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What Is Arbitrage? | Business: Explained

Business: Explained Series

In alternative investments, there are several strategies you can employ. One is called arbitrage. Arbitrage involves simultaneously purchasing and selling assets in multiple markets to take advantage of price differences and generate profits. There are several types of arbitrage, including pure , merger, and convertible. Pure arbitrage is the textbook definition-buying and assets in one market and selling it in  another. It’s the only type with no associated risk. When an assets is treated in multiple markets, such as the New York and London stock exchanges, price can temporarily fall out of sync, making pure arbitrage possible. Merger arbitrage is related to merging entities, such as two publicly traded companies. In its most basic form, merger arbitrage involves purchasing shares of a target company at a discounted price, then profiting once the acquisition goes through. 

Convertible arbitrage pertains to convertible bonds. A convertible bond is a form of corporate debt that yields interest payments to a bondholder. Unlike with traditional bonds, a bondholder can later converted  it into company shares, often at a discounted rate. Investors who engage in convertible arbitrage seek to take advantage of price difference between a bond’s conversion and company’s shares. This is typically achieved by taking long and short positions. A long position mens the investor owns the asset, whereas a short one means they owe the asset to someone but haven’t bought it yet. Which positions the investor takes and the ratio of buys and sells depends on weather they believe the bond is fairly priced. Do you want to learn more about arbitrage and other alternative investment strategies?

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Cash Flow vs. Profit: What’s the Difference? | Business: Explained

Business: Explained Series

Cash flow and profit are two key financial metrics, yet it’s common for those new to finance to confuse the two.  Cash flow refers to the net balance of cash moving in and out of a business at a specific point in time. The result can be positive or negative. Positive cash flow means a company has more money moving in that out. Negative cash flow indicates the opposite. Profit is the balance that remains when all of a business’s operating expenses are subtracted from its revenues. When this calculation results in a negative number it’s typically  called a loss because the company spent more money operating than it recouped from those operations. 

The key difference between cash flow and profit is that profit indicates the amount of money left over after expenses are paid, while cash flow signifies the net of cash in and out of a business during a specific  period.  Cash flow is reported on the cash flow statement, whereas profit is reported on the  income statement, sometimes  called a profit and loss or P&L statement. It’s possible  for a company to be profitable and have a negative cash flow, hindering its ability to pay its expenses, expand, and grow. Similarly a company with positive cash flow can fail to make a profit, as is the case with many startups and scaling businesses. Neither metric is more important. Both provide vital information about a company’s financial health.

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What Is Globalization? | Business: Explained

Business: Explained Series

As technology and transportation have advanced, business has become increasingly global. Globalization is defined as the increase in the flow of goods, services, capital people, and ideas across international boundaries. It’s had numerous affects both positive and negative, on business and society. One benefit of globalization is widespread economic growth due to greater access to labor, jobs, and resources. Another is increased global cooperation. For a globalized economy to exist, nations must be willing to put their differences aside and work together. Because of this globalization has been linked to reduces international conflict. Globalization also comes with downsides, one of which is environmental degradation. The increased transportation of goods causes greenhouse gas emissions and other pollutants, and infrastructure development has led to deforestation and loss of biodiversity worldwide. The good news is that business professionals willing to confront and prepare for globalizations’ opportunities and risks have the potential to benefits immensely, making a positive impact in the process. 

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Be a Successful Entrepreneur? | Business: Explained

Business: Explained Series

The world is filled with aspiring entrepreneurs-people who believe they have the potential to launch and scale a profitable venture. While anyone can start a company, not everyone can make it last long term. Research shows that half of small businesses fail within their first five years, begging the questions what does it take to be a successful entrepreneur? What characteristics, skills and resources do you need? While no single personality profile fits every entrepreneur, those who succeed shares several characteristics, including curiosity, a willingness to experiment, and persistence.

Although some are more naturally inclined to exhibit these than others, they can be developed through experience and training. Entrepreneurs have various responsibilities, especially in their business early stages. To improve their chances of success, they need essential business skills such as strategic thinking , which enables them to identify opportunities and threats to inform their decisions; communication , so they can better guide and collaborate with their growing team; and accounting, so they can understand and help manage their company’s finances. For a venture to thrive it must be centered around a viable opportunity. An opportunity is more than a product idea. Its a plan for how the company will attract, retain, and reward customers, employees, and investors. 

After coming up with an innovative business idea, entrepreneurs should validate it to determine whether it serves a market need and has profit potential. Launching a company requires funding. What that looks like varies depending on the type of business and industry. Self-funding is possible for some who can set aside enough money to cover living expenses while getting their venture off the ground. In other instances, entrepreneurs  might secure a small business loan, raise capital from investors, or crowdfund. Countless aspiring entrepreneurs have compelling business ideas but not the characteristics or skills to bring  them to fruition. Others lack opportunities to pursue or can’t secure funding . The good news is entrepreneurs aren’t born. They’re made. With the right training and development, everyone has the potential to become a successful entrepreneur. 

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What Is Return on Investment (ROI)? | Business: Explained

Business: Explained Series

Understanding return on investment is vital in business. Using it, you can justify projects you want to launch, gain insight into team performance, and identify which initiatives to prioritize or put on hold. Return on investment or ROI is a financial metric that denotes how much profit an investment has generated. ROI comes in two forms depending on when you calculate it, anticipated and actual. Anticipated ROI is calculated before a project begins and gauges its potential profit using estimated costs and revenues.

Actual ROI is computed after a project concludes and indicates  how much profit it produced compared to the estimate. The most common formula for calculating ROI is net profit, divided by the cost  of investment, multiplies by 100. A positive  return means a project’s revenue is greater than its cost.  A negative return means the opposite. If a project breaks even, then its revenue matches its expenses. Making smart decisions about when and where you allocate resources can accelerate business growth. Leveraging ROI, you can evaluate projects and advocate for why  you should or shouldn’t pursue them.  You can also measure the outcomes  of completed initiatives to inform future proposals.

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4 Stages of the Design Thinking Process | Business: Explained

Business: Explained Series

Design thinking has changed how professionals solve business problems and innovate. At its core, it’s a human-centered approach  to developing novel products, services, business models, and strategies. One way to systematize design thinking is through a four stage framework- clarify, ideate, develop, and implement. The first stage, clarify, involves observing a  problem and collecting as much data as possible without bias. By reflecting on your findings from different perspectives, you develop a problem statement, or questions to guide the design thinking process.

Next comes the second stage , ideate. This stage requires pushing the boundaries of your thinking, challenging assumptions, and generating ideas to solve the problem. Don’t feel limited as you ideate. All ideas are potential solutions. In the third stage, develop, you critique, refine, and combine ideas into innovative concepts. This stage involves prototyping, testing, and experimenting to answer critical questions about concepts’ viability and determine what does and doesn’t work. The fourth and final stage is where you implement a solution and communicate its value to stakeholders. Implementation doesn’t signal the end of testing and experimentation. Design thinking often requires returning to previous stages to iterate on solutions and sustain innovation over the long term.

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