What Is a Bitcoin Wallet?
TRADERPROFX brings you the ‘highlights’ of the most popular financial and trading terms that you should be familiar with in order to be a successful trader, and this time, what a Bitcoin wallet is and why does everyone have to have one?
A Bitcoin wallet is a kind of digital wallet used to send and get Bitcoins. This is analogous to an actual wallet. In any case, rather than putting away actual money, the wallet stores the cryptographic data used to get to Bitcoin addresses and send transactions. Some Bitcoin wallets can likewise be utilised for other cryptocurrencies.
- A Bitcoin wallet is a gadget or program for holding and sending Bitcoins.
- Bitcoin wallets contain the private keys expected to sign Bitcoin transactions.
- Any individual who realises the private key can handle the coins related to that location.
- The most dependable Bitcoin wallets are hardware wallets. Web wallets are the least secure.
- Some Bitcoin wallets can be utilised for multiple cryptocurrencies.
Understanding Bitcoin Wallets
A Bitcoin wallet is a device or program that can associate with the Bitcoin blockchain. Despite the fact that it is normal to think about these wallets “putting away” Bitcoins, a Bitcoin wallet really addresses cryptographic control of a blockchain address.
Each Bitcoin wallet contains a bunch of mystery numbers, or private keys, compared to the client’s blockchain address book. These keys are utilized to sign Bitcoin transactions, successfully giving the client authority over the bitcoins in that address. If an attacker can steal a wallet’s private keys, they can move the Bitcoins in that address to their own wallet.
The main types are desktop wallets, mobile wallets, web wallets, and hardware wallets.
Desktop wallets are introduced on a desktop or PC laptop computer and furnish the client with full oversight over the wallet. Some desktop wallets likewise incorporate extra functions, like hub programming or exchange integration.
In any case, desktop wallets are considered somewhat unreliable, because of the peril that the PC could be compromised. Some notable desktop wallets are Bitcoin Core, Armoury, Hive OS X, and Electrum.
Mobile wallets play out similar functions as a desktop wallet, yet on a smartphone or other mobile device. Numerous mobile wallets can work with speedy payments in actual stores through near field communication (NFC) or by scanning a QR code.
Mobile wallets will in general be compatible with either iOS or Android. Bitcoin Wallet, Hive Android, and Mycelium Bitcoin Wallet are instances of mobile wallets. There have been many instances of malware camouflaged as Bitcoin wallets, so it is advisable to research carefully prior to concluding which one to utilise.
A web wallet is an online service that can send and store cryptocurrency for your benefit. The specific advantage of web wallets is that they can be accessed anywhere, from any gadget, as effectively as browsing your email.
Nonetheless, security is a main issue. Notwithstanding the risks of malware and phishing to steal user’s passwords, there is likewise critical counterparty hazard. Numerous Bitcoin users have logged in to a third-party service, just to discover that their Bitcoins have vanished.
Some of the most known services are Coinbase, Blockchain, and Gemini.
Hardware wallets are by a wide most secure and dependable kind of Bitcoin wallet, as they store private keys on an actual gadget that can’t access to the Internet. These gadgets resemble a USB drive.When the user wishes to make a Bitcoin transaction on their PC, they plug in the hardware wallet, which can sign transactions without compromising the user’s private keys.
Hardware wallets are practically immune to virus attacks, and successful thefts have been rare. These devices often cost between $100 to $200. Ledger and Trezor are both well-known hardware wallet manufacturers.
Special Considerations for Wallet Security
Wallet safety is important, as cryptocurrencies are high-value targets for hackers. Some protections incorporate encrypting the wallet with a strong password, utilizing two-factor verification for exchanges, and storing huge sums in an offline gadget.
Most modern wallets are produced from a twelve-word mnemonic seed, which can be utilised to reestablish the wallet if the gadget is lost or damaged. These words ought to be carefully stored in a protected spot, since any individual who finds them will be able to steal your cryptocurrency.
How to Calculate Risk in Trading?
As ancient Romans observed, success loves preparation, and to be prepared in trading means managing risks well. If you do not analyse and quantify the potential for losses in an investment, you will quickly and surely incur a loss of your entire capital, which can prove irrecoverable. Knowing how to manage your losses in trading is, therefore, the number one skill that any trader has to develop before launching his or her trading career. In the paragraphs below, we are explaining what risk management is, how it works, and what mistakes you need to avoid to turn trading into a profitable business.
What Is Risk Management?
Risk management is defined as the process of managing, assessing, and mitigating losses. This definition applies to investing and any business. Risk management exists in many forms in the financial world.
Examples of Risk Management in Investing, Business, and Everyday Life
If you do not understand what it means to measure risk, do not worry. Think of your daily life. You constantly take measures against risk even if you are not consciously aware that you practice risk management. When you fly abroad, you exchange your local currency for the currency of the country of your destination. You also make sure that your credit or debit card is accepted in the place where you plan to land. These actions are nothing else than smart measures against the risk of finding yourself without money in a foreign country. When you buy an adaptor for your smartphone, you take precautions against losing connection with the people you leave behind at home.
An even more familiar form of risk management is health or property insurance. By buying these types of insurances, you protect yourself against illnesses, homelessness, burglary, and possibly even death. Pension is another valuable example. When you accumulate a fund for later use as a retirement income, you minimise the risk of facing destitute old age. And recently we have mastered another type of risk management: by keeping social distance, washing hands, and wearing facial masks, we have been shielding ourselves from Coronavirus.
In business and investing, you take similar steps to protect yourself against monetary losses and bankruptcy. Suppose you decide to buy a low-risk government security instead of high yield corporate bonds. In doing so, you exercise smart risk management. When you take various types of derivatives and futures securities, you hedge against wide swings in your investment portfolio. Your company might do the same. Firms often use financial derivatives like options and futures and employ such strategies as investment diversification in order to mitigate risks.
- Value per pip;
- The dollar value you are risking on each trade;
- The distance of your stop loss.
You can determine these three constituents in two easy steps. Once you determine them, you have calculated your forex position size and risk involved in your trading. To calculate how much you will lose in terms of pips, take into account your trading edge rules. TRADERPROFX’ trading platform facilitates your calculations with its sophisticated tool which measures the distance from your entry and stop-loss level in terms of pips. Its stop-loss function is designed to limit losses in volatile markets moving in a contrary direction to the initial trade. TRADERPROFX software implements this function by setting a stop-loss level, a specified number of pips away from the entry price.
To illustrate how TRADERPROFX’ measuring tool works, let us suppose you want to purchase the CAD/USD pair and set your stop-loss level 70 pips away from your entry. Then, take the second step: use our calculator and fill in the following information:
- Account currency
- Account size
- Risk ratio in percentages
- Stop-loss in pips
- Currency pair
After you have inserted the required data, push the button that says “Calculate.” Our software will quickly calculate for you your Forex Position Size and Risk. In this particular case, your risk would be $200 per trade. You can enter with no more than 0.286 lots; that is, no more than 28571 units of currency pair.
Or consider another example. Suppose you have $10,000 in yourTRADERPROFX trading account. Suppose also that you are risking 1% on each trade. You want to trade the AUD/USD pair and short it at 1.2700, since it is a resistance line – a price level where rising prices stop, make a U-turn, and start sliding. You also have a stop loss of 200 pips.
The formula used to make the required calculation is as follows:
position size = amount you are risking (stop-loss value per pip)
According to this formula, the amount you are risking equals 1% of $10,000, which is $100. Value per pip for one standard lot equals $10/pip. Stop-loss equals 200 pips. By calculating the numbers given in the second example according to this formula, you will receive these calculations: your position size equals 100/ (200*10), which equals 0.05 lot or 5 micro-lots. This means that you can trade 5 micro-lots on AUD/USD with a stop loss of 200 pips. The maximum loss on this trade is $100, which is 1% of your trading account.
If this formula looks intimidating, do not give up on risk management. You do not need to make these complex calculations by yourself. Please, use our position sizing calculator and it will correctly calculate your risk in seconds. You just need to fill in all the information correctly and trust our cutting-edge algorithms. TRADERPROFX risk calculator will take care of your risk management and will protect you from the loss of your capital.
Financial markets are volatile. At the foreign exchange, currency prices can go up and down within seconds, presenting you with profitable opportunities but also forcing you to face the risk of financial catastrophe. As traders, we cannot foresee all turns in currencies’ trajectories. But we can calculate our risks with a high degree of precision and, in doing so, save ourselves from financial insolvency.
How to Calculate Return on Investment (ROI)
TRADERPROFX brings you the ‘highlights’ of the most popular financial and trading terms that you should be familiar with in order to be a successful trader, and this time, how to calculate your return of investment (ROI).
In the paragraphs below, we are explaining how to calculate Return on Investment or ROI. But if you are new to the world of finance, you might not know what ROI is or might have only a vague notion of this concept. Before we show how to calculate ROI, a few words on the concept itself are in order.
What Is Return on Investment (ROI)?
Return on Investment is a performance measure. It is used in businesses to estimate the profitability or efficiency of an investment. ROI is also used to compare the efficiency of several investments. What Return on Investment does is it measures return on particular investment, compared to its cost.
Simply put, to calculate ROI, you need to divide the return of your investment (your profit) by its cost or outlay. The result is expressed either as percentage or a ratio. But note that ROI does not take into account the passage of time. Hence, it can miss opportunity costs of investing in some other businesses.
Suppose your investment has a profit of $100. If its cost is $100, its ROI will be 1, or 100%.
How to Calculate Return on Investment?
There is a formula to calculate your ROI. To calculate your Return on Investment, you need to subtract the cost of your investment from the current value of your investment. Then, you need to divide the received amount by the cost of your investment.
In this formula, Current Value of Investment is the proceeds received from the sale of the investment of interest. Note that ROI is measured as a percentage. Therefore, Return on Investment can be compared with returns from other investments, which enables you to measure your different investments against one another.
Why Is ROI Popular?
People prefer to use this metric because it is simple and applicable to various spheres of your business. It can help you precisely estimate the profitability of your investments. Whichever investment you make, use the Return on Investment formula to see whether it brings you profits. For example, you can count the ROI on a stock or asset investment, the ROI you expect on growing your business, or the ROI received in a real estate deal.
The ROI formula itself is so simple that even if you are not good at math, you will be able to interpret it. Simply put, if your investment’s ROI is positive, it means your business is profitable and can be moved forward. If you are choosing between several investment options, calculating ROI will come in handy as well. If you see that you have options with higher ROIs, you can easily choose the best option on offer, weeding out those that are less profitable. If you discover that the return on your investment is negative, you will understand that your business is in trouble.
Limitations of ROI
As mentioned, ROI does not take into account the progress of time. When you compare your investments, you will keenly feel these limitations. Suppose you have made two different investments. When you compare them by using the ROI formula, you discover that, say, your first investment was thrice larger than your second investment. Yet you also discover that the time between your purchase and sale was half a year for your first investment but a year and a half for your second one. The ROI formula did not take these significant differences into consideration and disregarded the time value of money. If this is the case, you would need to adjust your year-and-a half investment, accounting for time differences between the two investments.
To refine your calculations and your business management, you are advised to use ROI together with the rate of return (RoR), which, unlike ROI, does consider your investment’s time frame.
Or you can use net present value (NPV). NPV accounts for differences in the value of money over time, due to inflation. Analysts often call the application of NPV when calculating the ROR the real rate of return. Alternatively, you can use such metrics as the internal rate of return (IRR).
What Is a Profitable ROI?
This question does not have a definite answer, because investors have to consider their risk tolerance and the time during which their investment starts generating a return to understand what ROI is good for them. If you hate taking risks, you might be ready to receive lower ROIs, provided you take lesser risks. If your investments take more time to begin earning you profits, they need to generate a higher ROI.
On average, companies listed on such large indices as the S&P 500 have the annual ROI of 10%. But ROIs differ from industry to industry. Tech companies may generate larger ROIs than energy ones, yet ROIs within one industry may also change over time, because of competition, technological innovations, and people’s preferences.
We, at TRADERPROFX we can help you to create the best investment plan so your ROI will always be between great to amazing.
TRADERPROFX brings you the ‘highlights’ of the most popular financial and trading terms that you should be familiar with in order to be a successful trader, and this time, what IPO is?
An unlisted company (A company that isn’t listed on the stock exchange) declares an initial public offering (IPO) when it chooses to raise funds through the sale of securities or shares for the first time to the public. All in all, an IPO is the selling of securities to the public in the primary market. A primary market deals with new securities being given for the first time. After listing on the stock exchange, the company turns into a publicly-traded company and the shares of the firm can be freely traded in the open market.
IPO is utilized by small and medium enterprises, startups, and other new companies to expand, work on their current business. An IPO is a way for companies to secure new capital, which thus can be utilized to finance research, store capital consumption, pay off debt and explore other opportunities.
An IPO will likewise bring transparency into the affairs of the company since it will be needed to inform financial numbers and other market-related developments on time to the stock exchanges. The company’s investment in different equity and bond instruments will go under more prominent examination after it gets listed. The IPO of any company brings an incredible deal of attention and credibility. Analysts all throughout the world report on the investment choices of the customers.
Investment betting on an IPO can acquire attractive returns in case they are wise and have some expertise. The investors can form a decision by going through the plan of the companies initiating IPO. They need to go through the IPO prospectus cautiously to form an informed idea regarding the company’s business plan and its motivation for loading up stocks in the market. In any case, one should be careful and have a clear comprehension of analyzing financial metrics to distinguish opportunities.
An unlisted company (A company that isn’t listed on the stock exchange) reports an initial public offering (IPO) when it chooses to raise funds through the sale of securities or shares for the first time to the public. At the end of the day, IPO is the selling of securities to the public in the primary market. A primary market deals with new securities being issued for the first time. After the listing on the stock exchange, the company turns into a publicly-traded company and the shares of the firm can be traded freely in the open market.
What Bid and Ask Are?
Very important terms, TRADERPROFX brings you the ‘highlights’ of the most popular terms you should know in order to be a successful trader, and this time, ask and bid prices.
The term “bid and ask” (otherwise called “bid and offer”) refers to a two-way value quotation that shows all that expected price at which a security can be sold and purchased at a given point in time. The bid price addresses the maximum price that a purchaser will pay for a share of stock or other security. The ask price addresses the base price that a seller will take for that same security. An exchange or transaction occurs when a purchaser in the market will pay the best offer accessible—or will sell at the highest bid.
The difference among the bid and ask costs, or the spread is a critical indicator of the liquidity of the resource. As a general rule, the smaller the spread, the better the liquidity.
Understanding Bid and Ask
The average investor fights with the bid and ask spread as a suggested cost from trading. For instance, if the current value quotation for the stock of ABC Corp. is $10.50/$10.55, investor X, who is hoping to purchase A at the current market cost, would pay $10.55, while investor Y, who wishes to sell ABC shares at the current market cost, would get $10.50.
Who Benefits from the Bid-Ask Spread?
The bid-request spread works to the benefit of the market maker. Proceeding with the above example, a market maker who is providing a price of $10.50/$10.55 for ABC stock is showing a readiness to purchase A at $10.50 (the bid cost) and sell it at $10.55 (the asked cost). The spread addresses the market maker’s profit.
Bid-ask spreads can differ broadly, depending on the security and the market. Blue-chip companies that establish the Dow Jones Industrial Average might have a bid-ask spread of only a few cents, while a little cap stock that trades under 10,000 offers a day might have a bid-ask spread of 50 cents or more.
The bid-ask spread can broaden drastically during times of illiquidity or market turmoil, since traders can not be willing to pay a price beyond a specific threshold, and sellers may not acknowledge costs under a specific level.
The difference between a Bid Price and an Ask Price
Bid prices refer to the highest cost that traders will pay for a security. The ask price, then again, refers to the least value that the proprietors of that security will sell it for. In the event that, for instance, the stock is trading with an ask price of $20, then, at that point, an individual wishing to purchase that stock would have to offer at least $20 to buy it at today’s price. The gap between the bid and ask prices are regularly referred to as the bid-ask spread.
What’s the significance here When the Bid and Ask Are Close Together?
At the point when the bid and ask prices are extremely close, this commonly implies that there is ample liquidity in the security. In this situation, the security is said to have a “narrow” bid-ask spread. The situation can be useful for investors since it makes it simpler to enter or leave their positions, especially in the case of large positions.
Then again, securities with a “wide” bid-ask spread—that is, the place where the bid and ask prices are far separated—can be tedious and costly to trade.
How Are the Bid and Ask Prices Determined?
Bid and ask prices are set by the market. Specifically, they are set by the actual buying and selling choices of individuals and institutions who invest in that security. Assuming interest overwhelms supply, the bid and ask prices will steadily move upwards.
Then again, if supply overwhelms demand, bid and ask prices will float downwards. The spread between the bid and ask prices are dictated by the overall level of trading movement in the security, with higher action prompting to narrow bid-ask spreads and vice versa.
What Indices Are and How to Trade Them?
You can trade indices in any part of the world. There are large indices in the USA, Europe, Asia, and Australia. The largest American indices are the following:
- The Dow Jones (DJI) – This index measures the value of the 30 largest blue-chip stocks in the US.
The NASDAQ 100 (US Tech 100) – This index reports the market value of the 100 largest non-financial companies in the US.
- The S&P 500 (US 500) – This index follows the value of 500 large-cap companies in the US.
In Europe, you can trade such indices as the DAX, the CAC, and the FTSE:
- The DAX (Germany 30) – This index tracks the performance of the 30 largest companies listed on the Frankfurt Stock Exchange.
- The CAC (France 40) – This is the French Stock Market tracking the 40 largest French stocks based on the Euronext Paris market capitalization.
- The FTSE 100 – This index measures the performance of 100 blue-chip companies listed on the London Stock Exchange.
In Asia, there are several large indices. The most popular among them are the following:
- The Hang Seng – This is a market capitalization-weighted index of the largest companies that trade on the Hong Kong Exchange.
- The Nikkei 225 – This is the leading index of Japanese stocks. It is composed of Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange.
- The ASX 200 – This is a market-capitalization-weighted stock market index of stocks listed on the Australian Securities Exchange.
How Are Indices Calculated?
Most stock market indices are calculated using the Capitalization-Weighted Average. This method gives greater weighting to larger-cap companies. That is, it takes the size of each company into account. The more a particular company is worth, the more share’s price will affect the index as a whole. Lower cap companies will affect the index’s performance to a lesser degree.
Some popular indices are, by contrast, price-weighted. The Dow Jones and the Nikkei 225 are price-weighted indices. This method gives greater weighting to companies with higher share prices. Changes in their values will affect the current price of an index more than changes in companies with lower share prices: a stock trading at $200 will influence the value of the Dow Jones or the Nikkei more than a stock trading at $55.
Note that because indices are numbers, you cannot sell or buy them directly. To trade a certain index with TRADERPROFX, you need to choose either Index Funds or Exchange-traded funds, or Futures, or Options, or CFDs. All of these products track the price of the underlying index. Also note that because they are made of so many stocks, the value of indices is always shifting. Indices are more volatile than individual shares. They do provide traders with multiple trading opportunities. Yet they also increase traders’ risk.
Why Do You Need to Trade Indices?
Despite the risks involved in trading indices, any index can potentially provide you with many trading opportunities and various ways of trading. When you trade indices, you can go long or short, trade with leverage, and hedge your existing positions.
Go Long or Short
You can go long or short when trading an index with TRADERPROFX, provided you trade it with CFDs. When you go long, you are buying a market, because you expect the price to jump. When you go short, you are selling a market, because you predict that the price will slide. With CFDs, your profit or loss is determined by the accuracy of your prediction together with the overall size of the market movement.
Trade with Leverage
CFDs can be leveraged. That is, you need to invest only a small initial deposit, called a margin, to open a position giving you much larger market exposure. But note that when you trade with leverage, your profit or loss is calculated using the size of the entire position, not just the initial margin invested to open it.
Hedge Your Existing Position
If you trade different shares, you may short your index to prevent losses in your portfolio. When the market enters negative territory and shares’ value diminishes, the short position on the index will increase in value and will thus offset the losses from the stocks. But note that when stocks rise, the short position of the index will offset a proportion of the profits you have earned.
But suppose you have a short position on several individual stocks featuring on the index where you trade. If this is the case, you can hedge against the risk of the price’s increase with a long position on the index. When the index jumps, your index position will bring you a profit and, in so doing, will offset a proportion of the losses on your short stock positions.
More volatile than individual shares, indices can bring you lucrative trading opportunities and handsome profits. Sign up with TRADERPROFX now and confidently trade indices with us.
This article explains what makes the S&P 500 Index stand out among other indices. Before we elaborate on the S&P 500, however, a short definition of an index is in order.
An index is a method to evaluate the performance of a group of assets. As a rule, indices measure the performance of a group of securities meant to replicate a specific area of the market. These can be so-called broad-based indices tracking the whole market. Indices can also be more specialized, evaluating a specific industry or a segment.
What Is the S&P 500 Index?
The index under discussion is called the Standard & Poor’s 500 Index, or the S&P 500 for short. It is an index of the 500 largest US companies which are traded publicly. The index is market-capitalization weighted; that is, it is a type of index where its individual components are included in amounts corresponding to their total market capitalization, shortened as “market cap”.
What Companies Are Eligible for S&P 500 Inclusion?
Note that the S&P 500 is not a list of exactly 500 US companies by market capitalization, since there are other criteria by which companies get included in the index. To be eligible for S&P 500 index inclusion, a company should satisfy the following criteria:
- Be a US company;
- Have a market capitalization of at least USD 11.8 billion;
- Be highly liquid;
- Have a public float of at least 10% of its shares outstanding;
- Its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive.
What Companies Are Listed on the S&P 500?
The S&P 500 Index is viewed as the best gauge of large-cap US equities. The Index does not provide the full list of 500 companies, many of which include technology companies and financial businesses. The top ten S&P 500 companies by Index weighting are the following:
- Apple (AAPL), index weighting is 5.9%.
- Microsoft (MSFT), index weighting is 5.4%.
- Amazon.com, index weighting is 4.2%.
- Facebook, (aka Meta Platforms) (FB), index weighting is 2.2%.
- Alphabet (GOOGL), index weighting is 2.0%.
- Alphabet (GOOG), index weighting is 2.0%.
- Tesla (TSLA), index weighting is 1.5%.
- Berkshire Hathaway (BRK.B), index weighting is 1.5%.
- JPMorgan (JPM0, index weighting is 1.3%.
- Johnson & Johnson (JNJ), index weighting is 1.2%.
While many of these above-mentioned companies may be household names, broad popular familiarity is not a requirement. That means that the index also includes lesser-known companies, so long as they meet the criteria for index inclusion.
What Is Inside the S&P 500 Index?
There are eleven sectors included in the S&P 500 Index, according to the Global Industry Classification Standard:
- Consumer Discretionary
- Consumer Staples
- Health Care
- Information Technology
- Communication Services
- Real Estate
These sectors are further divided into 24 industry groups, 69 industries, and 158 sub-industries. The S&P 500 represents more than 83% of the total domestic U.S. equity market capitalization. The S&P Composite 1500, which comprises the S&P 500, S&P MidCap 400, and S&P SmallCap 600, represents over 90% of the S&P TMI (Total Market Index).
History of the S&P 500
The origin of the S&P 500 goes back to 1923 when Standard & Poor’s introduced indices that included 233 companies spread over 26 industries. The S&P 500, as it is now known, was introduced in 1957. The S&P 500 is regarded as a proxy for the U.S. equity market. It is the only stock market benchmark serving as an economic indicator in The Conference Board Leading Economic Index. It has stood for U.S. stock market performance in that context since 1968.
S&P 500 Index Construction
In order to calculate the market capitalization of a company, one needs to multiply the current stock price by the outstanding shares; that is, those shares that are shown on a company’s balance sheet under the heading Capital Stock. Note that the S&P only uses free-floating shares or the shares that are traded by the public. The S&P 500 adjusts each company’s cap to compensate for the issues of new shares or companies’ mergers. The value of the index is calculated by totaling the adjusted market caps of each company and dividing the result by a divisor.
Investors can calculate how much a particular company weighs in the index. This information is important: if a stock jumps or sinks, investors, by calculating its weight, can understand whether it might have an impact on the S&P 500 as a whole. A company with a 15% weighting will affect the value of the S&P 500 more than a company with a 1% weighting.
S&P 500 Most Recent Rebalancing
The S&P 500 was rebalanced last time on March 12, 2021. The rebalancing was brought into effect on March 22, 2021, before markets opened. NXP Semiconductors (NXPI), Penn National Gaming (PENN), Generac Holdings (GNRC), Caesars Entertainment (CZR) were included on the list of S&P 500 companies. Xerox Holdings (XRX), Flowserve (FLS), SL Green Realty (SLG), and Voter (VNT) were crossed out of the list.
TRADERPROFX always offers the widest range of indices for daily and long-term trading for its clients. Join now!
When you enter the financial world, you encounter such concepts as money, currency, and fiat money. And you might wonder while hearing these words whether they differ. Are money, currency, and fiat money interchangeable synonyms or are there conceptual differences between these notions? In what follows, we are shedding some light on these concepts, dwelling longer on the concept of fiat money.
How Do Money and Currency Differ?
The two concepts of money and currency seem interchangeable, but they are fundamentally different. These are several points at which these two concepts diverge:
- Money is not tangible. They cannot be touched or smelled. Money is seen only as numbers. Currency is, by contrast, tangible. It is the promissory note or coin that can be touched, smelled, cast up or down, or kept in your wallet.
- Money takes the form of numbers. Currency is shaped like coins, banknotes, or hard plastic.
- Money can be transferred online, whereas currency must be transferred physically. You hand currencies out to another person.
What Is Fiat Money?
The concept of fiat money is not difficult to understand. The etymology of the word fiat might be helpful. This word comes from the Latin word facio – facere meaning “to do” and in Latin means “let it be done.” It, therefore, presupposes some authority behind it. When we hear the words fiat money, we hear the authoritative voice giving it permission to exist. And indeed, fiat money is currency backed by the government that issued it. Imagine the government minting fiat money and confirming its existence by its authority and you will understand the concept of fiat money.
How Does Fiat Money Differ from Commodity Money?
Another type of money – commodity money – is backed by precious commodities – gold or silver. The value of fiat money is not derived from the value of gold or silver but from the relationship between supply and demand. Its value also depends on the stability of the government that issued it rather than on the stability and worth of commodities backing it, as is the case with commodity money. Note that the majority of our paper money, be it the US dollar, the euro, or the British pound, are fiat currencies.
It is worth emphasizing that fiat money has value only because the government decides to maintain its value. Two parties in a transaction can agree on its value, too. Fiat money is inconvertible and cannot be redeemed. Because fiat money is not backed by physical reserves, such as gold or silver, it can lose value due to inflation or hyperinflation. If people stop believing in their country’s currency, it will stop having any value. Herein lies the major difference between fiat money and commodity money. Currency backed by gold or silver does have intrinsic value, absent in fiat money, because of the demand for gold in jewelry, decoration, electronic devices, or aerospace vehicles.
The credit theory of money maintains that money should not be backed by commodities or any other valuables. This theory views all money as a credit-debit relation, which in itself is binding. Therefore, to be valuable, money does not need to be backed by anything at all.
Is the US Dollar Fiat Money?
Like the majority of the major currencies, the US dollar is fiat currency. But this was not always the case. Earlier in US history, the greenback was backed by gold and sometimes silver. In 1933, however, the federal government signed the Emergency Banking Act that disallowed citizens to exchange currency for government gold. The gold standard, which backed US currency with federal gold, ended completely in 1971. That year, the government also stopped issuing gold to foreign governments in exchange for US currency.
Since 1971, the US dollars have been backed by the “full faith and credit” of the US government, “legal tender for all debts, public and private” but not “redeemable in lawful money at the United States Treasury or at any Federal Reserve Bank,” according to the words formerly written on the American banknotes. These days, US dollars are “legal tender,” rather than “lawful money,” exchanged for gold or silver.
Advantages of Fiat Money
At TRADERPROFX, you will be able to understand that fiat money plays the role of a country’s money by storing value, providing a numerical account, and facilitating exchange but it shouldn’t be like that, boring, you can make some money from it. Fiat currencies became particularly popular in the twentieth century because governments and central banks wanted to protect their economies from the worst effects of the natural blossoming and crush of the business cycles. Because fiat money is not as rare as gold, central banks have more control over its supply. Having this control over money gives them the power to manage economic variables – interest rates, liquidity, credit supply, and money velocity. Fiat money gives governments the flexibility to manage their currency, set monetary policy, and even stabilize global markets. Commercial banks can also increase the amount of money in circulation when they need to meet particular demands from borrowers.
What Are the Alternatives to Fiat Money?
Gold and silver coins were used to participate in monetary exchanges. These days, you can definitely buy or sell gold or gold coins but you cannot use them in exchange for everyday purchases. Gold and gold coins have turned into speculative assets.
Many people view Bitcoin and other altcoins as a new alternative to fiat money since they challenge their inflationary nature. And yet, even though the popularity of digital coins has been growing, they have not become money in our traditional understanding of the concept.
In what follows, we are explaining why and how earnings per share (EPS) are calculated. As EPS is a widely used metric for estimating corporate value, understanding this concept is useful and important. In investors’ eyes, a higher EPS indicates a larger value: they will pay more for a company’s shares if they think the company has higher profits relative to its share price.
What Is Earnings Per Share (EPS)?
Earnings per share (EPS) is calculated as follows: a company’s profit gets divided by the outstanding shares of its common stock. The number that you get by these calculations shows how profitable a company is. The higher a company’s EPS, the more profitable it is thought to be.
How Is EPS Calculated?
Earnings per share value are calculated as net income, i.e. profits or earnings, divided by available shares. If you want to make a more refined calculation, adjust the numerator and denominator for shares that could be created through options, convertible debt, or warrants. Note also that the numerator of the equation is also more relevant if it is adjusted for continuing operations.
When you want to calculate a company’s EPS, you need to obtain its balance sheet and income statement. Use them to find the period-end number of common shares, dividends paid on preferred stocks, if they exist, and the net income or earnings. But note that your calculations will be more precise if you use a weighted average number of common shares over the reporting term because the number of shares can change over time.
Remember to include in the calculation of the weighted average number of shares outstanding any stock dividends or splits. You may also simplify the calculation by using the number of shares outstanding at the end of a period.
How Is EPS Used?
You cannot determine a company’s profitability on an absolute basis without EPS. It is one of the most important metrics employed in determining how much the company is worth. EPS is also an important component of calculating the price-to-earnings (P/E) valuation ratio. “E” in “P/E” is EPS. When you divide a firm’s share price by its earnings per share, you will see how much the market is willing to pay for each dollar of its earnings.
EPS is also useful if you are looking to choose stocks in which to invest. Interactive Traders can help you choose stocks with high EPS and explain how to invest in them. We will show you how to compare EPS with the share price of the stock so that you can determine the value of earnings with precision and gauge how investors feel about your chosen stock’s future growth.
What Is the Difference between Diluted EPS and Basic EPS?
Basic EPS is the company’s net income divided by its outstanding shares. When you read about companies’ profits, this is the figure you usually see in reports about them. As its name suggests, basic EPS is the simplest definition of EPS. Diluted EPS, by contrast, includes a more complex definition of the company’s shares outstanding. Diluted EPS is, therefore, is lower than or equal to the basic EPS. Diluted EPS includes shares that are not presently outstanding but can be so if stock options and other convertible securities are exercised.
What Is the Difference between EPS and adjusted EPS?
As its name suggests, adjusted EPS is a type of EPS calculation in which the analyst makes some adjustments to the numerator. Usually, analysts would add or remove components of net income considered non-recurring. Suppose a company’s net income grew because of one single successful sale. In this case, analysts, seeing that the sale was not recurring, might deduct the proceeds from this sale and, in doing so, make the company’s net income smaller. If this happens, adjusted EPS would be lower than basic EPS.
Some Limitations of EPS
There is a caveat when you look at EPS to make an investment: this measure has drawbacks. There are certain ways to play with EPS: companies buy back stocks, reduce the number of shares outstanding, and even increase the EPS number, even though the level of earnings remains the same. Also, note that EPS does not take into account the price of the share. Hence, by looking at EPS, you cannot understand whether a company’s stock is overvalued or undervalued.
What are Commodities?
At TRADERPROFX, together with such traditional securities as stocks and currencies, traders invest in commodities. Simply put, a commodity is a basic good used in commerce and interchanged with other goods of the same type. The most common examples of commodities traded these days at financial markets are oil, natural gas, gold, silver, platinum, grains, and beef. Traders invest in these commodities for several reasons: they either want to make their trading portfolio more varied, adding commodities to other securities they trade, or they turn to commodities in the time of economic or political instability when markets are beset with volatility. The truth is that prices of commodities usually move in the opposite direction from stocks or currencies. When, say, the American dollar sinks and extends its losses for a considerable period of time, traders begin to buy gold, traditionally looked at as a haven in hard times. When the dollar dips, the prices of gold, as a rule, climb.
Risk Involved in Trading Commodities
Compared to other securities, commodities are thought to present bigger risks, because their supply and demand are influenced by unpredictable uncertainties such as weather, natural disasters, and epidemics. Prices of commodities are also impacted by changes in supply. If there is a low supply of a specific commodity, its prices skyrocket. Thus, large increases in agricultural prices from 2010 to 2011 in the USA happened because the production of some goods stagnated, while demand rose. Oversupply of a commodity, by contrast, causes its prices to drop. Oil prices have long been sinking due to its recurrent oversupply, related to economic shifts in China and oil producers’ inability to stop pumping more oil. Commodities’ dependence on events outside of traders’ control requires extra caution and deep knowledge of financial markets. This is where TRADERPROFX comes into the picture.
Why Should You Trade Commodities with TRADERPROFX?
TRADERPROFX has years of trading experience to its credit and is qualified to give a valuable piece of advice on how to trade commodities. We have also compiled a rich collection of educational materials to assist our customers on their trading journey. Consisting of webinars, videos, booklets, seminars, and markets’ reviews, our educational resources will explain to you the specificity of trading commodities and will prepare you for the profitable trading of metals, oil, or any agricultural goods in which you will choose to invest.
In addition to helpful educational materials, TRADERPROFX has a sophisticated trading platform, specifically designed for trading a large number of commodities. Our platform does not only offer advanced risk management and analytical tools that will safeguard you against monetary losses but it also allows you to invest in all types of commodities: metal, energy, livestock and meat, and agricultural. Our platform also lets traders invest in commodities using futures and ETFs and Notes.
Types of Commodities Traded at TRADERPROFX
Our platform is so designed that you can invest in any type of commodities, be that metal, energy, livestock, or agricultural goods, in keeping with your trading interests or trading style. Please, read on to understand the basic differences between these four types of commodities.
People have been trading precious metals for thousands of years and continue doing so with equal gusto and consistency. Metals such as gold, silver, platinum, and copper tend to grow in value, because they are reliable assets, particularly when markets are volatile. When markets enter negative territory, investors usually turn to gold and, in doing so, manage not only to weather an economic storm but also earn profits. Traders invest in precious metals as protection against periods of high inflation or currency devaluation. At TRADERPROFX, you are welcome to invest in metals to diversify your trading portfolio. The metals you will trade with us are as follows:
Note that bids, spreads, market rates, and margin requirements vary from country to country. But whatever are these variations, we always help our clients trade precious metals at a profit and safeguard them from financial risks.
Energy commodities that you can trade with us include crude oil, heating oil, natural gas, and gasoline. Trading growth in this category reflects the economic growth of traders, of the whole organization, or of the whole nation. Traders usually earn profits by trading oil, but you should be aware of several caveats if you intend to invest in this commodity. Oil prices are influenced by several factors: economic decline, shifts in oil productions orchestrated by OPEC, and new technological inventions of alternative energy sources. At TRADERPROFX, we take these factors into consideration and guide our clients through trading commodities step-by-step to a successful conclusion of their trades.
TRADERPROFX also gives you an opportunity to invest in agricultural goods such as corn, wheat, rice, cocoa, coffee, soybeans, sugar, and cotton. What you need to remember, however, if you plan to trade these commodities, is that they are dependent on seasons and changes in weather. Prices of all grains are usually volatile during summer or between seasons. Note also that although these commodities are influenced by such unpredictable factors as weather and natural disasters, they allow more room for profit than do oil or natural gas. The world’s population is on the rise, while agricultural supply is severely limited. The shortage of agricultural goods in the world pushes their prices up, inviting traders to capitalize on these changes in prices and earn extra money.
How to Trade Commodities with TRADERPROFX?
TRADERPROFX invites traders to invest in commodities through a futures contract, which is a legal agreement to purchase or sell a certain commodity at a fixed rate at a certain time in the future. Futures contracts are available for all types of commodities traded with our help. What you will find particularly convenient with a future contract is taking long or short positions when trading. Another trading option we provide is ETFs and ETNs. Similar to stocks, ETFs and ETNs allow you to profit from fluctuations in commodity prices without signing future contracts. But remember to check whether the commodity you want to trade has ETFs and ETNs associated with them, because not all commodity assets have this trading option.