Factors of production are the inputs needed for creating a good or service, and the factors of production include land, labor, entrepreneurship, and capital.

Those who control the factors of production often enjoy the greatest wealth in a society. In capitalism, the factors of production are most often controlled by business owners and investors. In socialist systems, the government (or community) often exerts greater control over the factors of production. How Factors of Production Work

The modern definition of factors of production is primarily derived from a neoclassical view of economics. It amalgamates past approaches to economic theory, such as the concept of labor as a factor of production from socialism, into a single definition. 

Land, labor, and capital as factors of production were originally identified by early political economists such as Adam Smith, David Ricardo, and Karl Marx. Today, capital and labor remain the two primary inputs for processes and profits. Production, such as manufacturing, can be tracked by certain indexes, including the ISM manufacturing index.

The 4 Factors of Production

There are four factors of production—land, labor, capital, and entrepreneurship. Land As a Factor

Land has a broad definition as a factor of production and can take on various forms, from agricultural land to commercial real estate to the resources available from a particular piece of land. Natural resources, such as oil and gold, can be extracted and refined for human consumption from the land.

Cultivation of crops on land by farmers increases its value and utility. For a group of early French economists called “the physiocrats,” who predated the classical political economists, land was responsible for generating economic value.

While land is an essential component of most ventures, its importance can diminish or increase based on industry. For example, a technology company can easily begin operations with zero investment in land. On the other hand, land is the most significant investment for a real estate venture.Labor As a Factor

Labor refers to the effort expended by an individual to bring a product or service to the market. Again, it can take on various forms. For example, the construction worker at a hotel site is part of labor, as is the waiter who serves guests or the receptionist who enrolls them into the hotel.

Within the software industry, labor refers to the work done by project managers and developers in building the final product. Even an artist involved in making art, whether it is a painting or a symphony, is considered labor. For the early political economists, labor was the primary driver of economic value. Production workers are paid for their time and effort in wages that depend on their skill and training. Labor by an uneducated and untrained worker is typically paid at low prices. Skilled and trained workers are called “human capital” and are paid higher wages because they bring more than their physical capacity to the task.

For example, an accountant’s job requires the analysis of financial data for a company. Countries that are rich in human capital experience increased productivity and efficiency. The difference in skill levels and terminology also helps companies and entrepreneurs create corresponding disparities in pay scales. This can result in a transformation of factors of production for entire industries. An example of this is the change in production processes in the information technology (IT) industry after jobs were outsourced to countries with lower salaries.

Capital As a Factor

In economics, capital typically refers to money. However, money is not a factor of production because it is not directly involved in producing a good or service. Instead, it facilitates the processes used in production by enabling entrepreneurs and company owners to purchase capital goods or land or to pay wages. For modern mainstream (neoclassical) economists, capital is the primary driver of value.

It is important to distinguish personal and private capital in factors of production. A personal vehicle used to transport family is not considered a capital good, but a commercial vehicle used expressly for official purposes is. During an economic contraction or when they suffer losses, companies cut back on capital expenditure to ensure profits. However, during periods of economic expansion, they invest in new machinery and equipment to bring new products to market.

An illustration of the above is the difference in markets for robots in China compared to the United States after the 2008 financial crisis. After the crisis, China experienced a multi-year growth cycle, and its manufacturers invested in robots to improve productivity at their facilities and meet growing market demands.12 As a result, the country became the biggest market for robots.3 Manufacturers within the United States, which had been in the throes of an economic recession after the financial crisis, cut back on their investments related to production due to tepid demand.4   

As a factor of production, capital refers to the purchase of goods made with money in production. For example, a tractor purchased for farming is capital. Along the same lines, desks and chairs used in an office are also capital.

Entrepreneurship As a Factor

Entrepreneurship is the secret sauce that combines all the other factors of production into a product or service for the consumer market. An example of entrepreneurship is the evolution of the social media behemoth Meta (META), formerly Facebook.

Mark Zuckerberg assumed the risk for the success or failure of his social media network when he began allocating time from his daily schedule toward that activity. When he coded the minimum viable product himself, Zuckerberg’s labor was the only factor of production. After Facebook, the social media site, became popular and spread across campuses, it realized it needed to recruit additional employees. He hired two people, an engineer (Dustin Moskovitz) and a spokesperson (Chris Hughes), who both allocated hours to the project, meaning that their invested time became a factor of production.5

The continued popularity of the product meant that Zuckerberg also had to scale technology and operations. He raised venture capital money to rent office space, hire more employees, and purchase additional server space for development. At first, there was no need for land. However, as business continued to grow, Meta built its own office space and data centers.6 Each of these requires significant real estate and capital investments.

Connecting the Factors

Another example of entrepreneurship is Starbucks Corporation (SBUX). The retail coffee chain needs land (prime real estate in big cities for its coffee chain), capital (large machinery to produce and dispense coffee), and labor (employees at its retail outposts for service). Entrepreneur Howard Schultz, the company’s founder, provided the fourth factor of production by being the first person to realize that a market for such a chain existed and figuring out the connections among the other three factors of production.7

While large companies make for excellent examples, a majority of companies within the United States are small businesses started by entrepreneurs. Because entrepreneurs are vital for economic growth, countries are creating the necessary framework and policies to make it easier for them to start companies.

Ownership of Factors of Production

The definition of factors of production in economic systems presumes that ownership lies with households, who lend or lease them to entrepreneurs and organizations. But that is a theoretical construct and rarely the case in practice. Except for labor, ownership for factors of production varies based on industry and economic system.

For example, a firm operating in the real estate industry typically owns significant parcels of land, while retail corporations and shops lease land for extended periods of time. Capital also follows a similar model in that it can be owned or leased from another party. Under no circumstances, however, is labor owned by firms. Labor’s transaction with firms is based on wages.

Ownership of the factors of production also differs based on the economic system. For example, private enterprises and individuals own most of the factors of production in capitalism. However, collective good is the predominating principle in socialism. As such, factors of production, such as land and capital, are owned and regulated by the community as a whole under socialism.

Conflict theory, first developed by Karl Marx, is a theory that society is in a state of perpetual conflict because of competition for limited resources.

Conflict theory holds that social order is maintained by domination and power, rather than by consensus and conformity. According to conflict theory, those with wealth and power try to hold on to it by any means possible, chiefly by suppressing the poor and powerless. A basic premise of conflict theory is that individuals and groups within society will work to try to maximize their own wealth and power.Understanding Conflict Theory

Conflict theory has sought to explain a wide range of social phenomena, including wars, revolutions, poverty, discrimination, and domestic violence. It ascribes most of the fundamental developments in human history, such as democracy and civil rights, to capitalistic attempts to control the masses (as opposed to a desire for social order). Central tenets of conflict theory are the concepts of social inequality, the division of resources, and the conflicts that exist among different socioeconomic classes.

The central tenets of conflict theory can explain many types of societal conflicts throughout history. Some theorists believe, as Marx did, that societal conflict is the force that ultimately drives change and development in society.

Marx’s version of conflict theory focused on the conflict between two primary classes. Each class consists of a group of people bound by mutual interests and a certain degree of property ownership. Marx theorized about the bourgeoisie, a group that represented members of society who hold the majority of the wealth and means. The proletariat is the other group: It includes those considered working-class or poor.

With the rise of capitalism, Marx theorized that the bourgeoisie, a minority within the population, would use their influence to oppress the proletariat, the majority class. This way of thinking is tied to a common image associated with conflict theory-based models of society; adherents to this philosophy tend to believe in a pyramid arrangement in terms of how goods and services are distributed in society. At the top of the pyramid is a small group of elites that dictate terms and conditions to the larger portion of society because they have an outsized amount of control over resources and power.

Uneven distribution within society was predicted to be maintained through ideological coercion; the bourgeoisie would force acceptance of the current conditions by the proletariat. Conflict theory assumes that the elite will set up systems of laws, traditions, and other societal structures in order to further support their own dominance while preventing others from joining their ranks.

Marx theorized that, as the working class and poor were subjected to worsening conditions, a collective consciousness would raise more awareness about inequality, and this would potentially result in revolt. If, after the revolt, conditions were adjusted to favor the concerns of the proletariat, the conflict circle would eventually repeat but in the opposite direction. The bourgeoisie would eventually become the aggressor and revolter, grasping for the return of the structures that formerly maintained their dominance.1

Conflict Theory Assumptions

Current conflict theory has four primary assumptions that are helpful to understand: competition, revolution, structural inequality, and war.

Competition

Conflict theorists believe that competition is a constant and, at times, an overwhelming factor in nearly every human relationship and interaction. Competition exists as a result of the scarcity of resources, including material resources—money, property, commodities, and more. Beyond material resources, individuals and groups within a society compete for intangible resources as well. These can include leisure time, dominance, social status, sexual partners, etc. Conflict theorists assume that competition is the default (rather than cooperation).

Revolution

Given conflict theorists' assumption that conflict occurs between social classes, one outcome of this conflict is a revolutionary event. The idea is that change in a power dynamic between groups does not happen as the result of a gradual adaptation. Rather, it comes about as the symptom of conflict between these groups. In this way, changes to a power dynamic are often abrupt and large in scale, rather than gradual and evolutionary.

Structural inequality

An important assumption of conflict theory is that human relationships and social structures all experience inequalities of power. In this way, some individuals and groups inherently develop more power and reward than others. Following this, those individuals and groups that benefit from a particular structure of society tend to work to maintain those structures as a way of retaining and enhancing their power.

War

Conflict theorists tend to see war as either a unifier or as a "cleanser" of societies. In conflict theory, war is the result of a cumulative and growing conflict between individuals and groups and between entire societies. In the context of war, a society may become unified in some ways, but conflict still remains between multiple societies. On the other hand, war may also result in the wholesale end of a society.

Special Considerations

Marx viewed capitalism as part of a historical progression of economic systems. He believed capitalism was rooted in commodities, or things that are purchased and sold. For example, he believed that labor is a type of commodity. Because laborers have little control or power in the economic system (because they don’t own factories or materials), their worth can be devalued over time. This can create an imbalance between business owners and their workers, which can eventually lead to social conflicts. He believed these problems would eventually be fixed through a social and economic revolution. 

Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. Thus, line items on an income statement can be stated as a percentage of gross sales, while line items on a balance sheet can be stated as a percentage of total assets or liabilities, and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.

KEY TAKEAWAYS

• Vertical analysis makes it easier to understand the correlation between single items on a balance sheet and the bottom line, expressed in a percentage.1

• Vertical analysis can become a more potent tool when used in conjunction with horizontal analysis, which considers the finances of a certain period of time.

How Vertical Analysis Works

Vertical analysis makes it much easier to compare the financial statements of one company with another, and across industries. This is because one can see the relative proportions of account balances. It also makes it easier to compare previous periods for time series analysis, in which quarterly and annual figures are compared over a number of years, in order to gain a picture of whether performance metrics are improving or deteriorating.

For example, by showing the various expense line items in the income statement as a percentage of sales, one can see how these are contributing to profit margins and whether profitability is improving over time. It thus becomes easier to compare the profitability of a company with its peers.

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Vertical Analysis

Financial statements that include vertical analysis clearly show line item percentages in a separate column. These types of financial statements, including detailed vertical analysis, are also known as common-size financial statements and are used by many companies to provide greater detail on a company’s financial position.

Common-size financial statements often incorporate comparative financial statements that include columns comparing each line item to a previously reported period.

Vertical analysis is used in order to gain a picture of whether performance metrics are improving or deteriorating.1

Vertical vs. Horizontal Analysis

Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis. This is where ratios or line items in a company's financial statements are compared over a certain period of time by choosing one year's worth of entries as a baseline, while every other year represents percentage differences in terms of changes to that baseline.

For example, the amount of cash reported on the balance sheet on December 31 of 2018, 2017, 2016, 2015, and 2014 will be expressed as a percentage of the December 31, 2014, amount. Instead of dollar amounts, you might see 141, 135, 126, 118, and 100.

This shows that the amount of cash at the end of 2018 is 141% of the amount it was at the end of 2014. By doing the same analysis for each item on the balance sheet and income statement, one can see how each item has changed in relationship to the other items.

Example of Vertical Analysis

For example, suppose XYZ Corporation has gross sales of $5 million and cost of goods sold of $1 million and general and administrative expenses of $2 million and a 25% tax rate, its income statement will look like this if vertical analysis is used:

Sales5,000,000100%Cost of goods sold1,000,00020%Gross profit4,000,00080%General and Administrative Expenses2,000,00040%Operating Income2,000,00040%Taxes (%25)500,00010%Net income1,500,00030%

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Vertical integration is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers.

A company may achieve vertical integration by acquiring or establishing its own suppliers, manufacturers, distributors, or retail locations rather than outsourcing them.

Vertical integration has potential disadvantages, including the significant initial capital investment required.

• Vertical integration requires a company's direct ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain.

• The advantages can include greater efficiencies and reduced costs.

• The disadvantages include a steep initial cost.

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Vertical Integration

Understanding Vertical Integration

Netflix, Inc. is a prime example of vertical integration. The company started as a DVD rental business before moving into online streaming of films and movies licensed from major studios.

Then, Netflix executives realized they could improve their margins by producing some of their own original content like the hit shows Grace & Frankie and Stranger Things. It also produced some bombs, like 2016's The Get Down, which reportedly cost the company $120 million.1

Today, Netflix uses its distribution model to promote its original content alongside programming licensed from studios.2

This also illustrates the potential perils of vertical integration. A successful original series can bring in new subscribers and keep current ones loyal. An original bomb is far more costly for Netflix than a licensed studio bomb.

Owning the Supply Chain

A typical company's supply chain or sales process begins with the purchase of raw materials from a supplier and ends with the sale of the final product to the customer.

Vertical integration requires a company to take control of two or more of the steps involved in the creation and sale of a product or service. The company must buy or recreate a part of the production, distribution, or retail sales process that was previously outsourced.

Companies can vertically integrate by purchasing their suppliers to reduce manufacturing costs. They can invest in the retail end of the process by opening websites and physical stores. They can invest in warehouses and fleets of vans to control the distribution process.

All of these steps involve a substantial investment of money to set up facilities and hire additional talent and management. Vertical integration also ends up increasing the size and complexity of the company's operations.

Types of Vertical Integration

There are a number of ways that a company can achieve vertical integration. Two of the most common are backward and forward integration.

Backward Integration

A company that chooses backward integration moves the ownership control of its products to a point earlier in the supply chain or the production process.

Amazon.com, Inc. started as an online retailer of books that it purchased from established publishers. It still does that, but it also has become a publisher. The company eventually branched out into thousands of branded products. Then it introduced its own private label, Amazon Basics, to sell many of them directly to consumers.

Forward Integration

A company that decides on forward integration expands by gaining control of the distribution process and sale of its finished products.

A clothing manufacturer can sell its finished products to a middleman, who then sells them in smaller batches to individual retailers. Or, the manufacturer can open its own stores. The company will bring in more money per product, assuming it can operate its retail arm efficiently.

Although vertical integration can reduce costs and create a more efficient supply chain, the capital expenditures involved can be significant.

Advantages and Disadvantages of Vertical Integration

Vertical integration can help a company reduce costs and improve efficiency. But the company's efforts can backfire.

Advantages

• Lower transportation costs and turnaround times

• Reduced disruptions and quality problems from suppliers

• Lower costs through economies of scale

• Improved profitability

Disadvantages

• A company may underestimate the difficulty and cost of the overall process

• Outsourcing to a company with superior expertise may be a better choice

• The initial costs are significant

• Increased debt may be needed for capital expenditures

Real-World Examples of Vertical Integration

The fossil fuel industry is a case study in vertical integration. British Petroleum, ExxonMobil, and Shell all have exploration divisions that seek new sources of oil and subsidiaries that are devoted to extracting and refining it. Their transportation divisions transport the finished product. Their retail divisions operate the gas stations that deliver their product.

The merger of Live Nation and Ticketmaster in 2010 created a vertically integrated entertainment company that manages and represents artists, produces shows, and sells event tickets. The combined entity manages and owns concert venues, while also selling tickets to the events at those venues.3

This is an example of forward integration from the perspective of Ticketmaster, and backward integration from the perspective of Live Nation.

When Is an Acquisition Considered Vertical Integration?

An acquisition is an example of vertical integration if it results in the company's direct control over a key piece of its production or distribution process that had previously been outsourced.

A company's acquisition of a supplier is known as backward integration. Its acquisition of a distributor or retailer is called forward integration. In the latter case, the company is often buying a customer, whether it was a wholesaler or a retailer.

Is Vertical Integration Good for a Company?

A company that is considering vertical integration needs to consider which is better for the business in the long run.

If a company makes clothing that has buttons, it can buy the buttons or make them. Making them eliminates the markup charged by the button-maker. It may give the company greater flexibility to change button styles or colors. It may eliminate the frustrations that come with dealing with a supplier.

Then again, the company would have to set up or buy a whole separate manufacturing process for buttons, buy the raw materials that go into making and attaching buttons, hire people to make the buttons, and hire a management team to manage the button division.

A company must carefully evaluate the costs and complexities of vertical integration before making this buy or make decision.

How Is Vertical Integration Different from Horizontal Integration?

Horizontal integration involves the acquisition of a competitor or a related business. A company may do this to eliminate a rival, improve or diversify its core business, expand into new markets, and increase its overall sales.

Vertical integration involves the acquisition of a key component of the supply chain that the company has previously contracted for. It may reduce the company's costs and give it greater control of its products. Ultimately, it can increase the company's profits.

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A Yankee bond is a debt obligation issued by a foreign entity, such as a government or company, which is traded in the United States and denominated in U.S. dollars.

KEY TAKEAWAYS

• A Yankee bond is a debt obligation denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporation, and sometimes even governments.

• Yankee bonds are subject to U.S. securities laws, as they trade on U.S. exchanges.

• Yankee bonds offer the issuer to chance to get cheaper financing and reach a broader investment audience; they offer investors the chance for better yields.

• On the downside, Yankee bonds can take a long time to come to market, subjecting them to interest rate risk; they are also vulnerable to currency risk and other problems in their home country's economy.

Understanding a Yankee Bond

Yankee bonds are governed by the Securities Act of 1933, which requires the bonds to be registered with the Securities and Exchange Commission (SEC) before being offered for sale. Yankee bonds are frequently issued in tranches, individual portions of a larger debt offering or structured financing arrangement that have differing risk levels, interest rates and maturities, and offerings may be extremely large, as much as $1 billion.

There are also Yankee certificate of deposits, CDs that are issued in the United States by a branch or agency of a foreign bank.

Advantages of Yankee Bonds

Yankee bonds can represent a win-win opportunity for both issuers and investors. One of the primary potential advantages for a Yankee bond issuer is the opportunity to obtain cheaper financing capital at a lower cost if comparable bond rates in the United States are significantly lower than the current rates in a foreign company’s own country. The size of the U.S. bond market and the fact U.S. investors very actively trade it also confers an advantage for the issuer, especially if the bond offering is a large one. Although U.S. regulatory requirements may initially hamper a foreign issuer in regard to obtaining approval to offer bonds, conditions for lending in the United States may still be less stringent overall than those in the issuer’s own country, allowing the issuer greater flexibility in terms of the offering.

A major advantage for U.S. investors in Yankee bonds is such bonds frequently offer higher yields than the yields available on comparable, or even lower-rated, bond issues from U.S. issuers. Another potential advantage is the fact that Yankee bonds offer investors a means of obtaining international diversification in a portfolio of bond investments. Yankee bonds also offer U.S. investors an advantage over investing in foreign corporation bond issues made in the foreign company’s home country. Since Yankee bonds are denominated in U.S. dollars, the currency risk commonly associated with foreign bond investments is virtually eliminated.

Disadvantages of Yankee Bonds

One of the drawbacks of Yankee bonds for issuers is the time involved. Because of strict U.S. regulations for the issuing of such bonds, it can take more than three months for a Yankee bond issue to be approved for sale. The approval process includes an evaluation of the issuer’s creditworthiness by a debt-rating agency such as Moody’s or Standard & Poor’s.

Another consideration is the interest rate environment. Foreign issuers usually favor issuing Yankee bonds when there is a low-interest-rate environment in the United States, since that means the issuer can offer the bond with lower interest payments. But should something send interest rates soaring or plummeting in three months, it could mess up the carefully calibrated pricing of the Yankee bond, affecting how well it sells.

Finally, a Yankee bond can be affected by the economy of its home country. So if that country has a shaky economy, its price could topple, or the issuer could run into problems—which could affect its coupon payments. And while the Yankee bond is issued in dollars, it could be vulnerable to some currency risk as well, as a nation's economic woes often affect its money's performance in the foreign exchange markets.

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The term social media refers to a computer-based technology that facilitates the sharing of ideas, thoughts, and information through virtual networks and communities. Social media is internet-based and gives users quick electronic communication of content, such as personal information, documents, videos, and photos. Users engage with social media via a computer, tablet, or smartphone via web-based software or applications. While social media is ubiquitous in America and Europe, Asian countries like Indonesia lead the list of social media usage.1 More than 4.5 billion people use social media, as of October 2021.2

KEY TAKEAWAYS

• Social media is a computer-based technology that facilitates the sharing of ideas, thoughts, and information through the building of virtual networks and communities.

• There are more than 4.5 billion social media users around the world.

• The largest social media networks include Facebook, Instagram, Twitter, YouTube, and TikTok.

• Social media typically features user-generated content and personalized profiles.

• By 2023, the number of social media users in the United States is forecast to increase to approximately 257 million.

Understanding Social Media

Social media originated as a way to interact with friends and family but was later adopted by businesses that wanted to take advantage of a popular new communication method to reach out to customers. The power of social media is the ability to connect and share information with anyone on Earth, or with many people simultaneously.

There are more than 3.8 billion social media users around the world. Social media is an ever-changing and ever-evolving field, with new apps such as TikTok and Clubhouse coming out seemingly every year, joining the ranks of established social networks like Facebook, YouTube, Twitter, and Instagram. By 2023, the number of social media users in the United States is forecast to increase to approximately 257 million.3

According to the Pew Research Center, social media users tend to be younger. Nearly 90% of people between the ages of 18 and 29 used at least one form of social media. Further, these users tend to be better educated and relatively wealthy, or earning over $75,000 per year.4

Types of Social Media

Social media may take the form of a variety of tech-enabled activities. These activities include photo sharing, blogging, social gaming, social networks, video sharing, business networks, virtual worlds, reviews, and much more. Even governments and politicians utilize social media to engage with constituents and voters.

For individuals, social media is used to keep in touch with friends and extended family. Some people will use various social media applications to network career opportunities, find people across the globe with like-minded interests, and share their thoughts, feelings, insights, and emotions. Those who engage in these activities are part of a virtual social network.

For businesses, social media is an indispensable tool. Companies use the platform to find and engage with customers, drive sales through advertising and promotion, gauge consumer trends, and offer customer service or support.

Social media's role in helping businesses is significant. It facilitates communication with customers, enabling the melding of social interactions on e-commerce sites. Its ability to collect information helps focus on marketing efforts and market research. It helps in promoting products and services, as it enables the distribution of targeted, timely, and exclusive sales and coupons to would-be customers. Further, social media can help in building customer relationships through loyalty programs linked to social media.

145 minutes

The average daily social media usage of internet users worldwide.5

Benefits of Social Media

Social media has changed the way we all interact with each other online. It gives us the ability to discover what's happening in the world in real-time, to connect with each other and stay in touch with long-distance friends, and in order to have access to endless amounts of information at our fingertips. In many senses, social media has helped many individuals find common ground with others online, making the world seem more approachable.

According to a survey by Pew Research Center, the use of social media is correlated with having more friends and more diverse personal networks, especially within emerging economies.6 For many teenagers, friendships can start virtually, with 57% of teens meeting a friend online.7

Businesses are also using social media marketing to target their consumers right on their phones and computers, building a following in order to build a loyal fan base, and create a culture behind their own brand. Some companies, such as Denny's, have created entire personas on Twitter in order to market to younger consumers using their own language and personas.8

Examples of Social Media

While social media has its positive side, many point to the platform and call out negative features, likening its overuse to an addiction. Some contest it contributes to inattentiveness, stress, and jealousy. The National Center for Biotechnology Information links heavy social media use to depression.9 Social media may also be a conduit for misleading information and falsehoods.

The 2016 American presidential election has well-documented accounts of the impact of the ability to spread false information through the platform.10 Such a phenomenon leverages the power of social media, allowing anyone to reach an audience of millions with content that lacks oversight or fact-checking.

Facebook is the largest social media platform in the world, with a clear advantage over other social media, though it has similar audiences to others like Twitter and Instagram. The figures for the most popular social media websites as of January 2021 are as follows:

1. Facebook (2.74 billion users)

2. YouTube (2.29 billion users)

3. WhatsApp (2 billion users)

4. Facebook Messenger (1.3 billion users)

5. Instagram (1.22 billion users)

6. WeChat (1.21 billion users)

7. TikTok (689 million users)

8. QQ (617 million users)

9. Douyin (600 million users)

10. Sino Weibo (511 million users)11

What Are the Top 10 Social Media Apps?

The top 10 social media apps are Facebook, YouTube, WhatsApp, Facebook Messenger, Instagram, WeChat, TikTok, QQ, Douyin, and Sino Weibo.

What Is the Use of Social Media?

Social media allows individuals to keep in touch with friends and extended family. Some people will use various social media applications to network and find career opportunities, connect with people across the globe with like-minded interests, and share their own thoughts, feelings, and insights online.

What Are the 6 Types of Social Media?

The six types of social media, though this can be broken down in many ways, include social networking, bookmarking, social news, media sharing, microblogging, and online forum sites.

What Is the Most Popular Social Media?

The most popular social media site is Facebook.

What Is Social Media Marketing?

Social media marketing is the use of social networks in order to market a company's products, such as through Facebook or Instagram ads, using influencers, or otherwise building a presence online to engage with customers.

The Bottom Line

Social media has taken the world by storm, capturing more than 3.8 billion users worldwide and counting. Whether or not each platform resonates with you personally, there are endless ways for businesses to market to their consumers and target them to ultimately make a purchase. Allowing us to stay connected with friends, find information easily, and add our own personalities to the online world, social networks are here to stay.

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A qualified dividend is a dividend that falls under capital gains tax rates that are lower than the income tax rates on unqualified or ordinary dividends. Tax rates for ordinary dividends (typically those paid out from most common or preferred stocks) are the same as standard federal income tax rates, which range from 10% to 37% for tax years 2021 and 2022.12

By comparison, qualified dividends are taxed as capital gains at rates of 20%, 15%, or 0%, depending on the tax bracket.3 Because of this discrepancy in rate, the difference between ordinary vs. qualified dividends can be substantial when it comes time to pay taxes.

KEY TAKEAWAYS

• A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.3

• Qualified dividends must meet special requirements put in place by the IRS.

• The maximum tax rate for qualified dividends is 20%; for ordinary dividends for the 2021 and 2022 calendar years, it is 37%.312

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Watch Now: What Are Qualified Dividends?

Understanding Qualified Dividends

Regular dividends are classified as either qualified or ordinary, each with different tax implications that impact an investor's net return.4 The tax rate on qualified dividends for investors that have ordinary income taxed at 10% or 12% is 0%. Those that pay income tax rates greater than 12% and up to 35% (for ordinary incomes of up to $445,850) have a 15% tax rate on qualified dividends. The tax rate on qualified dividends is capped at 20%, which is for individuals in the 35% or 37% tax brackets and with ordinary income greater than $445,850. These tax rates on long-term capital gains are current through the 2021 calendar year.1 Note also that there is an additional 3.8% Net Investment Income Tax (NIIT) which is applicable for individuals with modified adjusted gross income exceeding $200,000 or $250,000 for married taxpayers who are filing their taxes jointly.56

Qualified dividends are listed in box 1b on IRS Form 1099-DIV, a tax form sent to investors who receive distributions during the calendar year from any type of investment. Box 1a on the form is reserved for ordinary dividends, which are the most common type of dividend paid to investors from a corporation or mutual fund, according to the IRS.3

To qualify for the maximum tax rates of 0%, 15%, or 20% that apply to long-term capital gains, qualified dividends must meet the following requirements, as outlined by the Internal Revenue Service (IRS):

1. The dividend must have been paid by a U.S. company or a qualifying foreign company.

2. The dividends are not listed with the IRS as those that do not qualify.

3. The required dividend holding period has been met.3

Ordinary vs. Qualified Dividends

Qualified and unqualified (ordinary) dividends may have differences that appear to be minor, but they have a significant impact on overall returns. Overall, most regular dividends distributed by companies in the U.S. can be classified as qualified.

The biggest difference between qualified and unqualified dividends, as far as their impact at tax time is the rate at which these dividends are taxed. Unqualified dividends are taxed at an individual’s normal income tax rate, as opposed to the preferred rate for qualified dividends as listed above. This means that individuals occupying any tax bracket will see a difference in their tax rates depending upon whether they have qualified or ordinary dividends.

Requirements for Qualified Dividends

Qualifying Foreign Companies

A foreign corporation qualifies for the special tax treatment if it meets one of the following three conditions: the company is incorporated in a U.S. possession, the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States, or the stock is readily tradable on an established securities market in the United States. A foreign corporation is not qualified if it is considered a passive foreign investment company.3

Dividends That Do Not Qualify

Some dividends are automatically exempt from consideration as a qualified dividend. These include dividends paid by real estate investment trusts (REITs), master limited partnerships (MLPs), those on employee stock options, and those on tax-exempt companies. Dividends paid from money market accounts, such as deposits in savings banks, credit unions, or other financial institutions, do not qualify and should be reported as interest income.7

Special one-time dividends are also unqualified. Lastly, qualified dividends must come from shares that are not associated with hedging, such as those used for short sales, puts, and call options. The aforementioned investments and distributions are subject to the ordinary income tax rate.

The Holding Period

The IRS requires investors to hold shares for a minimum period of time to benefit from the lower tax rate on qualified dividends. Common stock investors must hold the shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date, or the date after the dividend has been paid out and after which any new buyers would then be eligible to receive future dividends. For preferred stock, the holding period is more than 90 days during a 181-day period that starts 90 days before the ex-dividend date.3

For mutual funds, the holding period requirements are somewhat different. In this case, a mutual fund must have held the security unhedged for at least 61 days of the 121-day period which began at least 60 days before the ex-dividend date of the security.3 Investors must have held the applicable share of the mutual fund for the same period as well.

Example

Because the holding period requirements can be difficult to assess, consider the following hypothetical example:

An investor receives dividends as qualified from shares in mutual fund X. That investor bought 1,000 shares of fund X on May 1 for the tax year in question. That investor then sold 100 of those shares on June 1 but continued to hold the (unhedged) 900 remaining shares. The ex-dividend date for the fund in question was May 15.

Within the 121-day window, the investor held 100 shares for 31 days (from May 1 through June 1) and the remaining 900 shares for at least 61 days (from May 1 through July 1). This means that the dividend income earned from the 900 shares held for at least 61 days would be considered qualified dividend income, while the income earned from the 100 shares held for just 31 days would be unqualified dividend income. The investor could then use the qualified dividend per share price in order to calculate the actual amount of qualified dividends for tax reporting purposes.

What It Means for Investors

For most everyday investors, the question of whether a dividend will be qualified or not is usually a non-issue. The reason for this is that most regular dividends from U.S. corporations are considered qualified. Nonetheless, particularly for those investors focused on foreign companies, REITs, MLPs, and other types of investment vehicles indicated above, the difference between qualification and the alternative can be significant when it comes time to calculate taxes.

On the other hand, there isn’t much that an investor can do to have a bearing on whether or not dividends will be considered qualified. The most important action an investor can take is to hold stocks for the minimum holding period as stipulated by the type of stock as detailed above.

Why Are Qualified Dividends Taxed More Favorably Than Ordinary Dividends?

Qualified dividends are taxed at the same rate as long-term capital gains, lower than that of ordinary dividends, which are taxed as ordinary income. This was done to incentivize companies to reward their long-term shareholders with higher dividends and also incentivizes investors to hold their stocks for longer to collect these dividends payments.

What Are the Requirements for a Dividend to Be Considered Qualified?

The stocks that pay the dividends must be held for at least 60 days within a 121-day period that begins 60 days before the ex-dividend date, which is the first date following the declaration of a dividend on which the holder is not entitled to the next dividend payment. The number of days includes the day the recipient sold the stock but not the day he acquired it, and he cannot count days during which his "risk of loss was diminished," according to IRS rules.3

How Do I Know if the Dividends I've Received Are Qualified or Not?

Your broker will break out the qualified and ordinary dividends that are paid to you and are reported in separate boxes on the IRS Form 1099-DIV that your broker will send to you each tax year. Ordinary dividends are reported in box 1a, and qualified dividends in box 1b.

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Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. It is an important metric to gauge a company's health, providing a useful snapshot of its current financial position.

KEY TAKEAWAYS

• Net worth is a quantitative concept that measures the value of an entity and can apply to individuals, corporations, sectors, and even countries.

• Net worth provides a snapshot of an entity's current financial position.

• In business, net worth is also known as book value or shareholders' equity.

• People with substantial net worth are called high-net-worth individuals (HNWI).

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What is Net Worth?

Understanding Net Worth

Net worth is calculated by subtracting all liabilities from assets. An asset is anything owned that has monetary value, while liabilities are obligations that deplete resources, such as loans, accounts payable (AP), and mortgages.

Net worth can be described as either positive or negative, with the former meaning that assets exceed liabilities and the latter that liabilities exceed assets. Positive and increasing net worth indicates good financial health. Decreasing net worth, on the other hand, is cause for concern as it might signal a decrease in assets relative to liabilities.

The best way to improve net worth is to either reduce liabilities while assets stay constant or rise, or increase assets while liabilities either stay constant or fall.

What if you had started investing years ago?

Find out what a hypothetical investment would be worth today.

SELECT A STOCK

TSLA

TESLA INC

AAPL

APPLE INC

NKE

NIKE INC

AMZN

AMAZON.COM, INC

WMT

WALMART INC

SELECT INVESTMENT AMOUNT

$

SELECT A PURCHASE DATE

              2 years ago                      5 years ago                      10 years ago         

CALCULATE

Types of Net Worth

Net worth can be applied to individuals, companies, sectors, and even countries.

Net Worth in Business

In business, net worth is also known as book value or shareholders' equity. The balance sheet is also known as a net worth statement. The value of a company's equity equals the difference between the value of total assets and total liabilities. Note that the values on a company's balance sheet highlight historical costs or book values, not current market values.

Lenders scrutinize a business's net worth to determine if it is financially healthy. If total liabilities exceed total assets, a creditor may not be too confident in a company's ability to repay its loans.

A consistently profitable company will register a rising net worth or book value as long as these earnings are not fully distributed to shareholders as dividends. For a public company, a rising book value will often be accompanied by an increase in the value of its stock price.

Net Worth in Personal Finance

An individual's net worth is simply the value that is left after subtracting liabilities from assets.

Examples of liabilities, otherwise known as debt, include mortgages, credit card balances, student loans, and car loans. An individual's assets, meanwhile, include checking and savings account balances, the value of securities such as stocks or bonds, real property value, the market value of an automobile, et al. Whatever is left after selling all assets and paying off personal debt is the net worth.

Note that the value of personal net worth includes the current market value of assets and the current debt costs.

People with a substantial net worth are known as high net worth individuals (HNWI) and form the prime market for wealth managers and investment counselors. Investors with a net worth, excluding their primary residence, of at least $1 million—either alone or together with their spouse—are "accredited investors" in the eyes of the Securities and Exchange Commission (SEC), and, therefore, permitted to invest in unregistered securities offerings.

Example of Net Worth

Consider a couple with the following assets:

• Primary residence valued at $250,000,

• An investment portfolio with a market value of $100,000,

• Automobiles and other assets valued at $25,000.

Liabilities include:

• An outstanding mortgage balance of $100,000

• A car loan of $10,000

The couple's net worth would, therefore, be calculated as:

[$250,000 + $100,000 + $25,000] - [$100,000 + $10,000] = $265,000

Assume that five years later, the couple's financial position changes: the residence value is $225,000, investment portfolio $120,000, savings $20,000, automobile and other assets $15,000; mortgage loan balance $80,000, and car loan $0 because it was paid off. Based on these new figures, the net worth five years later would be:

[$225,000 + $120,000 + $20,000 + $15,000] - $80,000 = $300,000.

The couple's net worth has gone up by $35,000, despite the decrease in the value of their residence and car. As we can see above, these declines were more than offset by increases in other assets, in this case, the investment portfolio and savings, as well as a drop in liabilities owed.

Special Considerations

Negative Net Worth

A negative net worth results if total debt is more than total assets. For instance, if the sum of an individual's credit card bills, utility bills, outstanding mortgage payments, auto loan bills, and student loans is higher than the total value of their cash and investments, net worth will be negative.

Negative net worth is a sign that an individual or family needs to focus its energy on debt reduction. A tough budget, the use of debt reduction strategies such as the debt snowball or debt avalanche, and perhaps negotiation of some debts with creditors can sometimes help people climb out of a negative net worth hole and start building up their resources.

Early in life, a negative net worth is not uncommon—student loans mean even the most careful-with-money young people can start out owing more than they own. Family responsibilities or an unexpected illness can also push people into the red.

When nothing else has worked, filing for bankruptcy protection to eliminate some of the debt and prevent creditors from trying to collect on it might be the most appropriate solution; however, some liabilities—such as child support, alimony, taxes, and often student loans—cannot be discharged. It’s also worth bearing in mind that a bankruptcy will stay on an individual's credit report for many years.

What Is a Good Net Worth?

Determining what a "good" net worth is will vary for every individual, according to their life's circumstances, financial needs, and lifestyle. The average net worth of an individual in the U.S. was $121,700, in 2019, according to the latest data from the Federal Reserve.1

How Do I Calculate My Net Worth?

To calculate your net worth, you subtract your total liabilities from your total assets. Total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.

How Much Should I Have Saved?

How much you should have saved will depend on your age, your career, your lifestyle, and your life's circumstances. Fidelity, for example, recommends having saved three times your annual salary by the time you are 40 across all of your retirement accounts.2

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Korean Composite Stock Price Indexes (KOSPI) refers to a series of indexes that track the overall Korean Stock Exchange and its components. Each of the KOSPI indexes are capitalization-weighted market averages. 

The best-known of these indexes is the KOSPI 200, which comprises the 200 largest publicly-traded common stocks traded in Korea, tracking roughly 70% of the market value of the overall Korean Stock Exchange.1 The KOSPI 200 is used as a rough benchmark when investors or traders refer to the performance of the Korean Exchange. For this reason, and because its components are large-cap stocks, people compare the KOSPI 200 to the S&P 500 in the United States.

As of 2021, major KOSPI 200 components included consumer product maker Samsung Electronics, Hyundai Motor, semiconductor manufacturer SK Hynix, utility provider Korea Electric Power, and Shinhan Bank.2

Understanding the Korean Composite Stock Price Indexes

The Korean Composite Stock Price Indexes (KOSPI) first debuted in the early 1980s, with several variants rolled out in subsequent years, including the KOSPI 100 which focused on mid-caps, and the KOSPI 50 which represents small caps. The KOSPI also refers to a family of indices tracking specific industries including chemicals and banks, and the KODI index, which specializes in dividend stocks. Also, the KOSPI appears on several other products that track the prices of futures, options, and sovereign bonds.

Note that while KOSPI refers to the entire family of indexes, many market participants call the KOSPI 200 simply the KOSPI.

History of the KOSPI 200

The KOSPI 200 began trading at the start of January in 1983 at a value of 122.52.1 Its base value, indexed to January 4, 1980, is 100. The KOSPI 200 rose more than 8-fold to a value of more than 1,000 by April of 1989, roughly two years following the Asian financial crisis. The index value surged to 1,997.06 by its 30th birthday at the end of 2012, trailing only the Hong Kong Stock Exchange and Taiwan Stock Exchange over the same time frame. The KOSPI 200 index stood at roughly 2,470 by mid-2018, up more than 20-fold since its introduction.3

Notable dates for the KOSPI include June 17, 1988, when it gained about 8.5%, its largest one-day percentage gain. It also fell more than 12% on September 12, 2001, the day following the 9/11 terrorist attack in the U.S. The index closed above 2,000 for the first time on July 24, 2007.3

Analysts, market participants, and the international financial news media all follow the KOSPI 200 to varying degrees. U.S.-based news outlets such as The Wall Street Journal and Bloomberg, as well as London-based Reuters, owned by Canada-based Thomson Reuters, often quote the index and use its values when reporting on market events in Korea.

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The International Monetary Fund (IMF) is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty.

Quotas of member countries are a key determinant of the voting power in IMF decisions. Votes comprise one vote per 100,000 special drawing rights (SDR) of quota plus basic votes. SDRs are an international type of monetary reserve currency created by the IMF as a supplement to the existing money reserves of member countries.

KEY TAKEAWAYS

• The IMF's mission is to promote global economic growth and financial stability, encourage international trade, and reduce poverty around the world.

• The IMF was originally created in 1945 as part of the Bretton Woods agreement, which attempted to encourage international financial cooperation by introducing a system of convertible currencies at fixed exchange rates.1

• The IMF collects massive amounts of data on national economies, international trade, and the global economy in aggregate and provides economic forecasts.

• One of the IMF's most important functions is to make loans to countries that are experiencing economic distress to prevent or mitigate financial crises.

International Monetary Fund (IMF)

Understanding the International Monetary Fund (IMF)

The International Monetary Fund (IMF) is based in Washington, D.C. The organization is currently composed of 190 member countries, each of which has representation on the IMF's executive board in proportion to its financial importance. Quotas are a key determinant of the voting power in IMF decisions. Votes comprise one vote per SDR100,000 of quota plus basic votes (same for all members).23

The IMF's website describes its mission as "to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world."2

History of the IMF

The IMF was originally created in 1945 as part of the Bretton Woods Agreement, which attempted to encourage international financial cooperation by introducing a system of convertible currencies at fixed exchange rates. The dollar was redeemable for gold at $35 per ounce at the time.1

The IMF also acted as a gatekeeper: Countries were not eligible for membership in the International Bank for Reconstruction and Development (IBRD)—a World Bank forerunner that the Bretton Woods agreement created in order to fund the reconstruction of Europe after World War II—unless they were members of the IMF.45

Since the Bretton Woods system collapsed in the 1970s, the IMF has promoted the system of floating exchange rates, meaning that market forces determine the value of currencies relative to one another. This system remains in place today.6

IMF Activities

The IMF's primary methods for achieving these goals are monitoring capacity building and lending.

The reports the IMF published on its monetary surveillance include the "World Economic Outlook," the "Global Financial Stability Report," and the Fiscal Monitor.

Surveillance

The IMF collects massive amounts of data on national economies, international trade, and the global economy in aggregate. The organization also provides regularly updated economic forecasts at the national and international levels. These forecasts, published in the World Economic Outlook, are accompanied by lengthy discussions on the effect of fiscal, monetary, and trade policies on growth prospects and financial stability.

Capacity Building

The IMF provides technical assistance, training, and policy advice to member countries through its capacity-building programs. These programs include training in data collection and analysis, which feed into the IMF's project of monitoring national and global economies.7

Lending

The IMF makes loans to countries that are experiencing economic distress to prevent or mitigate financial crises. Members contribute the funds for this lending to a pool based on a quota system. In 2019, loan resources in the amount of SDR 11.4 billion (SDR 0.4 billion above target) were secured to support the IMF’s concessional lending activities into the next decade.8

IMF funds are often conditional on recipients making reforms to increase their growth potential and financial stability. Structural adjustment programs, as these conditional loans are known, have attracted criticism for exacerbating poverty and reproducing the colonialist structures.9

Where Does the IMF Get Its Money?

The IMF gets its money through quotas and subscriptions from its member countries. These contributions are based on the size of the country's economy, making the U.S., with the world's largest economy, the largest contributor.

How Much Are the IMF Grants?

IMF grants are given to charities in Washington D.C. and member countries. The grants are meant to foster economic independence through education and economic development." The average grant size is $15,000.10

What Is the Difference Between the International Monetary Fund and the World Bank?

The International Monetary Fund is primarily focused on the stability of the global monetary system and monitoring the currencies of the world. The aim of the World Bank is to reduce poverty across the world and strengthen the low- to middle-class populations.

The Bottom Line

The IMF works to help reduce poverty, encourage trade, and promote financial stability and economic growth around the world. It accomplishes this by monitoring capacity building and providing loans. While the IMF is currently working on these goals with its 190 member nations, the organization has still faced criticism for the possible negative impacts of its structural adjustment programs. 

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Globalization is the spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free trade.

KEY TAKEAWAYS

• Globalization is the spread of products, technology, information, and jobs across nations.

• Corporations in developed nations can gain a competitive edge through globalization.

• Developing countries also benefit through globalization as they tend to be more cost-effective and therefore attract jobs.

• The benefits of globalization have been questioned as the positive effects are not necessarily distributed equally.

• One clear result of globalization is that an economic downturn in one country can create a domino effect through its trade partners.

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Globalization

Understanding Globalization

Corporations gain a competitive advantage on multiple fronts through globalization. They can reduce operating costs by manufacturing abroad, buy raw materials more cheaply because of the reduction or removal of tariffs, and most of all, they gain access to millions of new consumers.

Globalization is a social, cultural, political, and legal phenomenon. 

• Socially, it leads to greater interaction among various populations.

• Culturally, globalization represents the exchange of ideas, values, and artistic expression among cultures.

• Globalization also represents a trend toward the development of a single world culture. 

• Politically, globalization has shifted attention to intergovernmental organizations like the United Nations (UN) and the World Trade Organization (WTO).

• Legally, globalization has altered how international law is created and enforced.

On one hand, globalization has created new jobs and economic growth through the cross-border flow of goods, capital, and labor. On the other hand, this growth and job creation are not distributed evenly across industries or countries.

Specific industries in certain countries, such as textile manufacturing in the U.S. or corn farming in Mexico, have suffered severe disruption or outright collapse as a result of increased international competition.

Globalization's motives are idealistic, as well as opportunistic, but the development of a global free market has benefited large corporations based in the Western world. Its impact remains mixed for workers, cultures, and small businesses around the globe, in both developed and emerging nations.

The History of Globalization

Globalization is not a new concept. Traders traveled vast distances in ancient times to buy commodities that were rare and expensive for sale in their homelands. The Industrial Revolution brought advances in transportation and communication in the 19th century that eased trade across borders.

The think tank, Peterson Institute for International Economics (PIIE), states globalization stalled after World War I, and nations' moved toward protectionism as they launched import taxes to more closely guard their industries in the aftermath of the conflict. This trend continued through the Great Depression and World War II until the U.S. took on an instrumental role in reviving international trade.1

Globalization has sped up to an unprecedented pace, with public policy changes and communications technology innovations cited as the two main driving factors.

One of the critical steps in the path to globalization came with the North American Free Trade Agreement (NAFTA), signed in 1993.2 One of NAFTA's many effects was to give American auto manufacturers the incentive to relocate a portion of their manufacturing to Mexico where they could save on the costs of labor.3 NAFTA was replaced in 2020 by the United States-Mexico-Canada Agreement (USMC).4

Governments worldwide have integrated a free market economic system through fiscal policies and trade agreements over the last 20 years. The core of most trade agreements is the removal or reduction of tariffs.

This evolution of economic systems has increased industrialization and financial opportunities in many nations. Governments now focus on removing barriers to trade and promoting international commerce.

Advantages and Disadvantages of Globalization

Advantages

Proponents of globalization believe it allows developing countries to catch up to industrialized nations through increased manufacturing, diversification, economic expansion, and improvements in standards of living.

Outsourcing by companies brings jobs and technology to developing countries, which help them to grow their economies. Trade initiatives increase cross-border trading by removing supply-side and trade-related constraints.

Globalization has advanced social justice on an international scale as well, and advocates report that it has focused attention on human rights worldwide that might have otherwise been ignored on a large scale.

Disadvantages

One clear result of globalization is that an economic downturn in one country can create a domino effect through its trade partners. For example, the 2008 financial crisis had a severe impact on Portugal, Ireland, Greece, and Spain. All these countries were members of the European Union, which had to step in to bail out debt-laden nations, which were thereafter known by the acronym PIGS.

Globalization detractors argue that it has created a concentration of wealth and power in the hands of a small corporate elite that can gobble up smaller competitors around the globe.

Globalization has become a polarizing issue in the U.S. with the disappearance of entire industries to new locations abroad. It's seen as a major factor in the economic squeeze on the middle class.

For better and worse, globalization has also increased homogenization. Starbucks, Nike, and Gap dominate commercial space in many nations. The sheer size and reach of the U.S. have made the cultural exchange among nations largely a one-sided affair.

What Is the Simple Meaning of Globalization?

In essence, globalization is about the world becoming increasingly interconnected. Countries today are more connected than ever before, due to factors such as air travel, containerized sea shipping, international trade agreements and legal treaties, and the Internet. In the world of business, globalization is associated with trends such as outsourcing, free trade, and international supply chains.

Is Globalization Good or Bad?

Proponents of globalization will point to the dramatic decline in poverty that has taken place throughout the world over the past several decades, which many economists attribute in part to increased trade and investment between nations. Similarly, they will argue that globalization has allowed products and services such as cellphones, airplanes, and information technology to be spread far more widely throughout the world. On the other hand, critics of globalization will point to the negative impact it has had on specific nations’ industries, which might face increased competition from international firms. Globalization can also have negative environmental impacts due to economic development, industrialization, and international travel.

Why Is Globalization Important?

Globalization is important because it is one of the most powerful forces affecting the modern world, so much so that it can be difficult to make sense of the world without understanding globalization. For example, many of the largest and most successful corporations in the world are in effect truly multinational organizations, with offices and supply chains stretched right across the world. These companies would not be able to exist if not for the complex network of trade routes, international legal agreements, and telecommunications infrastructure that were made possible through globalization. Important political developments, such as the ongoing trade conflict between the United States and China, are also directly related to globalization.

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Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

KEY TAKEAWAYS

• Due diligence is a systematic way to analyze and mitigate risk from a business or investment decision.

• An individual investor can conduct due diligence on any stock using readily available public information.

• The same due diligence strategy will work on many other types of investments.

• Due diligence involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors.

• Due diligence is applied in many other contexts, for example, conducting a background check on a potential employee or reading product reviews.

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Due Diligence

Understanding Due Diligence

Due diligence became common practice (and a common term) in the United States with the passage of the Securities Act of 1933. With that law, securities dealers and brokers became responsible for fully disclosing material information about the instruments they were selling. Failing to disclose this information to potential investors made dealers and brokers liable for criminal prosecution.1

The writers of the act recognized that requiring full disclosure left dealers and brokers vulnerable to unfair prosecution for failing to disclose a material fact they did not possess or could not have known at the time of sale. Thus, the act included a legal defense: as long as the dealers and brokers exercised "due diligence" when investigating the companies whose equities they were selling, and fully disclosed the results, they could not be held liable for information that was not discovered during the investigation.

Types of Due Diligence

Due diligence is performed by equity research analysts, fund managers, broker-dealers, individual investors, and companies that are considering acquiring other companies. Due diligence by individual investors is voluntary. However, broker-dealers are legally obligated to conduct due diligence on a security before selling it.

How to Perform Due Diligence for Stocks

Below are 10 steps for individual investors undertaking due diligence. Most are related to stocks, but, in many cases, they can be applied to bonds, real estate, and many other investments.

After those 10 steps, we offer some tips when considering an investment in a startup company.

All of the information you need is readily available in the company's quarterly and annual reports and in the company profiles on financial news and discount brokerage sites.

Step 1: Analyze the Capitalization of the Company

A company’s market capitalization, or total value, indicates how volatile the stock price is, how broad its ownership is, and the potential size of the company's target markets.

Large-cap and mega-cap companies tend to have stable revenue streams and a large, diverse investor base, which tends to lead to less volatility. Mid-cap and small-cap companies typically have greater fluctuations in their stock prices and earnings than large corporations.

Step 2: Revenue, Profit, and Margin Trends

The company's income statement will list its revenue or its net income or profit. That's the bottom line. It's important to monitor trends over time in a company's revenue, operating expenses, profit margins, and return on equity.

The company's profit margin is calculated by dividing its net income by its revenue. It's best to analyze profit margin over several quarters or years and compare those results to companies within the same industry to gain some perspective.

Step 3: Competitors and Industries

Now that you have a feel for how big the company is and how much it earns, it's time to size up the industry in which it operates and its competition. Every company is defined in part by its competition. Due diligence involves comparing the profit margins of a company with two or three of its competitors. For example, questions to ask are: Is the company a leader in its industry or its specific target markets? Is the company's industry growing?

Performing due diligence on several companies in the same industry can give an investor significant insight into how the industry is performing and which companies have the leading edge in that industry.

Step 4: Valuation Multiples

Many ratios and financial metrics are used to evaluate companies, but three of the most useful are the price-to-earnings (P/E) ratio, the price/earnings to growth (PEGs) ratio, and price-to-sales (P/S) ratio. These ratios are already calculated for you on websites such as Yahoo! Finance.

As you research ratios for a company, compare several of its competitors. You might find yourself becoming more interested in a competitor.

• The P/E ratio gives you a general sense of how much expectation is built into the company's stock price. It's a good idea to examine this ratio over a few years to make sure that the current quarter isn't an aberration.

• The price-to-book (P/B) ratio, the enterprise multiple, and the price-to-sales (or revenue) ratio measure the valuation of the company in relation to its debt, annual revenues, and balance sheet. Peer comparison is important here because the healthy ranges differ from industry to industry.

• The PEG ratio suggests expectations among investors for the company's future earnings growth and how it compares to the current earnings multiple. Stocks with PEG ratios close to one are considered fairly valued under normal market conditions.

Step 5: Management and Share Ownership

Is the company still run by its founders, or has the board shuffled in a lot of new faces? Younger companies tend to be founder-led. Research the bios of management to find out their level of expertise and experience. Bio information can be found on the company's website.

P/E ratio

The P/E ratio gives a sense of the expectations that investors have for the stock's near-term performance.

Whether founders and executives hold a high proportion of shares and whether they have been selling shares recently is a significant factor in due diligence. High ownership by top managers is a plus, and low ownership is a red flag. Shareholders tend to be best served when those running the company have a vested interest in stock performance.

Step 6: Balance Sheet

The company's consolidated balance sheet will show its assets and liabilities as well as how much cash is available.

Check the company's level of debt and how it compares to others in the industry. Debt is not necessarily a bad thing, depending on the company's business model and industry. But make sure those debts are highly rated by the rating agencies.

Some companies and whole industries, like oil and gas, are very capital intensive while others require few fixed assets and capital investment. Determine the debt-to-equity ratio to see how much positive equity the company has. Typically, the more cash a company generates, the better an investment it's likely to be because the company can meet its debts and still grow.

If the figures for total assets, total liabilities, and stockholders' equity change substantially from one year to the next, try to figure out why. Reading the footnotes that accompany the financial statements and the management's discussion in the quarterly or annual reports can shed light on what's really happening in a company. The firm could be preparing for a new product launch, accumulating retained earnings, or in a state of financial decline.

Step 7: Stock Price History

Investors should research both the short-term and long-term price movements of the stock and whether the stock has been volatile or steady. Compare the profits generated historically and determine how it correlates with the price movement.

Keep in mind that past performance does not guarantee future price movements. If you're a retiree looking for dividends, for example, you might not want a volatile stock price. Stocks that are continuously volatile tend to have short-term shareholders, which can add extra risk for certain investors.

Step 8: Stock Dilution Possibilities

Investors should know how many shares outstanding the company has and how that number relates to the competition. Is the company planning on issuing more shares? If so, the stock price might take a hit.

Step 9: Expectations

Investors should find out what the consensus of Wall Street analysts is for earnings growth, revenue, and profit estimates for the next two to three years. Investors should also look for discussions of long-term trends affecting the industry and company-specific news about partnerships, joint ventures, intellectual property, and new products or services.

Step 10: Examine Long and Short-Term Risks

Be sure to understand both the industry-wide risks and company-specific risks. Are there outstanding legal or regulatory matters? Is there unsteady management?

Investors should play devil's advocate at all times, picturing worst-case scenarios and their potential outcomes on the stock. If a new product fails or a competitor brings a new and better product forward, how would this affect the company? How would a jump in interest rates affect the company?

Once you've completed the steps outlined above, you'll have a better sense of the company's performance and how it stacks up to the competition. You will be better informed to make a sound decision.

Due Diligence Basics for Startup Investments

When considering investing in a startup, some of the 10 steps above are appropriate while others just aren't possible because the company doesn't have the track record. Here are some startup-specific moves.

• Include an exit strategy. More than 90% of startups fail.2 Plan a strategy to recover your money should the business fail.

• Consider entering into a partnership: Partners split the capital and risk, so they lose less if the business fails.

• Figure out the harvest strategy for your investment. Promising businesses may fail due to a change in technology, government policy, or market conditions. Be on the lookout for new trends, technologies, and brands, and get ready to harvest when you find that the business may not thrive with the changes.

• Choose a startup with promising products. Since most investments are harvested after five years, it is advisable to invest in products that have an increasing return on investment (ROI) for that period.

• In lieu of hard numbers on past performance, look at the growth plan of the business and evaluate whether it appears to be realistic.

Special Considerations

In the mergers and acquisitions (M&A) world, there is a delineation between "hard" and "soft" forms of due diligence.

"Hard" due diligence is concerned with the numbers. "Soft" due diligence is concerned with the people within the company and in its customer base.

In traditional M&A activity, the acquiring firm deploys risk analysts who perform due diligence by studying costs, benefits, structures, assets, and liabilities. That's known colloquially as hard due diligence.

Increasingly, however, M&A deals are also subject to the study of a company's culture, management, and other human elements. That's known as soft due diligence.

Hard due diligence, which is driven by mathematics and legalities, is susceptible to rosy interpretations by eager salespeople. Soft due diligence acts as a counterbalance when the numbers are being manipulated or overemphasized.

There are many drivers of business success that numbers cannot fully capture, such as employee relationships, corporate culture, and leadership. When M&A deals fail, as more than 50% of them do, it is often because the human element is ignored.

The contemporary business analysis calls this element human capital. The corporate world started taking notice of its significance in the mid-2000s. In 2007, the Harvard Business Review dedicated part of its April issue to what it called "human capital due diligence," warning that companies ignore it at their peril.3

Performing Hard Due Diligence

In an M&A deal, hard due diligence is the battlefield of lawyers, accountants, and negotiators. Typically, hard due diligence focuses on earnings before interest, taxes, depreciation and amortization (EBITDA), the aging of receivables, and payables, cash flow, and capital expenditures.

In sectors such as technology or manufacturing, additional focus is placed on intellectual property and physical capital.

Other examples of hard due diligence activities include:

• Reviewing and auditing financial statements

• Scrutinizing projections for future performance

• Analyzing the consumer market

• Seeking operating redundancies that can be eliminated

• Reviewing potential or ongoing litigation

• Reviewing antitrust considerations

• Evaluating subcontractor and other third-party relationships

Performing Soft Due Diligence

Conducting soft due diligence is not an exact science. It should focus on how well a targeted workforce will mesh with the acquiring corporation's culture.

Hard and soft due diligence intertwine when it comes to compensation and incentive programs. These programs are not only based on real numbers, making them easy to incorporate into post-acquisition planning, but they can also be discussed with employees and used to gauge cultural impact.

Soft due diligence is concerned with employee motivation, and compensation packages are specifically constructed to boost those motivations. It is not a panacea or a cure-all, but soft due diligence can help the acquiring firm predict whether a compensation program can be implemented to improve the success of a deal.

Soft due diligence can also concern itself with the target company's customers. Even if the target employees accept the cultural and operational shifts from the takeover, the target customers and clients may well resent a change in service, products, or procedures. This is why many M&A analyses now include customer reviews, supplier reviews, and test market data.

Due Diligence FAQs

What Exactly Is Due Diligence?

Due diligence is a process or effort to collect and analyze information before making a decision. It is a process often used by investors to assess risk. It involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors to assess an investment's potential in terms of growth.

What Is the Purpose of Due Diligence?

Due diligence is primarily a way to reduce exposure to risk. The process ensures that a party is aware of all the details of a transaction before they agree to it. For example, a broker-dealer will give an investor the results of a due diligence report so that the investor is fully informed and cannot hold the broker-dealer responsible for any losses.

What Are the Types of Due Diligence?

Depending on its purpose, due diligence takes different forms. A company that is considering an M&A will perform a financial analysis on a target company. The due diligence might also include an analysis of future growth. The acquirer may ask questions that address the structuring of the acquisition. The acquirer is also likely to look at the current practices and policies of the target company and perform a shareholder value analysis. Due diligence can be categorized as "hard" due diligence, which is concerned with the numbers on the financial statements, and "soft" due diligence, which is concerned with the people within the company and its customer base.

What Is a Due Diligence Checklist?

A due diligence checklist is an organized way to analyze a company. The checklist will include all the areas to be analyzed, such as ownership and organization, assets and operations, the financial ratios, shareholder value, processes and policies, future growth potential, management, and human resources.

What Is a Due Diligence Example?

Examples of due diligence can be found in many areas of our daily lives. For example, conducting a property inspection before completing a purchase to assess the risk of the investment, an acquiring company that examines a target firm before completing a merger or acquisition, and an employer performing a background check on a potential recruit.

The Bottom Line

Due diligence is a process or effort to collect and analyze information before making a decision or conducting a transaction so a party is not held legally liable for any loss or damage. The term applies to many situations but most notably to business transactions. Due diligence is performed by investors who want to minimize risk, broker-dealers who want to ensure that a party to any transaction is fully informed of the details so that the broker-dealer is not held responsible, and companies who are considering acquiring another firm. Fundamentally, doing your due diligence means that you have gathered the necessary facts to make a wise and informed decision.

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Beta is a measure of the volatility*—or systematic risk—*of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). CAPM is widely used as a method for pricing risky securities and for generating estimates of the expected returns of assets, considering both the risk of those assets and the cost of capital.

KEY TAKEAWAYS

• Beta, primarily used in the capital asset pricing model (CAPM), is a measure of the volatility–or systematic risk–of a security or portfolio compared to the market as a whole.

• Beta data about an individual stock can only provide an investor with an approximation of how much risk the stock will add to a (presumably) diversified portfolio.

• For beta to be meaningful, the stock should be related to the benchmark that is used in the calculation.

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Understanding Beta

How Beta Works

A beta coefficient can measure the volatility of an individual stock compared to the systematic risk of the entire market. In statistical terms, beta represents the slope of the line through a regression of data points. In finance, each of these data points represents an individual stock's returns against those of the market as a whole.

Beta effectively describes the activity of a security's returns as it responds to swings in the market. A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period.

The calculation for beta is as follows:

\begin{aligned} &\text{Beta coefficient}(\beta) = \frac{\text{Covariance}(R_e, R_m)}{\text{Variance}(R_m)} \\ &\textbf{where:}\\ &R_e=\text{the return on an individual stock}\\ &R_m=\text{the return on the overall market}\\ &\text{Covariance}=\text{how changes in a stock's returns are} \\ &\text{related to changes in the market's returns}\\ &\text{Variance}=\text{how far the market's data points spread} \\ &\text{out from their average value} \\ \end{aligned}​Beta coefficient(β)=Variance(Rm​)Covariance(Re​,Rm​)​where:Re​=the return on an individual stockRm​=the return on the overall marketCovariance=how changes in a stock’s returns arerelated to changes in the market’s returnsVariance=how far the market’s data points spreadout from their average value​

The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights about how volatile–or how risky–a stock is relative to the rest of the market. For beta to provide any useful insight, the market that is used as a benchmark should be related to the stock. For example, calculating a bond ETF's beta using the S&P 500 as the benchmark would not provide much helpful insight for an investor because bonds and stocks are too dissimilar.

Ultimately, an investor is using beta to try to gauge how much risk a stock is adding to a portfolio. While a stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, it also doesn’t increase the potential for greater returns.

In order to make sure that a specific stock is being compared to the right benchmark, it should have a high R-squared value in relation to the benchmark. R-squared is a statistical measure that shows the percentage of a security's historical price movements that can be explained by movements in the benchmark index. When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, could indicate a more relevant benchmark.

For example, a gold exchange-traded fund (ETF), such as the SPDR Gold Shares (GLD), is tied to the performance of gold bullion.1 Consequently, a gold ETF would have a low beta and R-squared relationship with the S&P 500.

One way for a stock investor to think about risk is to split it into two categories. The first category is called systematic risk, which is the risk of the entire market declining. The financial crisis in 2008 is an example of a systematic-risk event; no amount of diversification could have prevented investors from losing value in their stock portfolios. Systematic risk is also known as un-diversifiable risk.

Unsystematic risk, also known as diversifiable risk, is the uncertainty associated with an individual stock or industry. For example, the surprise announcement that the company Lumber Liquidators (LL) had been selling hardwood flooring with dangerous levels of formaldehyde in 2015 is an example of unsystematic risk.2 It was risk that was specific to that company. Unsystematic risk can be partially mitigated through diversification.

Types of Beta Values

Beta Value Equal to 1.0

If a stock has a beta of 1.0, it indicates that its price activity is strongly correlated with the market. A stock with a beta of 1.0 has systematic risk. However, the beta calculation can’t detect any unsystematic risk. Adding a stock to a portfolio with a beta of 1.0 doesn’t add any risk to the portfolio, but it also doesn’t increase the likelihood that the portfolio will provide an excess return.

Beta Value Less Than One

A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. For example, utility stocks often have low betas because they tend to move more slowly than market averages.

Beta Value Greater Than One

A beta that is greater than 1.0 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks and small cap stocks tend to have higher betas than the market benchmark. This indicates that adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its expected return.

Negative Beta Value

Some stocks have negative betas. A beta of -1.0 means that the stock is inversely correlated to the market benchmark. This stock could be thought of as an opposite, mirror image of the benchmark’s trends. Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is also common.

Beta in Theory vs. Beta in Practice

The beta coefficient theory assumes that stock returns are normally distributed from a statistical perspective. However, financial markets are prone to large surprises. In reality, returns aren’t always normally distributed. Therefore, what a stock's beta might predict about a stock’s future movement isn’t always true.

A stock with a very low beta could have smaller price swings, yet it could still be in a long-term downtrend. So, adding a down-trending stock with a low beta decreases risk in a portfolio only if the investor defines risk strictly in terms of volatility (rather than as the potential for losses). From a practical perspective, a low beta stock that's experiencing a downtrend isn’t likely to improve a portfolio’s performance.

Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may add gains as well. It's recommended that investors using beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio.

Disadvantages of Beta

While beta can offer some useful information when evaluating a stock, it does have some limitations. Beta is useful in determining a security's short-term risk, and for analyzing volatility to arrive at equity costs when using the CAPM. However, since beta is calculated using historical data points, it becomes less meaningful for investors looking to predict a stock's future movements.

Beta is also less useful for long-term investments since a stock's volatility can change significantly from year to year, depending upon the company's growth stage and other factors.

Learn the Basics of Trading and Investing

Looking to learn more about trading and investing? No matter your learning style, there are more than enough courses to get you started. With Udemy, you’ll be able to choose courses taught by real-world experts and learn at your own pace, with lifetime access on mobile and desktop. You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and get started today.