Market Capitalization Calculation Stock Valuation FormulaA market capitalization calculation is a critical part of any stock valuation formula. Market capitalization (sometimes called market cap) is the total market value of all the companys outstanding shares. This represents the value the market has placed on the value of a companys equity. Market Capitalization CalculationMarket Capitalization = Number of shares outstanding multiplied by the price of the stock.Why is this Stock Valuation Formula Important?The market capitalization is the valuation the market is giving the equity of the whole company. When investors purchase a stock they are buying a fractional share of the whole company. Therefore, market capitalization represents the total price they would be paying for all of a companys stock.Market capitalization gives you a metric with which to compare profits, cash flows, revenues, expenses, assets, debt, etc. Remember, owning a stock represents a fractional ownership of the company. Market Capitalization is the current value for which you can buy and sell your fractional share of the company. This makes it a relevant and important measurement for financial analysis.In the next several posts we will look at how market capitalization relates to Calculating Enterprise Value of a company; and secondly, What is Net Cash Flow.Then we will examine the Best Stock Valuation Calculation to Value Company Shares is ROEV.

Market capitalization refers to the value of a company's outstanding shares.How It Works/Example:The formula for market capitalization is:

Market Capitalization = Current Stock Price xSharesOutstandingIt is important to note that market capitalization (sometimes called "market cap") is not the same as equity value, nor is it equal to a company's debt plus its shareholders' equity (although that is sometimes referred to as simply the company'scapitalization).Let's assume Company XYZ has 10,000,000 shares outstanding and the current share price is $9. Based on this information and the formula above, we can calculate that Company XYZ's market capitalization is 10,000,000 x $9 = $90 million.Why It Matters:Market capitalization reflects the theoretical cost of buying all of a company's shares, but usually is not what the company could be purchased for in a normal merger transaction. To estimate what it would cost for an investor to buy a company outright, the enterprise value calculation is more appropriate.Thus market capitalization is a better measure of size than worth. That is, market capitalization is not the same as market value, which can generally only be assigned when the company is actually sold.

Market capitalization From Wikipedia, the free encyclopediaJump to: navigation, search Market capitalization (often simply market cap) is the total value of the tradable shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company's net worth and is a determining factor in some forms of stock valuation. Preferred shares are not included in the calculation.The total capitalization of stock markets or economic regions may be compared to other economic indicators. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007[1] and rose as high as US$57.5 trillion in May 2008[2] before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008.[2]Contents[hide] 1 Valuation 2 Categorization of companies by capitalization 3 Related measures 4 See also 5 References 6 External links

[edit] ValuationMain article: Business valuationMarket capitalization represents the public consensus on the value of a company's equity. In a public corporation, ownership interest is freely bought and sold through purchases and sales of stock, providing a market mechanism (price discovery), which determines the price of the company's shares. Market capitalization is defined as the share price multiplied by the number of shares in issue, providing a total value for the company's shares outstanding.Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figuresIf a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 x $100 per share).Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stock market indices such as the S&P 500, Sensex, FTSE, DAX, Nikkei, Ibovespa, and MSCI adjust for these by calculating on a free float basis, i.e. the market capitalization that they use is the value of the publicly tradable part of the company. Thus, market capitalization is one measure of "float" i.e., share value times an equity aggregate, with free and public being others.Note that market capitalization is based on a market estimate of a company's value, based on perceived future prospects, economic and monetary conditions. Stock prices can also be moved by speculation about changes in expectations about profits or about mergers and acquisitions.It is possible for stock markets to get caught up in an economic bubble, like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash in 2000. Hype can affect any asset class, such as gold or real estate. In such events, valuations rise disproportionately to what many people would consider the fundamental value of the assets in question. In the case of stocks, this pushes up market capitalization in what might be called an "artificial" manner. Market capitalization is, therefore, only a rough measure of the true size of a market. However, it does represent the best estimate of all market participants at any point in timebubbles are easy to spot retrospectively, but if a market participant believes a stock is overvalued, then of course they can profit from this by selling the stock (or shorting it, if they don't hold it).[edit] Categorization of companies by capitalizationTraditionally, companies were divided into large-cap, mid-cap, and small-cap. The terms mega-cap and micro-cap have also since come into common use, and nano-cap is sometimes heard.[3] Different numbers are used by different indexes;[3][4] there is no official definition of, or full consensus agreement about, the exact cutoff values. The cutoffs may be defined as percentiles rather than in nominal dollars. The definitions expressed in nominal dollars need to be adjusted over the decades due to inflation, population change, and overall market valuation (for example, $1 billion was a large market cap in 1950, but it is not very large now), and they may be different for different countries. A rule of thumb may look like: Mega-cap: Over $200 billion Large-cap: Over $5 billion Mid-cap: $1 billion$5 billion Small-cap: $250 million$1 billion Micro-cap: Below $250 million Nano-cap: Below $50 millionCap is short for capitalization, a measure by which we can classify a company's size. Big/Large caps are companies that have a market cap between $10-200 billion dollars. Mid caps range from $2 billion to $10 billion dollars. Small caps are typically new or relatively young companies and have a market cap between $100 million to $1 billion dollars. SmallCap's track record won't be as lengthy as that of the Mid to MegaCaps. SmallCaps do present the possibility of greater capital appreciation, but at the cost of greater risk.[edit] Related measuresMarket cap reflects only the equity value of a company. It is important to note that a firm's choice of capital structure has a significant impact on how the total value of a company is allocated between equity and debt. A more comprehensive measure is enterprise value (EV), which includes debt, preferred stock, and other factors. Insurance firms use a value called the embedded value (EV).[edit] See also Financial ratio Free float List of finance topics List of corporations by market capitalization Market price Market trends Public float Shares authorized Treasury stock[edit] References1. ^ Global stock values top $50 trln: industry data (Reuters)2. ^ a b WFE Report Generator including report for Domestic Market Capitalization 2008 (World Federation of Exchanges)3. ^ a b According to Investopedia. (Investopedia also lists a definition for "nano-cap", but that term is not in wide use.)4. ^ Definition of Market CapitalizationThis article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (January 2008)

[edit] External linksLook up market capitalization in Wiktionary, the free dictionary.

How to Value Assets - from the Washington State (U.S.) government web site Year-end Market Capitalization by Country - World Bank, 1988-2010[hide] v t eStock market

Types of stocksCommon stock Concentrated stock Golden share Growth stock Preferred stock Restricted stock Tracking stock

Share capitalShares authorized Issued shares Shares outstanding Treasury shares

ParticipantsBroker-dealer Floor broker Floor trader Investor Market maker Proprietary trader Quantitative analyst Stock trader

ExchangesElectronic communication network Market opening times Over-the-counter Stock exchange (list) Multilateral trading facility

Stock valuationAlpha Arbitrage pricing theory Beta Book value CAPM Dividend yield Earnings per share Earnings yield Gordon model SCL SML T-Model

Financial ratiosCap rate D/E ratio Dividend cover Dividend payout ratio EV/EBITDA EV/GCI EV/Sales CROCI P/B ratio P/CF ratio P/E PEG P/S ratio RAROC ROA ROCE ROE ROTE ROIC SIR SGR Sharpe ratio Treynor ratio

Trading theoriesand strategiesAlgorithmic trading Buy and hold Contrarian investing Day trading Efficient-market hypothesis Fundamental analysis Market timing Modern portfolio theory Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory Random walk hypothesis Style investing Swing trading Technical analysis Trend following

Related termsBlock trade Cross listing Dark liquidity Dividend Dual-listed company DuPont Model Flight-to-quality Haircut IPO Margin Market anomaly Market capitalization Market depth Market manipulation Market trend Mean reversion Momentum Open outcry Public float Rally Reverse stock split Short selling Slippage Speculation Stock dilution Stock split Trade Uptick rule Volatility Voting interest Stock market index

Barron's Finance & Investment Dictionary: turnoverTop Home > Library > Business & Finance > Finance and Investment Dictionary

Finance:

1. number of times a given asset is replaced during an accounting period, usually a year. See also accounts receivable turnover; inventory takeover.

2. ratio of annual sales of a company to its net worth, measuring the extent to which a company can grow without additional capital investment when compared over a period. See also capital turnover.

Great Britain: annual sales volume.

Industrial relations: total employment divided by the number of employees replaced during a given period.

Securities: volume of shares traded as a percentage of total shares listed on an exchange during a period, usually either a day or a year.The same ratio is applied to individual securities and the portfolios of individual or institutional investors.some of its promotion expenses. Adopted by the Securities and Exchange Commission in 1980, Rule 12b-1 provides mutual funds and their shareholders with an asset-based alternative method of covering sales and marketing expenses. At least half of the more than 10,000 mutual funds in existence today have a 12b-1 fee typically ranging from .25%, in the case of no-load funds that use it to cover advertising and marketing costs, to as high as 8.5%, the maximum front-end load allowed under National Association of Securities Dealers (NASD) rules, in cases where annual 12b-1 spread loads replaced traditional front-end loads. The predominant use of 12b-1 fees is in funds sold through brokers, insurance agents, and financial planners.Changes to 12b-1 that became effective July 7, 1993, aim to limit fees paid by most fund investors to the 8.5% limit on front-end loads.This is achieved by an annual limit and by a rolling cap placed on new sales. The annual limit is .85% of assets, with an additional .25% permitted as a service fee. The rolling cap on the total of all sales charges is 6.25% of new sales, plus interest, for funds that charge the service fee, and 7.25%, plus interest, for funds that do not. The new regulation also prohibits funds with front-end, deferred, and/or 12b-1 fees in excess of .25% from being called no-load. See also mutual fund share classes; no-load fund.

Read more: http://www.answers.com/topic/turnover#ixzz1q5mLGqCp

TurnoverBusiness Turnover is sometimes a synonym for revenue (or in certain contexts, sales), especially in European and South African usageServices sold by a company during a particular period of time. Turnover is sometimes the name for a measure of how quickly inventory is sold (inventory turnover), . A high turnover means that goods are sold quickly, while a low turnover means that goods are sold more slowly. Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.[1] Turnover (employment), relative rate at which an employer gains and loses staff, especially in North American usage Customer turnover, the rate at which a business loses customers, sometimes called the churn[edit] Biology Cell turnover refers to the replacement of old cells with newly generated ones.[2][edit] Sports Turnover (gridiron football), in American football occurs when the offense loses possession of the football because of a fumble, interception, or on downs Turnover (basketball), a turnover in basketball occurs when a player from one team gives possession to the opposing team by losing the ball without taking a shot Turnover (rugby union), a turnover in rugby union occurs when a team loses possession in a ruck or a maul Turnover (rugby league), a turnover in rugby league occurs when a team loses possession or at the end of a team's six tackles[edit] Demographics Population turnover, measures gross moves in relation to the size of the population and is related to population mobility[edit] Chemical kinetics Turnover number, is the number of moles of substrate that a mole of catalyst can convert before becoming inactivated. In enzyme kinetics, the same term is used to refer to the moles of substrate converted by a mole of enzyme per second[edit] Music "Turnover" is a song by Fugazi from their album Repeater Turn Over is a live album by Japanese band Show-Ya Turnover, a pop-punk band from Virginia Beach, Virginia[edit] Food Turnover (food), a type of pastry or cakeFinancializationFinancialization is a term sometimes used in discussions of financial capitalism which developed over recent decades, in which financial leverage tended to override capital (equity) and financial markets tended to dominate over the traditional industrial economy and agricultural economics.Financialization is a term that describes an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialization is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.Workers, through a financial instrument such as a mortgage, could trade their promise of future work/wages for a home. Financialization of risk-sharing makes all insurance possible, the financialization of the U.S. Government's promises (bonds) makes all deficit spending possible. Financialization also makes economic rents possible.Contents[hide] 1 Specific academic approaches 2 Roots 3 Financial turnover compared to gross domestic product 4 Futures markets 5 Economic effects 5.1 Criticism of financialization 6 The development of leverage and of financial derivatives 7 See also 8 Further reading 9 Notes 10 External links

[edit] Specific academic approachesActually, various definitions, focusing on specific aspects and interpretations, have been used: Greta Krippner of the University of California, Los Angeles has written that financialization refers to a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production. In the introduction to the 2005 book Financialization and the World Economy, editor Gerald A. Epstein wrote that some scholars have insisted on a much more narrow use of the term: the ascendancy of "shareholder value" as a mode of corporate governance; or the growing dominance of capital market financial systems over bank-based financial systems. Pierre-Yves Gomez and Harry Korine in their 2008 book "Entrepreneurs and Democracy: a political theory of corporate governance" have identified a long-term trend in the evolution of corporate governance of large corporations and they have shown that financialization is one step in this process. Gerald Epstein defined financialization in 2001:[2]Financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels. Michael Hudson summarized financialization in a 2003 interview:[3]Companies are not able to invest in new physical capital equipment or buildings because they are obliged to use their operating revenue to pay their bankers and bondholders, as well as junk-bond holders. This is what I mean when I say that the economy is becoming financialized. Its aim is not to provide tangible capital formation or rising living standards, but to generate interest, financial fees for underwriting mergers and acquisitions, and capital gains that accrue mainly to insiders, headed by upper management and large financial institutions. The upshot is that the traditional business cycle has been overshadowed by a secular increase in debt. Instead of labor earning more, hourly earnings have declined in real terms. There has been a drop in net disposable income after paying taxes and withholding "forced saving" for social Security and medical insurance, pension-fund contributions andmost serious of alldebt service on credit cards, bank loans, mortgage loans, student loans, auto loans, home insurance premiums, life insurance, private medical insurance and other FIRE-sector charges. ... This diverts spending away from goods and services. Financialization may be defined as: "the increasing dominance of the finance industry in the sum total of economic activity, of financial controllers in the management of corporations, of financial assets among total assets, of marketised securities and particularly equities among financial assets, of the stock market as a market for corporate control in determining corporate strategies, and of fluctuations in the stock market as a determinant of business cycles" (Dore 2002) More popularly, however, financialization is understood to mean the vastly expanded role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies. Sociological and political interpretation have also been made. In his 2006 book, American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, American writer and commentator Kevin Phillips presented financialization as a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy. (page 268). Philips considers that the financialization of the U.S. economy follows the same pattern that marked the beginning of the decline of Habsburg Spain in the 16th century, the Dutch trading empire in the 18th century, and the British Empire in the 19th century: (It is also worth pointing out that the true final step in each of these historical economies is; collapse)... the leading economic powers have followed an evolutionary progression: first, agriculture, fishing, and the like, next commerce and industry, and finally finance. Several historians have elaborated this point. Brooks Adams contended that as societies consolidate, they pass through a profound intellectual change. Energy ceases to vent through the imagination and takes the form of capital. Nassim Taleb discusses the role mis-estimated financialization methods and processes can be the cause of disaster. In his book The Black Swan Taleb points out how financialization can misrepresent reality and lead to large errors. Relative to the 2007-2009 financial crisis it became clear that many mortgages did not accurately represent the risk to the lendor or the promise of future income from the borrower. Credit Default Swaps transactions initially overwhelmed the marketplace as many rushed to correct the error caused by the mis-financialization of borrowers' promises, i.e., mortgages. Nassim Taleb in a 2001 work titled "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets" foretold many of the errors in Financialization that were being made at the time, those errors in Financialization ultimately proved to be the major causes of the 2007-2009 financial crisis. Taleb suggests that mis-financializations are the root causes of most systemic economic problems in modern economies.[edit] RootsIn the American experience, the roots of financialization can be traced to the rise of Neoliberalism and the free-market doctrines of Milton Friedman and the Chicago School of Economics, which provided the ideological and theoretical basis for the increasing deregulation of financial systems and banking beginning in the 1970s. Notre Dame heterodox economist David Ruccio has summarized the politico-economic philosophy of Friedman and the Chicago School as one in which markets, private property and minimal government will achieve maximum welfare.One of the most important impetuses to the rise of financialization was the end of the post-World War Two Bretton Woods system of fixed international exchange rates and the dollar peg to gold in August 1971.In a 1998 article Michael Hudson discussed previous economists who saw the problems that result from financialization.[4] Problems were found by John A. Hobson (it enabled Britain's imperialism), Thorstein Veblen (it acts in opposition to rational engineers), Herbert Somerton Foxwell (Britain was not using finance for industry as well as Europe), and Rudolf Hilferding (Germany was surpassing Britain and U.S. in banking that supports industry).At the same 1998 conference in Oslo, Erik S. Reinert and Arno Mong Daastl in "Production Capitalism vs. Financial Capitalism" provided an extensive bibliography on past writings, and prophetically asked [5]In the United States, probably more money has been made through the appreciation of real estate than in any other way. What are the long-term consequences if an increasing percentage of savings and wealth, as it now seems, is used to inflate the prices of already existing assets - real estate and stocks - instead of to create new production and innovation?[edit] Financial turnover compared to gross domestic productOther financial markets exhibited similarly explosive growth. Trading in U.S. equity (stock) markets grew from $136.0 billion or 13.1 percent of U.S. GDP in 1970, to $1.671 trillion or 28.8 percent of U.S. GDP in 1990. In 2000, trading in U.S. equity markets was $14.222 trillion, or 144.9 percent of GDP. Most of the growth in stock trading has been directly attributed to the introduction and spread of program trading.According to the March 2007 Quarterly Report from the Bank for International Settlements (see page 24.):Trading on the international derivatives exchanges slowed in the fourth quarter of 2006. Combined turnover of interest rate, currency and stock index derivatives fell by 7% to $431 trillion between October and December 2006.Thus, derivatives trading mostly futures contracts on interest rates, foreign currencies, Treasury bonds, etc. had reached a level of $1,200 trillion, $1.2 quadrillion, a year. By comparison, U.S. GDP in 2006 was $12.456 trillion.The table below provides data for the annual amount of financial trading in U.S. financial markets, compared to GDP. Sources for table above: Equity Markets Trading, Statistical Abstract of the United States. For example 1990 and 2000 taken from Table 1201, Sales of Stocks on Registered Exchanges, 1990 to 2003, "Market Value of all Sales" minus "CBOE" Statistical Abstract of the United States, 2004-2005. U.S. government securities trading, Statistical Abstract of the United States. For example 1990 and 2000 taken from Table 1190, Volume of Debt Markets by Type of Security, 1990 to 2003, Statistical Abstract of the United States 2004-2005. Futures Trading, are estimates based on the average value of types of futures contracts, multiplied by the number of contracts traded, reported by the Futures Industries Association. Corporate Debt Trading and State and Municipal Bonds, the Bond Market Association reports average daily volume, multiplied by 240 business days. Options trading, on exchange, Statistical Abstract of the United States. For example 1990 and 2000 taken from Table 1201, Sales of Stocks on Registered Exchanges, 1990 to 2003, line for "CBOE" only, Statistical Abstract of the United States, 2004-2005. Mortgage Derivatives, 2000 taken from Table 1190, Volume of Debt Markets by Type of Security, 1990 to 2003, Statistical Abstract of the United States 2004-2005. OTC swaps, forwards, options is reported by the U.S. Federal Reserve Bank of New York, and the Bank for International Settlements, but I have not been able to determine what percentage of nominal values of these types of financial derivatives are actually traded.[edit] Futures marketsThe data for turnover in the futures markets in 1970, 1980, and 1990, is based on the number of contracts traded, which is reported by the organized exchanges, such as the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Commodity Exchange, and compiled in data appendices of the Annual Reports of the U.S. Commodity Futures Trading Commission. The pie charts below show the dramatic shift in types of futures contracts traded from 1970 to 2004. For a century after organized futures exchanges were founded in the mid-19th century, all futures trading was solely based on agricultural commodities.But after the end of dollar gold-backed fixed-exchange rate system in 1971, contracts based on foreign currencies began to be traded. After the deregulation of interest rates by the Bank of England, then the U.S. Federal Reserve, in the late 1970s, futures contracts based on various bonds / interest rates began to be traded. The result was that financial futures contracts - based on such things as interest rates, currencies, or equity indices - came to dominate the futures markets.

The dollar value of turnover in the futures markets is found by multiplying the number of contracts traded by the average value per contract for 1978 to 1980, which was calculated by ACLI Research in 1981. The figures for earlier years were estimated on computer-generated exponential fit of data from 1960 to 1970, with 1960 set at $165 billion, half the 1970 figure, on the basis of a graph accompanying the ACLI data, which showed that the number of futures contracts traded in 1961 and earlier years was about half the number traded in 1970.According to the ALCI data, the average value for interest rate contracts is around ten times that of agricultural and other commodities, while the average value of currency contracts is twice that of agricultural and other commodities. (Beginning in mid-1993, the Chicago Mercantile Exchange itself began to release figures of the nominal value of contracts traded at the CME each month. In November 1993, the CME boasted it had set a new monthly record of 13.466 million contracts traded, representing a dollar value of $8.8 trillion. By late 1994, this monthly value had doubled. On. Jan. 3, 1995, the CME boasted that its total volume for 1994 had jumped 54%, to 226.3 million contracts traded, worth nearly $200 trillion. Soon thereafter, the CME ceased to provide a figure for the dollar value of contracts traded.)[edit] Economic effectsFinancial services (banking, insurance, investment...) has become a key industry in developed economies in which it represents a sizeable share of the GDP and an important source of employment. Those activities also played a key facilitator role to foster economic globalization. In the wake of the 2007-2010 financial crisis, a number of economists and others began to argue that Financial services had become too large a sector in the U.S. economy, with no real benefit to society accruing from the activities of increased financialization. Some, such as former International Monetary Fund chief economist Simon Johnson even went so far as to argue that the increased power and influence of the financial services sector had fundamentally transformed the American polity, endangering representative democracy itself.[6]In February 2009, white-collar criminologist and former senior financial regulator William K. Black listed the ways in which the financial sector harms the real economy. Black wrote, The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation.[7]In testimony before the U.S. Congress in March 2009, former Federal Reserve ChairmanAlan Greenspan has proclaimed himself "shocked" that "the self-interest of lending institutions to protect shareholders' equity" proved to be an illusion.... The Reagan-Thatcher model, which favored finance over domestic manufacturing, has collapsed. ... The mutually reinforcing rise of financialization and globalization broke the bond between American capitalism and America's interests... we should take a cue from Scandinavia's social capitalism, which is less manufacturing-centered than the German model. The Scandinavians have upgraded the skills and wages of their workers in the retail and service sectors -- the sectors that employ the majority of our own workforce. In consequence, fully employed impoverished workers, of which there are millions in the United States, do not exist in Scandinavia.[8]

Emerging countries also try to develop their financial sector, as an engine of economic development. A typical aspect is the growth of microfinance/microcredit.On 15 February 2010, Adair Turner, head of Britains Financial Services Authority directly blamed financialization as a primary cause of the 20072010 financial crisis. In a speech before the Reserve Bank of India, Turner said that the Asian financial crisis of 1997-98 was similar to the 2008-2009 crisis in that ...both were rooted in, or at least followed after, sustained increases in the relative importance of financial activity relative to real non-financial economic activity, an increasing financialisation of the economy. [9][edit] Criticism of financializationThis recognized success brought also some negative reactions. In the Introduction to the 2005 book Financialization and the World Economy, editor Gerald A. Epstein wrote that... finance benefits handsomely from the same processes that create economic crises and injure so many others. Hence the costs of financial crises are paid by the bulk of the population, while large benefits accrue to finance. Dumnil and Lvy provide new and valuable data documenting these trends in the case of France and the USA....[edit] The development of leverage and of financial derivativesOne of the most notable features of financialization has been the development of overleverage (more borrowed capital and less own capital) and, as a related tool, financial derivatives financial instruments, the price or value of which is derived from the price or value of another, underlying financial instrument. Those instruments, which initial purpose was hedging and risk management, has become widely traded financial assets in their own. The most common types of derivatives are futures contracts, swaps, and options. In the early 1990s, a number of central banks around the world began to survey the amount of derivative market activity, and report the results to the Bank for International Settlements.In the past few years, the number and types of financial derivatives have grown enormously. In November 2007, commenting on the financial crisis sparked by the sub-prime mortgage collapse in the United States, Doug Nolands Credit Bubble Bulletin, on Asia Times Online, noted,The scale of the Credit "insurance" problem is astounding. According to the Bank of International Settlements, the OTC market for Credit default swaps (CDS) jumped from $4.7 TN at the end of 2004 to $22.6 TN to end 2006. From the International Swaps and Derivatives Association we know that the total notional volume of credit derivatives jumped about 30% during the first half to $45.5 TN. And from the Comptroller of the Currency, total U.S. commercial bank Credit derivative positions ballooned from $492bn to begin 2003 to $11.8 TN as of this past June....A major unknown regarding derivatives is the actual amount of cash behind a transaction. A derivatives contract with a notional value of millions of dollars may actually only cost a few thousand dollars. For example, an interest rate swap might be based on exchanging the interest payments on $100 million in U.S. Treasury bonds at a fixed interest of 4.5 percent, for the floating interest rate of $100 million in credit card receivables. This contract would involve at least $4.5 million in interest payments, though the notional value may be reported as $100 million. However, the actual cost of the swap contract would be some small fraction of the minimal $4.5 million in interest payments. The difficulty of determining exactly how much this swap contract is worth when accounted for on a financial institutions books, is typical of the worries many experts and regulators have over the explosive growth of these types of instruments.Contrary to common belief in the United States, the largest financial center for derivatives - and also for forex - is London. According to MarketWatch on December 7, 2006,The global foreign exchange market, easily the largest financial market, is dominated by London. More than half of the trades in the derivatives market are handled in London, which straddles the time zones between Asia and the U.S. And the trading rooms in the Square Mile, as the City of London financial district is known, are responsible for almost three-quarters of the trades in the secondary fixed-income markets.

Capital turnoverCalculated by dividing annual sales by average stockholder equity (net worth). The ratio indicates how much a company could grow its current capital investment level. Low capital turnover generally corresponds to high profit margins.Capital TurnoverA ratio of how effectively a publicly-traded company manages the capital invested in it to produce revenues. It is calculated by taking the total of the company's annual sales and dividing it by the average stockholder equity, which is the average amount of money invested in the company. A high ratio indicates that the company is using its capital well, while a low ratio indicates the opposite. It is also called equity turnover.capital turnoverA measure indicating how effectively investment capital is used to produce revenues. Capital turnover is expressed as a ratio of annual sales to invested capital.

The Evolution of the Finance Growth NexusPaul Wachtel 28 September 2010 PrintEmailComment

This article discusses the historical role of the financial sector in improving allocative efficiency thereby having a positive impact onTFPgrowth. However, this article points out that it is difficult to estimate the complicated relationship between financial deepening and economic growth.Modern growth theory dates back to the mid 1950s, only a little more than 50 years, to the contributions made by Robert Solow and others. Solows neoclassical production function approach attributes growth to the quantity of capital and labor inputs and a catchall residual factor called total factor productivity. Productivity studies tended to emphasize capital deepening, improvements in labor quality (human capital investments) and the adoption of new technologies.The approach reached its zenith in the early 1990s with a controversial literature on the rapid growth of the East Asian economies. Page (1994) distinguishes between the fundamentalist and the mystic explanation for the East Asian miracle. The fundamentalists stress the role of factor accumulation; they attribute growth to high savings rates and capital accumulation, and human capital development as an educated population moved into the active labor force. The mystics place greater emphasis on the role of the acquisition and mastery of technology. The controversy goes beyond the analytics of the sources of growth. The mystics, unlike the fundamentalists, were likely to support interventionist government development policies. The fundamentalist view of growth in East Asia seems to have won the debate although the argument regarding the efficacy of interventionist industrial policies is as yet unsettled.Empirical applications of the Solow framework tended to focus more and more attention on total factor productivity (TFP). The great American productivity slowdown in the 1970s and 1980s (the period between the oil shocks and the high tech boom) was attributed to many factors but most analyses were often left with a systematic and striking decline in TFP growth Such a conclusion was very disquieting because it attributed changes in growth rate to a great unknown residual. So, it comes as no surprise that economists began to think about the sources of differences in TFP growth. For example, the fundamentalists were aware of the fact that East Asian resource accumulation was very different than the similarly large levels of accumulation in the Soviet Union and other planned economies. The ability to allocate resources efficiently is hard to measure and, as an omitted variable, would be reflected in TFP growth.An important aspect of allocative efficiency is the role of the financial sector. Although it was not a new idea, it was largely forgotten by development economists who often called for explicit manipulation of financial markets through subsidies, directed credit, interest rate controls and other means in order to achieve development objectives. However, more market oriented discussions of the role of the financial sector, such as Goldsmith (1969) and McKinnon (1973), began to attract attention. The role of financial intermediaries is to bring savers and investors together in a way that directs savings into the most productive investments. The pooling of information and the creation of financial instruments both induces more activity and promotes efficient allocations. Thus, a country with a more developed or more extensive financial system is likely to grow more. The value added by a market oriented financial sector is that it promotes the efficient allocation of resources.This new understanding of the financial sector began to take root about the same time that the fundamentalists and mystics were debating and an empirical literature on the role of the financial sector in economic soon emerged. However, empirical application requires some definition of the role of the financial sector. Quickly, and perhaps mistakenly, the role of financial institutions became to be defined by the size of the sectors activity. That is an economy with more intermediary activity was assumed to be doing more to generate efficient allocations. So, the level of intermediation to GDP was taken as a broad measure of the size of the financial sector. A simple look at the raw data supported the idea that countries with more intermediation grew more rapidly. The table presents the average growth rates for 84 countries, 1960-2004 for quartiles of two commonly used financial depth ratios, M3 to GDP Total private credit to GDP:Financial Depth QuartilesM3/GDPCredit/GDP

1 (highest)2.812.84

22.202.41

31.651.21

4 (lowest)0.680.94

An extensive econometric literature emerged that held constant other determinants of growth and used the most sophisticated techniques to control for the simultaneity of growth and financial depth. Robert Barro (1991) and Robert King and Ross Levine (1993) pioneered the use of cross country panel data to examine the relationship while Paul Wachtel and Peter Rousseau (1995) developed evidence based on long time series for the few countries with available data. The literature grew rapidly and has been eloquently summarized by its champion, Ross Levine, at least three times (1997, 2005, and 2008). By the end of the 1990s, the finance-growth nexus was a well established part of the economic canon.However, the empirical literature might have over sold the nexus. In Wachtel (2001, 2004), I pointed out that it is misleading to draw inferences about policy objectives from the strong cross country results. First, there is wide variation in the level of financial depth among countries with similar levels of GDP per capita. Second, the between country variation is much larger than the within country variation even over long periods of time. Thus the variation in financial depth seems to be related to differences in institutional structures among countries. As a consequence it is a mistake to draw any causal inferences from the estimated effects of financial deepening on economic growth.For example, domestic credit to the private sector is typically about 40% in middle income countries (e.g. 36% in Costa Rica with real GDP in 2005 dollars of about $9000) and typically over 100% in high income countries (e.g. 90% in Israel, 125% in New Zealand and 178% in Canada). The cross section estimates of the effect of financial deepening on growth indicate that at an increase in 50 percentage points will increase growth rates by one percentage points. This is a very large effect, so large that concern about reverse causality seems reasonable. Perhaps, following Joan Robinson, enterprise leads and finance follows.The experiences of individual countries are also difficult to interpret. The development of the American financial system in the late 19th century was instrumental in understanding growth but 20th century developments are harder to understand. The chart shows the increase in financial depth in the US over the last 50 years; it presents the ratio of end of year Flow of Funds data for Debt Outstanding of the Domestic Nonfinancial Sectors (FRED series TODNS) to GDP (FRED series GDPA) from 1960 to 2009. There have been two recent episodes of financial deepening in the US. The ratio increased by about a third in the 1980s and again in the 2000s, otherwise there is little movement. How should we interpret these episodes? Do they represent periods of financial innovation and deeper financial activity which improved resource allocation and contributed to the growth of the economy? Or do they represent periods of increased leverage and risk taking which only temporarily increases growth and can precipitate financial crises. In the first instance, the stock market crash in 1987 did not have widespread macro consequences but in the second instance, the housing crash in 2007 did.

Both the Asian financial crises in 1997 and the global financial crisis in 2007 have brought the role of financial deepening under closer scrutiny. Reinhart and Reinhart (2010) look at 15 late 20th century severe financial crises (including emerging market, the Asian experience and advanced economies such as Japan and the Scandinavian banking crises). They describe the commonalities of the 10 year pre-crisis periods. In each instance there was a surge in the ratio of domestic bank credit to GDP prior to the crisis. The median increase was 38.4 percentage points and the deleveraging in the post-crisis decade was about the same proportional size. The run up of the credit to GDP ratio in the decade prior to the 2007 in the 9 countries that experienced systemic crisis was even larger, about 60 percentage points.The role of credit deepening as a possible cause of crisis is found earlier in Sachs and Radelet (1998) in their analysis of financial crises in emerging market countries. A significant variable in their probit model to predict severe reversals in capital flows is the private credit buildup, the increase over three years in the ratio of private sector financial claims to GDP. Financial depth is a bit of a chameleon; in some contexts it is a determinant of economic growth and in another it is a precursor of crisis. As Peter Rousseau suggested to me, one persons salubrious deepening is another persons financial crisis.Even without a financial crisis, there are difficulties in interpreting financial deepening experiences. Consider the case of Croatia where monetary stabilization and the end of hostilities led to rapid growth of intermediation in the late 1990s. By all accounts, this was viewed as a desirable deepening. However, a banking crisis in 1998-99 led to a contraction of credit. The banking crisis was short-lived and within a year there was a consolidation of the banking sector and privatization to foreign owners. A second credit boom ensued in and by 2006 domestic credit to the private sector exceeded 70% of GDP, more than double the level of decade earlier but still not unusually high for a middle income country. The Croatian National Bank responded to the rapid growth in lending by putting a tax on rapid lending growth and a marginal reserve requirement on foreign borrowing. There was considerable effort to distinguish between the gradual deepening of the financial sector and rapid loan growth.The financial sectors influence on economic growth is a complex phenomenon. The issue at hand may not be the finance-growth nexus per se but how we measure it. Aggregate data on credit to GDP ratios are useful because it is possible to abstract from national institutions and make formal cross country comparisons. But, the recent experiences described here make abundantly clear that the financial depth ratios are a poor description of the finance growth nexus.As noted the use of financial depth ratios (and generalizations such as adding the ratio of equity market capitalization to GDP) are a matter of convenience. Theoretical arguments about the role of the financial sector relate to the amount or quality of intermediary activity which need not be related to financial depth. My NYU colleague, Thomas Philippon (2008) examines the share of the financial sector in GDP in the US going back over 100 years. The chart shows that there have been several periods of rapid increase in the share. With one exception, Philippon associates these bursts in activity with periods of innovation when young, cash-poor firms require finance:The financial industry was around 1.5% of GDP in the mid-19th century. The first large increase between 1880 to 1900 corresponds to the financing of railroads and early heavy industries. The second big increase between 1918 and 1933 corresponds to the financing of the Electricity revolution, as well as automobile and pharmaceutical companiesAfter a continuous collapse in the 1930s and 40s, the GDP share of finance and insurance industries was down to only 2.5% of GDP in 1947. It recovered slowly and was mostly stable at around 4% until the late 1970s, and then grew quickly to reach 8.3% of GDP in 2006. The third large increase, from 1980 to 2001, corresponds to the financing of the IT revolution.

The one exception of course is the rapid after 2002. Philippons modeling suggests that there was a bubble in this period resulted in a financial sector that was about 10% larger than justified by economic fundamentals.Looking at the specific activities of the financial sector and their contribution towards growth is even more difficult. Financial innovations (e.g. derivatives, securitization, etc.) are valued because they facilitate the functioning of the sector. However, empirical analysis to evaluate the impact of specific activities is so far elusive. A comment made by Paul Volcker in December 2009 has been widely quoted in this regard:I wish somebody would give me some shred of evidence linking financial innovation with benefit to the economy.The ATM is the one innovation in the past 25 years that he was willing to cite:It really helps people. Its useful.Two years past the global meltdown, where does the finance-growth nexus stand? All in all, it is relatively unscathed. What we have learned is not that finance is unimportant but, instead, we have learned how difficult it is to measure financial sector activity properly.