Tag: Learn

Definition:

Alpha is a coefficient that compares specific investment indices over time to a wider indicator, such as the market as a whole.

‍

What is Alpha?
‍

The alpha coefficient of a security indicates its profitability superiority or lag in contrast to the broader market basket – the S&P 500 index. This coefficient has a single number format. So, the figure +2 indicates that the yield of the investment exceeded the benchmark level by 2% during a certain time period.

As alpha assesses an investment’s capacity to outperform the market using historical data, it is critical to understand that previous performance does not guarantee future outcomes.

‍

Alpha and Beta: The difference
‍

Alpha and Beta are both indicators that compare a stock’s performance to that of the market as a whole, but they do so in different ways.

Alpha is concerned with the extra returns that investments generate above and beyond market returns. The volatility of the stock price relative to the market, as well as whether it is moving in the same direction as the market as a whole, is indicated by beta.
‍

Let’s take an example:

• Alpha of +3 indicates that the return on investment surpasses the return on the chosen benchmark by 3%.
• A beta of +3 indicates that an investment is three times more volatile than the market. As a result, if the market rises by 5%, the stock should rise by 15%. In contrast, if the market declines by 7%, the stock price should decrease by 21%. When beta is zero, there is no relationship between investment and the market. When beta is negative, investments are inversely linked with the market, which means they rise when the market falls and decrease when the market rises.

‍

How to calculate Alpha?
‍

There are various approaches to Alpha calculation.

• The most straightforward method is to deduct the entire return on investment from the benchmark in the same investment category. Let’s imagine that you invested in a portfolio composed exclusively of equities in 2022 and had a return of 28%. Assume the S&P 500 returned around 25% during the same time span. When you subtract the S&P 500 return from the return on your assets, you get a +3 alpha for your portfolio.

• Using CAPM. The Capital Asset Pricing Model (CAPM), a model that determines the expected return of an asset while accounting for its risk, is a more comprehensive technique to compute the alpha coefficient.

This formula employs a beta version and a risk-free rate, which is the rate of return that an investor may expect in the absence of risk.

Alpha = R – R(f) – Beta (R(m) – R(f)), where

R = return on investment

Rf = risk-free rate of return

Beta = systemic risk of any investment

Rm = basic profitability

‍

Example
‍

Let’s say the portfolio yield is 15%, the risk-free rate is 5%, the beta version of the investment is 1.2, and the base yield is 10%. You measure alpha using CAPM as follows:

‍Alpha = (0.15 – 0.05) – 1,2 (0.1 – 0.05) = +0.04

‍According to the formula, this portfolio outscored the underlying index by 0.04 percent.

‍

Important points about the Alpha coefficient
‍

The alpha value of every stock changes depending on the calculation technique and benchmark used. Alpha fluctuates throughout time, therefore it should be reviewed on a regular basis.

When comparing investments with alpha, keep the following best practices in mind:

• A critical disclaimer: While the alpha coefficient may be computed for other asset classes, it is best suited for shares.
• The significance of comparative evaluation: it is essential to compare oranges with oranges rather than tomatoes. A fund specialized in real estate businesses, for example, is not the same as a fund focusing on mid-cap corporations.
• Compare various investments using the same benchmark: comparing a fund with an alpha index based on the S&P 500 to a fund with an alpha index based on the Nasdaq-100 is improper.
• Alpha is not an infallible indicator: the coefficient is generated based on prior indications, thus it is only an estimate. This does not guarantee what will occur in the future.

‍

Definition:

Tax withholding is a type of procedure in which your employer withholds a portion of your earnings for taxes and pays a tax bill to the tax office in your name.

‍

What is tax withholding?
‍

Wages are rarely paid in full since your company takes a tax deduction equivalent to a portion of your wage and pays it to the tax office on your behalf. It is important to note that you can adjust the amount of the tax deduction from your pay by changing the number of benefits claimed on your form W-4. As a result, the more of these advantages you have, the less withholding tax will be deducted from your salary.

‍

The working principle of tax withholding
‍

One of the primary functions of the tax withholding is to enable the US government to collect taxes, social security, and medical care not just in a single sum when filing annual taxes, but also throughout the year. As a result, the US government, which requires companies to collect monthly withholding taxes from their employees, is certain that it will get funds.

This procedure is straightforward for US residents. When applying for a job, an employee must complete Form W-4, which supplies the employer with the information needed to compute the amount of withholding tax to be withheld from the employee’s income.

If the employee is a non-resident he must file Form 1040NR with the government to record his income and pay taxes on it. It is crucial to remember that even if they do not live in the United States for a long time, they must still pay taxes on the money they earn from conducting business in the United States.
‍

Normally, your company will charge you 90% of your withholding tax during the year, so you will not be late in paying taxes, but you will not pay extra. If, on the other hand, you have not paid the appropriate tax amount, you will have a tax liability that must be paid to the tax office. If, on the other hand, you paid more at the end of the year, the government will surely refund the excess amounts.

‍

What are the payroll taxes?  
‍

Payroll taxes include social security and health-care contributions. Your firm is required to pay two additional types of payroll taxes for each of its employees: FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act). These taxes are used to fund unemployment benefits.

‍

How is a tax calculated?
‍

First, the new employee completes form W-4, in which he states how much taxes he wants the business to withhold from his pay. It is critical that an employee claims benefits in W-4, and the more allowances he shows, the higher his monthly income will be. However, you should be cautious when stating a high number of advantages: if the value of your benefits exceeds the amount of deductions at the end of the year, you will owe the tax service.

Following the W-4 form, the employer utilizes the IRS’s instructions to decide how much tax he should withhold. The IRS offers tables for businesses to use to determine how much to withhold based on the employee’s pay and marital status.

‍

Do you have a withholding tax?
‍

Yes. In the United States, practically everyone who earns money is required to pay withholding tax and FICA tax. Your employer, not you, is responsible for withholding taxes.

It is conceivable that individuals who give you a salary do not withhold taxes on your behalf if you work freelance or under contract. However, this does not absolve you of obligation. As a freelancer, you must pay withholding tax and FICA tax on a quarterly basis.

‍

Backup withholding – what does it mean?
‍

A backup withholding is a type of tax withholding that some people must pay. The tax rate is at 24%. Businesses and banks may be required to withhold taxes for backup deduction from a variety of payments, including interest, dividends, and other sources of revenue. If someone has not presented you with the required TIN (tax identification number), you must withhold money for a backup withholding as a business. This occurs if you hired a freelancer who did not give you this information. Furthermore, because you have not previously declared income and have not paid tax bills, you will be required to withhold taxes if the tax office tells you to do so.

‍

Definition:

Real estate investment trusts own and manage various forms of real estate providing shareholders with access to real estate without purchasing it.

‍

What is a REIT?
‍

These are corporations that own property on behalf of their shareholders/investors.

Investors like REITs because they offer a diverse approach to real estate ownership, with each REIT shareholder owning a unique property. REITs, on the other hand, differ from other investments because there are several rules investors should follow.

‍

Different types of REIT
‍

There are four main types of REIT:

• Equity
• Mortgage
• Private
• Public non-listed

‍

Almost all real estate investment funds are classified as stocks since they are often listed on the stock exchange and generate income through rent. That is why they fall into “equity”.

Mortgage REITs, on the other hand, earn on the property’s financing and debt. Mortgage interest payments will be the source of revenue for these trusts.

Private real estate investment funds seek the institutional market. Because they are directed at accredited investors, they do not require Securities and Exchange Commission registration or approval (people or businesses who have the opportunity to trade certain securities that may not be regulated).

Public non-listed REITs are not traded on a stock exchange. Typically, investors gain access to these types of real estate investment funds from a financial consultant or another agent.

‍

REIT criterias
‍

Several conditions must be completed before a real estate operator may qualify for a REIT.
‍

Shareholder base: The firm must have more than 100 shareholders, with no more than 5 depositors owning 50% of the shares. A business must have a fixed number of controlling stakeholders in order to qualify as a REIT.

Fully invested: 75% of the overall investment pool must be involved in real estate, with rent accounting for the same amount of revenue.

Dividend happy: 90% of the REIT’s profits should be paid to shareholders.

Structure: REITs are only available to taxable firms and corporations.

Management Board: The business must have a working board of directors with a set number of directors.

‍

Advantages & disadvantages of REITs
‍

The most important benefits are:

Flexibility: Apart from traditional ownership, several REITs may be purchased and sold on the stock market within a day, and cash can be obtained within three days. We actually mean liquidity while speaking about flexibility.

Higher payout percentage: In order to be considered as a REIT, a corporation must follow the payout rule, which states that 90% of income must be delivered to shareholders.

Diversification of property: A shareholder can get access to many sorts of property, such as commercial, medical, and infrastructural.
‍

Some of the drawbacks of participating in a REIT are as follows:

Minimal tax advantages: Dividend payments are counted as income. Long-term gains are generally taxed at a lower rate than income.

The 90% rule: While this is a benefit, it may also be detrimental and limit progress. Because REITs must disperse the majority of their earnings, the capital given to new programs or investments is restricted.

Fees: It is an essential component of the REIT ecosystem. Fees may be greater than those charged for other investments.

‍

How to invest in REIT
‍

Investing in equity or mortgage REITs is an easy procedure because they are traded on the NYSE, Nasdaq, and other serious trading platforms. If the investor has shares in these firms on the application deadline, they will be paid dividends. Non-listed trusts, on the other hand, are difficult to obtain, and most investors must apply through a financial consultant or broker.

‍

Investing in houses or in REIT: the best strategy
‍

It is important to understand that they differ from one another.  Buying and holding a property, for instance a house, usually carries a high level of risk. This means that the owner will be unable to compensate for changing market conditions.

The amount of investment choices available contrasts house ownership from a REIT. REITs allow investors to obtain access to many forms of property, such as commercial property, infrastructural facilities, hospitals, and so on.

Another consideration in comparison is liquidity. If an investor wants to sell his shares in an equity or mortgage REIT, he can do so through his brokerage account. The entire procedure, from start to finish, might take several days. And selling a property may take weeks, if not months, and can be costly when the agent’s fee and other costs related with preparing the house for sale are included in.

‍

Definition:

From individuals’ perspective, income is defined as money earned through working or the returns of their investments. From businesses’ perspective, it is what remains of a company’s revenue after expenses.

‍

How does it work?
‍

If you are an individual, the money you bring home at the end of the day is your income.

It’s quite simple to calculate your “income,” whether it comes from salary, investment gains, or business profits. However, “income” is a lot more complicated for enterprises. Businesses refer to the money that enters their bank accounts as “revenue.” They classify “income” in several ways (described below) to reflect how it has already been put to use, such as paying bills or taxes.
‍
Individual income is divided into two categories by the Internal Revenue Service (IRS). Your wage income constitutes your active income. The term “unearned income” refers to passive income, such as royalties, investment income, or, if you’ve suddenly struck it rich, gaming profits. In most developed countries individuals need to pay taxes on their income.

‍

Revenue VS Income
‍

If the words “revenue” and “income” are used together, it’s most likely in a commercial context. As a result, when you refer to “income,” it will mean something quite different than when you discuss individual income.

The term “revenue” in this context refers to the total sum of money received from a company’s sales. The money still available after expenses are covered is referred to as “income.” Let’s stick to the different types of income to help you understand the difference.

‍

Types of individual’s income
‍

There are three of them: earned income, portfolio income, and passive income:

 1. As the term suggests, earned income is money that you have worked for. This is labor converted into money, whether from pay or business ownership.

 2. Earnings from investing activities are referred to as portfolio income. Dividends, interest, and capital gains (profit from selling securities or investments that have appreciated in value) all fall under this heading.

 3. The IRS defines “passive income” as earnings from firms you possess a share in or from rental properties in which you “do not materially participate.”

‍

Disposable and discretionary income
‍

Your disposable income is the amount of money that is left over after paying income taxes, Social Security and Medicare taxes (FICA), and any pre-tax deductions for things like retirement and health insurance. But before you go on a spending binge, you still need to make your payments on time. This category of funds is used to pay for basics like housing, food, and other things.

If anything is left, it is your discretionary income. Discretionary income is for the enjoyable “extras” in life. This involves eating out, traveling, enjoying yourself, engaging in hobbies, and possibly investing.

‍

Gross profit and net income: the difference
‍

After the cost of products sold, profits are referred to as gross profits. Profits before taxes, depreciation, and interest are referred to as operating profits. When a business refers to “income,” it usually means net earnings, which are profits after taxes. All of these are listed on an organization’s income statement.

That’s a crucial distinction to make as net income occasionally falls well short of gross profit. Take ownership of a used car dealership that sells $1 million worth of used vehicles annually as an example. Your wholesale cost for the automobiles is $600,000. This indicates that you made a $400k gross profit.

‍

EXAMPLE

Let’s say you have a jewelry store that sells $1.3 million worth of jewelry in a year. The jewelry itself will set you back $800,000. This means you have a gross profit of $500,000.

But running a jewelry store costs a lot of money, from saloon rentals to advertising costs. Based on this, it costs the business $200,000 in operating expenses.

This is an operating profit of $300,000. But you have $20,000 in interest expenses and also $20,000 in depreciation (expenses on capital assets) that are needed, bringing the total profit to $260,000. If your tax rate is 50%, that gives you only $130,000 in income per year.

‍

Definition:

Revenue is the actual amount of money earned by a firm from the sale of goods and services. It is usually used to assess the “health” of a firm.

‍

What is Revenue?
‍

As it has already been said, revenue refers to a company’s health. Actually, it is one of the main measures that show if the company is doing well. A high revenue, in general, signifies a developing firm. Weak revenue indicates that the business is not being kept at the proper level and is not growing. Typically, reviewing a company’s financial statements (or earning reports) may show you how well it is working. These reports include revenue as well as other indicators like costs and profit.
‍

Gross revenue is computed by putting up all of the money collected from the company’s sales throughout the time period covered by the financial results report.

Net revenue is a related statistic that is generated by deducting from gross income expenses that decrease revenue (total selling expenses).

Net revenue = Gross revenue – Total selling expenses

‍

Revenue vs. Profit
‍

The main difference between these indexes is that revenue doesn’t count the costs of the business like profit does. Profit is obtained by deducting expenses from revenue.

If the firm receives more money than it spends, it is profitable. When it receives less money than it spends, it is considered to be detrimental.

The company’s revenue is favorable in practically every report. If you didn’t make any sales, your revenue would amount to zero. Any costs made in this period would result in losses.
‍

In exceptional instances, businesses show negative revenue. A negative result might indicate a shift in accounting standards. A change in accounting affects how a corporation values its money or assets. Generally, volume loss may not indicate an actual drop in income.

While profit is determined by income, it is also determined by costs. The company’s revenue may rise, however if its costs increase faster, its profit will fall.

‍

How to calculate revenue?
‍

The revenue is not difficult to calculate. Revenue is the total amount of money received by the firm, excluding sales tax, which doesn’t belong to the business. The sales tax is the responsibility of the city, county, state, or any other government that supervises the region where the firm is located.

‍

Revenue = Sales?
‍

Not all of the time. The company’s revenue might be similar to its sales for the quarter or the fiscal year. As a result, you may hear revenue coupled with sales as “sales revenue” rather frequently. However, there are also non-operational revenue sources that aren’t linked to sales.

Non-operating revenue is generated through sources other than sales. If a firm holds stock in another company, all dividends paid on those shares are considered as revenue. Dividends paid on government bonds will also be considered as revenue.

‍

Revenue vs. Income
‍

Income and revenue are closely connected but in fact income is influenced by the revenue indicator. When we consider their “pure” forms (net), the contrast between these terms is more clear.

 1. Net revenue is the amount of revenue that remains after subtracting refunds and discounts.

 2. Net profit is the amount of money left over after deducting all company expenses. They are, for example:

• the cost of producing the things sold;
• the cost of delivering services;
• other expenditures such as salaries, rent, and so on.

‍

The key distinction between them is that net revenue doesn’t include costs. Furthermore, it simply focuses on situations in which the corporation earned less than it planned. Net profit varies from gross profit because it includes costs.

The net profit is frequently found in the financial statements. Revenue is nearly always reported in the front of the report, whereas net profit is almost always given near the bottom.

‍

Definition:

Inflation is defined as the gradual increase in the price of goods and services, which results in a decrease in the purchasing power of a given currency.

‍

What is Inflation?
‍

As inflation increases, less and less goods and services can be bought with the same amount of money because inflation reduces the value of the dollar (or other currency). The measure of inflation over time is known as the inflation rate. These changes appear in many areas of our lives.

If you think about it, rising prices of housing, food, fuel, and consumer goods occur for a reason-these processes are the result of rising inflation. But it’s not all bad: moderate inflation can bring some benefits, such as reducing the national debt. Nevertheless, consumers tend to focus most of their attention on the decreasing solvency of their money.

‍

What are the causes of inflation?
‍

Here are three main causes of inflation:

‍
– Demand-pull inflation

Demand-pull inflation occurs when demand for goods and services exceeds supply. Buyers are willing to pay more, so suppliers raise the price.

– Cost-push Inflation

This phenomenon occurs when the cost of producing a product increases. It may be caused by an increase in labor costs or an increase in the cost of raw materials to produce a product.
‍

– Built-In Inflation

The third type of inflation that we will look at is built-in inflation. As prices of goods and services increase, wages must also rise. As wages rise, so do the costs of doing business. So, eventually, prices must rise as well.

‍

Analysis of inflation in America
‍

The inflation rate is determined by experts based on the past year, this means that the inflation rate for 2023 will be estimated at the beginning of 2024. As we found out earlier, this value depends on many factors, so it can change from year to year.
‍

For instance, the inflation rate in 2020 was 1.2%, in 2021 it was 4.7%, and in 2022 inflation peaked in June at 9.1%, but had already slowed to 6.5% by December. According to experts, the CPI inflation rate could drop to 2.5% by the end of the year in 2023.

However, inflation does not necessarily always have to rise. A negative inflation rate is called deflation, a phenomenon when a dollar or other currency can suddenly buy more goods and services than before, but such cases have been extremely rare for the world economy in the past few years.

In addition, there is the term hyperinflation, in which the rate of inflation increases too quickly. Periods of inflation and deflation often correlate with bull and bear markets. A bull market is more likely to experience inflation; a bear market is more likely to experience deflation.

‍

Inflation indexes
‍

There are two main ways to track inflation: one is consumer-oriented, the consumer price index (CPI); the other is producer-oriented, the wholesale price index (WPI) or the producer price index (PPI).

‍
1. Consumer Price Index

This index measures inflation by analyzing changes in prices of goods and services in various industries. The main industries included in this calculation are food and beverages, housing, clothing, transportation, education and communications, recreation, health care, and other goods and services.

2. Wholesale Price Index or Producer Price Index

The Wholesale Price Index (WPI) is similar to the Consumer Price Index because it, too, tracks changes in the price of goods. However, instead of tracking prices at the consumer level like the CPI, the WPI tracks changes at the producer level. Consequently, it is based on the price of goods sold in bulk from one company to another, rather than from company to consumer.

However, after 1978, the Wholesale Price Index was replaced by the Producer Price Index (PPI), which includes prices for both services and goods.

‍

Calculating Inflation
‍

The inflation rate is easy to find using the CPI inflation calculator created by the U.S. Bureau of Labor Statistics (BLS). The BLS uses the following calculation to determine the inflation rate:

Increase in Inflation = Final Consumer Price Index / Initial Consumer Price Index.

‍

‍Inflation: advantages and disadvantages
‍

The perception that inflation is always a bad thing has become entrenched in society. Of course, people have a right to think so, as with this phenomenon, everything becomes more expensive. However, this does not mean that inflation has no pluses.
‍

The Pros of Inflation

First of all, a moderate rate of inflation is a sign of economic growth. It is normal that when the economy is healthy, inflation rises slightly.

The second positive effect of inflation on the economy is less obvious, but no less significant: As the value of the dollar decreases, so does the value of debt. Income usually rises as inflation rises, which means that your monthly debt payments can take up a smaller portion of your income.
‍

The Cons of inflation

The downside of inflation is perhaps more obvious. Inflation lowers the value of the dollar and makes goods and services more expensive. Of course, higher spending is always unwelcome in society, but if incomes rise at a slower rate than inflation develops, they can become a serious problem for much of the population.

Inflation can also damage savings and retirement accounts. Money that is earned over time will eventually have more solvency than money held in savings and retirement accounts, so a potential pension will be less solvent than it may seem now.

‍

Definition:

Capital gains tax is a compulsory payment that is paid to the government when a person sells an asset (e.g., stock or real estate) for the purpose of making a profit.

‍

What is Capital Gains Tax?
‍

Capital gains tax applies to both individuals and businesses. It is paid when the underlying asset (such as stocks or bonds) is sold and a profit is earned.

In general, capital gains are divided into two categories: short-term and long-term. Short-term capital gains are gains from assets that have been owned for less than one year. Such capital gains are taxed as ordinary income, so the tax rate is generally higher than for long-term capital gains.

Long-term capital gains are taxed more leniently. It represents gain on the sale of an asset that has been owned for more than one year, and depending on your tax bracket, the long-term capital gains tax rate is either 0%, 15%, or 20%.

‍

Capital gains tax rates
‍

Before looking at the tax rates on capital gains, it is important to mention that the tax on both short-term and long-term gains is paid the year after the year of gain.

For instance, five years ago you bought a Manhattan apartment for $1,000,000 to sell it at a higher price a few years later. Then in 2023, you wanted to sell that property for $1,470,000. First, your profit, which would then be taxable, would be $470,000, and second, you would have to pay the tax the next spring, in 2024.

‍

Short-Term Capital Gains Tax
‍

This category includes investors who want to sell their stock or property for a profit but have owned it for one year or less. Such gains from the sale are taxed in the same way as ordinary income.

Here you can see the interest rates for corporations in 2022 and 2023:

‍

‍

Long-Term Capital Gains Tax
‍

Another category is long-term investments – if stock or real estate has been owned for more than one year, the tax rate on gains from the sale of these assets can be greatly reduced.

For individuals, the following capital gains tax rates are presented:

‍

‍

Strategies to reduce capital gains tax
‍

– Real estate sales tax

If a single person owns the property and sells it for profit, gains of up to $250,000 are not taxable (if the person is married, the amount doubles to $500,000).

However, this capital gains tax exemption has several exceptions and does not apply if the property owner:

• has not lived in the home (i.e., it is an investment property)
• is living abroad
• has not owned the house and has not lived in it for 2 years during the 5-year period preceding the date of sale.

A homeowner who has already used their $250,000/$500,000 CGT tax credit in the past two years will also not be able to apply for the exemption.
‍

– Gifts

Family gifts can be used to reduce the amount of capital gains tax. A family member can give up to $15,000 each year to another family member as a gift. A married couple can gift up to $30,000 to a relative. So if you gift a valuable asset to a family member who is in a lower tax bracket, together you can minimize the tax burden on your family.
‍

– Keeping

The obvious alternative to paying short-term capital gains tax is to simply keep your investment. Generally, a person’s capital gains tax liability is greatly reduced after a one-year period. Of course, this should be considered in the context of your overall investment strategy.

‍

Definition:

Interest is the cost of borrowing money — what you pay to borrow someone else’s or what you charge those to whom you lend.

‍

People don’t like to just share, especially if they are not sure they will get their loan back – that is why interest exists. Lenders can feel confident parting with their money for a while and taking on all the dangers that goes along with it when they receive interest.

‍

What is interest?
‍

The cost of borrowing money is known as interest and is typically stated as a percentage. Interest rates change over time, and a variety of factors determine the particular rate you might earn or pay. The going rates of the day, which are determined by the interest rate the Federal Reserve, the nation’s central bank, charges other banks to borrow money, are a crucial factor to take into account. In order to promote economic growth and combat unemployment, the Federal Reserve frequently reduces interest rates; conversely, when the economy is doing well, it rises rates.

Your lender will also take your borrower risk into account when setting your specific rate.This includes elements like your credit history, the amount of debt you are carrying relative to your income, and any troubling financial incidents from the past, such bankruptcies. Different methods of calculating interest might be used, but they all serve the same objective: to give the lender confidence to lend you money in light of the opportunity cost and risks associated.

‍

How does it work?
‍

Four factors determine how much interest you pay (or make, if you’re the lender):

 1. The sum of money being lent

 2. How long it will be lent for (the length of the loan)

 3. How frequently is interest calculated (daily, monthly, annually, etc.)

 4. The rate of interest

Given that interest is determined as a proportion of the loan amount, your interest payment will generally increase with the amount of borrowing. In general, borrowing will cost more the longer you keep the loan because interest can accrue more slowly.

The frequency of interest calculations affects how much money you owe overall as well. The general rule is that the ultimate sum will be bigger the more frequently interest is calculated. Therefore, even if the initial loan amount and period are the same, 3% computed monthly will result in a higher interest rate than 3% calculated annually.

‍

Interest formulas
‍

The most popular method of calculating interest in consumer finance is the annual percentage rate, or APR. This is probably the figure you’ll see when applying for a credit card, auto loan, or mortgage, expressed as a percentage. APR typically covers all annual expenses related to the loan in addition to interest. Therefore, the $10 arrangement fee that a payday lender imposes will undoubtedly be reflected in the APR.
‍

APY (Annual Percentage Yield) is also expressed annually, but unlike APR, it also factors in how often interest is calculated. So if your interest rate is 3% annually, with no additional fees, your APY is 3%. If your interest rate is 3% calculated monthly, then your APY is actually 3.04%.

(The formula for APY is (1 + r/n)^n – 1 where r is the interest rate and n is how often interest is calculated.)

‍

Simple vs Compound Interest
‍

Simple interest is calculated by multiplying the interest rate by the principal (or the original amount borrowed). Compound interest is calculated by multiplying the interest rate by the principal plus any unpaid interest. As a result, the more frequently interest is calculated or compounded, the more interest is paid or earned in total.

‍

How is interest calculated?
‍

Let’s discuss an example, taking into consideration four key factors:

 1. The amount of money being borrowed, also known as principal (P)

 2. The length of the loan (t)

 3. How often interest is calculated (n)

 4. The interest rate (i)

‍

For example, you take out a $2,000 loan (P) for two years (t) at a rate of 3% (i). There is no compounding, so you can use the simple interest formula:

P(1 +rt)

So it will be: $2,000(1+(0,03*2)) = $2120

At the end of two years you would owe $2120 ⁠— That’s the $2000 principal plus $120 of interest.
‍

Now imagine the 3% compounds monthly, so the formula for compound interest is:

P(1 + i/n)^nt

Then the answer will be:

$2000 (1 + 0,03/12)^(12*2) ~ $2123,5

‍

Good interesting rate
‍

‍An exact definition of a “good” interest rate is not known. Lenders typically seek the highest rate available, but borrowers typically want the lowest. Your ability to obtain a rate will be influenced by a number of elements, including your creditworthiness and current market rates.

How can you tell if an interest rate is good if it is offered to you? Examining typical market prices is a fantastic place to start. For instance, you can discover the most recent rates for a range of goods utilizing Bankrate.com.

‍

‍

What is a crypto wallet?
‍

The mechanism of crypto wallets is quite simple to understand, as it is comparable to email. The crypto wallet may still transmit, receive, and manage money in the same way that millions of people all over the world do via email.

You may also access your wallet at any time and from any location. In other words, you may use crypto wallets to transfer payments to family members and swap bitcoin with pals, provided they also have a cryptocurrency wallet.

‍

Bullet points
‍

• The crypto wallet provides access to currencies as well as security controls for all of your digital assets.

• With a custodial wallet, you keep your cryptocurrency with a third party who controls or holds your cryptocurrency’s private keys.

• You are the single owner and operator of a non-custodial wallet or web3 wallet. Although you have more freedom and access with this form of wallet, you are in charge of maintaining your own security and secret keys.

‍

Do crypto wallets make sense?
‍

The explanation is simple: they provide you control over your money. When you purchase or receive cryptocurrencies, a record is created on the blockchain indicating that you now hold a certain number of units of that coin, allowing you to access and manage your cryptocurrency.

‍

Classification of wallets
‍

There are two traditional types of wallets: custodial and non-custodial.

 1. A custodial wallet is one in which someone else stores your secret key (aka the password to your wallet). This generally implies storing your cryptocurrencies on an exchange or trading platform. The coins in your wallet can then be accessed by login onto the exchange or platform. (This may appear to be identical with signing into an online banking account.) The potential of losing your private key is lower with a custodial wallet, and you need to keep fewer backups. Another significant benefit is that if you ever lose or forget your password, you will not lose your bitcoin. You may, however, only use the cryptographic features and assets that are accessible on the platform you are utilizing.
‍

 2. A non—custodial wallet (also known as a web3 or DeFi wallet) is one in which you possess and store a private key. You have absolute control over your bitcoin with a non-custodial wallet, but you also have additional responsibilities. Only you have access to the secret key that unlocks your wallet.

Furthermore, a non-custodial wallet provides access to the web3 economy to complete control over your money. Web1 was static and read—only, but web2 is the interactive network you’re used to (dynamic, user—created social networks like Linkedin, Youtube, and so on). Web3 is the next stage: it is decentralized and controlled by the public or its users, not by a huge technical middleman or centralized side or platform.
‍

You can use a non-custodial wallet to gain access to the realm of decentralized applications (or “dapps”), which enable and support things like:

• DeFi (applications for decentralized finance): you may trade money digitally with both individuals and companies instead of needing a third party, such as a bank, to conduct financial transactions.

• Staking: Staking enables bitcoin holders to monetise specific types of coins stored in their wallet. You will be rewarded in return for granting permission to use your cryptocurrency to verify transactions.

• NFT (non-transferable tokens): These uniquely recognized data units may be found in online markets as digital artworks, gaming avatars, and other collectibles. You may immediately store and trade them in a non-jail wallet.

• Web3 Games: In Web3 games built with blockchain technology, players may earn bitcoin, NFT, and other game assets and exchange them directly with other players on virtual markets.

‍

How to choose the right one?
‍

Discussions about making a custodial wallet and a web3 wallet seems like deciding between riding an exercise bike and riding a street bike. When you have a custodial wallet, someone else controls it, just as on an exercise bike. While cycling on the street provides you greater flexibility and access to more locations, you must be cautious and safe, and never leave your bike alone.

A seed phrase or recovery phrase is frequently included in your non-storage wallet (note: other security and access methods may be offered). The phrase is made up of 12-24 randomly generated words that allow you to access your wallet if your private key is lost. Because anybody who knows your source phrase may access your wallet, it is just as crucial to safeguard it as your private key.

A non-custodial wallet, on the other hand, is a reliable alternative for accessing web apps. In addition, you have total control over your cash.

However, you are not required to select one of the options: Both sorts of wallets are acceptable.

‍

Wallets’ operating principle
‍

Well, let’s start out small: there are hot and cold wallets.

Hot wallets are online, which means they link to the internet and can often be used on a computer or mobile phone. It is typically easier to access and trade bitcoins using hot wallets. However, electronic wallets are more vulnerable to cyber assaults or fraud by anyone looking to steal cryptocurrency holdings.

Cold wallets are those that are not linked to the Internet. They are often maintained on a physical device, such as a sd card or even a piece of paper with your secret key, so your private key is never accessible online.

‍

Don’t lose the money: hints and tips
‍

• Be wary of anyone who requests that you download screen recording software.

• When you are requested to pay bitcoin to a third party to set up mining or staking activities, be wary of “learning” scam.

• Be wary of any unknown NFT or other assets transmitted to your wallet.

• Check the transaction information before signing a transaction. If you sign it, hackers can acquire access to your funds, therefore only authorize transactions if you trust the sender.

‍

Definition:

A corporation is a sort of legal entity that enables individuals to run a business with specific advantages, protections, and tax regulations.

‍

What a Corporation is?
‍

The businesses we’re familiar with as consumers, have a wide range of forms. One of these is a corporation, which is a type of legal structure meant to provide its owners with protection from certain risks as they perform their company. With the exception of their own investment in the company (limited liability), founders are typically not held personally responsible for the losses of the corporation. Through this legal separation, a person or group of individuals may be able to reduce some of the risks they assume while devoting time and resources to a business.

Similar to people, businesses are able to make and borrow money, enter into agreements, engage in legal disputes, and abide by the laws that are applicable to them. Corporations pay income tax on their profits, in contrast to various other forms of corporate ownership structures like partnerships or limited liability companies (LLCs).

‍

How is a corporation formed?
‍

Depending on the type of business you’re running and what requirements it has, forming a corporation may appear a little different. In general, the process includes making a number of decisions, such as where it will be located, who will oversee it, and whether to register the corporation with the government.

Forming a corporation typically involves the following steps:

 1. Select the business structure. One of the many legal structures that can be used when founding a business is a corporation. Other types include partnerships, limited liability firms, and sole proprietorships (LLCs). Each structure has its own set of advantages and rules.

2. Decide on a location. The location of a corporation is crucial because it affects the taxes your company may have to pay, any licenses it might need to apply for, the rules it will have to obey, and any financial incentives or perks it could be eligible for.

3. Make up a name for it. Any name can be used for a corporation, although normally names that are already in use by another firm that is registered in the same state are not permitted.

4. Obtain a federal employer identification number (EIN). The EIN functions similarly to a company’s SSN. The majority of corporations must apply for an IRS federal employment identification number since they must file tax returns and pay taxes.

5. Choose directors. You might need to choose a board of directors to manage the corporation and its interests depending on the state where you’re founding your organization. The board of directors of publicly traded companies is often charged with representing the interests of the company’s shareholders.

6. File articles of incorporation. These are filed with the secretary of state’s office and are sometimes referred to as “certificates of incorporation” or “charters.”

‍

The working process of a corporation
‍

An organization is given a defined ownership structure by the legal name of “corporation.” The assets and liabilities of a company become legally distinct from the people who own it after that company incorporates, or goes through the process of becoming a corporation. This means that if the corporation incurs debts or is involved in a scenario like a litigation, only the corporation itself is liable. If the corporation is unable to pay its debts, it often cannot assert a claim against the owners’ personal assets.

Understanding how this functions differently from other ownership structures may be helpful. One general partner often assumes unlimited liability in a limited partnership form, whilst all other partners only have limited liability.

‍

Types of corporations
‍

The most typical types of corporations are listed below:

• When we think of a “corporation,” we frequently think of C corporations, which can be any number of businesses, from a small neighborhood grocery store chain to global enterprises like Google or Amazon. C corporations typically provide owners with greater protection than other types of ownership arrangements because, according to the law, they are wholly distinct legal entities from the persons who own them. A higher price may be associated with this benefit. For instance, a C corporation’s income may be taxed twice: once on corporate profits and once again if any dividend payments are made to shareholders.
• S companies (also known as S corps) are similar to C corps in that they are both considered as separate legal entities that are not dependent on their owners. However, there are a few significant variations. For starters, a S corporation is limited to 100 shareholders. The profits of a S corporation can typically be “passed through” to the owners’ personal income, which means they aren’t subject to an additional corporate tax like many C corporations are. Separate from registering with the municipal or state government, a business must submit an application to the Internal Revenue Service in order to receive S corporation status.
• B corporations (B corps) are for-profit companies that are also motivated by a mission, therefore they often need to show both financial success and societal value. They normally pay the same taxes as C companies do. B corps are required to provide an annual report in several states that includes information about their finances as well as how they carried out their objective.
• Similar to B corps, close corporations are smaller businesses that normally cannot be traded publicly, however this too varies on the jurisdiction.
• Nonprofit corporations include mission-driven organizations such as charities and, for example, academic institutions. Nonprofits are tax exempt — they are not required to pay taxes on their profits, but they must follow some rules that govern how their profits should be spent. Nonprofits, for example, cannot pay dividends or contribute to political campaigns.

‍

Pros and cons of corporations
‍

Pros: Corporations are treated as a separate legal entity from the person or people who own them. This separation has a significant advantage over other types of ownership structures in that if the company faces liability, such as a lawsuit, its owners can be protected from risk to some extent.

Furthermore, many types of corporations can sell shares to a larger pool of investors, even on the public market, which can be critical for a business that intends to grow and sustain over time.

Cons: Forming a corporation may be more expensive than other types of ownership structures. Some businesses may also have to pay taxes twice. First, the corporation may be required to pay taxes on its profits; second, if the corporation pays dividends, shareholders are needed to pay additional taxes as part of their personal income tax.

Corporations, in addition to being potentially more expensive, may necessitate more work to operate and maintain.

‍

A corporation VS a company
‍

A company is a broad term that refers to a wide range of commercial enterprises. A company can be a one-person operation or a large multinational corporation with millions of employees.

A corporation, on the other hand, is a special legal designation that allocates a company a specific ownership structure. Depending on the chosen ownership structure, a company’s owners can go through the process of “incorporating” to legally separate the business from their personal assets, which can offer the owners some degree of protection against different liabilities.

A corporation is a type of a company that is organized to be treated as an entity, distinct from its owners.

‍