Tag Archive for Finance

Know About Different Types of Certificates of Deposit

The Certificate of Deposit is a special time deposit for a specific period of time and for a specific rate of interest and there is penalty for premature withdrawals and you can get higher interest rate. There are different products those similar to CD.

Callable CD: It is similar to traditional CD. But here bank has the right to call the investment. The bank can buy back CD after the initial non-callable period. Premium interest rate is paid by these CDs. Banks can manage the risk through selling callable CDs.

Brokerage CD: This CD is sold by brokerage. Brokers are used as sales representatives by some banks to find investors who are willing to buy CDs from their bank. Brokered CDs pay higher interest rate than other CDs from other local banks because brokered CDs compete in a national market. Brokered CDs are more liquid than CDs of bank because those can be traded like bonds on the secondary market. Holding the CD until the maturity is only way to guarantee getting full interest and principal. These have call option often.

Bump up CDs: You can take advantage of these CDs of a growing rate environment. This bump up CDs permit the account holder during the term of the CD to increase the interest rate once. The interest rate is bumped up on CD by bank upon request to a higher rate which is being offered by the issuing bank on that certificate of deposit.

Zero coupon CDs: The word coupon refers to interest payment. These CDs are issued at a acceptable discount from the face value of the CD. This zero coupon CDs don’t pay any interest till the maturity date.

Basics of Stock Trading

Trade means to purchase and sell in the jargon of the financial markets. Our financial markets are good in technology efficiency. However it is significance to understand how the markets work.

There are two basic ways exchanges execute a trade.
a. On the exchange floor
b. Electronically.

There is a solid push to carry more trading to the network and off the trading floor, this push meet with some resistance. Most of the markets, specially the NASDAQ, trades stocks electronically.

Exchange Floor:
At end of the day, markets work out all the trades and they get ready for the next day. There is a step-by-step walk by the implementation of a simple trade on the New York Stock Exchange.

  • Tell your broker to purchase 100 shares of ‘X’ company at market.
  • Order department of your broker sends the order to their floor clerk on the exchange.
  • One of the firm’s floor traders is alerted by the floor clerk who finds another floor trader willing to sell 100 shares of ‘X’ company.
  • Two should agree on a complete deal and price. The notification process will go up the line and you are called by your broker with the final price. The process would take a longer or few minutes, it depends on the stock and the market. Confirmation notice will be received by you in the mail.

This is the simple trade example, large blocks and complex trades of stocks involve considerable more detail.

The NYSE manages a small percentage of its volume electronically, but the rival NASDAQ manages completely electronically.

Vast computer networks are used by electronic markets to match buyers and sellers, rather than human brokers. It is efficient and fast. This method of trading is preferred by many large institutional traders like mutual funds, pension funds, and so on.

You can get almost instant confirmations for the individual investor on your trade, if that is important to you. It also assist further control of online investing through bringing you one step closer to the market.

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Importance Of Financial Planning

Financial planning is concluding purpose in life’s priorities, an individual’s financial goals, and after considering resources, current life style, risk profile to detail a realistic and balanced plan to achieve those goals.

Financial Planning
It is the process, it represents the current financial adjustments before an individual, organization or even a country, in the spending pattern in order to achieve the goal.

Importance of financial planning:
It is essential to plan finances in order to get long term benefits by the assets in hand. Through financial planning, investments are shaped properly and managed.

Cash flow: Financial planning helps in growing the cash flow and checking the spending pattern. The cash flow will be build up by taking measures like prudent spending, tax planning and careful budget.

Capital: An efficient financial planning helps to build the a strong capital base. So people can think about investments and their financial position can be improved.

Income: Income is managed efficiently by financial planning. Managing income will help in dividing the income in to savings, payments and other monthly expenditures.

Investment: Financial planning helps in selecting the right investments. It helps the person to achieve his objective.

Financial understanding: Planning will help to understand about current financial position.

Through the financial understanding an individual can do adjustments in investments and evaluating a retirement plan will become easy.

Assets: It is important to determine the value of assets. Knowledge of canceling of settling the liabilities, comes by understanding of finances. The overall process helps to construct the assets, not to become a burden in the future.

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Comparison Between Economic And Accounting Profit

In business world, profits are measured by two methods. One is known as accounting profit and other is termed as economic profit.

Accounting profit
It is the excess of business income over the business expenses. This method is mainly used to measure the amount of profit value. A business earns money after selling the goods. If the business earns more money than the money spends then it is said to be accounting profit. Accounting process doesn’t only include the money, which was spent by the business, but it also includes provision losses or depreciation that makes over an accounting period.

Hence after reducing all the spend cost from total income, if the remaining amount is positive then it is considered as accounting profit and if there remaining amount is negative then it is considered as accounting loss.

Accounting Profit = Total Income – Total Expenses is a common formula to calculate the accounting profit.

Economic profit
This is a slightly complicated concept. It is used to determine trade off what actually received with what could have received. Economic profit also adds the opportunity lost cost of another investment option to the cost of an investment. Hence an economic profit not only gives a profit on investment, but also gives more profit on accounting profit. This can be understood with following example.

Lets say, there is a two-investment option plan: A and B. Both the investment plans cost $500,000. Now, simultaneously track the progress of options A and B. At the end of investment option, A earns $550,000 while option B earns $520,000. The accounting profit formula will tell that by investing in option A, a person can made a tidy profit of $550,000 – $500,000 = $50,000. In case of option B, there will be an accounting profit of $520,000 – $500,000 = $20,000. A person can get $20,000 by investing in B. But the $30,000, which didn’t get is the opportunity lost cost or simply, opportunity cost of not investing in option A.

Economic Profit = Total Income – Total Expenses – Opportunity Lost Cost