Central Bank Rate
is the interest rate at which banks can borrow money from the Central Bank. Also known as the discount rate
is the average interest rate banks charge to their best customers, top corporates or other banks. Also known as the prime rate
is the average interest rate banks charge other banks for lending money. On every market, there are BID (from buyers side) and ASK (from sellers side) quotations. The difference between BEST BID - highest price from a buyer - and BEST ASK - lowest price from a seller - is known as SPREAD. On the money market, where banks borrow and lend money to each other, BID quotation is the interest rate they pay for borrowing money (or accepting deposits, ro.: depozite atrase
) while ASK quotation is the interest rate for lending money (or placing deposits, ro.: depozite plasate
There are many terms for interbank deposits such as O/N - overnight, T/N - tomorrow next, SW - single week, 1M - one month,.. 6M - six months,.. 1y - one year and so on. Each business day, at 11:00 hours, the Central Bank is calculating the average of BEST BID quotations of Romanian banks for each deposit term to obtain ROBID (Ro
manian Interbank Bid
Rate) and the average of BEST ASK quotations to obtain ROBOR (Ro
ate). Thus, ROBOR 6m is the average interest rate for a 6 month interbank loan or placed deposit
, denominated in RON, as calculated by National Bank of Romania at 11:00 on that particular day.
The deposits are posted and negotiated on REUTERS systems and electronically signed using SWIFT (an electronic system which replaced telex).
ate) is the average interest rate banks charge other banks - on the European market - for lending money. This rate is calculated daily by the European Central Bank, at 11:00 hours, and is the benchmark for EUR-denominated loans. Analogous to LIBOR for the euro.
ate) is the average interest rate banks charge other banks for loans, usually in Eurodollars (dollars outside of US). This rate is calculated daily by the British Bankers Association, on London market, at 11:00 hours, and is the benchmark for USD-denominated loans. There is a LIBOR calculated for other currencies too, such as EUR, CHF or JPY, but they are not used as benchmark interest rates for loans.
is the exchange rate between the european currency (EUR) and the United States Dollar (USD). EURUSD = 1.3289 means 1 EUR equals 1.3289 USD. There are FOREX (For
change) transactions with real money or with derivatives on currencies. FOREX Market is the most liquid and biggest market of all markets, in terms of traded value, especially due to low margins required for such transactions. The quotations for EURUSD, as well as for other financial instruments, are presented as 1.3286/90, meaning that the BID quotation is 1.3286 while the ASK quotations is 1.3290. The last digits are called pips
. Therefore, the SPREAD (i.e., ASK - BID) is 4 pips. This is the profit of the FOREX dealer displaying these quotations. When you want to buy EUR you pay 1.3290 USD, when you want to sell EUR you get 1.3286 USD. For calculations only, the EURUSD exchange rate is calculated as the middle point between BID and ASK; in our example is EURUSD = 1.3288. However, for most of the FOREX players, the most used figure is BID quotation.
transactions are deals based on a Time Deposit Agreement. Thus, money or other liquid assets are left with a bank to earn a return, called interest. The interest rate involved is called depo rate
, especially on the interbank market. For example, when referring to USD deposits, as LIBOR is an offered interest rate, the corresponding depo rate is a bid rate, called LIBID. See also REPO transactions
transactions are deals based on a Repurchase Agreement. This is a short-term contract under which a holder of securities sells these securities to an investor and agrees to buy back the securities at a specified time and price. The holder earns interest competitive with money market rates.
These repo deals are one of the most important vehicles by which a central bank performs domestic market operations. By using REPOs, a central bank can inject liquidity on one day and withdraw it on another day with a single transaction.
transactions are based on a Reverse Repurchase Agreement. This is a purchase of securities with an agreement to sell them back at a specified time and price. Usually, the counterparty is a central bank while the securities are issued by the government. The interest rate involved is called repo rate
. See also REPO transactions
are financial agreements or instruments which derive their value from the price or value of an underlying security, index, currency or commodity. Options, futures or forward agreements are included in this class.
Derivatives were first used for hedging purposes only: to avoid price changes, you can sell your production at the current price, and deliver months later, using futures contracts.
Nowadays, derivatives are used also for speculations. One of the most known derivates used for such purpose are Contracts for Difference (CFDs). For example, a CFD for Microsoft (Nasdaq: MSFT) shares would imitate the stocks accordingly: when the MSFT price will go up by 1%, the quotation of CFD are expected to increase with 1% as well. The main benefits of trading CFD are the margin requirements: 5% for CFDs compared with 50% for stocks.
is a derivative in which the two counterparties agree to an exchange of cash flows between them. The cash flows are computed based on a nominal or current value of the swapped asset, called the notional principal amount
, which is usually not exchanged between counterparties. Swap contracts can be used to offset interest rate or currency risks or for speculation purposes by creating exposure on changes in the price of the underlying assets.
are contracts between two counterparties to exchange two different cash flows over time based on predefined formulas. During the life of the equity swap, one party agrees to pay the rate of return on an equity, equity basket or index, while the other party agrees to pay a floating or fixed rate of interest.
For example, the buyer of say 1,000,000 EUR equity swap having BET index as the underlying asset, for a 90 days tenor, can agree with the seller to pay the latter an interest rate of EURIBOR6m+1.5%. Thus, the buyer will pay to the seller an interest of 16,050 EUR (considering a EURIBOR for six month deposits of 4.92%). If BET index increases by 5% over the contract period, the seller should pay the buyer an amount of 50,000 EUR (5% applied on the notional value of the contract, i.e. 1,000,000 EUR). On the other hand, if BET index drops 5%, the seller should receive from the buyer an additional amount of 50,000 EUR.
are financial agreements or instruments that confer, to the option buyer, the right (but not the obligation) to buy or to sell a particular security, index, currency or commodity. The right to buy is given by a call option
, while the right to sell is given by a put option
They are used for both hedging and speculations purposes. Suppose you have in your portfolio 1000 shares of Rompetrol Rafinare (RRC) and you fear its price might drop in the next 6 months below 0.1100 lei per share. To protect your investment, you should buy put options
that give you the right to sell your 1000 RRC shares within 6 months at this price. If RRC price goes up, you only lose the price paid for the put options, called premium
. When RRC price goes below 0.1100, you can exercise your option and sell your 1000 shares to this price, regardless of the market price. This way you protect yourself from a bigger loss.
are firm standardized agreements to buy or sell at a specified price, a certain amount of tangible or intangible assets with a future delivery date. Futures are traded on a derivative exchange, using margin accounts. The common margin requirement for a future contract lies between 5% and 15%. Like other derivatives, hedgers and speculators are the ones who trade futures contracts most. The reasons are to rule out the risk of price change or/and to make profits, respectively.
Crude oil, currencies, metals, interest rates are only few example of the assets traded through futures contracts.
refers to an investment position of someone who owns the securities, as a positive difference between bought and sold contracts. A Long position generates profits when the price increases. When you buy, say, 2000 BIO shares (Biofarm SA) you opened a long position
and it is called that you are long on Biofarm
. Long positions are closed by sell operations.
refers to an investment position of someone who owes the securities, as a positive difference between sold and bought contracts. A Short position generates profits when the price decreases. When you believe SNP Petrom will probably decrease in the near future, you would be able to make profits anyway by selling SNP today and buying it back later, at a lower price. Thus, you opened a short position
and it is called that you are short on SNP
. Short positions are closed by buying operations. In derivatives world, when you go short you just create an exposure to the market price of that underlying assets and you are happy when the price drops. In trading stocks, you should borrow first the share you intend to sell. Later on, when the price dropped or when you close your position, you buy back the shares from the market and return them to the owner.
BET Index Futures
are traded on Bucharest Stock Exchange starting with September 15, 2007. As all derivatives, BET Index Futures will be traded using margined transactions. That means you need an initial deposit of RON 1200 when you open a long or short position, called initial margin requirement
but you should maintain in your account a certain amount of funds, in our case RON 1000, called maintenance margin
When your account balance drops below maintenance margin, the broker has two options: either to close your positions or issue a a margin call
, which is a firm instruction for you to fund your account immediately otherwise the broker will close your position. In most of the cases, in a margin call situation, the broker closes your positions arbitrarily, i.e. whichever positions the brokers deems as necessary to be closed. Our recommendation is to keep enough free equity in your account to avoid any margin calls.
Please bear in mind that derivatives investments are very risky and you can lose more money than you projected, in a very short period of time.
are transactions for which you have maintain in your account a certain amount of money, as a collateral, called margin
. For instance, if you buy shares of USD 10,000 you may have to secure in your account, for the entire holding period, only 50%, i.e. USD 5,000. You can use margin accounts to trade stocks or derivatives. The margin requirement is usually 25% for stocks and 5% for derivatives in stocks and can get as low as 0.5% for FOREX transactions. Next, we will discuss about the risks associated with such transactions.
The Margined Transaction Risks
are considerable because of the levier effect, due to the fact that part of your stocks or positions are financed with broker′s money. We do not advise you to engage in such transactions unless you know what you are doing and only with funds that you don't need and you afford to lose. Let's take an example: suppose you have USD 10,000 and you want to invest on FOREX Market because you think you know where EURUSD will be in the future. If you think EURUSD will go up, i.e. EUR will get stronger against USD, you might want to open a long position, meaning you will gain money if EUR goes up against USD and lose money otherwise. With USD 10,000 in your account and a margin requirement of 1%, you can open a short position of USD 1,000,000. If you buy EUR at EURUSD = 1.3310 you will get a long position of EUR 751,000. If the EURUSD drops 2%, BID will be 1.3037, the broker will sell your EURUSD contracts for USD 979,078 because you don't have enough money to keep the position open. Your loss will be USD 20,921 plus commissions, more than your initial capital of USD 10,000! Some brokers close your position when you lose your margin, i.e. at about 1% drop in EURUSD. Keep in mind that you can lose your USD 10,000 within a single day, not to say quicker :)
RON Official Rate
is most known as the exchange rate between the Ro
ew Leu and EURO. The rate is computed daily, at 13:00 hours, by the National Bank of Romania based on EURRON quotations on Romanian FOREX market (compounded of all Romanian banks). That means EUR is the reference currency for RON and the obtained EURRON is called direct quotation
. Once EURRON is obtained, the exchange rate for all the other currencies is calculated using cross-rates system: for instance, say the calculated EURRON is 3.3499 while EURUSD is 1.3304, at 13:00 hours, on the international FOREX Market available on Reuters. By dividing EURRON to EURUSD, we obtain the official rounded exchange rate between RON and USD: USDRON = 2.5180. The exchange rates computed every business day are valid for the next business day. Therefore, Monday's official rate is computed on the previous Friday, at 13:00 while the official rate on that Friday was calculated on Thursday and so on. National Bank of Romania publishes every day the official rates on its website but, most likely intentionally, perhaps due to a certain agreement, instead of publishing the exchange rates at 13:01, it takes more sometimes than 45 minutes until you can see the official rates for tomorrow.
RON Official Rate can be estimated easily and with acceptable accuracy, for a less volatile day. Suppose you have access to Reuters, you have all EURRON quotations of Romanian banks and all international quotations against EUR. Thus, you can easily do what National Bank of Romania does at 13:00 and compute all RON exchange rates that will be valid tomorrow at, say, 11:00 hours. That means you know before others the estimates of the official exchange rates for the next business day. Bear in mind that the market is volatile, i.e. quotations change both on Romanian Forex market but especially on international Forex market. The key factors for these movements are macroeconomic indicators and Central Bank interventions on the market.
The currency symbols
follow an ISO standard and are compounded of three letters. First two letters are the international country code while the last letter is the first letter of the currency name. For instance, GBP comes from GB code for Great Britain and P from pound. Of course, EUR is one exception. Related with currencies are quotations for precious metals, out of which the most published is the gold quotation against USD, i.e. XAUUSD, where XAU is the symbol for gold. The relationship between gold or other precious metals and currencies comes from the times when currencies were convertible into gold or other precious metals. Nowadays, gold is mainly a refuge for Forex market players whenever there is a high volatility on this market. Therefore, if you see gold going up, people are expecting EURUSD to move significantly in the near future but the direction of movement is not clear.
Bucharest Stock Exchange
is the only market in Romania where you can trade stocks and bonds. Although it passed almost 12 years since its launch, the exchange is not fulfilling its role neither for companies, as source of capital, nor for investors, from real investment opportunities point of view. There are only few traded companies, even fewer bonds, low trading volume, no futures, no options, no other derivatives. Not even short selling or margin accounts are customary on this market. Therefore, it's at the beginning stage and has little interest for foreign funds. You can only have profits if prices go up. There is actually no hedging for the portfolio investors. However, it is our stock exchange, managed by our people and has an upward trend, driven by the macroeconomic growth. It is not a fashionable game
yet but it will be. Next, we will present stock indexes. Do not invest in any stock exchange money you cannot afford to lose.
Stock Exchange Indexes
are created in order reflect the general movement of a specific stock market, as a whole, or of a group of instruments traded on that market. They are like a basket of securities or like a portfolio. Their composition is changed from time to time as they try to meet the expectations: to be significant for that specific market or group of securities. For instance, BET is the main index for Bucharest Stock Exchange, compounded of most liquid companies listed on the exchange, while BET-C includes all the listed companies and BET-FI tracks only the SIFs investment companies traded on Bucharest Stock Exchange. Detailed information is available at www.bvb.ro
In developed markets, there are many futures contracts based on indexes. In order to be more attractive to its potential investors, the Vienna exchange requested Bucharest to calculate a similar index to BET, called ROTX, so that they could offer futures based on Romanian market :). When are we going to be able to launch index futures ourselves? Probably this year, if we learned the Austrian lesson.
is something you need to have when you place your money in any market. You need to define the amount you afford to lose, the time horizon you do not want to spend this money, the expected return you are happy with and how much risk are willing to take. Bear in mind that NOBODY KNOWS THE FUTURE. Otherwise, he or she would have been the richest person in the world. Keep in mind also that the broker advices are affected by a classic conflict of interest: their incomes depend on your portfolio turnover not on your portfolio performance. Therefore, the brokers always want you to trade. Read more about this by searching for agent theory
. If you feel like asking someone's advice, try investment consultants but do not expect too much so that you won't be disappointed.
Before entering in any transaction think twice: you will pay the SPREAD, the broker's buying and selling commissions and income taxes. Always calculate your break-even point (what should be the quotation where you get your money back, i.e. no profit and no loss). Get as much information as you can before making a decision. Do not be greedy and do not fall in love with one stock: sell it when you need to sell it.
is the simplest strategy one can use on capital markets. Studies showed this is the most profitable strategy on long run. According to this strategy, the only thing you have to do is to pick your stocks, buy them and hold them for a long period of time. It is not appropriate for speculators but it's preferred by investors that do not have necessary time, willingness or knowledge to monitor the market information. It works very nice on an upward trend.
We applied this strategy on Bucharest Stock Exchange, since 1 year and a half ago. We only acquired stocks from time to time and did not make any sell. Whenever the market dropped we stopped buying. This strategy generated for our portfolio an annualized return of 50%. Was it just a lucky period of time? Maybe. Or maybe not. We called it trend.
is another well-known investment strategy on stock exchange. The basic filter strategy is to buy when price increased by x% and sell when price dropped by y%. The percentage x and y vary from one stock to another and should be case-by-case estimated. To improve its performance, especially on low liquidity markets, we successfully tested this strategy considering the volume changes as well. The good news is that it worked, while the bad news is that coefficients were not stable over time. Some studies show that this strategy combined with averaging up/down techniques (a buy/sell signal is used not for one buying/selling order but to start buying/selling in an attempt to minimize the risk of false signals) has even better results.
is one of the most used investment strategy. Its followers think they can beat the market
, i.e. outperform the market index, by using various tools such as technical or fundamental analysis, especially for the market as a whole. They are trying to predict market future directions. Technical analysis is mainly based on graphs and price-volume indicators, while fundamental analysis is based on the economic intrinsic value of the financial instruments. If you want to get rich, both theories are wrong: the history does not repeat itself forever and it can take years till the market recognizes the calculated value of a stock.
There is another theory, called efficient market theory
, claiming that nobody can predict the market: if you think you discovered a buying signal using the technical analysis others discovered that signal before you and they have traded already. Therefore, you're late. If you think that a company is under-valuated by the market, think that the market can keep under-value this company for the next 5 years or so. Consequently, you're too early.
Notwithstanding what academicians say, the market is always in an equilibrium
, Soros said in one of his books: The Market is Always Wrong
, meaning that you can always make money on the stock market. If you are better informed, of course. We will let you decide who is right now and who will be right later :)
According to this strategy, you should be in the market - holding a stocks portfolio - when the interest rate is dropping and economy is growing. Sounds familiar? :)
is the strategy you follow when you think you're right but the market is wrong, i.e. you outsmart the others. For example, when practically everyone is selling a stock, you think this is just a temporary phase and, after this price drop - based mostly on psychological and emotional reasons - they will re-start buying that stock. It makes sense, but the main drawback of this strategy is that it doesn′st tell you how temporary
is this situation. It might take months if not years till the market eyes that particular stock again.
We did not test this strategy, therefore we recommend you to be extremely cautious when applying it.
is a process dedicated to distressed companies. It involves causes for failure, SWOT analysis, management and costs reviews in order to reveal why the company is in distress. Based on detailed and strategic analysis of the troubled company, turnaround consultants identify restructuring solutions and implement the new strategic plan, to ensure the company returns to profitability.
is the process in which the lender repossesses the property after the owner has defaulted on the mortgage, or otherwise failed to comply with the terms of the mortgage financing. In most of the cases, the default borrower is extinguished of all rights, title and interest on the property. Foreclosures are generally associated with forced sales of a real estate to repay the mortgage debt.
is a method used by companies or individuals with outstanding debt obligations to alter the terms of the financing agreements to avoid default on the existing debt or to take advantage of a lower interest rate.
represents a sale of an asset for a very low price compared with its fair value. in the beginning, it referred to a sale of product that had been damaged by fire. Nowadays, is typically associated with selling assets when the seller faces insolvency.
FORECLOSURES: Notice of Default
is a written document that gives the debtor a constructive notice of his or her failure to perform the obligations under a mortgage agreement, especially of his or her failure to repay a mortgage loan on time. This document states that the lender may foreclose the mortgaged property unless the debtor pays the overdue debts in a given period of time.
FORECLOSURES: Notice of Sale
is the notice which the lender is required to give to the borrower before foreclosure sale of the collateral, usually a property acquired with a mortgage loan. Typically, this notice will include the time, place, and date the property will be sold, together with the value of the unpaid debt.
FORECLOSURES: Deed in Lieu of foreclosure
is a way to stop the foreclosure procedure when the borrower conveys the property to the lender usually to settle a mortgage debt which is in default. Generally, the lender accepts this when the market value of the property is higher than the unpaid debt. Additionally, such procedure affects the credit score of the borrower less than a foreclosure does.
FORECLOSURES: Cash for Keys
is an option the lender might offer so that the former owner leaves the property, after the foreclosure procedure, without damaging it. The amount depends on the moving out expenses and can reach 1% of property value.
FORECLOSURES: Short Sale
is a sale of a property for a price below the outstanding loan amount based on an agreement between the borrower and the lender. In this case, the lender accepts the loss and releases the property from the mortgage. Usually, this happens in declining markets when the market price of a property is below the mortgage value and the loan is considered to be underwater
is an agreement between the lender and the borrower to delay the foreclosure procedure. During this limited period of time, the borrower is permitted to temporarily reduce or cease making payments for the mortgage loan. Also known as Repayment Plan.
FORECLOSURES: Real estate owned
is a property owned by a lender, usually a bank, as a result of an unsuccessful sale at a foreclosure auction. At the auction, the bank sets the opening bid, typically equal to the outstanding loan amount, and legally repossesses the property if there are no bidders. In declining markets, is common for the banks to set a lower opening bid to even 80% of the unpaid loan amount.
FORECLOSURES: Deficiency Judgment
refers to a court order which entitles the lender take possession of personal assets of a borrower in order to recover the difference between the mortgage balance and the proceeds of the foreclosure sale.
FORECLOSURES: Distressed Property Management
refers to the operation of a distressed property (or REO property) as a business. The property manager can, in the name of the owner, manage the accounting and reporting operations, find the tenants, set and collect the rent, order the maintenance and repair operations and pay the property taxes.
is probably the fastest multi-currency report ever made on Romanian companies, with an average processing time less than 15 seconds. To generate the report, we are currently using and relying on public trustworthy sources such as National Bank of Romania, The National Trade Register Office or Ministry of Finance.
In FLASH REPORT you will find general and financial information for the last 6 years about, virtually, any company from Romania. Furthermore, you are able to check their quarterly updated Overdue Debts to State.
The report is available in both English and Romanian languages. You can choose the report base currency: ROL, RON, EUR or USD. A PDF version is available on request.
are reports that our users previously generated and saved in our database. Beside the alert message, you can differentiate an offline from an online report by looking to the report date, red colored for offline reports. Read the main advantages of offline Flash Reports:
- You have instant access to the report, i.e. less than 1 second;
- The offline reports have the highest availability;
- These are the most active companies since, primarily, the marketing or credit officers were interested in;
- The offline database incorporates now over 70,000 reports;
- Overdue Debts to State for such reports are always updated with the last available information;
- Last but not least, it is free of charge for subscribers.
Moreover, you can see a previous status of a company and even tell exactly when other users requested the same information as you did.
TOP Market Players
is a special report based on the official main business of the companies verified by MarketAlerts.ro™. It contains basic information about the first maximum 100 market players, such as Turnover, Total Assets and Debts, or number of Employees. Since the report is based on offline flash reports, some players might be listed with 2005 or 2006 data and, therefore, they are highlighted with gray. To update their financials please generate their Flash Report with the Offline option unchecked.
The report is available in Excel or Html formats as Competitors
. We recommend you to print the report using Landscape orientation.
is a very concise report, containing the following information from Flash Report:
Fiscal code; Trade Register No.
Turnover; Net Profit
Net Worth; Overdue Debts to State
No. of Employees
Current Status; Business
Please note that the data you send by SMS are as of the Flash Report date
. Therefore, we recommend you to update the Flash Report, by unchecking Offline option, prior to send the SMS.
You can send 4 SMS with one MarketAlerts credit. First 2 SMS are free. Read more here
My SMS Report
is an SMS Report that you can now adjust or modify according to your wishes. Just click on the message area and change the text you want to send. The only thing you have to care about is the maximum length of your SMS, which should not be higher than 160 characters. Otherwise, your message might be truncated. A small field, on the right side of the message area, will help you counting the SMS length while you press any key. Enjoy it!
Flash Report: CURRENT STATUS
shows the condition of the company with the National Trade Register Office. This is very important information since it is real-time information
and helps you minimize the risk of doing business with companies removed from the market, such as dissolved, erased or insolvent ones.
The Romanian version of the report also shows if the company filed its financials (balance sheet) with the Trade Register; otherwise, the company can be dissolved based on a request from an interested party.
Flash Report: BUSINESS
is the main object of activity for that particular company, as of the last accounting data available on Ministry of Finance website, in accordance with the CAEN code (national activities codification).
You can see if the company changed its business over 2001-2006 period of time in Financial Highlights
section. The more activity changes, the worse. In pursue for identifying strong and weak companies, changing the main activity induces significant volatility into the company's financial status, pointing to a risky company to do business with.
Flash Report: REGISTERED AS VAT PAYER
field certifies if the company is VAT payer. However, especially for pan European transactions, we recommend you to check whether your Romanian or European business partner is duly registered with VAT authorities or not. Moreover, you can also verify the validity of a VAT number. For these European verifications, use this link: http://ec.europa.eu/taxation_customs/vies/vieshome.do?selectedLanguage=EN
Flash Report: LAST TRADE REGISTRY UPDATE
field shows you when was the last time the company changed its basic information with the National Trade Register Office. The information changed might be related to its legal address or headquarters, shareholders or shareholdings, administrators, current status or other information regarding the company by-laws.
You should be more careful with companies that changed recently their key information with Trade Register Office, since among them are many potential risky partners. Since legally the individuals who administrate the company are those registered with Trade Register Office, make sure you are dealing with the right person by asking them to provide in original, as proof, a Certificate of Ascertainment (ro.: Certificat Constatator
), issued recently (i.e. not older than one week) by the National Trade Register Office. The issuance fee for such certificate is currently RON 30.
Flash Report: LISTED BY AVAS AS CNAS DEBTOR
tells you whether the company is listed by AVAS (The Authority for State Assets Recovery) as debtor to Health Insurance Budget (CNAS) or not. It is important to know this, especially when the debt has a high value, because AVAS will block the bank accounts of such company in order to recover the debt. The bank accounts will not be unblocked unless the debt is fully recovered. Companies with high debts to CNAS might face a bankruptcy procedure, too.
Since there are rather frequent changes to this list, we recommend you to check the updated list here: http://www.avas.gov.ro/index.php?lang=ro&id=3089
INACTIVE TAX PAYERS
are tax payers who failed to file any fiscal statements for two consecutive deadlines. This is a new definition of the Ministry of Finance, available in Romanian language here
. While the previous list contained only about 4,000 tax payers, available for download here
, the new list incorporates more than 140,000 inactive tax payers! The complete list is posted here
as a huge PDF file. However, for your comfort, the Flash Report highlights these last published inactive tax payers.
Flash Report: DECLARED BY IRS AS INACTIVE
flag should be a significant indicator of companies you should avoid doing business with. The companies included in this list by the fiscal authorities have stopped reporting to the fiscal authorities.
Most of the companies declared as inactive are ghost companies
. After solving the all the above mentioned issues with Fiscal Administration, some of them are removed from this black list.
Since there are rather frequent changes to this list, we recommend you to check the updated list here: www.anaf.ro/public/wps/portal/
Flash Report: NUMBER OF EMPLOYEES
shows you the human resources available for the company, as of Decembrie 2006, i.e. last available data. Companies you should probably not be partner with are companies with 1 or 2 employees or, even worse, no employees at all over the years. These companies are also known as SPV companies, i.e. Special Purpose Vehicles. For examples, the intermediary companies with no added value are SPVs (ro., ex.: firme capusa
). SPV companies are also used by foreigners to acquire real estate in Romania, since they are not yet allowed to purchase lands on their name. According to a recent study of CENTURY 21 Romania, about 30% of real estate companies active in Romania have no employees at all.
Especially for companies, it is very important to evaluate things from a dynamic perspective. Therefore, you should evaluate the evolution of the number of employees: if the company has fewer employees every year, it might be a sign of financial difficulties or distress inside that company.
Flash Report: TOTAL ASSETS
shows you how big a company is. Bear in mind that this figure does not show you how much that company worth. Perhaps you can be impressed with its assets, especially when you actually see them, but always ask yourself how much of these assets belong to the company's owners and how much belongs to third parties. You should look all the time to the Debts figure: most of the times all the real estates of the company are mortgaged to banks or other financial institutions.
The Assets value of a company depends on its business sector: a service provider has, usually, a lower Total Assets value while a production company has commonly a higher Total Assets.
ASSETS GROWTH is the percentage increase or decrease within the last financial year. A recurring decrease of Assets can be a signal of problematic companies, their assets being, almost certainly, either sold out by the management or executed by creditors. Check the Assets Size vs. Equity graph to see the Total Assets evolution over the years.
Flash Report: NET WORTH
represents the accounting value of the company calculated as Total Assets minus Liabilities (Total Debts). It is also known as Net Assets Value
or Book Value
of the company. The idea behind this valuation approach is to see how much will remain if you deduct all debts from the total assets value, i.e. how much value remains to shareholders. That is why Net Worth is also called Shareholder's value.
The Net Worth value is the base value for all takeover negotiations or even for trading strategies focused on fundamental analysis. However, because the accounting shows you only the past and the assets or liabilities might not be correctly evaluated in the balance sheet, you should carefully consider this figure. We recommend you to adjust (according to the market conditions) the value of all balance sheet elements and combine this figure with other financial ratios, prior to take any business decision related to a company.
Regarding the companies you should not be partner with, take a look at Net Worth evolution over time: if the value is decreasing, that means the company is a loss generating one or is transferring profits using a tax optimization scheme. You should probably avoid doing business with companies having a negative Net Worth, especially for more than one year, since the probability of payment failures is significantly high.
Flash Report: TURNOVER
shows you the incomes registered with company's books generated from the regular business. It is different from Total Incomes or Revenues since it does not contain other incomes, such as income from fixed assets sold. T/O is a tool for comparison analysis, especially within the same sector when is used to calculate Market Share as company's T/O divided by the sum of companies' T/Os operating in the same sector. Your partner should be a company with an increasing market share, i.e. its T/O Growth is higher than competitors' growth.
Most of the banks and other financial institutions have T/O as a major factor in their risk analysis and in the decision process for a credit approval procedure. When bankers don't know anything about a company, they ask What is the company's business?
and How much is the Turnover?
. Banks like to see a T/O growth every year. If a company's T/O drops for two years consecutively, you should be quite reserved about its future. Even if the company's T/O is growing, you should compare its growth with the appropriate inflation rate to see if the company grew in real terms or not.
Flash Report: NET PROFIT
indicates the funds remained at company's disposal after deducting all expenses from the revenues for a specific period of time, usually one year. The Net Worth of the company increases with Net Profit, provided that shareholders do not distribute such profits as dividends. The more detailed formula to calculate the Net Profit figure is: (Turnover + Other incomes – Cost of Good or Services Sold – Other expenses)*(1- Profit tax percentage).
Because there is a time difference between the moment when you register the incomes and actually cash-in such incomes, keep in mind that there is a disparity between Net Profit figure and bank account balance. A profitable company can go bankrupt while a loss generating company can have lots of money in the bank.
Net Profit can be distributed as legal, statutory or other reserves, can be left at company's disposal or paid out to the shareholders as dividends. However, to avoid taxation (profit tax, dividend tax, income tax and so on) or to optimize taxes, many companies are registering expenses generated with shareholders or third parties directly or indirectly related to shareholders. This operation is called transferring profits
or tax optimization
In the light of this information, we should acknowledge a paradigm shift: a company's goal is not to maximize profits but to increase the wealth of its shareholders
Therefore, Net Profit figure alone is not or should not be a very important factor when assessing a company which is part of a group, although it can say many things about company's managers and shareholders. Check the Turnover vs. Net Profit graph to see the Net Profit evolution over the years.
Flash Report: NET MARGIN
is one of the best known financial ratios, expressing the company's efficiency. Computed as Net Profit divided by Turnover
, this ratio indicates, in percentage, how many euros is the company's profit out of the total revenues from regular business. Basically, a Net Margin of 8% means that out of 100 EURO income, 92% are expenses and 8% profits for shareholders.
This ratio is mainly used for comparison between the analyzed company and its competitors or compared with the average on that particular business sector.
Check the Turnover vs. Net Profit graph, or Financial Ratios section, to see the Net Margin evolution over the years.
Flash Report: PRODUCTIVITY
illustrates the company's efficiency and is calculated as Turnover divided by Number of Employees
. It shows how much income, on average, an employee brings to the company.
Combined with Net Margin, you can use it for performance comparisons, regardless of the business sector. However, keep in mind that SPV companies, i.e. Special Purpose Vehicles
, have the highest Productivity since they usually have only one or two employees.
It is important to have Productivity increases every year, otherwise can indicate a bad or improvable management of the company. See Productivity Growth for the last year evolution.
Tip: In Flash Report, keep the mouse pointer over a financial ratio to see the calculation formula
Flash Report: ASSETS UTILIZATION
denotes the business efficiency, calculated as Turnover divided by Total Assets
. It shows how much income the company is able to obtain for one currency unit invested in assets. Of course, the higher this ratio, the better.
This ratio can be applied on sector analysis and points out to the management performance, too. In association with other financial ratios, it can be also used to diagnose the company's profitability.
Flash Report: RETURN ON ASSETS
(ro. Rentabilitatea economica
) is one of the most relevant ratios indicating how much profits the management generated using all company's assets. This ratio is (also) used for comparative analyses between companies doing different business. It shows how efficient is the management in employing company's assets.
Some of the analysts are using Net Profit per Total Assets
to calculate Return on Assets. Others use Gross Profit instead of Net Profit. Our recommendation is to use EBITDA, i.e. Earnings Before Interests Taxes Depreciation and Amortization, to disregard the amortization, financing and fiscal policies.
stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It can be calculated as Net Profit + Company's Taxes + Interest Expenses + Depreciation and Amortization Expenses
. It is an approximation of operational cash flow and it offers more valuable information than Net Profit due to the differences between accrual accounting and cash basis accounting.
To asses the business risk, you can see the evolution or volatility of EBITDA over time. To evaluate the company's ability to pay its debts, you can calculate EBITDA divided by Interest Expenses
(the higher, the better). One way to check the solvability risk is to calculate the payback period as Total Debts divided by EBITDA
(the shorter, the safer).
Flash Report: DEBT RATIO
is calculated as Total Debts per Total Assets
and tells you how much of the company's assets were financed from external sources. The higher this ratio, the riskier company. However, a properly managed company can take more risk and generate more profits. By relying only on shareholders' funds (Equity), the management might not be able to get involved in profitable projects and lose good business. To determine the optimal Debt Ratio, you should take into consideration the company's average rate of return for its projects and the company's weighted cost of capital. Do not forget the fiscal shield, since the interest expenses are fiscally deductible.
When you assess the risk of a particular company and see a high Debt Ratio, bear in mind that funds invested by group companies and shareholders are also included in Debts. According to a recent study of CENTURY 21 Romania, the average Debt Ratio of real estate companies is about 88%. That means 88% of the company's assets belongs to third parties. Nevertheless, most of the debts are owed to shareholders and group companies.
Flash Report: OVERDUE DEBTS TO STATE
is one of the most important signals related to the payment behavior of a company. This section is quarterly updated so that the information is very recent. It shows how much the company did not pay on time to the State. The higher this value, the riskier company.
Usually, to recover these debts, the State starts a forced execution procedure. Thus, a notification is sent out to the company. Unless the company pays the overdue debts within two weeks, the State blocks the bank accounts of the company in order to recover all these debts. The bank accounts are unblocked only when all the overdue debts have been recovered. The trick is that, in such forced execution procedure, the executor should block the accounts with ALL the banks, not only with one or two banks. Otherwise, the debtor just changes its bank with another one and the execution procedure fails.
There are some cases when the company intentionally does not pay its debts to the State because it has also claims against the State, such as VAT to be recovered, without initiating the compensation procedure.
You can see the quality of the management team by looking at withheld taxes: if they do not pay on time withheld funds from their employees, although this is a severe breach of the law provisions, do you think they will pay on time their business partners? When a company has overdue debts to State, it means the management is so strong or so bad, or both, so that they can delay payments to any business partner. Do you want to be one of these partners? :)
Flash Report: OVERDUE RATIO
may indicate whether the company is struggling to pay its debts to the State or not. It is calculated as Overdue Debts to State divided by Total Debts to State
over a specific period of time. It shows, out of the total amount due to the State in time, how much is currently outstanding and overdue, i.e. amounts not paid on time which needs to be paid or otherwise settled with the State.
An Overdue Ratio equal to zero means there are no Overdue Debts to State. An Overdue Ratio equal to 50 percent shows that half of the all debts to the State are not paid and were supposed to be paid already. Certainly, an Overdue Ratio equal to 100 percent means that the company did not paid any of its debts to the State and all of them are already overdue! The higher Overdue Ratio, the worse payer the company seems to be.
Flash Report: OVERDUE TO TURNOVER RATIO
is calculated as Overdue Debts to State divided by last known Turnover. Its propose is to underline the significance of the overdue debts to State for that company: a company having EUR 10,000 overdue to State and a Turnover of EUR 3 million is less risky than a company with the same overdue debts to State but a Turnover of, say, only EUR 100,000. If we ignore any other reasons, in case the State blocks the accounts of the company, in a forced execution procedure, the company with a higher Turnover will most likely get its accounts unblocked sooner than a company with a low Turnover. The higher Overdue to Turnover Ratio, the riskier.
Flash Report: PREVIOUS OVERDUE DEBTS
refers to the amounts overdue to State as of the previous reporting period. The overdue debts to State are usually reported quarterly. For instance, you have now detailed information regarding the overdue debts to State as of September, in Overdue Debts to State section, and the total overdue debts to State as of July listed as Previous Overdue Debts at the end of said section.TIP: Check Turbo option to have instant access to last reported overdue debts to State
Flash Report: DAYS INVENTORIES
or INVENTORIES TURNOVER
is calculated as Inventories divided by daily Turnover
. It is an estimate of how many days the company keeps, on average, its inventories. To assess the efficiency of one company, we recommend you to note the evolution of this ratio over time OR to use it for comparison analyses between the company and its competitors or its sector average.
The lower this ratio, the more efficient the company seems to be.
Flash Report: DAYS RECEIVABLES
or AVERAGE COLLECTION PERIOD
is calculated as Receivables divided by daily Turnover
. It is an estimate of the credit offered by the company to its customers. Usually, the stronger the company, the lower this ratio. Frequently, the credit offered lies between 30 and 60 days for an average player on the market. Having a higher Average Collection Period, especially when this ratio increases in time, is not a good sign: most likely the company sold to bad customers, did not cash in the money and now it has accumulated bad receivables. Moreover, a company trying to sell an undesirable product has the average collection period increasing, since it may use it as a marketing tool and sell to low quality customers.
Always take into consideration the business sector of the analyzed company. For instance, restaurants have a very low, even close to zero, average collection period since they cash their sales on the spot.
However, always compare this ratio with DAYS PAYABLES, the average number of days to pay the invoices, to judge whether the treasury operations are properly managed or not.
Flash Report: LEVERAGE
is one of the financial leverage measurements, calculated as Total Assets divided by Equity
. It is also known as Equity Multiplier
. The leverage increases the effect of company's efficiency: a leveraged profitable company will produce more profits to its shareholders while a leveraged loss-generating company will produce more losses to shareholders compared with a similar non-leveraged company, other things being equal.
The higher this ratio, the riskier company. It is not necessarily a bad thing to be leveraged, i.e. to have debts, it also depends if the company is more profitable than without debts, on long term.
Flash Report: RETURN ON EQUITY
(ro. Rentabilitatea financiara
) is a measure of company's profitability from shareholders point of view. It is calculated as Net Profit divided by Equity
and shows the return on investments for the shareholders. One can compare this with other long term investments and see if holding shares in this company is a good investments or not.
Although you may think the higher this ratio, the better for the shareholder, you might as well be wrong about it. Keep in mind that the purpose of a company is not to generate profits for the shareholders but to maximize their wealth. If you are a small (minority) shareholder, you probably want a ROE as high as possible, but when you control the management of the company you can get richer by transferring profits and use tax optimization schemes in order to get the most out of that particular company. Especially for listed companies, it's better to gain from a share price increase than from a dividend pay-out because of the fiscal reasons.
Flash Report: FIXED ASSETS
includes Tangible Assets
, such as lands, buildings, plants, machineries, equipments or furniture, Intangible Assets
, such as licenses, franchises, patents, copyrights, goodwill or trademarks and Long-term Investments
. The assets included in Fixed Assets have life duration higher than 1 year. Also known as capital assets
Flash Report: CURRENT ASSETS
consist of assets expected to be consumed or converted into cash within 1 year. This category includes three major sections: Inventories
. To get the entire picture of Current Assets, we should mention separately Prepaid Expenses and Short-term Investments.
To check the liquidity of one company, compare the Current Assets and Current Liabilities (payables within 1 year).
Flash Report: INVENTORIES
refers to various goods and materials, including office items, raw materials, work in progress and finished products. A fast growing-company may have a higher T/O growth compared with the Inventories growth, while a potential risky company may have Inventories increasing faster than Turnover growth. See Days Inventories for more details.
Flash Report: CASH
includes cash-in-hands, current bank accounts and short-term deposits or assimilates. While an increase of Cash might look as a good thing, the company has more cash to meet immediate demands, access some opportunities or get higher discounts (by paying in advance), it is not always the case. A constant Cash increase overtime may signal an improvable treasury management. However, the more cash a company has in the accounts, the better.
Flash Report: RECEIVABLES
are funds not cashed-in yet; including issued and not paid invoices, promissory notes and checks to be recovered, debtors and recoverable VAT. A constant growth in Receivables might signal a weak debt-collection policy, higher payables terms offered to customers or bad clients in company's customer portfolio. See Days Receivables for more details.
Flash Report: SHARE CAPITAL
or ISSUED CAPITAL
represents the contribution of the shareholders to the company. The Share Capital is calculated as Number of outstanding shares * Nominal value of a share
. Since the value of one share changes over time due to company operations, profit or losses, the value of the Share Capital has nothing to do with the value of the company. The Share Capital figure has only an accounting value (since it's recorded at historical prices) and keeps track of both common and preferential shares issued for cash or other eligible assets.Subscribed Share Capital
includes issued but unpaid shares, based on a subscription procedure (like a promise to contribute to company's capital).Authorized Share Capital
is the maximum value of Share Capital the company is authorized, by its by-laws, to issue to current or potential shareholders.
DU PONT IDENTITY
attempts to explain the company's profitability to its shareholders by breaking it down into Assets use Efficiency
(calculated as Total Assets Utilization), Operating Efficiency
(measured by Profit Margin) and Financial Leverage
(expressed by the Equity Multiplier). Thus, the Return on Equity (ROE) is analyzed as Assets Turnover * Net Margin * Equity Multiplier
Check the evolution of each part of the Du Pont Identity and you can start understanding the Strengths, Weakness, Opportunities and Threats, as required in any SWOT analysis.
is a strategy used in various domains to make products, services or companies appear more appealing than it actually is. Fund raising, to show liquidity, profit and income transfers between group companies or accounting tricks to make the balance sheet and income statement appear better are included in this strategy. Such practices are common to happen before a reporting date or a loan application.
point refers to the point where revenues equal costs. For instance, for a production company, the beak-even level of production is the minimum quantity of sold products at which all expenses are covered by incomes from sales. For an investor, the break-even is the point at which the investment recovers all costs and goes into profit.
: Suppose you want to buy 1000 shares of Antibiotice (ATB) listed on Bucharest Stock Exchange. Let′s say the broker's commissions are 1.5% of the traded value and the share is quoted at 1.94/5, which means the best bid is 1.94 RON per share while the best ask is 1.95 RON per share. For your buying order you should pay 1979.25 RON (1000 shares x 1.95 plus 1.5% commission). Taking into consideration a 16% profit tax, for a holding period less than one year, the question is what should be the bid quotation at which you can sell all 1000 ATB shares and have neither profit nor loss? The answer is 2.01 RON per share, i.e. a price increase of 3.6%. This is the break-even level. If the ATB bid quotation is less than 2.01, you have net losses. If bid goes higher than 2.01 RON per share, you can start smiling :)
REAL ESTATE: Rental yield
is the return on investment in a real estate asset, calculated as the annual net income from rents divided by the amount of money invested in that property, and expressed as a percentage. Say you acquire a 2 rooms apartment with EUR 80,000 which pays a EUR 500 monthly rent. That means your gross annual rental income is EUR 6,000 while the income tax is EUR 720 (16% income tax with a 25% deduction). Therefore, your net after tax income is EUR 5,280. Thus, the yield of this investment is 6.6% per annum. You can compare this yield with the rate of return of other investment opportunities.
REAL ESTATE: Property bubbles
are periods of time when, due to speculative investments, the real estate prices increase rapidly until they reach levels that cannot be maintained based on the general financial status and income level. Such periods of time are closely related to the expansion of mortgage loans. Generated by interest rate decreases and improved income perspectives, the real estate bubbles come to an end due to significantly interest rates increases and worsening economic conditions.
After all economic bubbles, a crash always occurs, characterized by sudden drop in prices, resulting in many owners with mortgage debts higher than the property market value. Unlike the stock market, the real estate crash is extended over a longer period of time, because sellers would rather keep their homes than sell. In an attempt to foresee the market crash and to measure the phase of the market bubble, some specific housing indicators have been developed.
REAL ESTATE: Loan to value - LTV
is one of the recommended indicators in any housing or real estate analysis. LTV is calculated as a percentage of the mortgage debt to the property value. This is one of the restrictions of any financing institutions. In Romania, most of the banks request a maximum LTV of 75%, i.e. for a property evaluated to EUR 100,000, the maximum value of the mortgage loan is EUR 75,000. Some banks are even more prudent having a ceiling LTV of 50%, because they seek fast liquidation of their collaterals in case of payment default. Other financial institutions, such as leasing companies, allow for higher LTVs, reaching values close to 100%. The down payment, expressed in percentage of property value, can be computed as 100%- LTV%.
When computed at macroeconomic level, the higher LTV ratio, the higher probability for a market crash.
REAL ESTATE: Housing Debt to Income
or Payment to Income - PTI
is the fundamental ratio to measure the housing debt status. It is expressed as a percentage of the mortgage payment to the disposable income
(net income minus cost of living, ro.: venit eligibil
). For instance, on Romanian market, if you have RON 3,000 net salary and we consider an acceptable cost of living of RON 850, your disposable income is RON 2150. Therefore, for a monthly payment of say EUR 200 (eq. RON 674), your PTI is 31.35%.
This ratio is also used by banks to calculate your maximum loan value that you can afford. Recently, the accepted PTI on Romanian banking market has increased from 35% to 60% or even more. Hence, for a limited period of time, the real estate market received another support signal for a continuous growth. The standard PTI for US market is 35%.
REAL ESTATE: Housing Affordability
measures the capacity of an end user to afford to buy a house. Usually, the Housing Affordability is expressed as the maximum price that an end user or a household can pay for a house employing a mortgage loan.
The affordability depends on the net disposable income, i.e. the gross income minus the monthly expenses, the housing debt–to–income ratio, the loan–to–value ratio, i.e. the ratio between mortgage loan value and the property value, the standard loan tenure and the average interest rate for mortgage loans.
Read more on the Housing Affordability Study published by CENTURY 21 Romania.
REAL ESTATE: Escrow accounts
are a special type of bank accounts in which the buyer can make available to the seller the price paid for the acquired property. The seller has a specific period of time to present to the bank the necessary documents, as required by the buyer, in order to unblock the money from the escrow account. This type of bank deposit is very useful when you want to pay someone under certain conditions. For example, when you buy a property with cash, you can place your money in an escrow account and instruct the bank to release the money to the seller if and only if, within say 60 days, the seller provides to the bank all the documents proving that the property has been sold to you.
REAL ESTATE: CENTURY 21 Romania
organized a round table event at Athenee Palace Hilton, Bucharest, to present the conclusions of a market study performed in 2007/Q1. According to this study, top agencies growth is twice and a half higher than small agencies T/O increase. Furthermore, the real estate agencies market doubled in 2006, and reached almost EUR 94 million.
The market leaders remained the same, Colliers and Eurisko, having together almost one fifth of the market. However, CENTURY 21 Romania estimated that about 900 real estate companies will be established this year, even if, as real estate market matures, the biggers are getting bigger while smallers are getting smaller
, meaning that top agencies gain constantly market share from small and medium agencies.
REAL ESTATE: Parking Ratio
is one of the most important ratios investors in commercial properties ask. The ratio is calculated as number of parking places per 1000 square meters of gross leasable are. Sometimes, it can be expressed as 1 cps/50 sqm, which means there is a one car parking space for each 50 square meters. The desired values of this ratio for urban area can be 11 to 13 cps/1000 sqm. Nevertheless, for highly populated cities this ratio can drop to 3.
Beside the importance to the building tenants, parking ratio can be an indication of supplemental income source since both parking spaces (underground and above ground) can be charged for 80 to 120 EUR per space/month.
REAL ESTATE: Land coefficients CUT
are commonly calculated by land investors. The utilization coefficient CUT (ro.: Coeficientul de Utilizare a Terenului
) is the ratio between the total area of the building and the land area. The occupation coefficient POT (ro.: Procentul de Ocupare a Terenului
) is the ratio between the built area and the land area). Both indicators are upper limited by the City hall when they approved the urban plans. Another important coefficient is related to the maximum allowed height of the building and is known as RI (ro. Regim de Inaltime
Now, you know what a land with CUT 3.9, POT 50% and RI 35.5m can offer in terms of construction opportunities :)
REAL ESTATE: Agents
have to be licensed in most of the well-developed countries. To get their license, they have to be at least 18 years old, follow a specific education and pass one or two exams. The education courses can take as much as 18 months. The agent is usually representing only one party: the Buyer or the Seller. The agent representing both Buyer and Seller are called dual agents
, having higher income but representing actually neither the Seller nor the Buyer. The Seller's agent is also known as listing agent
REAL ESTATE: Sub-prime loans
are mortgage loans granted to borrowers having higher than average risk. They have difficulties in obtaining mortgage loans since they have bad credit history, are unable to provide documents for their (stable) incomes or there are other specific risks involved. To address this market niche, lenders usually add a risk premium to their standard interest rate for loans.
For instance, say the typical interest rate for mortgage loans is EURIBOR6m plus 375bps (basis points) and the risk premium is 250bps. That means risky borrowers will pay 11% instead of 8.5%, as regular borrowers pay, with EURIBOR for 6 months at 4.75%. The risk premium is meant to cover the higher default rate for the risky borrowers. However, in the recent US case it seems that risk premiums were inappropriate to cover default risks in case of significant interest rate increases.
REAL ESTATE: Caps
are the maximum limits for the adjustments the bank can do to the interest rate or to the monthly payments for a mortgage loan. Expressed in percentages, they can include periodic cap
, the maxim the interest rate can increase each adjustment period (in Romania, usually 6 months), and overall cap
, the maximum the interest rate can increase over the entire period of time.
For instance, adjustable mortgage loans can have caps quoted as 2/5, which means that for each adjustment the interest rate increase cannot exceed 2%, while the overall interest rate increase cannot be more than 5% over the loan lifetime. Loans having an initial fixed interest rate period can be quoted as 4/2/7, which means the first adjustment can be 4%, subsequent adjustments are limited to 2% each while the lifetime increase is limited to 7%.
About caps in Romania, without a real consumer protection for banking services, we could say sky is the limit
REAL ESTATE: Acceleration Clause
is a provision in your mortgage agreement which allows the lender to demand immediate payment of the outstanding loan balance for various reasons, usually if the borrower defaults on the loan, i.e. the borrower failed to pay on time.
REAL ESTATE: Adjustable-Rate Mortgage or ARM
is a mortgage in which the interest rate changes periodically, according to the market conditions. ARM is compounded of the index (such as EURIBOR3m) and a fixed margin that depends on the risk class of the borrower. Also knows as a floating rate
or variable rate mortgage
REAL ESTATE: Home Inspection
is a thorough inspection by a professional that evaluates the structural and mechanical condition of a property, often in connection with the sale of the property. This inspection will determine if the house is safe and make the buyer aware of the repairs needed.
REAL ESTATE: Owner Financing
is a property purchase transaction in which the seller provides all or part of the financing. Thus, the seller acts as a bank and accepts to take payments over a period of time, usually based on promissory notes. Also called seller financing
REAL ESTATE: Prepayment penalties
is a clause often included in the loan agreement to protect the lender against the prepayment risk, occured when the borrower makes early repayments of the loan. Prepayment is perceived as a reinvestment risk, because the lender, in order to maintain the expected incomes, should find another similar borrower who in the same risk class and accepts the same interest rate.
REAL ESTATE: Open House
is a real estate marketing event where the selling agent is inviting all buyers to visit the property for sale. After this event, the interested buyers can ask for private showings (ro.: vizionari
) or can make a written offer to the seller.
REAL ESTATE: Comparative Market Analysis (CMA)
(ro.: Analiza Comparativa de Piata - ACP
) is a valuation report of a property, taking into consideration similar properties that were recently sold, listed or expired. The report helps the seller to set the right price for his or her property. The similar properties should be the same type and located in the same area: the closest, the best. The recently sold properties
should have been sold during, at most, 6 or 12 months. The recently listed properties
are similar properties for sale, listed in the last, say, 90 days. The expired properties
are properties listed for sale but not sold for 90 days or more. The CMA report is free in most real markets. In Romania, the report is mandatory by law.
REAL ESTATE: For Sale by Owner - FSBO
are properties promoted for sale by the owner, without A real estate term, also used in the sale of businesses, to identify a business that is for sale without a professional representation from a real estate agent. Usually, the FSBO sales are less than 15 percent from all property trades. For residential sales, studies say in our country the percentage is about 50 percent, i.e. one in two transactions is closed with the assistance of real estate agents.
REAL ESTATE: Listing Agreement
is a contract between the seller and a real estate broker that gives the broker the right to offer the property for sale, for a specific price and time. The broker should seek for qualified buyers, forward all purchase offers to the seller and negotiate the highest possible price and most favorable terms for the seller. A commission is payable to the broker upon closing the property sale, usually as a percentage of the sale price.
REAL ESTATE: Lease to Buy
refers to an agreement where the tenant has the option to buy a property during or before the end of the agreement. This way, the potential buyer can test the ownership of a certain property while the monthly payments can add up as a downpayment for an eventual purchase. Also known as lease to own
INSURANCE: Rain insurance
is a business disruption insurance where the insured is indemnified for loss of incomes and payment of expenses due to adverse weather conditions. For instance, if you planned a company launch in an open space and invested a lot of money to organize this event but it rained, this policy covers part of your losses.
Nevertheless, rain insurance policies do not protect you against the damages to your property because of rain :)
INSURANCE: Blanket Bond
is an extensive insurance against potential losses due to employee misbehavior or dishonesty, or to theft actions. These risks are carried by financial institutions, such as banks or brokerage companies. For instance, a bank customer might complain again his bank because his account manager, employee of the bank, transferred funds from the customer′s account without authorization.
This insurance is a tool to protect against operational risk, according to Basel II provisions.
INSURANCE: Rent Coverage
protects building owners against potential loss of earnings when rentals revenues have been interrupted or rental value has been reduced by the occurrence of any of the insured risks. It aims to assure continuous income and is also known as business interruption insurance
for the landlord.
INSURANCE: Mortgage life insurance
protects the financial institution in the event of death or disability of the borrower. This is a life insurance covering the balance of the mortgage. Sometimes, banks ask for such insurance, especially for elderly applicants.
To protect against the risk of default, banks can also ask for a private mortgage insurance
. When the mortgagor is not able to continue the payments to the bank, this insurance usually covers the potential loss of the bank after foreclosing and selling the mortgaged property.
MACROECONOMICS: Gross Domestic Product (GDP)
measures the performance of a national economy during a specified period of time, regularly one year. It quantifies the market value of the goods and services produced by that particular country. There are three methods to calculated GDP:
1. Production approach
: GDP is computed as the sum of all the value added by all the activities which produce goods and services
2. Income approach
: GDP is calculated as the total incomes earned from the production of goods and services
3. Expenditure approach
: GDP is computed as the total expenditures for consumption of finished goods or services and accumulating wealth minus the imports cost. This is the common approach for calculating GDP and the formula used is presented below:GDP = Consumption + Investment + Government expenditure + Net exports
where Net exports are Exports - Imports
For a comparison analysis between countries GDP per capita is used, computed as GDP divided by the total number of inhabitants in the country, both residents and non-residents, for that period of time. For instance, 2006 GDP per capita was estimated to roughly EUR 35,000 for United States and EUR 7,500 for Romania.
refers to a sustained overall increase of prices for goods and services in an economy. It reflects the money supply increase without an appropriate increase in the supply of goods and services. The inflation is frequently expressed as percentage by the inflation rate
. The higher the inflation rate, the lower purchasing power of that domestic currency.
Economists use GDP deflator
to estimate the inflation rate, calculated as nominal GDP
(using current year prices and current production quantities) divided by the real GDP
(using current production quantities but constant prices, i.e. prices from the base year, usually prices from previous year).
However, most of the people are only interested of prices evolution for consumption sector. Hence, the Consumer Price Index is used as a proxy for the inflation rate.
MACROECONOMICS: Consumer Price Index (CPI)
is often used to track price changes in consumption sector of the economy. Inappropriately, CPI is also used as a gross estimate of the inflation rate. The CPI is calculated by monitoring prices for a fixed basket of goods and services that population uses most. Read here
, page 9, a sample of such basket.
According to the National Commission of Prognosis, the estimated CPI for December 2007 (compared with December 2006, also noted as year over year CPI or, shortly, YoY CPI) is 4.5%, while YoY CPI for December 2008 is estimated at 3.8%. Meanwhile, according to the same source, the YoY GDP Deflator for December 2007 is expected to be as high as 7.2% and to decrease to 6% for December 2008.
Should you feel like you wanna know more about such prognosis, read the document
published by the National Commission of Prognosis.
is the state of the economy when the overall prices are increasing at a slower pace, i.e. the inflation decreases. It should not be confused with deflation
which refers to a general decrease of prices, the opposite of inflation. While the disinflation is considered as a positive thing for the economy, the deflation is often linked to crisis periods because it usually reflects a drop in demand for good and services.
is an official reduction of the national currency value, usually against a hard currency or a basket of hard currencies, performed by the Central Bank within a fixed exchange rate system. It should not be confused with currency depreciation
which is a decrease in the currency value because of the market supply and demand in a floating exchange system. The opposite of devaluation is known as reevaluation
MACROECONOMICS: Unemployment rate
is the ratio between the unemployed people and total labor force in an economy. Regularly, a person is considered as unemployed if he or she is at least 16 years old, has no work but is available for work and actively seeking for a job.
According to the Philips curve
theory, there is an inverse relation between the unemployment rate and inflation rate. Thus, when the unemployment rate is decreasing, such is the case for Romania, one could expect an upward pressure on prices and an increasing inflation rate, mainly due to frequent salary changes.
MACROECONOMICS: Purchasing Power Parity (PPP)
theory assumes that similar products around the world should have the same price. It states that, on the long term, the market exchange rate between two currencies should reach the PPP exchange rate.
One of the most known PPP example is called Big Mac Index or The Hamburger Standard: since the Big Mac is assumed to be similar all over the world, this sandwich should have the same price in Sydney, New York, Paris or Bucharest. However, a Big Mac costs 3.58 USD in US and 8.5 RON in Bucharest. Therefore, the exchange rate between American Dollar and Romanian Leu should be 2.3743. Nevertheless, the current rate is 3.2224, i.e. 36% higher. Is the Romanian currency undervaluated? :)
MACROECONOMICS: The Current Account
is compounded of the Balance of Trade (i.e. exports minus imports) plus the net inflows from abroad (rentals, dividends, interest, aids and so on).
MACROECONOMICS: The Capital Account
is the difference between the new investments from abroad and the new investments abroad. It refers to both public and private investment inflows and outflows from the country. Added up with the Current Account they form the Balance of Payments (a.k.a. BOP), which reflects the cash flows between the country and the rest of the world.
MACROECONOMICS: The Consumer Confidence Index (CCI)
measures the optimism level between consumers regarding the economic perspectives. In United States, it is calculated based on a survey which includes 5,000 households. It was started in 1967 and, today, is benchmarked against the 1985 value (with CCI at 100). Nowadays, in January 2009, the CCI is about 38, its lowest value ever.
The index combines the opinions of consumers on both current (40% of the index) and future (60%) economic conditions and is considered to be a leading indicator for the economy future performance.
MACROECONOMICS: The Durable Orders (DO)
is another leading indicator measuring how much is spent on durable goods (goods having an expected lifetime of, at least, 3 years). Since the DO release is broken down by sector, one should eliminate first the volatile sectors, such as defense or aircraft orders. The market is only concerned with the overall increase or decrease in orders for the less volatile sectors.
MICROECONOMICS: Opportunity Cost
of an investment is represented by the lost profits of the best alternative investment. For instance, if you withdraw EUR 3,000 from your bank deposit to invest into stocks, your opportunity cost equals the lost interest rate bank would have paid you for the withdrawn funds. The average interest rate for EURO deposits is around 4%, which means you would lose EUR 120 per year. Hence, if you believe your expected return from the stocks portfolio is higher than 4%, you might consider it. Otherwise, it is probably wiser to keep your money in the bank.
MERGERS & ACQUISITIONS: Leveraged Buy-Out (LBO)
is a takeover strategy where the investors use more debt than equity to buy a company. Usually, the debt is obtained using the assets of the target company, as collateral, to get bank loans or issue junk bonds (high risk bonds) to finance the takeover. The debt is paid back from the cash flow of the company or by selling some of its assets.
MERGERS & ACQUISITIONS: Management Buy-Out (MBO)
represents the purchase of a company by part or all of the management team. The purchase can refer to all shares or only to the controlling stake of the voting rights. Frequently, for this operation the management cooperates with outside financiers. When the outside financiers acquire the majority of voting rights, the operation is know as Institutional Buy-Out (IBO)
MERGERS & ACQUISITIONS: Management Buy-In (MBI)
is a takeover operation where an outside management team acquires the company, usually with the support of other financiers, and replace the current management team. When the new management team involves members of the existing management team, the operation is called Buy-In Management Buy-Out (BIMBO)
AUCTIONS: Dutch auction
refers to an auction where the asked price is lowered until one participant accepts it. This type of auction was originally used for tulip auctions. Nowadays, it is used more for online auctions rather than the public, outcry actions. It is also know as descending price auction