Angel Investors, Capital Gains, And Much More!

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What Is an Angel Investor?

An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.

Often, angel investors are found among an entrepreneur's family and friends. 

The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.

---What Is an Annual Percentage Rate (APR)?

The term “annual percentage rate (APR)” refers to the annual rate of interest charged to borrowers and paid to investors. 

APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. 

This includes any fees or additional costs associated with the transaction, but it does not take compounding into account. 

The APR provides consumers with a bottom-line number they can easily compare with rates from other lenders.

---What Is the Cost of Funds?

The cost of funds is a reference to the interest rate paid by financial institutions for the funds that they use in their business. 

The cost of funds is one of the most important input costs for a financial institution since a lower cost will end up generating better returns when the funds are used for short-term and long-term loans to borrowers.

The spread between the cost of funds and the interest rate charged to borrowers represents one of the main sources of profit for many financial institutions.

---What Is Compounding?

Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. 

This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. 

Compounding, therefore, differs from linear growth, where only the principal earns interest each period.

---What is Capital Gain?

Capital gain is an increase in a capital asset's value. It is considered to be realized when you sell the asset. 

A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Understanding this distinction and factoring it into investment strategy is particularly important for day traders and others taking advantage of the greater ease of trading in the market online.

---What Is Capital Assets?

Capital assets are significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. 

For businesses, a capital asset is an asset with a useful life longer than a year that is not intended for sale in the regular course of the business's operation. 

This also makes it a type of production cost. For example, if one company buys a computer to use in its office, the computer is a capital asset. If another company buys the same computer to sell, it is considered inventory.

---Production Costs vs. Manufacturing Costs: An Overview

Production costs reflect all of the expenses associated with a company conducting its business while manufacturing costs represent only the expenses necessary to make the product.

Both of these figures are used to evaluate the total expenses of operating a manufacturing business. The revenue that a company generates must exceed the total expense before it achieves profitability.

---What Is an American Depositary Receipt (ADR)?

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares—often one share—of a foreign company's stock. 

The ADR trades on U.S. stock markets as any domestic shares would.

ADRs offer U.S. investors a way to purchase stock in overseas companies that would not be available otherwise.

Foreign firms also benefit, as ADRs enable them to attract American investors and capital without the hassle and expense of listing on U.S. stock exchanges.

---What is Negotiable?

Negotiable is used to describe the price of a good or security that is not firmly established. 

It is also used to describe a good or security, such as cash, whose ownership is easily transferable from one party to another. 

Other words used to describe negotiable are marketable, transferable or unregistered.

---Understanding Negotiable

You often hear the term negotiable used in reference to the purchase price of a particular good or security. 

The asking price is not set in stone and can be adjusted depending on the circumstance.

Most securities are negotiable; they can be easily transferred from one party to the next, provided all proper legal documentation is included.

In the world of finance, negotiable refers to a legal document or instrument that is used in lieu of cash. 

It is used to make a promise of payment, generally cash flow(s), at some point in the future. 

In context, the word negotiable implies a cash value and comes with specific instructions about the timing of cash flows to be paid. 

The term negotiable is used to suggest the document or instrument comes with the same faith legal backing as cash under the law.

---What Is a Security?

The term "security" refers to a fungible, negotiable financial instrument that holds some type of monetary value. 

It represents an ownership position in a publicly-traded corporation via stock; a creditor relationship with a governmental body or a corporation represented by owning that entity's bond; or rights to ownership as represented by an option.

---What Is Fungibility?

Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type. 

Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets.

---What Is a Call Option?

Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period. 

The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.

A call option may be contrasted with a put, which gives the holder the right to sell the underlying asset at a specified price on or before expiration.

---What Is a Put Option?

A put option is a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame. 

This pre-determined price that buyer of the put option can sell at is called the strike price.

Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. 

A put option can be contrasted with a call option, which gives the holder the right to buy the underlying at a specified price, either on or before the expiration date of the options contract.

---What Is a Strike Price?

A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. 

For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.

Strike price is also known as the exercise price.

---What Is an Exercise Price?

The exercise price is the price at which an underlying security can be purchased or sold when trading a call or put option, respectively. 

It is also referred to as the strike price and is known when an investor initiates the trade.

An option gets its value from the difference between the fixed exercise price and the market price of the underlying security.