Terms Beginning With 's'

Sharing Economy

  • November 18, 2020
  • Team Kalkine

When it comes to doing business, there are various business models that have been discovered by numerous entrepreneurs throughout the centuries. The business model is a specific fundamental framework upon which various business activities are carried out. Different businesses have different business models depending upon the industry, size of the company, capital structure etc.

Sharing economy is one of the most popular and fastest-growing business models that we have seen in the last few decades. Many of the startups nowadays are also preferring the sharing economy business models over the conventional models.

What is a Sharing Economy business model?

Sharing economy in its purest essence is not just a business model but also an economic principle that is continually evolving and thriving in the economy. It means to facilitate the exchange of goods and services between the parties by using means like technology. The underlying principle is that these parties can mutually share value from an underutilized asset.

The businesses which rely on the sharing economy model, do the same job. These businesses do not provide a product or service of their own but help to facilitate the transaction between buyers and sellers and charge a commission on that transaction. This model is also referred to as an asset-light model, peer to peer economy or Collaborative economy.

In today’s world of technology, this business model has become simpler than ever, and some companies are even going one step further to create their own marketplace for these buyers and sellers. The penetration of internet in various parts of the world is further helping the companies to thrive on this model.

What are the pros and cons of a Conventional Business Model?

Let's assume there is a businessman willing to open a transport company offering cab services. He buys 100 cabs for his company for which he takes up a humongous loan. After buying those 100 cabs, he then hires 100 cab drivers for which he needs to shell out a hefty amount every month to fund their salaries.

Advantages

  • The biggest advantage of this model is the ownership of the asset lies with the businessman. The asset can be sold off in the future in times of cash crunch. Higher number or value of assets adds more weightage to the balance sheet of the business.
  • As the cabs are owned by the company, they can be used whichever way the company likes, without the interference of another party. Ownership of the cabs would give the company flexibility to use it the way it wants to.
  • The revenue generated by the core operations is relatively higher, and the business keeps all of it. Like a cab fare generating $10 revenue would all be kept by the company, not a specific percentage of it.

Disadvantages   

  • However, there are relatively many disadvantages, as well. The initial financing of the assets is a big task which requires some guarantees or high creditworthiness. Financing also leads to interest cost, which may add a burden on the company’s cash flows.
  • Another disadvantage lies in the operational cost of the business. It includes the rent of a safe parking facility, the maintenance cost of the cabs along with the monthly salary of the drivers, irrespective of whether they sit idle or work throughout the month.
  • Scalability of the business becomes questionable when there is a lot of investment needed to scale up. In this example, in order to increase the scale of the business, additional cabs would need to be purchased, requiring substantial additional investment.

What are the pros and cons of a Sharing Economy Business Model?

Let's see how the same businessman can run the same company but on another business model. Instead of taking up a hefty loan to go straight to the cab showroom, he decides to contact the existing independent drivers who possess their own cabs.

The businessman would help the driver find new customers and in return would charge a nominal commission for every ride. If they both agree to the agreement, then the same business could take place as seen in the conventional model but with different economics.

Advantages

  • The biggest advantage of this model which is attracting a lot of startups is that the business does not need to own the asset. In the above example, the businessman does not have the ownership of the cab. Therefore, there is no cost of ownership being incurred by the company.
  • As you might have noticed, even the cab driver is also an independent driver and not the company’s employee, saving up additional costs towards the monthly salary.
  • As there is no ownership of assets required, the business can be scaled up with unparallel ease. In our example, all a businessman needs to do is contact more cab drivers and convince them to work with you (not for you).

Disadvantages

  • However, there are some disadvantages to this model too. There is no ownership of the asset, which takes away the flexibility to use it the way the company wants. If the cab driver refuses to take a fare, the company cannot do much about it as the cab driver is not an employee of the company.
  • Lower asset base might not be much of help in the time of cash needs as selling assets are one of the quickest ways to fund the capital needs.
  • Due to the revenue model, the company only earns a percentage of the actual revenue generated by the driver, called commission. If the driver generates $10, the company might get only $4 (as per the agreement). This kind of revenue model generally does not work well with the low volume of transactions.

Data smoothing is a process of manipulating data to eliminate or reduce short-term volatility, pulling out real patterns or trends from data results. Smoothed data assists in identification of changes in an economy by predicting different patterns and trends.

What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours.  One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job.  Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price.  Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility.  Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening.  Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating.  People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows.  What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives.  Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets.  After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy.   Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex.  Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies.  Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well.  The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood.  Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc.  Real-time market information flow   On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research.  Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours.  Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group.  What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently.  It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin.  Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses.  Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.   

What is Keynesian economics? Keynesian economics is the economic theory that states demand is the driver of economic growth. This economic theory also states that fiscal aid helps recover an economy from a recession. Certain Keynesian economic principles stand in stark contrast to the Classical theory of economics. The theory was given by John Maynard Keynes in the 1930s and published in Keynes’ “General Theory of Employment, Interest and Money” in 1936. The Keynesian theory stated that government spending was an essential factor in increasing demand and maintaining full employment. What are the theories under Keynesian economics? Aggregate demand is affected by a host of factors: Aggregate demand is affected by various factors public and private factors. Monetary and fiscal policy both affect the level of aggregate demand in the economy. Any decision taken by the monetary authority or the government greatly affects the economy’s level of demand. Say’s Law proposes that supply generates its own demand. However, Keynesian economics suggests that demand is the driver of supply and overall growth in the economy. Sticky Wages: According to the theory of sticky wages, employers would prefer laying off workers over decreasing the existing workers’ wages. This happens because even in the absence of labour unions, workers would still resist wages cuts. Even if the employers were to reduce wages, it would lead to economic depression as demand would fall and people would become more cautious about their spending. Keynes advocated that the labour markers do not function independently from the savings market. Therefore, prices and wages respond slowly to changes in supply and demand. Liquidity Trap: Liquidity trap refers to an economic scenario where there is a contraction in the economy despite very low interest rates. This contrasts with the relationship between interest rates and investment given in Classical economics. How is Keynesian economics different from Classical economics? Classical economics states that the economy self-regulates in case of a disequilibrium. Any deviations from the market equilibrium would be adjusted on its own without any government regulation. However, Keynesian economics propagates that government intervention must maintain equilibrium or come out of an economic downturn. Keynesian economics highlights the importance of monetary and fiscal policy, while Classical economics does not mention any government intervention. Another crucial difference is that Classical economics suggests that governments should always incur less debt, while Keynesian economics advises that governments should practice deficit financing during a recession. Classical economics states that government spending can be harmful as it leads to crowding out of the private investment. However, it has been later established that this happens when the economy is not in a recession. Government borrowing competes with private investment leading to higher interest rates. Thus, Keynesian economics is of the view that deficit spending during a recession does not crowd out private investment. What are the policy measures advocated by Keynesian economics? According to Keynes, adopting a countercyclical approach can help economies stabilise. This means that governments must move in a direction opposite to the business cycles. The theory also states that governments should recover from economic downturns in the short run itself, instead of waiting for the economy to recover over time. Keynes wrote the famous line, “In the long run, we are all dead”. The short run knowledge of the economy would be far better than the long run prediction made by any government. Thus, it makes sense for governments to focus on short run policies and maintain short run equilibrium. Keynes’ multiplier effect states that government spending would increase the GDP by a greater amount than the increase in government spending. This multiplier effect established a reason for governments to go for fiscal support when the economy requires it. What have been the criticisms of Keynesian economics? The initial stages of Keynesian economics propagated that monetary policy was ineffective and did not play any role in boosting economic growth. However, the positive effects of monetary policy are well established and have been integrated into the new Keynesian framework. Another criticism is that the advantage of the fiscal benefits to the GDP cannot be measured. Thus, it becomes difficult to fine-tune the fiscal policy to suit the economic scenario better. Also, the Keynesian belief of increased spending leading to economic growth may lead to the government investing in projects with a vested interest. It could also lead to increased corruption in the economy. The theory of rational expectations suggests that people understand that tax cuts are only temporary. Thus, they prefer to save up the income left behind to pay for future increases in taxes. This is the Ricardian Equivalence theory. Thus, fiscal policy may be rendered ineffective due to this. Supply-side economics has also shown contrast to Keynesian beliefs. During the stagflation in the 1970s, the Phillips curve failed, bringing out the importance of supply-side economics.

In a knowledge economy, the exchange of goods and services is primarily based upon knowledge-intensive activities. And, a large part of the economic prosperity is due to knowledge-based activities.

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