Terms Beginning With 'b'

Black Friday

What is Black Friday?

Black Friday is the day after the US thanksgiving holiday, marked by heavy retail activity. It is the unofficial beginning of the holiday season in the country and across the globe as huge discounts are given on this day.

Thanksgiving holiday in the US is on the last Thursday of November. Thus, the following day has come to be known as Black Friday. This day is a crucial day for many shop owners and retailers as they see heavy inflow of shoppers.

Cyber Monday was later introduced in addition to Black Friday where customers could avail discounts on online shopping on various websites. It is the Monday after Black Friday. It was initially introduced to encourage people to shop online. As more and more businesses are moving online coupled with digital marketing, higher sales are being observed on e-commerce platforms than on physical retail stores.

 

Why is it called Black Friday?

It is believed that Black Friday was given its name due to the heavy inflow of profits on this day. As customers flocked to the shops, shopkeepers recorded unusual profits and started calling them “black”. The term black is also sometimes used to refer to profits as black because they would mark profits with black in their book of accounts and losses with red.

Thus, on Black Friday, shops can “move into the black” or make enough profits so that prices can be reduced for the customers. Anticipating high sales, many shops offer heavy discounts on their products. These discounts end up attracting more buyers.

However, this is only one part of the story as it is believed that the actual origin of the term came in 1950s when the police started referring to the day following Thanksgiving as “Black Friday”.

What is the history of Black Friday?

The term Black Friday was earlier associated with the crash of the US gold market which happened on the 24th of September 1869. This happened after two investors tried to buy all the gold in the market to increase its price only to sell it later when prices were to rise. However, their strategy was revealed, and markets came crashing. Therefore, the day came to be known as the Black Friday. However, over time the term developed a new meaning.

In the 1950s, police used the term Black Friday to refer to the chaos and mania that ensued amongst the shoppers on this day. People used to flock the stores a day in advance to buy items on a discount. Many a times, fights would break in stores and this would give rise to shoplifters taking advantage of the situation. Also, people from different regions would drive down to their local stores or to stores far away that had higher discounts. This often led to large gatherings and huge traffic on the streets.

All these factors led to the requirement of law enforcement in major cities in the United States. Police officials had to work extra shifts to manage the crowds, and they could not take leaves too. Shoplifters added to the mayhem and led to the requirement of more security management. Thus, the term Black Friday was given a new meaning.

Why has the term evolved over time?

Over time, many retailers tried to remove the negative connotations behind the term since Black Friday was used to refer to the chaotic situation caused by consumers. Therefore, it is believed that retailers tried to change the origin story of the term and thus, the theory about the ‘red and black’ accounts came to light.

However, the true story is still believed to be the one given by the police in the 1950s. The police accounts in Philadelphia are believed to be the origin story behind the name.

Why is Black Friday important?

Black Friday is the unofficial beginning of the holiday season. Many shopkeepers expect greater profits on the day and money is expected to flow into the economy. Consumer confidence also increases, and the stock market is also driven by the Black Friday event.

It is a known fact that there is increased liquidity during and before Christmas and New Year celebrations. Since Thanksgiving is an official holiday, followed by Black Friday, it makes for four days for consumers to shop for the holidays. This positive sentiment is translated into the stock market too. As companies expect greater profits during this time, their stocks tend to gain value as well. This sets the expectations of investors too.

Black Friday sales are also used as a benchmark to analyse the health of the economy. Many investors use Black Friday sales as a tool to judge how well the retail sector is doing. If the profits on Black Friday are less than expectations, then it is estimated that the economy has slowed down. On the contrary, if expectations are exceeded, then it means that the economy is performing better than anticipated.

Black Friday is also important because the U.S. stock market is closed on Thanksgiving. Thus, profits to businesses coming from the holidays are translated only a day later. Stock markets are also expected to show greater activity before the weekend. This makes Black Friday even more important for the equity market.

Black Friday has progressively become an online event. With the emergence of major ecommerce websites, most retail transactions happen virtually. Thus, Cyber Monday was introduced as a supplement to Black Friday.

Cyber Monday is especially important because companies offer discounts online and not on the physical stores. This is a much better method of providing discounts as there are lesser chances of people getting hurt or any law enforcement getting involved.

In times of the pandemic, firms should offer greater online discounts rather than a sale on their physical stores. It is expected that people would avail greater discounts virtually rather than driving down to stores.

A hammer clause also referred as blackmail clause is an insurance policy clause that gives the power to the insurer allowing to oblige the insured party to settle a claim, very much in a way a hammer is used against a nail.

What is the October Effect: a myth, or a reality? October effect refers to the theory that stock prices crash in the month of October. This happens without any methodical reason or any specific factor affecting the stock prices. However, the theory has come into existence because of repeated crashes observed in October over the years. October effect is more of a psychological concept than a real-stock market concept.  There have also been price crashes observed in September. However, the reasons for these crashes have been varied. How does October Effect impact the markets? The hysteria around the October effect might make investors scared in this month. The expectations of a price decrease might lead to many investors selling their stocks in early October. If too many investors end up selling stocks, that might inadvertently lead to more panic selling among the investors. Why do investors believe in the October Effect? Often investors let emotions get the best of them. People might lose out on their money because they let their emotions guide them, which may include fear, greed, or a herd mentality. Behavioural finance suggests that investors might be motivated by factors other than their rational decision making. Some of the biggest crashes in history have happened because of the poor decision-making of the investors. People might follow a crowd and put their money in stocks which are more popular among investors, without having any other reason for doing it. At times, the media accounts about the market and a general notion, which is framed without any rational explanation, end up misguiding investors into the wrong direction. These factors may lead to investors giving in to the mass hysteria prevailing during October, which may end up fuelling the October Effect. Therefore, investors must consider all the factors before putting their money in a particular stock. Why was the concept of October Effect formed? The following historic incidents led to the phenomenon of stock prices crashing during October: Panic of 1907: This occurred in the beginning of October. It started with the bankruptcy of two small brokerage firms. Two investors failed to buy shares of a copper mining firm, which led to a run on banks associated with them. This resulted in a domino effect. The crash started with New York city, but it eventually spread to other parts of America. As money was withdrawn from the economy, financial institutions faced the brunt. It also led to the shutdown of Knickerbocker Trust, which had been refused a loan by JP Morgan. The crash was ultimately resolved when the US government gave a fiscal credit of over $30 million, which led to the consumer confidence coming back. Stock Market crash of 1929: This is also referred to as Black Tuesday and it occurred on October 29, 1929. During the 1920s, the US economy was going through various expansions and peaked during a period of high speculation. This was referred to as the Roaring Twenties. As a result of this rise in speculation, there was overvaluation of the stocks, when their prices went way beyond their actual value. However, the bubble burst with reasons attributed to low wages, a downfall of the agricultural sector, and a multiplication of debt. Black Monday: This event occurred on 19th of October, 1987. There were many factors at play, which led to the stock market crash. These included a widening of the trade deficit, incoming of computerised trading and various other geopolitical reasons. The computerised models used for trading were programmed to give a positive feedback. This led to the model generating increased buy orders when prices were increasing, and more sell orders when the prices began to fall. International tensions between countries also led to the crash and loss of confidence in the market. Other events in September: There were historical events which led to a crash in September, like the Black Friday, Black Wednesday, the WTC attacks in 2001, and the housing market crash of 2008. Black Wednesday occurred on September 16, 1992. A collapse in the Pound Sterling led to the UK to opt out of the European Exchange Rate Mechanism. All these factors occurred because of different reasons, which were specific to that particular time period and set-up. Thus, it can be argued that the fact that these events occurred in October is a coincidence. Is the October Effect real or just a coincidence? It is safe to say that October Effect is nothing more than a mere coincidence. The events discussed above happened without any methodical linkage connecting them to the month of October. There has been further evidence proving that the October Effect failed to occur in the years when the market remained strong in this month. The historical crashes mentioned above occurred because of issues which had been specific to those times. Stock exchanges and trading platforms have incorporated the necessary changes to ensure that these events do not get repeated. Regardless of these regulations, it is safe to say that some of these crashes were Black Swan events and could not have been predicted under any circumstances. Therefore, it is difficult to say whether the current market is immune to phenomena like the October Effect or any other crash.

What is a luxury tax? A luxury tax is a tax imposed on those goods and services that are possessed by only the affluent sections of the society. These goods are luxury goods. The idea is to tax the richer sections of society. Some of the items that come under luxury taxes include perfumes, luxury cars, jewellery, etc. This makes luxury taxes a progressive tax as the richer people in the society are taxed more than the lower income groups. This is the opposite of a regressive tax. However, there are instances of the luxury tax being levied on the luxuries of the lower income groups. The ethical reason for the introduction of luxury taxes was to prevent economic spending on unnecessary and non-essential goods. Conversely, in the modern world the revenue earned from luxury taxes overweighs the ethical intent behind the tax. It can be implemented through a sales tax system, value added system or as a customs duty. When were luxury taxes introduced? Luxury taxes were first introduced in France in 1918. The purpose of the tax was to attack manifestations of wealth and rather than instruments of labour. A luxury tax would strike enjoyment but not the industry producing luxury goods. The luxury goods were classified into 2 categories as follows: Obvious luxuries: This group included perfumes, yachts, liqueurs, watches, antiques, etc. General articles: These articles were normal items that became luxuries past a certain point such as clothing items. There was an upper limit placed on the prices of these everyday items, beyond which these goods became luxury items. These taxes were not well received by the public as there were many protests in France. People perceived the tax as a tool for the government to earn more revenue. Thus, the luxury tax was eventually removed and was later introduced with major changes. England was the second country to introduce the luxury tax in 1918. Most countries were criticised for implementing the luxury with the intent of increasing revenue rather than checking spending. What are the categories of luxury taxes? In current times, luxury taxes have evolved, and they have the following two categories: Sin Taxes: These are the taxes imposed on products which are detrimental to the well-being of individuals. These goods include cigarettes, liquor, and other harmful substances. The government can discourage spending on these goods with a tax while earning revenue at the same time. Items which are only purchased by wealthier sections of the society. Both these categories were relatively well received by the population as they hit only selected individuals in the economy. Why are luxury taxes important? Luxury taxes are indirect taxes, the burden of which falls on the consumers. The goods on which luxury taxes are levied include private jets, expensive cars, yachts, etc. In essence, a luxury tax is supposed to bring more equality in the economy by taxing the ultra-wealthy population. The revenue collected from these wealthy sections of the society would be ultimately used as government spending which will benefit the entire population. Therefore, a luxury tax is not a regressive tax but is a progressive tax. A regressive tax is one which affects the lower income groups more than it affects the higher income group. What are the challenges of implementing a luxury tax? Government must adopt a luxury tax cautiously as there have been many previous instances where a luxury tax has failed to serve its purpose. For example, in the US, the luxury tax had to be abolished as it ended up hurting the sellers of these luxury items and it did not even generate as much revenue as was expected out of it. There was also a black market that had formed for these luxury goods, which is another challenge that comes with luxury taxes. The major challenge in adopting a luxury tax anywhere in the world is to identify which goods can be termed as luxury goods. The variations that exist in the definition of the term “luxury item” make it a somewhat vague subject. With the goods that hold a large price tag, it becomes obvious that they must constitute as luxuries. However, the part that difficult to answer is where to draw the line. The erroneous classification of everyday items as luxury goods can be motivated by many reasons which are mostly political. It has been observed that luxury taxes are often imposed during times of war, to increase the government revenue. This can also be done to obtain revenues in times of distress when other types of taxes can not be increased. These motives by the government may go unfulfilled as sometimes a luxury tax might fail. If goods lying only on the more expensive side are taxed, then it is possible that their demand falls sharply. Thus, the government would not be able to earn the expected revenue and the tax would fail. Any real-life example of a luxury tax being implemented? The Australian Taxation Office has implemented a luxury car tax on imported vehicles. These vehicles are valued above a certain threshold, which makes them fit to be deemed as “luxury cars”. The LCT value is calculated given by the car’s sale price minus any LCT included in the sale price and minus any other taxes or fees.

What are Growth Stocks? Although legendary investor like Warren Buffet has reckoned that ‘Growth and Value Investing are joined at the hip’, the market obsession with the divergences in the market multiples across businesses continues to ignite Growth and Value debate. Thomas Rowe Price Jr is called the father of Growth Investing. Initially a chemist at DuPont, he later opted to work at a brokerage. He set up T. Rowe Price Associates, an investment advisory firm in 1937 and T. Rowe Price Growth Stock Fund was incorporated in 1950. Rowe Price Associates is now T. Rowe Price Group, Inc. – a publicly listed global investment management firm. And the T. Rowe Price Growth Stock Fund is still operating. According to Mr Price, a growth stock should be able to retain growth in purchasing power terms, meaning that earnings of the enterprise should increase at a rate more than the existing level of inflation. He stressed that a cyclical upside in the earnings of an enterprise should not be perceived as the growth of the firm, and the opposite is true when earnings of an enterprise are under strain during a cyclical slowdown. Mr Price often held stocks for decades and noted that Growth Stocks should be held until the growth in the enterprise is exhausted, or the enterprise is no longer a Growth Stock. He published a list of stocks that were owned by him in the 1930s and 1940s, delivering outstanding returns. These stocks were Black & Decker, 3M, Scott Paper, IBM, Pfizer, DuPont, and Merck & Co. Investors chase Growth Stock to realise long-term capital appreciation from the investments, which are expected to deliver better-than-average growth in the share price. Growing companies carry the potential to outperform income stocks since growing companies reinvest their profits instead of distributions to exhibit further growth. Must Read: How To Identify A Growth Stock? What are the features of Growth Stocks? High earnings multiple:  As a result of high expectations from the market participants, Growth Stocks usually trade at a high earnings multiples. Not all growing companies pay dividends, the potential returns from growth investments are likely to be realised through capital appreciation. But investors may also feel that the stock is overvalued given its high multiple. Another legendary Growth Investor – Philip Fisher, noted that sometimes high price-to-earnings multiple indicates the intrinsic value of a company rather than discounting for expected growth. Stocks of businesses with long growth run way tend to sustain high multiples as time is in favour of the business. Many growth stocks across the world have traded at high multiples in the era of ultra-low interest rate. Read: Popular Names Under Growth Versus Value Scanner: TLS, XRO, LLC, SPT, PBH Target market: Growing enterprises often have a large target market, allowing the business to grow since there are a large number of customers. It is important that the target market is growing because a slowly-growing target market would also impact the growth of the company. Usually, growth companies are found lead the market be it in terms of scale, industry leading margins, over all market share, etc. A new entrant in the industry: A business could be a growth business when it is a relatively new player in the industry that is challenging other players to gain market share. Since the business is new to the industry, the level of the growth realised by the business could be better-than-average. On account of scale. A small cap company growing strong: Baby Bunting Delivers Strong Profitability Growth New product development & innovation: It is crucial for growing enterprises to continuously develop new products driven by innovation, which would require investments in research and development. A disruptive new product in any industry developed by a business has the potential to gain market share due to its value to the customers. High reinvestment rate:  A successful growth enterprise would need to continuously improve its processes and products to deliver a better return on invested capital with sustainable debt. Growth Stocks generally exhibit a high growth rate due to their high reinvestment, which is applied to new product development, enhancement of standard business practices or enter new markets and geographies, especially with high growth potential. A growth stock raising capital: Afterpay to raise 1 billion in Fresh Capital Sound management: Management of a business is responsible for the many important decisions in a firm, whether it is purchasing new machinery or acquiring a business. Investors also study the past projections and compare those to realised results by the firm, allowing investors to form a view on management skills. Qualities of a good management read: 5 Traits of a Good Management Team It also becomes imperative for investors to evaluate how the business has performed in times of distress like an economic slowdown, and how the management of the business has been able to navigate the business out of the crisis. Investors also prefer leadership that has delivered results consistently and has a reputation for thinking out-of-box. Studying management style of leadership would enable the investor to know the risks associated with the decision-making. Moreover, the management team is responsible for capital allocation decision and prudent use of capital that is deployed in the pursuit of growth. What are the risks associated with Growth Stocks? Capital allocation: Capital allocation is a crucial exercise undertaken by the management, and investors carefully evaluate these decisions by management. Since Capital Expenditure would deliver benefits in the future, there always remains a risk of underachievement by the business. It is also important for investors to question the funding sources and the rationale behind those sources. Businesses could take up a huge debt to fund the growth plans, but when the expected outcomes are not realised – the return on capital will deplete. More on return on invested capital: What Is Return On Invested Capital (ROIC)? Growing competition: A new entrant in a market with disruptive products remains a major threat to all existing companies in the industry. As competition grows, the management needs to be proactive and responsive to the underlying change in the industry. Moreover, it is equally important for management to know what their peers are developing and launching in the market. When a business is not paying attention to how its competition is evolving, it could well trigger a crisis for the business. Small & growing enterprises: In most of the cases, a growing enterprise would be a small business seeking to expand and grow due to its relatively small penetration in the target market. Since small businesses have less diversified revenue streams, new business model and lack of experience in the market, these factors could impact the businesses when growth in the target market slows down, especially during times of cyclical slowdown. How to select growth stocks? Growth businesses tend to be leader in a particular category as discusses above. Investors can look for businesses that have shown consistent growth in revenue, margin, market share- if not growth at least sustain market share and show growth in other parameters. These stocks tend to be in good momentum; thus stock price is usually seen trading near or at 52- highs. Growth stocks typically do not provide dividend as they reinvest capital back into the business. Look for good management pedigree as they are the stewards of the business. The management of a growth stock in the 21st century is expected to build a business that is not just robust but also antifragile. To know more on antifragility read here: Developing Antifragility was Essential Pre Covid-19; Now It Is A Must- Taleb Your Go to Guru

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