a
market being "oversold" or "overbought". To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors
focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself
becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent
years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that
traders may attempt to use. Many traders study price charts in order to identify such patterns.

Algorithmic trading in forex
Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates,
by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.

Financial instruments

Spot
A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar, which settles the next day), as opposed to the futures contracts,
which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a
contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in
FX transactions among all instruments.

Forward
See also: forward contract
One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon
future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates
are then. The duration of the trade can be a few days, months or years.

Future: Currency future
Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an
agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures
contracts are usually inclusive of any interest amounts.

Swap: Forex swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse
the transaction at a later date. These are not standardized contracts and are not traded through an exchange.

Option: Foreign exchange option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money
denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most
liquid market for options of any kind in the world.

Exchange Traded Fund: Exchange-traded fund
Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to
replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF
increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world
currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar
denominated investors and speculators.

Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including
Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for
hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists such as Joseph Stiglitz consider this argument to be
based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is
considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that
often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to
500% per annum, and later to devalue the krona[15]. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed
the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the
effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators allegedly made the
inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other
critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia
recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.

References
^ a b c Triennial Central Bank Survey (December 2007), Bank for International Settlements.
^ Annual FX poll (May 2008), Euromoney.
^ Source: Euromoney FX survey FX Poll 2008: The Euromoney FX survey is the largest global poll of foreign exchange service providers.'
^ http://www.ifsl.org.uk/upload/CBS_Foreign_Exchange_2007.pdf (December 2007), International Financial Services, London.
^ Alan Greenspan, The Roots of the Mortgage Crisis: Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own. , the
Wall Street Journal, December 12, 2007
^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits", The Wall Street
Journal, Dow Jones and Company.
Retrieved on 31 October 2007.
^ Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100", The New York Times. Retrieved on 30 October 2007.
^ The Sunday Times (UK), 16 July 2006
^ Safe haven currency
^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), pp. 343–375.
^ Investopedia
^ Sam Y. Cross, All About the Foreign Exchange Market in the United States, Federal Reserve Bank of New York (1998), chapter 11, pp. 113–115.
^ Michael A. S. Guth, "Profitable Destabilizing Speculation," Chapter 1 in Michael A. S. Guth, SPECULATIVE BEHAVIOR AND THE OPERATION OF
COMPETITIVE MARKETS UNDER
UNCERTAINTY, Avebury Ashgate Publishing, Aldorshot, England (1994), ISBN 1856289850.
^ What I Learned at the World Economic Crisis Joseph Stiglitz, The New Republic, April 17, 2000, reprinted at GlobalPolicy.org
^ But Don't Rush Out to Buy Kronor: Sweden's 500% Gamble - International Herald Tribune
^ a b Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995. Source: Wikipedia
The Universal Currency Converter® contains the top 85 currencies sorted by country name - listing the ten most popular currencies first. Special units and
precious metals are listed both alphabetically and separately, at the end of this list. For every world currency, use to the XE Full Universal Currency Converter.

About the Universal Currency Converter
The XE Universal Currency Converter®, the world's most popular currency tool, lets you to perform currency and foreign exchange rate calculations, using live,
up-to-the-minute mid-market currency rates.

To make global payments and transfers on-line with guaranteed best exchange rates, use XE Trade. For 24-hour online currency trading on the Forex Market, try
FXCM, a service that allows you to buy and sell foreign exchange positions in real time.

Instructions
Type the amount of source currency in the input box. You may include commas and a decimal point. Then Scroll down to select the source and destination
currencies and press "Go!". The results of your conversion will be displayed.
Note: An asterisk (*) indicates if currencies are obsolete or being phased out.

Learn more about the three-letter currency codes, or have a look at our list of world currency symbols.

Universal Currency Converter using live mid-market rates. Using live mid-market rates Convert: From this currency: X To this currency:X. Enter an amount > Euro
- EUR United States Dollars - USD United Kingdom Pounds - GBP Canada Dollars - CAD Australia Dollars - AUD Japan Yen - JPY India Rupees - INR New
Zealand Dollars - NZD Switzerland Francs - CHF South Africa Rand - ZAR -- Top 85 Currencies: -- Afghanistan Afghanis - AFN Albania Leke - ALL Algeria Dinars -
DZD America (United States) Dollars - USD Argentina Pesos - ARS Australia Dollars AUD -Austria Schillings - ATS* Bahamas Dollars - BSD Bahrain Dinars - BHD
Bangladesh Taka - BDT Barbados Dollars - BBD Belgium Francs - BEF* Bermuda Dollars - BMD Brazil Reais - BRL Bulgaria Leva - BGN Canada Dollars - CAD
CFA BCEAO Francs - XOF CFA BEAC Francs - XAF Chile Pesos - CLP China Yuan Renminbi - CNY RMB (China Yuan Renminbi) - CNY Colombia Pesos - COP
CFP Francs - XPF Costa Rica Colones - CRC Croatia Kuna - HRK Cyprus Pounds - CYP* Czech Republic Koruny - CZK Denmark Kroner - DKK Deutsche
(Germany) Marks - DEM* Dominican Republic Pesos - DOP Dutch (Netherlands) Guilders - NLG* Eastern Caribbean Dollars - XCD Egypt Pounds - EGP Estonia
Krooni - EEK Euro - EUR Fiji Dollars - FJD Finland Markkaa - FIM* France Francs - FRF* Germany Deutsche Marks - DEM* Gold Ounces - XAU Greece Drachmae
- GRD* Holland (Netherlands) Guilders - NLG* Hong Kong Dollars - HKD Hungary Forint - HUF Iceland Kronur - ISK IMF Special Drawing Right - XDR India
Rupees - INR Indonesia Rupiahs - IDR Iran Rials - IRR Iraq Dinars - IQD Ireland Pounds - IEP* Israel New Shekels - ILS Italy Lire - ITL* Jamaica Dollars - JMD
Japan Yen - JPY Jordan Dinars - JOD Kenya Shillings - KES Korea (South) Won - KRW Kuwait Dinars - KWD Lebanon Pounds - LBP Luxembourg Francs - LUF*
Malaysia Ringgits - MYR Malta Liri - MTL* Mauritius Rupees - MUR Mexico Pesos - MXN Morocco Dirhams - MAD Netherlands Guilders - NLG* New Zealand
Dollars - NZD Norway Kroner - NOK Oman Rials - OMR Pakistan Rupees - PKR Palladium Ounces - XPD Peru Nuevos Soles - PEN Philippines Pesos - PHP
Platinum Ounces - XPT Poland Zlotych - PLN Portugal Escudos - PTE* Qatar Riyals - QAR Romania New Lei - RON Romania Lei - ROL* Russia Rubles - RUB
Saudi Arabia Riyals - SAR Silver Ounces - XAG Singapore Dollars - SGD Slovakia Koruny - SKK Slovenia Tolars - SIT* South Africa Rand - ZAR South Korea
Won - KRW Spain Pesetas - ESP* Special Drawing Rights (IMF) - XDR Sri Lanka Rupees - LKR Sudan Pounds - SDG Sweden Kronor - SEK Switzerland Francs -
CHF Taiwan New Dollars - TWD Thailand Baht - THB Trinidad and Tobago Dollars - TTD Tunisia Dinars - TND Turkey New Lira - TRY United Arab Emirates
Dirhams - AED United Kingdom Pounds - GBP United States Dollars - USD Venezuela Bolivares - VEB* Venezuela Bolivares Fuertes - VEF Vietnam Dong - VND
Zambia Kwacha - ZMK -- Special Units: -- CFA BEAC Francs - XAF CFA BCEAO Francs - XOF CFP Francs - XPF Eastern Caribbean Dollars - XCD Euro - EUR IMF
Special Drawing Rights - XDR -- Precious Metals: -- Silver Ounces - XAG Gold Ounces - XAU Platinum Ounces - XPT Palladium Ounces - XPD Click for every
world currency > More currencies > United States Dollars - USD Euro - EUR United Kingdom Pounds - GBP Canada Dollars - CAD Australia Dollars - AUD Japan
Yen - JPY India Rupees - INR New Zealand Dollars - NZD Switzerland Francs - CHF South Africa Rand - ZAR -- Top 85 Currencies: -- Afghanistan Afghanis - AFN
Albania Leke - ALL Algeria Dinars - DZD America (United States) Dollars - USD Argentina Pesos - ARS Australia Dollars - AUD Austria Schillings - ATS* Bahamas
Dollars - BSD Bahrain Dinars - BHD Bangladesh Taka - BDT Barbados Dollars - BBD Belgium Francs - BEF* Bermuda Dollars - BMD Brazil Reais - BRL Bulgaria
Leva - BGN Canada Dollars - CAD CFA BCEAO Francs - XOF CFA BEAC Francs - XAF Chile Pesos - CLP China Yuan Renminbi - CNY RMB (China Yuan
Renminbi) - CNY Colombia Pesos - COP CFP Francs - XPF Costa Rica Colones - CRC Croatia Kuna - HRK Cyprus Pounds - CYP* Czech Republic Koruny - CZK
Denmark Kroner - DKK Deutsche (Germany) Marks - DEM* Dominican Republic Pesos - DOP Dutch (Netherlands) Guilders - NLG* Eastern Caribbean Dollars -
XCD Egypt Pounds - EGP Estonia Krooni - EEK Euro - EUR Fiji Dollars - FJD Finland Markkaa - FIM* France Francs - FRF* Germany Deutsche Marks - DEM* Gold
Ounces - XAU Greece Drachmae - GRD* Holland (Netherlands) Guilders - NLG* Hong Kong Dollars - HKD Hungary Forint - HUF Iceland Kronur - ISK IMF Special
Drawing Right - XDR India Rupees - INR Indonesia Rupiahs - IDR Iran Rials - IRR Iraq Dinars - IQD Ireland Pounds - IEP* Israel New Shekels - ILS Italy Lire - ITL*
Jamaica Dollars - JMD Japan Yen - JPY Jordan Dinars - JOD Kenya Shillings - KES Korea (South) Won - KRW Kuwait Dinars - KWD Lebanon Pounds - LBP
Luxembourg Francs - LUF* Malaysia Ringgits - MYR Malta Liri - MTL* Mauritius Rupees - MUR Mexico Pesos - MXN Morocco Dirhams - MAD Netherlands
Guilders - NLG* New Zealand Dollars - NZD Norway Kroner - NOK Oman Rials - OMR Pakistan Rupees - PKR Palladium Ounces - XPD Peru Nuevos Soles - PEN
Philippines Pesos - PHP Platinum Ounces - XPT Poland Zlotych - PLN Portugal Escudos - PTE* Qatar Riyals - QAR Romania New Lei - RON Romania Lei -
ROL* Russia Rubles - RUB Saudi Arabia Riyals - SAR Silver Ounces - XAG Singapore Dollars - SGD Slovakia Koruny - SKK Slovenia Tolars - SIT* South Africa
Rand - ZAR South Korea Won - KRW Spain Pesetas - ESP* Special Drawing Rights (IMF) - XDR Sri Lanka Rupees - LKR Sudan Pounds - SDG Sweden Kronor -
SEK Switzerland Francs - CHF Taiwan New Dollars - TWD Thailand Baht - THB Trinidad and Tobago Dollars - TTD Tunisia Dinars - TND Turkey New Lira - TRY
United Arab Emirates Dirhams - AED United Kingdom Pounds - GBP United States Dollars - USD Venezuela Bolivares - VEB* Venezuela Bolivares Fuertes - VEF
Vietnam Dong - VND Zambia Kwacha - ZMK -- Special Units: -- CFA BEAC Francs - XAF CFA BCEAO Francs - XOF CFP Francs - XPF Eastern Caribbean Dollars
- XCD Euro - EUR IMF Special Drawing Rights - XDR -- Precious Metals: -- Silver Ounces - XAG Gold Ounces - XAU Platinum Ounces - XPT Palladium Ounces -
XPD Click for every world currency > More currencies > License our Data · Free rates by e-mail · Put this tool on your site for free
Covariance
A statistical measure of correlation of the fluctuations of two different quantities. In finance, covariance is applied to the annual rates of return of different
investments, to measure the correlation of their year-to-year fluctuations in performance.
The definition is
Cov(r1, r2) = 1/n * (r1 i - r1 ave) * (r2 i - r2 ave)
where the terms r1 i and r2 i are actual values of the annual rates of return of two investments, taken over several years, n is the total number of values of r1 i and
r2 i used, and r1 ave and r2 ave are the average values of r1 i and r2 i. See below on the efficient frontier for a description of how covariance is related to asset
allocation.
The Efficient Frontier and Portfolio Diversification
The graph on the previous page shows how volatility increases your risk of loss of principal, and how this risk worsens as your time horizon shrinks. So all other
things being equal, you would like to minimize volatility in your portfolio.

Of course the problem is that there is another effect that works in the opposite direction: if you limit yourself to low-risk securities, you'll be limiting yourself to
investments that tend to have low rates of return. So what you really want to do is include some higher growth, higher risk securities in your portfolio, but
combine them in a smart way, so that some of their fluctuations cancel each other out. (In statistical terms, you're looking for a combined standard deviation
that's low, relative to the standard deviations of the individual securities.) The result should give you a high average rate of return, with less of the harmful
fluctuations.

The science of risk-efficient portfolios is associated with a couple of guys (a couple of Nobel laureates,
actually) named Harry Markowitz and Bill Sharpe.

Suppose you have data for a collection of securities (like the S & P 500 stocks, for example), and
you graph the return rates and standard deviations for these securities, and for all portfolios you can
get by allocating among them. Markowitz showed that you get a region bounded by an
upward-sloping curve, which he called the efficient frontier.

It's clear that for any given value of standard deviation, you would like to choose a portfolio that
gives you the greatest possible rate of return; so you always want a portfolio that lies up along the
efficient frontier, rather than lower down, in the interior of the region. This is the first important
property of the efficient frontier: it's where the best portfolios are.

The second important property of the efficient frontier is that it's curved, not straight. This is actually
significant -- in fact, it's the key to how diversification lets you improve your reward-to-risk ratio. To
see why, imagine a 50/50 allocation between just two securities. Assuming that the year-to-year
performance of these two securities is not perfectly in sync -- that is, assuming that the great years
and the lousy years for Security 1 don't correspond perfectly to the great years and lousy years for
Security 2, but that their cycles are at least a little off -- then the standard deviation of the 50/50
allocation will be less than the average of the standard deviations of the two securities separately.
Graphically, this stretches the possible allocations to the left of the straight line joining the two
securities.

In statistical terms, this effect is due to lack of covariance. The smaller the covariance between the
two securities -- the more out of sync they are -- the smaller the standard deviation of a portfolio that
combines them. The ultimate would be to find two securities with negative covariance (very out of
sync: the best years of one happen during the worst years of the other, and vice versa).

Next: finding the best portfolio in the efficient frontier
Current Assets
Assets that are expected to be converted to cash within one year. These include cash, accounts receivable, and inventory.
Current Liabilities
Liabilities that must be paid within one year.
Current Ratio
Ratio of a company's current assets to its short-term debt. Used as a measure of a company's ability to survive over the near term, by being able to meet
obligations with available funds. A current ratio of 1.0 means that the company could theoretically survive for one year, even if it made no sales. Compare
quick ratio.
Current Yield
Annual interest rate paid by a bond, expressed as a percentage of its current market price. Compare coupon, yield to maturity.
Currently Taxable Investment
An investment on which taxes are not deferred. In other words, a normal investment, on which you pay income taxes the same year you realize income.
Debt-to-Equity Ratio
A company's debt divided by its equity. This ratio is used as a relative measure of debt, but it isn't always useful since equity is a complicated number. It's
sometimes better just to look at a company's total debt per share, which you can either look up or calculate since>>>>>>>>> Debt per share = EPS / ROE x
Debt/Equity:
Example; if Earnings per share: $3.00, Return on Equity: 15 % , Debt-to-Equity ratio: 0.50 >>>>> then Debt per share is: $10.00
Default
The failure of a bond issuer to meet a payment obligation, either on interest or redemption.
Deficit Spending
Government spending in excess of what they take in as tax revenue.
Don't confuse the deficit with the debt: the debt is the total amount the government owes; the deficit is the annual amount by which the debt gets bigger... and
bigger:

U.S. Debt (as of early 2003) $ 6,400,000,000,000
Projected Deficit for 2003 $ 300,000,000,000
Distance to Pluto 3,000,000,000 mi
U.S. Population 290,000,000 (2008: 304,000,000)

"Running a deficit" is sometimes proposed as a short term economic stimulus (Democrats tend to mean an increase in spending, Republicans tend to mean a
decrease in tax rates); but the after-effects can be a long term drag, either in the form of an eventual tax increase or higher interest rates to cover the increase in
government debt.
Depreciation
Method to account for assets whose value is considered to decrease over time.
The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement, and also makes up part of the expenses shown
on the income statement. The amount that assets have depreciated to by the end date of the period is shown on the balance sheet.
Dilution
An increase in the number of shares of a company's stock, causing the value of each share to decrease. The number of shares increases when the company
offers new stock to the public to raise cash; or when employees exercise their stock options; or when holders of convertible bonds convert their bonds to stock.
Companies that can afford to will frequently buy back issues of stock to fight dilution. (Note that dilution is different from a stock split. If you're an investor and
your stock splits, the number of shares increases but you receive additional shares, so the value of your investment remains constant. Dilution means that current
investors do not receive more shares; so you'll own a smaller percentage of the company's stock, and your investment is worth less).
Information about the company's issuing and buying back stock is shown in the "financing" section of the cash flow statement.
Discount Bond
A bond selling at a market price below its par value.
Par value is the face value of a bond: the price the issuer promises to pay on its date of maturity.
Discounted cash flow (DCF) technique to value common stock.
DCF techniques are used by investment bankers for merger and acquisition analysis, Wall Street traders to value all types of debt obligations, and Wall Street
analysts to value stock.
The value of any asset is equal to the expected cash flows of the asset, discounted for timing and risk. Future cash flows for common stock can come from
dividends, from the sale or merger of the company (e.g. AOL's merger with Time Warner), from the repurchase of the stock by the company (e.g. Microsoft and
Intel have large share repurchase programs), or from the sale of the stock at market prices. Description of the DCF valuation approach.
—Forecast Expected Cash Flow: forecast the expected cash flow for the company based on assumptions regarding the company's revenue growth rate, net
operating profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement.
—Estimate the Discount Rate: estimate the company's weighted average cost of capital (WACC), which is the discount rate that's used in the valuation process.
—Calculate the Value of the Corporation: the company's WACC is then used to discount the expected cash flows during the Excess Return Period to get the
corporation's Cash Flow from Operations. WACC nust be also used to calculate the company's Residual Value. To that it must be added the value of Short-Term
Assets on hand to get the Corporate Value.
—Calculate Intrinsic Stock Value: we then subtract the values of the company's liabilities—debt, preferred stock, and other short-term liabilities to get Value to
Common Equity, divide that amount by the amount of stock outstanding to get the per share intrinsic stock value. How does a corporation make money? It makes
money by operating business lines where it manufactures products or provides services. A company generates revenue by selling its products and services to
another party. In generating revenue, a company incurs expenses—salaries, cost of goods sold (CGS), selling and general administrative expenses (SGA),
research and development (R&D). The difference between operating revenue and operating expense is Operating Income or Net Operating Profit. To produce
revenue a firm not only incurs operating expenses, but it also must invest money in real estate, buildings and equipment, and in working capital to support
its business activities. Also, the corporation must pay income taxes on its earnings. The amount of cash that's left over after the payment of these investments
and taxes is known as Free Cash Flow to the Firm (FCFF). FCFF is an important measure to stockholders. This is the cash that is left over after the payment of all
cash expenses and operating investment required by the firm. It is the hard cash that is available to pay the company's various claim holders, especially the
stockholders. The simple equation used to calculate FCFF is: FCFF = NOP – Taxes – Net Investment – Net Change in Working Capital

There are five key cash flow measures that are important in estimating the free cash flow to the firm that is used in the DCF approach. Those five cash flow
measures are: the revenue growth rate, the net operating profit margin, the company's income tax rate, net fixed capital investment rate, and incremental
working capital investment rate.

The revenue growth rate is equal to your estimate of the firm's revenue growth rate in percent over the Excess Return Period. Finance Internet sites like Zack's,
First Call, and IBES project revenue growth rates over differing periods. Yahoo Finance and America Online also have growth rates. Warning: Academic studies
have shown that analyst's forecasted growth rates have been upwardly biased. Net operating profit margin is equal to a firm's operating profits divided by its
revenues. A firm's income tax rate is equal to the provision for income taxes divided by the firm's operating income before provision for taxes. The information
necessary to compute NOPM and income tax rate can be found on the firm's income statement as part of its annual or quarterly reports. Net fixed investment rate
is equal to the company's new investment in plant, property and equipment (PP&E) minus depreciation charges taken. To calculate this ratio, you need to know
the company's investment rate, equal to the firm's yearly investment in PP&E divided by revenues, and the company's depreciation rate, equal to the firm's
depreciation charges divided by revenues. The firm's investment in PP&L and depreciation charges can be found on its cash flow statement in its annual report.
Incremental working capital investment rate is equal to the change in working capital divided by the change in revenue. Working capital is equal to [( Accounts
Receivable + Inventory) – Accounts Payable]. The firm's accounts payable, inventories, and accounts receivable can be found on its annual balance sheet in
its annual report.

The free cash flow to the firm approach provides for several distinct time periods for estimating cash flow which allow differing value-creating periods for a
corporation's business strategy. In the Excess Return Period, because of a competitive advantage that the firm has, the corporation is able to earn returns on new
investments that are greater than its cost of capital. Classic examples of companies that experienced a significant period of competitive advantage are IBM in
the 1950's and 1960's, Apple Computer in the 1980's, and Microsoft and Intel in the 1990's.

Success invariably attracts competitors whose aggressive practices cut into market share and revenue growth rates, and whose pricing and marketing activities
drive down net operating profit margins. A reduction in NOPM drives return on new investment to levels that approach the corporation's WACC. When a company
loses its competitive advantage and the return from its new investments just equals its WACC, the corporation is investing in business strategies in which the
aggregate net present value is zero (or worse yet, negative—witness IBM in the 1980's and Apple in the 1990's).

The length of the Excess Return Period for the corporation will depend on the particular products being produced, the industry in which the company operates,
and the barriers for competitors to enter the business. Products that have a very high barrier to entry due to patent protection, strong brand names, or unique
marketing channels might have a long Excess Return Period (10 to 15 years or longer). The Excess Return Period for most companies is 5 to 7 years or shorter.
All else equal, a shorter Excess Return Period results in a lower stock value.

What do you use as an input for the Excess Return Period? This is your judgment call when valuing a stock. We use what we call the 1-5-7-10 RULE. A firm's
weighted average cost of capital (WACC) is a difficult concept to understand. It may be helpful to think of a company's WACC in relation to the weighted average
return on your own investment portfolio. You may own $10,000 in a money market fund that has an expected yearly return of 6%. You also may own $10,000 of
a preferred stock with an expected return of 8%. And you also may own $80,000 market value of a common stock with an expected return of 10%. The expected
weighted average return of your $100,000 (in total) investment portfolio equals:

Exp. Port. = ($10,000 x .06) + ($10,000 x .08) + ($80,000 x .10) = $9,400 = 9.4%
Return ($100,000) $100,000

A company's WACC is very similar to your investment portfolio's weighted average return as described above. It's simply the weighted average expected cost for
the company's various types of obligations—debt, preferred stock, and common stock—that are issued by the corporation to finance its operations and
investments. The company's WACC is a very important number, both to the stock market for stock valuation purposes and to the company's management for
capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the
company's WACC will generate additional free cash flow and will create positive net present value for stock owners. These corporate investments should result in
an increase in stock prices. These projects are good things! Investments that earn less than the firm's WACC will result in a decrease in stockholder value and
should be avoided by the company. Where are the best places to go on the Internet to get the information that you need to value stocks and use the ValuePro
Program? Our web site with its online
valuation service is a good place to start.

When you value a stock of a company, the next place that you should visit for information is the company's own corporate Web site. At this site you can get the
corporation's Annual Report, which contains its Income Statement, Balance Sheet, and Cash Flow Statement, and its most recent quarterly earnings release.
This will provide you with the bulk of the information that you need for valuing its stock. The next set of sites that you should visit are Internet sites devoted to
investment information. Some sites are free or partly-free and some provide information to subscribers only. Good sites to get corporate betas and growth rates
are America Online, Microsoft Investor, S&P Personal Wealth and Yahoo Finance. At most of these sites, either Zack's, First Call, or IBES act as the source of
growth rate data. Warning: Academic studies have shown that analyst's forecasted growth rates have been upwardly biased. Yahoo, AOL, MSN, Market Guide,
Hoover's and Bloomberg Finance, among others, act as good sites to get valuation inputs relating to cost of capital, such as the risk-free Treasury yields, rates
associated with preferred stock and corporate debt, shares outstanding, and current stock prices.

General categories and Excess Return Periods:
(1) Companies that operate in a competitive, low-margin industry in which they have nothing particular going for them—a 1-year Excess Return Period;
(2) Companies that have a recognizable name and reputation and perhaps a regulatory benefit (e.g. Consolidated Edison)—a 5-year Excess Return Period;
(3) Large, economies of scale good companies with good brand names, marketing channels, and consumer identification (e.g. McDonald's and AT&T)—a 7-year
Excess Return Period; and (4) Great companies with tremendous marketing power, brand names, and in-place benefits (e.g. Intel, Microsoft, Coca Cola and
Disney)—a 10-year Excess Return Period.

We do not believe in going out more than 10-years with an Excess Return Period. Some fundamental stock valuation models, like the dividend discount model,
incorporate earnings and dividend growth in excess of the company's WACC, out to an infinite time period. Cash flow in these models is discounted until the
'hereafter'. We think that 10 years is a reasonable amount of time to incorporate the product cycles of today's markets.

What happens after the Excess Return Period? Does the company dry up, die, or go bankrupt? NO! For valuation purposes, the company loses its competitive
advantage. This loss of competitive advantage means that the company's stock value will grow only at the market's required rate of return for the stock. For
example, if the common stock price of XYZ Boring Company (which does not pay dividends) is $20, and its required rate of return is 12%, its stockholders expect
it to grow to ($20 * 1.12) = $22.40 after year 1, ($22.40 * 1.12) = $25.08 after year 2, and ($25.08 * 1.12) = $28.06 after year 3. After year 3, in this example, the
company should pay all of its free cash flow to stockholders through dividends or share repurchases.

The annual rate of return that an investor expects to earn when investing in shares of a company is known as the cost of common equity. That return is
composed of the dividends paid on the shares and any increase (or decrease) in the market value of the shares. For example, if an investor expects a 10% return
from McDonald's stock and he buys a share at $67.25, her expectation is to receive $6.72 during the year through a combination of dividends (currently $.34 per
share during 1999) and the appreciation of the stock price (presumed to be $6.38 to give her the 10% expected return totaling $6.72) during the year. The return
expected of any risky common stock should be composed of at least three different return components: (1) a return commensurate with a risk-free security (Rf); (2)
a return that incorporates the market risk associated with common stocks as a whole (Rm); and (3) a return that incorporates the business and financial risks
specific to the stock of the company itself, known as the company's beta.

The first measure of return (Rf) relates to what market rate of return is currently available from a risk-free security, like the yield associated with a long-term
Treasury Bond. So if the yield on Treasury Bonds is 5%, an investor should expect a return greater than 5% for a common stock.

The second measure of return (Rm) relates to what market returns are currently available from and what risks are associated with stocks in general. There is a
general risk premium (the equity risk premium) associated with the stock market as a whole. That risk premium should be priced into any equity investment. For
example, if you expect to earn 8% on average (from a diversified portfolio) in the stock market and the risk-free rate is 5%, the Equity Risk Premium (Rerp) would
be (Rerp) = (8% - 5%) = 3%.
Equity Risk Premium(Rerp) = Exp. Return on Market(Rm) - Risk Free Rate(Rf)

The third measure of return versus risk (beta) should be related to the specific stock being purchased—how risky is the type of business the firm does and how risky
is the financial structure or leverage of the firm. Beta measures the risk of the company relative to the risk of the stock market in general. With greater risk, as
measured by a larger variability of returns (business or operating risk), the company's should have a larger beta. And with greater leverage (higher debt to value
ratio) increasing financial risk, the company's stock should also have a larger beta. And with a larger beta, an investor should expect a greater return. The beta
of an average risk firm in the stock market is 1.00.

The financial risk model that uses beta as its sole measure of risk ( a single factor model) is called the Capital Asset Pricing Model (CAPM) and is used by many
market analysts in their valuation process. The relationship between risk and return that comes out of that model and the one that is incorporated into our FCFF
analysis and spreadsheet software is: Exp.(Rs) = (Rf) + beta(Rerp) which is: the expected return on a stock (e.g. McDonald's) is equal to the risk free rate (e.g. 5%)
plus the specific stock's beta (e.g. 0.97) times the equity risk premium (e.g. 3.0%)." In numbers it looks like this: Expected Return on McDonald's Stock = 5% +
0.97(3.0%) = 7.91%

Always is preferable to buy a stock that is priced below or near its intrinsic value and do not buy a stock that is trading at a price that is above its value. We
understand the 'momentum trading approach' and know that when the stock market is bullish and a stock's trend is up, the trend can carry an 'overvalued' stock
even higher. This occurs especially with a hot, growth industry like the Internet and with a stock that has a relatively small amount of shares available for trading.
We strongly believe that there is value to careful stock selection; also, an investor should own a diversified portfolio of common stocks. Within that portfolio the
investor should value each stock individually using the DCF valuation technique. When the stock is 'overvalued' and it exceeds its intrinsic value by more than
X% (the investor should pick that percentage, e.g. 15%), he should sell that stock and replace it with another stock that is 'undervalued' by more than X% (e.g.
15%).
Definition of Terms

Valuation Measures

Market Cap
Formula: Current Market Price Per Share * Number of Shares Outstanding
The total dollar value of all outstanding shares. Computed as shares times current market price. Capitalization is a measure of corporate size.

Enterprise Value
Formula: Market Cap + Total Debt – Total Cash & Short Term Investments
EV is a measure of theoretical takeover price, and is useful in comparisons against income statement line items above the interest expense/income lines such
as revenue and EBITDA.

Trailing P/E Ratio
Formula: Current Market Price / Earnings Per Share
A popular valuation ratio calculated by dividing the current market price by trailing 12-month (ttm) Earnings Per Share.

Forward P/E Ratio
Formula: Current Market Price / Projected Earnings Per Share
A valuation ratio calculated by dividing the current market price by projected 12-month Earnings Per Share.

PEG Ratio
Formula: P/E Ratio / 5-Yr Expected EPS Growth
Forward-looking measure rather than typical earnings growth measures, which look back in time (historical). Used to measure a stock's valuation against its
projected 5-yr growth rate.

Price/Sales Ratio
Formula: Current Market Price / Total Revenues Per Share
A valuation ratio calculated by dividing the current market price by trailing 12-month (ttm) Total Revenues. Often used to value unprofitable companies.

Price/Book Ratio
Formula: Current Market Price / Book Value Per Share
A valuation ratio calculated by dividing the current market price by the most recent quarter's (mrq) Book Value Per Share.

Enterprise Value/Revenue
Formula: Enterprise Value / Total Revenues
Firm value compared against revenue. Provides a more rigorous comparison than the Price/Sales ratio by removing the effects of capitalization from both sides
of the ratio. Since revenue is unaffected by the interest income/expense line item, the appropriate value comparison should also remove the effects of
capitalization, as EV does.

Enterprise Value/EBITDA
Formula: Enterprise Value / EBITDA
Firm value compared against EBITDA (Earnings before interest, taxes, depreciation, and amortization). See Enterprise Value/Revenue.

Financial Highlights

Fiscal Year Ends
The date of the end of the firm's accounting year.

Most Recent Quarter
Date for the most recent quarter end for which data is available on the Key Statistics page. This period is often abbreviated as "MRQ."

Profit Margin
Formula: (Net Income / Total Revenues) * 100
Also known as Return on Sales, this value is the Net Income After Taxes for the trailing 12 months divided by Total Revenue for the same period and is
expressed as a percentage.

Operating Margin
Formula: [(Total Revenues – Total Operating Costs) / (Total Revenues)] * 100
This item represents the difference between the Total Revenues and the Total Operating Costs divided by Total Revenues, and is expressed as a percentage.
Total Operating Costs consist of: (a) Cost of Goods Sold (b) Total (c) Selling, General & Administrative Expenses (d) Total R & D Expenses (e) Depreciation &
Amortization and (f) Total Other Operating Expenses, Total. A ratio used to measure a company's operating efficiency.

Return on Assets
Formula: Earnings from Continuing Operations / Average Total Equity
This ratio shows percentage of Returns to Total Assets of the company. This is a useful measure in analyzing how well a company uses its assets to produce
earnings.

Return on Equity
Formula: [(Earnings from Continuing Operations) / Total Common Equity] * 100
This is a measure of the return on money provided by the firms' owners. This ratio represents Earnings from Continuing Operations divided by average Total
Equity and is expressed as a percentage.

Revenue
The amount of money generated by a company's business activities. Also known as Sales.

Revenue (Sales) Per Share
Formula: Total Revenues / Weighted Average Shares Outstanding

Quarterly Revenue Growth
Formula: [(Qtrly Total Revenues – Qtrly Total Revenues (yr ago)) / Qtrly Total Revenues (yr ago)] * 100
The growth of Quarterly Total Revenues from the same quarter a year ago.

Gross Profit
Formula: Total Revenues - Cost of Revenues
This item represents Total Revenues minus Cost Of Goods Sold, Total.

EBITDA
The accounting acronym EBITDA stands for "Earnings Before Interest, Tax, Depreciation, and Amortization."

Net Income Avl to Common
Formula: Net Income - Preferred Dividend and Other Adjustments - Earnings Of Discontinued Operations - Extraordinary Item & Accounting Change
This ratio shows percentage of Net Income to Common Excluding Extra Items less Earnings Of Discontinued Operations to Total Revenues. This is the dollar
amount accruing to common shareholders for dividends and retained earnings.

Diluted EPS
Formula: (Net Income - Preferred Dividend and Other Adjustments)/ Weighted Average Diluted Shares Outstanding
This is the Adjusted Income Available to Common Stockholders (based on Generally Accepted Accounting Principles, GAAP) for the trailing 12 months divided
by the trailing 12 month weighted average shares outstanding. Diluted EPS uses diluted weighted average shares in the calculation, or the weighted average
shares assuming all convertible securities are exercised.

Quarterly Earnings Growth
Formula: [(Qtrly Net Income – Qtrly Net Income (yr ago)) / Qtrly Net Income (yr ago)] * 100
The growth of Quarterly Net Income from the same quarter a year ago.

Total Cash
The Total Cash and Short-term Investments on the balance sheet as of the most recent quarter.

Total Cash Per Share
This is the Total Cash plus Short Term Investments divided by the Shares Outstanding at the end of the most recent fiscal quarter.

Total Debt
Formula: Short Term Borrowings + Current Portion of Long Term Debt + Current Portion of Capital Lease + Long Term Debt + Long Term Capital Lease +
Finance Division Debt Current + Finance Division Debt Non Current
The Total Debt on the balance sheet as of the most recent quarter.

Total Debt / Total Equity
Formula: [(Long-term Debt + Capital Leases + Finance Division Debt Non-Current + Short-term Borrowings + Current Portion of Long-term Debt + Current Portion
of Capital Lease Obligation + Finance Division Debt Current) / (Total Common Equity + Total Preferred Equity)] * 100
This ratio is Total Debt for the most recent fiscal quarter divided by Total Shareholder Equity for the same period.

Current Ratio
Formula: Total Current Assets / Total Current Liabilities
This is the ratio of Total Current Assets for the most recent quarter divided by Total Current Liabilities for the same period.

Book Value Per Share
Formula: Total Common Equity / Total Common Shares Outstanding
This is defined as the Common Shareholder's Equity divided by the Shares Outstanding at the end of the most recent fiscal quarter.

Operating Cash Flow
Formula: Net Income + Depreciation and Amortization, Total + Other Amortization + Other Non-Cash Items, Total + Change in Working Capital
Net cash used or generated in operating activities during the stated period of time. It reflects net impact of all operating activity transactions on the cash flow of
the entity. This GAAP figure is taken directly from the company's Cash Flow Statement and might include significant non-recurring items.

Levered Free Cash Flow
Formula: (EBIT + Interest Expense) * (1 – Tax Rate) + Depreciation & Amort., Total + Other Amortization + Capital Expenditure + Sale (Purchase) of Intangible
assets - Change in Net Working Capital + Pref. Dividends Paid + Total Debt Repaid + Total Debt Issued + Repurchase of Preferred + Issuance of Preferred Stock
Where: Tax Rate = 0.375
This figure is a normalized item that excludes non-recurring items and also takes into consideration cash inflows from financing activities such as debt or
preferred stock issuances.

Trading Information

Beta
The Beta used is Beta of Equity. Beta is the monthly price change of a particular company relative to the monthly price change of the S&P500. The time
period for Beta is 3 years (36 months) when available.

Price
This is the Closing or Last Bid Price. It is also referred to as the Current Price. For NYSE, AMEX, and Nasdaq traded companies, the Price is the previous
Friday's closing price. For companies traded on the National Quotation Bureau's "Pink Sheets," and OTC bulletin boards, it is the bid price obtained at the time
the report is updated.

52-Week Change
The percentage change in price from 52 weeks ago.

S&P500 52-Week Change
The S&P 500 Index's percentage change in price from 52 weeks ago.

52-Week High
This price is the highest Price the stock traded at in the last 12 months. This could be an intraday high.

52-Week Low
This price is the lowest Price the stock traded at in the last 12 months. This could be an intraday low.

50-Day Moving Average
A simple moving average that is calculated by dividing the sum of the closing prices in the last 50 trading days by 50.

200-Day Moving Average
A simple moving average that is calculated by dividing the sum of the closing prices in the last 200 trading days by 200.

Average Volume (3 month)
This is the average daily trading volume during the last 3 months.

Average Volume (10 day)
This is the average daily trading volume during the last 10 days.

Shares Outstanding
This is the number of shares of common stock currently outstanding—the number of shares issued minus the shares held in treasury. This field reflects all
offerings and acquisitions for stock made after the end of the previous fiscal period.

Float
This is the number of freely traded shares in the hands of the public. Float is calculated as Shares Outstanding minus Shares Owned by Insiders, 5% Owners,
and Rule 144 Shares.

Shares Short
This is the number of shares currently borrowed by investors for sale, but not yet returned to the owner (lender).

Short Ratio
This represents the number of days it would take to cover the Short Interest if trading continued at the average daily volume for the month. It is calculated as
the Short Interest for the Current Month divided by the Average Daily Volume.

Short % of Float
Number of shares short divided by float.

Shares Short Prior Month
Shares Short in the prior month. See Shares Short.

Forward Annual Dividend Rate
The annualized amount of dividends expected to be paid in the current fiscal year.

Forward Annual Dividend Yield
Formula: (Forward Annual Dividend Rate / Current Market Price) * 100

Trailing Annual Dividend Rate
The sum of all dividends paid out in the trailing 12-month period.

Trailing Annual Dividend Yield
Formula: (Trailing Annual Dividend Rate / Current Market Price) * 100

5-Year Average Dividend Yield
The average Forward Annual Dividend Yield in the past 5 years.

Payout Ratio
The ratio of Earnings paid out in Dividends, expressed as a percentage.

Dividend Date
The payment date for a declared dividend.

Ex-Dividend Date
The first day of trading when the seller, rather than the buyer, of a stock is entitled to the most recently announced dividend payment. The date set by the NYSE
(and generally followed on other U.S. exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is denoted by an x in
newspaper listings on that date.
Accredited Investor
Any person or institution deemed capable of understanding and affording the financial risks associated with the purchase of Restricted Securities. The Securities
and Exchange Commission ("SEC") recognizes the following entities/parties as being accredited:

Individuals
Any person who individually or jointly with their spouse has a net worth of at least $1 million.
Any person who has had income in excess of $200,000 for the immediately preceding two years and has an expectation of such income in the current year, or
any person and their spouse who has had a joint income in excess of $300,000 for such periods. Any director, officer or general partner of the Issuer.

Institutions
A financial institution such as bank, broker/dealer, insurance company or business development company.
A trust or business partnership, with assets in excess of $5 million, that wasn't formed for the purpose of acquiring the unregistered securities.
Any entity wholly owned by accredited investors.

American Depositary Receipt (ADR)
A receipt for shares of foreign-based companies that entitles the holder of an ADR to all dividends and capital gains related to the Issuer. ADRs allow U.S.
Investors to buy shares of foreign-based corporations' securities through U.S. stock markets and exchanges instead of having to buy shares through a
foreign-based companies' primary stock exchange.

Affiliate
A person or entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with an Issuer.

American Stock Exchange ("AMEX")
A national U.S. stock market exchange.

Blank Check Preferred Stock
Preferred Stock that has been authorized, but not yet issued, by an Issuer. The specific rights and preferences of the Preferred Stock being issued, including
liquidation preferences, dividend rates, and voting rights, are established by the board of directors during completion of an Equity Private Placement. Blank
Check Preferred Stock lets an Issuer's board structure and negotiate terms directly with Investors without additional stockholder authorization.

Bond (Debt: non-Convertible)
A certificate of indebtedness. The Issuer promises to pay the bondholder a specified amount of interest ("coupon") for a specified time period and to repay the
debt at the end of a specified period (the "maturity of the bond").
A secured bond is one that is backed by collateral that may be sold if the Issuer fails to pay interest and principal when they are due.
An unsecured bond (a "Debenture") is only backed by the full faith and credit of the Issuer.

Certificate of Incorporation (or Articles of Incorporation)
An Issuer's basic organizational document, filed with the Secretary of State in the state of incorporation. It includes the name, location, and purpose of a
company; the number, classification, rights, and preferences of an Issuer's capital stock; and voting authority of the directors with respect to related party
transactions and redemptions.

Common Stock
Common stock represents an ownership stake in the Issuer. Common stock is the most junior security that may be offered by an Issuer (i.e, holders of preferred
stock, subordinated debt, secured debt, and trade payables all get paid before common stockholders in the event of a liquidation of the Issuer). There can be
different classes or series of common stock with different rights, including voting or dividend differences.

Convertible Debt (Debt: Convertible)
Debt that can be converted into equity, usually at the option of the debt holder. Convertible Debt is similar to Convertible Preferred Stock, but it ranks senior to
Preferred Stock in the event of a liquidation of the company.

Convertible Preferred Stock (Preferred Stock: Convertible)
A form of Preferred Stock that grants an Investor the right (but not the obligation) to convert the Preferred Stock into the common stock of the Issuer.

Convertible Security (Other: Convertible)
Any security - other than Preferred Stock, Debt or a Warrant - that permits an Investor to acquire an ownership stake in the Issuer by converting the original
security, typically, into Common Stock (e.g., Trust Preferred Securities).

Corporate Insiders
Officers, director, or anyone individual owning 10% or more of the outstanding securities of an Issuer.

Covenants
Agreements made by an Issuer with specified Investors in relation to Equity Private Placements. Affirmative covenants detail positive actions that an Issuer
intends to perform. Negative covenants specify actions that an Issuer will not take without consent of such Investors. If an Issuer breaches a covenant, it is
considered to be in default, giving specified default rights to Investors.

Debenture
A type of Bond that is not collateralized by another asset of the Issuer. An indenture agreement sets forth the terms of the Bond.

Demand Registration Rights
An Investor's contractual right to demand that the Issuer file and get effective a Registration Statement for the securities issued in an Equity Private Placement
so that Investors may resell such securities to public.

Due Diligence
The research efforts of an Investor to evaluate a potential investment opportunity.

EDGAR
Electronic Data Gathering, Analysis and Retrieval. The SEC system for electronically handling documents from reporting Issuers (e.g, 10-Ks, 10-Qs, 8-Ks, etc.).

Exchangeable Debt
A Bond that gives the holder the right to exchange it for securities of a firm other than the Issuer of the original security.

Equity Line
An Equity Line financing structure allows an Issuer to "draw-down" on a pre-determined amount of capital committed to by an Investor during a specified time
period (typically 24 to 36 months). The Issuer "draws down" on the Equity Line by making periodic sales of its securities (typically Common Stock) to the Investors.


Equity Private Placement
A Private Placement of Equity or Equity-Linked Securities by an Issuer.

Equity and Equity-Linked Securities
Equity and Equity-Linked Securities are securities sold by an Issuer which provide either (i) a direct ownership stake via common stock or (ii) an ownership stake
based upon conversion or exercise of a security into the common stock of the Issuer. Common examples of Equity and Equity-Linked Securities are Common
Stock, Convertible Preferred Stock, Convertible Debt, Warrants, Prepaid Warrants, Preferred Stock (non-convertible) with Warrants, Debt (non-convertible) with
Warrants and Options.

FASB
Acronym for Financial Accounting Standards Board.

Follow-On Offering
The sale of Common Stock by an Issuer through a public offering after it is already a public company.

GAAP
Abbreviation for "Generally Accepted Accounting Principles." The FASB is the body that determines what accounting procedures are generally accepted.

Hedge Fund
Hedge funds are private investment partnerships among a number of Accredited Investors. Hedge funds are exempt from the regulations governing mutual funds.

Investor Legal Counsel Profile
Investor Legal Counsel Profiles provide comprehensive and detailed summaries on the historical Investor representation activity of a specific Legal Counsel.

Investors
Any Investment Fund or Investment Manager (see definitions below) that makes investments in Equity Private Placements.

Investment Fund
An Investment Fund is typically a private investment fund ("Hedge Fund") or mutual fund that makes investments in Equity Private Placements. Investment Funds
may be controlled by an Investment Manager. "Investment Fund" can also refer to any public/private corporate entity, Corporate Insiders, or individual
Accredited Investors that invest in Equity Private Placements.
Investment Fund Profile
Investment Fund Profiles provide comprehensive and detailed summaries on the historical investing activity of a specific Investment Fund.
An Investment Fund is typically a private investment fund ("Hedge Fund") or mutual fund that makes investments in Equity Private Placements.
However, for the purposes of Investment Fund Profiles, Investment Fund can also refer to any public/private corporate entity, Corporate Insiders, or individual
Accredited Investors that invest in Equity Private Placements.
Notes:
In the case of Corporate Insiders, Investment Fund Profiles are aggregated at the "Corporate Insider" level to denote the collective participation of corporate
insiders across all Equity Private Placements.
In the case of individual Accredited Investors, Investment Fund Profiles are aggregated at the "Individual Investor" level to denote the collective participation of
individual investors across all Equity Private Placements.
Relevant Investment Fund Profiles are automatically updated as each new placement is entered into the Equity Private Placement (EPP) DatabaseTM.

Investment Manager
An Investment Manager is an entity which controls/manages an Investment Fund. An Investment Manager typically controls/manages several Investment Funds.
"Investment Manager" can also refer to any public/private corporate entity, Corporate Insiders, or individual Accredited Investors that invest in Equity Private
Placements.
Investment Manager Profile
Investment Manager Profiles provide comprehensive and detailed summaries on the aggregate, historical investing activity of all of the Investment Funds
controlled by a specific Investment Manager.
Notes:
In the case of a corporate entity that invests in Equity Private Placements, such corporation is considered to be an Investment Manager (e.g., Microsoft)
In the case of Corporate Insiders, Investment Manager Profiles are aggregated at the "Corporate Insider" level to denote the collective participation of corporate
insiders across all Equity Private Placements.
In the case of individual Accredited Investors, Investment Manager Profiles are aggregated at the "Individual Investor" level to denote the collective
participation of individual investors across all Equity Private Placements.
Relevant Investment Manager Profiles are automatically updated as each new placement is entered into the Equity Private Placement (EPP) DatabaseTM.

Investing Public
All institutional and individual investors who buy and sell common shares of publicly-traded corporations through open market transactions.

Issuer
Any public corporation that has the authority to issue and distribute securities through Equity Private Placements. Issuers are required to describe material
financings (e.g., Equity Private Placements) through timely disclosure in any of the following documents filed with the SEC:
Form 8-K
The report that a publicly-held Issuer must file reporting on defined "material" events (e.g., Equity Private Placements) that might affects its financial situation or
the value of its assets or shares.
Form 10-Q
A comprehensive overview of the state of Issuer's business and financial health which must be filed with the SEC on a quarterly basis.
Form 10-K
A comprehensive overview of the state of an Issuer's business and financial health which must be filed with the SEC within 90 days of the company's fiscal
year-end.
Issuer Legal Counsel Profile
Issuer Legal Counsel Profiles provide comprehensive and detailed summaries on the historical Issuer representation activity of a specific Legal Counsel.
Issuer Profile
Issuer Profiles provide comprehensive and detailed summaries on the placement history of a specific Issuer.

Legal Counsel
Legal Counsel act as legal advisors during execution of an Equity Private Placements. Legal Counsel may represent an Issuer or Investor.

Market Capitalization (Equity)
The aggregate value of an Issuer's common shares as determined by the market. Equity Market Capitalization is calculated by multiplying the total number of
common shares outstanding by the current share price.

Maturity
The date on which the principal amount of a Bond, Convertible Debt, Preferred Stock, Convertible Preferred Stock or any other Convertible Security is to be
paid in full.

Mezzanine Financing
Financing that ranks above equity, but below debt in the capital structure of an Issuer.

NASD
The National Association of Securities Dealers is a self-regulating organization that is responsible for regulating its members. Most broker-dealers are members.
The NASD operates the NASDAQ stock markets.

NASDAQ
Abbreviation for National Association of Securities Dealers Automated Quotation System. The system is designed to facilitate over-the-counter stock trading.
NASDAQ Global Select Market (NASDAQ - GS)
A major national stock market that uses computers and telecommunications for trading securities. Newly created effective 7/3/06.
NASDAQ Global Market (NASDAQ - GM)
A major national stock market that uses computers and telecommunications for trading securities of compnaies that do not qualify for inclusion in the NASDAQ
Global Select. Renamed from NASDAQ National Market System (NASDAQ - NM) effective 7/3/06.
NASDAQ Captial Market (NASDAQ - CM)
NASDAQ market for the trading of securities of generally smaller, less-well capitalized companies that do not qualify for inclusion in the NASDAQ Global Market.
Renamed from NASDAQ SmallCap Market (NASDAQ - SC) effective 9/27/05.

New Issue
A security being offered to the public for the first time by an Issuer. New issues may be initial public offerings by private companies going public or additional
securities of Issuers that already public.

New York Stock Exchange (NYSE)
The oldest and largest national stock exchange. Commonly referred to as the "Big Board".

Options
An Investors' or Issuers' right (but not obligation) to buy (or sell) Equity and Equity-Linked Securities or require the other party to buy (or sell) Equity and
Equity-Linked Securities.

Over-the-Counter (OTC)
Also known as Pink Sheets. Companies that do not meet the minimum listing criteria for the OTC BB.

Over-the-Counter Bulletin Board (OTC BB)
Companies that do not meet the minimum listing criteria for the national stock exchanges or the NASDAQ stock market.


Placement Agent
A Placement Agent is any fiduciary agent that assists Issuers in executing Equity Private Placements or Registerd Direct Offerings (e.g., investment banks,
broker-dealers, financial advisors, etc.).
Placement Agent Profile
Placement Agent Profiles provide comprehensive and detailed summaries on the historical placement activity of a specific Placement Agent.

Placement Profile
Placement Profiles provide detailed summaries of Equity Private Placements, with varying Placement Status, based on publicly available information.
Important pricing elements of a transaction are highlighted in the form of a Term Sheet. In addition, relevant Investor, Placement Agent and Legal Counsel
information is provided.
Placement Status
Placement Status for Equity Private Placements:
Closed
Securities have been sold by Issuer and funds have been invested/paid by Investors.
Equity Lines are considered to be closed upon mutual execution of investment documentation by Issuer and Investor
144A Debt: Convertible transactions are considered to be closed on the settlement date as disclosed in a press release and/or SEC regulatory filing.
Definitive Agreement
Terms of private placement have been mutually agreed upon by Issuer and Investor and investment documents have been executed (awaiting closing).
Announced
Issuer has publicly and specifically disclosed the existence of ongoing private placement negotiations or efforts.
Intended
Issuer has publicly disclosed its intent to pursue an Equity Private Placement.
Postponed
Issuer has publicly disclosed that is has decided to postpone an intended/in-progress Equity Private Placement.
Cancelled
Issuer has publicly disclosed that it has cancelled an intended/in-progress Equity Private Placement.

Preferred Stock (Preferred Stock: non-Convertible)
A Preferred Stock is a type of capital stock that pays dividends at a set rate. Generally, dividend payments to preferred holders must be made before common
stock dividends can be paid. Preferred stocks usually do not have voting rights.

Primary Offering
The sale of securities by an Issuer, as distinct from a Secondary Offering in which the seller of securities is an entity other than the Issuer (e.g., Investors who had
made investments prior to an Issuer becoming a public company). In a Primary Offering, the Issuer receives the proceeds from the offering of securities.

Principal
The amount of money that is financed, borrowed, or invested.

Private Placement
A private placement is a private sale of Restricted Securities by an Issuer to a relatively small number of institutions and/or individuals. This private sale of
securities is executed under certain exemptions from the registration requirements of the Securities Act of 1933 (e.g., Regulation D, Regulation S, Rule 144A).
However, these securities are ineligible for resale into the public market until such time that either (i) a resale Registration Statement has been filed with the
SEC and declared effective or (ii) resale is permitted under Rule 144 without the need for an effective registration statement.

Prospectus
Under the Securities Act of 1933, an Issuer of securities must describe the securities issued by it to raise capital in a document called the prospectus. The
document must explain the terms, the planned use of the money, historical financial statements and other information that could help an investor decide
whether the investment is appropriate. A prospectus must be given to all buyers and potential buyers of the new issue.

Public Float
The number of common shares of an Issuer, or the market value of the number of shares, that are available for trading by the public. Shares held by Corporate
Insiders or affiliated companies are not included in the public float.

Qualified Institutional Buyer
An entity, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at
least $100 million in securities of Issuers that are not affiliated with the entity.

Registered Direct
A placement of Registered Securities by an Issuer to a limited number of Accredited Investors. The most common Registered Direct Placements involve a
placement of Equity and Equity-Linked Securities.

Registration Statement
Document filed with the SEC by an Issuer in order to comply with the registration requirements under the Securities Act of 1933 with regard to (i) offerings of
securities to the public and (ii) resale of such securities to the public by purchasers of Restricted Securities (e.g, Equity Private Placements). The most common
registration statements filed by Issuers regarding Equity Private Placements are Forms S-1, S-3, SB-1, and SB-2. Issuers must meet varying eligibility
requirements in order to use a specific registration statement. Registration statements must be declared effective by the SEC prior to resale of the securities
purchased in an Equity Private Placement. Alternatively, Investors may make resales of such securities to the public in accordance with Rule 144.

Regulation D
Regulation D is a series of six rules, rules 501-506, which describe three transactional exemptions from the registration requirements under the Securities Act of
1933 for sales of Equity and Equity-Linked Securities to U.S.-based Investors.

Regulation S
An exemption from the registration requirements under the Securities Act of 1933 for offshore sales of Equity and Equity-Linked Securities by U.S.-based Issuers.
These Equity and Equity-Linked Securities are treated as Restricted Securities under Rule 144 with respect to resale of such securities to the public.

Registered Securities
Securities acquired directly or indirectly from an Issuer, or from an affiliate of the Issuer, in a transaction or series of transactions under a valid and effective
Registration Statement. Such securities are freely tradeable and do not have any resale limitations.

Restricted Securities
Securities acquired directly or indirectly from an Issuer, or from an affiliate of the Issuer, in a transaction or series of transactions which do not involve a public
offering and are subject to resale limitations (e.g., Equity Private Placements).

Rule 144
SEC Rule 144 allows for the resale of Restricted Securities to the public in limited quantities. Rule 144 generally applies to Corporate Insiders and buyers of
Private Placement securities that were sold under exemptions from the SEC's registration statement requirements defined in the Securities Act of 1933. Under
Rule 144, Restricted Securities may be sold to the public by Corporate Insiders and buyers of Private Placements, prior to a two year holding period, without full
registration of such securities under specific conditions and limitations. After a two year holding period, resale of such securities by non-affiliates of the Issuer to
the public are unrestricted.

Rule 144A
Rule 144A applies to securities which are offered or sold by a seller (e.g., Qualified Institutional Buyer ("QIB")) only to another QIB or to a purchaser that the
seller and any entity acting on behalf of the seller reasonably believes is a QIB.

Secondary Offering
In contrast to a Primary Offering where the seller of securities is the Issuer, in a Secondary Offering the seller is any entity other than the Issuer. In a Secondary
Offering, the Issuer that originally issued the securities does not receive any proceeds.

Securities Act of 1933
An act of Congress which governs the issuance of New Issues of securities. It requires the registration of securities, disclosure of pertinent information relating to
new issues so that investors may make informed decisions. The oversight of this function is the responsibility of the Securities and Exchange Commission ("SEC").

Securities and Exchange Commission ("SEC")
The Securities and Exchange Commission is the federal agency created to administer various acts that constitute the federal securities laws.

Term Sheet
A summary of the key financial terms and conditions to be included in an agreement about a proposed Equity Private Placement. Such details would typically
include, amount of investment/financing, interest or dividend payments, value per share, agents, fees, conditions, closing dates, etc.

Treasury Stock
Common shares that have been repurchased by the Issuer. These common shares are included in the count of the number of shares issued but they are not
counted as shares outstanding. They may eventually be retired or they may be reissued by the company.

Warrants
A security issued by an Issuer entitling the holder to buy a certain number of shares of a specified security (typically Common Stock) at a specified price during a
specified time period. A Warrant may be issued separately or together with other Equity Private Placement securities (e.g., Convertible Preferred Stock)

Warrants (Prepaid)
A Warrant issued by an Issuer entitling the holder to exercise into a specified number of different securities, for no additional financial consideration, during a
specified time period.
Warren Buffett's, the "Oracle of Omaha", Top Picks.

1962, a 32-year-old Warren Buffett acquired a textile manufacturer, Berkshire Hathaway (NYSE: BRK-B). Buffett took total control of the company in 1965 and
replaced the company's management team. Buffett wasn't interested in the textile business itself, but was instead interested in the firm's cash. While the business
wasn't growing, Berkshire generated copious free cash flow and had plants, equipment and land that could be liquidated to provide even more cash.

With this in mind, Buffett dissolved his investment partnership and began instead to invest Berkshire's excess cash flows, offering his investors a stake in Berkshire
in lieu of their previous fund holdings. Investors who took that deal were amply rewarded. Buffett's returns have been nothing short of legendary, averaging nearly
+22% annually since he took over Berkshire's reins in 1965. $10,000 invested in Berkshire in the 1960s would be worth more than $36 million today against less
than $700,000 for the same sum invested in S&P 500. That's more than a +361,000% gain. Amazingly, out of the more than 40 years Buffett has been at the
helm of Berkshire, there has only been one year in which Berkshire's book value actually fell. And Berkshire stock has only underperformed the S&P 500 six times
in that timeframe. Buffett's long track record of success is unprecedented -- according to Forbes, Warren Buffett is among the richest men in the world with a
total net worth above $50 billion. But what's even more unique is that he is one of only a handful of names on that list to attain virtually his entire wealth by
investing in the stock market. Berkshire's performance is proof of the wisdom and value of Buffett's approach. Not surprisingly, dozens of books have been written
on the subject, probing virtually every aspect of the Oracle's life and all of his legendary investment decisions.

(FIRST) Buffett's Point of View

-- Easy-to-Understand Businesses
Buffett believes in limiting your investments to companies with businesses that can be easily understood and analyzed. After all, if you can't understand how a
business makes money, then how can you possibly gauge its financial performance or estimate its true value?. It's easier to forecast future results for companies
with straightforward and uncomplicated business models. Buffett likes to look into the future when he invests, searching for businesses that he feels will still look
solid at least 10 or 20 years down the road. If you can't fully explain a business and why you should own its shares in just a few, coherent paragraphs, then you
should walk away.

-- Low Debt Levels
His success stories like Coca-Cola (NYSE: KO), The Washington Post Co. (NYSE: WPO), Moody's (NYSE: MCO), etc, it is obvious that Buffett carefully examines
a company's balance sheet, and prefers to invest in those with relatively modest debt burdens. During the 1990s, investors ignored debt levels and focused
instead on growth metrics. However, to his credit Buffett has never wavered in his focus on debt. In his 1987 letter to shareholders, Buffett eloquently noted that:
"Good business or investment decisions will eventually produce quite satisfactory economic results with no aid from leverage." In the years since, adhering to
that policy has kept Berkshire shareholders out of trouble. When it comes to funding future growth, Buffett prefers companies that can meet their requirements
through internally generated cash, as opposed to raising capital by taking on debt or issuing more stock. Companies that can grow using only their existing cash
flows are more or less internally financed. In other words, these firm's aren't dependant on securing loans to stay in business. By contrast, companies with large
debt loads are usually reliant on external financing -- in most cases this means the capital markets -- to keep growing and operating. There are risks to these
external financing sources. We all know that conditions in the capital markets can shift on a dime. Back in 1999, for example, a tech company could get
showered with cash by simply listing its stock for public trading. However, by 2001 a bear market in technology stocks essentially closed that window. The same
can be said for the bond market -- interest rates rise and fall and bond investors' perception of risk sometimes changes overnight. Of course, a credit downgrade
can make it much more costly to secure financing, and higher interest payments tend to eat into profits. When measuring a company's reliance on debt, it's
usually helpful to begin by examining its debt-to-equity (D/E) ratio. D/E can be easily calculated by dividing a particular company's total debt load by its
shareholder's equity. Both of these key figures are located on the balance sheet. There's no hard-and-fast rule for evaluating this metric, but as a broad average
for non-financial companies, it's usually wise to look for firms with D/E ratios below 0.50 (50%).

-- High Profitability and Return-on-Equity
A piece of financial associated with Buffett is return-on-equity (ROE). The calculation of ROE is relatively simple, and can be found on all financial websites.
Simply divide a company's net income -- defined as total profits after interest, taxes, and depreciation -- by its shareholder equity. This ratio measures how much
profit a company produces relative to shareholders' investment in the firm. Earnings growth always comes at a price. That's where ROE comes in. This figure
tells us how efficiently a company is using the capital. Companies showing ROE of 15% or higher must be picked. ROE must be checked to know if has been
falling, rising, or stable over time. Also, if a company has a particularly strong year, then its net income figure can be inflated, which can cause ROE to be
exceptionally strong. Such one or two-year blips have a tendency to fade quickly once the business environment becomes less favorable. Therefore, it's always
important to examine ROE performance over a five or ten-year period. The second point to consider is the relationship between ROE and D/E. By taking on
additional debt, companies can effectively lower the amount of shareholder's equity they need to stay in business. By definition, this tends to inflate ROE.
Therefore, it's crucial to look for companies that have a high ROE and low D/E.

-- Proven Managerial Expertise
Not all of Buffett's investing criteria is objective. Buffett seeks out firms with highly competent management teams. When Buffett makes an investment, he
believes that he is buying a management team, as well as the business itself. In fact, when Berkshire makes an acquisition, the existing management team
usually remains in place after the deal is completed. Typically, this has often meant getting to know a management team on a personal level. A great example
of that is Clayton Homes, as detailed in Berkshire's 2003 annual report. In a letter addressed to Berkshire's shareholders, Buffett explained how he became
interested in and ultimately acquired Clayton Homes, a manufactured home builder. Buffett became aware of Clayton Homes in the 1990s when he bought the
distressed, junk-rated debt of Oakwood Homes, an investment that got wiped out when Oakwood declared bankruptcy. The problem with the manufactured home
industry, according to Buffett, is that overly generous consumer-lending practices often lead to a buildup of non-performing loans, and in severe cases, high
default rates can eventually lead to bankruptcy. Buffett was first attracted to Clayton because the company's management team was well known in the industry
for its conservative lending practices, which included larger down payment requirements and shorter-term loans. Ultimately, he contacted the company's CEO,
Kevin Clayton, and was impressed with the way he described the company's risk-management style. Buffett also attributed a great deal of his knowledge about
the company to a biography he read on Clayton Home's founder, Jim Clayton, the father of the CEO. Buffett prefers companies with capable, experienced, and
trustworthy management teams -- particularly if they have an economic stake in the business. A company is only as strong as its leaders, so ask yourself these
questions before investing: Do leaders candidly admit mistakes? Are the incentives of a company's managers aligned with the interests of shareholders? Does
the stock have relatively high insider ownership? Has the firm made rational decisions with its retained earnings? Is management committed to delivering
long-term shareholder value, or does it destroy value by employing tactics designed to meet arbitrary short-term earnings targets and appease Wall Street
analysts?. Financial results can change overnight, so it pays to also evaluate the leaders responsible for delivering those numbers.

-- Attractive Valuation and Measurable Margin of Safety
"The more vulnerable the business is...the larger margin of safety you'd need." W. Buffett. We all invest with one goal in mind: to buy a stock at one price, and
then later sell it at a higher price. Therefore, the price we pay should always be the first and most important consideration. The concepts of intrinsic value and
margin of safety form the core of what is considered value investing. Buffett's use of both intrinsic value and margin of safety were heavily influenced by the
teachings of mentor Benjamin Graham. As opposed to P/E ratios and other similar valuation tools, which only tell us how expensive one stock is relative to
another stock, intrinsic value attempts to capture the true worth of a company, and by extension, its share price. Of course, investors often take different
approaches when attempting to estimate a firm's intrinsic value. As a result, you'll often see wildly different assessments of what a particular stock is worth.
However, most estimates incorporate many of the same variables, including the value of a firm's real assets, its current and future earnings, and the value of
intangibles like brand names. Graham focused mainly on a company's current assets and book value -- the actual numbers that can be found on the balance
sheet. Buffett, however, tends to lend more credence to intangibles and potential growth in a business, and his analysis of intrinsic value focuses on key
fundamentals like revenues, assets, cash flow (see below), and projected growth. In other words, Buffett believes that a company's valuation is often driven by its
long-term earnings power. However, nobody can precisely project a company's future earnings exactly, so it is important to leave some room for error -- or a
margin of safety. In essence, the idea is to give yourself room to make mistakes when assessing intrinsic value. After all, if you overestimate the value of a
business, then you're likely to overpay for its stock. However, if you require a large margin of safety before making any investment, then you'll reduce the chances
of making a poor decision. For example, paying $45 for a stock with an intrinsic value of $50 might be okay if everything goes according to plan -- but what if
the company's growth rates began to miss the mark? By refusing to pay any more than say, $30 for that same stock, you would have substantial room for future
downward adjustments to intrinsic value. In other words, if the company's results stray off target or some unexpected problem pops up, dropping the intrinsic
value to $40, then the stock would still have $10 of upside potential. Graham would not invest in a stock unless it was trading at a minimum 25% margin of
safety. Likewise, Buffett looks for companies that are trading at deep discounts to his calculation of their intrinsic value.

-- Sustainable Economic Advantages
"The key to investing is ... determining the competitive advantage of any given company and, above all, the durability of that advantage." W. Buffett. It has
long been one of the most fundamental axioms of basic economics: success invites competition. Regardless of the industry, any company that finds a way to
earn outsized profits will sooner or later attract competition. While no company is immune, some are less susceptible to the threat of competition than others.
Those with well-developed economic advantages in place are much more likely to withstand an attack from competitors. Think of a medieval castle surrounded
by a moat full of water. The wider the moat, the more difficult it is for invaders to successfully attack and conquer the castle. So, how does this concept apply to
the financial markets? It's simple -- companies that have wide moats are better insulated from competitive threats and fluctuations in the business cycle.
Because Buffett is always thinking down the road, this concept is central to his investment philosophy. Some economic moats are easily spotted. For example,
stringent SEC regulations and oversight have long thwarted new companies trying to enter the credit ratings business, and that barrier to entry has dug a wide
economic moat for established players like Moody's (NYSE: MCO). A strong brand name would be another example. Coca-Cola (NYSE: KO) is one of the most
widely recognized names in the world, and that valuable brand gives the firm significant pricing power, as millions of consumers are willing to pay premium
prices for Coca-Cola beverages. Not surprisingly, both Moody's and Coca-Cola are long-time Berkshire holdings. However, there are many other competitive
advantages that are not easily recognized. For instance, a powerful retailer might have tremendous bargaining power over suppliers, and thus be able to
negotiate favorable purchasing terms -- a firm like Wal-Mart (NYSE: WMT) springs to mind here. The network effect is another intangible, but very real
competitive advantage. Just think of online auction giant eBay (Nasdaq: EBAY). Millions use eBay to sell items because of the large number of potential buyers
the site reaches. Meanwhile, millions of buyers shop on eBay because of the high number of sellers offering a variety of products. As the site's membership
continues to grow, the benefit to both buyers and sellers grows as well -- further strengthening the company's position in the market.

-- Consistent Free Cash Flow and Owner Earnings.
"Calculate owner earnings to get a true reflection of value." W. Buffett. Due to the nature of accrual accounting, a company's net income often bears little
resemblance to its true net cash profits in any given period. Therefore, it is usually a good idea to also keep track of free cash flow (FCF) -- or operating cash
flows less capital expenditures. Free cash flow measures the cash available to shareholders after a company has paid all of its bills in full. Buffett relies heavily
on a similar metric that he dubs "owner earnings." One way to gauge a firm's cash flow production is to examine its free cash flow yield. This is calculated by
dividing free cash flow by market capitalization, or the inverse of the Price/FCF ratio. A firm with a free cash flow yield of 10%, for example, generates 10% of its
total market value in cash each year. That cash, in turn, can be used to pay dividends or fund share buybacks -- items that enhance shareholder returns. Buffett
always looks for companies that have a proven ability to generate healthy, consistent free cash flows over the long-haul.

(SECOND) How You Can Profit from Buffett's Teachings

The most obvious method is to buy shares directly in Berkshire Hathaway itself. Berkshire is an unusual entity. Since Buffett took effective control of the holding
company in 1965, he has never split the stock or declared a dividend, believing that any excess earnings should be held for reinvestment. The other thing to
remember about Berkshire is that the investment side of the firm's business is only part of the story. Berkshire is also one of the world's largest insurance
companies. Keep in mind that insurance firms make money in two ways: underwriting income and investment income.

On the underwriting side, Berkshire is very profitable. The company's GEICO subsidiary focuses on insuring low-risk drivers at favorable rates. That's a solid niche
business to be in -- it's easier to model the claim payouts necessary to cover safer drivers. Meanwhile, the company's reinsurance unit (reinsurance is the business
of insuring other insurance companies as a means to spread risk) is one of the largest and most profitable players in the industry.

While underwriting profits are certainly desirable, Berkshire's insurance operations come with an added benefit -- they feed Buffett a large pile of cash to invest.
Specifically, after the firm's insurance units take in premiums, Buffett is then free to invest these funds until they have to be paid out as claims. This cash, called
the float, forms the core of what Buffett invests for Berkshire. Of course, all insurance companies invest their float in stocks and bonds. However, when it comes to
Berkshire, you're buying the investment savvy of Warren Buffett as part of the mix.

There's also another unique way for individual investors to invest directly in Buffett's philosophy, the Wisdom Fund (WSDVX). This mutual fund's stated goal is to
mimic the investments made by Berkshire Hathaway, and its top holdings include Coca-Cola, Wells Fargo, American Express and Johnson & Johnson -- mirroring
Buffett's long-time core positions. Keep in mind, though, that the fund's returns may differ from those of Berkshire, as Buffett also has stakes in many private
businesses, as well as foreign securities. Nevertheless, the fund is still a quick and easy way to follow in Buffett's footsteps.

Applying Buffett's Teachings
Investing in Berkshire, the Wisdom Fund, or just picking up stocks that are traditional Buffett favorites are all good ways to cash in on Buffett's timeless value
philosophy. However, the best idea of all is to learn from Buffett's investments and try to adapt his techniques to your own investment strategy.

Regardless of your particular investment strategy, Buffett would advise a long-term, buy-and-hold perspective. He also believes that diversification is for
beginners only, as more experienced investors are better off sticking to their best ideas than spreading their assets too thin. Look for mature, well-run companies
with good cash flow visibility, high returns on capital and sustainable competitive advantages. And when you find them, resist the urge to get caught up in
day-to-day fluctuations.

With all this in mind, we spent countless hours scouring the market for a few stocks that we believe fit Buffett's criteria. None of these picks are currently in
Berkshire's portfolio. However, for a variety of reasons we believe they best exemplify the spirit of Buffett's philosophy.

Three quality Buffett-like investments . . .

Automatic Data Processing (NYSE: ADP)
ADP is one of the world's largest payroll processors, with an established base of 585,000 clients representing roughly 35 million workers around the globe. The
firm also provides a full suite of related business services, ranging from background screening to benefits administration, as well as inventory management
systems and support for more than 25,000 automobile dealers. Every day, millions of people receive their wages, either via paycheck or direct deposit, and few
of us ever stop to think about how that money was transferred from an employers' account to our own. However, the process can be quite complex, particularly
for larger organizations. Time sheets may need to be validated, payroll taxes have to be calculated, and deductions for health care premiums and retirement
account contributions must be withheld. Determining the final total and making sure that employees are paid promptly and accurately can be an expensive and
time-consuming undertaking. That's where ADP comes in. As a trusted leader in the field, ADP handles these outsourced operations for thousands of employers
around the world -- reducing expenses, eliminating bookkeeping headaches, and giving companies more time to do whatever it is that they do best. Few rivals
can match the comprehensive platform ADP has built -- the firm now distributes paychecks to one out of every six private sector workers in the U.S. And once
those companies have been freed of the payroll burden, many of them turn to ADP for other services, such as employee background screens, workers
compensation coverage, and 401(k) plans -- everything from "hire to retire." Integrating payroll processing with retirement plans and other human resources
functions can yield considerable cost savings, and ADP has become proficient at cross-selling new products and services to existing clients. At the same time, a
90% customer retention rate is a testament to the firm's expertise, efficiency, and commitment to customer service. With a well-respected brand name and a
global platform that would be incredibly difficult and expensive to replicate, ADP's core operations are protected by a wide economic moat. As is often the
case, this moat is invisible to the eye, but its impact is reflected in the firm's lofty operating margins, which currently stand at 20% -- well above the industry
average. Though unemployment ebbs and flows, favorable demographics (population growth, longer life expectancy, etc) tend to expand the overall size of the
labor pool over time. ADP has benefited nicely from this trend, at one point racking up 41 consecutive years of double-digit earnings growth. Though that
impressive streak came to an end when the events of September 11th, 2001 took a heavy toll on the economy, ADP is still a model of consistency, and analysts
expect the firm to deliver healthy profit growth of +14% per year over the next five years.

Diageo (NYSE: DEO)
Brewing king Anheuser-Busch (NYSE: BUD) is currently one of Buffett's top holdings, and it's not a stretch to assume that he might also find many favorable traits
in one of the firm's rivals from across the pond -- the world's largest liquor distributor, Diageo. Diageo produces, packages, and distributes a wide range of
premium products in more than 180 markets around the world. Beer remains on top as the nation's drink of choice. However, the wine and spirits groups have
closed the gap markedly in recent years, and they now sit close behind. Around the country, many drinkers, particularly the trend-conscious younger crowd, have
been increasingly ordering a glass of wine or a splashy cocktail over a bottle of beer. And while per-capita beer consumption has been flat over the past several
years, wineries and liquor distillers have seen a significant uptick in their business. Many of the world's most popular brands fall under the Diageo umbrella,
including: Crown Royal, Guinness Stout, Johnny Walker, Smirnoff, Captain Morgan, Jose Cuervo, and Tanqueray. And millions of consumers have been
migrating to high-end premium brands, playing right into Diageo's strength. Thanks to several waves of global consolidation, the total number of alcohol
distributors has declined sharply over the past couple decades, and Diageo is an imposing force in the industry. And with its size and scope, Diageo is able to
leverage its success into new markets. For example, its international market segment (including Latin America, Africa, and the Middle East) is seeing
double-digit sales growth -- allowing the company to continue growing despite already universal popularity in most developed markets. Along with a bright
sales picture, Diageo also enjoys powerful economies of scale, intoxicating net profit margins of around 20%, and very low capital requirements. Last year, the
company's capital expenditures ($549 million) only amounted to about 3.5% of total sales ($16 billion). As a result, DEO is able to generate barrels of annual
free cash flow -- much of which it uses to fund a healthy annual dividend payment. In all, Diageo is a classic wide-moat firm whose products are largely
insulated from cyclical slowdowns or economic turbulence -- and is still within reach of value investors.

NYSE Euronext (NYSE: NYX)
The New York Stock Exchange is the world's largest and most liquid stock exchange, with approximately 3,300 listed companies valued at more than $25
trillion. In exchange for "superior services and outstanding market quality and visibility," annual listing fees on the "Big Board" can reach as much as $500,000.
Most of the nation's older blue-chip companies (and a number of foreign standouts) trade on the venerable NYSE floor, while flashier high-tech firms typically
take up residence in the Nasdaq. Over the past 15 years, global trading volume has been growing at a healthy +25% annual clip, and that trend should remain
in place for years to come. Growing populations, reduced trading costs, and technological innovations (like online financial information and research) have all
helped bring stock ownership to the masses. In 1983, just one-fifth of all U.S. households owned stocks. Today, that percentage has grown to one-half, and tens
of thousands of people join the ranks of new investors every year. Better still, regardless of whether investors' picks make or lose money, the NYSE receives a
small cut from every transaction. Like many of its rivals, the NYSE has looked to secure a major acquisition, and the company found its prize with Euronext (the
union of exchanges in Paris, Brussels and Amsterdam) -- the second largest stock/futures exchange in all of Europe. The move will benefit shareholders for a
number of reasons. Cost savings from the transatlantic merger are expected to reach $275 million per year, which could pave the way for the firm's already lofty
operating margins to expand well beyond the 50% mark. Second, the acquisition will dramatically boost transaction volume and allow the company to
capitalize on its scaleable business model. Finally, Euronext will spice up the NYSE's product offerings by adding futures contracts to the mix. Futures volume is
not only growing rapidly, but it also tends to be far less commodity-like than equity trading -- offering greater pricing power. This is a business where size matters,
not only in terms of liquidity (investors are drawn to liquid exchanges where prices are efficient and instantly adjust to changes in supply and demand), but also
because of economies of scale. As the largest and most liquid exchange in the world, the New York Stock Exchange benefits from a strong "network effect." At
the same time, companies want to list on an exchange where they have the highest visibility, which gives the NYSE's listing business a wide economic moat.
NYSE has many of the hallmarks that Buffett looks for: scalability, hefty operating margins, significant barriers to entry, and (unless people suddenly stop
investing in stocks, options, and futures) robust demand and very little threat of obsolescence. With its infrastructure already in place, any incremental revenues
should flow largely to the bottom line, pushing shares of this venerable firm forward in the years ahead.

(THIRD) What is Buffett Buying Right Now?

Over the past few decades, Buffett has amassed a fortune by investing in some of the world's greatest companies, including Coca-Cola and Procter & Gamble.
But if you really want to profit form Buffett's investing genius, then might be interested in what he's buying RIGHT NOW. Here's a closer look at a few of Buffett's
more recent purchases . . .

ConocoPhillips (NYSE: COP) -- Warren Buffett has been pilling up shares of this dividend-paying oil company. He recently bought $1.2 billion worth of the
company's stock. This makes Berkshire Hathaway the largest holder of Conoco shares, with 5.6% of shares outstanding, a holding valued at around $4 billion.

CarMax (NYSE: KMX) -- Buffett recently invested $500 million into this promising retail stock, buying 21 million shares.

General Electric Co. (NYSE: GE) -- In an unexpected move, Buffett bought $3 billion worth of GE preferred shares. These shares will provide Buffett with an
annual dividend yield of 10%. The legendary investor bought into this blue-chip company on very favorable terms in a deal The Wall Street Journal "vintage
Buffett."

Goldman Sachs Group (NYSE: GS) -- Berkshire Hathaway just bought $5 billion in perpetual preferred shares of Goldman and received warrants to buy $5 billion
more at $115 each any time during the next five years. (A warrant allows its holder the right to buy shares during a certain time for a set price.) Goldman has
taken only $4.9 billion in subprime writedowns so far, a tiny fraction of the $29.1 billion recorded by Merrill Lynch (NYSE: MER) or the $37.7 billion incurred by
UBS (NYSE: UBS). It also hasn't posted a quarterly loss since its IPO in 1999.

Sanofi-Aventis SA (NYSE: SNY) -- Buffett recently upped his stake by +8% in this French pharmaceutical company and currently holds a total of 3.9 million
shares. Soon after Buffett reported his additional purchase, SNY announced it would be replace its CEO with experienced veteran Chris Viehbacher, executive
director and president at GlaxoSmithKline (NYSE: GSK).

NRG Energy (NYSE: NRG) -- NRG is the newest addition to the Berkshire Hathaway portfolio. Buffett started by picking up a little more than 3.2 million shares of
the wholesale power generation company, and has been adding shares to his holdings since then. At last count, Buffett's stake in NRG was up to 5 million
shares. While NRG is the only utility in the portfolio, Berkshire itself became one of the largest utility companies in the U.S after it acquired MidAmerican Energy
and PacifiCorp.

Burlington Northern Santa Fe (NYSE: BNI) -- Burlington Northern boasts monopoly control over some of the most valuable railroad lines in the U.S. Buffett has
already invested over $5 billion in BNI, and he's buying even more shares, bringing his total stake in the company up to nearly 20%.

UnitedHealth (NYSE: UNH) -- UnitedHealth offers health insurance products as well as services related to employer-managed healthcare plans. Berkshire's stake
in UnitedHealth is relatively small at less than 0.5% of the company's outstanding stock. But Berkshire has been buying UNH lately, recently adding 1.2 million
shares to its portfolio.

POSCO (NYSE: PKX) -- It's also easy to see why Buffett might admire a company like POSCO, the world's third-largest steelmaker. This undervalued market
leader has a dominant stranglehold on the South Korean steel market, and it's also fueling the economic boom in China. In mid-2007, we learned that
Berkshire had shelled out $572 million to acquire a 4% stake in PKX.

US Bancorp (NYSE: USB) -- Berkshire Hathaway has increased its stake in this bank by 45.6 million shares since the end of 2006 - making it one of the biggest
share position buildups Buffett has ever amassed. US Bancorp has everything Buffett loves, and it yields just over 5%.

Ingersoll-Rand (NYSE: IR) -- This is a classic Buffett value play: he has bought a business he would be thrilled to hold at a rock bottom price. This $12 billion
maker of climate-control systems, industrial equipment and security technology is trading at just 3.4 times earnings. But with a backlog of orders worth a billion
dollars its prospects look good.

(FOURTH) What is Buffett Selling?

Anheuser-Busch (NYSE: BUD) -- Buffett recently sold 20 million shares of the iconic brewer. He also helped arrange its sale to Belgium's InBev in a $52 billion
deal.
Discount Rate (Federal Reserve rate)
Interest rate at which the Federal Reserve lends money to commercial banks
Federal Reserve
System of federal banks, charged with regulating the US money supply, mainly by buying and selling US securities; and setting the discount interest rate. In
particular, the Fed is known for watching for threatened inflation, and fighting it off by raising the discount rate and decreasing the money supply.
Discount Rate (present value)
Term for the annual growth rate of an investment, used when a future value is assumed and you are trying to find the required present value. Also called the
internal rate of return, or CAGR for Compound Annual Growth Rate.
Compound Annual Growth Rate (CAGR)
Interest rate at which a given present value would "grow" to a given future value in a given amount of time. The formula is CAGR = (FV/PV)1/n - 1 where FV
is the future value, PV is the present value, and n is the number of years. See the interactive graph for an explanation of the formula and some examples, or the
CAGR calculator.
Distribution
Withdrawal from an investment. In particular, distribution is used to refer to withdrawals from a tax-sheltered account like an IRA or annuity, which often have IRS
regulations about when you can, can't, or must make withdrawals without incurring a penalty.
Dividend Discount Model
Valuation model popularized by John Burr Williams in the 1930s, holding that the value of a share of common stock is equal to the present value of all of its
future dividends. This model does apply to "growth" companies not yet paying dividends, but only theoretically. The preferred model today is that stock is worth
the present value of its future earnings (or more accurately, of its future free cash flows).
Dividend Discount Model
The dividend discount model is a more conservative variation of discounted cash flows, that says a share of stock is worth the present value of its future
dividends, rather than its earnings. This model was popularized by John Burr Williams in The Theory of Investment Value. Williams wrote his book in the 1930s,
when people were trying to establish a science of investing after getting burned by the irrational exuberance and accounting tricks of the previous decade. (Plus
ca change, Jack.) Williams decided that reported earnings were way too nebulous to be trusted, like buying "bees for their buzz" instead of their honey, and that
the only return you could really believe in was an actual check in the mail: ... a stock is worth the present value of all the dividends ever to be paid upon it, no
more, no less... Present earnings, outlook, financial condition, and capitalization should bear upon the price of a stock only as they assist buyers and sellers in
estimating future dividends. Short version: you buy "a stock, by heck, for her dividends."

If you'd like to try this method out, you can use the regular calculator, substituting dividends for earnings. (Find Dividend >>>> Ticker:
(You presumably use a lower discount rate to reflect lower risk, since a dividend is more of a sure thing than reported earnings; the only guidance Williams gives
here is that you use your desired rate of return as the discount rate.) You can also see the dividend discount formula - again, think "dividends" when the page
says "earnings".

The dividend discount model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. But in
theory it applies to all cases, since even retained earnings should eventually turn into dividends. That's because once a company reaches its "mature" stage it
won't need to reinvest in its growth, so management can begin distributing cash to the shareholders. (Plan "B" would be for the CEO to pursue some insane
acquisition, just to gratify his bloated ego.) As Williams puts it,

If earnings not paid out in dividends are all successfully reinvested... then these earnings should produce dividends later; if not, then they are money lost.... In
short, a stock is worth only what you can get out of it.

Dividend Taxes
Williams mentions that the "rich men" of his day were starting to prefer dividends over capital gains, due to some recent changes in the tax code.
The Theory of Investment Value
Fast-forward a few generations... and in May 2003 the tax rate on dividends was lowered to match that on long term capital gains. Whether or not any rich men
were involved, the change is logical in the sense that companies that ought to be paying dividends will no longer have a disincentive for doing so out of
concerns for the tax consequences to their shareholders. But one thing that probably won't ever happen is setting the dividend tax even lower than the long term
capital gains tax, because doing so would disadvantage the stock of growing companies that really can't pay dividends yet - what would it mean for our
economic growth if we made it harder for "growth" companies to raise capital?
Stock Valuation based on Earnings
Stock valuation based on earnings starts out with one giant logical leap: you assume that each dollar of earnings per share of a company is really worth one
actual dollar of income to you as a stockholder. This is theoretically because you expect the company to use that dollar in a beneficial way: for example, they
could use it to pay you a dividend; or they could invest it in their own growth, which would cause future earnings to be even greater. You also generally assume
that the company will go through several distinct phases, starting with a "growth" phase where earnings are increasing at a predictable rate, followed by a
"mature" phase where earnings level off to a constant level.

To find the value of a stock, you need to calculate all of these future earnings (out to infinity!), and then use your own desired rate of return as a discount rate to
find their present value. The infinite sum of these present values is the fair market value of the stock; or more accurately, it's the maximum price you should be
willing to pay.

(The current fair market value is equal to the sum of the heights of all of the green bars, which are the present values of the corresponding blue bars.) (See more
detail.)

To get the formula, we'll define some variables:

E = this year's Earnings per Share
G = growth rate of earnings (written as a decimal)
N = number of years earnings will grow
We're assuming that earnings will start to grow for N years, and then level off:

Year Earnings
1 E(1 + G)
2 E(1 + G)2
N E(1 + G)N
N + 1 E(1 + G)N
N + 2 E(1 + G)N

Now we'll write R for our desired rate of return, and use it to find the present values of all of these earnings:

Year Present Value of Earnings
1 E(1 + G)/(1 + R)
2 E(1 + G)2/(1 + R)2
N E(1 + G)N/(1 + R)N
N + 1 E(1 + G)N/(1 + R)N+1
N + 2 E(1 + G)N/(1 + R)N+2

What we've got here is two geometric series; one going from 1 to N, and the other going from N + 1 to infinity. The result is basically too ugly to bother writing
out; it's more sensible just to use the formula for the geometric series in a spreadsheet or computer program. When people do write it out, they usually write it this
way:

P = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)
where E2 is the earnings in year 2 (or whatever) and Q is the so-called "discount factor" 1/(1 + R).

Zero-Growth Case
One special case is actually interesting to write out though. If you assume that the stock is already in the "mature", zero-growth years -- ie, that N is zero -- the
geometric series formula will simplify to:

P = E / R or, equivalently,

P / E = 1 / R
So if you take a desired return of 11%, you find that the theoretical "fair" P/E ratio of the zero-growth stock is 1/.11 = 9.09, which sounds reasonable.

Constant-Growth Case
A second special case that people use is the "constant growth forever" case, meaning N is infinity. The formula in this case simplifies to

P = E1 / (R - G)
where E1 is earnings over the next 12 months.

This approach can be dangerous. Constant growth forever means the company is going to get infinitely big, which is a hard concept to fit into a common sense
understanding of valuation. The formula will give you a number as long as the growth rate G is less than the discount rate R; but you can force it to give you a
ridiculously huge number if you make G very close to R. This graph won't let you try that - the blue bars could blow through the top of your screen and hurt
somebody - but you can see it happen in the discounted cash flows calculator in the stock valuation article.
EBIT
Earnings Before Interest and Taxes; intended to be a measure of the amount of cash generated by a company's operations
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization; intended to be a measure of the amount of cash generated by a company's operations (but
leaving out the costs of financing and taxes - the "I" and the "T"). The danger with EBITDA is that if the "D" and "A" represent a "using up" of an asset that will
have to be replaced in the future, then they really are operations-related expenses, making EBITDA too liberal a number.
EVA
Economic Value Added, a measure of the superiority of the return a company is able to realize on invested capital above the baseline return expected by the
investment community. The formula is EVA = NOPAT - ( C x Kc )
where C is the amount of capital a company plans to invest in a project, and Kc is the cost of capital, i.e. the return rate expected by investors. Positive EVA
means the project will add value for shareholders; negative EVA means they would be better off if management just gave them the money as a dividend. EVA is
analogous to earnings; but where earnings expenses debt financing only, the C x Kc term in EVA is expensing the cost of all capital, equity as well as debt.
NOPAT
Net Operating Profit After Taxes. The formula is NOPAT = operating income x (1 - Tax Rate)
NOPAT is a profitability measure that omits the cost of debt financing (i.e. it omits interest payments, along with their associated tax break). NOPAT is primarily
used in the calculation of EVA.
Earnings
Total income minus total expenses; synonymous with profit.
Actually, the terminology is usually more precise than this. "Net income" is used for after-tax profit before paying dividends; this is the number that's carried to
the top of the cash flow statement. What's left over after paying dividends is called "earnings available to common shareholders"; this is the number used to
calculate earnings per share and the P/E ratio. All of these numbers are shown on the income statement.
Earnings Statement is Synonym for income statement
Earnings Yield
The ratio of a company's annual earnings per share to its stock price; the reciprocal of the P/E ratio. The earnings yield is an estimate of the inflation-adjusted
growth you can reasonably expect from a stock investment; in a normal market it should be at least equal to the T-Bill rate, minus the inflation rate, plus a risk
premium of about 3 or 4 percent. Very low earnings yields are a warning sign of a bubble.
P/E Ratio
The ratio of a stock price to its company's annual earnings per share.
Price to Earnings Ratio
Although discounted cash flows is the correct way to value a company, people naturally like to use simpler rules of thumb. The P/E ratio is the most popular
because it's easy to understand. If you buy stock at a P/E ratio of 15, say, then it will take 15 years for the company's earnings to add up to your original
purchase price - 15 years to "pay you back". That's assuming that the company is already in its "mature" stage, where earnings are constant.

Let's make that last paragraph a little more accurate. If you actually use the discounted cash flows formula on a zero growth company, you find that its fair P/E
ratio equals 1/R, where R is the discount rate. So, using a discount rate of 11%, you find that the fair P/E for a mature company is 9.09.

Of course, you'd be willing to pay a higher P/E ratio if earnings were growing - the payback time would be quicker. And you'd want to pay less if future earnings
looked risky to you for some reason.

This calculator lets you find the relationship between growth rate and the fair P/E ratio. (It's the same calculator as before, but rearranged to express the answer
as a P/E ratio rather than a share price.)

Growth Assumptions

Earnings are expected to grow at a rate of % annually for the next years, before leveling off to an annual growth rate of % thereafter.
Discount Rate
Return available on an appropriate market benchmark investment (like the S&P 500): %

Fair P/E Ratio:

(One thing you should try is setting the growth rate to zero and the discount rate to 11%, to make sure that the fair P/E ratio really is 9.09.)
Enterprise Value
Total market value that all investors (equity and debt) have placed on a company's operations; equal to: Market Capitalization + Debt - Cash and Equivalents
Equity
The portion of a company's assets that the shareholders own, as opposed to what they've borrowed: equal to total assets minus liabilities. Also called "owners'
equity" or "shareholders' equity".
Equity is detailed on the balance sheet. "Equity" is also used as an adjective, to describe mutual funds that invest in stocks, rather than bonds.
Equivalent Yield
Pro-rated annual interest rate paid by a short-term bond, expressed as a percentage of its current market price. (In other words, it's the same as current yield, but
for bonds that reach maturity in less than a year).
Exchange Traded Fund (ETF)
Logically similar to an index fund - somebody somewhere is managing a stock portfolio that tracks an index - but it's traded on a stock exchange and you buy
shares through a broker.
An ETF has the disadvantage that you pay broker's fees; it may have tax advantages. But the greatest advantage may be convenience: if you already have a
brokerage account then you are ready to buy shares of an ETF, using its symbol, the same way you would buy shares of a stock. See the index funds article,
especially this tiny list of useful ETFs and index funds.
Factoring.
Factoring could be understood as account receivable financing. It is a type of commercial finance whereby an entity sells its accounts receivable at a
discount. The actual payment from their customers takes place on typical 30 to 90 days terms. Entities benefit from the acceleration of cash flow by obtaining
cash from the factor equal to the face value of the sold account receivable, less a factor's fee. There are usually three parties involved when an invoice is
factored: Seller, Debtor and Factor.

Seller: Seller of the product or service who originates the invoice.

Debtor: Debtor is the customer of the Seller, the recipient of the invoice for products supplied or services rendered who promises to pay the balance within the
agreed payment terms.

Factor: Factor is the factoring company.

Types of factoring:

Notified (full service factoring): With notified factoring, the debtors are aware of the factoring as there will be a notice of assignment contained on each
invoice and the factoring company normally does the credit control, that is, collects the outstanding debts.

Confidential (invoice finance): With invoice finance (confidential or non-notification factoring), the factoring is undisclosed, with the seller usually retaining
the credit control function.

Recourse Factoring: Recourse factoring is the most common type of factoring transaction. It allows the factor to go back to the seller if payment is not received
after a 90 day period. The credit risk does not transfer to the factor during the recourse factoring process. In the event of non-payment by the customer, the
seller must buy back the invoice with another credit worthy invoice. Recourse factoring is the lowest cost for the seller because the risk for the factor on the
funding transaction is lower.

Non Recourse Factoring: Non recourse factoring is the traditional method of factoring and puts the risk of non-payment fully on the factor. If the debtor can not
pay the invoice the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and he will turn away average credit
quality customers. The cost is typically higher with this type of factoring as the factor assumes a greater risk.
We are one of the best factoring companies in the world. We offer small, medium and large businesses money they can use now. We understand the
entrepreneurial world, thus we are flexible and offer good service. We have quick, same-day funding, rapid credit approvals and fast answers to questions.

We offer money to improve and expand your business. We are one of the oldest factors with over 30 years of experience. Knowledgeable, professional,
experienced collection staff, direct lenders. Credit and risk coverage from professional lenders. 24-hour response to your funding requests.

You'll have information on such topics as accounts receivable factoring, invoice factoring, domestic factoring, trade financing, purchase order financing and
more!. Whether you're looking for accounts receivable factoring, invoice factoring or other funding or factoring services, you'll find what you need here!. That's
because we are the expert!

Browse our site for more information or fill out a quick application for our review. From the quick application we will review your factoring needs. From this
review, we'll give you quick quote. If you are interested further, we will ask you to send the documents for factoring. We'll review these documents and then give
you a written no obligation quote. What information do you need to provide to start factoring your receivables?
1) Fill out our Quick Application and let us review it. We will respond immediately.
2) After we respond and if your company is factorable, we will need specific documentation.

How long does it take to get funded?
After we review all the requested documents (which takes two to seven days) we will sign an agreement. Once the agreement is signed we ask you to submit
documentation for credit checking your customers and verification of initial invoices that you wish to factor. Upon completion of the credit and verification
funding will occur immediately.

If you have tax problems will we fund you?
We have funded companies with IRS or state tax liens. It depends on monthly volume in relation to the tax lien and if the government agency will work with us.
After we complete our due diligence we will make every effort to satisfy your needs.

Your customer won't pay an invoice, what do we do?
We offer recourse lines of credit (your risk) and non-recourse lines of credit (factor risk with a credit line) accounts. If the account has a credit line (non-recourse)
the receivable is at our risk and we will pay you for the uncollected payment. If the invoice does not have a credit line (recourse) you will have to purchase the
invoice back.

Do we fund companies in bankruptcy?
With permission of the court we will consider funding a bankrupt company.

Do we notify your customer?
Yes. All invoices are stamped payable to us. Since factoring is now so common, almost all account debtors will work with you. Our staff acts as your collection
team and we represent you with professionalism. Also, notification from a factor usually generates quicker payment since many factors report payment history to
national credit reporting firms.

What is your cost to factor with us?
We treat each account individually
Factoring Fees and Factoring Services

We look at the following factoring information when we consider pricing your deal: Annual Sales Volume, Credit Worthiness of your clients, Average Invoice
Size, Domestic or International and
Payment Terms.

A typical charge for a 30 day invoice will be 2% to 4%, 3% to 6% if the invoice is aged 60 days.

We want to charge you fair factoring fees and interest for our factoring services. Having been in business for over 30 years we can proudly say that the reason
why we have been in business for this long is because we have treated clients fairly over the years.

We use the Prime Plus Method of factoring not the Discount Method of factoring. The Prime Plus Method is used by larger factoring financial services firms
while the Discount Method is used by smaller factors.

Usually the Prime Plus Method produces lower rates to you than the Discount Method. When talking to other factors find out how they are charging you for their
factoring services. Ask also if there are additional factoring fees if your receivable gets "old". We do not charge any additional fees if your receivable gets "old".

The Prime Plus Method has only two fees used by a factoring financial services firm. The first fee is a one-time fee per invoice called the Factoring Fee.
Factoring fees are charged on the gross amount of the invoice. The second fee is the interest charge on the money advanced per invoice based on your
advance rate. The interest charge begins on the day we advance your funds for that invoice. The interest charge is a percentage over the prime rate that has
been agreed upon prior to signing our factoring agreement.
Example: Invoice Amount: $1000

What is the cost for a 45 day invoice for each method?

Prime Plus Method

Factor fee is $30 ($1000 x 3% the Factoring Fee)
Money Advanced $800 (1000 x 80% the advance rate)
$800 x 12% APR. x 45 days = $12.00 is the interest charge for $800 borrowed for 45days at 12% APR
Total Cost is $30 + $12 = $42
(Factoring Fee + Interest Charge)
$42 / $1000 = 4.2% is charged on the gross amount of the invoice of $1000

Discount Method

3% for the first 30 days is = $1000 x 3% = $30
1% for the next 10 days is = $1000 x 1% = $10
1% for the next 5 days is = $1000 is 1% = $10
The Total is $30 + $10 + 10 = $50
$50 / $1000 = 5% is charged on the gross amount of the invoice of $1000

As you can see the Prime Plus Method in this case gives a lower total fee than the Discount Method, 4.2% vs 5%.
Invoice Factoring

Cash flow factoring—also known as invoice factoring and accounts receivable factoring—is the sale of your invoices for immediate cash. As top-of-the-line
factoring companies go, we purchase your receivables and: Advance you up to 80% of the face value of the invoice. Charge you a fee. A typical charge for an
aged 30 day invoice will be 2% to 4%, 3% to 6% if the invoice is aged 60 days. Remit to you the balance when the invoice is paid.

We are a full service factor (not all factoring companies are full service). Our accounts receivable factoring services include:

Credit: We are your credit department. We provide our clients an established line of credit for their customer. Each month we provide a credit report
summarizing customer list with credit status.
Bookkeeping: We are your bookkeeping department. Twice a month we will provide you with an aging of receivables. Each week you will receive a report listing
which receivables had been paid in the prior week. You can also access your aging and payments at any time on line.
Funding: We provide advanced funding. We will purchase the receivables at up to 80% advance rate. We purchase the receivables on a recourse and non-
recourse basis. Each week our customers receive an equity payment based on collections from the prior week.
Collection: We are your collection department. Full staff of trained collection representatives . Availability of collection staff to answer any and all questions. In
house legal department to handle any collection problems. Our collection staff is bi-lingual (English/Spanish).

We provides each client with the access to fast and accurate factoring. When considering choosing a factor ask specifically what services are included and if
services are extra. Many factors charge extra for credit work, mailing, running reports, etc. Our services are all inclusive, there are no hidden fees.

We factor any type of industry whether it be service, manufacturing or distribution. With over 30 years of experience we have factored thousands of companies
with:
Revenue from $1,000,000 to $20,000,000 per month.
Invoice size from $100 to $1,000,000
Start ups to established companies
Single accounts to customers with hundreds of accounts.

Want us to evaluate your company for factoring? You can send a quick application. The quick application is to evaluate your company potential for factoring.
From this basic information we can give a tentative quote. However, before any deal is consummated we will need all documents listed in the complete
document listing.
International Factoring Funding

We offer international factoring funding to clients anywhere in the world. We will consider international trade finance on any transaction that includes:

U.S. Seller to Foreign Buyer
Foreign Seller to U.S. Buyer

Factoring Funding - Example 1: Foreign Seller to US Buyer

A spanish manufacturer (exporter) of high quality wine sells container loads to credit worthy U.S. customers (buyers) (importers). When we receive invoices and
bills of lading that the goods have been shipped to the U.S. buyers, we will wire funds to the spanish manufacturer. This is an example of import/export
financing.

Factoring Funding - Example 2: US Seller to Foreign Buyer

A U.S. aircraft aviation parts supplier sells to a Chilean Airline. Goods are shipped by air and all invoices are covered by credit insurance. When the Chilean
Airline receives the goods, funds are advanced to the U.S. seller. 60-90 days later the Chilean Airline will wire funds to us. This is an example of an export
finance transaction.

In almost all international trade finance cases—whether its import/export financing or an export finance transaction—we will want the goods sold to foreign
buyers to be covered by our export insurance policy. Coverage on the export policy is usually an additional 1.5% to the normal factoring charges. Credit
insurance is needed for international transactions due to lenient financial reporting requirements in foreign countries and the difficulty of obtaining quality
foreign credit information.
Purchase Order Financing

Purchase Order Financing is used to pay your suppliers, laborers, or other intermediaries for goods or services to generate additional sales.

A company will need PO financing when:
You need expertise to handle the financing
You need additional working capital
You need a quick response to an immediate sales need
You don’t want to incur additional credit risk, be it foreign or domestic
You want your buyers and sellers to not know each other
You want the opportunity to make additional profit

We understand all the above reasons and will work with you to fulfill your purchase order funding needs.

We offer purchase order finance transactions for all types of transactions that include:
U.S. Supplier to U.S. Buyer
U.S. Supplier to Foreign Buyer
Foreign Supplier to U.S. Buyer
Foreign Supplier to Foreign Buyer

Every purchase order finance transaction stands on its own. We look at your business history, the credit worthiness of the buyer, the ability of your supplier to
produce the goods, and if the transaction is profitable for all parties.

Business History
We consider purchase order funding for those organizations with a track record of producing goods. Your company may be young or a start-up, but your
company management must have a proven track record to produce the goods.

Buyers Purchase Order
Your buying firm must be reputable with a good credit line. The purchase order must be verifiable. .

Suppliers.

Your suppliers must know your product and be able to produce it in time and to meet your buyer's terms. The supplier must be a firm with a good business
history and track record of producing goods.
Profitability
The transaction after all expenses must make a profit for all parties. Payment of the money lent to support the transaction can come from any number of sources
such as factored receivables.

Purchase Order Financing is available only to qualified customers. P.O. Financing falls into two types:
Finished Goods
Non-Finished Goods

Finished Goods refers to transactions where the goods are never touched by you. Usually these goods go directly from your supplier to your buyer. You never
take direct possession.

Non-Finished Goods are when you the seller take possession of the goods either in a raw state (such as yarn to make blue jeans) or a semi finished state (partially
sewn blue jeans). In either case you must take possession of the product.

Finished Goods are easier to finance than Non-Finished Goods. We will need to assess your ability to complete the transaction in processing the goods for the
final shipment to your buyer. We finance both Finished and Non-Finished purchase order financing.

In order to consider P.O. Financing for your firm we will need:
Completed P.O. Application Form
Your invoice to buyer
Your supplier’s invoice
Your purchase order to your supplier
Profit on transaction - gross margins >18%
Business History
P&L (most recent)
Balance Sheet (most recent)
Time frame to produce goods
Credit information on your buyer
Supplier Information
Finished Goods or Non-Finished Goods.

Generally we charge 5% (sometimes more, sometimes less) one time fee for purchase order financing on the gross amount to be paid by the buyer. Sometimes
there may be an additional interest charge on the money advanced if the purchase order takes greater than 30 days to complete. Every purchase order pricing
is individual and unique. This purchase order fee does not include the factoring fee which may cost an additional 3% to 6% if you are factoring the receivable.
(Learn more about Factoring Fees). We will consider financing a purchase order transaction to be paid out by another factor or lender. In order to see if the
transaction will make money for both parties, please fill out the worksheet section of the application form. As you can see the total cost of purchase order
financing fee and factoring fee can range from 8 to 11%. Since both of us need to make money, the gross margin should be greater than 18%.

PO Financing - How it works Your buyer gives you a purchase order for goods. You give your supplier your company's purchase order to fulfill the buyer's
purchase order. The gross margin between the two purchase orders should be at least 18%. Your supplier ships goods to you (non finished goods) or to your
buyer (finished goods). Payment to your supplier is made by us immediately or some time in the future subject to the negotiated terms. This is called Purchase
Order Financing. If the goods (non finished) were sent to you from the supplier, you finish making the product and ship to your buyer the finished product. You
send your invoice for your buyers order to us for factoring. We factor your invoice to your buyer. We advance you funds against this invoice less any factoring
and purchase order financing fees. In this case, the funds are used to make payment to us to pay off the amount we paid to your supplier for the purchase order
financing plus any purchase order fees for our services. When your buyer pays the invoice per terms we collect our factoring advance and interest charges. Any
funds left are forwarded to you.

Purchase Order Financing Example 1: US Supplier to US Buyer

You are a car parts manufacturer. You have been in business for 5 years and have a good Profit and Loss Statement and Balance Sheet. You just received a
large order and are maxed out on credit from your suppliers. Your sales price to your buyer is $100,000 and your total cost to produce the goods is $75,000.
Your gross margin is 25%. We will purchase the goods for you from your supplier, give you 45 days to produce the goods, charge you a 5% purchase order fee
($5000, 5% of $100,000) and factor your receivables.

Purchase Order Financing Example 2: Foreign Supplier to US Buyer

You are importing car parts from China. You do not need to touch the goods, they will be shipped directly to the buyer, a large U.S. retailer. The cost of the
goods is $500,000 and you will sell them to the buyer for $700,000. Gross margins are 20% (after all importing costs). We open a Letter of Credit to your supplier
and will factor the receivables. When the goods are shipped your Chinese supplier will get paid. When the goods are landed in the U.S. and shipped to the U.S.
buyer, we will factor the receivable and pay the purchase order from the funds advanced.

Purchase Order Financing Example 3: Foreign Supplier to Foreign Buyer

You are an international car parts broker. You are buying car parts in China from a reputable supplier and selling it to a credit worthy buyer in Chile. The gross
margin on this sale is 18%. We will finance the full transaction by wiring funds to your supplier of car parts for $80,000 and collect payment from the Chilean
buyer of $110,000, less our factoring fees, insurance and inspection fees.
International Trade Financing

International Trade Financing is funding international business transactions using either foreign buyers (international factoring) or foreign suppliers (purchase
order financing).

With foreign buyers involved we will usually factor the receivable. We will want either the foreign company to be covered by an export credit insurance policy
either through a commercial insurance carrier or Ex-Im Bank. We have overseas insurance policies through various institutions.

The foreign supplier will usually require payment through a wire transfer or a letter of credit. Terms vary from deal to deal. We are well versed in international
financial transactions.

To get a better understanding of trade financing for international business transactions, look at our information on: international factoring and purchase order
financing.
Construction Factoring

Your General Contractor is waiting to get paid from the Owner. You are waiting to get paid from the General Contractor or a subcontractor. You need
commercial construction financing now to:
Make payroll
Pay a supplier to get discounts
To start a new job

We can help your firm through our construction factoring program. Over the years we have provided commercial factoring to contractors and subcontractors. We
have supplied commercial construction financing through the factoring of receivables to window and door manufacturers, concrete providers, heating repair
and installation, electricians and others.

Because of mechanic lien laws, suppliers have certain rights. Commercial factoring of construction receivables requires additional work on your part and your
customers’ part. If you have a potential construction deal that you want construction project financing by factoring receivables please send your quick
application.
The person who must sign the construction factoring verification form cannot be the project manager but a person in authority who can order payment of your
invoices or who signs the checks. .

Usually this person is the Controller, Chief Financial Officer or President of the General Contracting firm. This form says that the GC will pay us in full per terms
without any disputes or deductions regardless of your state specific mechanic lien laws, your contract with the GC or if you owe money to any suppliers.

If the GC will not sign this form we cannot factor your receivables. If the GC will sign this form we will consider factoring your receivables. Once you get approval
from the GC then please review our construction factoring guidelines.

If you feel you can do these additional steps then please present to us documents needed from the Factoring Application Page. We funds construction
receivables only in the United States.
Factoring Construction Receivables requires different standards than factoring other types of receivables.

The following comments assumes you are a subcontractor.

Joint Check Agreement: You, we and the General Contractor will have to sign a joint check agreement indicating that all payments must come to us.

Lien Rights: You must assign all lien rights to us. If the state requires preliminary notices, these must be filed on time.

Verification of Invoices: Attached will be a copy of the form that the general contractor (GC) must sign off before any invoice is funded. Show this form to your
GC and see if he will sign. If the GC will not sign, we cannot fund. See Construction Form.

Payment of Suppliers from Advance. We generally advance up to 80% to our client. Because of the Mechanics Lien Laws affecting your supplier, we will want
to pay major suppliers from your advance OR have your suppliers sign lien waivers.

We will not fund retainage, liens, offsets, charge backs or claims.

The average customer will pay 3-4%of the gross invoice aged 30 days, 6% if aged 60 days.

Bonding: If the job is bonded, the bonding agency must either put us in a first UCC-1 position on the receivables OR sign a contract signing they will pay us for
invoices factored if the Bonding agency takes over the job.

General Contractor: The same rules apply to General Contractors in privity with the owner as discussed above.
Government Factoring

We have the experience in factoring government receivables for local, state or government contracts. We know that these agencies have unique ways of
handling your invoices, and — as part of our government factoring — we will work with them to process your invoices in the fastest way possible. When factoring
government receivables, we understand U.S. government finances are governed by the Federal Government Assignment of Claims Act. We are familiar with the
law and will advance you up to 80% of your invoices once notice of assignment is accepted by the government agencies.
Business Factoring Loans and Business Line of Credit

We will consider factoring loans based on inventory of credit secured by or a business line assets to qualified customers only in connection with their factoring of
receivables. Some of our best factoring loan examples are below..

A liquidation company in business for 12 years needed a short term inventory loan to purchase book closeouts. With 50% of the value of the books pre-sold, we
loaned him up to $2,050,000 to purchase books. All invoices had to be factored and the loan to be paid off in 30 days. This short-term, revolving, easy factoring
loan increased sales substantially.

An apparel manufacturer saw growth ahead. An easy factoring loan provided money to grow but it was not enough. We made a one year $1,000,000 loan on his
equipment and machinery. With this additional capital he could make his business grow and factor more receivables.
A nursing staffing firm placed nurses at 13 week stints around the country in hospitals. Included in the cost were the housing of nursing staff. Because of deposits
due to landlords, the staffing company needed additional money. We were able to give a $2,000,000 revolving business line of credit secured by property,
receivables, equity and personal guarantee of the owner. Our client was able to increase sales dramatically.

The best factoring loan is usually made to clients who have a track record of producing quality goods and/or a good balance sheet. We only make factoring
loans in conjunction with account receivable factoring or purchase order financing.
Factoring Fees and Factoring Services

We look at the following factoring information when we consider pricing your deal: Annual Sales Volume, Credit Worthiness of your clients, Average Invoice
Size, Domestic or International and
Payment Terms.

A typical charge for a 30 day invoice will be 2% to 4%, 3% to 6% if the invoice is aged 60 days.

We want to charge you fair factoring fees and interest for our factoring services. Having been in business for over 30 years we can proudly say that the reason why
we have been in business for this long is because we have treated clients fairly over the years.

We use the Prime Plus Method of factoring not the Discount Method of factoring. The Prime Plus Method is used by larger factoring financial services firms
while the Discount Method is used by smaller factors.

Usually the Prime Plus Method produces lower rates to you than the Discount Method. When talking to other factors find out how they are charging you for their
factoring services. Ask also if there are additional factoring fees if your receivable gets "old". We do not charge any additional fees if your receivable gets "old".

The Prime Plus Method has only two fees used by a factoring financial services firm. The first fee is a one-time fee per invoice called the Factoring Fee.
Factoring fees are charged on the gross amount of the invoice. The second fee is the interest charge on the money advanced per invoice based on your
advance rate. The interest charge begins on the day we advance your funds for that invoice. The interest charge is a percentage over the prime rate that has
been agreed upon prior to signing our factoring agreement.
Factoring (finance) This article is about finance. For other uses, see factor. Corporate finance
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Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) at a discount. Factoring differs from a bank loan in three main
ways. First, the emphasis is on the value of the receivables (essentially a financial asset)[1], not the firm’s credit worthiness. Secondly, factoring is not a loan – it
is the purchase of a financial asset (the Receivable). Finally, a bank loan involves two parties whereas factoring involves three. Factoring is a word often misused
synonymously with accounts receivable financing. In Europe the term Factoring typically mean accounts receivable financing. Here, the term factoring comes
from American Accounting.

The three parties directly involved are: the one who sells the Receivable, the debtor, and the factor. The Receivable is essentially a financial asset associated
with the debtor’s Liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the
Receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the Receivables essentially
transfers ownership of the Receivables to the factor, indicating the factor obtains all of the rights and risks associated with the Receivables.[2] Accordingly, the
factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount.
Usually, the debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. However, at times, the seller will collect the
payments made by the debtor, and will remit them to the factor. The factor usually charges the seller a service charge, as well as interest based on how long the
factor must wait to receive payments from the debtor. [3] The seller also estimates the amount that may not be collected due to non-payment, and makes
accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the
invoice and the money received from the debtor, less the amount lost due to non-payment.[2]

American Accounting considers the receivables sold when the buyer has "no recourse"[4], or when the financial transaction is substantially a transfer of all of the
rights associated with the receivables and the seller's monetary Liability under any "recourse" provision is well established at the time of the sale.[5] Otherwise,
the financial transaction is treated as a loan, with the receivables used as collateral.

1 Reason 2 Differences from bank loans 3 Invoice sellers 4 Factors 5 Invoice payers (debtors) 6 History 7 Publications

Reason
A company sells its invoices, even at a discount to their face value, when it calculates that it will be better off using the proceeds to bolster its own growth than it
would be by effectively functioning as its "customer's bank." In other words, it figures that the return on the proceeds will exceed the income on the receivables.

Some businesses find a large variability in the inflow of cash and revenue. As a result, it might need to maintain a large cash balance on hand to cover its
current cash needs when the cash flow is low. With a large variability in cash flow, there will also be instances that the cash flow will provide more than enough
cash to meet all current cash needs. Rather than maintain a large average cash balance to cover this variability in cash flow, the firm may find it may obtain a
profit advantage by paying a finance charge when it runs into a low cash flow situation in order to reduce the amount of money that is not invested in some profit
making venture. Companies with a low variability in cash flow do not need to maintain a large cash balance to cover the periods of time cash flow is relatively
low. These companies will find it more costly (in terms of lost profit) to pay the finance charge, and will tend to act as the "customer's bank" instead.

Differences from bank loans
Factors make funds available, even when banks would not do so, because factors focus first on the credit worthiness of the debtor, the party who is obligated to
pay the invoices for goods or services delivered by the seller. In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of
the borrower, not that of its customers. While bank lending is cheaper than factoring, the key terms and conditions under which the small firm must operate differ
significantly.

From a combined cost and availability of funds and services perspective, factoring creates wealth for some but not all small businesses. For small businesses,
their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firm’s
choice is between seeking venture capital (i.e., equity) or the lower cost of selling invoices to finance their growth. The latter is also easier to access and can be
obtained in a matter of a week or two, whereas securing funds from venture capitalists can typically take up to six months. Factoring is also used as bridge
financing while the firm pursues venture capital and in conjunction with venture capital to provide a lower average cost of funds than equity financing alone.
Firms can also combine the three types of financing, angel/venture, factoring and bank line of credit to further reduce their total cost of funds whilst at the
same time improving cash flow.

As with any technique, factoring solves some problems but not all. Businesses with a small spread between the revenue from a sale and the cost of a sale, should
limit their use of factoring to sales above their breakeven sales level where the revenue less the direct cost of the sale plus the cost of factoring is positive.

While factoring is an attractive alternative to raising equity for small innovative fast-growing firms, the same financial technique can be used to turn around a
fundamentally good business whose management has encountered a perfect storm or made significant business mistakes which have made it impossible for the
firm to work within the constraints of their bank covenants. The value of using factoring for this purpose is that it provides management time to implement the
changes required to turn the business around. The firm is paying to have the option of a future the owners control. The association of factoring with troubled
situations accounts for the half truth of it being labeled 'last resort' financing. However, use of the technique when there is only a modest spread between the
revenue from a sale and its cost is not advisable for turnarounds. Nor are turnarounds usually able to recreate wealth for the owners in this situation.

Large firms use the technique without any negative connotations to show cash on their balance sheet rather than an account receivable entry, money owed from
their customers, particularly when these show payments being due for extended periods of time beyond the North American norm of 60 days or less.

Invoice sellers
The invoice seller presents recently generated invoices to the factor in exchange for a dollar amount that is less than the value of the invoice(s) by an agreed
upon discount and a reserve. A reserve is a provision to cover short payments, payment of less than the full amount of the invoice by the debtor, or a payment
received later than expected. The result is an initial payment followed by a second one equal to the amount of the reserve if the invoice is paid in full and on
time or a credit to the account of the seller with the factor. In an ongoing relationship the invoice seller will get their funds one or two days after the factor
receives the invoices. Astute invoice sellers can use a combination of techniques to cover the range of 1% to 5% plus cost of factoring for invoices paid within
50 to 60 days or more. In many industries, customers expect to pay a few percentage points higher to get flexible sales terms. In effect the customer is willing
to pay the supplier to be their bank and reduce the equity the customer needs to run their business. To counter this it is a widespread practice to offer a prompt
payment discount on the invoice. This is commonly set out on an invoice as an offer of a 2% discount for payment in ten days. {Few firms can be relied upon to
systematically take the discount, particularly for low value invoices - under $100,000 - so cash inflow estimates are highly variable and thus not a reliable basis
upon which to make commitments.} Invoice sellers can also seek a cash discount from a supplier of 2 % up to 10% (depending on the industry standard) in return
for prompt payment. Large firms also use the technique of factoring at the end of reporting periods to ‘dress’ their balance sheet by showing cash instead of
accounts receivable There are a number of varieties of factoring arrangements offered to invoice sellers depending upon their specific requirements. The basic
ones are described under the heading Factors below.

Factors
When initially contacted by a prospective invoice seller, the factor first establishes whether or not a basic condition exists, does the potential debtor(s) have a
history of paying their bills on time? That is, are they creditworthy? (A factor may actually obtain insurance against the debtor’s becoming bankrupt and thus the
invoice not being paid.) The factor is willing to consider purchasing invoices from all the invoice seller’s creditworthy debtors. The classic arrangement which
suits most small firms, particularly new ones, is full service factoring where the debtor is notified to pay the factor {notification} who also takes responsibility for
collection of payments from the debtor and the risk of the debtor not paying in the event the debtor becomes insolvent, non recourse factoring. This traditional
method of factoring puts the risk of non-payment fully on the factor. If the debtor cannot pay the invoice due to insolvency, it is the factor's problem to deal with
and the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and often turns away average credit quality
customers. The cost is typically higher with this factoring process because the factor assumes a greater risk and provides credit checking and payment collection
services as part of the overall package. For firms with formal management structures such as a Board of Directors (with outside members), and a Controller (with a
professional designation), debtors may not be notified (i.e., non-notification factoring). The invoice seller may not retain the credit control function. If they do
then it is likely that the factor will insist on recourse against the seller if the invoice is not paid after an agreed upon elapse of time, typically 60 or 90 days. In the
event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is typically the lowest cost for
the seller because they retain the bad debt risk, which makes the arrangement less risky for the factor.

Despite the fact that most large organizations have in place processes to deal with suppliers who use third party financing arrangements incorporating direct
contact with them, many entrepreneurs remain very concerned about notification of their clients. It is a part of the invoice selling process that benefits from
salesmanship on the part of the factor and their client in its conduct. Even so, in some industries there is a perception that a business that factors its debts is in
financial distress.

Invoice payers (debtors)
Large firms and organizations such as governments usually have specialized processes to deal with one aspect of factoring, redirection of payment to the factor
following receipt of notification from the third party (i.e., the factor) to whom they will make the payment. Many but not all in such organizations are
knowledgeable about the use of factoring by small firms and clearly distinguish between its use by small rapidly growing firms and turnarounds.

Distinguishing between assignment of the responsibility to perform the work and the assignment of funds to the factor is central to the customer/debtor’s processes.
Firms have purchased from a supplier for a reason and thus insist on that firm fulfilling the work commitment. Once the work has been performed however, it is a
matter of indifference who is paid. For example, General Electric has clear processes to be followed which distinguish between their work and payment
sensitivities. (GE is also very active in the factoring industry as a supplier of funds).

History
Factoring's origins lie in the financing of trade, particularly international trade. Factoring as a fact of business life was underway in England prior to 1400. It
appears to be closely related to early merchant banking activities. The latter however evolved by extension to non-trade related financing such as sovereign
debt. Like all financial instruments, factoring evolved over centuries. This was driven by changes in the organization of companies; technology, particularly air
travel and non-face to face communications technologies starting with the telegraph, followed by the telephone and then computers. These also drove and were
driven by modifications of the common law framework in England and the United States.

Governments were latecomers to the facilitation of trade financed by factors. English common law originally held that unless the debtor was notified, the
assignment between the seller of invoices and the factor was not valid. The Canadian Federal Government legislation governing the assignment of moneys owed
by it still reflects this stance as does provincial government legislation modelled after it. As late as the current century the courts have heard arguments that
without notification of the debtor the assignment was not valid. In the United States it was only in 1949 that the majority of state governments had adopted a rule
that the debtor did not have to be notified thus opening up the possibility of non-notification factoring arrangements.[9]

Originally the industry took physical possession of the goods, provided cash advances to the producer, financed the credit extended to the buyer and insured the
credit strength of the buyer.

In England the control over the trade thus obtained resulted in an Act of Parliament in 1696 to mitigate the monopoly power of the factors.[11] With the
development of larger firms who built their own sales forces, distribution channels, and knowledge of the financial strength of their customers, the needs for
factoring services were reshaped and the industry became more specialized.

By the twentieth century in the United States factoring became the predominant form of financing working capital for the then high growth rate textile industry. In
part this occurred because of the structure of the US banking system with its myriad of small banks and consequent limitations on the amount that could be
advanced prudently by any one of them to a firm. In Canada, with its national banks the limitations were far less restrictive and thus factoring did not develop as
widely as in the US. Even then factoring also became the dominant form of financing in the Canadian textile industry.

Today factoring's rationale still includes the financial task of advancing funds to smaller rapidly growing firms who sell to larger more creditworthy organizations.
While almost never taking possession of the goods sold, factors offer various combinations of money and supportive services when advancing funds.

Factors often provide their clients four key services: information on the creditworthiness of their prospective customers domestic and international; maintain the
history of payments by customers (i.e., accounts receivable ledger); daily management reports on collections; and, make the actual collection calls. The
outsourced credit function both extends the small firms effective addressable marketplace and insulates it from the survival-threatening destructive impact of a
bankruptcy or financial difficulty of a major customer. A second key service is the operation of the accounts receivable function. The services eliminate the need
and cost for permanent skilled staff found within large firms. Although today even they are oursourcing such backoffice functions. More importantly, the services
insure the entrepreneurs and owners against a major source of a liquidity crises and their equity.

In the latter half of the twentieth century the introduction of computers eased the accounting burdens of factors and then small firms. The same occurred for their
ability to obtain information about debtor’s creditworthiness. Introduction of the Internet and the web has accelerated the process while reducing costs. Today
credit information and insurance coverage is available any time of the day or night on-line. The web has also made it possible for factors and their clients to
collaborate in realtime on collections. Acceptance of signed documents provided by facsimile as being legally binding has eliminated the need for physical
delivery of “originals”, thereby reducing time delays for entrepreneurs.

By the first decade of the twenty first century a basic public policy rationale for factoring remains that the product is well suited to the demands of innovative
rapidly growing firms critical to economic growth. A second public policy rationale is allowing fundamentally good business to be spared the costly management
time consuming trials and tribulations of bankruptcy protection for suppliers, employees and customers or to provide a source of funds during the process of
restructuring the firm so that it can survive and grow. Source: Wikipedia
The International Factoring Association's (IFA) goal is to assist the Factoring community by providing information, training, purchasing power and a resource for
the Factoring community.

IFA Member Services. Mission Statement:
To disseminate information to the Factoring Community in regards to developments and changes in the factoring industry and to provide a forum for educational
meetings and seminars.

Membership: Membership is open to all banks and finance companies that perform financing or factoring through the purchase of invoices or other types of
accounts receivable. To join the IFA, please download the membership application and submit it to the IFA via email at: info@factoring.org or fax at:
805-773-0021.

Factor Search: This area is designed to let business that are seeking a factoring firm to e-mail specifics regarding their business to the factors. Only those factors
that meet the business search criteria will be notified. Click Here: Factor Search

Code of Ethics: This document outlines the goals and objectives that all members of the International Factoring Association must adhere to. IFA Code of Ethics

Listserver: To receive our newsletter and email of upcoming events, send email to: info@factoring.org , in the subject line state Subscribe IFA

Discussion Group: For additional information please visit our Discussion Group

Job Board: Allows Companies to post job openings and Candidates to post resumes and search for factoring job listings: Click Here: Job Board What is
Factoring? (source: wisegeek)

Factoring goes by many names, including invoice discounting, receivables factoring and debtor financing. In simple terms, factoring is a practice wherein one
company purchases a debt or invoice from another company. It refers to the acquisition of accounts receivable, which are discounted in order to allow the buyer
to make a profit upon collection of monies owed. Factoring transfers ownership of such accounts to another party that then works vigorously to collect the debt.

While factoring may allow the liable party to be relieved of the debt for less than the full amount, it is generally designed to be more beneficial to the factor, or
new owner, and the seller of the account than to the debtor. The seller receives working capital, while the buyer is able to make a profit by buying the account
for substantially less than what it is worth and then collecting on it. Factoring allows a buyer to purchase such accounts for about 25% less than what they are
actually worth.

The factor takes full responsibility for collecting the debt. The factor is required to pay additional fees, usually a small percentage, once collection efforts prove
successful. The new owner of the account may offer the liable person or entity a small discount on the outstanding debt. Other arrangements are sometimes
made, in which the debt is considered paid in full if a lump sum payoff is made under certain terms and conditions. Unfortunately, in some cases, factoring can
cause the consumer or indebted company a great deal of financial stress, such as in the case of debt consolidation.

For example, if a person joins a debt consolidation program and one creditor engages in factoring, then the entity that purchases the account may not be bound
by the program's contract with the original creditor. The factor may demand a large sum to consider the account current, and may increase interest rates as well
as the monthly payment amount. This form of factoring may prove profitable in some cases, but in others it may backfire. The debtor may have no choice but to
file for bankruptcy because he or she simply cannot afford the inflated interest rates and payment amounts. In the majority of cases, factoring is a profitable
venture, but it is a good idea to review each account on an individual basis before deciding how to proceed.
Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or
organization for goods and services that have been provided to the customer. In most business entities this is typically done by generating an invoice and
mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms.

An example of a common payment term is Net 30, meaning payment is due in the amount of the invoice 30 days from the date of invoice. Other common
payment terms include Net 45 and Net 60 but could in reality be for any time period agreed upon by the vendor and client.

While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments on the accounts
receivable subsidiary account balances can be a full time proposition. Depending on the industry in practice, accounts receivable payments can be received up
to 10 - 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or
because of the financial condition of the client.

On a company's balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified
as current assets. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their
accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit.

Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally
use accounting software on a computer to perform this task.

Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.

Accounts receivable departments use the sales ledger. Accounts receivable is more commonly known as Credit Control in the UK, where most companies have a
credit control department.

Other types of accounting transactions include accounts payable, payroll, and trial balance.

Since not all customer debts will be collected, businesses typically record an allowance for bad debts which is subtracted from total accounts receivable. When
accounts receivable are not paid, some companies turn them over to third party collection agencies or collection attorneys who will attempt to recover the debt
via negotiating payment plans, settlement offers or legal action. Outstanding advances are part of accounts receivables if a company gets an order from its
customers with payment terms agreed in advance. Since no billing is being done to claim the advances several times this area of collectible is not reflected in
accounts receivables. Ideally, since advance payment is mutually agreed term, it is the responsibility of the accounts department to take out periodically the
statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be
protected either by a letter of credit or by Trade Credit Insurance.

Companies can use their accounts receivable as collateral when obtaining a loan (asset-based lending) or sell them through factoring (finance). Pools or
portfolios of accounts receivable can be sold in the capital markets through a securitization.

Bookkeeping for Accounts Receivable
Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an
allowance account from the accounts receivable account.

The first method is the allowance method, which establishes a liability account, allowance for doubtful accounts, or bad debt provision, that has the effect of
reducing the balance for accounts receivable. The amount of the bad debt provision can be computed in two ways - either by reviewing each individual debt
and deciding whether it is doubtful (a specific provision) or by providing for a fixed percentage, say 2%, of total debtors (a general provision). The change in the
bad debt provision from year to year is posted to the bad debt expense account in the income statement.

The second method, known as the direct write-off method, is simpler than the allowance method in that it allows for one simple entry to reduce accounts
receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective account receivable in the
sales ledger.

The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts and will also write off specific debts that they know to
be bad (for example, if the debtor has gone into liquidation.)

For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit [1] - a business can only get relief for specific debtors that
have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts in line with their past
experience of customer payments in order to avoid over stating debtors in the balance sheet. Source: Wikipedia.

An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the
seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms.

From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is a purchase invoice. The document indicates the
buyer and seller, but the term invoice indicates money is owed or owing. In English, the context of the term invoice is usually used to clarify its meaning, such as
"We sent them an invoice" (they owe us money) or "We received an invoice from them" (we owe them money).

1 Basic invoice 2 Variations 2.1 Utility bills 3 Electronic invoices 3.1 EDIFACT 3.2 UBL 4 Payment for invoices

The word "invoice"
A unique reference number (in case of correspondence about the invoice)
Date of the invoice
Name and contact details of the seller
Tax or company registration details of seller (if relevant)
Name and contact details of the buyer
Date that the product was sent or delivered
Purchase order number (or similar tracking numbers requested by the buyer to be mentioned on the invoice)
Description of the product(s)
Unit price(s) of the product(s) (if relevant)
Total amount charged (optionally with breakdown of taxes, if relevant)
Payment terms (including method of payment, date of payment, and details about charges late payment)
The US Defense Logistics Agency requires an employer identification number on invoices.

The European Union requires a VAT (value added tax) identification number on invoices between entities registered for VAT[3]. If seller and buyer belong to two
different EU countries, both VAT identification numbers must be on the invoice in order to claim VAT exemption (VAT exemption according to directive
77/388/CEE of 17 May 1977). In the UK, if the issuing entity is not registered for VAT, the invoice must state that it is "not a VAT invoice".

Variations
There are different types of invoices:

Pro forma invoice - In foreign trade, a pro forma invoice is a document that states a commitment from the seller to provide specified goods to the buyer at
specific prices. It is often used to declare value for customs. It is not a true invoice, because the seller does not record a pro forma invoice as an accounts
receivable and the buyer does not record a pro forma invoice as an accounts payable. A pro forma invoice is not issued by the seller until the seller and buyer
have agreed to the terms of the order. In few cases, pro forma invoice is issued for obtaining advance payments from buyer, either for start of production or for
security of the goods produced. Credit memo - If the buyer returns the product, the seller usually issues a credit memo for the same or lower amount than the
invoice, and then refunds the money to the buyer, or the buyer can apply that credit memo to another invoice. Commercial invoice - a customs declaration form
used in international trade that describes the parties involved in the shipping transaction, the goods being transported, and the value of the goods.[4] It is the
primary document used by customs, and must meet specific customs requirements, such as the Harmonized System number and the country of manufacture. It is
used to calculate tariffs.

Debit memo - When a company fails to pay or short-pays an invoice, it is common practice to issue a debit memo for the balance and any late fees owed. In
function debit memos are identical to invoices. Self-billing invoice - A self billing invoice is when the buyer issues the invoice to himself (e.g. according to the
consumption levels he is taking out of a vendor-managed inventory stock). Evaluated receipt settlement (ERS) - ERS is a process of paying for goods and services
from a packing slip rather than from a separate invoice document. The payee uses data in the packing slip to apply the payments. "In an ERS transaction, the
supplier ships goods based upon an Advance Shipping Notice (ASN), and the purchaser, upon receipt, confirms the existence of a corresponding purchase order
or contract, verifies the identity and quantity of the goods, and then pays the supplier." Timesheet - Invoices for hourly services such as by lawyers and
consultants often pull data from a timesheet. Invoicing - The term invoicing is also used to refer to the act of delivering baggage to a flight company in an
airport before taking a flight

Statement - A periodic customer statement includes opening balance, invoices, payments, credit memos, debit memos, and ending balance for the customer's
account during a specified period. A monthly statement can be used as a summary invoice to request a single payment for accrued monthly charges. Progress
billing used to obtain partial payment on extended contracts, particularly in the construction industry (see Schedule of values)

Collective Invoicing is also known as monthly invoicing in Japan. Japanese businesses tend to have many orders with small amounts because of the outsourcing
system (Keiretsu), or of demands for less inventory control (Kanban). To save the administration work, invoicing is normally processed on monthly basis.

Utility bills
Bills from utility companies are based on measured (metered) use of electricity, natural gas or other utilities at a residence or business. When an individual or
business applies for service from the utility (opens an account), he signs an agreement (contract) to pay for his metered use of the utility.

Electronic invoices
Some invoices are no longer paper-based, but rather transmitted electronically over the Internet. It is still common for electronic remittance or invoicing to be
printed in order to maintain paper records. Standards for electronic invoicing varies widely from country to country. Electronic Data Interchange (EDI) standards
such as the United Nation's EDIFACT standard include message encoding guidelines for electronic invoices.

But the most common continues to be PDF over email.[citation needed]

EDIFACT
The United Nations standard for electronic invoices ("INVOIC") includes standard codes for transmitting header information (common to the entire invoice) and
codes for transmitting details for each of the line items (products or services). The "INVOIC" standard can also be used to transmit credit and debit memos.[8] The
"IFTMCS" standard is used to transmit freight invoices.[9]

UBL
Use of the XML message format for electronic invoices has begun in recent years. There are two standards currently being developed. One is the cross industry
invoice under development by the United Nations standards body UNCEFACT and the other is UBL (Universal Business Language) which is issued by [Oasis]http:
//www.oasis-open.org. Implementations of invoices based on UBL are common, most importantly in the public sector in Denmark. Further implementations are
under way in the Scandinavian countries as result of the NES (North European Subset) project http://www.nesubl.eu. Implementations are also underway in ,
Italy, Spain, Holland and with the European Commission itself.

The NES work has been transferred to [CEN]http://www.cen.eu, (the standards body of the European Union) workshop CEN/BII, for public procurement in Europe.
The result of that work is a pre-condition for PEPPOL, pan European pilots for public procurement, financed by the European commission. There UBL
procurement documents will be implemented in cross border pilots between European countries.

Agreement has been made between UBL and UN/CEFACT for convergence of the two XML messages standards with the objective of merging the two standards
into one before end of 2009 including the provision of an upgrade path for implementations started in either standard.

Payment for invoices
Organizations purchasing goods and services usually have a process in place for approving payment on the invoice based on an employee's confirmation that
the goods or services have been received.

Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both)

1 Faced by lenders to consumers 2 Faced by lenders to business 3 Faced by business 4 Faced by individuals 5 Counter-party risk 6 Sovereign risk 7 References
8.1 Other types of risk
9 External links

Faced by lenders to consumers: Consumer credit risk
Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With
products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as
credit cards and overdrafts, risk is controlled through careful setting of credit limits. Some products also require security, most commonly in the form of property.

Faced by lenders to business
Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk.
Protective covenants are written into loan agreements that allow the lender some controls. These covenants may:

limit the borrower's ability to weaken their balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further.
allow for monitoring the debt requiring audits, and monthly reports allow the lender to decide when he can recall the loan based on specific events or when
financial ratios like debt/equity, or interest coverage deteriorate. A recent innovation to protect lenders and bond holders from the danger of default are credit
derivatives, most commonly in the form of a credit default swap. These financial contracts allow companies to buy protection against defaults from a third party,
the protection seller. The protection seller receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it agrees to buy the debt
should a credit event ("default") occur.

Faced by business
Companies carry credit risk when, for example, they do not demand up-front cash payment for products or services.[1] By delivering the product or service first
and billing the customer later - if it's a business customer the terms may be quoted as net 30 - the company is carrying a risk between the delivery and payment.

Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the
financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk.
They also use third party provided intelligence.

Companies like Standard & Poor's, Moody's and Dun and Bradstreet provide such information for a fee.

For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by tightening payment terms to "net 15", or by actually selling
fewer products on credit to the retailer, or even cutting off credit entirely, and demanding payment in advance. Such strategies impact sales volume but reduce
exposure to credit risk and subsequent payment defaults.

Credit risk is not really manageable for very small companies (i.e., those with only one or two customers). This makes these companies very vulnerable to defaults,
or even payment delays by their customers.

The use of a collection agency is not really a tool to manage credit risk; rather, it is an extreme measure closer to a write down in that the creditor expects a
below-agreed return after the collection agency takes its share (if it is able to get anything at all).

Faced by individuals
Consumers may face credit risk in a direct form as depositors at banks or as investors/lenders. They may also face credit risk when entering into standard
commercial transactions by providing a deposit to their counterparty, e.g., for a large purchase or a real estate rental. Employees of any firm also depend on the
firm's ability to pay wages, and are exposed to the credit risk of their employer.

In some cases, governments recognize that an individual's capacity to evaluate credit risk may be limited, and the risk may reduce economic efficiency;
governments may enact various legal measures or mechanisms with the intention of protecting consumers against some of these risks. Bank deposits, notably, are
insured in many countries (to some maximum amount) for individuals, effectively limiting their credit risk to banks and increasing their willingness to use the
banking system.

Counterparty risk
Counterparty risk, otherwise known as default risk, is the risk that an organization does not pay out on a credit derivative, credit default swap, credit insurance
contract, or other trade or transaction when it is supposed to. Even organizations who think that they have hedged their bets by buying credit insurance of some
sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues.

Large insurers are counterparties to many transactions, and thus this is the kind of risk that prompts financial regulators to act, e.g., the bailout of insurer AIG.

On the methodological side, counterparty risk can be affected by wrong way risk, namely the risk that different risk factors be correlated in the most harmful
direction. Including correlation between the portfolio risk factors and the counterparty default into the methodology is not trivial, see for example Brigo and
Pallavicini

Sovereign risk
Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. The existence of
sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should
consider the sovereign risk quality of the country and then consider the firm's credit quality.

Five macroeconomic variables that affect the probability of sovereign debt rescheduling are:

Debt service ratio
Import ratio
Investment ratio
Variance of export revenue
Domestic money supply growth
The probability of rescheduling is an increasing function of debt service ratio, import ratio, variance of export revenue and domestic money supply growth.
Frenkel, Karmann and Scholtens also argue that the likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity
gains. Saunders argues that rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its
external creditors and so be less concerned about receiving credit from these countries/investors.

References
^ Principles for the management of credit risk from the Bank for International Settlement
^ Investopedia. Counterparty risk. Retrieved 2008-10-06
^ Tom Henderson. Counterparty Risk and the Subprime Fiasco. 2008-01-02. Retrieved 2008-10-06
^ Brigo, Damiano and Andrea Pallavicini (2007). Counterparty Risk under Correlation between Default and Interest Rates. In: Miller, J., Edelman, D., and
Appleby, J. (Editors), Numerical
Methods for Finance. Chapman Hall. ISBN 158488925X. Related SSRN Research Paper
^ Country Risk and Foreign Direct Investment. Duncan H. Meldrum (1999)
^ Cary L. Cooper, Derek F. Channon (1998). The Concise Blackwell Encyclopedia of Management. ISBN 978-0631209119.
^ Frenkel, Karmann and Scholtens (2004). Sovereign Risk and Financial Crises. Springer. ISBN 978-3540222484.
^ Cornett, Marcia Millon and Saunders, Anthony (2006). Financial Institutions Management: A Risk Management Approach, 5th Edition. McGraw Hill. ISBN 978-
0073046679.
Bluhm, Christian, Ludger Overbeck, and Christoph Wagner (2002). An Introduction to Credit Risk Modeling. Chapman & Hall/CRC. ISBN 978-1584883265.
Damiano Brigo and Massimo Masetti (2006). Risk Neutral Pricing of Counterparty Risk, in: Pykhtin, M. (Editor), Counterparty Credit Risk Modeling: Risk
Management, Pricing and Regulation.
Risk Books. ISBN 1-904339-76-X.
de Servigny, Arnaud and Olivier Renault (2004). The Standard & Poor's Guide to Measuring and Managing Credit Risk. McGraw-Hill. ISBN 978-0071417556.
Darrell Duffie and Kenneth J. Singleton (2003). Credit Risk: Pricing, Measurement, and Management. Princeton University Press. ISBN 978-0691090467.
Invoice discounting is a form of short-term borrowing often used to improve a company's working capital and cash flow position.

Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid. To do this, the business borrows a
percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing.

Although the end result is the same as for debt factoring (the business gets cash from its sales invoices earlier than it otherwise would) the financial arrangement
is somewhat different.

1 Features of Invoice Discounting 2 Benefits 3 Drawbacks

Features of Invoice Discounting
When a business enters into an invoice discounting arrangement, the finance company will allow the business to draw down a percentage of the outstanding
sales invoices - usually in the region of 80%. As customers pay their invoices, and new sales invoices are raised, the amount available to be advanced will
change so that the maximum drawdown remains at 80% of the sales ledger.

The finance company will charge a monthly fee for the service, and interest on the amount borrowed against sales invoices. In addition, the finance company
may refuse to lend against some invoices, for example if it believes the customer is a credit risk, sales to overseas companies, sales with very long credit terms, or
very small value invoices. The lender will require a floating charge over the book debts (trade debtors) of the business as security for the funds it lends to the
business under the invoice discounting arrangement.

Responsibility for raising sales invoices and for credit control stays with the business, and the finance company will often require regular reports on the sales
ledger and the credit control process.

Benefits
By receiving cash as soon as a sales invoice is raised, the business will find that its cash flow and working capital position is improved. The business will only pay
interest on the funds that it borrows, in a similar way to an overdraft, which makes it more flexible than debt factoring. Invoice financing can be arranged
confidentially, so that customers and suppliers are unaware that the business is borrowing against sales invoices before payment is received.

Drawbacks
In some industries, financing debts can be associated with a company that is in financial distress. This can result in suppliers becoming reluctant to offer credit
terms, which will reverse many of the benefits of the arrangement. Invoice discounting is an expensive form of financing compared to an overdraft or bank loan.
As the finance company takes a legal charge over the sales ledger, the business has fewer assets available to use as collateral for other forms of lending - this
may make taking out other loans more expensive or difficult. Once a business enters into an invoice discounting arrangement, it can be difficult to leave as the
business becomes reliant on the improved cash flow.

Factoring
Accounts receivable

References
^ Business Link. "Debt factoring and invoice discounting: the basics". Retrieved on 2008-11-01.
Retrieved from "http://en.wikipedia.org/wiki/Invoice_discounting"

Category: Financial services
In business and accounting, assets are everything of value that is owned by a person or company. The balance sheet of a firm records the monetary[1] value of
the assets owned by the firm.

The two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including financial assets and fixed assets.[2]
Financial assets include such items as accounts receivable, bonds, stocks and cash; while fixed assets include such items as buildings and equipment.[3]
Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place.
Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs.

Asset characteristics
Assets have three essential characteristics:

The probable future benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or
indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
The entity can control access to the benefit;
The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.
It is not necessary, in the financial accounting sense of the term, for control of assets to the benefit to be legally enforceable for a resource to be an asset,
provided the entity can control its use by other means.

It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term "equity," (see
the related term shareholders' equity). Assets are equal to "equity" plus "liabilities."

The accounting equation relates assets, liabilities, and owner's equity:
Assets = Liabilities + Owners' Equity

The accounting equation is the mathematical structure of the balance sheet.

Assets are usually listed on the balance sheet. It has a normal balance, or usual balance, of debit (i.e., asset account amounts appear on the left side of a
ledger).

Similarly, in economics an asset is any form in which wealth can be held.

Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board . The following is a quotation from
the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow
to the enterprise."

Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing,
licensing, disposal etc., of both physical and non-physical assets.[clarification needed] In a company's balance sheet certain divisions are required by generally
accepted accounting principles (GAAP), which vary from country to country.

Current assets: Current asset
Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are
continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:

Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque,
bank drafts).
Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
Receivables — usually reported as net of allowance for uncollectable accounts.
Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market
value, whichever is lower. This is known as the "lower of cost or market" rule.
Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also
adjusting entries.
The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.

Long-term investments
Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed in the near future. This group
usually consists of four types of investments:

Investments in securities, such as bonds, common stock, or long-term notes.
Investments in fixed assets not used in operations (e.g., land held for sale).
Investments in special funds (e.g., sinking funds or pension funds).
Investments in subsidiaries or affiliated companies.
Different forms of insurance may also be treated as long term investments.

Fixed assets: Fixed asset
Also referred to as PPE (property, plant, and equipment), or tangible assets, these are purchased for continued and long-term use in earning profit in a business.
This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits
over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in
the notes.

These are also called capital assets in management accounting.

Intangible assets: Intangible asset
Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names,
etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Tangible or intangible assets
What is Factoring? (source: wisegeek)

Factoring goes by many names, including invoice discounting, receivables factoring and debtor financing. In simple terms, factoring is a practice wherein one
company purchases a debt or invoice from another company. It refers to the acquisition of accounts receivable, which are discounted in order to allow the buyer
to make a profit upon collection of monies owed. Factoring transfers ownership of such accounts to another party that then works vigorously to collect the debt.

While factoring may allow the liable party to be relieved of the debt for less than the full amount, it is generally designed to be more beneficial to the factor, or
new owner, and the seller of the account than to the debtor. The seller receives working capital, while the buyer is able to make a profit by buying the account
for substantially less than what it is worth and then collecting on it. Factoring allows a buyer to purchase such accounts for about 25% less than what they are
actually worth.

The factor takes full responsibility for collecting the debt. The factor is required to pay additional fees, usually a small percentage, once collection efforts prove
successful. The new owner of the account may offer the liable person or entity a small discount on the outstanding debt. Other arrangements are sometimes
made, in which the debt is considered paid in full if a lump sum payoff is made under certain terms and conditions. Unfortunately, in some cases, factoring can
cause the consumer or indebted company a great deal of financial stress, such as in the case of debt consolidation.

For example, if a person joins a debt consolidation program and one creditor engages in factoring, then the entity that purchases the account may not be bound
by the program's contract with the original creditor. The factor may demand a large sum to consider the account current, and may increase interest rates as well
as the monthly payment amount. This form of factoring may prove profitable in some cases, but in others it may backfire. The debtor may have no choice but to
file for bankruptcy because he or she simply cannot afford the inflated interest rates and payment amounts. In the majority of cases, factoring is a profitable
venture, but it is a good idea to review each account on an individual basis before deciding how to proceed.
Financial services

Financial services refer to services provided by the finance industry.

The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card
companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004,
the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.

1 History of financial services 1.1 In the United States 2 Banks 2.1 Banking services 2.2 Private banking 2.3 Capital market banks 2.4 Bank cards 2.5 Credit card
machine services and networks 3 Investment services 3.1 Asset management 3.2 Hedge fund management 3.3 Custody services 4 Insurance 4.1 Insurance
brokerage 4.2 Insurance underwriting 4.3 Reinsurance 5 Intermediation or advisory services 5.1 Stock brokers (private client services) and discount brokers 6
Private equity 7 Venture capital 8 Angel investment 9 Conglomerates 10 Financial crime 10.1 UK 11 Market share 12 Brand equity 13 Glossary 14
Acronyms 16 Notes 17 References

History of financial services

In the United States
The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled
different types of companies operating in the US financial services industry at that time to merge.[citation needed] In the USA almost every company now which
previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services institution.

Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an
investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S.,
e.g., in Japan, non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its
own customers, etc.

In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with
incentives for combining all things with one company.

Banks: Bank
A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of
financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock
(equity).

Banking services
The primary operations of banks include:
Keeping money safe while also allowing withdrawals when needed
Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)
Issuance of credit cards and processing of credit card transactions and billing
Issuance of debit cards for use as a substitute for checks
Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
Provide wire transfers of funds and Electronic fund transfers between banks
Facilitation of standing orders and direct debits, so payments for bills can be made automatically
Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current
account.
Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.
Notary service for financial and other documents

Private banking: Private banking
The providing of banking services to very wealthy individuals and families. Many financial services firms require a person or family to have a certain minimum
net worth to qualify for private
banking services. Services are provided by a bank or a division of a financial services company.

This table displays the results of the Ultra high net worth (US$30m+) category of the 2006 private banking awards:

Rank 06 Company Rank 05
1. JPMorgan Private Bank 1
2. Goldman Sachs 3
3. UBS 2
4. Citigroup Private Bank 4
5. Credit Suisse Private Banking 5
6. HSBC Private Bank 7
7. Pictet & Cie 6
8. Merrill Lynch n
9. N M Rothschild & Sons 8
10. ABN Amro Private Banking 10

Ranking: 'n' denotes 'nominated'

State Bank of India
ICICI

Capital market banks
Capital market banks underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured
finance products. Prominent
amongst them include:

Barclays Capital
Citigroup Global Markets (formerly Salomon Brothers)
Credit Suisse First Boston
Deutsche Bank
Goldman Sachs
ING Group
JPMorgan Chase
Lehman Brothers
Merrill Lynch
Morgan Stanley
Needham & Company
Nomura
UBS
Gleacher Shacklock
D.A. Davidson & Co.
See also: Mergers & acquisitions

Bank cards
Bank cards include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.

American Express
Barclay card
Capital One
Discover Card
HSBC
Intelligent Finance
Master Card
Washington Mutual
VISA

Credit card machine services and networks
Companies which provide credit card machine and payment networks call themselves "merchant card providers". These include:

BA Merchant Services (Bank of America)
First Data Corporation
Heartland Payment Systems
US Bank
PBZ Card
Barclays
HSBC
HBOS (Halifax Bank of Scotland)
RBS (Royal Bank of Scotland)

nvestment services

Asset management: Investment management
Asset management is the term usually given to describe companies which run collective investment funds.

The following is Global Investor’s 2005 ranking of the top 10 investment managers by assets under management:

Rank Company Assets under management
(US$million) Country
1. Barclays Global Investors 1,400,491 UK
2. State Street Global Advisors 1,367,269 US
3. Fidelity Investments 1,299,400 US
4. Capital Group Companies 1,050,435 US
5. The Vanguard Group 852,000 US
6. Allianz Global Investors 790,513 Germany
7. JPMorgan Asset Management 782,646 US
8. Mellon Financial Corporation 738,294 US
9. Deutsche Bank Asset Management 723,366 Germany
10. Northern Trust Global Investments 589,800 US

Hedge fund management
Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. Prominent hedge funds include:

BlackRock, Inc.
Bridgewater Associates
Caxton Associates
Citadel Investment Group
Deutsche Bank
Renaissance Technologies
SAC Capital Partners
Soros Fund Management
Man Investments
Fortress Management

Custody services
Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world was estimated to $65
trillion at the end of 2004. Firms engaged in custody services include:

State Street Corporation
The Bank of New York Mellon
JPMorgan Chase
PNC Financial Services Group
Kas Bank

Insurance: Insurance

Insurance brokerage
Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Significant companies in this sector of the
financial services market include:

IBS Insurance Broking Services
Aon Corporation
Marsh & McLennan Companies
Wachovia
Wells Fargo
Hiscox

Insurance underwriting
Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock
brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement
insurance, health insurance, and property & casualty insurance. Some well known insurers include:

Allianz
Allied Insurance
Allstate
AIG
Aviva
AXA
Berkshire Hathaway
Chubb Corporation
CGNU
Independent Order of Foresters
Geico
Life Insurance Corporation of India
MetLife
Mutual of Enumclaw
Nationwide Insurance
New York Life
Safeco
State Farm
Zurich Financial Services

Reinsurance
Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses. Firms in this sector include:

Berkshire Hathaway
Lloyd's of London
Munich Re
Swiss Re
Aon
Towers Perrin
Underwriting

Intermediation or advisory services

Stock brokers (private client services) and discount brokers
Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now
have branch offices to assist clients. These brokerages primarily target individual investors. Examples of discount brokerages include:

Ameritrade
Charles Schwab
Edward Jones
E-Trade
Fidelity Investments
Scottrade
Tradeking
FolioFN
Sharebuilder
Zecco.com

Full service and private client firms primarily assist execute trades and execute trades for clients with large amounts of capital to invest, such as large companies,
wealthy individuals, and investment management funds. Examples include:

Deutsche Bank
Goldman Sachs
Merrill Lynch
Morgan Stanley
Smith Barney
UBS AG

Private equity: Private equity
Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once
acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can
generate returns significantly higher than provided by the equity markets

Venture capital: Venture capital
Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of
taking the company to an IPO or trade sale of the business.

Angel investment: Angel investor
An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually
in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks
to share research and pool their investment capital.

Conglomerates
A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general
insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc.

A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.
e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital
is for the sum of its parts.

Financial crime

UK
Fraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further £25bn is laundered by British institutions.

Market share
The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market cap. However it is not the largest
category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (Citigroup), only
having a 3 % US market share. In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house
Starbucks has a 32 % market share.

Brand equity
Each year, BusinessWeek and Interbrand publish their 100 Best Global Brands study, ranking the financial value of brands. The following are the financial
services companies in this list, ranked by this study for 2006:

Rank Brand Brand value
(US$billion) Annual
change 2005
Rank Country of origin
11 Citigroup 21.46 7% 12 U.S.
14 American Express 19.64 6% 14 U.S.
21 Merrill Lynch 13.00 8% 25 U.S.
28 HSBC 11.62 11% 29 U.K.
33 J.P. Morgan 10.21 8% 34 U.S.
36 Morgan Stanley 9.76 0% 33 U.S.
37 Goldman Sachs 9.64 13% 37 U.S.
42 UBS 8.73 15% 44 Switzerland
87 ING 3.47 9% 87 Netherlands

Glossary
Glossary for reading financial services reports:

Asset sensitive - a financial institution that has a negative duration of equity may also be described as having a positive gap or as being asset sensitive.
Charge-offs - written off debt Cost of funds - the cost of loan capital, the cost of funding assets; free liabilities include interest free checking accounts
Cost-to-Income Ratio (CIR, C/I ratio) - An important measure of the efficiency of financial institutions, this refers to their operating expenses divided by their
operating revenues. [Euromoney: cited below]
Diversification - In portfolio management, refers to the variety of securities within a portfolio in terms of its geographical or sectoral spread, or in terms of its credit
quality. In general, risk is reduced as portfolio diversification increases. [Euromoney: cited below]
Equity-Linked Annuity - An annuity paying a fixed minimum rate, qualifying for bonus payments linked to the performance of an equity benchmark such as the
S&P 500.
Liability sensitive - the inverse of asset sensitive.
Operating leverage - a simple indication of a firm' s earnings strength; usually measuring the operating income as a percentage of gross income

Acronyms
NCL - net credit losses - cost of charge-offs, written off debt
NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid
NII - net interest income - interest income less interest cost
NIM - net interest margin - margin between interest income and interest cost
NPA - non performing assets - interest bearing assets not paying interest

Accounting scandals
BFSI
European Financial Services Roundtable
Financial analyst
Financial markets
Financialization
Government sponsored enterprise
International Monetary Fund
Investment management
Misleading financial analysis
Thomson Financial League Tables
Source: Wikipedia
Fiscal Policy
All policy by the government involving the collection and spending of revenue; ie "tax and spend" policy.
In particular, fiscal policy refers to efforts by the government to stimulate the economy directly, through spending. Compare monetary policy.
Float
Number of shares of a stock available to the public.
Forex

"Forex" stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another - that is, you're exchanging
the sold currency for the one you're buying. The foreign exchange market is an over-the-counter market.

Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Unlike stocks or futures, there's no centralized exchange for
forex. All transactions happen via phone or electronic network.

Who trades currencies, and why?

Daily turnover in the world's currencies comes from two sources:
Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.

Speculation for profit (95%).
Most traders focus on the biggest, most liquid currency pairs. "The Majors" include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar
and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.

The world's most traded market, trading 24 hours a day

With average daily turnover of US$3.2 trillion, forex is the most traded market in the world.
A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to
Tokyo, London, and New York.

Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur - day or night.
More Info

"All About the Foreign Exchange Markets in the United States", from the Federal Reserve Bank of New York
Forex? What is it, anyway?. The market The currency trading (FOREX) market is the biggest and the fastest growing market on earth. Its daily turnover is more
than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover.The Forex are the currencies of various countries. You buy Euro, paying with
US dollars, or you sell Japanese Yens for Canadian dollars. That's all.

How does one profit in Forex? Very simple and obvious: buy cheap and sell for more! The profit is generated from the fluctuations (changes) in the currency
exchange market.Such fluctuations, say - around 1%, are multiplied by 100! (in general, Forex offers trading ratios from 1:50 to 1:200). If, for example, the
exchange rate of "your" pair of currencies increased by 0.6% in the last 4 hours, your profit will be 60% on your investment! Such can happen in one business
day, or in a few hours, even minutes.Moreover, you cannot lose more than your "margin"! You may profit unlimited amounts, but you never lose more than what
you initially risked and invested.You can implement your choice (the pair of currencies, the volume amount) under any direction to which the market is moving,
and yet make profit. It does not matter whether the exchange rate is going up or down: you can always decide to buy Euro and sell dollar, or vice versa - buy
dollar and sell Euro. You don't have to physically possess certain currencies in order to perform "buy" or "sell" with them.

How do I start? The simplest and quickest registration process, no obligation); deposit your first trading "margin" amount and start trading.It can't be simpler or
easier than that. Need help?
We'll provide you with 1-on-1 training and service, as much as necessary (real people service, live, in your own language).

How do I trade Forex? You select the pair of currencies with which you wish to make a Forex deal. You determine the volume (the amount of the deal). You
deposit the "margin" (collateral needed to facilitate the deal. Usually - only a very small portion of the whole deal, say: 1% or 1:100).When your Forex deal is
running (you hold an "open position"), you can monitor its status and check scenarios online, whenever you wish. You may change some terms in the deal, or
close it (and cash the profit, if any, or minimize the loss, if any). Moreover, Forex lets you determine a "take-profit" rate, with which the deal will close
automatically for you, when and if such rate occurs in the market. Meaning: you do not have to stay near your computer when you hold open positions.
The foreign exchange (currency, forex or FX) market is where currency trading takes place. FX transactions typically involve one party purchasing a quantity of
one currency in exchange for paying a quantity of another. The FX market is one of the largest and most liquid financial markets in the world, and includes
trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global
forex and related markets is continuously growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International
Settlement. [1] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

1 Market size and liquidity 2 Market participants 2.1 Banks 2.2 Commercial companies 2.3 Central banks 2.4 Hedge funds 2.5 Investment management firms
2.6 Retail forex brokers
2.7 Other 3 Trading characteristics 4 Factors affecting currency trading 4.1 Economic factors 4.2 Political conditions 4.3 Market psychology 5 Algorithmic
trading in forex
6 Financial instruments 6.1 Spot 6.2 Forward 6.3 Future 6.4 Swap 6.5 Option 6.6 Exchange Traded Fund 7 Speculation 8 References

Market size and liquidity

The foreign exchange market is unique because of its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.As such, it has been referred to as the market closest to the ideal perfect
competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[1] average daily turnover in global
foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately
$3.21 trillion in main foreign exchange market turnover was broken down as follows:

$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center
for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to
"traditional" turnover, $2.1 trillion was traded in derivatives. Exchange- traded forex futures contracts were introduced in 1972 at the Chicago Mercantile
Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of
the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Top 10 currency traders
% of overall volume, May 2008 Rank Name Volume
1 Deutsche Bank 21.70%
2 UBS AG 15.80%
3 Barclays Capital 9.12%
4 Citi 7.49%
5 Royal Bank of Scotland 7.30%
6 JPMorgan 4.19%
7 HSBC 4.10%
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing
importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse
selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for
retail traders to trade in the foreign exchange market. [4] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another,
there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has
increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP The ten most active traders account for
almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with
both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the
price at which a market-maker will buy ("bid") from a wholesale customer.
This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail
broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot". These spreads might not apply to retail customers at
banks, which will routinely mark up the difference to say 1.2100 /1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at
market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip
spreads shrink on the major pairs to as little as 1 to 2 pips.

Market participants Financial markets Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt
Stock market Stock Preferred stock Common stock Registered share Voting share Stock exchange
Foreign exchange market Derivatives market Credit derivative Hybrid security Options Futures Forwards Swaps
Other Markets Commodity market Money market OTC market Real estate market Spot market

--------------------------------------------------------------------------------

Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market,
which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are
razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2
pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a
smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by
the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there
are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large
hedge funds, and even some of the retail forex-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and
other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.”
(2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also
participate in the forex market to align currencies to their economic needs.

Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of
dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees.
Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank
trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies
often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless,
trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact
when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often
have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton
Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high —
that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because
central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times
each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily
overwhelm any central bank.[5] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Hedge funds
Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more,
and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange
market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell
several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim
of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management
(AUM), and hence can generate large trades.

Retail forex brokers
There are two types of retail brokers offering the opportunity for speculative trading: retail forex brokers and market makers. Retail traders (individuals) are a small
fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and
NFA might be subject to forex scams[6] [7]. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net
Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail
brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of
interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through
Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.

Other
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as
Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually
a physical delivery of currency to a bank account.

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[8]. These companies' selling point is usually that
they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that
they generally offer higher-value services.

Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite
Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the
Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.

Trading characteristics Most traded currencies Currency distribution of reported FX market turnover
Rank Currency ISO 4217 code (Symbol) % daily share (April 2007)
1  United States dollar USD ($) 86.3%
2  Euro EUR (€) 37.0%
3  Japanese yen JPY (¥) 16.5%
4  Pound sterling GBP (£) 15.0%
5  Swiss franc CHF (Fr) 6.8%
6  Australian dollar AUD ($) 6.7%
7  Canadian dollar CAD ($) 4.2%
8-9  Swedish krona SEK (kr) 2.8%
8-9  Hong Kong dollar HKD ($) 2.8%
10  Norwegian krone NOK (kr) 2.2%
11  New Zealand dollar NZD ($) 1.9%
12  Mexican peso MXN ($) 1.3%
Other 16.8%
Total 200%

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC)
nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there
is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the
rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's
quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and
aspires to the role of a central market clearing mechanism.

The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate.
Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American
session and then back to the Asian session, excluding weekends.

Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP
growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is
released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important
advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the
ISO 4217 international three- letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is
the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger
currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

EUR/USD: 27 %
USD/JPY: 13 %
GBP/USD (also called sterling or cable): 12 % and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and
sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-
centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and
USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during
2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has
increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Factors affecting currency trading. Exchange rates
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can
be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one
currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as
foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall
into three categories: economic factors, political conditions and market psychology.

Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports,
and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank
influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget
deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a
country's currency to conduct trade.
Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact
on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising.
This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation
rises because of expectations that the central bank will raise short- term interest rates to combat rising inflation.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of
a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more
demand for it there will be.

Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally
responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the
process, affect its currency.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a
higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of
political or economic uncertainty.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical
commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a
particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a
market being "oversold" or "overbought". To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors
focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself
becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent
years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that
traders may attempt to use. Many traders study price charts in order to identify such patterns.

Algorithmic trading in forex
Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates,
by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.

Financial instruments

Spot
A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar, which settles the next day), as opposed to the futures contracts,
which are usually three months.
This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included
in the agreed-upon transaction.
The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.

Forward. Forward contract
One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon
future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates
are then. The duration of the trade can be a few days, months or years.

Future: Currency future
Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an
agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures
contracts are usually inclusive of any interest amounts.

Swap: Forex swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse
the transaction at a later date.
These are not standardized contracts and are not traded through an exchange.

Option: Foreign exchange option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money
denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most
liquid market for options of any kind in the world.

Exchange Traded Fund: Exchange-traded fund
Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to
replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF
increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world
currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar
denominated investors and speculators.

Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including
Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for
hedgers and transferring risk from those people who don't wish to bear it, to those who do.[13] Other economists such as Joseph Stiglitz consider this argument to
be based more on politics and a free market philosophy than on economics.[14]

Large hedge funds and other well capitalized "position traders" are the main professional speculators.

Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is
considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that
often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to
500% per annum, and later to devalue the krona[15]. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed
the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.[16]

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the
effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators allegedly made the
inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other
critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia
recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt.

References
^ a b c Triennial Central Bank Survey (December 2007), Bank for International Settlements.
^ Annual FX poll (May 2008), Euromoney.
^ Source: Euromoney FX survey FX Poll 2008: The Euromoney FX survey is the largest global poll of foreign exchange service providers.'
^ http://www.ifsl.org.uk/upload/CBS_Foreign_Exchange_2007.pdf (December 2007), International Financial Services, London.
^ Alan Greenspan, The Roots of the Mortgage Crisis: Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own. , the
Wall Street Journal, December 12, 2007
^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits", The Wall Street
Journal, Dow Jones and Company.
Retrieved on 31 October 2007.
^ Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100", The New York Times. Retrieved on 30 October 2007.
^ The Sunday Times (UK), 16 July 2006
^ Safe haven currency
^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), pp. 343–375.
^ Investopedia
^ Sam Y. Cross, All About the Foreign Exchange Market in the United States, Federal Reserve Bank of New York (1998), chapter 11, pp. 113–115.
^ Michael A. S. Guth, "Profitable Destabilizing Speculation," Chapter 1 in Michael A. S. Guth, SPECULATIVE BEHAVIOR AND THE OPERATION OF
COMPETITIVE MARKETS UNDER
UNCERTAINTY, Avebury Ashgate Publishing, Aldorshot, England (1994), ISBN 1856289850.
^ What I Learned at the World Economic Crisis Joseph Stiglitz, The New Republic, April 17, 2000, reprinted at GlobalPolicy.org
^ But Don't Rush Out to Buy Kronor: Sweden's 500% Gamble - International Herald Tribune
^ a b Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995.
Balance of trade
Bretton Woods system
Currency pair
Foreign currency mortgage
Foreign exchange hedge
Foreign exchange reserves
Forex scam
Forex swap
Retail forex
Special Drawing Rights
Tobin Tax
World currency
Major inter-dealer FX brokers: EBS, Reuters
Major retail FX brokers: World First, Travelex
Benchmark Currency Rates from Bloomberg
CFTC Commission Advisory Customer fraud Protection
United States Federal Reserve daily update
Microstructure effects, bid-ask spreads and volatility in the spot foreign exchange market pre and post-EMU Technical description of FX market workings.
Retrieved from "http://en.wikipedia.org/wiki/Foreign_exchange_market"
Category: Foreign exchange market
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2008 Source: Wikipedia
Currency exchange tips

It can be really cumbersome to understand the way currency works in a new economic system when you frequently travel from one country to another. To
understand the whole concept of money exchange, we need to understand the concept of money itself. During the prehistoric times, money as a currency did
not exist only, rather, goods and services were exchanged or ‘bartered’. The need for money arose when some one wanted goods, but the goods seller did not
have an appropriate service for the buyer. So the traders of that time invented coins, which a service provider would get after providing services and then
exchange these coins for the goods he or she wants- it was a simple universal solution to the problems of both the sellers and the buyers. Building on the above
information, the reason why the rates of currencies change in different countries is because the rates of services and goods exchanged in different marketplaces
vary greatly. For example, a service in Europe would be expensive as compared to the same service in a third world nation such as India or the Philippines.

So as travelers, we need to understand the main reason why at times we might end up spending more than what the currency conversions say? See, when you
go to an exchange counter, you see two types of boards- one that says “we sell” and the other that says “we buy”. What is the difference and why is there a rate
difference between the two?” Well, the difference lies in the fact that the bank or the exchanger would sell the local currency to you in exchange of your own
currency at a lower rate in order to get more of your currency for less local currency. For example, if the Euro is equivalent to 70 rupees INR, then the
exchanger would give you 70 rupees for every Euro you sell him, or for every Euro he buys. On the contrary, if at the end of your holiday, you are left with some
extra local currency, the same money exchanger would now buy it back at a higher rate. For example, if you have additional INR left at the end of your perfect
little Indian vacation, then a bank would buy it back at 75 rupees in exchange of one Euro, and therefore you end up paying more than what you had brought
the local currency for.

In the light of all this knowledge, I would like to share some simple tricks with you regarding currency conversion and the way in which you can minimize your
losses. The best way to go about it is to get yourself traveler checks, preferably in USD or Euro denominations. You should distribute these in various segments of
$10, $20, $50, $100 and so on. The best thing with traveler checks is that you use them as and when you need them and you don’t need to get all of your
money converted all at once. If you haven’t used up all your money in the foreign land, you can come back home and get a full refund of all your traveler
checks, without loosing a single penny.

Another way to save on these unforeseen currencies exchange expenses is to tie up with a local person and try to do money exchange with him. Usually, this
would require you to hike the exchange rate a bit, but in this way, you can set up an agreement under which both of you charge and give the same exchange
rate while selling or buying back. This acts as a buffer to international exchange rate fluctuations and the rate differential between the selling and the buy back
rates at various banks of the countries. This method is usually a great way to counter the risks of a volatile market if you are planning to stay on a vacation for a
long period of time, usually for more than a month and you are therefore not sure about the amount of local currency you would be requiring for the whole trip.

So there you have it, the whole idea behind currency, Euro currency exchange and how to minimize your Euro currency exchange woes while on a vacation to
a foreign country.
Currency Exchange for the Smart Traveler
By ROBIN AGUILAR, AOL TRAVEL

Think you can use your ATM card everywhere while traveling? Think again. Explore the basics of currency exchange before you go, and you might avoid
expensive surprises.

It’s a common mistake. First-time travelers head overseas for the trip of a lifetime armed with only an ATM card. Sadly, these newbies spend the majority of their
trip calling their home bank to find one location that will actually take their ATM card. Excitedly they rush to the very far location, only to be disappointed (yet
again) to find that the machine accepts a 4-digit PIN only, or won’t issue cash to non-residents.

Understanding currency exchange while traveling could have avoided this mess. For many, the concept of traveler’s checks and currency exchange surcharges
is as foreign as the land they’re headed to. Although the money exchange rules are constantly changing, it’s important to get a handle on them before you step
on a plane. It may save you time, money and heartache on your next trip.

ATMs and Currency Exchange Machines
Rule of thumb is that ATMs tend to offer better exchange rates than traveler’s checks. This due to a relatively low interbank rate, the interest rate charged by the
bank you’re withdrawing from to your bank for the “short-term loan”, a.k.a. your withdrawal. Some banks might tack on conversion fees for currency exchange
from US dollars. If the same fee is charged if you withdraw $50 or $300, go for the larger amount instead of hitting the ATM twice and getting charged twice.
Plus, don’t forget the classic non-bank ATM fees we all know and loathe.

If you decide to go with ATMs while traveling, do your homework before you go. Call your bank to see if your card is usable in your destination and where. Many
foreign ATMs only accept 4- digit numeric PIN, so make sure you have one set up before hand. Some countries might not have ATMs or won’t give money to
non-residents. It’s best to carry a credit card and/or traveler’s checks as a backup.

More Money Exchange Conversion Fees
As mentioned earlier, currency exchange conversion fees are charged by the ATM logo on your card and/or bank to change US dollars into local money. Plus,
when making purchases with your debit card in foreign amounts, you might also encounter overseas transaction fees. Should a merchant convert your bill into
US dollars, you will be charged a sizeable currency exchange conversion fee by the merchant. To save yourself from these currency exchange fees, ask to be
charged for your bill in the local currency, only use partner bank ATMs, and switch banks if you have to before you leave.

Credit Card Fees
Credit cards have all sorts of tricks when it comes to currency exchange transactions. Some of these currency exchange fees include a commission for the
currency exchange itself (purchase or cash withdrawal), as well as an international transaction fee on top of that. There may also be another type of currency
exchange fee particular to cruise travelers that is charged for being “cross-border”, even if the transaction is in US dollars. And for those who make an
international purchase and end up returning it, you might be charged a currency exchange fee on the refund as well.

On the plus side, it’s rumored that some credit card issuers won’t post your transaction until the currency exchange rate is in your favor. Check to see if this is the
case.

Travel Money Cards
Companies like American Express and Visa are offering prepaid travel money cards for travelers. For a fee, you can load up this card with money (up to a
certain limit) and use for purchases or cash withdrawals overseas. The problem with these cards is the exorbitant currency exchange fees. You’ll be charged
currency exchange fees for every withdrawal, all local bank fees and reloading fees. Plus, don’t try to use these cards in a country not associated with the travel
money card, or else you’ll get more fees.

Traveler’s Checks
Major banks are still issuing traveler’s checks in US dollars and foreign currencies. Your best bet is to buy traveler’s checks in small and large denominations (not
everyone will cash the big bills) in the foreign currency of your destination (to avoid currency exchange fees). Treat traveler’s checks like cash, keep multiple
copies of your receipts, and if traveling with someone you trust, have them be the second signature required to cash the check.

Currency Exchange Tips
• Call each bank of the cards you’ll be using abroad to verify fees and ATM locations. Print maps of those locations.
• Nasty currency exchange fees for your situation? Switch banks.
• Currency exchange rates at airports, hotels and tourist change bureaus are horrible. Buy a modest amount of local currency before you leave to cover you
until you can get to a bank in your destination.
• Because exchange rates change quickly, exchange your currency as seldom as possible.
• Bring money in a mix of forms to cover money exchange surprises.

The Amero is a theoretical unit of currency that would be used throughout North America. The Amero is seen as a replacement for the three currencies of the
three large countries in North America, the Canadian Dollar, the US Dollar, and the Mexican Peso. The Amero can be seen as a correlary to the European
Union’s unit of the currency, the Euro, and its name is a play off of that name.

In South America, the Union of South American Nations, which includes every independent nation in South America, has been moving towards a more
cooperative union as well, modeled after the European Union. One of the eventual goals of their union is a universal currency, as well, also modeled after the
Euro.

None of the three governments which would be involved have moved forward at all with an Amero currency, but a number of theorists have pointed to it as a
natural progression in the free market movement of North America. As the North American Free Trade Agreement (NAFTA) broke down many trade barriers
between the three countries, and the Security and Prosperity Partnership of North America (SPP) linked the countries to some extent in terms of mutual aid, the
Amero is seen as further uniting the countries’ interests.

The Amero was first proposed by a Canadian economist, Herb Grubel, in a book he wrote in 1999, entitled The Case for the Amero. A number of think tanks
have since come out in favor of the Amero, arguing it would help strengthen all three countries by fostering a large-scale cooperation. A number of progressive
groups in Canada have opposed the idea of the Amero, arguing that it would open up Canada even more to American corporations who wish to exploit Canada’
s natural resources for their own gain.

The Amero mainly has benefits for Canada and Mexico, while the United States would see little gain from the adoption of a single shared currencies. Canadian
theorists have argued it would save Canada billions of dollars a year in currency transactions, and that it would help bolster the nation’s GDP enormously. Some
prominent Mexican theorists, including former president Vicente Fox, have supported the idea of an Amero as being very beneficial to Mexico’s currency in the
long run.

To some extent, it can be argued that a shared currency already exists in the Americas, with the US Dollar acting as a de facto currency in many nations in
Central and South America, including Peru, Panama, Honduras, Ecuador, Nicaragua, El Salvador, and much of the Caribbean. Many of these countries accept
the US Dollar along with their own currencies, while some, like Ecuador, actually use the US Dollar as their primary unit of exchange.

There are a number of critiques of the idea of an Amero, the largest simply being that given the US Dollar’s unique role in the world, the adoption of an Amero
currency could have unexpected repercussions. Unlike the European Union, where the economies of the largest countries are at least somewhat comparable in
size, the US economy dwarfs those of the other two nations involved, which would give the country a large imbalance of power. At the same time, given the
global economy’s de facto use of the US Dollar as a common currency, anything that might jeopardize that role is treated with some caution. Source: wisegeek.
EXCHANGE RATE by Valentino Piana (2001)
--------------------------------------------------------------------------------

Significance
The exchange rate expresses the national currency's quotation in respect to foreign ones. For example, if one US dollar is worth 10 000 Japanese Yen, then the
exchange rate of dollar is 10 000 Yen. If something costs 30 000 Yen, it automatically costs 3 US dollars as a matter of accountancy. Going on with fictious
numbers, a Japan GDP of 8 million Yen would then be worth 800 Dollars.

Thus, the exchange rate is a conversion factor, a multiplier or a ratio, depending on the direction of conversion.

In a slightly different perspective, the exchange rate is a price. If the exchange rate can freely move, the exchange rate may turn out to be the fastest moving
price in the economy, bringing together all the foreign goods with it.

Types of exchange rate

It is customary to distinguish nominal exchange rates from real exchange rates. Nominal exchange rates are established on currency financial markets called
"forex markets", which are similar to stock exchange markets. Rates are usually established in continuous quotation, with newspaper reporting daily quotation (as
average or finishing quotation in the trade day on a specific market). Central bank may also fix the nominal exchange rate.

Real exchange rates are nominal rate corrected somehow by inflation measures. For instance, if a country A has an inflation rate of 10%, country B an inflation
of 5%, and no changes in the nominal exchange rate took place, then country A has now a currency whose real value is 10%-5%=5% higher than before [1]. In
fact, higher prices mean an appreciation of the real exchange rate, other things equal.

Another classification of exchange rates is based on the number of currencies taken into account. Bilateral exchange rates clearly relate to two countries'
currencies. They are usually the results of matching of demand and supply on financial markets or in banking transaction (usually with central bank as a one
side of the relationship).

Other bilateral exchange rates may be simply computed from triangular relationships: if the exchange rate dollar/yen is 10 000 and the dollar/Angolan kwanza
is 100 000 then, as a matter of computation, one yen is worth 10 kwanza. No direct yen/kwanza transaction needs to take place. If, instead, there exist a
financial market for yen to be exchanged with kwanza, the expectation is that actions by speculators (arbitrage among markets) will bring the parity of 10 kwanza
per yen as an effect.

Multilateral exchange rates are computed in order to judge the general dynamics of a country's currency toward the rest of the world. One takes a basket of
different currencies, select a (more or less) meaningful set of relative weights, then computes the "effective" exchange rate of that country's currency.

For instance, having a basket made up of 40% US dollars and 60% German marks, a currency that suffered from a value loss of 10% in respect to dollar and
40% to mark will be said having faced an "effective" loss of 10%x0.6 + 40%x0.4 = 22%.

Some countries impose the existence of more than one exchange rate, depending on the type and the subjects of the transaction. Multiple exchange rates
then exist, usually referring to commercial vs. public transactions or consumption and investment imports. This situation requires always some degree of capital
controls.

In many countries, beside the official exchange rate, the black market offers foreign currency at another, usually much higher, rate.

Exchange rate regimes

When the exchange rate can freely move, assuming any value that private demand and supply jointly establish, "freely floating exchange rate" will be the
name of currency institutional regime. Equivalently, it is called "flexible" exchange rate as well.

If the central bank timely and significantly intervenes on the currency market, a "managed floating exchange rate regime" takes place. The central bank
intervention can have an explicit target, for example in term of a band of currency acceptable values.

In "freely" and "managed" floating regimes, a loss in currency value is conventionally called a "depreciation", whereas an increase of currency's international
value will be called "appreciation". If the dollar rise from 10 000 yen to 12 000 yen, then it has shown an appreciation of 20%. Symmetrically, the yen has
undergone a 8.3% depreciation.

But central banks can also declare a fixed exchange rate, offering to supply or buy any quantity of domestic or foreign currencies at that rate. In this case, one
talks of a "fixed exchage rate".

Under this regime, a loss of value, usually forced by market or a purposeful policy action, is called a "devaluation", whereas an increase of international value is
a "revaluation".

The most stabile fixed exchange regimes are backed by an international agreement on respective currency values, often with a formal obligation of loans
among central banks in case of necessity.

A "currency crisis" is a rupture of fixed exchange rates with an unwilling devaluation or even the end of that regime in favour of a floating exchange rate.

An extreme national engagement to fixed exchange rates is the transformation of the central bank in a mere "currency board" with no autonomous influence on
monetary stock. The bank will automatically print or lend money depending on corresponding foreign currency reserves. Thus, exports, imports and capital
inflows (e.g. FDI) will largely determine the monetary policy.

Determinants of the nominal exchange

Fixed exchange rates are chosen by central banks and they may turn out to be more or less accepted by financial markets.

Changes in floating rates or pressures on fixed rates will derive, as for other financial assets, from three broad categories of determinants:

i) variables on the "real" side of the economy;
ii) monetary and financial variables determined in cross-linked markets;
iii) past and expected values of the same financial market with its autonomous dynamics.

Let's see them separately for the case of the exchange rate.

Real variables

1. Exports, imports and their difference (the trade balance) influence the demand of currency aimed at real transactions.

A rising trade surplus will increase the demand for country's currency by foreigners, so that there should be a pressure for appreciation. A trade deficit should
weaken the currency.

Were exports and imports largely determined by price competitiveness and were the exchange rate very reacting to trade unbalances, then any deficit would
imply a depreciation, followed by booming exports and falling imports. Thus, the initial deficit would be quickly reversed. Trade balance saldo would almost
always be zero.

This is hardly the case in contemporary world economy. Trade unbalances are quite persistent, as you can verify with these real world data. Additionally, not so
seldom, exchange rates go in the opposite direction than one would infer from trade balance only.

2. An even more radical form of real determination of exchange rate is offered by the "one price law", according to which any good has the same price
worldwide, after taken into account nominal exchange rates. If a hamburger costs 3 US dollars in the United States and 30 000 yen in Japan, then the
exchange rate must be 10 000 yen per dollar. The forex market would passively adjust to permit the functioning of the "one price law".

But in order to equalize the price of several goods, more than one exchange rate may turn out to be "necessary". Moreover the "one price law" seems to suffer
from too many exceptions to be accepted as the fundamental determinant of exchange rates.

Large, persistent and systematic violations of Purchasing Power Parity are connected to price-to-market decisions of firms in this paper of September 2007.

Monetary and financial variables in cross-linked markets

1. Interest rates on Treasury bonds should influence the decision of foreigners to purchase currency in order to buy them. In this case, higher interest rates
attracts capital from abroad and the currency should appreciate. Decisive would be the difference between domestic and foreign interest rates, thus a reduction
in interest rates abroad would have the same effects.

Similarly other fixed-interest financial instruments could be object of the same dynamics. Accordingly, an increase of domestic interest rates by the central
bank is usually consider a way to "defend" the currency.

Nonetheless, it may happen that foregners rather buy shares instead of Treasury bonds. If this were the strongest component of currency demand, then an
increase of interest rate may even provoke the opposite results, since an increase of interest rate quite often depresses the stock market, favouring a tide of share
sales by foreigners.

In the same "inversal" direction might foreign direct investments work. A restrictive monetary policy usually depresses the growth perspective of the economy. If
FDI are mainly attracted by sales perspectives and they constitute a large component of capital flows, then FDI inflow might stop and the currency weaken.

Needless to say, those conditions are quite restrictive and not so usually met.

As a temporary conclusion, interest rates should have an important impact on exchange rate but one has to be careful to check additional conditions.

2. Inflation rate is often considered as a determinant of the exchange rate as well. A high inflation should be accompanied by depreciation. The more so if
other countries enjoy lower inflation rates, since it should be the difference between domestic and foreing inflation rates to determine the direction and the
scale of exchange rate movements.

All this would be implied by a weak version of "one price law" stating that price dinamics of a good are the same worldwide, after taking into account nominal
exchange rates. Thus, here the absolute level is not requested to be equalized but just the percentage differences in price.

If an hamburger costs in Japan 5% more than a year ago, while in USA it costs 8% more, then the dollar should have been depreciated this year by about 8-
5=3%.

But in order to equalize the price dynamics of different goods, more than one exchange rate change may turn out to be "necessary".

In reference to the overall price level of the economy, if exchange rates would move exactly counterbalancing inflation dynamics, then real exchange rates
should be constant. On the contrary, this is not true as a strict universal rule.

Still, even if this weak version of the "law" does not always hold, high inflation usually give rise to depreciation, whose exact dimension need not match the
inflation itself or its difference with foreign inflation rates.

3. The balance of payments can highlight pressures for devaluation or revaluation, reflected in large and systematic trend of foreing currency reserves at the
central bank.

Autonomous dynamics on the forex market

Past and expected values of the exchange rate itself may impact on current values of it. The activities of forex specialists and investors may turn out to be
extremely relevant to the detemination of market exchange rate also thanks to their complex interaction with central banks. Sophisticated financial instruments
like futures on exchange rates may play an important role. Imitation and positive feedbacks give rise to herd behaviour and financial fashions.

For a full-text free book on artificial forex market based on empirical field research see here.

Impact on other variables

Levels and fluctuations in the exchange rate exert a powerful impact on exports, imports and the trade balance. A high and rising exchange rate tends to
depress exports, to boost import and to deteriorate the trade balance, as far as these variables respond to price stimuli. Consumers find foreign goods cheaper so
the consumption composition will change. Similarly, firms will reduce their costs by purchasing intermediate goods abroad.

A devaluation or depreciation should work in the opposite direction, improving the trade balance thanks to soaring exports and falling imports.

If, however, imports have an elasticity to price less than 1, their values in local currency will grow instead of falling.

Hosting different industries, regions usually exhibit a differenciated degree of international openness: exchange rate fluctuations will have a uneven impact on
them. Similarly, the number of job places and the working conditions may be influenced by the degree of international competition and exchange rates levels.

Exchange rate influences also the external purchasing power of residents abroad, for example in term of real estate purchasing.

Exchange rate devaluation or depreciation give rise to inflationary pressures: imported good become more expensive both to the direct consumer and to
domestic producer using them for further processing.

Symmetrically, the central bank may use a fixed exchange rate as a nominal anchor for the economy, compelling domestic producer to face tougher
competition as soon as they decide to increase prices.

Long-term trends

Some geographical monetary areas have enjoyed long periods of stable exchange rate, with moments of consensual realignment after divergence in inflation
rates. Many countries strive to keep their currency at a fixed level toward the dollar, the Euro (earlier the German mark) or a basket with multiple currencies.

Still, most currency progressively devaluate, especially those issued by periphery countries. US dollar have extremely wide fluctuations with years of "weak" and
"strong" dollar.

Business cycle behaviour

Too many elements are at work for the exchange rate possessing a clearly-defined business cycle behaviour. To the extent that the exchange rate is determined
by the trade balance, the exchange rate is counter-cyclical as the latter. At peaks, the trade deficit would depress the exchange rate, forcing it to depreciate.

If it is rather the interest rate that turns out to the main driver of the exchange rate, a possible pro-cyclicity of the interest rate would imply a pro-cyclical
exchange rate.

In this scenario, recovery and boom are accompanied by rising interest rates and exchange rates. At peaks, we would see very strong currency. Together with
domestic demand pressures, this would be the source of a high trade deficit.

If autonomous dynamics in the forex market are the main determinants of the exchange rate, then intense micro-fluctuations and long term tides would ride the
exchange rate, possibly with central bank significant interventions.

Data
Exchange rates for 200 currencies, spanning across more than 20 years
Inflation rates for 170 countries (1970-1996)
Total exports, imports, trade balances for 181 countries - a time-series - Absolute values, shares in world market, rankings
Bilateral imports and exports among 186 countries (a time series of 52 years) - Huge dataset
Monthly data for interest rates (1980-2006) in 6 major countries
Long-term interest rates in OECD countries (1982-1998)
Lending and deposit interest rates in 13 EU countries (1980-2001)
93 Food products prices in 198 countries (1985-2001)
Data for all the variables in IS-LM model
EU data for all the variables in IS-LM model (Germany, France, Italy, Spain, UK, Switzerland and other 13 European countries)
Formal models
An interactive map of how the economy works according to a basic macroeconomic scheme: the IS-LM model
A simulation model of an exporter firm - to play and understand how the exchange rate impacts on exports or whether is it easier for international business
activities to work with fixed exchange rate or floating exchange rate
How do managers react to exchange rate volatility? An empirical survey in Latin America corporations
Recent and historical daily currency exchange rates

NOTES
To be precise, the required operation is not a subtraction but a ratio:
This means that the exact appreciation was 4.76
Free Cash Flow
Similar to earnings, but omitting purely "paper only" expenses, and accounting for capital spending when it actually occurs rather than depreciating it over
many years. The real difference between earnings and free cash flow is that depreciation accounts for sunk costs of the past; free cash flow is meant to capture
all real cash outlays of the present.
Fundamental
A quantity used to relate a stock price with the underlying company's financial strength, performance, or growth potential. A few popular ones, listed by what
they measure:
Assets: Book Value Cash per Share Debt-to-Equity Ratio
Price: Value : P/E Ratio P/S Ratio PEG Ratio
Profitability, Growth Potential: Gross Margin Operating Margin Profit Margin Return on Assets Return on Equity
Viability: Current Ratio Quick Ratio
Fundamental Analysis
An attempt to predict the performance of a stock through the study of its company's financial situation and prospects. Compare technical analysis; also see the
article on stock valuation.
How much is a share of stock really worth? Not just in terms of analysts' opinions, but logically, based on facts?

In theory, the answer is simple: a company is worth the total amount of cash it will generate over its lifetime, discounted to its present value. (And don't panic if
you don't really understand that last sentence, because the next page explains it. You do not need any background to read this article.)

This article presents a simple discounted cash flows calculator, along with some popular variations and shortcuts, to make stock valuation make sense.

But before we get started.... When you use any kind of value formula, it's a good idea to remember Warren Buffett's advice, that "it's far better to buy a wonderful
company at a fair price than a fair company at a wonderful price". The idea is to find a company whose prospects you really believe in, and then use a
valuation technique as a reality check, to make sure the purchase price is acceptable. And try to make your valuation estimates realistic and conservative:
you're trying to protect yourself from overpaying, not justify your surplus of enthusiasm.
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-- Clients Relation -- Investors Relation -- Financial Analysis -- Legal Issues -- Due Diligence
-- Title Insurance -- Risk Management -- Financial Engineering -- Stock Portfolios -- Bond Portfolios
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Asset Management: Investment Strategy for Asset Enhancement.

1- DGHC uses Arbitrage, simultaneous buying and selling of securities in different markets with the purpose of profiting
from the price difference in the markets, under absolutely controlled circumstances only.

2- DGHC strongly avoids Derivatives, a volatile financial instrument whose value depends on or is derived from the
performance of a secondary source such as an underlying bond or currency.

3- DGHC hedges, making arrangements to safeguard against loss on an investment, by the use of various techniques:
avoiding overvalued securities and potential bubble bursts, having in mind the intrinsic value of securities, watching
historical lows of strong fundamentals securities, etc.

4- DGHC strongly avoids Leverage, the use of credit (such as margin) to improve one’s speculative ability. DGHC prefers
to increase the rate of return on an investment, by the use of less risky methods.

5- DGHC strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the seller does own the security it
is said to be in a “long position”), and that the seller must borrow. The only exception is when a security is very obviously
near of a bubble burst situation. Usually, the technique is employed when prices are likely to drop. If the price of the
security does drop, the seller can make a profit on the price of the shares sold versus the price of the shares bought to
pay back the borrowed shares.

6- DGHC can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively undervalued securities. DGHC
Invests in equities expected to experience acceleration in growth of earnings per share. DGHC hedges watching the best
opportunity on undervalued securities. However DGHC avoids shorting of equities unless there are obvious and strong
expectation of earnings disappointment.

7- DGHC can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying equity, debt, or trade claims at
deep discounts of companies in or facing bankruptcy or reorganization, when there is strong indications that DGHC can
profit from the market’s lack of understanding of the true value of the deeply discounted securities and because the
majority of institutional investors cannot own below investment grade securities.

8- DGHC can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in equity or debt of emerging
(less mature) markets which tend to have higher inflation and volatile growth. Short selling is not permitted in many
emerging markets, and, therefore, such type of hedging is often not available.

9- DGHC can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be mixes and matches hedge
funds and other pooled investment vehicles. This blending of different strategies and asset classes aims to provide a
more stable long-term investment return than any of the individual funds. Volatility depends on the mix and ratio of
strategies employed.

10- DGHC can invest up to 3/10 of the assets in Income. Investing with primary focus on yield or current income rather
than solely on capital gains. May utilize leverage to buy bonds and sometimes fixed income like RE Notes in order to
profit from discounted purchase, principal appreciation and interest income under absolutely controlled circumstances
only.

11- DGHC can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from changes in global economies,
typically brought about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and
bond markets. Participates in all major markets -- equities, bonds, currencies and commodities -- though not always at
the same time. Uses leverage and derivatives to accentuate the impact of market moves, under absolutely controlled
circumstances only.

12- DGHC can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage. Attempts to hedge out most
market risk by taking offsetting positions, often in different securities of the same issuer.

13- DGHC can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities Hedging. Invests equally in
long and short equity portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective
stock analysis and stock picking is essential to obtaining meaningful results. Leverage may be used to enhance returns,
under absolutely controlled circumstances only.

14- DGHC can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating assets among different asset
classes depending on the manager’s view of the economic or market outlook.

15- DGHC can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment theme changes from strategy to
strategy as opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim
earnings disappointment, hostile bids, and other event-driven opportunities. May utilize several of these investing styles
at a given time and is not restricted to any particular investment approach or asset class.

16- DGHC strongly avoids Short Selling: Sells securities short in anticipation of being able to re-buy them at a future
date at a lower price due to the manager’s assessment that the securities are overvalued, or the market, or in
anticipation of earnings disappointments often due to accounting irregularities, new competition, change of
management, etc. However, DGHC can invest, alternatively, up to 1/10 of the assets in some opportunities, under
absolutely controlled circumstances.

17- DGHC can invest up to 3/10 of the assets in Value, under certain circumstances. Usually DGHC Invests in securities
perceived to be selling at deep discounts to their intrinsic value or their potential worth. Such securities may be out of
favor with analysts. Long-term holding, patience, and strong discipline are often required until the ultimate value is
recognized by the market.

Should you decide to contact us for any business opportunity CLICK HERE
See our portfolio: DGHC SP5H Equity Holding (As Of January First, 2009). Profitable equity holding, solid
out-performers, stronger, wider balanced. Not leverage, 50 % less risky. Up To Two Billion USD or larger investment.
Monthly operation expenses: 0.25 % (not from holding, free). Operation expenses & brokerage expenses do not affect the
integrity of the holding, due to the only use of margin to such effect. The Most Conservative (just capital gains, dividends
not included)
Potential Gross Profit At January First, 2010 (%) ----------------------------------------------------------------------------------------- 175.00
January First, 2009: $2,000,000,000.00 >>>>>>>>>>>>>>>>>>>>>>>>>> January First, 2010: $3,500,000,000.00
>>>>>>>Potential Gross Profit One Year Later >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> $1,500,000,000.00 <<<<<<<
Asset Management For Accredited Investors Only. Minimum Amount Per Account: One
Million USD. Unless otherwise agreed the standard holding period is 18 months.

DGHC Global Asset Management is the only global group that charges no management fees (usually
2 % or larger fee) based on the amount of assets under management.

DGHC Asset Management is the only global group who provide not from holding help to Client if Client is in need of
liquidity due to sudden financial problems.

DGHC Asset Management is the only global group who create a Limited Liability Company for the asset management of
each Accredited Investor, as well as the only who appoint the Accredited Investor as Supervisor for the financial
operation, treasury, investment accounts and accountability control of such Limited Liability Company.

DGHC Asset Management is the only global group whose income rely solely on the success of the Client, the Accredited
Investor, regarding the investment made. AlphaOdit considers extremely trustworthy the quality of investment decisions
made by AlphaOdit's experts, so, should AlphaOdit is not able to provide to the Accredited Investor an Annual Return,
the income (contingent fee: performance or incentive) of AlphaOdit will be ZERO.

DGHC Asset Management Annual FEE will be contingent, based on the performance of investments. The only incentive
of AlphaOdit comes from the creation of wealth for the Accredited Investor. That is to say that if there is no Annual
Return, Success, Profit, to the benefit of the Accredited Investor, there will not be any FEE paid to the order of
AlphaOdit.


Contingent FEE Structure: (See Asset Management Contract)
-- Annual Profit up to 20 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 20% of Annual Profit
-- Annual Profit larger than 20 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 25 % of Annual Profit
-- Annual Profit larger than 35 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 30 % of Annual Profit
-- Annual Profit larger than 50 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 35 % of Annual Profit
-- Annual Profit larger than 65 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 40 % of Annual Profit
-- Annual Profit larger than 80 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 45 % of Annual Profit
-- Annual Profit larger than 100 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 50 % of Annual Profit
Note: This is neither an offer nor an advertisement. See disclaimer at left column. Should you decide to contact us for
any business opportunity
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