Monthly Archives: September 2012
Companies need funds for many reasons such as expansions into new markets. The trouble with larger organizations and emerging companies is that they need more money than what they can obtain from a bank loan. Effi Enterprises works with companies to secure various means of financing such as venture capital, private equity financing, stocks and bonds or IPO’s. One solution that is offered to raise money for these companies is to issue bonds to the public market. Through offering bonds publically, it means that rather than looking for one huge investor, thousands of investors can lend a small portion of needed capital. A bond is essentially a loan in which the company is the lender. The company which sells a bond is called the issuer. It is sort of like an IOU given to a lender (the investor) by a borrower (the issuer).
There is a little more depth to it than a simple loan because most people do not loan out their money without expecting something in return. This means that the issuer must offer the investor something in exchange for the loan of their money. This comes from interest payments the rate of which is predetermined and they are made according to a schedule. The date which the issuer has to finish paying the borrowed amount is referred to as the maturity date. Bonds are classified as a fixed-income security because the amount that an investor will get in return is fixed as long as the bond is held until it matures.
What is the difference between stocks and bonds?
The difference in bonds and stocks is that bonds are a debt but stocks are equity. An investor can become part owner of a company by purchasing stock, or equity. But when an investor purchases debt, or bonds they become a creditor to the company. There is an advantage of becoming a creditor in that they will have a higher claim on assets than a shareholder will and if there was a failure causing a bankruptcy they would receive their money before the shareholders. The disadvantage is that a bondholder does not own shares of the company and it the company realizes large profits they will still only get their fixed amount in return. This means that owning bonds is less risky than owning stocks but there is also a much lower return.
Why purchase bonds?
It is true that stocks can offer a larger return than bonds, especially for time periods of at least 10 years. But that does not mean that investing in bonds is a bad investment. Bonds can be a good investment if you are unsure of the stock market’s short term volatility.
What types of bonds are available?
There are two basic types of bonds: municipal and corporate. Municipal bonds are also called “munis.” The returns on this type of bond will incur no federal taxes. Oftentimes local governments will also make their bonds tax free for residents which make them a completely tax free investment. These can be a great investment for many individuals. Corporations offer bonds in the say way it issues stocks. Sometimes a corporate bond is as short as a 5 year term, intermediate are 5 to 12 years and long term is anything over 12 years. These have a higher yield, but it also has higher risk involved. They are more likely to default than a government; but they can also be one of the most rewarding of all the fixed income investments. The credit quality of the company is also very important. Companies can also offer convertible bonds which can later be converted to stocks. Or they can offer callable bonds which the company can redeem before maturity.
Innovation is a very important aspect of running a business. It takes innovative thinking for an entrepreneur to get started and get the business off the ground to begin with; and it takes innovation to keep a business fresh and in a state of growth. Since so much business is conducted via the internet, small businesses are no longer just competing with local companies in their region but with global businesses. One of the keys to being able to keep a business alive is having an emphasis on innovation instead of getting in a rut of just doing things the old fashioned way.
According to the dictionary, innovation is defined as introducing something new, whether it is a method, an idea or a device. To maintain an innovative atmosphere it is important to create a work environment that fosters, stimulates and rewards creativity.
Business Model to Include Innovation
When developing your business model it must be a top priority to include innovation and creativity as core values. Employees need to know from the start that the company has an emphasis on innovation and that creativity is rewarded and not shunned. When you are drawing up the core values of the company do not be vague about innovative ideas. There is not enough to substantiate the thought in a simple statement like, “our company strives to innovate.” It leaves the employee scratching their head and wondering what needs to be innovated products or processes. Be very specific with statements.
Let Everyone Participate
Engineers can be great innovators; however do not limit innovations to just one type of worker. You never know when a great innovative idea for a product may come from an office worker or an accountant. Don’t discount their new ideas on how to process purchase orders or invoices. They may have some innovations that end up saving the company a substantial amount of money. An idea that leads to improvements may come from anywhere; it is important to encourage an environment which is open to innovation for everyone in the company.
Build a Creative Atmosphere
It is up to you to create a creative atmosphere. Use colors which stimulate creativity and make sure there is adequate lighting; natural light is best if it is possible. Use inspiring colors and hang artwork throughout the workplace. It is also a great idea to provide a variety of creative activities for employees. Providing the right environment can increase employee’s creativity and output. There are some companies which provide stimulating games such as foosball and pool to help keep employee’s creative juices flowing.
Designate Time for Creativity
Stuffing someone in a cold white office for hours on end will stifle creativity. Get your workers out of the office now and then. Perhaps one Friday a month take a group outing. This may depend on the type of work that they need to do but trips to the library, gym or even a local coffee shop can spark creativity. One book company we are familiar with takes their design artists out to local bookstores/coffee shops once a month. They take time to discuss the various book covers, the creativity or lack of creativity in the designs. This fosters innovative thinking.
Reward Creativity and Innovation
Make sure to reinforce innovative ideas. They should feel comfortable sharing new ideas and it is important that they get credit for the ideas that are used. Rewards do not have to be outlandish, gift cards are an inexpensive reward. It is okay to reward with money and some even offer a bonus as well as a simple, but public recognition of their contribution.
To foster innovation will mean that you create an environment where new ideas are welcomed and rewarded. It is not an expensive undertaking to design a work environment that stirs up employee’s creative juices and foster innovation that each person has.
With recent computer glitches chipping away at investor’s confidence in the market, a repeat of the stock market crash of 1929 becomes a real fear. Investors such as Efraim Landa must continue to exercise caution in their investments. Effi Enterprises is a consulting business which offers counsel to emerging businesses and entrepreneurs regarding financial investments and how to increase the value of the company. They offer marketing strategies and assist in helping businesses get started with brokers, divestiture strategies, capital sources and IPOs. Because Effi Enterprises helps businesses create value it is important to stay up to date on various aspects of the market and note how changes can affect business on every level. One of the acts that helped shape the market as we know it today was the Glass-Steagall Act.
The Glass-Steagall Act (GSA) brought about a separation between commercial banking activities and the investment markets. This was due to the fact that most agreed that too much commercial bank involvement in market activities was behind the stock market crash of 1929. According to Congress banks were taking too large of risks with their depositors’ money. The GSA continued as established until it was repealed in 1999.
Just before the depression most feel that commercial banks were too careless in their investing practices. They did a lot of investing of their assets and became greedy by taking larger risks hoping to gain even larger financial rewards. The objectives of banking itself became somewhat blurred and many loans were made into companies that the bank had invested in. They encouraged their clients to invest in the same stocks. Many feel that this mismanagement of funds caused the stock market crash. Henry Steagall was chairman of the House Banking and Currency Committee and seated in the House of Representatives at the time. Senator Carter Glass founded the US Federal Reserve System. Steagall supported Glass after they added an amendment which would allow bank deposit insurance for the first time.
The GSA was in response to financial crisis and set up a sort of regulatory firewall between investment banks and other commercial activities. Banks were allowed a one year time frame in which to decide whether they wanted to specialize in investment banking or commercial banking. The Act allowed only 10 percent of the income for commercial banks to come from securities; but one exception was allowed in which commercial banks were allowed to underwrite government issued bonds. JP Morgan and other financial giants were forced to cut the services they provided which cut their income drastically as well. The goal of the GSA was to prevent banks from using deposits if an underwriting job failed. Many in the financial community felt like the GSA was too harsh and glass even moved for a repeal right after the Act passed claiming himself that it was an overreaction.
The Federal Reserve Board is the US bank regulator implemented the GSA but in 1956 Congress decided to regulate another bank sector. To keep any specific financial corporation from gaining too much power, they extended the GSA by adding the Bank Holding Company Act to create a wall between banking and insurance companies. This stopped banks from being able to underwrite insurance companies even though they could sell insurance.
There have been many debates over whether these restrictions were the healthiest option for the industry or not. Many felt like banks should be allowed to diversify to reduce risks and that the GSA restrictions had the adverse effect and made the banking industry riskier instead of safer. After the Enron market mistakes banks are more likely to be transparent and less likely of making risky or unsound decisions regarding investment procedures. Reputation is a key component in the market today and this in itself motivates banks to regulate their own activities.
In November, 1999, congress repealed the GSA and eliminated the restrictions prohibiting affiliations between investment and commercial banks. The Gramm-Leach-Bliley Act allows banks to engage in a wider range of services which include underwriting. The intent of the GSA was to prevent deposits from being lost if there were investment failures, the repeal and establishment of the Gramm-Leach-Bliley Act demonstrates that many times attempts to regulate can end up with adverse effects.
Many people depend on the stability of the stock market from day to day. It is understood of course that there are times when it can have greater fluctuations than others. And there are times when the market becomes volatile which can be advantageous to some and a detriment to others depending on the types of trades occurring at the time. But for regular investors such as Effi Enterprises a glitch in the system can be disastrous. Efraim Landa helps business owners organize and maintain investments, offer IPOs, learn about brokers and dealers, and use many other aspects of financial resources to increase the value of their business or company. A glitch can mean real trouble for a business which is trying to achieve valuation. But we must remember that the market is primarily computer based and occasionally there are those times when a glitch will occur. Such was the case on May 6, 2010 when the Flash Crash occurred.
On this date the crisis occurred in a very short time frame of about 5 minutes just before 3 p.m. In this short amount of time the Dow Jones Industrial Average suddenly dropped almost 600 points. It was nick named the “flash crash.” Most blame it on a computer glitch of some sort while others tried to look at several trades which occurred shortly before the crash happened.
This year in May Facebook anticipated very good first day trades but on May 18 their jump into the market with their IPO ended up in chaos. A NASDAQ computer glitch delayed the opening by about 30 minutes which meant that investors were unable to purchase shares in the morning and then sell them later that day. They couldn’t even tell if their orders had gone through. NASDAQ is looking to pay nearly $62 million to different firms who suffered financial harm due to the glitch.
March of this year there was a glitch of some sort which affected at least one market which was trying to offer an IPO. Kansas City based BATS Global Markets, Inc. ended up canceling the IPO because a series of glitches never allowed the stock to open for trade. Later the CEO, Joe Ratterman, resigned as the chairman and offered a public apology.
Even though the specific details of what happened are sketchy, most of them seem to come from issues with the algorithms which keep high frequency trading afloat. These types of trades are conducted at a rate of millions in just nanoseconds. The large volume of stock trading is all computerized this means that the chance of malfunction is relatively high with the biggest problem being that a human cannot stop them before it’s too late and the damage is usually already done.
For investors such as Efraim Landa these glitches can be very detrimental. They rely on the constant working of the market and place automatic orders expecting that their brokers will sell the stocks when they hit a particular price. Kevin Callahan, the spokesman for the Securities and Exchange Commission (SEC) made a statement in which he said that they “are closely monitoring the situation.” He also stated that they were in constant contact with the New York Stock Exchange and various other market participants. Many leading businessmen are asking for better oversight of some of the practices such as high frequency trading which seems to be the culprit leading to these types of glitches.
The most interesting thing about this recent glitch is that it occurred on the same day that the SEC published a rule which was set up to prevent glitches such as the “flash crash” of 2010. The goal of the rule was to establish one consolidated record of all the day’s trades. Many are calling for tighter regulations and closer monitoring to help prevent these glitches from occurring.
Efraim Landa is president of Effi Enterprises which assists entrepreneurs and emerging companies create value. The company offers growing companies hands-on executive management and leadership and helps them discover various ways of securing finances. They offer options such as introducing businesses to angel money, marketing strategies and divestures among many other options. Effi Enterprises works with emerging companies to help find the best solution for their particular situation. This may include stock options for employees, future contracts or any number of other strategies. Future contracts, options, and warrants are all common derivatives.
What is a derivative?
A derivative’s value is based on a contract between parties who are agreeing on an underlying financial asset, security or index. Some of the most common underlying instruments are bonds, currencies, market indexes, stocks interest rates and commodities. Some common derivatives are warrants, swaps, options, forward contracts and futures contracts. Basically, a derivative is an instrument which derives its price from another variable or financial asset. A stock option derives its value from that of a stock; and a swap gets its value from the interest rate index. A derivative obtains its value form an underlying asset and the derivative’s price will rise or fall along with the underlying asset’s value. The derivative’s value is based off of the price of the instrument and the payoff will mirror that of the instrument that they are based on.
A derivative is a contract on an underlying asset. There are many different derivatives but options are the most common type. When an owner purchases an options contract they have the right to purchase or sell the asset at a certain price prior to a pre-set date. The most common underlying assets for which contracts are purchase are stocks, commodities, bonds, currencies, market indexes and interest rates.
Basically, a derivative is a contract between a buyer and a seller. Unlike traditional investments, there is a pre-set expiration date. This time is established at the time the contract is purchased. Payoff is typically determined at the expiry most of the time. Occasionally there is no exchange of money when the contract is made.
Some very well established exchanges trade derivatives. The New York stock Exchange, the Chicago Board of Trade and the French CAC are three. Trades such as these are called exchange-traded derivatives which mean that the terms and features are highly standardized. The advantage to these is that they are regulated which is just an extra safeguard for investors.
Other types of derivative instruments like swaps, forwards and other exotic derivatives are traded over-the-counter. These have very flexible terms and a large number of underlying assets and combinations which can be purchased. These types of financial dealers can customize the derivatives for specific clients and their needs.
The largest thing that makes derivatives appealing to businesses is that they allow a certain amount of leverage. This is a financial term which refers to the increase that occurs when a small quantity of money is all that is used to control another item which is of a larger value. An example is a mortgage. A person can gain control of a highly priced piece of property for a smaller amount of money. Derivatives can give this same type of leverage, or multiplication as a mortgage can. An investor can actually control company stock which has a large value by using a small amount of money. An investor has the opportunity to make more money than the company who is reaping the benefit of the investment.
However, if derivatives take a turn for the worse they can be very costly for a business. In 1995, trader Nick Leeson traded derivatives but the trades were not profitable and because of the leverage the losses were so huge for the Barings Bank of England that they ended up in bankruptcy. Warren Buffet, who is a very successful investor, is against using derivatives and he sees them in a very negative light. However, just like any investment there are always risks involved. Derivatives are a form of investing which have been part of business finance for many years and will likely remain an integral part for many years to come.