Background

Stablecoins are a crucial component of the crypto industry, especially in DeFi. As of 2023, the stablecoin market has shown significant progress, with a growing demand for stablecoins. This is evident in the chart below, which displays the total supply of stablecoins.

https\://www.theblock.co/data/decentralized-finance/stablecoins/total-stablecoin-supply

The largest growth in stablecoins has been observed in fiat-backed and crypto-backed stablecoins. Additionally, there is another type of stablecoin called Algorithmic Stablecoin, which operates based on an algorithm.

What is Algorithmic Stablecoin?

Algorithmic Stablecoin uses an algorithm called Rebase to maintain its stability through an elastic supply mechanism.

When dealing with Algorithmic stablecoins, it's crucial to understand the rebase rules, including:

• Rebase time: This varies between projects and may have different names.

• Rebase trigger price: The project must have a price range to trigger the rebase condition to increase or decrease the supply. For instance, AMPL has a +-5% price range.

• Oracle source: Usually, projects use Uniswap's TWAP as the oracle source for pricing.

• Maximum increase/decrease in supply.

Algorithmic Stablecoin Classification

I will temporarily divide Algorithmic Stablecoins into three types: the single-token model, the multiple-token model, and the hybrid model.

Single-Token Model

Algorithmic stablecoins under the 1-token model will work with a simple Rebase mechanism. The token price will be pegged at $1. Every time a Rebase occurs, there will be three possible outcomes:

• (1) If the token price increases by more than $1, the total supply will increase.

• (2) If the token price drops by more than $1, the total supply will decrease.

• (3) If the token price remains around $1, the total supply will remain unchanged.

When the total supply changes, it will directly affect the token holders, represented by the number of tokens that can increase or decrease corresponding to the Rebase result.\ The most prominent project and leader of the Algorithmic Stablecoin trend is Ampleforth (AMPL), followed by Yam Finance (YAM).

Multiple-Token Model

The mechanism of operation of the Multiple-Token Model is still the same as that of the Single-Token Model, with the token price still pegged at $1. When a Rebase occurs, there are three possible outcomes:

• (1) If the token price is above $1, more tokens will be generated.

• (2) If the token price is below $1, debt will be created in the form of a bond.

• (3) If the token price remains stable at $1, no more tokens will be generated.

Projects following this model must have up to 3 tokens, including:

• Stablecoin.

• Shares tokens for Shareholders.

• Bond tokens representing the debt of the protocol.

Unlike the Single-Token Model, the Multiple-Token Model does not distribute the generated token equally to all holders. Instead, it will distribute to the participants in the protocol, such as shareholders, liquidity providers, and bond token holders, with different rates depending on the specific protocol.

Projects of this type include Basis Cash (BAC, BAS, BAB) and Dollar Protocol (USDX, SHARE, xBOND).

Hybrid Model

The working mechanism of the Hybrid Model involves only one stablecoin. When the rebase is positive, the total supply will increase and be distributed to the participants in the protocol. When the rebase is negative, debt is issued as a coupon at a high discount to incentivize stablecoin holders to buy debt.

Examples of this type of model include Empty Set Dollar (ESD) and its fork, Dynamic Set Dollar (DSD).

The Paradox of Algorithmic Stablecoins

For a stablecoin to have lasting value, it must exhibit a certain degree of stability to attract widespread use. Algorithmic stablecoins, in particular, must achieve a sufficiently large market capitalization (ranging from 1 to 10 billion USD) to ensure ample liquidity and prevent price fluctuations.

However, to reach such a sizable cap, the rebase loop must remain positive. This raises the crucial question of how to generate enough demand for stablecoins to maintain a price level above $1.

To solve this problem, it is necessary to incentivize the participants in the protocol by creating a reward program for those who provide liquidity through liquidity mining (single-token).

Multiple-token:

• Liquidity provider is entitled to % of stablecoins generated after a positive rebase

• Speculator: Buy debt as a bond at a high discount.

• Shareholders who hold shares tokens will receive more stablecoins following a positive rebase

Hybrid:

• Liquidity Provider is entitled to % of stablecoins generated after positive rebase.

• Speculators buy debt in the form of coupons at highly discounted prices.

• Stakers are entitled to a percentage of the stablecoins generated after a positive rebase.

However, these incentives are not sustainable in the long term and can lead to a 'death spiral' if participants lose interest or the incentives are no longer available.

Closing Thoughts

Although the idea of Algorithmic Stablecoin has been around since 1974 and 2014, it wasn't until 2020 that many experimental and active projects began creating stablecoin products.

Therefore, these stablecoins are still very young, but the experiences of the above-mentioned projects have given us an overview of the paradoxes from which we can find good solutions, bringing us closer to the goal of creating fully decentralized stablecoins.

A code of ethics is a guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values, and the standards to which the professional is held.

A code of ethics, also referred to as an "ethical code," may encompass areas such as business ethics, a code of professional practice, and an employee code of conduct.

Understanding Codes of Ethics

Business ethics refers to how ethical principles guide a business's operations. Common issues that fall under the umbrella of business ethics include employer-employee relations, discrimination, environmental issues, bribery, insider trading, and social responsibility.

While many laws exist to set basic ethical standards within the business community, it is largely dependent upon a business's leadership to develop a code of ethics.

Both businesses and trade organizations typically have some sort of code of ethics that their employees or members are supposed to follow. Breaking the code of ethics can result in termination or dismissal from the organization. A code of ethics is important because it clearly lays out the rules for behavior and provides the groundwork for a preemptive warning.Given the importance of climate change and how human behavior has led to severely impacting the climate, many companies have taken to include climate factors in their code of ethics. These principles include manners in which the company is dedicated to operating sustainably or how they will shift to doing so.

In many cases, this commitment to sustainability adds to the costs of a company, but because consumers are becoming more focused on the types of businesses they choose to engage with, it is often worth the cost to maintain a good public image.

Regardless of size, businesses count on their management staff to set a standard of ethical conduct for other employees to follow. When administrators adhere to the code of ethics, it sends a message that universal compliance is expected of every employee.

Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes of ethics not only set guidelines for conduct but also determine penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries formulate compliance-based codes of ethics to enforce laws and regulations. Employees usually undergo formal training to learn the rules of conduct. Because noncompliance can create legal issues for the company as a whole, individual workers within a firm may face penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint a compliance officer. This individual is tasked with keeping up to date on changes in regulation codes and monitoring employee conduct to encourage conformity.

This type of code of ethics is based on clear-cut rules and well-defined consequences rather than individual monitoring of personal behavior. Despite strict adherence to the law, some compliance-based codes of conduct do not thus promote a climate of moral responsibility within the company.

Value-Based Code of Ethics

A value-based code of ethics addresses a company's core value system. It may outline standards of responsible conduct as they relate to the larger public good and the environment. Value-based ethical codes may require a greater degree of self-regulation than compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values. For example, a grocery store chain might create a code of conduct that espouses the company's commitment to health and safety regulations above financial gain. That grocery chain might also include a statement about refusing to contract with suppliers that feed hormones to livestock or raise animals in inhumane living conditions.

Code of Ethics in Different Professions

Certain professions, such as those in the finance or health fields, have specific laws that mandate codes of ethics and conduct. 

A yearly renewable term is a one-year term life insurance policy. This type of policy gives policyholders a quote for the year the coverage is bought. When someone buys a yearly renewable term insurance policy, the premium quoted is for a one-year term, starting in the current year.

At the same time next year, the insured will pay another annual premium for a person in the same situation, but one year older. In the following year, the premium increases again as it will be for the same person, two years older. Premiums increase annually in order to cover increased risk with age. This type of insurance is also referred to as increasing premium term insurance or annual renewal term assurance.1

KEY TAKEAWAYS

• A yearly renewable term is a one-year term life insurance policy, which gives policyholders a quote for the year the coverage is bought.

• When someone buys a yearly renewable term insurance policy, the premium quoted is for a one-year term, starting in the current year.

• If a policyholder renews for many years, they might pay more in premiums than if they'd bought a level term life or permanent life insurance policy.

Understanding Yearly Renewable Terms (YRTs)

Actuaries are in charge of figuring out what premium will be charged for a yearly renewable term, based on different risk variables. Using a specific formula for these variables, actuaries can predict at what age a policyholder will likely die. As the policyholder grows older, premiums to the policy can be added.

These policies tend to be attractive to young insurance seekers who want to start out with a low cost, flexible premium. It also pays a death benefit to any named beneficiary if the policyholder passes away within the one-year term.

The primary drawback of yearly renewable term life insurance is that if a policyholder renews for many years, they could end up paying more in premiums than if they'd bought a level term life or permanent life insurance policy. If someone buys a yearly renewable term life policy and later figures out their coverage needs are longer, the insurance company may let a policyholder convert the policy to whole life insurance without taking another medical exam.

Why Choose a Yearly Renewable Term

Policyholders with a yearly renewable term life insurance policy can lock in a length of time during which they remain insurable. During this time, the policy can be renewed without the need for a medical exam. Renewability varies by state but is generally permissible up to a certain age.2

The policyholder's age has a lot to do with how premiums are priced. A young insured person's premiums are lower and generally increase with age. That's because the older a person gets, the more costly it becomes to insure him or her. Most policies come with a "schedule of premiums." This is a chart that outlines the maximum amount you'll have to pay each year. Premiums are billed for the exact amount when the policy is renewed. While the premiums may increase, the death benefit stays the same.

Why might you be interested in yearly renewable term life insurance?

Policyholders can lock in a length of time during which they remain insurable. During this time, the policy can be renewed without the need for a medical exam.

What's a big drawback of YRT?

If a policyholder renews for many years, they could end up paying more in premiums than if they'd bought a level term life or permanent life insurance policy. If someone buys a yearly renewable term life policy and later figures out their coverage needs are longer, the insurance company may let a policyholder convert the policy to whole life insurance without taking another medical exam.

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"Yield" refers to the earnings generated and realized on an investment over a particular period of time. It's expressed as a percentage based on the invested amount, current market value, or face value of the security.

Yield includes the interest earned or dividends received from holding a particular security. Depending on the valuation (fixed vs. fluctuating) of the security, yields may be classified as known or anticipated.

KEY TAKEAWAYS

• Yield is a return measure for an investment over a set period of time, expressed as a percentage.

• Yield includes price increases as well as any dividends paid, calculated as the net realized return divided by the principal amount (i.e. amount invested).

• Higher yields are perceived to be an indicator of lower risk and higher income, but a high yield may not always be a positive, such as the case of a rising dividend yield due to a falling stock price.

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1:32

Introduction To Dividend Yields

Formula for Yield

Yield is a measure of cash flow that an investor gets on the amount invested in a security. It is mostly computed on an annual basis, though other variations like quarterly and monthly yields are also used. Yield should not be confused with total return, which is a more comprehensive measure of return on investment. Yield is calculated as:

Yield = Net Realized Return / Principal Amount

For example, the gains and return on stock investments can come in two forms. First, it can be in terms of price rise, where an investor purchases a stock at $100 per share and after a year they sell it for $120. Second, the stock may pay a dividend, say of $2 per share, during the year. The yield would be the appreciation in the share price plus any dividends paid, divided by the original price of the stock. The yield for the example would be:

($20 + $2) / $100 = 0.22, or 22%

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

What Yield Can Tell You

Since a higher yield value indicates that an investor is able to recover higher amounts of cash flows in their investments, a higher value is often perceived as an indicator of lower risk and higher income. However, care should be taken to understand the calculations involved. A high yield may have resulted from a falling market value of the security, which decreases the denominator value used in the formula and increases the calculated yield value even when the security’s valuations are on a decline.

While many investors prefer dividend payments from stocks, it is also important to keep an eye on yields. If yields become too high, it may indicate that either the stock price is going down or the company is paying high dividends.

Since dividends are paid from the company’s earnings, higher dividend payouts could mean the company's earnings are on the rise, which could lead to higher stock prices. Higher dividends with higher stock prices should lead to a consistent or marginal rise in yield. However, a significant rise in yield without a rise in the stock price may mean that the company is paying dividends without increasing earnings, and that may indicate near-term cash flow problems.

Types of Yields

Yields can vary based on the invested security, the duration of investment, and the return amount.

Yield on Stocks

For stock-based investments, two types of yields are popularly used. When calculated based on the purchase price, the yield is called yield on cost (YOC), or cost yield, and is calculated as:

Cost Yield = (Price Increase + Dividends Paid) / Purchase Price

For example, if an investor realized a profit of $20 ($120 - $100) resulting from price rise, and also gained $2 from a dividend paid by the company. Therefore, the cost yield comes to ($20 + $2) / $100 = 0.22, or 22%.

However, many investors may like to calculate the yield based on the current market price, instead of the purchase price. This yield is referred to as the current yield and is calculated as:

Current Yield = (Price Increase + Dividend Paid) / Current Price

For example, the current yield comes to ($20 + $2) / $120 = 0.1833, or 18.33%.

When a company's stock price increases, the current yield goes down because of the inverse relationship between yield and stock price. 

Yield on Bonds

The yield on bonds that pay annual interest can be calculated in a straightforward manner—called the nominal yield, which is calculated as:

Nominal Yield = (Annual Interest Earned / Face Value of Bond)

For example, if there is a Treasury bond with a face value of $1,000 that matures in one year and pays 5% annual interest, its yield is calculated as $50 / $1,000 = 0.05 or 5%.

However, the yield of a floating interest rate bond, which pays a variable interest over its tenure, will change over the life of the bond depending upon the applicable interest rate at different terms.

If there is a bond that pays interest based on the 10-year Treasury yield + 2% then its applicable interest will be 3% when the 10-year Treasury yield is 1% and will change to 4% if the 10-year Treasury yield increases to 2% after a few months.

Similarly, the interest earned on an index-linked bond, which has its interest payments adjusted for an index, such as the Consumer Price Index (CPI) inflation index, will change as the fluctuations in the value of the index.

Yield to Maturity

Yield to maturity (YTM) is a special measure of the total return expected on a bond each year if the bond is held until maturity. It differs from nominal yield, which is usually calculated on a per-year basis and is subject to change with each passing year. On the other hand, YTM is the average yield expected per year and the value is expected to remain constant throughout the holding period until the maturity of the bond.

Yield to Worst

The yield to worst (YTW) is a measure of the lowest potential yield that can be received on a bond without the possibility of the issuer defaulting. YTW indicates the worst-case scenario on the bond by calculating the return that would be received if the issuer uses provisions including prepayments, call back, or sinking funds. This yield forms an important risk measure and ensures that certain income requirements will still be met even in the worst scenarios.

Yield to Call

The yield to call (YTC) is a measure linked to a callable bond—a special category of bonds that can be redeemed by the issuer prior to its maturity—and YTC refers to the bond’s yield at the time of its call date. This value is determined by the bond’s interest payments, its market price, and the duration until the call date as that period defines the interest amount.

Municipal bonds, which are bonds issued by a state, municipality, or county to finance its capital expenditures and are mostly non-taxable, also have a tax-equivalent yield (TEY).1 TEY is the pretax yield that a taxable bond needs to have for its yield to be the same as that of a tax-free municipal bond, and it is determined by the investor's tax bracket.2

While there are a lot of variations for calculating the different kinds of yields, a lot of liberty is enjoyed by the companies, issuers, and fund managers to calculate, report, and advertise the yield value as per their own conventions.

Regulators like the Securities and Exchange Commission (SEC) have introduced a standard measure for yield calculation, called the SEC yield, which is the standard yield calculation developed by SEC and is aimed at offering a standard measure for fairer comparisons of bond funds. SEC yields are calculated after taking into consideration the required fees associated with the fund.3

Mutual fund yield is used to represent the net income return of a mutual fund and is calculated by dividing the annual income distribution payment by the value of a mutual fund’s shares. It includes the income received through dividends and interest that was earned by the fund's portfolio during the given year. Since mutual fund valuations change every day based on their calculated net asset value, the yields are also calculated and vary with the fund’s market value each day.

Along with investments, yield can also be calculated on any business venture. The calculation retains the form of how much return is generated on the invested capital.

What Does Yield Represent?

Yield measures the realized return on a security over a set period of time. Typically, it applies to various bonds and stocks and is presented as a percentage of a security’s value. Key components that influence a security’s yield include dividends or the price movements of a security. Yield represents the cash flow that is returned to the investor, typically expressed on an annual basis.

How Is Yield Calculated?

To calculate yield, a security’s net realized return is divided by the principal amount. Importantly, there are different ways to arrive at a security’s yield depending on the type of asset and the type of yield. For stocks, yield is calculated as a security's price increase plus dividends, divided by the purchase price.

For bonds, yield can be analyzed as either cost yield or current yield. The cost yield measures the returns as a percentage of the original price of the bond, while current yield is measured in relation to the current price.

What Is an Example of Yield?

As one measure for assessing risk, consider an investor who wants to calculate the yield to worst on a bond. Essentially, this measures the lowest possible yield. First, the investor would find that the bond’s earliest callable date, the date that the issuer must repay principal and stop interest payments. After determining this date, the investor would calculate the yield to worst for the bond. Consequently, since the yield to worst is the return for a shorter time period, it expresses a lower return than the yield to maturity.

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A zero-lot-line house is a piece of residential real estate in which the structure comes up to, or very near to, the edge of the property line. Rowhouses, garden homes, patio homes, and townhomes are all types of properties that may be zero-lot-line homes. They may be attached (as in a townhouse) or a detached single story or multistory residence.

KEY TAKEAWAYS

• A zero-lot-line house is a piece of residential real estate in which the structure comes up to, or very near to, the edge of the property line.

• Zero-lot-line houses can be attached or detached, and are especially popular in urban areas.

• Noise and proximity to neighbors can be disadvantages to zero-lot-line homes.

• Low maintenance and lower prices are advantages of zero-lot-line homes.

Understanding a Zero-Lot-Line House

Zero-lot-line houses are built very close to their boundary lines to create more usable space for the residence. Because there is virtually no space left over they are called "zero lot." With a zero-lot-line house, the buyer only has to pay for a lot large enough to hold the house. Such a home confers savings to purchasers who cannot afford a larger lot or do not feel they need one enough to justify the expense.

These homes are especially popular in urban renewal settings. In places with high population density, such as the urban core of a large metropolitan area, zero-lot-line houses impart buyers with options beyond the typical lofts and condos while maintaining the ability to provide housing for large numbers of people in a tightly circumscribed area.

Zero-Lot-Line House Advantages

Though they cost less than homes with lots of extra acreage, zero-lot-line homes are not just for low-income homebuyers; they are an attractive option for anyone who doesn't have the time or inclination to maintain landscaping. Not leaving room in the property plot for a yard allows for maximum square footage in the home. Zero-lot homes offer many of the advantages of actual houses—without the time-consuming demands of upkeep and the expense of large backyards or front lawns.

These homes are also an appealing alternative to condos because they offer greater privacy and independence while still being low-maintenance. A common complaint in condominium settings is that a homeowner shares walls with as many as five neighbors, increasing the chances of noise disturbances from neighbors and eroding any sense of privacy. While certain zero-lot-line homes, such as townhouses and rowhouses, still include shared walls, there are fewer of them. Other zero-lot-line options, such as garden homes, offer homeowners the freedom of a standalone structure.

Because zero lot developments often incorporate shared spaces into their design—features such as shared back alleys and front porches right at the street—many of these home encourage a real sense of community among neighbors.

Zero-Lot-Line House Disadvantages

Window placement, noise, and a lack of privacy can be issues with these types of homes since there is little to no buffer zone surrounding them. Moreover, because zero-lot-line homes typically feature less setback from the road compared to homes on larger lots, noise from passing cars may be of constant concern, particularly if the home is situated on a busy thoroughfare.

Zero-lot-line houses can create challenges among neighbors, especially in areas where people are used to having larger buffer zones. In traditionally dense neighborhoods where residents are used to living in close quarters, smaller buffer zones are less of a challenge.

Finally, zero-lot-line homes might fetch less on the real estate market, especially in boom times. Lots of land around a home still connote luxury and value, and provide homeowners with flexibility to expand. To some, a zero-lot-line home could represent the worst of all worlds: all the noise and lack of privacy of an apartment, with the upkeep of a free-standing structure, but without compensatory acreage and space.

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Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ROIC gives a sense of how well a company is using its capital to generate profits. Comparing a company's return on invested capital with its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively.1

KEY TAKEAWAYS

• Return on invested capital (ROIC) is the amount of money a company makes that is above the average cost it pays for its debt and equity capital.1

• The return on invested capital can be used as a benchmark to calculate the value of other companies.1

• A company is thought to be creating value if its ROIC exceeds its weighted average cost of capital (WACC).1

0 seconds of 1 minute, 54 secondsVolume 75%

1:54

The Return On Invested Capital (ROIC)

Formula and Calculation of Return on Invested Capital (ROIC)

The formula for ROIC is:

\begin{aligned} &\text{ROIC} = \frac{ \text{NOPAT} }{ \text{Invested Capital} } \\ &\textbf{where:}\\ &\text{NOPAT} = \text{Net operating profit after tax} \\ \end{aligned}​ROIC=Invested CapitalNOPAT​where:NOPAT=Net operating profit after tax​

Written another way, ROIC = (net income – dividends) / (debt + equity). The ROIC formula is calculated by assessing the value in the denominator, total capital, which is the sum of a company's debt and equity.1

There are several ways to calculate this value. One is to subtract cash and non-interest-bearing current liabilities (NIBCL)—including tax liabilities and accounts payable, as long as these are not subject to interest or fees—from total assets.

A third method of calculating invested capital is to add the book value of a company's equity to the book value of its debt and then subtract non-operating assets, including cash and cash equivalents, marketable securities, and assets of discontinued operations.

A final way to calculate invested capital is to obtain the working capital figure by subtracting current liabilities from current assets. Next, you obtain non-cash working capital by subtracting cash from the working capital value you just calculated. Finally, non-cash working capital is added to a company's fixed assets.1

An ROIC higher than the cost of capital means a company is healthy and growing, while an ROIC lower than the cost of capital suggests an unsustainable business model.1

The value in the numerator can also be calculated in several ways. The most straightforward way is to subtract dividends from a company's net income.

On the other hand, because a company may have benefited from a one-time source of income unrelated to its core business—a windfall from foreign exchange rate fluctuations, for example—it is often preferable to look at net operating profit after taxes (NOPAT). NOPAT is calculated by adjusting the operating profit for taxes:

NOPAT = (operating profit) x (1 – effective tax rate)1

Many companies will report their effective tax rates for the quarter or fiscal year in their earnings releases, but not all companies do this—meaning it may be necessary to calculate the rate by dividing a company's tax expense by net income.2

What ROIC Can Tell You

ROIC is always calculated as a percentage and is usually expressed as an annualized or trailing 12-month value. It should be compared to a company's cost of capital to determine whether the company is creating value.

If ROIC is greater than a firm's weighted average cost of capital (WACC)—the most commonly used cost of capital metric—value is being created and these firms will trade at a premium. A common benchmark for evidence of value creation is a return of two percentage points above the firm's cost of capital.

Some firms run at a zero-return level, and while they may not be destroying value, these companies have no excess capital to invest in future growth.

ROIC is one of the most important and informative valuation metrics to calculate. However, it is more important for some sectors than others, since companies that operate oil rigs or manufacture semiconductors invest capital much more intensively than those that require less equipment.1

Limitations of ROIC

One downside of this metric is that it tells nothing about what segment of the business is generating value. If you make your calculation based on net income (minus dividends) instead of NOPAT, the result can be even more opaque, since the return may derive from a single, non-recurring event.

ROIC provides the necessary context for other metrics such as the price-to-earnings (P/E) ratio. Viewed in isolation, the P/E ratio might suggest a company is oversold, but the decline could be because the company is no longer generating value for shareholders at the same rate (or at all). On the other hand, companies that consistently generate high rates of return on invested capital probably deserve to trade at a premium compared to other stocks, even if their P/E ratios seem prohibitively high.1

Example of How to Use ROIC

As an example, let's consider Target Corporation (TGT). The company calculates its ROIC directly in its fiscal year 2021 10-K, showing the components that went into the calculation:3

The ROIC calculation begins with operating income, then adds nets other income to get EBIT. Operating lease interest is then added back and income taxes subtracted to get NOPAT. Target's invested capital includes shareholder equity, long-term debt, and operating lease liabilities. Target subtracts cash and cash equivalents from the sum of those figures to get its invested capital.

What Is Invested Capital?

Invested capital is the total amount of money raised by a company by issuing securities—which is the sum of the company's equity, debt, and capital lease obligations. Invested capital is not a line item in the company's financial statement because debt, capital leases, and stockholder’s equity are each listed separately on the balance sheet.

What Does Return on Invested Capital Tell You?

Return on invested capital (ROIC) determines how efficiently a company puts the capital under its control toward profitable investments or projects. The ROIC ratio gives a sense of how well a company is using the money it has raised externally to generate returns. Comparing a company's return on invested capital with its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively.1

How Do You Compute ROIC?

The ROIC formula is net operating profit after tax (NOPAT) divided by invested capital. Companies with a steady or improving return on capital are unlikely to put significant amounts of new capital to work.1

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Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or debt obligations.

KEY TAKEAWAYS

• Present value states that an amount of money today is worth more than the same amount in the future.

• In other words, present value shows that money received in the future is not worth as much as an equal amount received today.

• Unspent money today could lose value in the future by an implied annual rate due to inflation or the rate of return if the money was invested.

• Calculating present value involves assuming that a rate of return could be earned on the funds over the period.

0 seconds of 1 minute, 39 secondsVolume 75%

1:39

Present Value

Understanding Present Value (PV)

Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.

Receiving $1,000 today is worth more than $1,000 five years from now. Why? An investor can invest the $1,000 today and presumably earn a rate of return over the next five years. Present value takes into account any interest rate an investment might earn.

For example, if an investor receives $1,000 today and can earn a rate of return of 5% per year, the $1,000 today is certainly worth more than receiving $1,000 five years from now. If an investor waited five years for $1,000, there would be an opportunity cost or the investor would lose out on the rate of return for the five years.

Inflation and Purchasing Power

Inflation is the process in which prices of goods and services rise over time. If you receive money today, you can buy goods at today's prices. Presumably, inflation will cause the price of goods to rise in the future, which would lower the purchasing power of your money.

Money not spent today could be expected to lose value in the future by some implied annual rate, which could be inflation or the rate of return if the money was invested. The present value formula discounts the future value to today's dollars by factoring in the implied annual rate from either inflation or the rate of return that could be achieved if a sum was invested.

Discount Rate for Finding Present Value

The discount rate is the investment rate of return that is applied to the present value calculation. In other words, the discount rate would be the forgone rate of return if an investor chose to accept an amount in the future versus the same amount today. The discount rate that is chosen for the present value calculation is highly subjective because it's the expected rate of return you'd receive if you had invested today's dollars for a period of time.

In many cases, a risk-free rate of return is determined and used as the discount rate, which is often called the hurdle rate. The rate represents the rate of return that the investment or project would need to earn in order to be worth pursuing. A U.S. Treasury bond rate is often used as the risk-free rate because Treasuries are backed by the U.S. government.1 So, for example, if a two-year Treasury paid 2% interest or yield, the investment would need to at least earn more than 2% to justify the risk.

The discount rate is the sum of the time value and a relevant interest rate that mathematically increases future value in nominal or absolute terms. Conversely, the discount rate is used to work out future value in terms of present value, allowing a lender to settle on the fair amount of any future earnings or obligations in relation to the present value of the capital. The word "discount" refers to future value being discounted to present value.

The calculation of discounted or present value is extremely important in many financial calculations. For example, net present value, bond yields, and pension obligations all rely on discounted or present value. Learning how to use a financial calculator to make present value calculations can help you decide whether you should accept such offers as a cash rebate, 0% financing on the purchase of a car, or pay points on a mortgage.

PV Formula and Calculation

\begin{aligned} &\text{Present Value} = \dfrac{\text{FV}}{(1+r)^n}\\ &\textbf{where:}\\ &\text{FV} = \text{Future Value}\\ &r = \text{Rate of return}\\ &n = \text{Number of periods}\\ \end{aligned}​Present Value=(1+r)nFV​where:FV=Future Valuer=Rate of returnn=Number of periods​

1. Input the future amount that you expect to receive in the numerator of the formula.

2. Determine the interest rate that you expect to receive between now and the future and plug the rate as a decimal in place of "r" in the denominator.

3. Input the time period as the exponent "n" in the denominator. So, if you want to calculate the present value of an amount you expect to receive in three years, you would plug the number three in for "n" in the denominator.

4. There are a number of online calculators, including this present value calculator.

Future Value vs. Present Value

A comparison of present value with future value (FV) best illustrates the principle of the time value of money and the need for charging or paying additional risk-based interest rates. Simply put, the money today is worth more than the same money tomorrow because of the passage of time. Future value can relate to the future cash inflows from investing today's money, or the future payment required to repay money borrowed today.

Future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth. The FV equation assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment. The FV calculation allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments.

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Present value takes the future value and applies a discount rate or the interest rate that could be earned if invested. Future value tells you what an investment is worth in the future while the present value tells you how much you'd need in today's dollars to earn a specific amount in the future.

Criticism of Present Value

As stated earlier, calculating present value involves making an assumption that a rate of return could be earned on the funds over the time period. In the discussion above, we looked at one investment over the course of one year. However, if a company is deciding to go ahead with a series of projects that has a different rate of return for each year and each project, the present value becomes less certain if those expected rates of return are not realistic. It's important to consider that in any investment decision, no interest rate is guaranteed, and inflation can erode the rate of return on an investment.

Example of Present Value

Let's say you have the choice of being paid $2,000 today earning 3% annually or $2,200 one year from now. Which is the best option?

• Using the present value formula, the calculation is $2,200 / (1 +. 03)1 = $2135.92

• PV = $2,135.92, or the minimum amount that you would need to be paid today to have $2,200 one year from now. In other words, if you were paid $2,000 today and based on a 3% interest rate, the amount would not be enough to give you $2,200 one year from now.

• Alternatively, you could calculate the future value of the $2,000 today in a year's time: 2,000 x 1.03 = $2,060.

Present value provides a basis for assessing the fairness of any future financial benefits or liabilities. For example, a future cash rebate discounted to present value may or may not be worth having a potentially higher purchase price. The same financial calculation applies to 0% financing when buying a car.

Paying some interest on a lower sticker price may work out better for the buyer than paying zero interest on a higher sticker price. Paying mortgage points now in exchange for lower mortgage payments later makes sense only if the present value of the future mortgage savings is greater than the mortgage points paid today.

How Do You Calculate Present Value?

Present value is calculated by taking the future cashflows expected from an investment and discounting them back to the present day. To do so, the investor needs three key data points: the expected cashflows, the number of years in which the cashflows will be paid, and their discount rate. The discount rate is a very important factor in influencing the present value, with higher discount rates leading to a lower present value, and vice-versa. Using these variables, investors can calculate present value using the formula:

\begin{aligned} &\text{Present Value} = \dfrac{\text{FV}}{(1+r)^n}\\ &\textbf{where:}\\ &\text{FV} = \text{Future Value}\\ &r = \text{Rate of return}\\ &n = \text{Number of periods}\\ \end{aligned}​Present Value=(1+r)nFV​where:FV=Future Valuer=Rate of returnn=Number of periods​

What Are Some Examples of Present Value?

To illustrate, consider a scenario where you expect to earn a $5,000 lump sum payment in five years' time. If the discount rate is 8.25%, you want to know what that payment will be worth today so you calculate the PV = $5000/(1.0825)5 = 3,363.80.

Why Is Present Value Important?

Present value is important because it allows investors to judge whether or not the price they pay for an investment is appropriate. For example, in our previous example, having a 12% discount rate would reduce the present value of the investment to only $1,802.39. In that scenario, we would be very reluctant to pay more than that amount for the investment, since our present value calculation indicates that we could find better opportunities elsewhere. Present value calculations like this play a critical role in areas such as investment analysis, risk management, and financial planning.

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A mixed economic system is a system that combines aspects of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.

According to neoclassical theory, mixed economies are less efficient than pure free markets, but proponents of government interventions argue that the base conditions required for efficiency in free markets, such as equal information and rational market participants, cannot be achieved in practical application.

KEY TAKEAWAYS

• A mixed economy is an economy organized with some free-market elements and some socialistic elements, which lies on a continuum somewhere between pure capitalism and pure socialism.

• Mixed economies typically maintain private ownership and control of most of the means of production, but often under government regulation.

• Mixed economies socialize select industries that are deemed essential or that produce public goods.

• All known historical and modern economies are examples of mixed economies, though some economists have critiqued the economic effects of various forms of mixed economy.

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Mixed Economic System

Understanding Mixed Economic Systems

Most modern economies feature a synthesis of two or more economic systems, with economies falling at some point along a continuum. The public sector works alongside the private sector, but they may compete for the same limited resources. Mixed economic systems do not block the private sector from profit-seeking, but do regulate business and may nationalize industries that provide a public good.

For example, the United States is a mixed economy, as it leaves ownership of the means of production in mostly private hands but incorporates elements such as subsidies for agriculture, regulation on manufacturing, and partial or full public ownership of some industries like letter delivery and national defense. In fact, all known historical and modern economies fall somewhere on the continuum of mixed economies. Both pure socialism and pure free markets represent theoretical constructs only.

What Is the Difference Between a Mixed Economy and Free Markets?

Mixed economic systems are not laissez-faire systems, because the government is involved in planning the use of some resources and can exert control over businesses in the private sector. Governments may seek to redistribute wealth by taxing the private sector and by using funds from taxes to promote social objectives. Trade protection, subsidies, targeted tax credits, fiscal stimulus, and public-private partnerships are common examples of government intervention in mixed economies. These unavoidably generate economic distortions, but they are instruments to achieve specific goals that may succeed despite their distortionary effect.

Countries often interfere in markets to promote target industries by creating agglomerations and reducing barriers to entry in an attempt to achieve a comparative advantage. This was common among East Asian countries in the 20th-century development strategy known as export-led growth, and the region has turned into a global manufacturing center for a variety of industries. Some nations have come to specialize in textiles, while others are known for machinery, and others are hubs for electronic components. These sectors rose to prominence after governments protected young companies as they achieved competitive scale and promoted adjacent services such as shipping.

What Is the Difference Between a Mixed Economy and Socialism?

Socialism entails common or centralized ownership of the means of production. Proponents of socialism believe that central planning can achieve a greater good for a larger number of people. They do not trust that the free-market outcomes will achieve the efficiency and optimization posited by classical economists, so socialists advocate the nationalization of all industries and the expropriation of privately owned capital goods, lands, and natural resources. Mixed economies rarely go to this extreme, instead, they identify only select instances in which intervention could achieve outcomes unlikely to be achieved in free markets.

Such measures can include price controls, income redistribution, and intense regulation of production and trade. Virtually universally this also includes the socialization of specific industries, known as public goods, that are considered essential and that economists believe the free market might not supply adequately, such as public utilities, military and police forces, and environmental protection. Unlike pure socialism, however, mixed economies usually otherwise maintain private ownership and control of the means of production.

History and Criticism of the Mixed Economy

The term mixed economy gained prominence in the United Kingdom after World War II, even though many of the policies associated with it at the time were first proposed in the 1930s. Many of the supporters were associated with the British Labour Party.

Critics argued that there could be no middle ground between economic planning and a market economy, and many—even today—question its validity when they believe it to be a combination of socialism and capitalism. Those who believe the two concepts don’t belong together say either market logic or economic planning must be prevalent in an economy.

Classical and Marxist theorists say that either the law of value or the accumulation of capital is what drives the economy, or that non-monetary forms of valuation (i.e. transactions without cash) are what ultimately propel the economy. These theorists believe that Western economies are still primarily based on capitalism because of the continued cycle of accumulation of capital.

Austrian economists starting with Ludwig von Mises have argued that a mixed economy is not sustainable because the unintended consequences of government intervention into the economy, such as the shortages that routinely result from price controls, will consistently lead to further calls for ever-increasing intervention to offset their effects.1 This suggests that the mixed economy is inherently unstable and will always tend toward a more socialistic state over time.

Beginning in the mid 20th century, economists of the Public Choice school have described how the interaction of government policymakers, economic interest groups, and markets can guide policy in a mixed economy away from the public interest. Economic policy in the mixed economy unavoidably diverts the flow of economic activity, trade, and income away from some individuals, firms, industries, and regions and toward others.

Not only can this create harmful distortions in the economy by itself, but it always creates winners and losers. This sets up powerful incentives for interested parties to take some resources away from productive activities to use instead for the purpose of lobbying or otherwise seeking to influence economic policy in their own favor. This non-productive activity is known as rent-seeking.

What Are the Characteristics of a Mixed Economy?

The characteristics of a mixed economy include allowing supply and demand to determine fair prices, the protection of private property, innovation being promoted, standards of employment, the limitation of government in business yet allowing the government to provide overall welfare, and market facilitation by the self-interest of the players involved.

What Are the Disadvantages of a Mixed Economy?

Mixed economies stress profit above all else, including the well-being of citizens, there tends to be mismanagement at various levels, it creates economic inequality throughout the population as wealth is not distributed evenly, inefficiency occurs due to government involvement, and the working class can be exploited.

What Are the 4 Main Types of Economic Systems?

The four main types of economic systems are a pure market economy, a pure command economy, a mixed economy, and a traditional economy.

Which Countries Have a Mixed Economy?

Countries that have a mixed economy include the United States, the United Kingdom, Sweden, Iceland, France, and Germany.

The Complete Introduction to Economics

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Keynesian economics is a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run. Keynes’s theory was the first to sharply separate the study of economic behavior and markets based on individual incentives from the study of broad national economic aggregate variables and constructs.1 

Based on his theory, Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. Subsequently, Keynesian economics was used to refer to the concept that optimal economic performance could be achieved—and economic slumps prevented—by influencing aggregate demand through activist stabilization and economic intervention policies by the government.1

KEY TAKEAWAYS

• Keynesian economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions.

• Keynes developed his theories in response to the Great Depression, and was highly critical of previous economic theories, which he referred to as “classical economics”. 

• Activist fiscal and monetary policy are the primary tools recommended by Keynesian economists to manage the economy and fight unemployment.

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Keynesian Economics

Understanding Keynesian Economics

Keynesian economics represented a new way of looking at spending, output, and inflation. Previously, what Keynes dubbed classical economic thinking held that cyclical swings in employment and economic output create profit opportunities that individuals and entrepreneurs would have an incentive to pursue, and in so doing correct the imbalances in the economy. According to Keynes’s construction of this so-called classical theory, if aggregate demand in the economy fell, the resulting weakness in production and jobs would precipitate a decline in prices and wages. A lower level of inflation and wages would induce employers to make capital investments and employ more people, stimulating employment and restoring economic growth. Keynes believed that the depth and persistence of the Great Depression, however, severely tested this hypothesis.

In his book, The General Theory of Employment, Interest, and Money and other works, Keynes argued against his construction of classical theory, that during recessions business pessimism and certain characteristics of market economies would exacerbate economic weakness and cause aggregate demand to plunge further.2

For example, Keynesian economics disputes the notion held by some economists that lower wages can restore full employment because labor demand curves slope downward like any other normal demand curve. Instead he argued that employers will not add employees to produce goods that cannot be sold because demand for their products is weak. Similarly, poor business conditions may cause companies to reduce capital investment, rather than take advantage of lower prices to invest in new plants and equipment. This would also have the effect of reducing overall expenditures and employment. 

Keynesian Economics and the Great Depression

Keynesian economics is sometimes referred to as "depression economics," as Keynes's General Theory was written during a time of deep depression not only in his native land of the United Kingdom but worldwide. The famous 1936 book was informed by Keynes’s understanding of events arising during the Great Depression, which Keynes believed could not be explained by classical economic theory as he portrayed it in his book.

Other economists had argued that in the wake of any widespread downturn in the economy, businesses and investors taking advantage of lower input prices in pursuit of their own self-interest would return output and prices to a state of equilibrium, unless otherwise prevented from doing so. Keynes believed that the Great Depression seemed to counter this theory. Output was low and unemployment remained high during this time. The Great Depression inspired Keynes to think differently about the nature of the economy. From these theories, he established real-world applications that could have implications for a society in economic crisis.

Keynes rejected the idea that the economy would return to a natural state of equilibrium. Instead, he argued that once an economic downturn sets in, for whatever reason, the fear and gloom that it engenders among businesses and investors will tend to become self-fulfilling and can lead to a sustained period of depressed economic activity and unemployment. In response to this, Keynes advocated a countercyclical fiscal policy in which, during periods of economic woe, the government should undertake deficit spending to make up for the decline in investment and boost consumer spending in order to stabilize aggregate demand.

Keynes was highly critical of the British government at the time. The government greatly increased welfare spending and raised taxes to balance the national books. Keynes said this would not encourage people to spend their money, thereby leaving the economy unstimulated and unable to recover and return to a successful state. Instead, he proposed that the government spend more money and cut taxes to turn a budget deficit, which would increase consumer demand in the economy. This would, in turn, lead to an increase in overall economic activity and a reduction in unemployment.

Keynes also criticized the idea of excessive saving, unless it was for a specific purpose such as retirement or education. He saw it as dangerous for the economy because the more money sitting stagnant, the less money in the economy stimulating growth. This was another of Keynes's theories geared toward preventing deep economic depressions.

Many economists have criticized Keynes's approach. They argue that businesses responding to economic incentives will tend to return the economy to a state of equilibrium unless the government prevents them from doing so by interfering with prices and wages, making it appear as though the market is self-regulating. On the other hand, Keynes, who was writing while the world was mired in a period of deep economic depression, was not as optimistic about the natural equilibrium of the market. He believed the government was in a better position than market forces when it came to creating a robust economy.

John Maynard Keynes (Source: Public Domain).

Keynesian Economics and Fiscal Policy

The multiplier effect, developed by Keynes’s student Richard Kahn, is one of the chief components of Keynesian countercyclical fiscal policy. According to Keynes's theory of fiscal stimulus, an injection of government spending eventually leads to added business activity and even more spending. This theory proposes that spending boosts aggregate output and generates more income. If workers are willing to spend their extra income, the resulting growth in the gross domestic product( GDP) could be even greater than the initial stimulus amount.3

The magnitude of the Keynesian multiplier is directly related to the marginal propensity to consume. Its concept is simple. Spending from one consumer becomes income for a business that then spends on equipment, worker wages, energy, materials, purchased services, taxes and investor returns. That worker's income can then be spent and the cycle continues. Keynes and his followers believed individuals should save less and spend more, raising their marginal propensity to consume to effect full employment and economic growth.

In this theory, one dollar spent in fiscal stimulus eventually creates more than one dollar in growth. This appeared to be a coup for government economists, who could provide justification for politically popular spending projects on a national scale.

This theory was the dominant paradigm in academic economics for decades. Eventually, other economists, such as Milton Friedman and Murray Rothbard, showed that the Keynesian model misrepresented the relationship between savings, investment, and economic growth.4 Many economists still rely on multiplier-generated models, although most acknowledge that fiscal stimulus is far less effective than the original multiplier model suggests.

The fiscal multiplier commonly associated with the Keynesian theory is one of two broad multipliers in economics. The other multiplier is known as the money multiplier. This multiplier refers to the money-creation process that results from a system of fractional reserve banking. The money multiplier is less controversial than its Keynesian fiscal counterpart.

Keynesian Economics and Monetary Policy

Keynesian economics focuses on demand-side solutions to recessionary periods. The intervention of government in economic processes is an important part of the Keynesian arsenal for battling unemployment, underemployment, and low economic demand. The emphasis on direct government intervention in the economy often places Keynesian theorists at odds with those who argue for limited government involvement in the markets. 

Keynesian theorists argue that economies do not stabilize themselves very quickly and require active intervention that boosts short-term demand in the economy. Wages and employment, they argue, are slower to respond to the needs of the market and require governmental intervention to stay on track. Furthermore they argue, prices also do not react quickly, and only gradually change when monetary policy interventions are made, giving rise to a branch of Keynesian economics known as Monetarism. 

If prices are slow to change, this makes it possible to use money supply as a tool and change interest rates to encourage borrowing and lending. Lowering interest rates is one way governments can meaningfully intervene in economic systems, thereby encouraging consumption and investment spending. Short-term demand increases initiated by interest rate cuts reinvigorate the economic system and restore employment and demand for services. The new economic activity then feeds continued growth and employment. 

Without intervention, Keynesian theorists believe, this cycle is disrupted and market growth becomes more unstable and prone to excessive fluctuation. Keeping interest rates low is an attempt to stimulate the economic cycle by encouraging businesses and individuals to borrow more money. They then spend the money they borrow. This new spending stimulates the economy. Lowering interest rates, however, does not always lead directly to economic improvement.

Monetarist economists focus on managing the money supply and lower interest rates as a solution to economic woes, but they generally try to avoid the zero-bound problem. As interest rates approach zero, stimulating the economy by lowering interest rates becomes less effective because it reduces the incentive to invest rather than simply hold money in cash or close substitutes like short term Treasuries. Interest rate manipulation may no longer be enough to generate new economic activity if it cannot spur investment, and the attempt at generating economic recovery may stall completely. This is a type of liquidity trap.

When lowering interest rates fails to deliver results, Keynesian economists argue that other strategies must be employed, primarily fiscal policy. Other interventionist policies include direct control of the labor supply, changing tax rates to increase or decrease the money supply indirectly, changing monetary policy, or placing controls on the supply of goods and services until employment and demand are restored.

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Nasdaq is a global electronic marketplace for buying and selling securities. Its name was originally an acronym for "National Association of Securities Dealers Automated Quotations"—Nasdaq started as a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Nasdaq was launched after the Securities and Exchange Commission (SEC) urged NASD to automate the market for securities not listed on an exchange. The result was the first electronic trading system. Nasdaq opened for business on Feb. 8, 1971.1

KEY TAKEAWAYS

• Nasdaq is an online global marketplace for buying and trading securities—the world's first electronic exchange.

• It operates 29 markets, one clearinghouse, and five central securities depositories in the United States and Europe.

• Most of the world's technology giants are listed on the Nasdaq.

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NASDAQ

Understanding Nasdaq

The term “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,700 stocks listed on the Nasdaq exchange that includes technology giants Apple Inc. (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOG, GOOGL), Meta Platforms Inc. (FB), Amazon.com Inc. (AMZN) and Tesla Inc. (TSLA).2

Nasdaq officially separated from the NASD and began to operate as a national securities exchange in 2006. In 2008, it combined with the Scandinavian exchanges group OMX to become the Nasdaq OMX Group.3 The company changed its name to Nasdaq Inc. (NDAQ) in 2015.4

Headquartered in New York, the Nasdaq operates 29 markets enabling the trading of stocks, derivatives, fixed income and commodities in the U.S., Canada, Scandinavia and the Baltics. the company also runs a clearinghouse and five central securities depositories in the United States and Europe.5 Its trading technology is used by 100 exchanges in 50 countries. Nasdaq Inc is listed on the Nasdaq stock market under the symbol NDAQ and has been part of the S&P 500 Index since 2008.

Tale of Two Nasdaqs' Booms and Busts

The Nasdaq computerized trading system was initially devised as an alternative to the inefficient “specialist” system, which had been the prevalent model for almost a century. The rapid evolution of technology has made Nasdaq’s electronic trading model the standard for markets worldwide.

It was only fitting for the world’s up-and-coming technology companies to list on an exchange using the latest technology. As the tech sector grew in prominence in the 1980s and 1990s, the Nasdaq Composite Index became its most widely quoted proxy.

That turned Nasdaq Composite into the index of the dot-com boom and bust. After rallying nearly 150% in the 16 months through March 2000, the Nasdaq Composite then slumped almost 80% by October 2002.

Recent History of Nasdaq

On November 2016, Chief Operating Officer Adena Friedman was promoted to the role of CEO, becoming the first woman to run a major exchange in the United States.6 

Board Diversity Disclosure Rule

On Dec. 1, 2020, Nasdaq proposed a new rule requiring companies listed on the exchange to report on the diversity of their board of directors. The rule requires companies to include on their boards at least one female director and one who is a member of an underrepresented minority or LGBTQ+, or to publicly explain why they have not done so. The SEC approved the board diversity disclosure rule on Aug. 6, 2021.78

Financial Performance

Nasdaq generates revenue from clients, including financial institutions, brokers, institutional investors, and corporations. Nasdaq's revenue is mainly derived from fees charged for the following:

• Market services, which give investors access to various markets

• Investment intelligence: data, indices, and investment analytics for financial institutions, brokers, and asset managers

• Market technology, which includes trading and settlement platforms as well as technology safeguards against financial crime

• Corporate services, such as listing fees and investment relations services

For Q1 2022 ended March 31, Nasdaq reported net income of $283 million on revenue of $1.54 billion, and revenue less transaction-based expenses of $892 million. The company also increased the quarterly dividend by 11% to $0.60 per share and announced plans to seek SEC and shareholder approval for a 3-to-1 stock split to be completed in the third quarter of 2022.9

Nasdaq Composite Index Performance

The Nasdaq Composite closed at a record high of 16,057.44 on Nov. 19, 2021. The index proceeded to drop more than 23% from that point through April 2022.10 The Nasdaq Composite's 13.3% decline in April 2022 was its worst monthly drop since October 2008, when the index lost 17.4% amid the global financial crisis.

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The four Ps of marketing are the key factors that are involved in the marketing of a good or service. They are the product, price, place, and promotion of a good or service. Often referred to as the marketing mix, the four Ps are constrained by internal and external factors in the overall business environment, and they interact significantly with one another.

The 4 Ps are used by companies to identify some key factors for their business, including what consumers want from them, how their product or service meets or fails to meet those needs, how their product or service is perceived in the world, how they stand out from their competitors, and how they interact with their customers.

KEY TAKEAWAYS

• The four Ps are the four essential factors involved in marketing a good or service to the public.

• These are the four Ps: the product (the good or service), the price (what the consumer pays), the place (the location where a product is marketed), and promotion (the advertising).

• The concept of the four Ps has been around since the 1950s; as the marketing industry has evolved, the concepts of people, process, and physical evidence have become important components of marketing a product, too.

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Four Ps

Understanding the 4 Ps

Neil Borden popularized the idea of the marketing mix—and the concepts that would later be known primarily as the four Ps—in the 1950s. Borden was an advertising professor at Harvard University. His 1964 article titled "The Concept of the Marketing Mix" demonstrated the ways that companies could use advertising tactics to engage their consumers.1 Decades later, the concepts that Borden popularized are still being used by companies to advertise their goods and services.

When they were first introduced, Borden's ideas were very influential in the business world and were developed and refined over a number of years by other key players in the industry. It was actually E. Jerome McCarthy, a marketing professor at Michigan State University, who refined the concepts in Borden's book and created the idea of the "4 Ps," a term that is still used today. In 1960, McCarthy co-wrote the book "Basic Marketing: A Managerial Approach," further popularizing the idea of the 4 Ps.2

At the time the concept was first coined, the marketing mix helped companies account for the physical barriers that prevented widespread product adoption. Today, the Internet has helped businesses achieve a greater level of integration between businesses and consumers, and also to overcome some of these barriers. People, process, and physical evidence are extensions of the original 4 Ps, and are more relevant to the current trends in marketing.

Any successful marketing strategy requires revisiting over time. If you are developing a 4 Ps strategy for your business, it's important to understand that the elements of the first marketing mix you create are not intended to be static; they are meant to be adjusted and refined as your company's product grows and as your potential buyers change.

How the Four Ps Work

Product

Product refers to a good or service that a company offers to customers. Ideally, a product should fulfill an existing consumer demand. Or a product may be so compelling that consumers believe they need to have it and it creates a new demand. To be successful, marketers need to understand the life cycle of a product, and business executives need to have a plan for dealing with products at every stage of their life cycle. The type of product also partially dictates how much businesses can charge for it, where they should place it, and how they should promote it in the marketplace.

Many of the most successful products have been the first in their category. For example, Apple was the first to create a touchscreen smartphone that could play music, browse the Internet, and make phone calls. Apple reported total sales of the iPhone to be $71.6 billion in Q1 2022.3 In 2021, Apple hit the milestone of selling two billion iPhones.4

Price

Price is the cost consumers pay for a product. Marketers must link the price to the product's real and perceived value, but they also must consider supply costs, seasonal discounts, and competitors' prices. In some cases, business executives may raise the price to give the product the appearance of being a luxury. Alternatively, they may lower the price so more consumers can try the product.

Marketers also need to determine when and if discounting is appropriate. A discount can sometimes draw in more customers, but it can also give the impression that the product is less exclusive or less of a luxury compared to when it is was priced higher.

UNIQLO, headquartered in Japan, is a clothing manufacturer of global casual wear. Like its competitors—other famous causal wear brands such as Gap and Zara—UNIQLO creates low-price, daily-use garments.

What makes UNIQLO unique is that it creates innovative, high-quality products. It is able to accomplish this by procuring its fabric from its material manufacturer partners, securing stable, high-quality materials at low cost by ordering in large volumes, and continuously seeking the highest-quality and lowest-cost material in the world. The company also directly negotiates with its manufacturers and has built strategic partnerships with high-quality and innovative Japanese manufacturers.

UNIQLO also outsources its production to partner factories; because it doesn't own its own factories, it has the flexibility to change production partners if the best production location changes over time. Finally, the company employs a team of skilled textile artisans that it sends to its partner factories all over the world for quality control. In addition, production managers visit factories once a week to resolve quality problems.5

Place

When a company makes decisions regarding place, they are trying to determine where they should sell a product and how to deliver the product to the market. The goal of business executives is always to get their products in front of the consumers that are the most likely to buy them.

In some cases, this may refer to placing a product in certain stores, but it also refers to the product's placement on a specific store's display. In some cases, placement may refer to the act of including a product on television shows, in films, or on web pages in order to garner attention for the product.

The 1995 movie GoldenEye was the seventeenth installment in the James Bond movie franchise. It was the first Bond movie not to feature an Aston Martin car. Instead, the British actor Pierce Brosnan got into a Z3 by BMW. Although the Z3 was not released until months after the film had left theaters, BMW received 9,000 orders for the car the month after the movie opened.

Promotion

Promotion includes advertising, public relations, and promotional strategy. The goal of promoting a product is to reveal to consumers why they need it and why they should pay a certain price for it.

Marketers tend to tie promotion and placement elements together so they can reach their core audiences. For example, In the digital age, the "place" and "promotion" factors are as much online as they are offline. Specifically, where a product appears on a company's web page or social media, as well as which types of search functions trigger corresponding, targeted ads for the product.

The Swedish vodka brand Absolut sold only 10,000 cases of its vodka in 1980. But by 2000, the company had sold 4.5 million cases, thanks in part to its iconic advertising campaign. The images in the campaign featured the brand's signature bottle styled as a range of surreal images: a bottle with a halo, the bottle made of stone, or as the outline of trees on a ski slope. To date, this Absolut advertising campaign is one of the longest-running continuous ad campaigns of all time, from 1981 to 2005.6

4 Ps of Marketing FAQs

What do the 4 Ps mean in marketing?

Product, price, promotion, and place form the 4 Ps of the marketing mix. These are the key factors that are involved in the marketing of a good or service.

What are the 4 Ps of marketing and examples?

The 4 Ps of marketing are place, price, product, and promotion. By carefully integrating all of these marketing strategies into a marketing mix, companies can ensure they have a visible, in-demand product or service that is competitively priced and promoted to their customers.

Place refers to where and how people buy your product. Some examples of places consumers can buy products and services include online via a web browser, through a smartphone app, retail locations, through trade shows or events, through marketplace channels like Amazon or Walmart, or through a sales professional.

Price refers to how much your product or service costs. How you price your product depends on your competitors, demand, cost to produce the product, and what consumers are willing to spend. Companies also need to consider their pricing models, including choosing between one-time purchases and subscription models.

Product refers to the product or services your business provides to your target audience. The product a company provides can vary significantly depending on the type of company and what they do. For example, McDonald's provides consistent fast food, including hamburgers, french fries, and chicken products, whereas Salesforce provides customer relationship management (CRM) software and marketing automation tools for businesses.

Promotion refers to specific and thoughtful advertising that reaches a company's target market. A company might use an Instagram campaign, a PR campaign that showcases a product, or an email campaign to reach its audience at the right place and the right time.

How do you use the 4 Ps of marketing?

The model of the 4Ps can be used when you are planning a new business venture, evaluating an existing offer, or trying to optimize your sales with your target audience. It can also be used to test your current marketing strategy.

The Bottom Line

The four Ps of marketing—product, price, place, promotion—are often referred to as the marketing mix. These are the key elements involved in marketing a good or service, and they interact significantly with each other. Considering all of these elements is one way to approach a holistic marketing strategy.

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Delivered-at-place (DAP) is an international trade term used to describe a deal in which a seller agrees to pay all costs and suffer any potential losses of moving goods sold to a specific location. In delivered-at-place agreements, the buyer is responsible for paying import duties and any applicable taxes, including clearance and local taxes, once the shipment has arrived at the specified destination.

The phrase "delivered-at-place" was introduced in the International Chamber of Commerce's (ICC) eighth publication of its Incoterms—international commercial terms—in 2010.1

KEY TAKEAWAYS

• Delivered-at-place (DAP) is an international trade term used to describe a deal in which a seller agrees to pay all costs and suffer any potential losses of moving goods sold to a specific location.

• Delivered-at-place simply means that the seller takes on all the risks and costs of delivering goods to an agreed-upon location.

• Delivered-at-place is an international trade term that was introduced in the International Chamber of Commerce's (ICC) eighth publication of its Incoterms.

How Delivered-at-Place (DAP) Works

Delivered-at-place simply means that the seller takes on all the risks and costs of delivering goods to an agreed-upon location. This means the seller is responsible for everything, including packaging, documentation, export approval, loading charges, and ultimate delivery. The buyer, in turn, takes over risk and responsibility as of the unloading of the goods and clearing them for import.

A delivered-at-place agreement is applicable for any form, or combination of forms, of transportation and usually lists the point at which the buyer takes on financial responsibilities—for example, “Delivered-at-place, Port of Oakland.”

When it was introduced in 2010, DAP replaced the term Delivery Duty Unpaid (DDU) and, while DDU may still be used colloquially, DAP is now the official term used in international trade.1

The opposite of Delivered-at-place (DAP) is Delivered Duty Paid, which indicates that the seller must cover duties, import clearance, and any taxes.

Special Considerations

The main driver behind the ICC and the Incoterms is the need for a clear understanding of counter-party responsibilities in international contracts, particularly when it comes to who ships what to where. With the ICC issuing concrete definitions, contracts can refer to the Incoterms, and the signing parties have a shared understanding of responsibilities. The Incoterms are updated in order to simplify usages and remove obsolete terms. Delivered-at-place was one of those simplifications, as the definition applies regardless of the method of transport.

The ICC was founded in 1919 and has released eight updates of its international commercial terms since 1936.

Even with the clear guidelines for DAP arrangements, there are still situations that result in disputes, such as when the carrier of the goods incurs demurrage—a charge for failing to unload in time—as a result of not receiving the proper clearance from one of the parties. In these cases, the fault usually lies with whichever party was amiss in providing timely documentation, but determining that can be difficult, as documentation requirements are defined by the national and local authorities controlling ports and vary from country to country. Indeed, international trade law can be complex even with the benefit of defined contract terms.

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The Automated Clearing House (ACH) Network is an electronic funds-transfer system run by the former National Automated Clearing House Association (NACHA) since 1974.

The ACH payment system provides ACH transactions for use with payroll, direct deposit, tax refunds, consumer bills, tax payments, and many more payment services in the U.S.

KEY TAKEAWAYS

• The Automated Clearing House (ACH) is an electronic funds-transfer system that facilitates payments in the U.S.

• The ACH is run by the National Automated Clearing House Association (NACHA).

• Recent rule changes are enabling most credit and debit transactions made through the ACH to clear on the same business day.

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How the ACH Network Works

NACHA is a self-regulating institution, and it provides the ACH Network with its management, development, administration, and rules. The organization's operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.

The ACH Network is an electronic system serving financial institutions to facilitate financial transactions in the U.S. It represents more than 10,000 financial institutions and ACH transactions totaled more than $55 trillion in 2019 by enabling nearly 25 billion electronic financial transactions.1

The ACH Network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of direct deposits and direct payments, including business-to-business (B2B) transactions, government transactions, and consumer transactions.

An originator starts a direct deposit or direct payment transaction using the ACH Network. Originators can be individuals, organizations, or government bodies, and ACH transactions can be either debit or credit. The originator's bank, also known as the originating depository financial institution (ODFI), takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.

An ACH operator, either the Federal Reserve or a clearinghouse, receives the batch of ACH transactions from the ODFI with the originator's transaction included. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the receiving depository financial institution (RDFI). The recipient's bank account receives the transaction, thus reconciling both accounts and ending the process.

Benefits of the ACH Network

Because the ACH Network batches financial transactions together and processes them at specific intervals throughout the day, it makes online transactions extremely fast and easy. NACHA rules state that the average ACH debit transaction settles within one business day, and the average ACH credit transaction settles within one to two business days.

Changes to NACHA's operating rules expanded access to same-day ACH transactions, which allows for same-day settlement of most (if not all) ACH transactions as of March 19, 2021.1

The use of the ACH network to facilitate electronic transfers of money has also increased the efficiency and timeliness of government and business transactions. More recently, ACH transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e-check.

ACH for individual banking services had typically taken two or three business days for monies to clear, but starting in 2016, NACHA rolled out in three phases for same-day ACH settlement. Phase 3, which launched in March 2018, requires RDFIs to make same-day ACH credit and debit transactions available to the receiver for withdrawal no later than 5 p.m. in the RDFI’s local time on the settlement date of the transaction, subject to the right of return under NACHA rules.

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