Chicago Picks Musk’s Boring Co. for O’Hare Express Service

The Boring Company is on its way to Chicago.

Elon Musk’s venture was picked to finance and build an express train from the downtown Loop neighborhood to Chicago’s O’Hare International Airport, Mayor Rahm Emanuel announced. No taxpayer dollars will be funding the service, the mayor said.

Mr. Musk, chief executive officer of Tesla Inc., created Boring Co. in 2016 as a hobby to build tunnel networks beneath major cities with the goal of increasing speeds dramatically compared with traditional trains and reducing costs by a factor of 10.

Mr. Musk has yet to complete a project using the company’s transportation technology, which is still under development.

Plans for the express train come as the city works on an $8.5 billion expansion of O’Hare, the country’s third- busiest airport by passenger traffic. The modernization of O’Hare, which will include adding dozens of new gates, rebuilding the international terminal and renovating three other terminals, is expected to take eight years. It would be the largest renovation of O’Hare in its 73-year history.

About 20,000 passengers travel between O’Hare and downtown Chicago daily, and the number is forecast to reach at least 35,000 by 2045, according to the city.

Boring was one of two finalists for the project, after the city issued a request for proposals in March. The decision will kick off formal negotiations with the transportation company and then a final agreement will be presented for a vote to Chicago’s city council.

The city asked for proposals that would cut the current travel times to O’Hare by 50%, down to 20 minutes or less. With a projected travel time of 12 minutes using automated vehicles that would travel over 100 miles an hour, Mr. Musk’s proposed solution would beat expectations. Trains will carry as many as 16 passengers and their luggage as often as every 30 seconds, according to the city. The cost to consumers will be less than cabs or ride-share services, the city said.

Mr. Emanuel said the project  “will help Chicago write the next chapter in our legacy of innovation and invention.”

Write to Shayndi Raice at shayndi.raice@wsj.com

Appeared in the June 14, 2018, print edition as ‘Elon Musk’s Boring Co. Wins Chicago Contract.’

https://www.wsj.com/articles/chicago-picks-musks-boring-co-for-ohare-express-service-1528947987?mod=pls_whats_news_us_business_f

Participation Mortgage

What is ‘Participation Mortgage’

A participation mortgage is a type of mortgage which allows the lender to share in part of the income, or resale proceeds, of a property. As such the lender becomes an equity partner in the purchase, rather than just a mortgage issuer. In return for a lower interest rate on loan, a lender will take a share of the net operating income (NOI).

BREAKING DOWN ‘Participation Mortgage’

Participation mortgages, often seen in commercial real estate transactions, anticipate ongoing rental income. Commercial property include office buildings or apartment complex. The parties will split the net operating income which is the sum of revenues from the operation of the property minus the operating expenses. A typical profit split would be 55/45, with the lender receiving the smaller share. Also, the lender gets a portion of the resale revenues, often all profits above a specific benchmark, including repayment of the loan principal.

Why a Borrower Would Want a Participation Mortgage

The advantage of a participation mortgage to a borrower is the lower interest rate demanded by the lender, who makes up for diminished earnings on loan with the income revenue stream and the future sale revenue. From a borrower’s perspective, participation loans are similar to the introductory teaser rates offered with an adjustable rate mortgage (ARM). The difference is the low rate is stable over the life of the loan.

Of course, the borrower is giving up a lot of equity in return for that lower rate. But depending on how the deal is structured, the interest savings could well offset the loss of equity. In the near term, it could make it possible for the borrower to develop a more substantial property than he might otherwise be able to afford.

The Lender’s Perspective

Issuers of participation mortgages are often non-traditional lenders. They could be entrepreneurs looking for real estate investments without the hassle of developing or maintaining properties themselves; participation mortgages allow them to be silent partners. Sometimes the lenders are pension funds looking for quality investments that return more than bonds but don’t have the volatility of stocks.

A particular appeal for pension funds is the built-in inflation proofing of participation mortgages. Most pensions include cost-of-living adjustments (COLA) that increase payouts during inflationary times. Since real estate prices generally track inflation,  participation mortgages ensure higher returns on equity during periods of inflation.

A consideration for lenders is the problem of monitoring cash flow. They must inspect the borrower’s books to ensure that declared net revenues are accurate. Otherwise, a lender would not know if the developer was padding expenses to report lower net income. Moreover, a developer could cut corners on improvements or even safety features, since he bears the cost of all repairs but only gets a share of net income, a form of moral hazard.

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Elon Musk’s Boring Co. wins bid to build Chicago high-speed airport transit: report

Elon Musk’s Boring Co. has won a bid to build a high-speed transit link between downtown Chicago and O’Hare International Airport, Bloomberg News reported Wednesday night. The multibillion-dollar bid to fund, build and operate the airport link is a major step in building the credibility of the Boring Co., which previously has been best known for its futuristic ideas and raising funds by selling caps and flamethrowers. Bloomberg said the city may announce the deal as soon as Thursday. Winning the bid means Chicago has exclusive negotiating rights with the Boring Co. for one year. It’s not known what technology would be used for the route, though in a November tweet Musk said: “Electric pods for sure. Rails maybe, maybe not.” The Boring Co. is also seeking to fast-track a plan to build transportation tunnels beneath Los Angeles, and Musk has said he has verbal approval to build an underground hyperloop from New York to Washington.


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Convertible ARM

What is ‘Convertible ARM’

A convertible ARM is an adjustable rate mortgage (ARM) that gives the borrower the option to convert to a fixed-rate mortgage. Convertible ARMs are marketed as a way to take advantage of falling interest rates and usually include specific conditions. The financial institution generally charges a fee to switch the ARM to a fixed-rate mortgage.

BREAKING DOWN ‘Convertible ARM’

​​​​​​​Convertible ARMS are a hybrid of two mortgage types: the conventional fixed-rate 30-year mortgage, and the adjustable-rate mortgage (ARM). Fixed-rate mortgages give the borrower the security of knowing his monthly payment will never change, even if rates rise; over time, the payments effectively decline relative to inflation. An adjustable-rate mortgage begins with a much lower introductory “teaser” rate, but after a set period (typically five years) the rate is adjusted according to an index, such as the LIBOR, plus a margin. The rate is generally adjusted every six months and can go up or down (within limits outlined in the contract).

With a convertible ARM, the mortgage begins like a 30-year adjustable-rate—that is, at a teaser rate below market average. But within a specified period, often after the first year but before the fifth, the borrower has the option to convert to a fixed rate. The new interest rate is usually the lowest rate offered within the seven days before locking in. Thus if interest rates are dropping, the borrower can get a lower fixed rate than he might have obtained initially.

Convertible ARMs Can Make Sense When Rates Are High

Introduced in the early 1980s, convertible ARMs entered the scene during a period of double-digit fixed-rate mortgages. The theory was that because interest rates were historically unlikely to go much higher (barring extraordinary inflation), borrowers of convertible ARMs could essentially bet on the great likelihood of lower rates in the future. Early convertible ARMs were expensive and contained onerous restrictions. But in 1987, the government-sponsored mortgage enterprises Fannie Mae and Freddie Mac began buying convertible ARMs on the secondary market; since most commercial banks sell their mortgage loans on the secondary market, the acceptance of convertible ARMs by the two mortgage giants led to their rapid expansion. Competition, in turn, brought lower fees and less restrictive conditions.

The Downside

The main downside of convertible ARMS is that they force the borrower to monitor interest rates, and predict future changes—something even experts can’t do reliably. Also, interest rates on convertible ARMS—both the introductory rate and the later fixed rate–are usually a little higher than market rates. And while borrowers do not pay closing costs when converting the mortgage, lenders do charge fees. Meanwhile, if interest rates rise during the introductory period, the benefit of a convertible ARM is lost. Finally, the monthly payment after conversion will almost certainly be higher than what the homeowner was paying under the teaser rate, albeit with the security that it will remain fixed.

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How can I purchase stock directly from a company?

A:

There are a few circumstances in which a person can buy stock directly from a company. The following is meant to cover some of these instances, which include direct stock purchase plans, dividend reinvestment plans (DRIPs) and employee stock purchase plans (ESPPs).

Direct Stock Purchase Plan

This is when a person buys stock directly from the issuing company. There are a number of well-known companies that will sell stock directly to individual investors. Most companies that offer this kind of purchase option don’t charge investors a commission, and if they do, the commission or service charges is very low compared to buying stocks through a broker. If you’re buying a very small number of shares and want to minimize your costs, a direct stock purchase is a great way to go.

Dividend Reinvestment Plans

Investors who own shares in a company with a dividend reinvestment plan have the option of registering with the company and participating in the plan. Instead of receiving dividends from the company, DRIP participants’ dividends go directly toward buying more stock in the company. As with direct stock purchases, there are often no commission charges associated with DRIPs. (For more on this, read The Perks of Dividend Reinvestment Plans and What is a DRIP?)

Here is how a DRIP works:

Example
Company A pays a dividend of $0.50 per share on an annual basis, and its stock is worth $40 per share. A DRIP participating investor owns 200 shares of Company A’s stock. Instead of receiving a $100 check each year in dividends, the investor can buy 2.5 shares ($100/$40 per share) of stock. These shares are given directly from the company and no commission fees are charged.

Employee Stock Purchase Plans

For employees that work for public companies, ESPPs provide a great chance to buy the company’s stock at a discount. Employees are limited in the number of shares they can buy, and it’s not always a good thing to increase your holdings in your employer’s company – it’s a bit like putting all of your eggs into one basket.

In general, ESPPs offer employees the chance to buy stock for 85% of the market value. These stocks can go directly into a retirement fund, so there’s usually an opportunity to participate in ESPPs with untaxed income; in these cases, money is deducted from an employee’s salary.

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Good Debt Vs. Bad Debt

Debt, for many people today, is simply a fact of life. It’s the way they pay for just about everything from big-ticket items like homes and cars to daily purchases like gasoline and chewing gum. At its most basic definition, debt is simply an amount of money borrowed by one party from another. Under this definition, debt sounds neither good nor bad. A closer look at the subject provides a more sophisticated way of both viewing indebtedness.

Check out our credit card comparison tool and find out which credit card is right for you.

Good Debt

There’s no better example of the old adage “it takes money to make money” than good debt. Good debt helps you generate income and increases you net worth. Four notable things that are worth going into debt for:

1. Technical or College Education
Education has long been synonymous with success. In general, the more education an individual has, the greater that person’s earning potential. Education also has a positive correlation with the ability to find employment. Better educated workers are more likely to be employed in good-paying jobs, and tend to have an easier time finding new opportunities should the need arise. An investment in a technical or college degree is likely to pay for itself within just a few years of the newly educated worker entering the workforce. Over the course of a lifetime, educated workers are likely to rack up a return on investment measuring in the hundreds of thousands of dollars.

2. Small Business Ownership
Making money is the whole point to starting a small business. Earning income is a primary benefit of entrepreneurship, with being your own boss also a positive result of the endeavor. Not only can you avoid reliance on a third party to hire you and give you a paycheck, but your earnings potential can be directly improved by your willingness to work hard. With a bit luck, you can turn your drive and ambition into a self-sustaining enterprise and perhaps down the line, an initial public offering (IPO) that results in major wealth.

3. Real Estate
There are a variety of ways to make money in real estate. On the residential front, the simplest strategy often involves buying a house and living in it for a few decades before selling it at a profit. Residential real estate can also be used to generate income, by taking in a boarder or renting out the entire residence. Commercial real estate can also be an excellent source of cash flow and capital gains for investors.

4. Investing
Short-term investing provides an opportunity to generate income, and long-term investing may be the best opportunity most people have to generate wealth. The wide variety of available investments from traditional stocks and bonds to alternatives investments, commodities, futures and precious metals (just to name a few) provides an array of choices for just about every need and every risk tolerance.

No Guarantees

While good debt may seem like a great idea, it is important to realize that even the best ideas don’t always work out as intended. A second look at those four “good debt” categories underscores the point.

The Downside of Higher Education
In and of itself, an education is not a guaranteed ticket to wealth and success. A field of study must be chosen carefully, as not all degrees and designations offer equal opportunities in the marketplace. Difficult economic conditions must also be taken into consideration, as lucrative career opportunities will be more difficult to obtain during economic downturns. Workers who are unwilling to relocate to areas where their skills are in demand or unwilling to accept low-paying, entry-level jobs may find their degrees don’t deliver the expected returns.

The Risks of Small Business Ownership
Like any business venture, small businesses run the risk of failure. Hard work, a good game plan and a little bit of luck may all be necessary to help you fulfill the dream of working for yourself.

The Real Estate Money Pit
Until just a few years ago, buying real estate seemed like a guaranteed win for most homeowners, as price appreciation over time was more the norm than not in good neighborhoods. Downward fluctuations in global real estate prices have taught many homeowners that price appreciation is not guaranteed. On the other hand, real estate taxes, homeowners association fees and home maintenance costs last forever.

Investing
Investing can be a complex and volatile process. Just as fortunes can be made, they can also be lost. Do-it-yourself investing isn’t the right path for all investors, and even hiring help doesn’t guarantee a positive result.

Bad Debt

While even “good debt” can have a downside, certain debts are downright bad. Items that fit into this category include all debts incurred to purchase depreciating assets. In other words, “if it won’t go up in value or generate income, you shouldn’t go into debt to buy it.” Some particularly notable items related to bad debt include:

1. Cars
Vehicles are expensive. New cars, in particular, cost a lot of money. While you may need a vehicle to get yourself to work and to run the errands that make up everyday life, paying interest on a car purchase is simply a waste of money. By the time you leave the car lot, the vehicle is already worth less than it was when you bought it.

Put your ego aside and pay cash for a used car, if you can afford to do so. If you can’t, take out a loan to buy the least expensive reliable vehicle you can find and pay it off as quickly as you can. Buyers who insist on living beyond their means and financing a new car should look for a loan with little to no interest on it. While you’ll still be spending a large amount of money for something that eventually depreciates until it is worthless, at least you won’t be paying interest on it.

2. Clothes, Consumables and Other Goods and Services
It’s often said that clothes are worth less than half of what consumers pay to purchase them. If you look around a used clothing store, you’ll see that “half” is being generous. In addition to clothing, vacations, fast food, groceries and gasoline, these are all items commonly bought with borrowed money. Every penny spent in interest on these items is money that could have been used more wisely elsewhere.

3. Credit Cards
Credit cards are one of the worst forms of bad debt. The interest rates charged are often significantly higher than the rates on consumer loans and the payment schedules are arranged to maximize costs for the consumer. Keeping a balance on a credit card is rarely a good idea.

The Gray Area

In between good debt and bad debt is a gray area that generates a lot of controversy. Three hot-button topics in this realm include:

Consolidation Loans
For consumers who are already in debt, consolidating higher-interest debt by taking out a loan at a lower rate of interest is a great idea, in theory. In reality, it often just frees up cash that consumers use to fund new debt.

Borrowing to Invest
Leveraging, or borrowing money at a low interest rate and investing at a higher rate of return (most likely with a margin account), may appear to investors as a solid way to achieve better-than-expected results. Unfortunately, with it come numerous risks for the inexperienced and the potential hazard of losing a significant amount of money and being required to compensate your broker for the borrowed funds.

Credit Card Reward Programs
There are some great credit card reward programs available for consumers. The money spent using credit cards can help buyers earn free airline tickets, free cruises, cash back and a host of other benefits. The danger here is that the interest spent on the credit card debt offsets the value of the rewards.

The Bottom Line

There is certainly an argument to be made that no debt is good debt. Unfortunately, few people can afford to pay cash for everything they purchase. With that in mind, a motto of “everything in moderation” is the right approach to take where debt is concerned. Remember, even “good” debt has a potentially bad downside.

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The forex 3-session system

One of the greatest features of the foreign exchange market is that it is open 24 hours a day. This allows investors from around the world to trade during normal business hours, after work or even in the middle of the night. However, not all times are created equal. Although there is always a market for this most liquid of asset classes, there are times when price action is consistently volatile and periods when it is muted.

What’s more, different currency pairs exhibit varying activity over certain times of the trading day due to the general demographic of those market participants who are online at the time. In this article, we will cover the major trading sessions, explore what kind of market activity can be expected over the different periods, and show how this knowledge can be adapted into a trading plan.

[Note: The foreign exchange market presents a great opportunity for day traders given its 24 hour per day operation. Investopedia’s Become a Day Trader course will show you strategies that can be applied to any security and any market – including currencies. With over five hours of on-demand video, exercises, and interactive content, you’ll learn how to capitalize on trade ideas and manage risk to maximize your gains.]

Breaking a 24-Hour Forex Market into Manageable Trading Sessions

While a 24-hour market offers a considerable advantage for many institutional and individual traders, it also has its drawbacks because it guarantees liquidity and the opportunity to trade at any conceivable time. Although currencies can be traded anytime, a trader can only monitor a position for so long. This means that there will be times of missed opportunities, or worse – when a jump in volatility will lead to a movement against an established position when the trader isn’t around. A trader needs to be aware of times of market volatility and decide when is best to minimize this risk based on their trading style.

Traditionally, the market is separated into three peak activity sessions: the Asian, European and North American sessions. These three periods are also referred to as the Tokyo, London and New York sessions. These names are used interchangeably, as the three cities represent the major financial centers for each of the regions. The markets are most active when these three powerhouses are conducting business, as most banks and corporations make their day-to-day transactions in these regions and there is a greater concentration of speculators online. We’ll now take a closer look at each of these sessions.

Asian Forex Session (Tokyo)

When liquidity is restored to the forex (or FX) market at the start of the week, the Asian markets are naturally the first to see action. Unofficially, activity from this part of the world is represented by the Tokyo capital markets, which are live from midnight to 6 a.m. Greenwich Mean Time (GMT). However, there are many other countries with considerable pull that are present during this period including China, Australia, New Zealand and Russia. Considering how scattered these markets are, it makes sense that the beginning and end of the Asian session are stretched beyond the standard Tokyo hours. Asian hours are often considered to run between 11 p.m. and 8 a.m. GMT, accounting for the activity within these different markets.

European Forex Session (London)

The European session takes over in keeping the currency market active just before the Asian trading hours come to a close. This FX time zone is very dense and includes a number of major financial markets that could stand in as the symbolic capital.

London has taken the honors in defining the parameters for the European session to date. Official business hours in London run between 7:30 a.m. and 3:30 p.m. GMT. This trading period is also expanded due to other capital markets’ presence (including Germany and France) before the official open in the U.K.; while the end of the session is pushed back as volatility holds until after the close. Therefore, European hours typically run from 7 a.m. to 4 p.m. GMT.

North American Forex Session (New York)

The Asian markets have already been closed for a number of hours by the time the North American session comes online, but the day is only halfway through for European traders. The Western session is dominated by activity in the U.S., with contributions from Canada, Mexico and countries in South America. As such, it comes as little surprise that activity in New York City marks the high in volatility and participation for the session.

Taking into account the early activity in financial futures, commodity trading and the concentration of economic releases, the North American hours unofficially begin at 12 p.m. GMT. With a considerable gap between the close of the U.S. markets and open of Asian trading, a lull in liquidity sets the close of New York exchange trading at 8 p.m. GMT as the North American session closes.

Figure 1 outlines the aforementioned trading sessions:

Session Major Market Hours (GMT)
Asian Session Tokyo 11 p.m. to 8 a.m.
European Session London 7 a.m. to 4 p.m.
North American Session New York noon to 8 p.m.
Figure 1: Major market session hours
Figure 2: Three-market session overlap
Copyright Investopedia
Figure 3: Currency market volatility

Copyright Investopedia

The Asian/European session overlap, creating more volatility, while price action is subsequently more muted during the market’s other high points.

If the currency pair is a cross made of currencies that are most actively traded during Asian and European hours (like EUR/JPY and GBP/JPY), there will be a greater response to the Asian/European session overlaps and a less dramatic increase in price action during the European/U.S. sessions’ concurrence. Of course, the presence of scheduled event risk for each currency will still have a substantial influence on activity, regardless of the pair or its components’ respective sessions.

Figure 4: A greater response to Asian/European session overlaps is shown in pairs that are actively traded during Asian and European hours.

Copyright Investopedia

For long-term or fundamental traders, trying to establish a position during a pair’s most active hours could lead to a poor entry price, a missed entry or a trade that counters the strategy’s rules. In contrast, volatility is vital for short-term traders who do not hold a position overnight.

The Bottom Line

When trading currencies, a market participant must first determine whether high or low volatility will work best with their trading style. Trading during the session overlaps or typical economic release times may be the preferable option if more substantial price action is desired. The next step would be to decide what times are best to trade, accounting for a volatility bias. A trader will then need to determine what timeframes are most active for their preferred trading pair.

When considering the EUR/USD pair, the European/U.S. session crossover will find the most movement. There are usually alternatives to trading in this session, and a trader should balance the need for favorable market conditions with outlying factors, such as physical well-being. If a market participant from the U.S. prefers to trade the active hours for GBP/JPY, they will have to wake up very early in the morning to keep up with the market. If this person is not a professional trader, this could lead to exhaustion and errors in judgment. An alternative may be trading during the hours that comprise the European/U.S. session overlap, where volatility is still elevated, even though Japanese markets are offline.

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Deficiency Judgment

What is ‘Deficiency Judgment’

A deficiency judgment is a ruling made by a court against a debtor in default on a secured loan, indicating that the sale of a property to pay back the loan did not cover the outstanding debt in full. It is mostly a lien placed on the debtor for further money.

BREAKING DOWN ‘Deficiency Judgment’

Associated mostly with mortgage foreclosures, the legal principle of a deficiency judgment could apply to any secured loan where the property sells for less than the loan amount due, such as a car loan.

Home mortgages are designed to avoid the possibility of deficiency by requiring borrowers to make down payments, and by basing loans on the appraised value of the property. In theory, those safeguards ensure that the lender can sell the property to recoup a loan. But in a real estate downturn such as occurred after the market crash of 2008, home values can drop below the value of the outstanding loan.

For example, consider a home, bought for $300,000 with a 4% interest rate and including a $30,000 down payment. The borrower defaults on the $270,000 loan after two years, leaving a principal balance of $256,000. The bank sells the home for $245,000, then seeks a deficiency judgment against the borrower for the outstanding $11,000.

A High Bar for Deficiency Judgments

Many states prohibit deficiency judgments after a foreclosure. Where they are allowed, lenders generally must demonstrate through comparable listings and appraisals that the sale price is fair. This safeguard prevents a bank from accepting a lowball offer and demanding the balance from the borrower. State laws against deficiency judgment claims usually don’t apply to second mortgages such as home equity loans.

Even where allowed, a deficiency judgment is not automatic. The court only considers it if the lender makes a motion or ask for its granting. If the lender does not make the motion, then the court finds the money gained from the foreclosed property to be sufficient.

Beyond foreclosures, most states allow deficiency judgments in so-called short sales, which is when a bank agrees to let a borrower sell her home at a price lower than the loan amount. This low-priced sale can happen when real estate prices are falling, and a bank seeks to mitigate its loss through a quick sale, rather than going through foreclosure. Likewise, deficiency judgments are usually allowed in a transaction known as a deed instead of foreclosure, when the bank agrees to take title to a property instead of foreclosing.

A debtor who receives a deficiency judgment may seek exemption from the lender or other creditors, file a motion to have the judgment overturned or, if necessary, declare bankruptcy. In any case, when a debtor is let “off the hook” from the full repayment of a loan, the forgiven debt is considered income by the IRS and subject to taxes.

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Asia Markets: Asian markets swing lower after Fed rate hike

Asian stock markets were down in early trading Thursday, after the U.S. Federal Reserve raised interest rates and indicated two more rate hikes were coming later this year.

Japanese stocks opened lower, with just the fishery/ag/forestry and marine transportation sectors up. The Nikkei
NIK, -0.52%
  was down 0.4%, though few big caps were moving sharply. Nintendo
7974, -4.17%
 , however, was down 3.7% and tractor maker Kubota
6326, -2.27%
  eased 2.3% amid the dollar’s
USDJPY, -0.10%
  pullback. Elsewhere, Toshiba
6502, +2.08%
  was up a further 2% to again be the best-performing large cap after Wednesday’s 6.6% jump on its stock-buyback plans.

South Korean stocks were notably lagging after Wednesday’s day off for elections, with the Kospi
SEU, -1.50%
  down more than 1%. Construction names, which have surged since late April amid a Korean Peninsula thaw, continued the pullback seen during Tuesday’s Trump-Kim summit. Hyundai Engineering
000720, -7.18%
  was off 6% while construction-materials maker Busan Industrial
011390, -12.99%
  slid 11%.

Hong Kong stocks were little changed, with the Hang Seng Index
HSI, -0.61%
  off 0.4%. Financial stocks slipped after the Fed’s latest rate hike, with China Construction Bank
0939, -0.88%
  down 1%. The Hong Kong Monetary Authority raised its base rate a quarter-point to 2.25%, matching the overnight interest rate hike by the Fed. A day after ZTE
0763, +1.07%
  shares sank 42% in their second day of resumed trading, they were up 3% Thursday.

The Shanghai Composite
SHCOMP, -0.28%
  was down slightly, as was Australia’s S&P/ASX 200
XJO, -0.19%
  as well as stocks in Singapore
STI, -0.31%
  and Taiwan
Y9999, -0.89%
 .


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Net Operating Loss – NOL

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What is a ‘Net Operating Loss – NOL’

A net operating loss (NOL) is a loss taken in a period where a company’s allowable tax deductions are greater than its taxable income. When more expenses than revenues are incurred during the period, the net operating loss for the company can generally be used to recover past tax payments. The reasoning behind this is that corporations deserve some form of tax relief when they lose money, so they may apply the net operating loss to future income tax payments, reducing the need to make payments in future periods.

BREAKING DOWN ‘Net Operating Loss – NOL’

A net operating loss (NOL) makes a company unprofitable for tax purposes. For example, Company A has taxable income of $500,000, tax deductions of $700,000 and a corporate tax rate of 30%. Its NOL is $500,000 – $700,000 = -$200,000. Because Company A does not have taxable income, it does not pay taxes that year. Otherwise it would have paid $250,000 x 30% = $75,000 in taxes. Because the company had an NOL the previous year, it may put the NOL toward the current year’s tax bill or apply it against taxable income in previous years.

Rules for Applying an NOL

A business may carry the taxable amount back to the two previous years and apply it against taxable income for a refund. For example, an NOL occurring in 2018 may be used for lowering tax payments in 2017 or 2016. Because the time value of money shows that tax savings at that time is more valuable than in the future, this is the more beneficial choice. However, if the business did not pay taxes in prior years, or the owner’s income is expected to substantially increase in the future and raise the company’s tax rate, the business may also carry forward the amount over the next 20 years, reducing the amount of taxable income during that time.

If a business creates NOLs in more than one year, they are to be drawn down completely in the order that they were created before drawing down another NOL. Because any remaining NOL is canceled after 20 years, this reduces the risk of the NOL not being used.

Section 382 Limitation

An NOL may be considered a valuable asset because it can lower a company’s amount of taxable income. For this reason, the Internal Revenue Service (IRS) restricts using an acquired company simply for its NOL’s tax benefits. Section 382 of the Internal Revenue Code states that if a company with a NOL has at least a 50% ownership change, the acquiring company may use only that part of the NOL in each concurrent year that is based on the long-term tax-exempt bond rate multiplied by the stock of the acquired company. However, purchasing a business with a substantial NOL may mean an increased amount of money going to the acquired company’s shareholders than if the business possessed a smaller NOL.

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JetBlue Narrows Unit Revenue Guidance; Investors Aren't Impressed

JetBlue Airways (NASDAQ: JBLU) delivered strong results in the first quarter of 2018, growing earnings per share despite a big increase in fuel costs. Nevertheless, JetBlue stock fell after the company’s earnings report and has been stuck near its 52-week low. The main reason for investors’ lackadaisical response to JetBlue’s earnings report was the carrier’s forecast that unit revenue will decline and pre-tax profit will plunge in the second quarter.

On Tuesday, JetBlue narrowed its second-quarter revenue guidance range, thus confirming that revenue per available seat mile (RASM) will decline. This news helped to keep JetBlue stock grounded this week. However, investors may be underestimating JetBlue’s near-term and long-term revenue and earnings potential.

Q2 is coming in as expected

JetBlue’s RASM surged 6.1% in the first quarter, driven in part by a shift in the timing of Easter. By contrast, JetBlue warned investors in April that the early timing of Easter and one-time factors that boosted unit revenue a year ago would negatively impact RASM by 3.75 percentage points in Q2.

Additionally, JetBlue’s management noted that demand has been very strong on peak days, but overcapacity has held down fares on non-peak days. The second quarter of 2018 hasn’t had very many peak days. As a result, JetBlue initially projected that RASM would decline 0% to 3% year over year this quarter.

A JetBlue plane preparing to land

JetBlue expects its unit revenue to decline this quarter. Image source: JetBlue Airways.

On Tuesday, it updated that forecast, stating that unit revenue is on track to fall 0.5% to 2.5% for the quarter. Thus, the midpoint of the guidance range stayed unchanged, but the range was tightened from 3 percentage points to 2 percentage points.

A lesson for airline investors

A day before JetBlue updated its guidance, United Continental (NYSE: UAL) announced that its load factor — the percentage of seats filled with paying customers — rose by 2.0 percentage points in May, reaching 83.6%. Investors took this as a sign that United is seeing strong demand, causing United Continental stock to rally on Monday.

However, it’s noteworthy that JetBlue’s load factor is also rising. In April, the carrier’s load factor increased by 0.4 percentage points to 85.7%, despite the unfavorable timing of Easter. In May, its load factor rose by 1.1 percentage points to 85.8%.

JetBlue is maintaining its forecast for unit revenue to decline this quarter despite its strong load factor performance. This highlights the fact that airlines actively make trade-offs between fares and load factors. As many airlines have stopped providing regular updates on unit revenue, investors have started to put more weight on load factor results — as was the case with United’s recent stock surge. That’s dangerous, because load factor improvements don’t necessarily translate to unit revenue.

Revenue trends should rebound in the second half of 2018

Looking ahead, there are several reasons to be optimistic about JetBlue’s prospects. First, the carrier will benefit from more peak days during the summer season and around the Thanksgiving and Christmas holidays. Second, the carrier is making drastic cuts in Long Beach — its smallest and least successful hub — after Labor Day. Third, JetBlue is starting to benefit from capacity cuts by rivals (particularly Alaska Air ) on certain routes.

These factors should allow JetBlue to accelerate its unit revenue growth in the second half of 2018, relative to the 2% to 3% underlying RASM growth rate it has seen in the first half of the year. Beyond 2018, the success of JetBlue’s Mint premium service — and a potential expansion of Mint service to Europe — could help drive further unit revenue gains.

Meanwhile, a variety of cost control initiatives are set to pay dividends starting in the second half of 2018. These efforts will allow JetBlue to keep non-fuel unit costs roughly flat over the next three years, despite the likely headwind from increased pilot pay. Fuel efficiency should also improve substantially.

JetBlue stock trades for a very modest valuation of 11 times its projected 2018 earnings per share and just 9 times projected 2019 EPS. That leaves plenty of room for JetBlue stock to zoom higher, if the carrier can get unit revenue growing faster in the second half of the year while slowing its non-fuel unit cost growth.

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Adam Levine-Weinberg owns shares of Alaska Air Group and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.




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Financial Accounting

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What is ‘Financial Accounting’

Financial accounting is the process of recording, summarizing and reporting the myriad of transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements, including the balance sheet, income statement and cash flow statement, that record the company’s operating performance over a specified period.

BREAKING DOWN ‘Financial Accounting’

Financial accounting utilizes a series of established accounting principles. The selection of accounting principles to use during the course of financial accounting depends on the regulatory and reporting requirements the business faces. For U.S. public companies, businesses are required to perform financial accounting in accordance with Generally Accepted Accounting Principles (GAAP). International public companies also frequently report financial statements in accordance to International Financial Reporting Standards. The establishment of these accounting principles is to provide consistent information to investors, creditors, regulators and tax authorities.

Accrual Method vs. Cash Method

Financial accounting may be performed using either the accrual method, cash method or a combination of the two. Accrual accounting entails recording transactions when the transactions have occurred and the revenue is recognizable. Cash accounting entails recording transactions only upon the exchange of cash. Revenue is only recorded upon the receipt of payment, and expenses are only recorded upon the payment of the obligation.

Financial Accounting Reporting

Financial reporting occurs through the use of financial statements. The financial statements present the five main classifications of financial data: revenues, expenses, assets, liabilities and equity. Revenues and expenses are accounted for and reported on the income statement. Financial accounting results in the determination of net income at the bottom of the income statement. Assets, liabilities and equity accounts are reported on the balance sheet. The balance sheet utilizes financial accounting to report ownership of the company’s future economic benefits.

Financial Accounting Vs. Managerial Accounting

The key difference between financial and managerial accounting is that financial accounting aims at providing information to parties outside the organization, whereas managerial accounting information is aimed at helping managers within the organization make decisions. Financial statement preparation using accounting principles is most relevant to regulatory organizations and financial institutions. Because there are numerous accounting rules that do not translate well into business operation management, different accounting rules and procedures are utilized by internal management for internal business analysis.

Accounting Certifications

The most common accounting designation demonstrating an ability to perform financial accounting within the United States is the Certified Public Accountant (CPA) license. Outside of the United States, holders of the Chartered Accountant (CA) license demonstrate the ability as well. The Certified Management Accountant (CMA) designation is more demonstrative of an ability to perform internal management functions than financial accounting.

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INVESTOR ALERT: Law Offices of Howard G. Smith Announces Investigation on Behalf of Akers Biosciences, Inc. Investors (AKER)

BENSALEM, Pa.–()–Law Offices of Howard G. Smith announces an investigation on behalf of Akers Biosciences, Inc. (“Akers” or the “Company”) (NASDAQAKER) investors concerning the Company and its officers’ possible violations of federal securities laws.

On May 21, 2018, Akers disclosed it was unable to file its Form 10-Q with the SEC for the quarter ended March 31, 2018 and that its continuing review of the “characterization of certain revenue recognition items . . . now includes certain transactions in previous quarters.” On this news, shares of Akers fell $0.058 or over 8% to close at $0.599 on May 22, 2018.

Then on May 29, 2018, Akers issued a press release stating that “Raymond F. Akers Jr., Ph.D has resigned as a director of the Company with immediate effect.” On this news, shares of Akers fell $0.198 or over 33% to close at $0.391 on May 29, 2018, thereby injuring investors.

If you purchased Akers securities, have information or would like to learn more about these claims, or have any questions concerning this announcement or your rights or interests with respect to these matters, please contact Howard G. Smith, Esquire, of Law Offices of Howard G. Smith, 3070 Bristol Pike, Suite 112, Bensalem, Pennsylvania 19020 by telephone at (215) 638-4847, toll-free at (888) 638-4847, or by email to howardsmith@howardsmithlaw.com, or visit our website at www.howardsmithlaw.com.

This press release may be considered Attorney Advertising in some jurisdictions under the applicable law and ethical rules.

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BMA INVESTOR ALERT: Law Offices of Howard G. Smith Announces Investigation on Behalf of Banco Macro S.A. Investors

BENSALEM, Pa.–()–Law Offices of Howard G. Smith announces that it has commenced an investigation on behalf of Banco Macro S.A. (“Banco Macro” or the “Company”) (NYSE: BMA) investors concerning the Company and its officers’ possible violations of federal securities laws.

On December 7, 2017, Bloomberg reported that Banco Macro Chairman Jorge Horacio Brito contributed to the corruption scandal surrounding former Argentine Vice President Amado Boudou. According to the article, Boudou had been charged with “illicit enrichment for allegedly using shell companies and secret middlemen to gain control of a company given contracts to print the national currency.” Chairman Brito was identified as one of the middlemen involved in the alleged scheme. On this news, shares of Banco Macro fell significantly, thereby injuring investors.

If you purchased Banco Macro securities, have information or would like to learn more about these claims, or have any questions concerning this announcement or your rights or interests with respect to these matters, please contact Howard G. Smith, Esquire, of Law Offices of Howard G. Smith, 3070 Bristol Pike, Suite 112, Bensalem, Pennsylvania 19020 by telephone at (215) 638-4847, toll-free at (888) 638-4847, or by email to howardsmith@howardsmithlaw.com, or visit our website at www.howardsmithlaw.com.

This press release may be considered Attorney Advertising in some jurisdictions under the applicable law and ethical rules.

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SportsWatch: Passing this new soccer rule would be a World Cup game-changer

The penalty shoot-out (PSO) is monumentally unfair. The last time the World Cup was held in the U.S., for example, the tournament ended in the style of a tragic Italian opera. Roberto Baggio, Italy’s star striker who had scored five goals on the way to the final, stepped up to take the fifth penalty in the PSO. If Baggio missed, the Cup went to Brazil. If he scored Italy remained alive.

Baggio had an 85% career success rate at taking penalties, but with the outcome of the world’s most important trophy riding on his kick, he ran up and kicked the ball five yards over the bar. He later said that this tragedy lived with him for many years since that day in 1994.

The PSO is a way of settling tied games in single-elimination soccer championships, typically after 90 minutes of regulation play and 30 minutes of extra time. Until now they have worked like this: each team takes turns to shoot a penalty, with the team going first being decided by a coin toss. The highest score after five penalties wins. (In that 1994 championship match, Italy had missed three and Brazil scored three, Brazil won the shoot out 3-2 having taken only four penalties.) If still level after five penalties each team takes turns until one team is ahead (each team having made an equal number of attempts).



The system was adopted by FIFA, soccer’s international governing body, in 1970 and since then four World Cup finals have been decided by this method — two for the men (1994 and 2006) and two for the women (1999, when the U.S. defeated China, and 2011, when Japan out-shot the U.S). Dozens of other ties have been decided in the same way in the World Cup and many other competitions. The Germans are notoriously good at them: At the World Cup and European Championships they have participated in six shoot-outs since 1976 and lost only once (in 1976). Their conversion rate is a striking 85%; by contrast England and the Netherlands are the laughing stocks of the PSO, having lost six of seven, and five of six, respectively, with woeful conversion rates of 65% and 63%.


The team shooting first wins 60% of the time, and the team winning the toss almost always chooses to go first.


We know that the PSO is unfair thanks to the work of economist Ignacio Palacios-Huerta of the London School of Economics. The unfairness resides with the order in which the penalties are taken. After collecting data for hundreds of PSOs, Palacios-Huerta found that the team shooting first wins 60% of the time, and the team winning the toss almost always chooses to go first. In other words, simply by winning the toss, you give yourself an enormous edge that may well override merit, skill, or preparation. What is the source of this advantage? It is probably psychological pressure that accounts for the discrepancy: If you shoot first and miss, you can still be bailed out either by your opponent’s or your goalie’s performance, but if you shoot second, the entire game rests on your shot and yours alone, the previous 120 minutes be damned.

Read: Nafta partners U.S., Canada and Mexico celebrate FIFA nod to jointly host World Cup

Also: Watch these soccer players in the World Cup — and how they cash in afterward

Palacios-Huerta has done more than simply demonstrate the unfairness. He identified the ideally fair system and then persuaded notoriously conservative soccer authorities to experiment with a fairer system. Economists struggle to influence economic policy these days, so persuading a sports governing body to change its rules is nothing short of miraculous.

First the theory: The sequence in traditional PSOs is the “ABAB” system — team A alternates with team B. The problem is that if there is any advantage in the order (going first or second), then the sequence perpetuates this advantage endlessly. It follows, therefore, that any advantage in the ordering from the first two attempts (AB) can be nullified simply by reversing the order (BA).

So now the sequence is ABBA. If there is any advantage to one side in the sequence ABBA, then this can be nullified by reversing the sequence for next four attempts (BAAB). Fairness then is ensured by reversing the current sequence in the following sequence.

This sequence itself has a name — the Prouhet-Thue-Morse sequence, named for the two mathematicians and an inventor who independently discovered it (this Morse is same one who invented Morse code). Palacios Huerta realized that implementing this ideal sequence might seem a little complicated, so he advocated a close approximation, the “ABBA” system. Tennis fans will note that this is essentially the sequence used to settle tie-breaks in that sport. It’s not quite as fair as the ideal, but is much closer than ABAB.

Palacios-Huerta had one advantage in his efforts to persuade the authorities to change — he is a board member of the celebrated Basque soccer club, Athletic Bilbao. In 2017 FIFA announced that it would experiment with the system and in May 2017 Norway’s under-17 women were the first team to lose an international match under the ABBA system (to Germany, of course). Since then some national federations have adopted ABBA for domestic cup competitions.

FIFA remains tight-lipped about whether the system will be extended to the World Cup. Unsurprisingly, many soccer fans, long noted for their traditionalism, have complained about the newfangled procedure. But if your team loses the toss in a PSO this World Cup under the old ABAB system, don’t say you weren’t warned.

Stefan Szymanski is the Stephen J. Galetti Collegiate Professor of Sport Management at the University of Michigan’s School of Kinesiology. He is the author, with Simon Kuper, of Soccernomics: Why England Loses; Why Germany, Spain, and France Win; and Why One Day Japan, Iraq, and the United States Will Become Kings of the World’s Most Popular Sport  (Nation Books)

Also see: Here are 10 players to watch at the 2018 World Cup


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How does the balance of payments impact currency exchange rates?

A:

A change in a country’s balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. The reverse is also true when a fluctuation in relative currency strength can alter the balance of payments. There are two different and interrelated markets at work: the market for all financial transactions on the international market (balance of payments) and the supply and demand for a specific currency (exchange rate).

These conditions only exist under a free or floating exchange rate regime. The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds.

The world has not operated under any single rules-based or fixed exchange-rate system since the end of Bretton Woods in the 1970s.

To explain further, suppose a consumer in France wants to purchase goods from an American company. The American company is not likely to accept euros as payment; it wants U.S. dollars. Somehow the French consumer needs to purchase dollars (ostensibly by selling euros in the forex market) and exchange them for the American product. Today, most of these exchanges are automated through an intermediary so that the individual consumer doesn’t have to enter the forex market to make an online purchase. After the trade is made, it is recorded in the current account portion of the balance of payments.

The same holds true for investments, loans or other capital flows. American companies normally do not want foreign currencies to finance their operations, thus their expectation for foreign investors to send them dollars. In this scenario, capital flows between countries show up in the capital account portion of the balance of payments.

As more U.S. dollars are demanded to satisfy the needs of foreign investors or consumers, upward pressure is placed on the price of dollars. Put another way, it costs relatively more to exchange for dollars, in terms of foreign currencies.

The exchange rate for dollars may not actually rise if other factors are concurrently pushing down the value of dollars. For example, expansionary monetary policy might increase the supply of dollars.

For further reading, see “Understanding Capital and Financial Accounts in the Balance of Payments.”

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Compulsive Shopping

What is ‘Compulsive Shopping’

Compulsive shopping is an unhealthy obsession with shopping that interferes with the daily life of the afflicted. This ailment goes beyond mere consumerism and is psychological. Symptoms include obsession with shopping, anxiety when not shopping, the constant need to shop and the purchase of unnecessary or even unwanted items. 

BREAKING DOWN ‘Compulsive Shopping’

​​​​​​​Compulsive shopping is an addiction that triggers pleasure receptors in the brain, much like drugs. The addiction escalates because the guilt over shopping leads to more depression, which prompts more buying. As with any other addiction, it can lead to professional, marital and family problems. Although there is some debate about whether this condition is indeed a mental disorder, compulsive shopping is listed as an “impulse control disorder” by the World Health Organization in its International Statistical Classification of Diseases and Related Health Problems (ICD). It is not the same as retail therapy, the occasional shopping binge in which many people indulge.

Diagnosing Compulsive Shopping

Compulsive shoppers typically are insecure people with low self-esteem and low impulse control. Not surprisingly, people with mood, anxiety and eating disorders the condition is often exhibit symptoms. Much as bulimics will purge meals after overeating, compulsive shoppers are known to throw away their purchases. Some research shows attention a link between deficit disorders and compulsive shopping.

Studies suggest about 5.8 percent of Americans are compulsive shoppers for at least some period in their lives. It’s more common among women, and it typically starts in the late teens and early twenties. The affliction does not always lead to spending beyond one’s means but can involve simply obsessing about shopping. Someone who continuously window shops or browses internet shopping sites, even without buying, is considered compulsive. Often it is the thrill of the hunt, more than the actual purchase, which brings pleasure. As such, a subset of compulsive shopping involves obsessive attention to online auctions, even for goods that are not wanted or needed.

Compulsive shopping is often considered a modern affliction with today’s consumerist pressures such as ubiquitous advertising and the easy availability of credit cards. In fact, an unhealthy obsession with purchasing goods is not new. In the nineteenth century First Lady Mary Todd Lincoln, who also suffered from depression, was known to be a compulsive shopper who ran up President Lincoln’s credit line.

Treatment for Compulsive Shopping

Experts say awareness of the problem is the first step in healing. To that end, research indicates that ten weeks of cognitive behavioral therapy (CBT) is effective in reducing episodes of compulsive shopping. Support groups like Debtors Anonymous may also help. Medications can help, such as anti-depressants in the family of selective serotonin reuptake inhibitors (SSRIs), as well as opioid antagonists like naltrexone.

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Fortune 100

What is the ‘Fortune 100’

The Fortune 100 is an annual list of the 100 largest U.S. public and privately held companies, published by Fortune magazine. The ranking is compiled using gross revenue figures. The Fortune 100 list is more exclusive than both the Fortune 500 and Fortune 1000 lists, both of which rank more companies.

BREAKING DOWN ‘Fortune 100’

The Fortune 100 list does not include foreign companies, though many of the listed companies have significant international operations. The list is made up of public companies and private companies that report annual revenue figures.

Fortune 100 Began in 1955

Fortune first published its annual list of top revenue-producing companies in 1955. At first, the magazine’s editors were stricter on which business sectors were included. From 1955 to 1994, the Fortune 100 list only included businesses in the manufacturing, mining and energy sectors. This left out many of the top earning companies across the country. Fortune did publish individual sector lists for the top 50 companies in the industries of banks, utilities, insurance, retailers and transportation.

The Fortune 100 in 1955 was led by General Motors, a company that held the top position for over 30 years. General Motors had revenues of $9.8 billion to top the list. The remaining top 10 was rounded out by Exxon, US Steel, General Electric, Esmark, Chrysler, Armour, Gulf Oil, Mobil and DuPont.

Big Change to the Fortune 100 List in 1994

In 1994, Fortune expanded its list of companies to include service companies, opening the door for many newcomers to join. This change added many new companies to the Fortune 100 list and also dramatically increased the amount of annual revenue required to make the prestigious list. A company had to generate $10.9 billion in revenue to make the 1995 Fortune 100 list, compared to $5.3 billion in 1994.

The change made in 1994 allowed Wal-Mart to join the list. The leading American retailer topped the list in 2018 and has been a frequent top 10 company since its inclusion at the 1994 switch.

Fortune 100 in 2018

In 2018, Wal-Mart was the top company on the Fortune 100 for the sixth straight year with revenues of $500.3 billion. The rest of the top 10 was Exxon Mobil, Berkshire Hathaway, Apple, UnitedHealth Group, McKesson, CVS Health, Amazon.com, AT&T and General Motors. USAA, which ranked 100th on the list had revenues of $30 billion. Dell Technologies, with revenues of $78.7 billion led the private companies, ranking 35th.

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Forex leverage: A double-edged sword

One of the reasons why so many people are attracted to trading forex compared to other financial instruments is that with forex, you can usually get much higher leverage than you would with stocks. While many traders have heard of the word “leverage,” few know its definition, how leverage works and how it can directly impact their bottom line.

The concept of using other people’s money to enter a transaction can also be applied to the forex markets. In this article, we’ll explore the benefits of using borrowed capital for trading and examine why employing leverage in your forex trading strategy can be a double-edged sword. (For further reading, see “Forex Trading: A Beginner’s Guide and “How Does Leverage Work in the Forex Market?)

Defining Leverage 

Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of forex, that money is usually borrowed from a broker. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up – and control – a huge amount of money.

To calculate margin-based leverage, divide the total transaction value by the amount of margin you are required to put up.

Margin-Based Leverage = Total Value of Transaction
Margin Required

For example, if you are required to deposit 1% of the total transaction value as margin and you intend to trade one standard lot of USD/CHF, which is equivalent to US$100,000, the margin required would be US$1,000. Thus, your margin-based leverage will be 100:1 (100,000/1,000). For a margin requirement of just 0.25%, the margin-based leverage will be 400:1, using the same formula.

Margin-Based Leverage Expressed as Ratio Margin Required of Total Transaction Value
400:1 0.25%
200:1 0.50%
100:1 1.00%
50:1 2.00%

However, margin-based leverage does not necessarily affect risk and whether a trader is required to put up 1% or 2% of the transaction value as margin may not influence their profits or losses. This is because the investor can always attribute more than the required margin for any position. This indicates that the real leverage, not margin-based leverage, is the stronger indicator of profit and loss.

To calculate the real leverage you are currently using, simply divide the total face value of your open positions by your trading capital.

Real Leverage = Total Value of Transaction
Total Trading Capital

For example, if you have $10,000 in your account, and you open a $100,000 position (which is equivalent to one standard lot), you will be trading with 10 times leverage on your account (100,000/10,000). If you trade two standard lots, which is worth $200,000 in face value with $10,000 in your account, then your leverage on the account is 20 times (200,000/10,000).

This also means that the margin-based leverage is equal to the maximum real leverage a trader can use. Since most traders do not use their entire accounts as margin for each of their trades, their real leverage tends to differ from their margin-based leverage.

Generally, a trader should not use all of their available margin. A trader should only use leverage when the advantage is clearly on their side.

Once the amount of risk in terms of the number of pips is known, it is possible to determine the potential loss of capital. As a general rule, this loss should never be more than 3% of trading capital. If a position is leveraged to the point that the potential loss could be, say, 30% of trading capital, then the leverage should be reduced by this measure. Traders will have their own level of experience and risk parameters and may choose to deviate from the general guideline of 3%. (For further reading, see “Limiting Losses.”)

Traders may also calculate the level of margin that they should use. Suppose that you have $10,000 in your trading account and you decide to trade 10 mini USD/JPY lots. Each move of one pip in a mini account is worth approximately $1, but when trading 10 minis, each pip move is worth approximately $10. If you are trading 100 minis, then each pip move is worth about $100.

Thus, a stop-loss of 30 pips could represent a potential loss of $30 for a single mini lot, $300 for 10 mini lots and $3,000 for 100 mini lots. Therefore, with a $10,000 account and a 3% maximum risk per trade, you should leverage only up to 30 mini lots even though you may have the ability to trade more. (To learn more, see “Finding Your Margin Investment Sweet Spot.”)

Leverage in Forex Trading

In the foreign exchange markets, leverage is commonly as high as 100:1. This means that for every $1,000 in your account, you can trade up to $100,000 in value. Many traders believe the reason that forex market makers offer such high leverage is because leverage is a function of risk. They know that if the account is properly managed, the risk will also be very manageable, or else they would not offer the leverage. Also, because the spot cash forex markets are so large and liquid, the ability to enter and exit a trade at the desired level is much easier than in other less liquid markets. (For further reading, see “Place Forex Orders Properly.”)

In trading, we monitor the currency movements in pips, which is the smallest change in currency price and depends on the currency pair. These movements are really just fractions of a cent. For example, when a currency pair like the GBP/USD moves 100 pips from 1.9500 to 1.9600 – that is, just a one cent move of the exchange rate.

This is why currency transactions must be carried out in sizable amounts, allowing these minute price movements to be translated into larger profits when magnified through the use of leverage. When you deal with an amount such as $100,000, small changes in the price of the currency can result in significant profits or losses.

Risk of Excessive Real Leverage in Forex Trading

This is where the double-edged sword comes in, as real leverage has the potential to enlarge your profits or losses by the same magnitude. The greater the amount of leverage on capital you apply, the higher the risk that you will assume. Note that this risk is not necessarily related to margin-based leverage although it can influence if a trader is not careful.

Let’s illustrate this point with an example (See Figure 1).

Both Trader A and Trader B have a trading capital of US$10,000, and they trade with a broker that requires a 1% margin deposit. After doing some analysis, both of them agree that USD/JPY is hitting a top and should fall in value. Therefore, both of them short the USD/JPY at 120.

Trader A chooses to apply 50 times real leverage on this trade by shorting US$500,000 worth of USD/JPY (50 x $10,000) based on their $10,000 trading capital. Because USD/JPY stands at 120, one pip of USD/JPY for one standard lot is worth approximately US$8.30, so one pip of USD/JPY for five standard lots is worth approximately US$41.50. If USD/JPY rises to 121, Trader A will lose 100 pips on this trade, which is equivalent to a loss of US$4,150. This single loss will represent a whopping 41.5% of their total trading capital.

Trader B is a more careful trader and decides to apply five times real leverage on this trade by shorting US$50,000 worth of USD/JPY (5 x $10,000) based on their $10,000 trading capital. That $50,000 worth of USD/JPY equals to just one-half of one standard lot. If USD/JPY rises to 121, Trader B will lose 100 pips on this trade, which is equivalent to a loss of $415. This single loss represents 4.15% of their total trading capital.

Figure 1 shows how the trading accounts of these two traders compare after the 100-pip loss:

Trader A Trader B
Trading Capital $10,000 $10,000
Real Leverage Used 50 times 5 times
Total Value of Transaction $500,000 $50,000
In the Case of a 100-Pip Loss -$4,150 -$415
% Loss of Trading Capital 41.5% 4.15%
% of Trading Capital Remaining 58.5% 95.8%
*All figures in U.S. dollars

The Bottom Line

There’s no need to be afraid of leverage once you have learned how to manage it. The only time leverage should never be used is if you take hands-off approach to your trades. Otherwise, leverage can be used successfully and profitably with proper management. Like any sharp instrument, leverage must be handled carefully – once you learn to do this, you have no reason to worry.

Smaller amounts of real leverage applied on each trade affords more breathing room by setting a wider but reasonable stop and avoiding a higher loss of capital. A highly leveraged trade can quickly deplete your trading account if it goes against you, as you will rack up greater losses due to bigger lot sizes. Keep in mind that leverage is totally flexible and customizable to each trader’s needs.

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FA Center: Calling a company ‘great’ doesn’t make it a good stock

It is easy to identify successful companies, but hard to pin down the characteristics that make them successful. Why do some companies grow and prosper while others languish and fail? Why are some companies great while others are merely good, mediocre, or bad? These questions are asked and answered over and over again by business executives, management consultants, financial analysts, and investors, but their answers are usually wrong.

For example, in his best-selling 2001 book, “Good to Great: Why Some Companies Make the Leap and Others Don’t,” Jim Collins’ boasted that, “We believe that almost any organization can substantially improve its stature and performance, perhaps even become great, if it conscientiously applies the framework of ideas we’ve uncovered.”

Bold claims — if indeed they were true, as research paper I co-authored points out. The paper, “Great Companies: Looking for Success Secrets in All the Wrong Places,” published in the Fall 2015 Journal of Investing, shows the problem with “Good to Great” is that it relies on a backward-looking study, undermined by data mining.

Collins and his research team spent five years looking at the 40-year stock market history of 1,435 companies and identified 11 stocks that outperformed the overall market and were still improving 15 years after they made the leap from good to great: Abbott Laboratories
ABT, -0.46%
 ; Kimberly-Clark
KMB, -0.62%
 ; Pitney Bowes
PBI, -1.25%
 ; Circuit City; Kroger
KR, +1.25%
 ; Walgreens (now Walgreens Boots Alliance)
WBA, +0.33%
 ; Fannie Mae; Nucor
NUE, -0.45%
 ; Wells Fargo
WFC, -0.40%
 ; Gillette (since  acquired by Procter & Gamble
PG, -1.00%
  ), and Philip Morris
PM, -0.27%
 .

Collins scrutinized these 11 great companies and identified five common themes, He gave them catchy labels, such as “Level 5 Leadership” (leaders who are personally humble, but professionally driven to make a company great), and concluded that these were a road map to greatness.

Collins wrote: “We developed all of the concepts in this book by making empirical deductions directly from the data. We did not begin this project with a theory to test or prove. We sought to build a theory from the ground up, derived directly from the evidence.”

Collins apparently believed that this proclamation made his study sound unbiased and professional. He didn’t just make this stuff up. He went wherever the data took him. The reality is that Collins was admitting that he had no idea why some companies are more successful than others, and he was revealing that he was blissfully unaware of the perils of data mining — deriving theories from data.



When we look back in time at any group of companies, the best or the worst, we can always find common characteristics. Finding such traits only confirms that we looked, and tells us nothing about whether these characteristics were responsible for past successes or are reliable predictors of future success. For instance, each of the 11 companies selected by Collins has either an I or an R in its name, and several have both an I and an R. Is the key for going from good to great to make sure that your company’s name has an I or R in it?

Of course not. This random I-or-R pattern is an obvious example of data mining. Collins’ data mining is less obvious, because the appealing labels he thought up make his unearthed patterns sound plausible. It is nonetheless data mining because, as he freely admits, Collins made up his theory after looking at the data.

Read: A deep look at the stocks held by this money manager Warren Buffett admires

Collins does not provide any evidence that the five characteristics he discovered were responsible for these companies’ success. To do that, he would have had to eschew data mining and, instead, follow the scientific method that has been the foundation for the triumph of science over superstition: (a) select the characteristics beforehand and provide a logical reason for why these characteristics predict success; (b) select companies beforehand that do and do not have these characteristics; and (c) monitor their success over the next several years using a metric established beforehand. Collins did none of this.

To buttress the statistical legitimacy of his theory, Collins cited a professor at the University of Colorado: “What is the probability of finding by chance a group of 11 companies, all of whose members display the primary traits you discovered while the direct comparisons do not possess those traits?” The professor calculated this probability to be less than 1 in 17 million.

In statistics, this kind of reasoning is known as the Feynman Trap, a reference to the Nobel Laureate Richard Feynman. Feynman asked his Cal Tech students to calculate the probability that, if he walked outside the classroom, the first car in the parking lot would have a specific license plate, say 8NSR26. Cal Tech students are very smart and they quickly calculated a probability by assuming each number and letter were determined independently. This answer is less than 1 in 17 million. When they finished, Feynman revealed that the correct probability was 1 because he had seen this license plate on his way to class. Something extremely unlikely is not unlikely at all if it has already happened.

The Colorado professor fell into the Feynman Trap, coincidentally with the same 1-in-17-million probability as in Feynman’s license-plate calculation. The calculations made by the Colorado professor and the Cal Tech students assume that the five traits and the license plate number were specified before looking at which companies were successful and which cars were in the parking lot. They were not, and the calculations are irrelevant. Finding common characteristics after the companies or cars have been selected is not surprising, or interesting.

The interesting question is whether these 11 companies’ common characteristics are of any use in predicting which companies will succeed in the future. For these 11 companies, the answer is no. Fannie Mae stock went from more than $80 a share in 2001 to less than $1 a share in 2008, and delisting in 2010. Circuit City went bankrupt in 2009. The performance of the other nine stocks since the publication of “Good to Great” has been distinctly mediocre. Overall, five of the 11 stocks did better than the S&P 500
SPX, -0.40%
  , six did worse. On average, they did slightly worse than S&P 500.

The Feynman Trap plagues every book espousing formulas/secrets/recipes for a successful business, a lasting marriage, living to be 100 years old, and so on, that are based on backward-looking studies. To avoid the Feynman Trap, we need to specify the secrets ahead of time (and explain why they make sense), and then test them with fresh data.

Gary Smith  is the Fletcher Jones Professor of Economics at Pomona College and author of “ Money Machine: The Surprisingly Simple Power of Value Investing .”


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