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Q: What Is the Social Impact of Carbon Emissions?

The theory around carbon pricing is that each ton of CO2 should have a price equal to the social cost of carbon. The social cost of carbon is the current amount of estimated damages over time that each ton of CO2 emitted causes today.

Dec

2024

What Is a Carbon Tax?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

In countries where there is a carbon tax, businesses must pay a levy based on the amount of carbon emissions produced by their business operations. A carbon tax is designed to reduce the amount of carbon in the atmosphere — also known as CO2 emissions.

There are generally two types of carbon taxes: a tax on quantities of greenhouse gases emitted, and a tax on carbon-intensive goods and services such as gasoline production. In the United States, several carbon tax proposals have been introduced in Congress, but none have yet been implemented.

Key Points

• A carbon tax is a levy on businesses for their carbon emissions, aimed at reducing CO2 emissions and promoting low-emission energy sources.

• Two main types of carbon taxes exist: one on greenhouse gas emissions and another on carbon-intensive goods and services.

• The U.S. does not have a federal carbon tax, but several states and localities have implemented regional versions, with ongoing discussions about a national approach.

• Revenue from carbon taxes can fund environmental restoration and decarbonization, though deciding the best use of these funds is challenging.

• Countries like Finland, Norway, and Sweden have high carbon tax rates, and the concept is becoming increasingly popular as a climate change tool globally.

How Does a Carbon Tax Work?

When a government implements a carbon tax, a price per ton of greenhouse gas emissions is chosen, and a company is taxed the applicable amount for every ton of carbon it emits or is responsible for. In some cases, the price per ton increases the more an entity emits, thereby incentivizing companies to reduce and prevent emissions.

What Type of Carbon Is Taxed?

Although it is called a carbon tax, usually the price is actually per ton of CO₂ gas emitted. That’s because every fossil fuel has a particular amount of carbon content in it, and when burned each carbon molecule combines with two oxygen molecules and becomes CO₂ gas which goes into the atmosphere.

So the amount of emissions associated with the fuel can be taxed at the point of extraction, refinement, import, or use.

As many ESG investors likely know, burning coal emits the highest amount of CO₂, followed by diesel, gasoline, propane, and natural gas. Therefore, coal gets taxed higher than other fossil fuels. Once CO₂ is emitted into the atmosphere, it remains there for a hundred years or more, creating a greenhouse effect which heats up the planet and leads to climate change (hence the name “greenhouse gases”).

Only products associated with the burning of fossil fuels get taxed. So products such as plastic that contain petroleum but don’t directly result in CO₂ emissions don’t get taxed.

What Is the Economic Impact of Carbon Taxation?

Since a carbon tax increases costs across the entire supply chain, everyone from extractors to consumers are theoretically incentivized to reduce fossil fuel consumption. Those being taxed can raise the prices of their goods and services, but only as much as the market is willing to pay while allowing them to remain competitive.

What Is the Social Impact of Carbon Emissions?

The theory around carbon pricing is that each ton of CO₂ should have a price equal to the social cost of carbon. The social cost of carbon is the current amount of estimated damages over time that each ton of CO₂ emitted causes today.

In addition to causing climate change, emissions and pollution typically lead to negative effects on human health and natural ecosystems. Thus investing in companies with lower carbon emissions can be considered a type of socially responsible investing.

Over time, the social cost of carbon increases, because each ton of emissions is more damaging as climate change worsens. Therefore, the price of carbon and the tax would increase over time.

Those producing emissions know that the tax will increase over time, and so investments into decarbonization are worth it to them today. For instance, a company can invest in solar energy and wind power, and while that might have a high upfront cost for them, over time it could be worth it could help them avoid a rising carbon tax.

Examples of Carbon Taxes

Understanding carbon taxes is an important facet of sustainable investing. Carbon taxes have been put into place in many countries around the world so far, and their popularity is rising. As of 2024, 75 countries had a form of carbon tax or energy tax.

• Finland was the first country to implement a carbon tax in 1990, soon followed by Norway and Sweden in 1991. In 2024, Finland’s price per ton was more than $100. Norway is known to have one of the strictest carbon taxes.

• The Canadian province of British Columbia implemented a carbon tax in 2008. In 2019, South Africa became the first African country to install a carbon tax.

• Although there is not yet a federal carbon tax in the U.S., there are more than 50 regional ones. For instance, the city of Boulder, CO, implemented a carbon tax in 2006 after it passed a local vote.

Support for a U.S. federal carbon tax has generally increased over time, but one of the things holding it back is debate about how the revenue from the tax would be used. A few ideas include: paying back consumers through a carbon dividend; using the money to fund infrastructure upgrades or low-emissions technologies, or reducing other taxes.

The Importance of Carbon Tax

Scientists believe that reducing global emissions is essential to stop the buildup of CO2 in the Earth’s atmosphere. The more CO₂ gets emitted, the more the planet warms and the worse climate change becomes — including the frequency of climate-related disasters.

Global temperatures have already increased 1°C over pre-industrial levels, and if emissions are not reduced temperatures are projected to rise 4°C by the end of this century.

A carbon tax is a powerful tool to discourage the use of fossil fuels and incentivize a shift to low- and zero-emission energy sources. This is why many people invest in green stocks.

Pros and Cons of Carbon Tax

There are several pros and cons to a carbon tax.

Some of the pros of a carbon tax include:

• The carbon tax is a way to regulate emissions without having to actually mandate production and consumption limits directly.

• Carbon taxes incentivize companies and individuals to reduce and avoid emissions.

• Carbon taxes are easy to administer.

• A carbon tax may help reduce the buildup of greenhouse gasses, which in turn may help reduce pollution, improve air and water quality, and more.

• The revenue raised through a tax can be used to fund decarbonization efforts, environmental restoration, and other projects.

• Other programs, such as an incentive using renewable energy, haven’t been as successful in reducing fossil-fuel use.

A few cons of a carbon tax include:

• It can be challenging to figure out how the revenues should be spent.

• A carbon tax can be put on any point of a supply chain and it’s hard to decide which is best.

• It’s hard to predict how much emissions will be reduced as a result of the carbon tax.

• If a carbon tax increases energy costs, this can have a big impact on lower-income households which tend to spend a higher percentage of their income on energy than higher-income households.

• If one country implements a carbon tax and others don’t, then that puts local industries at a competitive disadvantage. If they have to raise prices, customers may start buying from the countries that don’t have the tax, resulting in the same or more emissions. For this reason carbon tax plans build in ways to prevent emissions leakage and issues with competition. Some of these include rebates, exemptions for particular industries, and taxation based on past emissions.

• Companies can purchase carbon offsets or carbon credits to lower the amount they pay in taxes. They can also use those offsets to claim that they are carbon neutral or carbon negative. This isn’t exactly true, since they are still emitting carbon. The ability to purchase offsets reduces their incentive to decarbonize.

Who Regulates Carbon Taxes?

Carbon tax programs are regulated by federal, state, or local governments. Regulation involves setting the price per ton of carbon, deciding which entities get taxed, collecting the tax, and deciding how the revenues are spent.

There is an ongoing discussion about the international coordination of carbon pricing. If a minimum price per ton is set, this would eliminate issues around competition and guarantee a certain amount of effort towards emission reduction. Canada has already implemented national price coordination. The minimum price per ton in Canadian provinces and territories is CAD $50.

Which Countries Have the Highest Carbon Tax?

Below are a few of the countries that have the highest carbon tax rates. The rates are in USD price per ton:

• Uruguay: $155.87

• Switzerland: $130.81

• Sweden: $125.56

• Liechtenstein: $96.30

• Norway: $90.86

The Takeaway

A carbon tax can be a powerful tool for reining in carbon emissions, and potentially helping reduce the amount of greenhouse gasses in the atmosphere. Essentially, these taxes penalize companies by making them pay a fee for CO2 emissions relating to their products or operations.

While the U.S. doesn’t have a federally mandated carbon tax, there are state and local levies. Given concerns about climate change, it’s likely that more countries will continue to adopt and adjust carbon taxes.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q424-014

Dec

2024

Guide to Investment Risk Pyramids

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

An investment risk pyramid is an illustration used to help investors understand the risk/reward profile of various assets. The investment risk pyramid uses a base, middle, and top to rank investments by the likelihood of losing money or seeing big returns. The tool is useful when getting started with investing.

Building a portfolio is no easy task. It requires due diligence and an assessment of your risk tolerance and return goals. The investment risk pyramid may help you determine what approaches work best for you.

What Are Investment Pyramids?

Investment pyramids are practical tools for gauging how risky certain asset types are. The pyramid model has been used in many areas for a long time, and it’s useful when learning what your risk tolerance is.

An investment risk pyramid has three levels grouped by risk/return profile. The least-risky securities are found in the large base; growth and moderately risky assets are in the middle; then the most speculative strategies are at the top.

Again, this can be helpful to investors who are looking to buy and sell stocks or other securities, and also get a sense of how much associated risk they’re introducing or jettisoning from their portfolio.

How Investing Pyramids Work

There are many investing risk need-to-knows, and the pyramid of investment risk works by helping investors understand the connection between their asset allocation and their risk tolerance.

The visual should ultimately lead individuals to better grasp what percentage of their investable assets should go to which types of investments based on risk level and return potential.

Using a risk pyramid investment strategy provides a basic framework for analyzing portfolio construction. The investment risk pyramid is structured so that it suggests people hold a higher percentage of lower-risk assets, and relatively little in the way of ultra-high-risk, speculative assets.

Base of the Pyramid

Managing investment risk is among the most fundamental aspects of investing, and risk is controlled by ensuring an allocation to some safe securities. The base of the investment risk pyramid, which is the bulk of total assets, contains low-risk assets and accounts. Investments such as government bonds, money markets, savings and checking accounts, certificates of deposit (CDs), and cash are included in the base.

While these securities feature relatively low risk, you might lose out to inflation over time if you hold too much cash, for example.

Middle of the Pyramid

Let’s step up our risk game a bit by venturing into the middle of the investment risk pyramid. Here we will find medium-risk assets. In general, investments with some growth potential and a lower risk profile are in this tier. Growth and income stocks and capital appreciation funds are examples.

Other holdings might include real estate, dividend stock mutual funds, and even some higher-risk bond funds.

Top of the Pyramid

At the top of the investment risk pyramid is where you’ll find the most speculative asset types and even margin investing strategies. Options, futures, and collectibles are examples of high-risk investments.

You will notice that the top of the pyramid of investment risk is the smallest – which suggests only a small portion of your portfolio should go to this high-risk, high-reward niche.

Sample Investment Pyramid

Here’s what a sample investment risk pyramid might contain:

Top of the pyramid, high risk: Speculative growth stocks, put and call options, commodities, collectibles, cryptocurrency, and non-fungible tokens (NFTs). Generally, just a small percentage of an overall portfolio should be allocated to the top of the pyramid.

Middle of the pyramid, moderate risk: Dividend mutual funds, corporate bond funds, blue-chip stocks, and variable annuities. Small-cap stocks and foreign funds can be included, too. A 30-40% allocation could make sense for some investors.

Base of the pyramid, low risk: U.S. government Treasuries, checking and savings accounts, CDs, AAA-rated corporate bonds. This might comprise 40-50% of the portfolio.

Pros and Cons of Investment Pyramids

The investment risk pyramid has advantages and disadvantages. Let’s outline those to help determine the right investing strategy for you.

Pros

The investment risk pyramid is useful as a quick introduction to asset allocation and bucketing. Another upside is that it is a direct way to differentiate asset types by risk.

Cons

While the investment risk pyramid is helpful for beginners, as you build wealth, you might need more elaborate strategies beyond the pyramid’s simplicity. Moreover, in the end, you determine what securities to own – the pyramid is just a suggestion.

Examples of Low-Risk Investments

Let’s describe some low-risk investments in more detail since these are including the investment risk pyramid’s biggest tier.

Bonds

Bonds are essentially a loan you make to the government or other entity for a set amount of time. In return for lending your money, the debtor promises to pay you back at maturity along with periodic coupon payments, like interest.

Lower-risk bonds include short-term Treasury bills while riskier bonds are issued by speculative companies at a higher yield.

Cash

Cash feels like a low-risk asset, but ideally you would store it in an interest-bearing savings account in order to keep up with inflation.

Also consider that holding too much cash can expose you to inflation risk, which is when cash loses value relative to the cost of living.

Bank Accounts

You can earn a rate of return through a bank account with FDIC insurance. Keeping an emergency fund in a checking account can be a prudent move so you can pay expenses without having to sell assets like stocks and bonds or take on debt.

Examples of High-Risk Investments

At the top of the pyramid, you will find assets and strategies that may generate large returns, but also expose you to serious potential losses. Margin trading is a method often employed by some investors to try and increase their returns.

Margin Trading

Margin trading is using borrowed funds in an attempt to amplify returns. A cash account vs. margin account has key differences to consider before you go about trading. Trading with leverage offers investors the possibility of large short-term gains as well as the potential for outsize losses, so it is perhaps best suited for sophisticated investors.

Options

Options on stocks and exchange-traded funds (ETFs) are popular these days. Options, through calls and puts, are derivative instruments that offer holders the right but not the obligation to buy shares at a specific price at a predetermined time. These are risky since you can lose your entire premium if the option contract strategy does not work out for the holder.

Collectibles

Collectibles, such as artwork or wine, are alternative investment types that may provide some of the benefits of diversification, but it’s hard to know what various items are worth since they are not valued frequently. Consider that stocks and many bonds are priced at least daily.

Collectibles might also go through fad periods and booms and bust cycles, which can add to the risk factors in this category.

Discovering Your Risk Tolerance

The investment risk pyramid is all about helping you figure out your ability and willingness to accept risk. It is a fundamental piece of being an investor. You should consider doing more research and even speaking with a financial advisor for a more detailed risk assessment along with an analysis of what your long-term financial goals are.

The Takeaway

Using an investment risk pyramid can make sense for many investors. It’s an easy, visual way to decide which asset classes you might want to hold in your portfolio, so that the percentage of each (i.e. your asset allocation) is aligned with your risk tolerance.

The other helpful aspect of the investment risk pyramid is that it presumes a bigger foundation in lower-risk investments (the bottom tier), with gradually smaller allocations to moderate risk and higher-risk assets, as you move up the pyramid. This can be helpful for a long-term strategy. In a nutshell, the investment risk pyramid helps you figure out how to allocate investments based on your risk tolerance and return objectives.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

What are the levels of an investment pyramid?

The levels of an investment risk pyramid are low-risk at the base, moderate-risk in the middle, and high-risk at the top. The risk/return investment pyramid helps investors understand how to think about various assets they may want to own.

What does investment risk refer to?

Investment risk can be thought of as the variance in return, or how great the chance is that an investment will experience sharp losses. While the risk investment pyramid helps you build a portfolio, you should also recognize that a diversified stock portfolio performs well over time, while cash generally loses out due to the risk of inflation.

What are some examples of high-risk investments?

High-risk investments include speculative assets like options, trading securities on margin, and even some collectibles that might be hard to accurately value since they are based on what someone might be willing to pay for them. The low-risk to high-risk investments pyramid can include virtually any asset.

Photo credit: iStock/MicroStockHub

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q324-024

Dec

2024

Risks and Benefits of Margin Trading: Is It a Good Idea?

By Kenny Zhu | Growing Wealth, invest, Investing | Comments Off

Margin trading refers to trading or investing using funds borrowed from a brokerage. Investors should understand that trading on margin operates like a double-edged sword; while it allows you to potentially multiply your gains, it can also multiply your losses.

At its core, margin trading involves borrowing from your broker to increase your purchasing power. This allows you to buy well beyond the actual cash you have at your disposal. We’ll cover the mechanics of how this works, as well as the risks and benefits of undertaking such a strategy.

Key Points

• Margin trading is trading or investing with funds borrowed from a brokerage.

• Borrowing boosts purchasing power but requires interest repayment.

• Risks include high interest costs and margin calls, leading to forced sales.

• Margin trading may help some traders access more purchasing power.

• Margin trading is risky, and may be unsuitable for some investors, especially those with long-term strategies.

Understanding Margin Trading

Margin trading means borrowing funds from your broker and using those funds to buy securities. Any borrowed funds must be repaid, with interest, regardless of whether or not you earn a profit on your trade. If you’re wondering about the difference between leverage vs. margin, you can think of margin as a form of leverage.

When investing – be it online investing or otherwise – with margin, your broker will require you to post cash collateral to match a percentage of the funds you borrowed. This is known as the margin, and the exact amount is set by your broker, the type of security traded, and prevailing market conditions.

Risks and Benefits of Margin Trading

Here’s a rundown of some of the most obvious risks and benefits to margin trading:

Risks	Benefits
Amplified losses	Increased purchasing power
High interest expense	Added liquidity
Risk of margin call	No set repayment schedule

Benefits of Margin Trading

Some of the benefits of margin trading include:

Added liquidity: Assuming you remain inside of acceptable maintenance margin requirements, margin trading grants additional buying power to smaller cash balances, which can be useful if you don’t want to liquidate existing holdings.

No set repayment schedule: Unlike standard fixed loans, there’s no repayment schedule for repaying your margin loan. The interest accrues while your balance remains outstanding, and is only repaid once the position is closed.

Risks of Margin Trading

Some of the risks of margin trading include:

Debt risks: Trading or investing with borrowed money has its risks, as you could end up in debt to your broker.

High interest expense: Interest rates on margin loans can range from low single digits to as high as 11% or more, depending on your broker and the size of your margin balance. At best, this is a drag on investment returns; at worst, an additional cost you have to pay on a loss.

Risk of margin calls: If at any point, the value of your investments fall beneath a broker’s posted margin requirements, you will be required to deposit additional collateral to cover the shortfall. This is known as a margin call. Failure to meet a margin call can result in a forced sale of your security, additional charges, and other penalties as dictated by your brokerage firm’s policies.

Is Margin Trading Ever Risk-Free?

Under no circumstances is margin trading ever considered free of risk. The core precept of all investing involves risk, and leveraged strategies like margin trading increase risk exposure.

Unlike cash accounts, which limit your losses to the value of your initial investment, margin accounts can result in losses that exceed the value of your initial deposit.

Is Margin Trading a Good Idea for You?

Margin trading isn’t for all investors, and its suitability depends on both the scenario as well as the experience and knowledge of each individual investor.

Trading on margin can be useful when you have a high conviction short-term trade idea. It can also provide the benefit of additional liquidity when much of your cash is tied up in existing investments that can’t be quickly unwound.

When considering margin trading, investors need to be willing and able to absorb any potential losses associated with this strategy. Make sure you fully understand the dynamics of each trade before opening a margin position.

Margin Trading With SoFi

Margin trading allows traders and investors to increase their purchasing power by using borrowed funds to buy securities. But it’s critical that traders and investors keep in mind that using margin can swing both ways – that is, it can allow them to invest more money, but it could also lead to increased losses.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

What are the downsides of trading on margin?

Trading on margin involves a number of possible downsides, including added interest costs, heightened portfolio volatility, and magnified losses that may exceed the value of your initial investment.

Do some people make a lot of money trading on margin?

Trading on margin can amplify your potential investment returns thanks to the added buying power it offers. However, this multiplier effect swings both ways and will amplify the size of your loss, should the market move against you.

Is margin trading a good long-term investment strategy?

Margin trading is a form of leveraged trading and therefore not recommended for long-term investors. Over extended periods of time, there’s a heightened risk that market volatility may force a margin call. Also, the added interest expense incurred by margin loans can act as a drag on your investment returns.

Photo credit: iStock/valentinrussanov

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q424-016

Dec

2024

What Are Labor Market Indicators?

By Michael Flannelly | invest, Life & Career | Comments Off

The labor market is a key component of the economy, as it represents the supply and demand for workers and their respective wages. Labor market indicators are statistics that reflect the state of the labor market, providing information about employment levels, wage growth, and other factors that can impact the overall economy.

A wide range of analysts, from economists to investors to business owners to policymakers, pay close attention to various labor market indicators to help gauge the state of the economy. These data can play a critical role in determining how investors and businesses make investment decisions and how policymakers shape laws and regulations that affect society. They can also be important for investors, too.

Key Points

• Labor market indicators offer insights into employment levels, wage growth, and economic health, influencing investment decisions and policy-making.

• Key indicators include the unemployment rate, nonfarm payrolls, and average hourly earnings, reflecting labor market conditions.

• The employment-to-population ratio and labor force participation rate assess workforce utilization and availability.

• JOLTS data provides insights into job openings, hires, and separations, indicating labor market dynamics.

• Initial and continuing jobless claims measure unemployment benefits filings, reflecting layoffs and employment challenges.

What Is the Labor Market?

The labor market, also known as the job market, is where workers and employers come together to find jobs and workers, respectively. It is critical to the economy because the supply and demand for labor determines wages and other employment-related issues. That, in turn, can affect how people invest, which can be helpful to know if you’re actively online investing or figuring out your strategy.

The labor market is influenced by various factors, including the overall health of the economy, the level of education and training of the workforce, and government policies that impact employment and wages. The labor market can also be affected by broader economic trends, such as globalization and technological change.

Low unemployment and rising wages often characterize a healthy labor market. These developments may indicate a robust economy and can lead to improved living standards for workers and their families. On the other hand, a weak labor market can signal economic difficulties, like a recession, and result in lower wages and higher levels of unemployment.

The labor market plays a crucial role in the functioning of the economy. By paying attention to the labor market and labor market indicators, investors can better evaluate the health and well-being of the economy, which may help inform investment strategies.

Common Labor Market Indicators

Investors, economists, and policymakers use several common economic indicators to evaluate the state of the labor market. These indicators, most of which are released by the Bureau of Labor Statistics (BLS), can provide valuable information about employment levels, wage growth, and other factors that can impact the economy.

Some of the most common labor market indicators include the following.

Unemployment Rate

One of the most closely watched labor market indicators is the unemployment rate, which is the percentage of the labor force that is not currently employed but is actively seeking work. This number can give insight into the overall health of the economy, as a high unemployment rate can indicate a sluggish economy. A low unemployment rate may signal a strong economy where most people are able to find jobs if they’re looking for one.

The unemployment rate is calculated by dividing the number of unemployed workers actively seeking work by the total number of individuals in the labor force (which includes both employed and unemployed workers). The unemployment rate is expressed as a percentage. For example, if there are 100 unemployed workers and 500 individuals in the labor force, the unemployment rate would be 20% (100/500 = 0.20).

Nonfarm Payrolls

Nonfarm payrolls, also known as nonfarm employment or total nonfarm payrolls, measure the number of people employed in the United States. The nonfarm payrolls number is derived from the monthly Employment Situation report (also known as the Jobs Report), which is based on a survey of nonfarm establishments. This survey excludes farm workers, private household workers, employees of nonprofit organizations, and other types of businesses.

The nonfarm payroll number is considered an essential indicator of the state of the labor market, as it provides information about employment levels across a wide range of industries. A rising nonfarm payroll number can indicate a strong labor market and a growing economy, while a falling number can signal economic difficulties.

Average Hourly Earnings

Average hourly earnings is a measure of the average wage earned by workers. Along with the nonfarm payrolls report, it is released monthly by the BLS and is considered an important indicator of wage growth and the well-being of workers.

Average hourly earnings are calculated by dividing the total wages paid to workers by the number of hours worked. This number is then expressed in terms of an average hourly wage. For example, if the total wages paid to workers are $100,000 and the total number of hours worked is 2,000, the average hourly earnings would be $50 per hour (100,000/2,000 = 50).

Average hourly earnings can provide valuable information about the state of the labor market and the well-being of workers. Rising average hourly earnings may indicate that workers are seeing their wages increase, which may signify a strong labor market and a growing economy. However, rising wages may be a cause of inflation. On the other hand, falling average hourly earnings may signal economic difficulties and stagnant wages.

Employment-to-Population Ratio

Another critical labor market indicator is the employment-to-population ratio, which is the percentage of the population that is currently employed. This indicator is calculated by dividing the number of employed individuals by the total population.

The employment-to-population ratio can give a sense of the extent to which the labor force is being utilized. A high employment-to-population ratio can indicate a strong labor market, while a low ratio can signal economic difficulties. Additionally, this ratio can also be used to compare the employment levels of different groups within the population. For example, analysts may use the ratio to compare the employment levels of men and women or to evaluate the employment levels of different age groups.

Labor Force Participation Rate

The labor force participation rate (LFPR) is the percentage of the population that is either employed or actively seeking work. It is calculated by dividing the number of individuals in the labor force (which includes both employed and unemployed workers) by the total population and is expressed as a percentage. The LFPR can provide information about the availability of workers in the labor market and can be used to evaluate trends in the workforce.

JOLTs

JOLTS, or the Job Openings and Labor Turnover Survey, is a monthly survey conducted by the BLS. It provides data on job openings, hiring, separations (including layoffs, discharges, and quits), and other labor market dynamics in the United States.

The JOLTS data can provide insight into employment and job growth trends and can also be used to identify potential labor shortages or surpluses. For example, a high number of job openings and quits can indicate a strong labor market, while a low number can signal a weak labor market.

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Initial Jobless Claims

Initial jobless claims, also known as new unemployment claims or jobless claims, measure the number of individuals who have filed for unemployment benefits for the first time. This number is released weekly by the United States Department of Labor (DOL).

The number of initial jobless claims is a measure of the pace of layoffs in the economy. A rising number of initial jobless claims can lead to a weak labor market and a slowing economy. In contrast, a falling number can signal a strong labor market and a growing economy.

Continuing Jobless Claims

Continuing jobless claims, also known as continuing unemployment claims or continuing claims, is a measure of the number of individuals who have filed for unemployment benefits and have yet to find a job. Like initial jobless claims, this indicator is released weekly by the DOL.

The number of continuing jobless claims provides information about the number of individuals who have been unable to find work after filing for unemployment benefits. A high number of continuing jobless claims can indicate a weak labor market, suggesting that many workers are struggling to find employment. On the other hand, a low number of continuing jobless claims can signal a strong labor market, as it suggests that most workers can find jobs.

The Takeaway

Labor market indicators are an important tool for understanding the state of the economy and the health of the labor market. By tracking these indicators, you can better understand the factors that drive employment, wage growth, and the economy and make more informed decisions about your investments. Depending on the data, labor market indicators may show a strong economy, which may be a positive sign for your portfolio, or vice versa.

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SOIN-Q424-023

Dec

2024

Annual Report: The Key Info Companies Provide in Theirs

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

An annual report is a document that provides insight into a company’s operations and financial performance over the previous year. While annual reports are primarily associated with large, publicly traded companies, small businesses and non-profit organizations may also release yearly reports.

Companies issue annual reports to provide shareholders, potential investors, employees, and other interested parties with a comprehensive overview of the company’s financial position. Companies also use annual reports to inform investors about the company’s performance and prospects for the future. Annual reports can be an essential tool for investors to make informed decisions about their investments.

Key Points

• An annual report provides insight into a company’s operations and financial performance over the previous year.

• It is used by companies to inform shareholders and potential investors about their financial position and future prospects.

• Annual reports typically include financial statements, management information, and a performance overview.

• They are essential tools for investors to make informed decisions about their investments.

• The report may also include information on corporate governance, environmental impact, and future outlook.

What Is an Annual Report?

As noted above, an annual report is a document that publicly traded companies are usually required to issue each year to share information about their financial performance and activities with their shareholders. These reports typically include quantitative and qualitative details about the company’s revenue, expenses, profits, losses, and plans for the future.

Companies send annual reports to their shareholders before they hold annual meetings, often to assist in the shareholder voting process. Additionally, reporting companies will post their annual reports on their websites.

A company’s annual report is typically prepared by the company’s management team, with input from other members of the organization, such as the finance department and the board of directors.

The individuals and teams preparing the annual report can vary depending on the company and the information it wishes to include. It is typically a collaborative effort involving many different people within the organization. In some cases, a company may also enlist the help of external parties, such as auditors or consultants, to assist with preparing the annual report.

Often a company’s creative and communications teams will be involved in preparing the report, as they contribute to the narrative text, graphics, and photos that may be in an annual report. By making it visually appealing, companies can make it easier for readers to digest the information.

A publicly traded company’s annual report is related to, but different from, the Form 10-K annual report that they must file with the Securities and Exchange Commission (SEC). The Form 10-K annual report may contain more detailed information about the company’s earnings and financial condition than the annual report. Companies may send Form 10-K to their shareholders instead of – or in addition to – providing them with a separate annual report.

What Information Is Contained In an Annual Report?

The main components of an annual report typically include an overview of the company’s operations and financial performance, financial statements, and information about the company’s management and board of directors.

The specific components of an annual report can vary depending on the company and the information it wishes to share with its shareholders. In addition to the main features outlined below, the contents of an annual report may also include other information, such as details about the company’s corporate governance practices, its environmental and social impact, and any additional information that the company feels is important for shareholders to know.

Letter from the CEO

Annual reports usually start with a letter from the chief executive officer (CEO) or chairman of the board that provides an overview of the company’s performance and highlights any significant events or developments that have occurred over the past year.

Performance Overview

Companies often provide a review of the company’s operations, including information about its products or services, market position, and any important milestones or achievements that have occurred over the past year, in an annual report.

Financial Statements

Financial statements, such as the balance sheet, income statement, and statement of cash flows, providing detailed information about the company’s financial performance and position, are a critical part of an annual report.

Corporate Leadership Overview

Annual reports include information about the company’s management and board of directors, including biographies and details about their backgrounds and experience. The reports may also have detailed information about executive compensation.

Future Outlook

A discussion of any risks or uncertainties that the company faces and how it plans to address them in the future is often included in the annual report. This can be helpful for shareholders and potential investors to gain an understanding of the company’s possible performance in the future.

Example of an Annual Report

Annual reports can vary depending on the company, its industry, and whether it is a publicly traded or privately held firm.

For example, an annual report for a company in the retail industry might include information about the company’s same-store sales over the past year. Additionally, the report may provide details about the products it sells, a breakdown of its inventory, an overview of its financial position, and information about the company’s management team and any potential risks or challenges it faces in the coming year.

To find out more about a specific company’s annual reports, you can usually find them under the investor relations portion of the company’s website or through the SEC’s EDGAR database .

Who Can Benefit From Reading an Annual Report?

Several groups of people may benefit from reading an annual report. For example, the company’s shareholders are usually interested in an annual report to use the information to understand the company’s financial performance and make more informed decisions about their investments.

Other groups who may find annual reports useful include potential investors, who can use the information in the annual report to assess the company’s financial health and determine if it is a good investment opportunity. In addition, analysts, customers, journalists, and other stakeholders may find annual reports to be a valuable source of information about a company and its operations.

The Takeaway

An annual report is a crucial document that provides a comprehensive overview of a company’s performance and financial position. These documents can be a critical resource for investors to make informed investment decisions. It is important to understand the information contained in the report and to analyze the information critically. By doing so, investors can make informed decisions about their investments.

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SOIN-Q424-024

What Is a Carbon Tax?

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What Is the Economic Impact of Carbon Taxation?

What Is the Social Impact of Carbon Emissions?

Examples of Carbon Taxes

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The Importance of Carbon Tax

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Base of the Pyramid

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Cons

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Examples of Low-Risk Investments

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Cash

Bank Accounts

Examples of High-Risk Investments

Margin Trading

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Collectibles

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What Are Labor Market Indicators?

What Is the Labor Market?

Common Labor Market Indicators

Unemployment Rate

Nonfarm Payrolls

Average Hourly Earnings

Employment-to-Population Ratio

Labor Force Participation Rate

JOLTs

Initial Jobless Claims

Continuing Jobless Claims

The Takeaway

Annual Report: The Key Info Companies Provide in Theirs

What Is an Annual Report?

What Information Is Contained In an Annual Report?

Letter from the CEO

Performance Overview

Financial Statements

Corporate Leadership Overview

Future Outlook

Example of an Annual Report

Who Can Benefit From Reading an Annual Report?

The Takeaway

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