Municipal Bond
A bond issued by a state or local government. These bonds are always exempt from federal tax, and usually exempt from state and local tax as well.
NASD
National Association of Securities Dealers.
An association of brokers and other companies that sell stocks, bonds, mutual funds, and other investment products. The NASD regulates important aspects of the ways its members do business, including claims they can make in advertising and minimum liquidity requirements. The NASD also sets limits on loads and 12b-1 fees charged by mutual funds.
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.
Net Asset Value (NAV)
Price per share of a mutual fund.
Operating Expenses
Expenses associated with running a business but not considered directly applicable to the current line of goods and services being sold. These include Sales and Marketing, R & D, and General and Administrative costs (including the salaries of people working in these areas).
See the sample income statement.
Income Statement
Stock investors like to look at the income statement (a.k.a. "earnings statement" or "statement of operations") because it shows the company's "bottom line": its earnings, or profit. Most of the income statement details the company's operations: the yellow zone back in the diagram.

Consolidated Financial Statements

Income Statement
(click on highlighted text for more information)
(dollar figures are in thousands) 1997 1996

Sales Revenue
Widget Sales $ 12,347 $ 9,746
Services 6,912 5,688
Total Sales Revenue 19,259 15,434

Sales Costs
Widget Sales 5,649 4,688
Services 3,166 2,712
Total Sales Costs 8,815 7,400

Gross Profit 10,444 8,034
Gross Margin 54 % 52 %

Operating Expenses
Sales & Marketing 4,078 3,132
General & Administrative 916 705
Research & Development 2,364 1,831
Total Operating Expenses 7,358 5,668

Operating Income 3,086 2,366
Operating Margin 16 % 15 %

Interest Payments to Bondholders 147 253
Earnings Before Taxes 2,939 2,113
Provision for Taxes 1,028 739
Earnings ("net income") 1,911 1,374
Profit Margin 10 % 9 %

Dividends paid to Shareholders 10 -
Earnings available to Shareholders 1,901 1,374

Introduction / Diagram
Income Statement
Cash Flow Statement
Balance Sheet
Books & Links

Notes
This company is showing positive earnings. In fact, if you compare the earnings between the two years shown, you'll find that earnings "grew" by 39%. As you might expect, the figures for sales costs and operating expenses are also higher, so the company is probably growing physically as well: in order to make more money, it's increasing its capacity to produce more of whatever it sells.

One important thing that the income statement doesn't show is how the company is paying for this growth. To find that, you need to look at the cash flow statement. Another shortcoming of the income statement is that expense items are only shown "by department" and not "by type". For example, employee salaries make up part of sales cost and part of all items listed under operating expenses; but you can't tell from here how big a part.
Operating Income
Gross Profit minus Operating Expenses.
Operating Income is the pre-tax, pre-interest profit from the company's "operations".
Gross Profit = Sales revenue minus sales costs.
Also called "sales profit".
Operating Margin
Ratio of operating income to sales revenue.
Operations
The core activities of a business: making money by selling goods and services.
Operations is considered distinct from other business activities, such as
"financing" (raising money by issuing stocks and bonds) and "investing" (for example, acquiring another company or selling off a subsidiary). Detail is available on the income statement and cash flow statement.
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): %

Results

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.)
P/S Ratio
The ratio of a stock price to its company's annual sales per share.
Also called the "PSR".
Price to Sales Ratio
The trouble with the P/E ratio is that earnings is a complicated "bottom line" number, sometimes reflecting non-recurring events; so many people look at sales revenue as a more reliable indicator of a company's size and growth. The Price/Sales ratio, also called the "PSR", is a company's stock price divided by its annual sales per share.

Since P/S = P/E x (profit margin), you can find any of these quantities if you know the other two:

P/S versus P/E

P/S Ratio:
What is a realistic long-term profit margin
for this company and industry? %
Corresponding P/E Ratio:
(you can change any of these three inputs)

Find P/S, P.M. and P/E

Ticker:

This calculator is telling you that for a "typical" company with a profit margin of 5%, a P/S of 1.0 is in the right ballpark because it corresponds to a P/E of 20.

One common way people abuse the Price/Sales ratio is by assuming that a PSR of 1.0 is right for all companies, and then hunting for "bargains" selling at a PSR of 0.5 or less. That simply doesn't work in general, since different industries have widely different profit margins, ranging from 2% for many discount retailers to 20% or more for some software companies; so a P/S of 1.0 would be on the pricey side for the retailer, but extremely cheap for the software company.

A second problem with the PSR is that sales, unlike earnings, contains no information about a company's debt. It's easy to find lots of companies with no profits and huge debt selling at a PSR of 0.1 or less. Some of these are on the verge of bankruptcy; definitely not "bargains".

For more on the PSR, see Ken Fisher's book Super Stocks (a Peter Lynch-style book about stock picking, but with more emphasis on valuation), and James O'Shaughnessy's What Works on Wall Street (a statistical study of how well different valuation measures have identified stocks that actually beat the market).
PEG Ratio
A stock's P/E ratio divided by the annual growth rate of its company's earnings.
A popular rule of thumb in picking growth stocks is to consider a stock underpriced if its PEG falls much below 1, and overpriced if the PEG is much greater than 1.

See the main article for a calculator and discussion of this rule's accuracy.
PEG Ratio
The PEG approach is a simple valuation tool, popularized by Peter Lynch and The Motley Fool among many others. Here is how Lynch puts it in One Up on Wall Street:

"The p/e ratio of any company that's fairly priced will equal its growth rate."
In other words,

P/E = G
where P/E is the stock's P/E ratio, and G is its earnings growth rate.
It looks simple and elegant, like a finance version of e = mc2, but watch out - this formula is strictly a rule of thumb, not a valid financial "law". (If you aren't convinced, just notice that the two sides of the formula have different units: you're comparing a fraction with a percent, meaning that a factor of 100 has magically appeared on one side only.)

So how accurate is this rule of thumb? It's certainly way off for at least some cases; for example, it implies that a company with zero growth should sell for a P/E of 0. But for normal values of growth stocks, this formula works surprisingly well. This calculator lets you compare the PEG approximation with the "correct" results from the cash flows calculator for different rates of "G":

Annual Growth

Earnings Growth Rate: %

Results

Fair P/E Ratio
PEG Approximation:
Actual Value (via Discounted Cash Flows):

The assumptions are (1) a discount rate of 11%; (2) the growth rate you specify will be maintained for five years, after which growth will flatten out to zero.

If you do use this (or any other) valuation technique, remember to use it the way Lynch suggests: first find a company whose prospects seem attractive to you, and then use the techniques to make sure the price is reasonably attractive as well.

One way people misuse PEG and get themselves into trouble is by taking earnings from two successive years off of an annual report, and using them to calculate the earnings growth rate:

Dangerous Calculator

This year's annual earnings per share: $
Annual earnings per share from year(s) ago: $

Results

Annualized Earnings Growth Rate (over this period): %
PEG Approximation for Fair P/E Ratio:

That's dangerous! Each year's earnings is a highly refined number, potentially including significant non-recurring items. That means the change between these two numbers can be very different from what you really want, namely, a conservative estimate for earnings growth that can be sustained over the next five years or more.

Finally, note that properly speaking the PEG ratio is defined as (P/E) / G. So the quote and formula from the top of the page are equivalent to saying that if a company is fairly priced, its PEG ratio ought to equal 1.0.
Par Value
The face value of a bond: the price the issuer promises to pay on its date of maturity.
Passive Investing
Investment in index funds, instead of actively managed mutual funds. See the main article on Modern Portfolio Theory.
Payroll Tax
Your contribution to Social Security and Medicare: 15.3% of your salary, up to a limit, half of which is paid by your employer.
A huge number of people pay far more in payroll taxes than they do in income taxes. On the other hand, the payroll tax isn't a true "tax" in the sense that it isn't supposed to be a source of revenue for the government - it's supposed to be a contribution to an account that you'll be entitled to withdraw benefits from at a later date. For that reason payroll taxes generally aren't included in discussions about tax cuts: the only way you can get a cut in your contributions is to (a) accept a corresponding cut in benefits, or (b) have your benefits subsidized by somebody else, or (c) reform the entire system. See the Social Security and Medicare contributions calculator.
Premium Bond
A bond selling at a market price greater than its par value.
Private Equity

In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.

There is a wide array of types and styles of private equity and the term private equity has different connotations in different countries.[1]

1 Types of private equity
1.1 Other strategies
2 History and further development
2.1 Early history and the development of venture capital
2.2 Origins of the leveraged buyout
2.3 Private equity in the 1980s
2.4 Age of the mega-buyout 2005-2007
3 Investments in private equity
3.1 Investment features and considerations
4 Liquidity in the private equity market
5 Private equity firms
6 Record Private Equity Deals
7 Private equity funds
7.1 Size of industry
7.2 Private equity fund performance
8 See also
9 References and notes

Types of private equity
Private equity investments can be divided into the following categories:

Leveraged buyout, LBO or simply Buyout: refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically more mature and generate operating cash flows.
Venture capital: a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth.[2]
Growth capital: refers to equity investments, most often minority investments, in more mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.

Other strategies
Other strategies that can be considered private equity or a close adjacent market include:

Distressed or Special situations: can refer to investments in equity or debt securities of a distressed company, or a company where value can be unlocked as a result of a one-time opportunity (e.g., a change in government regulations or market dislocation). These categories can refer to a number of strategies, some of which straddle the definition of private equity.
Mezzanine capital: refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity.
Real Estate: in the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the investments often more closely resemble leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate to be a separate asset class.
Secondary investments: refer to investments made in existing private equity assets including private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. Often these investments are structured similar to a fund of funds.[3]
Infrastructure: investments in various public works (e.g., bridges, tunnels, toll roads, airports, public transportation and other public works) that are made typically as part of a privatization initiative on the part of a government entity.[4][5][6]
Energy and Power: investments in a wide variety of companies (rather than assets) engaged in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution (Energy) or companies engaged in the production or transmission of electrical power (Power).
Merchant banking: negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.[7]

History and further development
Main article: History of private equity and venture capital

Early history and the development of venture capital
Main articles: History of private equity and venture capital and Early history of private equity

The seeds of the private equity industry were planted in 1946 with the founding of two venture capital firms: American Research and Development Corporation (ARDC) and J.H. Whitney &
Company.[8] Before World War II, venture capital investments (originally known as "development capital") were primarily the domain of wealthy individuals and families. ARDC was founded
by Georges Doriot, the "father of venture capitalism"[9] and founder of INSEAD, with capital raised from institutional investors, to encourage private sector investments in businesses run by
soldiers who were returning from World War II. ARDC is credited with the first major venture capital success story when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC)
would be valued at over $355 million after the company's initial public offering in 1968 (representing a return of over 500 times on its investment and an annualized rate of return of 101%).
[10] It is commonly noted that the first venture-backed startup is Fairchild Semiconductor (which produced the first commercially practicable integrated circuit), funded in 1959 by what
would later become Venrock Associates.[11]

Origins of the leveraged buyout
Main articles: History of private equity and venture capital and Early history of private equity
The first leveraged buyout may have been the purchase by McLean Industries, Inc. of Pan-Atlantic Steamship Company in January 1955 and Waterman Steamship Corporation in May 1955
[12] Under the terms of that transaction, McLean borrowed $42 million and raised an additional $7 million through an issue of preferred stock. When the deal closed, $20 million of Waterman
cash and assets were used to retire $20 million of the loan debt.[13] Similar to the approach employed in the McLean transaction, the use of publicly traded holding companies as
investment vehicles to acquire portfolios of investments in corporate assets was a relatively new trend in the 1960s popularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor
Posner (DWG Corporation) and later adopted by Nelson Peltz (Triarc), Saul Steinberg (Reliance Insurance) and Gerry Schwartz (Onex Corporation). These investment vehicles would utilize a
number of the same tactics and target the same type of companies as more traditional leveraged buyouts and in many ways could be considered a forerunner of the later private equity firms.
In fact it is Posner who is often credited with coining the term "leveraged buyout" or "LBO"[14]

The leveraged buyout boom of the 1980s was conceived by a number of corporate financiers, most notably Jerome Kohlberg, Jr. and later his protégé Henry Kravis. Working for Bear Stearns
at the time, Kohlberg and Kravis along with Kravis' cousin George Roberts began a series of what they described as "bootstrap" investments. Many of these companies lacked a viable or
attractive exit for their founders as they were too small to be taken public and the founders were reluctant to sell out to competitors and so a sale to a financial buyer could prove attractive.
Their acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions.[15]. In the following years the three Bear Stearns bankers would
complete a series of buyouts including Stern Metals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as well as Thompson Wire,
Eagle Motors and Barrows through their investment in Stern Metals. [16] By 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and
the formation of Kohlberg Kravis Roberts in that year.

Private equity in the 1980s
Main articles: History of private equity and venture capital and Private equity in the 1980s
In January 1982, former US Secretary of the Treasury William Simon and a group of investors acquired Gibson Greetings, a producer of greeting cards, for $80 million, of which only $1
million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the original deal, Gibson completed a $290 million IPO and Simon made
approximately $66 million.[17] The success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts. Between 1979 and
1989, it was estimated that there were over 2,000 leveraged buyouts valued in excess of $250 million[18]

During the 1980s, constituencies within acquired companies and the media ascribed the "corporate raid" label to many private equity investments, particularly those that featured a hostile
takeover of the company, perceived asset stripping, major layoffs or other significant corporate restructuring activities. Among the most notable investors to be labeled corporate raiders in the
1980s included Carl Icahn, Victor Posner, Nelson Peltz, Robert M. Bass, T. Boone Pickens, Harold Clark Simmons, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman.
Carl Icahn developed a reputation as a ruthless corporate raider after his hostile takeover of TWA in 1985.[19][20] Many of the corporate raiders were onetime clients of Michael Milken,
whose investment banking firm, Drexel Burnham Lambert helped raise blind pools of capital with which corporate raiders could make a legitimate attempt to takeover a company and
provided high-yield debt financing of the buyouts.

One of the final major buyouts of the 1980s proved to be its most ambitious and marked both a high water mark and a sign of the beginning of the end of the boom that had begun nearly a
decade earlier. In 1989, KKR closed in on a $31.1 billion dollar takeover of RJR Nabisco. It was, at that time and for over 17 years, the largest leverage buyout in history. The event was
chronicled in the book (and later the movie), Barbarians at the Gate: The Fall of RJR Nabisco. KKR would eventually prevail in acquiring RJR Nabisco at $109 per share marking a dramatic
increase from the original announcement that Shearson Lehman Hutton would take RJR Nabisco private at $75 per share. A fierce series of negotiations and horse-trading ensued which
pitted KKR against Shearson Lehman Hutton and later Forstmann Little & Co. Many of the major banking players of the day, including Morgan Stanley, Goldman Sachs, Salomon Brothers,
and Merrill Lynch were actively involved in advising and financing the parties. After Shearson Lehman's original bid, KKR quickly introduced a tender offer to obtain RJR Nabisco for $90 per
share—a price that enabled it to proceed without the approval of RJR Nabisco's management. RJR's management team, working with Shearson Lehman and Salomon Brothers, submitted a
bid of $112, a figure they felt certain would enable them to outflank any response by Kravis's team. KKR's final bid of $109, while a lower dollar figure, was ultimately accepted by the board
of directors of RJR Nabisco.[21] At $31.1 billion of transaction value, RJR Nabisco was by far the largest leveraged buyouts in history. In 2006 and 2007, a number of leveraged buyout
transactions were completed that for the first time surpassed the RJR Nabisco leveraged buyout in terms of nominal purchase price. However, adjusted for inflation, none of the leveraged
buyouts of the 2006 – 2007 period would surpass RJR Nabisco.

By the end of the 1980s the excesses of the buyout market were beginning to show, with the bankruptcy of several large buyouts including Robert Campeau's 1988 buyout of Federated
Department Stores, the 1986 buyout of the Revco drug stores, Walter Industries, FEB Trucking and Eaton Leonard. Additionally, the RJR Nabisco deal was showing signs of strain, leading to a
recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR.[22]

Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980s due to its leadership in the issuance of high-yield debt.

Drexel reached an agreement with the government in which it pleaded nolo contendere (no contest) to six felonies – three counts of stock parking and three counts of stock manipulation.[23]
It also agreed to pay a fine of $650 million – at the time, the largest fine ever levied under securities laws. Milken left the firm after his own indictment in March 1989.[24][25] On February 13,
1990 after being advised by Secretary of the Treasury Nicholas F. Brady, the SEC, the NYSE and the Federal Reserve, Drexel Burnham Lambert officially filed for Chapter 11 bankruptcy
protection.[24]

Age of the mega-buyout 2005-2007
Main articles: History of private equity and venture capital and Private equity in the 21st century
The combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly traded companies (specifically the Sarbanes-Oxley Act) would set the stage for
the largest boom private equity had seen. Marked by the buyout of Dex Media in 2002, large multi-billion dollar U.S. buyouts could once again obtain significant high yield debt financing
and larger transactions could be completed. By 2004 and 2005, major buyouts were once again becoming common, including the acquisitions of Toys "R" Us[26], The Hertz Corporation [27]
[28], Metro-Goldwyn-Mayer[29] and SunGard[30] in 2005.

As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed several times with nine of the top ten buyouts at the end of 2007 having been announced in an 18-
month window from the beginning of 2006 through the middle of 2007. In 2006, private equity firms bought 654 U.S. companies for $375 billion, representing 18 times the level of
transactions closed in 2003.[31] Additionally, U.S. based private equity firms raised $215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22%
and 33% higher than the 2005 fundraising total[32] The following year, despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with $302
billion of investor commitments to 415 funds[33] Among the mega-buyouts completed during the 2006 to 2007 boom were: Equity Office Properties, HCA[34], Alliance Boots[35] and TXU
[36].

In July 2007, turmoil that had been affecting the mortgage markets, spilled over into the leveraged finance and high-yield debt markets.[37][38] The markets had been highly robust during
the first six months of 2007, with highly issuer friendly developments including PIK and PIK Toggle (interest is "Payable In Kind") and covenant light debt widely available to finance large
leveraged buyouts. July and August saw a notable slowdown in issuance levels in the high yield and leveraged loan markets with few issuers accessing the market. Uncertain market
conditions led to a significant widening of yield spreads, which coupled with the typical summer slowdown led many companies and investment banks to put their plans to issue debt on hold
until the autumn. However, the expected rebound in the market after Labor Day 2007 did not materialize and the lack of market confidence prevented deals from pricing. By the end of
September, the full extent of the credit situation became obvious as major lenders including Citigroup and UBS AG announced major writedowns due to credit losses. The leveraged finance
markets came to a near standstill.[39] As 2007 ended and 2008 began, it was clear that lending standards had tightened and the era of "mega-buyouts" had come to an end. Nevertheless,
private equity continues to be a large and active asset class and the private equity firms, with hundreds of billions of dollars of committed capital from investors are looking to deploy capital
in new and different transactions.

Investments in private equity

Diagram of the structure of a generic private equity fundInstitutional investors provide private equity capital in the hopes of achieving risk adjusted returns that exceed those possible in the
public equity markets and will typically include private equity as part of a broad asset allocation that includes traditional assets (e.g., public equity and bonds). Most institutional investors, do
not invest directly in privately held companies, lacking the expertise and resources necessary to structure and monitor the investment. Instead, institutional investors will invest indirectly
through a private equity fund. Certain institutional investors have the scale necessary to develop a diversified portfolio of private equity funds themselves, while others will invest through a
fund of funds to allow a portfolio more diversified than one a single investor could construct.

Private equity firms generally receive a return on their investments through one of the following avenues:

an Initial Public Offering (IPO) - shares of the company are offered to the public, typically providing an partial immediate realization to the financial sponsor as well as a public market into
which it can later sell additional shares;
a merger or acquisition - the company is sold for either cash or shares in another company;
a Recapitalization - cash is distributed to the shareholders (in this case the financial sponsor) and its private equity funds either from cash flow generated by the company or through raising
debt or other securities to fund the distribution.

Investment features and considerations
Considerations for investing in private equity funds relative to other forms of investment include:

Substantial entry requirements. With most private equity funds requiring significant initial commitment(usually upwards of $1,000,000) which can be drawn at the manager's discretion over
the first few years of the fund.
Limited liquidity. Investments in limited partnership interests (which is the dominant legal form of private equity investments) are referred to as "illiquid" investments which should earn a
premium over traditional securities, such as stocks and bonds. Once invested, it is very difficult to achieve liquidity before the manager realizes the investments in the portfolio as an investor's
capital is locked-up in long-term investments which can last for as long as twelve years. Distributions are made only as investments are converted to cash; limited partners typically have no
right to demand that sales be made.
Investment Control. Nearly all investors in private equity are passive and rely on the manager to make investments and generate liquidity from those investments. Typically, governance rights
for limited partners in private equity funds are minimal.
Unfunded Commitments. An investor's commitment to a private equity fund is drawn over time. If a private equity firm can't find suitable investment opportunities, it will not draw on an
investor's commitment and an investor may potentially invest less than expected or committed.
Investment Risks. Given the risks associated with private equity investments, an investor can lose all of its investment. The risk of loss of capital is typically higher in venture capital funds,
which invest in companies during the earliest phases of their development or in companies with high amounts of financial leverage. By their nature, investments in privately held companies
tend to be riskier than investments in publicly traded companies.
High returns. Consistent with the risks outlined above, private equity can provide high returns, with the best private equity managers significantly outperforming the public markets.[40]
For the above mentioned reasons, private equity fund investment is for those who can afford to have capital locked in for long periods of time and who are able to risk losing significant
amounts of money. These disadvantages are offset by the potential benefits of annual returns which range up to 30% for successful funds.

Liquidity in the private equity market

Diagram of a simple secondary market transfer of a limited partnership fund interest. The buyer exchanges a single cash payment to the seller for both the investments in the fund plus any
unfunded commitments to the fund.Main article: Private equity secondary market
The private equity secondary market (also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative
investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity
asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however, there is a
robust and maturing secondary market available for sellers of private equity assets.

Increasingly, secondaries are considered a distinct asset class with a cash flow profile that is not correlated with other private equity investments. As a result, investors are allocating capital to
secondary investments to diversify their private equity programs. Driven by strong demand for private equity exposure, a significant amount of capital has been committed to secondary
investments from investors looking to increase and diversify their private equity exposure.

Investors seeking access to private equity have been restricted to investments with structural impediments such as long lock-up periods, lack of transparency, unlimited leverage, concentrated
holdings of illiquid securities and high investment minimums.

Secondary transactions can be generally split into two basic categories:

Sale of Limited Partnership Interests - The most common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in
various funds through the transfer of the investor's limited partnership interest in the fund(s). Nearly all types of private equity funds (e.g., including buyout, growth equity, venture capital,
mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the
funded investments as well as a release from any remaining unfunded obligations to the fund.
Sale of Direct Interests – Secondary Directs or Synthetic secondaries, this category refers to the sale of portfolios of direct investments in operating companies, rather than limited partnership
interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions.

[edit] Private equity firms
Main articles: Private equity firm and List of private equity firms
According to an updated 2008 ranking created by industry magazine Private Equity International[41] (published by PEI Media called the PEI 50), the largest private equity firm in the world
today is The Carlyle Group, based on the amount of private equity direct-investment capital raised over a five-year window. As ranked in this article, the 10 largest private equity firms in the
world are:

The Carlyle Group
Goldman Sachs Principal Investment Area
TPG
Kohlberg Kravis Roberts
CVC Capital Partners
Apollo Management
Bain Capital
Permira
Apax Partners
The Blackstone Group
Because private equity firms are continuously in the process of raising, investing and distributing their private equity funds, capital raised can often be the easiest to measure. Other metrics
can include the total value of companies purchased by a firm or an estimate of the size of a firm's active portfolio plus capital available for new investments. As with any list that focuses on
size, the list does not provide any indication as to relative investment performance of these funds or managers.

Additionally, Preqin (formerly known as Private Equity Intelligence), an independent data provider, ranks the 25 largest private equity investment managers. Among the larger firms in that
ranking were AlpInvest Partners, AXA Private Equity, AIG Investments, Goldman Sachs Private Equity Group and Pantheon Ventures.

Record Private Equity Deals
The largest private equity deal of all time was that of Equity Office Properties Trust which was acquired by Blackstone in 2007 for $38.9 billion an increase of $3.1 billion because of intense
bidding war[42][43]. The largest private equity deal for an Individual was the sale of London City Airport, Dermot Desmond purchased the airport for an estimated £25 million in 1995. In 2006
a consortium of AIG, GE Capital and Credit Suisse paid a reported £1.65 billion of which Dermot Desmond gained £1.2 billion[44].

Private equity funds
Main article: Private equity fund
Private equity fundraising refers to the action of private equity firms seeking capital from investors for their funds. Typically an investor will invest in a specific fund managed by a firm,
becoming a limited partner in the fund, rather than an investor in the firm itself. As a result, an investor will only benefit from investments made by a firm where the investment is made from
the specific fund in which it has invested.

Fund of funds. These are private equity funds that invest in other private equity funds in order to provide investors with a lower risk product through exposure to a large number of vehicles
often of different type and regional focus. Fund of funds accounted for 14% of global commitments made to private equity funds in 2006 according to Preqin ltd (formerly known as Private
Equity Intelligence)
Individuals with substantial net worth. Substantial net worth is often required of investors by the law, since private equity funds are generally less regulated than ordinary mutual funds. For
example in the US, most funds require potential investors to qualify as accredited investors, which requires $1 million of net worth, $200,000 of individual income, or $300,000 of joint
income (with spouse) for two documented years and an expectation that such income level will continue.
As fundraising has grown over the past few years, so too has the number of investors in the average fund. In 2004 there were 26 investors in the average private equity fund, this figure has now
grown to 42 according to Preqin ltd. (formerly known as Private Equity Intelligence).

The managers of private equity funds will also invest in their own vehicles, typically providing between 1–5% of the overall capital.

Often private equity fund managers will employ the services of external fundraising teams known as placement agents in order to raise capital for their vehicles. The use of placement agents
has grown over the past few years, with 40% of funds closed in 2006 employing their services, according to Preqin ltd (formerly known as Private Equity Intelligence). Placement agents will
approach potential investors on behalf of the fund manager, and will typically take a fee of around 1% of the commitments that they are able to garner.

The amount of time that a private equity firm spends raising capital varies depending on the level of interest among investors, which is defined by current market conditions and also the track
record of previous funds raised by the firm in question. Firms can spend as little as one or two months raising capital when they are able to reach the target that they set for their funds
relatively easily, often through gaining commitments from existing investors in their previous funds, or where strong past performance leads to strong levels of investor interest. Other managers
may find fundraising taking considerably longer, with managers of less popular fund types (such as European venture fund managers in the current climate) finding the fundraising process
more tough. It is not unheard of for funds to spend as long as two years on the road seeking capital, although the majority of fund managers will complete fundraising within nine months to
fifteen months.

Once a fund has reached its fundraising target, it will have a final close. After this point it is not normally possible for new investors to invest in the fund, unless they were to purchase an
interest in the fund on the secondary market.

Size of industry
A record $686bn of private equity was invested globally in 2007, up over a third on the previous year and more than twice the total invested in 2005. Private equity fund raising also surpassed
prior years in 2007 with $494bn raised, up 10% on 2006. Despite growing turbulence in the financial markets in the latter part of the year, activity was split equally between the first and
second half of the year. Buyouts further increased their share of investments to 89% from a fifth in 2000. Early indicators show that activity is down in the first half of 2008 in comparison to the
same period in 2007. The contraction in the credit markets caused by the sub-prime crisis, triggered a slowdown in private equity financing and it became more difficult for private equity
firms to obtain debt financing from banks to complete private equity deals.

The regional breakdown of private equity activity shows that in 2007, North America accounted for 71% of global private equity investments (up from 66% in 2000) and 65% of funds raised
(down from 68%) (Table 1, Chart 2). Between 2000 and 2007, Europe’s share of investments fell from 20% to 15% and funds raised from 25% to 22%. This was largely a result of stronger
buyout market activity in US than in Europe. Between 2000 and 2007 there was a rise in the importance of Asia-Pacific and emerging markets as investment destinations, particularly China,
Singapore, South Korea and India. Asia-Pacific’s share of funds raised increased from 6% to 10% during this period while its share of investments remained unchanged at around 12%. [45]

The biggest fund type in terms of commitments garnered was buyout, with 188 funds raising an aggregate $212 billion. So-called mega buyout funds contributed a significant proportion of
this amount, with the ten largest funds of 2006 raising $101 billion alone—23% of the global total for 2006. Other strong performers included real estate funds, which grew 30% from already
strong 2005 levels, raising an aggregate $63 billion globally. The only fund type to not perform so well was venture, which saw a drop of 10% from 2005 levels.

In terms of the regional split of fundraising, the majority of funds raised in 2006 were focusing on the American market, with 62% of capital raised in 2006 focusing on the US. European
focused funds account for 26% of the global total, while funds focusing on Asia and the Rest of World accounted for the remaining 11%.

Venture capital is considered a subset of private equity focused on investments in new and maturing companies.

Mezzanine capital is similar class of alternative investment focused on structured debt securities in private companies.

Private equity fund performance
In the past the performance of private equity funds has been relatively difficult to track, as private equity firms are under no obligation to publicly reveal the returns that they have achieved
from their investments. In the majority of cases the only groups with knowledge of fund performance were investors in the funds, academic institutes (as CEPRES Center of Private Equity
Research) and the firms themselves, making comparisons between various different firms, and the establishment of market benchmarks to be a difficult challenge.

The application of the Freedom of Information Act (FOIA) in certain states in the United States has made certain performance data more readily available. Specifically, FOIA has required
certain public agencies to disclose private equity performance data directly on the their websites[46]. In the United Kingdom, the second largest market for private equity, more data has
become available since the 2007 publication of the David Walker Guidelines for Disclosure and Transparency in Private Equity[47].

The performance of the private equity industry over the past few years differs between funds of different types. Buyout and real estate funds have both performed strongly in the past few years
(i.e., from 2003-2007) in comparison with other asset classes such as public equities. In contrast other fund investment types, venture capital most notably, have not shown similarly robust
performance.

Within each investment type, manager selection (i.e., identifying private equity firms capable of generating above average performance) is a key determinant of an individual investor's
performance. Historically, performance of the top and bottom quartile managers has varied dramatically and institutional investors conduct extensive due diligence in order to assess
prospective performance of a new private equity fund.

It is challenging to compare private equity performance to public equity performance, in particular because private equity fund investments are drawn and returned over time as investments
are made and subsequently realized. One method, first published in 1994, is the Long and Nickels Index Comparison Method (ICM). Another method which is gaining ground in academia is
the public market equivalent or profitability index. The profitability index determines the investment in public market investments required to earn a target profit from a portfolio of private
equity fund investments.[48]

History of private equity and venture capital
Private equity firm
Private equity fund
Financial sponsor
Leveraged buyout
Management buyout
Venture capital
Mezzanine capital
Private equity secondary market (Secondaries)
Publicly traded private equity
Private investment in public equity
Taxation of Private Equity and Hedge Funds

References and notes
Cendrowski, Harry (2008). Private Equity: Governance and Operations Assessment. Hoboken, NJ: John Wiley & Sons. ISBN 0-470-17846-1.
Maxwell, Ray (2007). Private Equity Funds: A Practical Guide for Investors. New York: John Wiley & Sons. ISBN 0-470-02818-6.
Leleux, Benoit; Hans van Swaay (2006). Growth at All Costs: Private Equity as Capitalism on Steroids. Basingstoke: Palgrave Macmillan. ISBN 1-403-98634-7.
Fraser-Sampson, Guy (2007). Private Equity as an Asset Class. Hoboken, NJ: John Wiley & Sons. ISBN 0-470-06645-8.
Bassi, Iggy; Jeremy Grant (2006). Structuring European Private Equity. London: Euromoney Books. ISBN 1-843-74262-4.
Thorsten, Gröne (2005). Private Equity in Germany — Evaluation of the Value Creation Potential for German Mid-Cap Companies. Stuttgart: Ibidem-Verl. ISBN 3-898-21620-9.
Lerner, Joshua (2000). Venture Capital and Private Equity: A Casebook. New York: John Wiley & Sons. ISBN 0-471-32286-5.
Grabenwarter, Ulrich; Tom Weidig (2005). Exposed to the J Curve: Understanding and Managing Private Equity Fund Investments. London: Euromoney Institutional Investor. ISBN 1-84374-
149-0.
^ This article uses the American definitions for most terms. The British Venture Capital Association provides An Introduction to Private Equity, including differences in terminology.
^ In the United Kingdom, venture capital is often used instead of private equity to describe the overal asset class and investment strategy described here as private equity.
^ A Secondary Market for Private Equity is Born, The Industry Standard, 28 August 2001
^ Investors Scramble for Infrastructure (Fiancial News, 2008)
^ Is It Time to Add a Parking Lot to Your Portfolio? (New York Times, 2006
^ [Buyout firms put energy infrastructure in pipeline] (MSN Money, 2008)
^ Merchant Banking: Past and Present
^ Wilson, John. The New Ventures, Inside the High Stakes World of Venture Capital.
^ WGBH Public Broadcasting Service, “Who made America?"-Georges Doriot”
^ Joseph W. Bartlett, "What Is Venture Capital?"
^ The Future of Securities Regulation speech by Brian G. Cartwright, General Counsel U.S. Securities and Exchange Commission. University of Pennsylvania Law School Institute for Law
and Economics Philadelphia, Pennsylvania. October 24, 2007.
^ On January 21, 1955, McLean Industries, Inc. purchased the capital stock of Pan Atlantic Steamship Corporation and Gulf Florida Terminal Company, Inc. from Waterman Steamship
Corporation. In May McLean Industries, Inc. completed the acquisition of the common stock of Waterman Steamship Corporation from its founders and other stockholders.
^ Marc Levinson, The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger, pp. 44-47 (Princeton Univ. Press 2006). The details of this transaction are
set out in ICC Case No. MC-F-5976, McLean Trucking Company and Pan-Atlantic American Steamship Corporation--Investigation of Control, July 8, 1957.
^ Trehan, R. (2006). The History Of Leveraged Buyouts. December 4, 2006. Accessed May 22, 2008
^ The History of Private Equity (Investment U, The Oxford Club
^ Burrough, Bryan. Barbarians at the Gate. New York : Harper & Row, 1990, p. 133-136
^ Taylor, Alexander L. "Buyout Binge". TIME magazine, Jul. 16, 1984.
^ Opler, T. and Titman, S. "The determinants of leveraged buyout activity: Free cash flow vs. financial distress costs." Journal of Finance, 1993.
^ 10 Questions for Carl Icahn by Barbara Kiviat, TIME magazine, Feb. 15, 2007
^ TWA - Death Of A Legend by Elaine X. Grant, St Louis Magazine, Oct 2005
^ Game of Greed (TIME magazine, 1988)
^ Wallace, Anise C. "Nabisco Refinance Plan Set." The New York Times, July 16, 1990.
^ Stone, Dan G. (1990). April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. New York City: Donald I. Fine. ISBN 1556112289.
^ a b Den of Thieves. Stewart, J. B. New York: Simon & Schuster, 1991. ISBN 0-671-63802-5.
^ New Street Capital Inc. - Company Profile, Information, Business Description, History, Background Information on New Street Capital Inc at ReferenceForBusiness.com
^ SORKIN, ANDREW ROSS and ROZHON, TRACIE. "Three Firms Are Said to Buy Toys 'R' Us for $6 Billion ." New York Times, March 17, 2005.
^ ANDREW ROSS SORKIN and DANNY HAKIM. "Ford Said to Be Ready to Pursue a Hertz Sale." New York Times, September 8, 2005
^ PETERS, JEREMY W. "Ford Completes Sale of Hertz to 3 Firms." New York Times, September 13, 2005
^ SORKIN, ANDREW ROSS. "Sony-Led Group Makes a Late Bid to Wrest MGM From Time Warner." New York Times, September 14, 2004
^ "Capital Firms Agree to Buy SunGard Data in Cash Deal." Bloomberg, March 29, 2005
^ Samuelson, Robert J. "The Private Equity Boom". The Washington Post, March 15, 2007.
^ Dow Jones Private Equity Analyst as referenced in U.S. private-equity funds break record Associated Press, January 11, 2007.
^ Dow Jones Private Equity Analyst as referenced in Private equity fund raising up in 2007: report, Reuters, January 8, 2008.
^ SORKIN, ANDREW ROSS. "HCA Buyout Highlights Era of Going Private." New York Times, July 25, 2006.
^ WERDIGIER, JULIA. "Equity Firm Wins Bidding for a Retailer, Alliance Boots." New York Times, April 25, 2007
^ Lonkevich, Dan and Klump, Edward. KKR, Texas Pacific Will Acquire TXU for $45 Billion Bloomberg, February 26, 2007.
^ SORKIN, ANDREW ROSS and de la MERCED, MICHAEL J. "Private Equity Investors Hint at Cool Down." New York Times, June 26, 2007
^ SORKIN, ANDREW ROSS. "Sorting Through the Buyout Freezeout." New York Times, August 12, 2007.
^ Turmoil in the marketsThe Economist July 27, 2007
^ Michael S. Long & Thomas A. Bryant (2007) Valuing the Closely Held Firm New York: Oxford University Press. ISBN13: 9780195301465 [1]
^ Top 50 PE funds from Private equity international
^ http://money.cnn.com/2007/02/16/magazines/fortune/top10.fortune/index.htm
^ http://www.guardian.co.uk/business/2007/feb/08/privateequity.usnews
^ http://business.timesonline.co.uk/tol/business/markets/united_states/article711293.ece
^ Private Equity 2008.pdf
^ In the United States, FOIA is individually legislated at the state level, and so disclosed private equity performance data will vary widely. Notable examples of agencies that are mandated to
disclose private equity information include CalPERS, CalSTRS and Pennsylvania State Employees Retirement System and the Ohio Bureau of Workers' Compensation
^ Guidelines for Disclosure and Transparency in Private Equity
^ See Phalippou and Gottschalg's 2007 paper, Performance of Private Equity Fundsfor an overview of the profitability index

Topics on private equity and venture capital

Basic investment types Buyout • Venture • Growth • Mezzanine • Secondaries • Equity co-investment

History History of private equity and venture capital • Early history of private equity • Private equity in the 1980s • Private equity in the 1990s • Private equity in the 21st century

Terms and concepts Buyout Financial sponsor • Management buyout • Divisional buyout

Venture Seed money • Startup company • Angel capital • Angel investor • Venture capital financing • Pre-money valuation • Post-money valuation • Venture round • Venture debt

Structure Private equity firms and funds • Limited partnership • Limited liability company • Carried interest • Publicly traded private equity • Private Investment in Public Equity (PIPE)

Investors Institutional investors • Pension funds • Insurance companies • Endowments • Fund of funds • High net worth individuals • Sovereign wealth funds

Related financial terms Initial Public Offering (IPO) • Mergers and acquisitions • Leverage • High-yield debt • Capital structure

Private equity and venture capital investors • Private equity firms • Venture capital firms • Portfolio companies

Corporate finance and investment banking

Capital
structure Senior secured debt · Senior debt · Second lien debt · Subordinated debt · Mezzanine debt · Convertible debt · Exchangeable debt · Preferred equity · Shareholder loan · Common
equity · Pari passu

Transactions
(terms/conditions) Equity offerings Initial public offering (IPO) · Secondary Market Offering (SEO) · Follow-on offering · Greenshoe (Reverse) · Book building

Mergers and
acquisitions Takeover · Reverse takeover · Tender offer · Poison pill · Freeze-out merger · Tag-along right · Drag-along right · Control premium · Divestment · Demerger

Leverage Leveraged buyout · Leveraged recap · Financial sponsor · Private equity · Bond offering · High-yield debt · DIP financing

Valuation Financial modeling · APV · DCF · Net present value (NPV) · Cost of capital (Weighted average) · Comparable company analysis · Enterprise value · Tax shield · Minority interest ·
EVA · MVA

List of investment banks · List of finance topics
Private_equity"
Categories: Private equity | Investment | Finance (Source: Wikipedia)
Private banking

Rich pickings
Aug 17th 2006 | NEW YORK AND PARIS
From The Economist print edition

The rich are getting richer. So are the bankers serving them

ON THE 11th and 12th floors of JPMorgan Chase's private bank, overlooking Manhattan's Park Avenue, David Rockefeller keeps part of his private collection of modern art. Andy Warhol's
Marilyn Monroe paintings hang on the walls; the gun fired by Aaron Burr that killed Alexander Hamilton sits behind a glass case next to objets d'art from Africa. Here, the private bank has its
meeting rooms, into which only the most treasured of its clients are invited. Those that are receive white-gloved treatment from bankers who might otherwise be considered elite themselves.
The private bankers aim to please: be that offering tricky investment advice to clients, or “summer reading” tips—this year's includes Elizabeth Kolbert on climate change. The attention pays
off. From San Francisco to Shanghai, Switzerland to Singapore, the merely rich are becoming super-rich. Private banking is in bloom.

That was one reason UBS, a Swiss bank, announced a rise of almost 50% in second-quarter earnings on August 15th. The world's largest private bank by profits took SFr31.2 billion ($25.2
billion) in net new money from rich clients in the quarter, a 12% annualised growth rate. Credit Suisse, another Swiss bank, has also reported record inflows of private-banking money, and is
expanding in the Middle East and Singapore (see article). Other big international banks, including JPMorgan Chase and HSBC, are investing heavily in wealth management. Goldman
Sachs, which attracts most attention for its success in the grubbier world of trading, has muscled in, growing fast in Europe and Asia. In Europe it is planning more than to double its numbers
by hiring several hundred private bankers over the next five years—wooing very rich clients with €10m ($13m) or more to invest.

One reason for the excitement is an increase in the number of plutocrats. According to the World Wealth Report published annually by Capgemini, a consultancy, and Merrill Lynch, a bank,
the number of “high net-worth” individuals—those with over $1m in financial assets—grew 20% in the past five years (see chart).

Many of those come from emerging economies such as China, India and the Middle East, and particularly in America and Asia are more likely to be self-made millionaires (or billionaires),
rather than inheritors of wealth. Their ways of dealing with money are entrepreneurial as well. Rather than parking it in bonds and property, they are increasingly likely to want it actively
managed. For that, they face a panoply of new (and volatile) investment opportunities, from hedge funds and private equity to derivatives and currencies.

More assets to look after mean more management fees for the banks, and these are the sort of stable, recurring fees that shareholders covet. Christopher Wheeler, of Bear Stearns, points out
that UBS and Merrill Lynch—which both derive a third or more of their pre-tax profits from wealth management—trade at around 11 times 2007 earnings, a premium rating. Mr Wheeler
reckons private banking is the fastest-growing area of financial services, with a compound annual growth rate of 24% between 2002 and 2005.

Predictably, the big banks argue that size helps: they can offer global networks to cater to their peripatetic clients, as well as more products. Bruce Holley, of Boston Consulting Group, thinks
the benefits of scale are probably overstated. Today, all private banks operate an “open-architecture” model, meaning, in theory, that they invest their customer's cash in the best assets
available—whether they sell them or rival banks do.

Whatever the merits of size, consolidation appears inevitable. According to Bear Stearns, the top ten private banks hold less than a fifth of the market. UBS, for all its clout, has only 3%. In
Switzerland alone, there are 350 private banks. Ray Soudah at MilleniumAssociates, a Swiss investment-banking boutique, reckons that in the next 24 months, many will merge or be taken
over. In the past year, some already have.

For banks going down market where the biggest numbers are, the trick will be building scale without losing the personal touch. The skill is not just about knowing the names of clients'
favourite grandchildren. Increasingly, it is about financial sophistication. For example, Capgemini and Merrill Lynch note that alternative investments accounted for 20% of total assets in
2005, compared with less than 10% in 2002. Growth has come at the expense of trusted old-money preserves, such as property and fixed income.

It is an open question whether or not these new investments will help spread risk for the wealthy (in the stockmarket sell-offs of May and June, they did not: hedge funds as a whole performed
poorly). But they are a sure bet for the private banks. As well as the management fees, sometimes there are trading fees and the more fancy the investment strategy, the more such revenues
roll in.

But the money is not going all one way. For some, the future is clouded. Switzerland, which the old tradition of bank secrecy turned into a home for one-third of the world's offshore private-
banking assets, cannot afford to rest on its laurels. Doug Grip, international head of private wealth management at Goldman Sachs, thinks tax harmonisation in the European Union, for
example, means more citizens are bringing money onshore, suggesting that bank secrecy is not as important as it was in the past.

In the end, a bigger danger is that the industry becomes a victim of its own success. As banks scent fat, stable profits, more will move into the business. By definition, however, private banking
is not a mass market and margins could shrink. Already, emerging centres such as Singapore and Dubai are chipping away at fees.

On the other hand, the growth of the industry—and the impression that it is becoming more a game of financial sophistication than secrecy—is making it more respectable. As long as the
rich get richer, the best private banks will, too.
Investor Education for Global Private Investment Funds in Film and Media Finance, Private Equity, Hedge Funds, Section 181 Investors
Posted: 19-03-2008 | Comments: 0 | Views: 39

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Investor Education for Global Private Investment Funds in Film and Media Finance, Private Equity, Hedge Funds, Section 181
Investors

Author: yuri rutman

About the Author:

CEO of noci pictures

Article Source: http://www.articlesbase.com/public-company-articles/investor-education-for-global-private-investment-funds-in-film-and-
media-finance-private-equity-hedge-funds-section-181-investors-364467.html

Alright, so you woke up one day, checked your Swiss Bank Account, called your family office planner,
had breakfast with your private client service wealth manager, got your tax accountant on the phone, and between three of you, you decided to invest your proceeds from your latest
company's Merger or Acquisition not into some dubious hedge fund or start-up biotech venture, but into financing Hollywood films because you figure you need the State tax Credits, the
Federal tax write-offs, as well as a nice hedge of revenues from a few movies.

Now, this may not ring too well initially with your hedge fund manager neighbors in Connecticut or your oil and gas investor friends in Bahrain or Dubai, but aren't these the same guys who
are financing Hollywood blockbusters? And the only question for you, how do you get in the game without feeling like the Uncle of the film school student who wrote his nephew a $1,000,000
check for a film that starred his theater department classmates and ended up as a free download on youtube.com?

So after doing your share of homework, here's what you discover may be the opportunity to spice up your wealthy but boring life:

*Sergey Brin And Larry Page Of Google, Fred Smith, the CEO of Federal Express, Norman Waitt, the Co-Founder of Gateway Computers, Jeff Skoll Of Ebay, Todd Wagner and Marc Cuban
(formerly of broadcast.com), Max Levchin and David Grodnick Of PAYPAL, Marc Turtletaub of The Money Store, Roger Marino Of EMC Corp, former Chicago bulls co-owner Jim Stern,
Sidney Kimmel Of Jones Apparel Group, Minnesota Twins owner Bill Pohlad; Real Estate Developers Tom Rosenberg, Bob Yari; and, financiers Robert Sturm, Sheikh Waleed Al Ibrahim,
Zeid Masri of SilverHaze Partners, Michael Singer, Mark Esses, David Larcher, Michael Goguen, Richard Landry, Michael Reilly, Rafael Fogel, and Philip Anschutz are just a handful of high
net worth entrepreneurs who entered the motion picture finance and production business with successful results.
*There are various tradable state, federal, and international tax credit incentives that would offer a premium based on an equity position. Assuming there is a 10 million dollar budget film,
where 50% of it is in equity, and 50% is through international distribution guarantees prior to release. Now assume there is a 20-25% tax credit on the entire amount of $10 million dollars,
which will immediately translate into $2-2.5 million tax credit to an investor.
*Numerous hedge funds such as Reed, Conner & Birdwell (DISNEY), Legendary Fund (Warner Brothers), Melrose Fund (Paramount Pictures), Ingenious Media’s 700 Million dollar Float on
London’s AIM, Benjamin Waisbren Investments, and a host of other funds and fund managers are entering the film finance arena.
*The explosion of international DVD, pay-per-view, home video, cable, megaplex theaters, the future of multi-lingual Internet video on demand downloads, and cross-market digital
distribution including low-cost theatrical digital projection, the movie industry is accelerating at an unprecedented growth rate.
*The American Jobs Creation Act of 2004, which amends the Internal Revenue Code of 1986, was signed into law . The Act creates three tax incentives expressly applicable to motion
pictures, one of which – § 181 of the Internal Revenue Code – is especially significant to independent film producers and their passive investors on qualifying films with budgets under $20
million dollars.
*The filmed and other entertainment sectors are constantly outperforming and beating analyst expectations with regards to growth, and are the only industries resistant to untimely global
events and adverse economic conditions.
*Movie Investor returns may be more favorable and more liquid than holding direct equity positions in most public entertainment and other public companies, real estate investments, and
other alternative investments.
*There is a huge demand, audience, and growing distribution structure for specialty independent, ,crime, horror, and other low budget films as exemplified by the success of such films as
“Brokeback Mountain”, “Sideways”, “Capote”, “Garden State”, “Napolean Dynamite”, “Y Tu Mama Tambien”, “My Big Fat Greek Wedding”, “Memento”, “Crash” , “Saw 1 &2”, Friday The 13th”,
“Halloween”, “Texas Chain Saw Massacre”, “Hostel” and “WOLF CREEK”, which was made for $800,000, bought for nearly 4 million dollars prior to its release by Dimension, as well as “Hustle
and Flow” which was made for $2 million dollars and bought for $16 million by Paramount Pictures.
*Apart from large blockbusters such as “King Kong”, “Harry Potter”, and other large scale studio films, the majority of studio-produced films have been under performing at the box office. The
films that have been successful for studios were all externally financed and or co-financed with studios, sold for 2-3 x their costs, and a majority of them retained foreign sales rights to
maximize revenues.
So after looking at all the great benefits, how do you actually go about finding a deal or movie project where you are certain that half your money isn't going to be used by a Hollywood
producer as a down payment on a new mansion in Pacific Palisades?

The key that separates the successful film financiers vs. the newbie Oil magnates who come to Los Angeles with a pocketful of money and end up leaving with half a pocketful of money is
called several things: structured finance, leverage, risk minimization, multiple exit strategies, tax credits, and the ethical consciousness of the filmmaker/producer.

What does that translate to you in a real world scenario. Lets say you want to finance 100% of a $1.5 million dollar low budget genre film whose worst case scenario is a DVD release and
profits from international sales and perhaps some other equity sweeteners in the conversion of the securities that you subscribe for as part of the deal.

Well, if you write a check for $1.5 million, and the film is shot in a state that has 30% in tax credits, you get back $450,000 in tax credits + under Section 181, you are able to write off that
amount under Federal. So you are already making a nice return before the profits kick in. Then you figure you sell the film to 50 countries, and if you are really lucky, you sell the film for 3-4
times it cost to a studio at a swanky festival like Sundance, Toronto, Cannes, etc. Do this over 5-10 films and you can make a very profitable name for yourself among the Hollywood elite.
But lets really take this a step further and see how the bigger boys leverage film investing because they can get a bigger star which can translate in larger overseas sales.

Lets say a filmmaker/producer has a $10 million film and you want in on the action. You would park $5 million in equity, receive an 20-30% tax credit on $10 million which will be $2-$3
million, the producer will get the biggest star he can, get a studio to kick in the other $5 million dollars, you wont worry about ever seeing a penny from the theatrical release because you
know your DVD profits and international sales will cover your equity position. Make sense?

Now leverage this with different budgets, genres, stars, distribution, places where you can get high tax credits (Ie Puerto Rico is 40%), other exit strategies where you can find your shares on
the London AIM, and you are on your new career path as a sophisticated and educated film financier. Off course, if you want to go even further and guarantee 100% of your capital, there are
tricks to that as well.
Productivity
Also known as "labor productivity" or "worker productivity"; value of goods and services produced in a period of time, divided by the hours of labor used to produce them. Productivity is reported
quarterly by the Bureau of Labor Statistics (website: www.bls.gov).
Investors pay attention to productivity because they know the Federal Reserve does: high productivity is the key to allowing the unemployment rate to drop to low levels without risking inflation.
Profit Margin
Earnings expressed as a percentage of Revenue, ie the percentage of sales the company has left over as profit after paying all expenses. See the sample income statement; also the page on the
price/sales ratio for the relationship between profit margin, price/sales, and price/earnings.
Profitability
The efficiency of a company or industry at generating earnings.
Profitability is expressed in terms of several popular numbers, that measure one of two generic types of performance: "how much they make with what they've got" and "how much they make
from what they take in". See Return on Assets; Profit Margin.
Prospectus
Document disclosing specific financial information, required by the SEC of companies issuing stocks or bonds, or selling mutual funds or other investment products to the public.
Protection of the Assets

1-There are ignorant of the law or unscrupulous promoters who recommend wealthy individuals to rely on banking secrecy in order to avoid declaring assets and income to the relevant tax
authorities, or to avoid criminal investigations concerning money gained from illegal transactions. They also recommend ways to break the law without being caught. Only very foolish
individuals will even try powerful governments. Nobody can break the law and escape the vast power and resources of the wealthiest governments. All assets protection's strategies have to rely
upon a legally defensible operation.

2- The best way wealthy individuals can protect themselves, as well as their heirs against leonine inheritance taxes, can be by establishing a legally defensible operation in order to "beggar"
themselves. Nobody can take the assets away from individuals if they do not own such assets. There is no need to move the assets but, obviously, the title has to. Once the assets' title has been
transferred to a legally defensible operation, such assets can not be levied against or seized by creditors, nor tied up in probate court, nor be taxed, because individuals do not own such assets.

3- There are ignorant of the law or unscrupulous promoters who claim they can offer tax advantages by going offshore. Concerning citizens or residents of the wealthiest countries of the world
such claim is far from the truth. There are no legitimate tax advantages to citizens or residents of the wealthiest countries of the world using an offshore I.B.C. or trust of any kind, unless investors,
rather than by hiding ( everything could be found by powerful governments ), are able to handle legally defensible operations in a more favorable business environment.

4- Governments of countries of the world that charge tax on income obtained overseas by their citizens or residents, violate the principle of territoriality.

5- Investors able to handle legally defensible operations, in a more favorable business environment, may, under an actual protective structure, handle investment funds, manage risks, minimize
taxes, own and operate businesses, issue shares, issue bonds, raise capital in other ways, reduce overall reserve and capital requirements, etc. Investors can create complex financial structures
whose beneficiaries are protected by a shield, rather than by hiding, by legally protecting themselves.

6- Wealthy individuals are the most important target of litigation and their protective abilities have been eroded, in certain countries, by court decisions and legislation which prevent such
individuals from operating in an asset protection sense. They can establish operations in jurisdictions with favorable asset protection laws having in mind several reasons, including but not
limited to : a claimant's attorney, who will not be able to accept the case on a contingency fee basis, contemplating an action to "recover" assets from individuals in other jurisdictions knows
nothing of such jurisdictions' laws, procedures, costs, currency, etc; well paid, and after a long time of litigation in order to reach the jurisdiction such attorney will likely be faced with an
expired statute of limitations; because of such obstacles individuals are not automatic target of litigation.

7- Investors can handle legally defensible operations in a more favorable business environment, including but not limited to no capital tax, no withholding tax on dividends or interest, no tax on
transfers, no corporation tax, no exchange controls, no capital gains tax, light regulation and supervision, less stringent reporting requirements, and less stringent trading restrictions. Investors do
not have to violate any law, but investors can take the opportunity to start over again.

8- Investors can find countries of the world where governments charge no tax (zero tax) on interests earned, nor on capital gained, nor on income obtained overseas.

9- This Website has welcomed thousands, as well as very interesting questions. The most recurrent is: What is the nature of the strategy, how to put a legally defensible operation on, and how
does it work?. The response to such combined question is more than 50 % of our wealth, more than 50 % of our business's core, and the outcome from more than ten years of deep study and
research.

10- A legally defensible operation must be properly established and maintained. The operation must have a purpose which can not be perceived as a tax avoidance. The operation must not be
a sham. In every case where an asset protection operation is held to be invalid,the most important reason is that such operation is a sham.

11- Wealthy individuals have to be able to understand the difference between actual or potential private claimant, and powerful governments. Nobody can take the assets away from wealthy
individuals, if they can not be found by them, can be near from the truth concerning private claimants; but wealthy individuals have to remember that everything can be found by powerful
governments. Concerning U.S. citizens or residents, under "Tax Neutral System", various I.R.S. reports are required.

12- Wealthy individuals in countries with weak economies and banking systems may rely upon a legally defensible operation, to protect themselves against the collapse of their domestic
currencies and banks, to "outside" the reach of potential or existing exchange control, to restructure ownership of their assets when facing unlimited liabilities in their home jurisdiction, to
protect those assets from lawsuits, etc.

Asset protection (sometimes also referred to as debtor-creditor law) refers to a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and
business entities from civil money judgments, creditors such as trusts, partnerships and international entities. Asset protection help minimizes the risk of loss from unexpected hazards of
businesses and individuals. This law has shielded and protected many families from business failures and lawsuits. There are many programs available to help an individual or business minimize
or avoid tax liability. Asset protection strategies vary depending on factors such as country of residence and citizenship, age, or annual net income. Lawyers are usually involved in the design
and management of an asset protection strategy. Strategies of asset protection include, amongst others, insurance, titling, formation of entities, trusts, privacy plans, equity stripping, and family
limited partnerships.

Asset. This article is about the business definition.
In business and accounting, assets are everything of value that is owned by a person or company. [1]. The Balance Sheet of a firm records the monetary[1] value of the assets owned by the firm.
The 2 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.[3]

1 Asset characteristics
1.1 Current assets
1.2 Long-term investments
1.3 Fixed assets

1.4 Intangible assets
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 [4]. 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." [5]

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.

= ways.[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
Main article: 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
Main article: 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. Websites are treated differently in different countries and may fall under either tangible or intangible assets.
Source: Wikipedia
Qualified Retirement Plan
An investment in which both contributions and growth are tax-deferred. Examples are 401(k) and Keogh plans and deductible IRAs.
Quick Ratio
Ratio of a company's current assets excluding inventory, to its short-term debt.
This ratio is a more conservative analog of the current ratio; inventory is excluded since the liquidation price of inventory is likely to be below its book value.
Real Estate

Real estate is a legal term (in some jurisdictions, notably in the USA, United Kingdom, Canada, and Australia) that encompasses land along with anything permanently affixed to the land,
such as buildings, specifically property that is stationary, or fixed in location.[1] Real estate law is the body of regulations and legal codes which pertain to such matters under a particular
jurisdiction. Real estate is often considered synonymous with real property (also sometimes called realty), in contrast with personal property (also sometimes called chattel or personalty under
chattel law or personal property law).

However, in some situations the term "real estate" refers to the land and fixtures together, as distinguished from "real property," referring to ownership rights of the land itself.[clarification
needed]

The terms real estate and real property are used primarily in common law, while civil law jurisdictions refer instead to immovable property.

1 Etymology
2 Real estate terminology and practice outside the United States (around the world)
2.1 Real estate as "real property" in the U.K.
2.2 Real estate in Mexico and Central America
3 Business sector
4 Residential real estate
5 Market sector value
6 Mortgages in real estate
7 See also
8 References

Etymology
In law, the word real means relating to a thing (res/rei, thing, from O.Fr. reel, from L.L. realis "actual," from Latin. res, "matter, thing"[2]), as distinguished from a person. Thus the law broadly
distinguishes between "real" property (land and anything affixed to it) and "personal" property (everything else, e.g., clothing, furniture, money). The conceptual difference was between
immovable property, which would transfer title along with the land, and movable property, which a person would retain title to. The oldest use of the term "Real Estate" that has been preserved
in historical records was in 1666.[2]

The use of "real" to refer to land also reflects the ancient preference for land, and the ownership thereof (and the owners thereof). This, in turn reflects the values of the medieval feudal
system, which is the ultimate root of the common law.

Some have claimed that the word Real is derived from "royal" (The word royal—and its Spanish cognate real—come from the related Latin word rex-regis, meaning king. For hundreds of years
the Royal family / King owned the land, and the peasants paid rent or property taxes to be on the Royal's land. Today, just like hundreds of years in the past, we pay property taxes, or rent to be
on the government's land or the Royal Estate). However, the "real" in "real property" is derived from the Latin for "thing".[3]

Real estate terminology and practice outside the United States (around the world)

Real estate as "real property" in the U.K.
In British usage, “real property”, often shortened to just “property”, generally refers to land and fixtures as such while the term “real estate” is used mostly in the context of probate law, and
means all interests in land held by a deceased person at death excluding interests in money arising under a trust for sale of or charged on land.[4]

See Real property for a definition and Estate agent for a description of the practice in the UK.

Real estate in Mexico and Central America
The real estate business in Mexico and Central America is different from the way that it is conducted in the United States.

Some similarities include a variety of legal formalities (with professionals such as real estate agents generally employed to assist the buyer); taxes need to be paid (but typically less than those
in U.S.); legal paperwork will ensure title; and a neutral party such as a title company will handle documentation and monies in order to smoothly make the exchange between the parties.
Increasingly, U.S. title companies are doing work for U.S. buyers in Mexico and Central America.

Prices are often much cheaper than most areas of the U.S., but in many locations prices of houses and lots are as expensive as the U.S., one example being Mexico City. U.S. banks have
begun to give home loans for properties in Mexico, but, so far, not for other Latin American countries.

One important difference from the United States is that each country has rules regarding where foreigners can buy. For example, in Mexico, foreigners cannot buy land or homes within 50km
of the coast or 100km from a border unless they hold title in a Mexican Corporation or a Fideicomiso (a Mexican trust). In Honduras, however, they may buy beach front property directly in
their name. There are also different special rules regarding certain types of property: ejidal land – communally held farm property – can only be sold after a lengthy entitlement process, but
that does not prevent them from being offered for sale.

Many websites advertising and selling Mexican and Central American real estate exist, but they may need to be researched.

In Costa Rica, real estate agents do not need a license to operate, but the transfer of property requires a lawyer.

Business sector
With the development of private property ownership, real estate has become a major area of business. Purchasing real estate requires a significant investment, and each parcel of land has
unique characteristics, so the real estate industry has evolved into several distinct fields. Specialists are often called on to valuate real estate and facilitate transactions. Some kinds of real
estate businesses include:

Appraisal: Professional valuation services
Brokerages: A fee charged by the mediator who facilitates a real estate transaction between the two parties.
Development: Improving land for use by adding or replacing buildings
Property management: Managing a property for its owner(s)
Real estate marketing: Managing the sales side of the property business
Real estate investing: Managing the investment of real estate
Relocation services: Relocating people or business to a different country
Corporate Real Estate: Managing the real estate held by a corporation to support its core business—unlike managing the real estate held by an investor to generate income
Within each field, a business may specialize in a particular type of real estate, such as residential, commercial, or industrial property. In addition, almost all construction business effectively
has a connection to real estate.

"Internet Real Estate" is a term coined by the internet investment community relating to ownership of domain names and the similarities between high quality internet domain names and real-
world, prime real estate.

Residential real estate
The legal arrangement for the right to occupy a dwelling is known as the housing tenure. Types of housing tenure include owner occupancy, Tenancy, housing cooperative, condominiums
(individually parceled properties in a single building), public housing, squatting, and cohousing.

Residences can be classified by if and how they are connected to neighboring residences and land. Different types of housing tenure can be used for the same physical type. For example,
connected residents might be owned by a single entity and leased out, or owned separately with an agreement covering the relationship between units and common areas and concerns.

Major physical categories in North America and Europe include:

Attached / multi-unit dwellings
Apartment ("flat" outside North America) - An individual unit in a multi-unit building. The boundaries of the apartment are generally defined by a perimeter of locked or lockable doors. Often
seen in multi-story apartment buildings.
Multi-family house - Often seen in multi-story detached buildings, where each floor is a separate apartment or unit.
Terraced house (a.k.a. townhouse or rowhouse) - A number of single or multi-unit buildings in a continuous row with shared walls and no intervening space.
Condominium - Building or complex, similar to apartments, owned by individuals. Common grounds are owned and shared jointly. There are townhouse or rowhouse style condominiums as
well.
Semi-detached dwellings
Duplex - Two units with one shared wall.
Single-family detached home
Portable dwellings
Mobile homes - Potentially a full-time residence which can be (might not in practice be) movable on wheels.
Houseboats - A floating home
Tents - Usually very temporary, with roof and walls consisting only of fabric-like material.
The size of an apartment or house can be described in square feet or meters. In the United States this includes the area of "living space", excluding the garage and other non-living spaces.
The "square meters" figure of a house in Europe reports the area of the walls enclosing the home, and thus includes any attached garage and non-living spaces.

It can also be described more roughly by the number of rooms. A studio apartment has a single bedroom with no living room (possibly a separate kitchen). A one-bedroom apartment has a
living or dining room, separate from the bedroom. Two bedroom, three bedroom, and larger units are also common. (A bedroom is defined as a room with a closet for clothes storage.)

See List of house types for a complete listing of housing types and layouts, real estate trends for shifts in the market and house or home for more general information.

Market sector value
According to The Economist, "developed economies" assets at the end of 2002 were the following:

Residential property: $48 trillion;
Commercial property: $14 trillion;
Equities: $20 trillion;
Government bonds: $20 trillion;
Corporate bonds: $13 trillion;
Total: $115 trillion.
That makes real estate assets 54% and financial assets 46% of total stocks, bonds, and real estate assets. Assets not counted here are bank deposits, insurance "reserve" assets, and human
assets; also it is not clear if all debt and equity investments are counted in the categories equities and bonds. For U.S. asset levels see FRB: Z.1 Release- Flow of Funds Accounts of the United
States.

Mortgages in real estate
In recent years, many economists have recognized that the lack of effective real estate laws can be a significant barrier to investment in many developing countries. In most societies, rich or
poor, a significant fraction of the total wealth is in the form of land and buildings.

In most advanced economies, the main source of capital used by individuals and small companies to purchase and improve land and buildings is mortgage loans (or other instruments). These
are loans for which the real property itself constitutes collateral. Banks are willing to make such loans at favorable rates in large part because, if the borrower does not make payments, the
lender can foreclose by filing a court action which allows them take back the property and sell it to get their money back. For investors, profitability can be enhanced by using an off plan or
pre-construction strategy to purchase at a lower price which is often the case in the pre-construction phase of development.

But in many developing countries there is no effective means by which a lender could foreclose, so the mortgage loan industry, as such, either does not exist at all or is only available to
members of privileged social classes.

Buyer brokerage (in the USA)
Buying agent (in the UK)
Estate (house)
Estate agent (in the UK) and
Real estate broker (in the USA)
Housing bubble
Immovable property
List of real estate topics
Master of Real Estate Development
Medical real estate
Mortgage
Mortgage loan
Neighborhood Watch
Private Equity Real Estate
Property rights
Real estate broker (in the USA) and
Estate agent (in the UK)
Real estate appraisal
Real estate economics
Real estate developer
Real estate investment trust
Real estate pricing
Real estate transaction
Real estate transfer tax
Real estate trends
Real property
Realtor
Short sale (real estate)
Subprime mortgage crisis
The Real Estate Wiki
1031 exchange
International real estate

References
Look up Real estate in
Wiktionary, the free dictionary.^ "Real estate" The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Dictionary.com Retrieved July 12,
2008
^ a b "Real" – Online Etymological Dictionary Retrieved July 12, 2008
^ "Real" – The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Dictionary.com Retrieved July 12, 2008
^ Oxford Dictionary of Law (4th edition), New York: Oxford University Press, 1997; See also Estate in land
Retrieved from "http://en.wikipedia.org/wiki/Real_estate"
Category: Real estate. Source: Wikipedia
Commercial Real Estate Industry Seeks U.S. Aid
washingtonpost.com

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, December 23, 2008; Page D01

Some of the country's biggest commercial real estate players are asking the government for help, as their $6 trillion industry of hotels, office buildings and shopping malls faces a record
amount of debt coming due in the next few years.

Trade association executives said that in the last few weeks they have met with members of President-elect Barack Obama's transition team, Congressional leaders, and officials at the
Treasury Department and Federal Reserve to make their case for assistance.

In the next three years, they pointed out, an estimated $530 billion of commercial mortgages will come due for refinancing -- with about $160 billion due next year, according to Foresight
Analytics, based in Oakland, Calif. But with the credit markets virtually collapsed, thousands of those properties could go into foreclosure or bankruptcy if owners are unable to get new loans.

"If you can't get a loan and you owe the bank the money, you have to find the cash to pay the loan back or you default on the property," said Steven A. Wechsler, who has been lobbying as
president and chief executive of the National Association of Real Estate Investment Trusts, a D.C. association with 3,000 members. "Banks' jobs are to make loans, not own real estate. That's
something we'd like to avoid. It could be a downward spiral that's driven by a compromised system of credit delivery. Some constructive step by federal policymakers would be wise and
appropriate to be able to free up the market."

The real estate industry is going to the government for help because "they can," said Jim Sullivan, a managing director at Green Street, a real estate research firm in Newport Beach, Calif.

"They see what everybody else has gotten," he said. "Real estate is a capital-intensive business and there is no capital. They'll take cheap money from whoever is giving it out, and now there's
only one source -- the government."

The trade associations are asking that their members be included in a $200 billion lending facility that was created by the government to support the market for consumer debt such as car
loans, student loans and credit cards. In a recent letter to Treasury Secretary Henry M. Paulson Jr., industry leaders from a dozen groups described the troubled situation. "The paralysis of
credit, which began in the short-term market, has coursed through the system and it now severely affects longer-term credit, especially secured and unsecured commercial real estate loans,"
they wrote.

When Paulson announced the $200 billion initiative, he noted that it could possibly be expanded to aid the commercial real estate market.

The real estate groups say they aren't asking for direct bailouts for their members, but rather for credit market support. "This is the same thing they're doing for car loans and student loans.
We're asking them to help restart the credit markets for commercial real estate mortgages," said Jeffrey D. DeBoer, president and chief executive of the Real Estate Roundtable, a major
industry trade group.

"Banks can't possibly absorb, manage and turn around properties at this scale if they come back to the lenders," he said.

The commercial real estate market boomed in the last few years, fed by easy credit. But starting in mid-2007, the credit crisis essentially froze the securities market.

The amount of new commercial mortgage-backed securities -- loans that are sliced, packaged and sold as bonds -- fell from $200 billion in 2007 to only $12 billion in the first six months of
the year, Wechsler said. "We've gone from 55 miles per hour to zero," he said.

When money was flowing, investors drove up the prices of real estate, betting that rents and occupancy rates would keep going up. But cash from properties is falling as more space becomes
available and rents drop, making it harder for owners to repay their debts.

While delinquency rates are low, they increased by one-third in November to 0.96 percent and could rise to more than 3 percent by the end of next year, according to figures from Deutsche
Bank. Atlanta, Detroit, New York and Tampa are among the markets showing signs of rising defaults. In the Washington region, defaults are below the national average.

"It won't help the economy if commercial real estate continues to fall like residential," said Lisa Pendergast, managing director of commercial real estate finance at RBS Greenwich Capital
Markets. "Then ultimately it will cause the recession to lengthen and deepen."

Staff writer David Cho contributed to this report.
The Great Real Estate Credit Freeze of 2007
Dec 1, 2007 12:00 PM, By Anthony Downs

By late October 2007, U.S. credit markets for most real estate lending became almost frozen because of uncertainty among both lenders and borrowers about how to value specific types of
property. This confusion arose from problems among subprime residential loans.

In subprime markets, many operators made loans on flimsy credit terms to low-income buyers, securitized those loans, put them in collateralized debt obligations (CDOs) or special investment
vehicles (SIVs), and tried to sell those instruments to investors.

At first this tactic appeared attractive because of the high yields on subprime loans. But subprime defaults began to rise beyond what packagers and investors expected. Some investors were
not being paid off as scheduled. These investors included many foreigners unfamiliar with U.S. home lending practices. They relied on AAA ratings made by U.S. credit rating agencies to
support their decision to buy such paper.

Investors flinch
As subprime defaults made headlines, other originators of subprime loans were still trying to sell securities that included similar loans. But potential investors refused to buy this paper at the
same rates that the originators had expected. Consequently, the originators could not sell the paper they were putting into CDOs or other SIVs at the prices they needed to cover the home
loans they had made.

Therefore, firms owning those originators, or banks who had lent the originators money, found themselves having to advance large sums to keep the originators from going broke. This chain
reaction exposed the problems that Bear Sterns had with two of its hedge funds, and affected a lot of other hedge funds and originators.

Although subprime loans were less than 15% of all residential mortgages outstanding, many CDOs contained a significant amount of subprime paper. Therefore, uncertainty had a much
broader impact than the total amount of subprime loans would imply. Such broadening was provoked by the frequent lack of transparency in CDOs. Many investors had bought them for high
yields without knowing all they contained.

Once widespread uncertainty arose about the value of CDOs, many investors who had been making real estate loans without doing traditional due diligence began to reconsider. They
recognized their own loans could also default, even if those loans were not subprime. So uncertainty about values of real estate debt securities became rampant.

Rating agencies stumble badly
The basic cause of poor real estate underwriting was immense competition among investors with lots of capital seeking good yields in markets where property prices had soared and cap rates
had fallen. After stocks crashed in 2000, a huge amount of global capital was looking for someplace to go in real estate. Pressure to make loans that ostensibly had good yields became
intense. Eager investors were often given no time to complete normal due diligence before having to commit funds.

As a result, credit terms deteriorated into covenant-light loans unsupported by much due diligence. But once most lenders realized that they might become vulnerable, they started
demanding more covenants, more time, and higher interest rates to cover their actual risks.

The resulting unwillingness of investors to buy commercial paper backing various types of high-risk instruments was reinforced by skepticism about the major rating agencies. Those agencies
had apparently closed their eyes to the poor-quality underwriting supporting not just subprime lending, but other lending as well.

Suddenly, AAA ratings were almost meaningless. This frightened even more investors who had relied on such ratings, and the credit freeze became endemic. The rating agencies should be
ashamed of themselves.

The stakes grow higher
The subprime contagion then spread to the private equity market. There, a few major banks had made huge loans to enable private equity firms to buy large publicly traded corporations. The
banks committed these big loans to private equity buyers at fixed prices over the London Interbank Offered Rate (LIBOR).

But when banks securitized those big loans and tried to sell the pieces in investment markets, investors began demanding higher yields than the banks' initial spreads over LIBOR. Investors
were seeking to protect themselves from increased uncertainty. Some banks were left with huge commitments they could not cover without large losses.

Banks affected by the credit crunch faced two alternatives. They could sell their securitized paper immediately and take major losses. That would give them back enough money to continue
in the lending business. Or they could hold the big loans without selling parts to others, in hopes that investor uncertainty would soon dissipate and they could then sell their paper at smaller
losses.

But if investors held out long enough, the banks would be out of the lending business for quite a while because the loans they had made had consumed so much of their capital. Big banks
need to keep lending because the interest generated from their big loans does not provide high enough yields to meet their earnings targets. To hit those targets, they need to charge a lot of
activity fees in addition to interest. Thus, they have to stay in the lending business.

On the other hand, bond investors had three alternatives. They could stop making loans unless they obtained better covenants and higher interest rates to offset the greater risks they perceived.
But this would slash their own yields on capital, since they would have to park that capital in low-paying money-market funds or U.S. Treasuries until bank behavior changed. After all, investors
were paid to get good returns on the capital entrusted to them, which often came from pension funds or other contributors.

The second option was that investors could accept banks' lower yields if the banks could offer more proof that the paper the banks were selling was properly underwritten. Thirdly, investors
could simply accept the banks' lower yields and therefore accept higher risks without getting any higher returns. But most investors by then perceived a large increase in uncertainty that raised
their risks, for which they believed they deserved more compensation.

Don't bank on a January thaw
This overall situation amounted to a standoff between banks and loan originators on one side, and investors loaded with capital on the other. Who would blink first? Neither side wanted to
yield. Both sides therefore decided to stand pat for a while. Both were betting on a gradual reduction of willingness to stay out of the game by people on the other side. Each side initially
thought that only the highest quality deals would be underwritten.

The conventional wisdom was that as confidence gradually returned among investors, more and more average deals would get through the process, and eventually the market would return to
normal — though probably with higher underwriting standards and somewhat higher interest rates.

At least that is where the real estate lending game stood as of late October. How long it will stay frozen or semi-frozen is difficult to predict. But both sides hope it will not remain frozen long
enough to severely damage either side. Don't bet too heavily on the outcome.

Anthony Downs is a senior fellow at the Brookings Institution and a visiting fellow at the Public Policy Institute of California. He can be reached at anthonydowns@csi.com.
Commercial real estate developers seek bailoutPittsburgh Business Times - by Tucker Echols and Melissa Castro Washington Business Journal
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Commercial real estate developers seek bailout [12/23/2008]
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Commercial real estate developers seek bailout [12/22/2008]
Commercial real estate developers seek bailout [12/22/2008]

Paralyzed by the credit crisis, the commercial real estate industry is the latest to seek a government bailout of sorts.

In November, a dozen real estate development groups banded together to ask Uncle Sam for help avoiding looming defaults, foreclosures and bankruptcies. On Monday, industry groups held
a conference call to draw further attention to their campaign.

Some of the country’s biggest developers have asked Treasury Secretary Henry Paulson to be included in a $200 billion loan program recently created by the government. The program, the
Term Asset-Backed Securities Loan Facility, was intended to support the market for car loans, student loans and credit card debt.

In a letter to Paulson, commercial real estate leaders warn that thousands of properties are in danger of foreclosure because current financing is coming due and new financing is hard to
come by.

The industry envisions a credit facility that would offer financing to investors interested in purchasing highly-rated securities backed by newly-underwritten and appraised commercial
properties. “Banks do not want to originate loans unless they have some way to transfer those loans to new investors,” said Jeffrey DeBoer, president and CEO of The Real Estate Roundtable.
“There needs to be market support for investors who want to buy highly-rated securities. Once they have a market, other securities will be able to price off of that.”

Unlike residential mortgages, which can have up to 30-year repayment schedules, commercial mortgages are repaid over five-, seven- or 10-year terms, with balloon payments at the end of
the term. If refinancing is unavailable, an owner would be faced with a distress sale or losing the property in foreclosure.

In commercial real estate’s most recent hey-day, the commercial mortgage-backed securities (CMBS) market provided easy money for purchases and refinancing. That market disappeared in
the summer of 2007.

Washington D.C.’s distressed and troubled commercial property inventory ranks it fifth (by volume) in the nation, behind New York, Los Angeles, Las Vegas and South Florida.

Nationally, real estate industry analysts predict that between $160 billion and $400 billion of commercial mortgages will mature through 2009, with up to $530 billion of commercial
mortgages due for refinancing in the next three years, according to the Wall Street Journal.

“It’s a rolling problem that is only going to get worse,” DeBoer said. “Rather than waiting until the situation gets so bad that the industry needs to be bailed out, we’re talking about preventing
that.”

Treasury officials have indicated a willingness to consider adding commercial real estate to the $200 billion loan initiative, but it could take time. The program is not even expected to be up
and running, let alone modifiable, until February.

Not everyone in the commercial real estate industry thinks a bailout is in order.

“Our business is cyclical in nature and is prone to boom and bust,” said Andrew Czekaj, chairman and CEO of Cambridge, a Herndon, Va.-based developer. “The boom in the last phase of the
cycle was underwritten by cheap credit, [and] the Fed’s predisposition to over-prime the pump led to riskier and riskier bets.”

“This does not require government intervention on behalf of the ownership group. Any intervention will simply prolong the structural problem of the market — too much capital chasing too few
deals — and lead to a more severe correction later,” Czekaj said.

DeBoer characterized the problem as more systemic than that. “This is putting pressure on property values and on state and local budgets. It’s causing services to be put on hold, and it’s
putting in severe jeopardy good and solid businesses that provide jobs to local communities
Frequently Asked Questions
> How has your investment philosophy changed given the recent market dislocation?

> With both the real estate and financial markets in turmoil, will GE Real Estate continue funding transactions?

> How will GE Real Estate operate going forward?

> GE Real Estate’s new ad stresses its commitment to real estate in all market cycles. What does that mean?

> What does your ad mean when it says “GE Real Estate is strong and playing through?”

> Do you offer any type of residential loans & can I get a home mortgage from you?

> I have a commercial property I would like to sell. How do I list my property with you?

> Your “Online Tools” section has been removed. How can I access my account?

> Where can I learn more about how GE Real Estate serves the commercial real estate industry?

> How can I get in touch with a GE Real Estate representative for more information?

> How has your investment philosophy changed given the recent market dislocation?

GE Real Estate has always underwritten conservatively. With the market reaching exceptional levels between 2005 and 2007, it got harder for rational players to compete. More recently,
purely opportunistic players began to disappear while committed real estate companies, such as GE Real Estate, remain. Pricing will adjust, providing future opportunities to invest. People
who know what they are doing, including our partners, borrowers etc., will, in time, thrive. But there’s no doubt that the current set of economic facts require significant patience from
everybody.
back to top...

> With both the real estate and financial markets in turmoil, will GE Real Estate continue funding transactions?

We are committed to real estate, and have a significant portfolio of direct property investments and real estate debt. We expect to face a more rational set of competitors in the foreseeable
future. We’ll certainly continue to be a big debt financing business, but sized for more modest growth. Tough realities face us all: good deals with strong returns will get done, marginal deals
won’t.
back to top...

> How will GE Real Estate operate going forward?

There are a number of forces at work that will allow us to shrink the balance sheet, and continue to invest selectively. In the normal course of business, loans are paid off creating balance
sheet capacity, and we intend to put our capital to work. Additionally, as our Global Investment Management business gains traction, when the time is right we’ll put our investing clients’
capital to work as well.
back to top...

> GE Real Estate’s new ad stresses its commitment to real estate in all market cycles. What does that mean?

GE Real Estate is committed long term to the commercial real estate business. We’re going to be a participant through all cycles. It doesn’t mean we’re going to be active every day. But we
do participate on the lending side and on the investing side, so through our multiple go-to-market strategies, we tend to be active.
back to top...

> What does your ad mean when it says “GE Real Estate is strong and playing through?”

GE Real Estate has offices in 30+ countries, and is committed to the commercial real estate business. In 2008, we have invested $20B. Much of that is in debt, because that is where the
returns are today. Granted there is uncertainty about what exactly the real estate market will look like at the other end, but we will be a leading, albeit smaller, player.
back to top...

> Do you offer any type of residential loans & can I get a home mortgage from you?

GE Real Estate is only involved in the commercial real estate sector of the mortgage market and we do not – and have not – offered residential mortgages.
back to top...

> I have a commercial property I would like to sell. How do I list my property with you?

What’s listed for sale on our website is a selection of properties we’re selling from our portfolios. We are not a real estate brokerage firm and do not take outside listings.
back to top...

> Your “Online Tools” section has been removed. How can I access my account?

All of our online applications are located within the services section of our “Products and Services” section. You may also access them here.
back to top...

> Where can I learn more about how GE Real Estate serves the commercial real estate industry?

Please feel free to contact us via the "contact us" link at the top of the page.
back to top...

> How can I get in touch with a GE Real Estate representative for more information?
Commercial Real Estate Industry Asks Treasury for Govt. Bailout
Wednesday, December 24, 2008
By Josiah Ryan, Staff Writer

In this Jan. 9, 2007 file photo, the Los Angeles Times newspaper buildings are seen in Los Angeles. With revenue plunging as readers and advertisers flee to the Web, many newspaper
companies have turned to selling off their buildings to raise money or save on costs. But now that option may be drying up too, as frozen credit markets make commercial real estate deals
scarce. (AP Photo/Reed Saxon, File)(CNSNews.com) - The commercial real estate industry could face massive bankruptcies in 2009 if it does not receive “urgent” loans from the federal
government, according to a November letter sent to Treasury Secretary Henry Paulson from the top commercial real estate trade organizations.

But an economist from the conservative Heritage Foundation told CNSNews.com that while the commercial real estate industry could face financial troubles in 2009, it is only one of many
industries that is suffering from the recession and credit crunch. Also, many of commercial real estate’s problems are self inflicted, he said.

In the letter to Paulson, the top real estate organizations predicted that $400 billion in commercial mortgages will mature and require refinancing in 2009. A tight credit market, in which
banks are wary to lend money, could prevent many owners from receiving refinancing, the letter said.

“Without swift federal action, borrowers will have no options for refinancing the $400 billion in commercial mortgages that are maturing over the next several months, and defaults will mount
with severe consequences for investors, workers, local governments and the economy as a whole," Jeffrey D. DeBoer, president and CEO of the Real Estate Roundtable, warned in a statement
accompanying the Nov. 26 letter.

Commercial mortgages are often designed to last only five to 10 years, and they sometimes expire with a final balloon payment, which is paid for through refinancing. If an owner is unable to
pay off a mature loan, he may face bankruptcy.

In the letter to Paulson, the organizations requested that their industry be included in the Treasury Department’s $200 billion Term Asset-Backed Securities Loan Facility (TALF), which was
crafted as part of the financial bailout to provide liquidity, or cash flow, to small businesses and consumers.

According the Federal Reserve’s Web site, $20 billion of TALF money will come from the Troubled Asset Relief Program (TARP), which grants the Treasury up to $700 billion to purchase
troubled financial assets and financial instruments. The TARP was signed into law by President Bush in early October.

“Many steps are needed to address this issue, but the most significant and time-critical step would be for the Federal government, through combined action of the Treasury Department and the
Federal Reserve, to extend and enhance the Term Asset-Backed Securities Loan Facility (TALF) announced on November 25, 2008, to highly rated (for example, AAA) commercial real estate
mortgage-backed securities,” the letter says.

But David John, a senior research fellow at the Heritage Foundation, emphasized how the recession is hurting nearly all areas of the economy, not just commercial real estate.

“Every morning you can look in the newspaper and see another industry that is coming forward with revised profit estimates, additional layoffs, closing factories, or something like that,” said
John. “The fact is that the federal government cannot single-handedly sustain the overall economy at its current level.”

Further, “it was very clear than many of these same problems we saw in other real estate transactions were going to appear in commercial transactions,” said John. “Underwriting standards were
less than perfect and, as with housing, a number of projects had been started under the assumption the boom would continue.”

The organizations that signed the letter were the Real Estate Roundtable, the American Land Title Association, American Resort Development Association, Appraisal Institute, Building
Owners and Managers Association, International Council of Shopping Centers, Mortgage Bankers Association, National Apartment Association, National Association of Industrial and Office
Properties, National Association of Real, Estate Investment Managers, National Association of Real Estate Investment Trusts and the National Multi- Housing Council.
Commercial Investment Real Estate Catagories:

Commercial Investment Real Estate Professionals
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Real Estate News

--------------------------------------------------------------------------------
Copyright 2008 Albuquerque Journal

Albuquerque Journal (New Mexico)

December 22, 2008 Monday

BUSINESS OUTLOOK; Pg. 3

1013 words

Commercial real estate loans still strong

Commercial Real Estate RICHARD METCALF Of the Journal

Delinquency rates on commercial real estate loans are mostly at or near their lows, which is in sharp contrast to the meltdown in residential mortgages, according to the Mortgage Bankers
Association.

"This is not surprising to those in the commercial real estate field," said Jim Chynoweth of CB Richard Ellis.

Delinquency rates were well under 1 percent for commercial mortgagebacked securities (CMBS), life insurance company loan portfolios, Fannie Mae and Freddie Mac - all are at the low end
of their delinquency ranges going back to 1996, the Washington, D.C.-based association reported.

The delinquency rate on commercial loans was highest for FDIC-insured banks and thrifts in the third quarter. Their rate was 1.4 percent at 90 days or more delinquent, the highest it's been
since 1996.

In comparison, 7 percent of all loans for one-to-fourunit residential properties were 30 days or more delinquent in the third quarter. Another 3 percent were somewhere in the foreclosure
process.

"Commercial delinquency rates are lower due to the protocol and rigor that accompany such loans," explained Vincent Garcia of Blue Dot Corp. in an e-mail.

Even when money was being thrown at real estate of all kinds, commercial lending standards were never relaxed the way they were with residential mortgages, he said. Commercial loans have
always needed a substantial down payment, even in the most lax of times. And the loans are more complicated in ways that reduce risk.

"These commercial loans are underwritten with certain ratios that allow for vacancies, tenant improvements, debt service coverage and other requirements that tend to limit losses," Garcia
said. "The appraisals are typically very rigorous, requiring three different approaches to value."

The upshot is when the national economy slows, vacancy rates typically soar in commercial properties like shopping centers, office buildings and warehouses, but delinquency rates on loans
for those properties just tend to wiggle around some.

As an example, let's look back at what happened during and after the last recession, which officially occurred from March through October 2001.

When the recession started, the office vacancy rate was 10.1 percent in the Albuquerque metro area, according to Grubb & Ellis New Mexico. The vacancy rate reached a high of 17 percent
in the first quarter of 2004, towards the end of what has been described as a 29-month "jobless recovery" from the 2001 recession.

During roughly the same period - early 2001 to mid 2004 - the national delinquency rate on commercial loans by banks and thrifts stayed between 0.6 percent and 0.9 percent. The
delinquency rate for CMBS moved up and down in the range of 0.5 percent to 1.7 percent.

That's not to say commercial real estate is shielded from the worst impacts of a recession and its aftermath. The retail market is considered particularly vulnerable due to the dramatic drop in
both consumer spending and consumer confidence. Unable to make sufficient sales, stores are closing at a pace not seen since 2001, according to the International Council of Shopping
Centers.

That's bad news for the property owners. "When a landlord loses tenants or experiences delinquencies in rent, the landlord may not be able to meet its loan payments," Garcia said.

Real Capital Analytics, a New York City-based research company, has compiled a report showing at least $107 billion worth of income-producing property in financial distress around the
country - far higher than what's reported by the Mortgage Bankers Association - according to a New York Times story last Wednesday. The report would seem to show the worst is yet to come for
commercial real estate.

However, Garcia, Chynoweth and many others expect to see commercial real estate in the metro outperform the country as a whole.

"In Albuquerque, we are anticipating doing better than the national average," Chynoweth said. "The market fundamentals were very strong going into this downturn, so there are not a lot of
property owners who will be in trouble."

Vacancy rates were near lows for the decade when the current recession started at the end of 2007: office space at 10.8 percent empty, retail at 8 percent and industrial at 5.9 percent
according to Grubb & Ellis. The low vacancy rates indicate a commercial real estate market that wasn't overbuilt and thus vulnerable to delinquencies and foreclosures.

In addition, Garcia noted that virtually all banks and thrifts in New Mexico are stable and solvent. Albuquerque-based First Community Bank requested $90 million from the federal
government's Troubled Asset Relief Program (the so-called $700 billion bailout), but Garcia noted the "request is relatively small and not an indicator of financial trouble."

Ironically, Garcia's Blue Dot Corp. was caught up in the national banking crisis when the lender on its Anasazi Downtown project was seized by the Federal Deposit Insurance Corp. in August.
The seizure of Topeka, Kan.-based Columbian Bank and Trust Co. eventually shut down construction of the ninestory mixed-use building at Sixth and Central in early October.

"When the FDIC seized our lender, we were not in default on our loan," Garcia said. "It is a common misperception when this occurs."

The FDIC now owns the loan, which will have to be repackaged. "It seems we may be making progress," he said. "It is a highly complex issue and takes some time to unwind."

Richard Metcalf covers commercial real estate for the Journal. You may reach him at 823-3972 or rmetcalf@abqjournal.com

Real estate loan delinquency rates as of the third quarter

One-to-four-unit residential mortgages of all types, 7 percent at 30 days or more delinquent

Bank and thrift commercial loans, 1.4 percent at 90 days or more delinquent

Commercial mortgagebacked securities, 0.63 percent at 30-plus days delinquent

Life insurance company commercial loan portfolios, 0.06 percent at 60-plus days delinquent

Fannie Mae commercial loans, 0.16 percent at 60 days or more delinquent

Freddie Mac commercial loans, 0.01 percent at 60 days or more delinquent

SOURCE: Mortgage Bankers Association

JOURNAL FILE The developer of Anasazi Downtown, the nine-story mixed-use project at Sixth and Central shown here, was not delinquent on its loan payments when the FDIC seized its
lender last summer.
R-Squared
Statistical measure of how well a regression line approximates real data points; an r-squared of 1.0 (100%) indicates a perfect fit. The formula for r is:
r(X,Y) = [ Cov(X,Y) ] / [ StdDev(X) x StdDev(Y) ]
In finance, r-squared measures how well the Capital Asset Pricing Model predicts the actual performance of an investment or portfolio. See the main article on CAPM regression.
Recession
Two consecutive quarters of declining GDP.
An alternate definition is any economic downturn significant enough to be declared a recession by the National Bureau of Economic Research, based on employment data and other
indicators; see the NBER's website, www.nber.org.
Regression
Technique of fitting a simple equation to real data points.
The most typical type of regression is linear regression (meaning you use the equation for a straight line, rather than some other type of curve), constructed using the least-squares method (the
line you choose is the one that minimizes the sum of the squares of the distances between the line and the data points). It's customary to use "a" or "alpha" for the intercept of the line, and "b"
or "beta" for the slope; so linear regression gives you a formula of the form: y = bx + a
See r-squared, and the pages on CAPM regression and the Fama and French three factor model.
Return on Assets
Earnings divided by total assets.
This number tells you "what the company can do with what it's got", ie how many dollars of profits they can achieve for each dollar of assets they control. It's a useful number for comparing
competing companies in the same industry. The number will vary widely across different industries. Capital-intensive industries (like railroads and nuclear power plants) will yield a low return on
assets, since they have to own such expensive assets to do business. (And if they have to pay a lot to maintain these assets, that will cut into the ROA even more, since the maintenance costs
will decrease their earnings). Shoestring operations (software companies, job placement firms) will have a high ROA: their required assets are minimal.
Return on Equity
Earnings divided by equity.
The idea is that this tells you the number of dollars of profits the company can earn for each dollar of shareholders' equity; but Return on Assets is probably a better number to look at. (After all,
their profitability is a function of all assets they control, not just of the equity portion of assets. Note that ROE is bigger than ROA, since equity is a subset of assets).
Roth IRA
An Individual Retirement Account featuring non-deductible contributions and tax-free growth. See Understanding the Roth IRA.
A Roth IRA is an Individual Retirement Account that provides tax-free growth. As a result, it's the simplest - and potentially the most effective - sheltered account imaginable.

The Roth Tax Advantage
Like a deductible IRA, Roth gives you the advantage of getting taxed only once, rather than twice (or more) as with a regularly-taxed investment account. Here is a summary of how it works:

Regularly-Taxed Account Deductible IRA Roth IRA
You pay income tax, and then make your contribution with post-tax dollars
Your principal may be subject to taxes on dividends and capital gains as it grows

You pay capital gains tax on your gain at withdrawal
You get a tax deduction, essentially letting you deposit pre-tax dollars
Your principal grows tax-free

You pay income tax on the entire amount of your withdrawal
You pay income tax, and then make your contribution with post-tax dollars
Your principal grows tax-free

You pay no further taxes on withdrawal.

The advantage of a Roth IRA over a regularly-taxed account is obvious. Either way you pay income tax up front. But with Roth, you're then done paying taxes; with a regular account you're just
getting started.

The advantage of a Roth IRA over a deductible IRA is almost obvious:

Roth is simple: it requires no special reporting to the IRS. (With a deductible IRA you have to report a deduction on your 1040 form when you make a contribution; on withdrawal you report the
entire withdrawal amount as taxable income.)

Roth is flexible: because you've taken care of your tax obligations up front you tend to face fewer restrictions later. (For example, you don't need to begin withdrawing your money by a set age;
with a deductible IRA you're required to start making withdrawals by age 70½.)

Roth has an extra advantage if you think taxes will probably rise in the future, since you're paying now rather than later. (Of course that's a disadvantage if you think taxes will fall.)

Roth has an additional, somewhat confusing advantage that it lets you shelter more real money: the same dollar amount, but in post-tax, rather than pre-tax dollars. (The idea is that a tax
deduction isn't "money you're getting back"; it's "money you aren't sheltering".) This issue is analyzed, in more detail than you probably want to see, in a sidebar article.
Russell 3000
Stock index consisting of the 3000 largest publicly listed U.S. companies, representing about 98% of the total capitalization of the entire U.S. stock market.
Different subsets of the Russell 3000 are also popular indexes:

Russell 1000 (large caps):
the 1000 largest companies in the Russell 3000;

Russell 800 (mid caps):
the smallest 800 companies in the Russell 1000;

Russell 2000 (small caps):
the smallest 2000 companies in the Russell 3000.
See the index funds overview, and the website of The Frank Russell Company.
S&P 500
Stock index consisting of 500 individually selected large companies.
The S&P 500 isn't exactly "the market", but it does cover about three-quarters of the total capitalization of the entire U.S. stock market. See the index funds overview, and the website of
Standard & Poor's.
SEP
Simplified Employee Pension plan: a deductible IRA with contributions made by both employer and employee, available to self-employed persons and employees of participating small
companies.
Salary Reduction Plan See 401(k).
401(k)
A retirement plan made available by a company to its employees, featuring tax-deferred contributions and growth. The plan may also include matching contributions by the company. Caveat:
many 401(k)s invest in the company's own stock; if the company has a bad enough year you could lose both your job and your retirement savings. So you need to diversify your retirement
account, even if you do take advantage of a 401(k).
Sales Costs
Expenses directly related to creating the goods or services being sold (like the cost of raw materials, salaries of persons turning raw materials into sellable goods, depreciation of equipment); but
sales costs exclude other important expenses, like R & D, marketing, and interest payments on debt.
Sales Revenue
Income from sales of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Also called "Sales", "Net Sales", "Net Revenue", and just plain
"Revenue". Compare gross revenue.
Gross Revenue
"Raw" sales income; the amount customers actually pay the company when they make their purchases.
When a company sells products, it has to make allowances for some portion of its sales for products expected to be returned, lost in delivery, or otherwise requiring the company to refund the
customers' money. The "official" revenue number, known as sales revenue, equals gross revenue minus these allowances.

Gross revenue is generally not an interesting number for investors. One case where it is interesting is when you're tracking the progress of a startup company. It's possible that at the very
beginning they'll be doing such a tiny amount of business that actual sales will be less than the allowances for refunds, meaning that sales revenue will technically be a negative number. In
this case the company will issue news releases about its gross revenue, so investors will at least know that a few customers have been showing up and laying out some cash.
Securities and Exchange Commission (SEC)
US Government agency, with the purpose of protecting investors from dangerous or illegal financial practices or fraud, by requiring full and accurate financial disclosure by companies offering
stocks, bonds, mutual funds, and other securities to the public. Website: www.sec.gov
Sell Short
Method of profiting from a declining stock price by borrowing shares of the stock, selling them at the market price, and then repurchasing the same number of shares at a future date (and at a
lower price, if you're lucky) to return them to the original lender.
Share

In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company). In the plural, stocks is often used as a synonym for shares
especially in the United States, but it is less commonly used that way outside of North America.[1]

In the United Kingdom, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable
securities.[2]

Contents
1 Types of stock
2 Stock derivatives
3 History
4 Shareholder
5 Application
5.1 Shareholder rights
5.2 Means of financing
6 Trading
6.1 Arbitrage trading
6.2 Buying
6.3 Selling
6.4 Stock price fluctuations

Types of stock
Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate
decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends
can be issued to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares,
usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares" (or "convertible preference shares" in the UK)

Although there is a great deal of commonality between the stocks of different companies, each new equity issue can have legal clauses attached to it that make it dynamically different from
the more general cases. Some shares of common stock may be issued without the typical voting rights being included, for instance, or some shares may have special rights unique to them and
issued only to certain parties. Note that not all equity shares are the same.

Stock derivatives
For more details on this topic, see equity derivatives.
A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. The
underlying security may be a stock index or an individual firm's stock, e.g. single-stock futures.

Stock futures are contracts where the buyer is long, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short, i.e., takes on the obligation to sell. Stock index
futures are generally not delivered in the usual manner, but by cash settlement.

A stock option is a class of option. Specifically, a call option is the right (not obligation) to buy stock in the future at a fixed price and a put option is the right (not obligation) to sell stock in the
future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative. The most popular method of valuing stock options is the Black
Scholes model.[3] Apart from call options granted to employees, most stock options are transferable.

History
During Roman times, the empire contracted out many of its services to private groups called publicani. Shares in publicani were called "socii" (for large cooperatives) and "particulae" which
were analogous to today's Over-The-Counter shares of small companies. Though the records available for this time are incomplete, Edward Chancellor states in his book Devil Take the
Hindmost that there is some evidence that a speculation in these shares became increasingly widespread and that perhaps the first ever speculative bubble in "stocks" occurred.

The first company to issue shares of stock after the Middle Ages was the Dutch East India Company in 1606. The innovation of joint ownership made a great deal of Europe's economic growth
possible following the Middle Ages. The technique of pooling capital to finance the building of ships, for example, made the Netherlands a maritime superpower. Before adoption of the joint-
stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families.

Economic historians find the Dutch stock market of the 1600s particularly interesting: there is clear documentation of the use of stock futures, stock options, short selling, the use of credit to
purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that unfolded and reverted in time with the market (in this case it was headdresses instead of hemlines). Dr.
Edward Stringham also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows
individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss. Stringham argues that this shows that contracts can be created and
enforced without state sanction or, in this case, in spite of laws to the contrary.[4][5]

Shareholder
A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Companies listed at the stock market
are expected to strive to enhance shareholder value.

Shareholders are granted special privileges depending on the class of stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors,
the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company.
However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors.

Shareholders are considered by some to be a partial subset of stakeholders, which may include anyone who has a direct or indirect equity interest in the business entity or someone with even a
non-pecuniary interest in a non-profit organization. Thus it might be common to call volunteer contributors to an association stakeholders, even though they are not shareholders.

Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards
each other.

However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, USA, majority shareholders of closely held corporations
have a duty to not destroy the value of the shares held by minority shareholders.[6][7]

The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and especially passively managed exchange-traded funds.

Application
The owners of a company may want additional capital to invest in new projects within the company. They may also simply wish to reduce their holding, freeing up capital for their own private
use.

By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a
fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends.

In the common case of a publicly traded corporation, where there may be thousands of shareholders, it is impractical to have all of them making the daily decisions required to run a company.
Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company.

In a typical case, each share constitutes one vote. Corporations may, however, issue different classes of shares, which may have different voting rights. Owning the majority of the shares allows
other shareholders to be out-voted - effective control rests with the majority shareholder (or shareholders acting in concert). In this way the original owners of the company often still have control
of the company.

Shareholder rights
Although ownership of 50% of shares does result in 50% ownership of a company, it does not give the shareholder the right to use a company's building, equipment, materials, or other property.
This is because the company is considered a legal person, thus it owns all its assets itself. This is important in areas such as insurance, which must be in the name of the company and not the
main shareholder.

In most countries, including the United States, boards of directors and company managers have a fiduciary responsibility to run the company in the interests of its stockholders. Nonetheless, as
Martin Whitman writes:

...it can safely be stated that there does not exist any publicly traded company where management works exclusively in the best interests of OPMI [Outside Passive Minority Investor]
stockholders. Instead, there are both "communities of interest" and "conflicts of interest" between stockholders (principal) and management (agent). This conflict is referred to as the
principal/agent problem. It would be naive to think that any management would forgo management compensation, and management entrenchment, just because some of these management
privileges might be perceived as giving rise to a conflict of interest with OPMIs.[8]
Even though the board of directors runs the company, the shareholder has some impact on the company's policy, as the shareholders elect the board of directors. Each shareholder typically
has a percentage of votes equal to the percentage of shares he or she owns. So as long as the shareholders agree that the management (agent) are performing poorly they can elect a new
board of directors which can then hire a new management team. In practice, however, genuinely contested board elections are rare. Board candidates are usually nominated by insiders or by
the board of the directors themselves, and a considerable amount of stock is held and voted by insiders.

Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by
converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (most often the
shareholders end up with nothing).

Means of financing
Financing a company through the sale of stock in a company is known as equity financing. Alternatively, debt financing (for example issuing bonds) can be done to avoid giving up shares of
ownership of the company. Unofficial financing known as trade financing usually provides the major part of a company's working capital (day-to-day operational needs).

Trading
A stock exchange is an organization that provides a marketplace for either physical or virtual trading shares, bonds and warrants and other financial products where investors (represented by
stock brokers) may buy and sell shares of a wide range of companies. A company will usually list its shares by meeting and maintaining the listing requirements of a particular stock exchange. In
the United States, through the inter-market quotation system, stocks listed on one exchange can also be bought or sold on several other exchanges, including relatively new so-called ECNs
(Electronic Communication Networks like Archipelago or Instinet).

In the USA stocks used to be broadly grouped into NYSE-listed and NASDAQ-listed stocks. Until a few years ago there was a law that NYSE listed stocks were not allowed to be listed on the
NASDAQ or vice versa.

Many large non-U.S companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These companies have then to ship a
certain number of shares to a bank in the US (a certain percentage of their principal) and put it in the safe of the bank. Then the bank where they deposited the shares can issue a certain
number of so-called American Depositary Shares, short ADS (singular). If someone buys now a certain number of ADSs the bank where the shares are deposited issues an American Depository
Receipt (ADR) for the buyer of the ADSs.

Likewise, many large U.S. companies list themselves at foreign exchanges to raise capital abroad.

Arbitrage trading
Although it makes sense for some companies to raise capital by offering stock on more than one exchange, a keen investor with access to information about such discrepancies could invest in
expectation of their eventual convergence, known as an arbitrage trade. In today's era of electronic trading, these discrepancies, if they exist, are both shorter-lived and more quickly acted
upon. As such, arbitrage opportunities disappear quickly due to the efficient nature of the market.

Buying
There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of
stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange, such as the New York Stock Exchange.

There are many different stock brokers from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or
more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with
either a full service or discount broker.

There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares
directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to
buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering in which the stock is purchased
directly from the company, usually without the aid of brokers.

When it comes to financing a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyer's ownership, or by buying stock on margin. Buying stock on margin
means buying stock with money borrowed against the stocks in the same account. These stocks, or collateral, guarantee that the buyer can repay the loan; otherwise, the stockbroker has the
right to sell the stock (collateral) to repay the borrowed money. He can sell if the share price drops below the margin requirement, at least 50% of the value of the stocks in the account. Buying
on margin works the same way as borrowing money to buy a car or a house, using the car or house as collateral. Moreover, borrowing is not free; the broker usually charges 8-10% interest.

Selling
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an
investor to sell at a loss, e.g., to avoid further loss.

As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of
brokerage, full service or discount, handles the transaction.

After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions
that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis.

Stock price fluctuations

Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed.[9] In the preface to this edition, Shiller warns that "[t]he
stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing [2005], in the mid-20s, far higher than the historical average. …
People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not
make conservative preparations for possible bad outcomes."
Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1[9], source). The horizontal axis shows the real price-earnings ratio of the S&P
Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis shows the
geometric average real annual return on investing in the S&P Composite Stock Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-
coded as shown in the key. See also ten-year returns. Shiller states that this plot "confirms that long-term investors—investors who commit their money to an investment for ten full years—did do
well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is
high, as it has been recently, and get into the market when it is low."[9]The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the
market, the price of a stock is directly proportional to the demand. However, there are many factors on the basis of which the demand for a particular stock may increase or decrease. These
factors are studied using methods of fundamental analysis and technical analysis to predict the changes in the stock price. A recent study shows that customer satisfaction, as measured by the
American Customer Satisfaction Index (ACSI), is significantly correlated to the stock market value. Stock price is also changed based on the forecast for the company and whether their profits
are expected to increase or decrease
Sharpe Ratio
A number measuring the reward-to-risk efficiency of an investment, used to create risk-efficient portfolios. The definition of the Sharpe Ratio is:
S(x) = (rx - Rf) / StdDev(x)
where
x is some investment
rx is the average annual rate of return of x
Rf is the best available rate of return of a "riskless" security (ie cash)
StdDev(x) is the standard deviation of rx
See the main article on the Sharpe Ratio for more information.
The Sharpe Ratio
The previous page showed that the efficient frontier is where the most risk-efficient portfolios are, for a given collection of securities. The Sharpe Ratio goes further: it actually helps you find the
best possible proportion of these securities to use, in a portfolio that can also contain cash.

The definition of the Sharpe Ratio is:

S(x) = ( rx - Rf ) / StdDev(x)
where
x is some investment
rx is the average annual rate of return of x
Rf is the best available rate of return of a "risk-free" security (i.e. cash)
StdDev(x) is the standard deviation of rx
The Sharpe Ratio is a direct measure of reward-to-risk. To see how it helps you in creating a portfolio, consider the diagram of the efficient frontier again, this time with cash drawn in.

There are three important things to notice in this diagram:

If you take some investment like "x" and combine it with cash, the resulting portfolio will lie somewhere along the straight line joining cash with x. (This time it's a straight line, not a curve; cash
is riskless, so there's no "damping out" effect between cash and x.)

Since you want the rate of return to be as great as possible, you want to select the x that gives you the line with the greatest possible slope (like we have done in the diagram).

The slope of this line is equal to the Sharpe Ratio of x.
Putting this all together gives you the method for finding the best possible portfolio from this collection of securities: First, find the investment with the highest possible Sharpe Ratio (this part
requires a computer); Next, take whatever linear combination of this investment and cash will give you your desired value for standard deviation. The result will be the portfolio with the greatest
possible rate of return.
Short-term Debt
Debt due to be paid off at a date less than one year in the future.
Standard Deviation
A statistical measure of the distance a quantity is likely to lie from its average value. In finance, standard deviation is applied to the annual rate of return of an investment, to measure the
investment's volatility, or "risk".
The definition is

StdDev(r) = [1/n * (ri - rave)2]½

where the terms ri are actual values of the investment's annual rate of return, taken over several years, n is the number of values of ri used, and rave is the average value of the ri.

See the article on modern portfolio theory for more details and some examples.
Tax-Deferred
An investment in which some or all taxes are paid at a future date, rather than in the year the investment produces income.
Tax-deferred investments in particular refer to retirement accounts which allow deferral of taxes on contributions, growth, or both; taxes are not paid until withdrawal of funds during retirement.

See 401(k), IRA, annuity.
Technical Analysis
An attempt to predict the performance of a stock by spotting trends in price, without regard to the financial situation of the underlying company. Commonly called "charting". Compare
fundamental analysis
Tobin Separation Theorem
Result in modern portfolio theory, that the problem of finding an optimal portfolio for a given level of risk tolerance can be separated into two easier problems: first finding an optimal mix of
market securities that doesn't vary with risk tolerance, and then combining it with an appropriate amount of cash.
See the page on index funds and optimal portfolios for a discussion and a link to Tobin's original paper.
Trade Deficit
Annual amount spent by U.S. individuals, companies, and government agencies on foreign-made products, minus the amount spent by foreign entities on U.S.-made products; accounting for
about negative 2% of the GDP.
Note the "negative" in the last line: by definition, the trade deficit is subtracted as an adjustment factor. That's because the other three factors in GDP measure "products made anywhere,
bought by Americans"; by subtracting the trade deficit you're left with "products made in the U.S., bought by anybody". See the interactive GDP Diagram.
Unemployment Rate
Percentage of employable people actively seeking work, out of the total number of employable people; determined in a monthly survey by the Bureau of Labor Statistics (website:
www.bls.gov).
An unemployment rate of about 4% - 6% is considered "healthy". Lower rates are seen as inflationary due to the upward pressure on salaries; higher rates threaten a decrease in consumer
spending.
Value Stock
A stock that appears attractive because of valuable assets, particularly cash and real estate, owned by its company. A stock may be a "buy" as a value stock if its cash per share (or less reliably,
its book value) is high relative to the stock price. Compare growth stock.
Variable Annuity
An annuity that provides a non-guaranteed, varying rate of return on investments. In particular, a retirement account with tax-deferred growth, allowing the investor to allocate among an
offering of managed funds similar to mutual funds.
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.
Also see the main article for the annuity formula and an interactive graph showing how annuities work, and the annuity calculator.
Wealth
Warning: In the real world there are social climbers, marriages of expediency, litigations based on dirty pitfalls for the unwary, financial predators, unjust states, etc. Marriage, as the base for a
divorce, could result the most dangerous covenant. Don't mix love with money. Love could finish, and also, after a divorce, the money of the wealthy counter-party. Make it impossible by
signing a detailed prenuptial agreement. Be sure that such agreement is legally defensible and can be enforced. There are more victims than those that majorities usually believe. Don't be a
victim, stop your foolish advance toward a costly mistake in the nick of time. This is not an advertisement, in addition of being a promoter of freedom, free enterprise and social responsibility,
among other things I am an attorney, however I have never prepared prenuptial agreements, and I don't plan to get involved with the practice again, with the exception of my own interests or
my corporate associates' interests.
Wealthy individuals are the most important target of litigation and their protective abilities have been eroded, in certain countries, by court decisions and legislation which prevent such
individuals from operating under an assets protection sense. They can establish operations in jurisdictions with favorable assets protection laws having in mind several reasons, including but
not limited to: a claimant's attorney, who will not be able to accept the case on a contingency fee basis, contemplating an action to "recover" assets from individuals in other jurisdictions
knows nothing of such jurisdictions' laws, procedures, costs, currency, etc; well paid, and after a long time of litigation in order to reach the jurisdiction, such attorney will likely be faced with
an expired statute of limitations; due to such obstacles wealthy individuals stop being automatic target of litigation.

One of the ways that wealthy individuals could use in order to protect themselves, as well as their heirs against leonine inheritance taxes, can be by establishing a legally defensible operation
in order to "beggar" themselves. Nobody can take the assets away from individuals if they don't own such assets or if the assets can't be found by claimants. There is no need to move the assets,
however, obviously, the title has to be moved. Once the assets' title has been transferred to a legally defensible operation, such assets can not be levied against or seized by creditors, nor tied
up in probate court, because individuals don't own such assets.

Wealthy individuals in countries with weak economies and weak banking systems may rely upon a legally defensible operation, in order to protect themselves against the collapse of their
domestic currencies and banks, to avoid the reach of potential or existing exchange controls, etc.

By restructuring the ownership of their assets wealthy individuals can protect themselves against lawsuits when facing unlimited liabilities in their home jurisdictions.

All of the above is valid regarding private claimants. However it is very important for wealthy individuals the ability to understand the difference between actual or potential private claimants,
and powerful governments. Everything can be found by powerful governments which also have the ability to put pressure on the governments of countries where there is a tax heaven.
Regarding American citizens or United States' residents, under "Tax Neutral System", various I.R.S reports are required. Source: "Wealthy individuals, the most important target of litigation"
(essay) written (1998)
Wealth derives from the old English word "weal". The term was originally an adjective to describe the possession of great qualities.

1 Definition
2 Anthropological views
2.1 The interpersonal concept
2.2 Accumulation of non-necessities
2.3 Control of arable land
2.4 The capitalist notion
3 Sociological view
3.1 The upper class
3.2 The middle class
3.3 The working class
3.4 The welfare class
4 Other concepts
4.1 Global wealth
4.2 Not a zero-sum game
4.3 The non-normative concept
4.4 Non-financial
4.5 Sustainable wealth as a measure of well-being
4.6 Sustainable wealth
4.7 Buckminster Fuller's Notion of Wealth
4.8 The limits to wealth creation
4.9 The difference between income and wealth
4.10 Wealth as measured by time
5 Distribution
6 Wealth in the form of land
7 See also
8 External links
9 References

Definition
Adam Smith, in his seminal work The Wealth of Nations, described wealth as "the annual produce of the land and labour of the society". This "produce" is, at its simplest, that which satisfies
human needs and wants of utility. In popular usage, wealth can be described as an abundance of items of economic value, or the state of controlling or possessing such items, usually in the
form of money, real estate and personal property. An individual who is considered wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their
society or reference group. In economics, net wealth refers to the value of assets owned minus the value of liabilities owed at a point in time.[citation needed] Wealth can be categorized into
three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of past income; and the capital wealth of income producing assets,
including real estate, stocks, and bonds.[citation needed] All these delineations make wealth an especially important part of social stratification. Wealth provides a type of safety net of
protection against an unforeseen decline in one’s living standard in the event of job loss or other emergency and can be transformed into home ownership, business ownership, or even a
college education. [1][not in citation given]

'Wealth' refers to some accumulation of resources, whether abundant or not. 'Richness' refers to an abundance of such resources. A wealthy (or rich) individual, community, or nation thus has
more resources than a poor one. Richness can also refer at least basic needs being met with abundance widely shared. The opposite of wealth is destitution. The opposite of richness is poverty.

The term implies a social contract on establishing and maintaining ownership in relation to such items which can be invoked with little or no effort and expense on the part of the owner (see
means of protection).

The concept of wealth is relative and not only varies between societies, but will often vary between different sections or regions in the same society. A personal net worth of US $10,000 in most
parts of the United States would certainly not place a person among the wealthiest citizens of that locale. However, such an amount would constitute an extraordinary amount of wealth in
impoverished developing countries.

Concepts of wealth also vary across time. Modern labor-saving inventions and the development of the sciences have enabled the poorest sectors of today's society to enjoy a standard of living
equivalent if not superior to the wealthy of the not-too-distant past. This comparative wealth across time is also applicable to the future; given this trend of human advancement, it is likely that
the standard of living that the wealthiest today enjoy will be considered rude poverty by future generations.

Some of the wealthiest countries in the world are the United States, the United Kingdom, the Republic of Ireland, Norway, Japan, Kuwait, United Arab Emirates, South Korea, Germany, The
Netherlands, Belgium, France, Israel, Taiwan, Australia, Singapore, Philippines, Canada, Finland, Greece, Spain, Portugal, Sweden, Italy, Denmark, New Zealand, Iceland, Monaco,
Luxembourg, Liechenstein and Switzerland, the larger of which are in the G8. All of the above countries, except United Arab Emirates and Kuwait, are considered developed countries.

Anthropological views
Anthropology characterizes societies, in part, based on a society's concept of wealth, and the institutional structures and power used to protect this wealth.[citation needed] Several types are
defined below. They can be viewed as an evolutionary progression. Many young adolescents have become wealthy from the inheritance of their families.

The interpersonal concept
Early hominids seem to have started with incipient ideas of wealth[citation needed], similar to that of the great apes. But as tools, clothing, and other mobile infrastructural capital became
important to survival (especially in hostile biomes), ideas such as the inheritance of wealth, political positions, leadership, and ability to control group movements (to perhaps reinforce such
power) emerged. Neandertal societies had pooled funerary rites and cave painting which implies at least a notion of shared assets that could be spent for social purposes, or preserved for
social purposes. Wealth may have been collective.

Accumulation of non-necessities
Humans back to and including the Cro-Magnons seem to have had clearly defined rulers and status hierarchies. Digs in Russia have revealed elaborate funeral clothing on a pair of children
buried there over 35,000 years ago.[citation needed] This indicates a considerable accumulation of wealth by some individuals or families. The high artisan skill also suggest the capacity to
direct specialized labor to tasks that are not of any obvious utility to the group's survival.

Control of arable land
The rise of irrigation and urbanization, especially in ancient Sumer and later Egypt, unified the ideas of wealth and control of land and agriculture.[citation needed] To feed a large stable
population, it was possible and necessary to achieve universal cultivation and city-state protection. The notion of the state and the notion of war are said to have emerged at this time. Tribal
cultures were formalized into what we would call feudal systems, and many rights and obligations were assumed by the monarchy and related aristocracy. Protection of infrastructural capital
built up over generations became critical: city walls, irrigation systems, sewage systems, aqueducts, buildings, all impossible to replace within a single generation, and thus a matter of social
survival to maintain. The social capital of entire societies was often defined in terms of its relation to infrastructural capital (e.g. castles or forts or an allied monastery, cathedral or temple), and
natural capital, (i.e. the land that supplied locally grown food). Agricultural economics continues these traditions in the analyses of modern agricultural policy and related ideas of wealth, e.g.
the ark of taste model of agricultural wealth.

The capitalist notion

Banknotes from all around the world donated by visitors to the British Museum, London.Industrialization emphasized the role of technology. Many jobs were automated. Machines replaced
some workers while other workers became more specialized. Labour specialization became critical to economic success. However, physical capital, as it came to be known, consisting of both
the natural capital (raw materials from nature) and the infrastructural capital (facilitating technology), became the focus of the analysis of wealth. Adam Smith saw wealth creation as the
combination of materials, labour, land, and technology in such a way as to capture a profit (excess above the cost of production).[2] The theories of David Ricardo, John Locke, John Stuart
Mill, and later, Karl Marx, in the 18th century and 19th century built on these views of wealth that we now call classical economics and Marxian economics (see labor theory of value). Marx
distinguishes in the Grundrisse between material wealth and human wealth, defining human wealth as "wealth in human relations"; land and labour were the source of all material wealth.

Sociological view
“Wealth provides an important mechanism of the intergenerational transmission of inequality.”[3] Approximately half of the wealthiest people in America inherited family fortunes. But the
effect of inherited wealth can be seen on a more modest level as well. For example, a couple that buys a house with the financial help from their parents or a student that has his or her
college education paid for, are benefiting directly from the accumulated wealth of previous generations. [4]

As a result of different conditions of life, members of different social classes view the world in many different ways. This allows them to develop different “conceptions of social reality, different
aspirations and hopes and fears, different conceptions of the desirable.” [5] The way different classes in society view wealth vary and these diverse characteristics are a fundamental dividing
line among the classes. Today there is an extremely skewed concentration of wealth in America, more so than even income. [6] In 1996 the Fed survey reported that the net worth of the top 1
percent was approximately equal to that of the bottom 90 percent. [7]

The upper class
Inheritance establishes different starting lines. The majority of those in the upper class have inherited their wealth and place a greater emphasis on wealth than on income. Upper class
children are taught about investments and accumulation. They are trained and conditioned, technically and philosophically, to handle the wealth that they will inherit and how to earn more
later in life. Wealth and being a member of the upper class requires significant prior preparation and familiarization. If not trained correctly children may easily squander immense wealth,
though this rarely happens. They use the power and freedom that comes with wealth to leverage opportunities. This allows them more flexibility in their lives and as a result have fewer worries.
[8]

The accumulation of wealth fosters a growth of power, which in turn creates privileges conducive to more wealth. Children of the upper class are socialized on how to manage this power and
channel this privilege in many different forms such as gaining access to other’s capital and to critical information. It is by accessing various edifices of information, associates, procedures and
auspicious rules that the upper class are able to maintain their wealth and pass it along, and not necessarily because of an extreme work ethic. [9]

The middle class
There is a distinct difference in views about wealth among the middle class compared to those of the upper class. Where the upper class beliefs focus on wealth, the middle class places a
greater emphasis on income. The middle class views wealth as something for emergencies and it is seen as more of a cushion. This class is comprised of people that were raised with families
that typically owned their own home, planned ahead and stressed the importance of education and achievement. They earn a significant amount of income and also have significant amounts
of consumption. However there is very limited savings (deferred consumption) or investments, besides retirement pensions and homeownership. They have been socialized to accumulate
wealth through structured, institutionalized arrangements. Without this set structure, asset accumulation would likely not occur. [10]

The working class
The working class has fewer options for advancement and wealth accumulation than the upper and middle classes. This can be characterized as having limited income, unstable employment
and an insignificant retirement pension account. Access to structured asset accumulation programs, such as retirement pensions, are not readily available to those in this class and as a result
little of their earnings are actually saved or invested. Consequently, there is a limited financial cushion available in times of hardship such as a divorce or major illness. Just as their parents,
children who lack assets are less likely to plan for the future. [11]

The welfare class
Those with the least amount of wealth are the welfare poor. Wealth accumulation for this class is to some extent prohibited. People that receive AFDC transfers cannot own more than a trivial
amount of assets, in order to be eligible and remain qualified for income transfers. Most of the institutions that the welfare poor encounter discourage any accumulation of assets. [12]

Other concepts

Global wealth
Michel Foucault commented that the concept of Man as an aggregate did not exist before the 18th century. The shift from the analysis of an individual's wealth to the concept of an
aggregation of all men is implied in the concepts of political economy and then economics. This transition took place as a result of a cultural bias inherent in the Enlightenment. Wealth was
seen as an objective fact of living as a human being in a society.

Not a zero-sum game
Regardless of whether one defines wealth as the sum total of all currency, the M1 money supply, or a broader measure which includes money, securities, and property, the supply of wealth,
while limited, is not fixed. Thus, there is room for people to gain wealth without taking from others, and wealth is not necessarily a zero-sum game, though short-term effects and some
economic situations may make it appear to be so. Many things can affect the creation and destruction of wealth including size of the work force, production efficiency, available resource
endowments, inventions, innovations, and availability of capital.

However, at any given point in time, there is a limited amount of wealth which exists. That is to say, it is fixed in the short term. People who study short term issues see wealth as a zero-sum
game and concentrate on the distribution of wealth, whereas people who study long-term issues see wealth as a non-zero sum game and concentrate on wealth creation. Other people put
equal emphasis on both the creation and the distribution of wealth. It has been theorized, for example, by Robert Wright, among others, that society becomes increasingly non-zero-sum as it
becomes more complex, specialized, and interdependent.

One's attitude towards this issue affects the design of the social or economic system that one prefers.

The non-normative concept
Neoclassical economics tries to be non-normative for the most part, to be objective and free of value statements. If it is successful, then wealth would be defined in such a way that it would not
be preconceived to be either positive or negative. This objective has not always been the case. In prior eras wealth was assumed to be a set of means of persuasion.

It was often seen as self-interested arguments by the powerful explaining why they should remain in power. In The Prince, Niccolò Machiavelli had commented in that earlier era on the
prudent use of wealth, and the need to tolerate some cruelty and vice in the use of it, in order to maintain appearances of strength and power.

Jane Jacobs in the 1960s and 70s offered the observation that there were two different moral syndromes that were common attitudes to wealth and power, and that the one more associated
with guardianship did in fact require a degree of ostentatious conspicuous consumption if only to impress others.

This logic is almost entirely absent from neoclassical economics, which in its extreme form argues for the abolition of any political economy apart from the service markets wherein favours
may be bought and sold at will, including political ones - the so-called political choice theory popular in the U.S.A.. While it is entirely likely that such assumptions apply in the subcultures
that dominate modern discourse on technical economics and especially macroeconomics, the less technical notions of wealth and power that are implied in the older theories of economics
and ideas of wealth, still continue as daily facts of life.

Non-financial
The 21st century view is that many definitions of wealth can exist and continue to co-exist. Some people talk about measuring the more general concept of well-being.[who?] This is a difficult
process but many believe it possible - human development theory being devoted to this. Furthermore, Manoj Sharma [1], the head of DifferWorld's [2]faculty makes a very strong case of the
importance of factoring in both financial wealth and non-financial wealth as a measure of True Wealth. Manoj Sharma's definition of True Wealth being a combination of financial, mental,
emotional, physical and spiritual wealth; and how it is channeled towards the general good of humanity. Although these alternative measures of wealth exist, they tend to be overshadowed
and influenced by the dominant money supply and banking system. For more on the modern notions of wealth and their interaction see the article on political economy.

Sustainable wealth as a measure of well-being
Sustainable wealth is defined by the author of Creating Sustainable Wealth, Elizabeth M Parker, as meeting the individual’s personal, social and environmental needs without compromising
the ability of future generations to meet their own needs. This definition of sustainable wealth comes from the marriage of sustainability as defined by the Brundtland Commission and wealth
defined as a measure of well-being, not only from marriage but it also can be earned by working hard.

Sustainable wealth
According to the author of Wealth Odyssey, Larry R. Frank Sr, wealth is what sustains you when you are not working. It is net worth, not income, which is important when you retire or are unable
to work (premature loss of income due to injury or illness is actually a risk management issue). The key question is how long would a certain wealth last? Ongoing withdrawal research has
sustainable withdrawal rates anywhere between approximately 3 percent and 8 percent, depending on the research’s assumptions. Time, how long wealth might last, then becomes a function
of how many times does the percentage withdrawal rate go into all the assets. Example: withdrawing 3 percent a year into 100 percent equals 33.3 years; 4 percent equals 25 years; 8 percent
equals 12.5 years, etc. This ignores any growth, which presumably would be used to offset the effects of inflation. Growth greater than the withdrawal rate would extend the time assets may last,
while negative growth would reduce the time assets may last. Clearly a lower withdrawal rate is more conservative. Knowing this helps you determine how much wealth you need also.
Example: you know you will need $40,000 a year and use a 4 percent withdrawal rate, then you need to use 5 percent and therefore need $800,000, etc. This simple “wealth rule” helps you
estimate both the time and the amount.

Buckminster Fuller's Notion of Wealth
In section 1075.25 of Synergetics, Buckminster Fuller defined wealth as "the measurable degree of established operative advantage." In Critical Path[13] Fuller described his notion as that
which "realistically protected, nurtured, and accommodated X numbers of human lives for Y number of forward days." Philosophically, Fuller viewed "real wealth" as human know-how and
know-what which he pointed out is always increasing.

The limits to wealth creation
There is a debate in economic literature, usually referred to as the limits to growth debate in which the ecological impact of growth and wealth creation is considered. Many of the wealth
creating activities mentioned above (cutting down trees, hunting, farming) have an impact on the environment around us. Sometimes the impact is positive (for example, hunting when herd
populations are high) and sometimes the impact is negative (for example, hunting when herd populations are low).

Most researchers feel that sustained environmental impacts can have an effect on the whole ecosystem. They claim that the accumulated impacts on the ecosystem put a theoretical limit on
the amount of wealth that can be created. They draw on archeology to cite examples of cultures that they claim have disappeared because they grew beyond the ability of their ecosystems to
support them.

Others are more optimistic (or, as the first group might claim, more naïve). They claim that although unrestrained wealth-creating activities may have localized environmental impact, large
scale ecological effects are either minor or non-existent; or that even if global scale ecological effects exist, human ingenuity will always find ways of adapting to them, so that there is no
ecological limit to the amount of growth or wealth that this planet will sustain[citation needed].

More fundamentally, the limited surface of Earth places limits on the space, population and natural resources available to the human race, at least until such time as large-scale space travel
is a realistic proposition.

The difference between income and wealth
Wealth is a stock that can be represented in an accounting balance sheet, meaning that it is a total accumulation over time, that can be seen in a snapshot. Income is a flow, meaning it is a
rate of change, as represented in an Income/Expense or Cashflow Statement. Income represents the increase in wealth (as can be quantified on a Cashflow statement), expenses the decrease
in wealth. If you limit wealth to net worth, then mathematically net income (income minus expenses) can be thought of as the first derivative of wealth, representing the change in wealth over
a period of time.

Wealth as measured by time
Wealth has also been defined as "the amount of time an individual can maintain his current lifestyle for, without any new income." For example if a person has $1000, and their lifestyle
dictates $1000 per week of expenses, then their wealth is measured as 1 week. Under this definition, a person with $10,000 of savings and expenses of $1000 per week (10 weeks of wealth)
would be considered wealthier than a person with $20,000 of savings and expenses of $5000 per week (4 weeks of wealth).

Distribution
Main article: Distribution of wealth
Capitalism asserts that all wealth is earned, not distributed. It can only be distributed after it is forcibly seized from the earners (usually in the form of tax). Wealth acquired this way is then
distributed. Thus this section is concerned with the anti-capitalist conception of wealth, namely that all wealth is collective and distributed among individuals.

Different societies have different opinions about wealth distribution and about the obligations related to wealth, but from the era of the tribal society to the modern era, there have been means
of moderating the acquisition and use of wealth.

In ecologically rich areas such as those inhabited by the Haida in the Cascadia ecoregion, traditions like potlatch kept wealth relatively evenly distributed, requiring leaders to buy continued
status and respect with giveaways of wealth to the poorer members of society. Such traditions make what are today often seen as government responsibilities into matters of personal honour.

In modern societies, the tradition of philanthropy exists. Large donations from funds created by wealthy individuals are highly visible, although small contributions by many people also offer a
wide variety of support within a society. The continued existence of organizations which survive on donations indicate that modern Western society has at least some level of philanthropy.

Furthermore, in today's societies, much wealth distribution and redistribution is the result of government policies and programs. Government policies like the progressivity or regressivity of the
tax system can redistribute wealth to the poor or the rich respectively. Government programs like “disaster relief” transfer wealth to people that have suffered loss due to a natural disaster. Social
security transfers wealth from the young to the old. Fighting a war transfers wealth to certain sectors of society. Public education transfers wealth to families with children in public schools.
Public road construction transfers wealth from people that do not use the roads to those people that do (and to those that build the roads). Certain people resent having to contribute to some or
all of these programs, and disparagingly label them social engineering.

Like all human activities, wealth redistribution cannot achieve 100% efficiency. The act of redistribution itself has certain costs associated with it, due to the necessary maintenance of the
infrastructure that is required to collect the wealth in question and then redistribute it. Different people on different sides of the political spectrum have different views on this issue. Some see it
as unacceptable waste, while others see it as a natural fact of life, which is inevitable in all kinds of inter-human relations.

Proponents of the supply-side theory of "trickle-down" economics claim that it is a form of time-deferred philanthropy. The theory is that newly created wealth eventually "trickles down" to all
strata of society. The argument goes that although wealth is created primarily by the wealthy, they will tend to reinvest their wealth, and this process will create even more wealth. As the
economy grows, it is said that more and more people will share in the newly created wealth. A similar argument can be made in the case of Keynesian economics. According to this theory,
government redistributions and expenditures have a multiplier effect that stimulates the economy and creates wealth. Supply-siders claim that wealth is created primarily by investment
(supply), whereas Keynesians claim that wealth is driven by expenditure (demand). Today most economists agree that growth can be stimulated by either the supply or demand side, and some
of them argue that these are really two sides of the same coin, in the sense that you seldom get one without the other. Nevertheless, the dispute between supply-side and Keynesian economics
is of continuing interest.

Stresses within social distribution systems can be understood within a broad theory of political economy, where tradeoffs between means of protection, persuasion and production, and
valuations of different styles of capital, are described. Simply put, if the rich do not at least once in a while give away, of their own free will, at least a small part of their wealth to the poor, then
the poor are much more likely to rebel against the rich.

Wealth in the form of land
Many indigenous cultures, being either nomadic or communitarian in nature, rejected the notion of the private ownership of land wealth. In the western tradition, the concepts of owning land
and accumulating wealth in the form of land were engendered in the rise of the first states, for a primary service and power of government was, and is to this day, the awarding and
adjudication of land use rights.

Land ownership was also justified according to John Locke. He claimed that because we admix our labour with the land, we thereby deserve the right to control the use of the land and benefit
from the product of that land (but subject to his Lockean proviso of "at least where there is enough, and as good left in common for others.").

Additionally, in our post-agricultural society this argument has many critics (including those influenced by Georgist and geolibertarian ideas) who argue that since land, by definition, is not a
product of human labor, any claim of private property in it is a form of theft; as David Lloyd George observed, "to prove a legal title to land one must trace it back to the man who stole it."

Many older ideas have resurfaced in the modern notions of ecological stewardship, bioregionalism, natural capital, and ecological economics.

Look up wealth in Wiktionary, the free dictionary.Affluence in the United States
Capital accumulation
Distribution of wealth
Household income in the United States
Income in the United Kingdom
Lists of billionaires
Personal income in the United States
Poverty
Private banking
Surplus product
Value added
Wealth (economics)
Wealth condensation
Wealth and religion

Article in Dow Jones Insight magazine on wealth

References
^ Gilbert, Dennis. The American Class Structure in an Age of Growing Inequality . N.p.: Wadsworth Publishing;, 2002.
^ Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations
^ Gilbert, Dennis. The American Class Structure in an Age of Growing Inequality . N.p.: Wadsworth Publishing;, 2002.
^ Gilbert, Dennis. The American Class Structure in an Age of Growing Inequality . N.p.: Wadsworth Publishing;, 2002.
^ Aspects of Poverty. Ed. Ben B Seligman. New York: Thomas Y. Crowell Company, 1968.
^ Ropers, Richard H, Ph.D. Persistent Poverty: The American Dream Turned Nightmare. New York: Insight Books, 1991.
^ Gilbert, Dennis. The American Class Structure in an Age of Growing Inequality . N.p.: Wadsworth Publishing;, 2002.
^ Smith, Roy C. The Wealth Creators: The Rise of Today's Rich and Super-Rich. New York: Truman Talley Books, 2001.
^ Sherraden, Michael. Assets and the Poor: A New American Welfare Policy. Armonk: M.E. Sharpe, Inc., 1991.
^ Sherraden, Michael. Assets and the Poor: A New American Welfare Policy. Armonk: M.E. Sharpe, Inc., 1991.
^ Sherraden, Michael. Assets and the Poor: A New American Welfare Policy. Armonk: M.E. Sharpe, Inc., 1991.
^ Sherraden, Michael. Assets and the Poor: A New American Welfare Policy. Armonk: M.E. Sharpe, Inc., 1991.
^ Fuller, R. Buckminster (1981). Critical Path. New York: St. Martin's Press. pp.p. 125. ISBN 0312174888.
In economics and business, wealth of a person or nation is the value of assets owned net of liabilities owed (to foreigners in the case of a nation) at a point in time. The assets include those
that are tangible (land and capital) and financial (money, bonds, etc.). Wealth may be measured in nominal or real values. Measurable wealth typically excludes intangible or nonmarketable
assets such as human capital and social capital. In economics, 'wealth' corresponds to the accounting term 'net worth'. But analysis may adapt typical accounting conventions for economic
purposes in social accounting (such as in national accounts). An example of the latter is generational accounting of social security systems to include the present value projected future
outlays considered as liabilities.

Economic terminology distinguishes between two types of variables: a stock and a flow. Wealth, as measurable at a date in time, is a stock, like the value of an orchard on December 31 minus
debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow. What marks the income as a flow is
its measurement per unit of time, like the value of apples yielded from the orchard per year.

Distribution (economics)
Distribution of wealth
Income, including section Meaning in economics and use in economic theory|
National accounts
Wealth effect
Wealth elasticity of demand

References
Robert J. Barro (1974). "Are Government Bonds Net Wealth?," Journal of Political Economy, 8(6), pp. 1095-111.
John Bates Clark (1902). The Distribution of Wealth (analytical Table of Contents).
Laurence J. Kotlikoff, 1987, “social security," The New Palgrave: A Dictionary of Economics, v. 4, pp. 413-18. Stockton Press.
_____, 1992, Generational Accounting. Free Press.
David S. Landes. (1998) The Wealth and Poverty of Nations. Book preview.
Nancy D. Ruggles (1987). "social accounting," The New Palgrave: A Dictionary of Economics, v. 3, pp. 377-82, esp. p. 380.
Paul A. Samuelson and William D. Nordhaus (2004, 18th ed.). Economics, "Glossary of Terms."
Adam Smith (1776). The Wealth of Nations.
Partha Dasgupta (1993). An Inquiry into Well-Being and Destitution. (Pub. description)
Categories: Wealth | Macroeconomics | Microeconomics | National accounts | Economic indicators | Index numbers | Welfare economics | Economics terminology | Economic term stubs
Source: Wikipedia
Weighted Average Cost of Capital (WACC)
The overall rate of return desired by all investors (stock and bond) in a company:
WACC = [Ke + Kd(D/E)] / [1 + D/E]
where the terms in the formula are defined in this WACC-a-tron:
Ke (desired return on equity):
Kd (desired return on debt):
D/E (debt-to-equity ratio)
Wilshire 5000
Stock index consisting of more than 5000 companies, representing virtually all of the capitalization of the entire U.S. stock market. See the index funds overview, and the website of Wilshire
Associates.
Yield
One of several numbers describing the annual interest rate paid by a bond.
See

coupon
current yield
equivalent yield
yield to call
yield to maturity
Coupon
Annual interest rate paid by a bond, expressed as a percentage of its par value. Compare current yield, yield to maturity.
Current Yield
Annual interest rate paid by a bond, expressed as a percentage of its current market price. Compare coupon, yield to maturity.
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).
Yield to Call
A rate of return measuring the performance of a callable bond, from the time of purchase to its call date. Similar to Yield to Maturity, but calculated using the call date instead of the maturity
date, and the call price instead of the par value.
Yield to Maturity (YTM)
A rate of return measuring the total performance of a bond (coupon payments as well as capital gain or loss) from the time of purchase until maturity. See the main article for the formula and
more information
Bond Yield-to-Maturity
Imagine you are interested in buying a bond, at a market price that's different from the bond's par value. There are three numbers commonly used to measure the annual rate of return you are
getting on your investment:

Coupon Rate: Annual payout as a percentage of the bond's par value
Current Yield: Annual payout as a percentage of the current market price you'll actually pay
Yield-to-Maturity: Composite rate of return off all payouts, coupon and capital gain (or loss)

(The capital gain or loss is the difference between par value and the price you actually pay.)

The yield-to-maturity is the best measure of the return rate, since it includes all aspects of your investment. To calculate it, we need to satisfy the same condition as with all composite payouts:

Whatever r is, if you use it to calculate the present values of all payouts and then add up these present values, the sum will equal your initial investment.

In an equation,

1. c(1 + r)-1 + c(1 + r)-2 + . . . + c(1 + r)-Y + B(1 + r)-Y = P
where
c = annual coupon payment (in dollars, not a percent)
Y = number of years to maturity
B = par value
P = purchase price

You should try to form a mental picture of what this equation is saying. The left side represents Y+1 different compound interest curves, all starting out now, and each one ending at the
moment that the payout it corresponds to takes place. Most of these curves will lie pretty low to the axis, because they only grow to a value of c, the coupon payment. The very last curve will be
a lot taller, and end up at the par value B. And if you add up the present values of all these curves (that's the left side of the equation), the sum will exactly equal the purchase price of the bond
(that's the right side).

As with most composite payout problems, equation 1 can't be solved exactly, in general. The nice part is that all yield-to-maturity problems have basically the same form, so people have been
able to create programmable calculators and computer programs (and even tables back in the old days) to help you find r.

Example: Suppose your bond is selling for $950, and has a coupon rate of 7%; it matures in 4 years, and the par value is $1000. What is the YTM?

The coupon payment is $70 (that's 7% of $1000), so the equation to satisfy is

2. 70(1 + r)-1 + 70(1 + r)-2 + 70(1 + r)-3 + 70(1 + r)-4 + 1000(1 + r)-4 = 950

Of course you aren't really going to solve this, so you just use the popup calculator instead, and find that r is 8.53%. If you want, you can plug this number back into equation 2, just to make
sure it checks out.

One thing to notice is that the YTM is greater than the current yield, which in turn is greater than the coupon rate. (Current yield is $70/$950 = 7.37%). This will always be true for a bond selling
at a discount. In fact, you will always have this:

Bond Selling At . . . Satisfies This Condition
Discount Coupon Rate < Current Yield < YTM
Premium Coupon Rate > Current Yield > YTM
Par Value Coupon Rate = Current Yield = YTM

Bond Yields and Prices
Once a bond has been issued and it's trading in the bond market, all of its future payouts are determined, and the only thing that varies is its asking price. If you buy such a bond the yield to
maturity you'll get on your investment naturally increases if you can buy it at a lower price: as they say, bond prices and yields "move" in opposite directions. That can be confusing since
people aren't always consistent in the way they talk about bond performance. If somebody says "10 year treasuries were down today", they probably mean that the asking price was down (so it
was a bad day for bond holders); but they sometimes mean that the yield to maturity was down because the asking price was up (a good day for bond holders).
Zero Coupon Bond
A bond that sells at a huge discount and pays no interest.
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