What is the meaning of realization in finance?
Realization is, literally, when something is made real. For example, let's say that you own some stock.  You bought the stock for $1000, and after many years the stock is worth $10,000.  Your investment has gained $9,000.  However, you don't actually have this $10,000; you just own stock that is supposedly worth $10,000 on paper.  Tomorrow, the value of the stock could plummet and only be worth $8,000.  But if you sell your stock today and obtain this $10,000, the gain has now become real.  You have realized a $9,000 gain. In investing, realization of a gain or loss occurs when an asset that you own has been sold for more or less than what you purchased it for.  Before the asset is sold, you only have a theoretical gain or loss based on what you might receive if you sold the asset today.  And tomorrow, that theoretical gain or loss could change. Realization is when you actually have something in hand, it isn't just theoretical anymore.  For instance, you may win the lottery, but until they hand you a check, you haven't realized the windfall.  Another example is that you may be paid a particular hourly wage, but until you cash the paycheck, you haven't realized the pay.
What is much more likely is immediate or close to immediate investment.  but this is exactly my point of contention with how they do things. I know for a fact that the money is immediately invested, which is why i find it wrong that interest for money collected in a given financial year is announced after the end of the next financial year.  i was wondering if this was a common practice in other countries. "Very interesting. I'm actually glad you mentioned term structure models, because that's something I'm interested in. But I don't think the distinction you draw between ""equilibrium"" and ""arbitrage free"" models makes sense with Black-Scholes.  My understanding was that the discrepancy between equilibrium and arbitrage-free term structure models arises because term structure models lack market completeness. In other words, when the market is incomplete (as it is with interest rates), you'll have a continuum of bond prices that are compatible with no arbitrage, and the exact price will depend on the market price for risk.   However, in Black-Scholes, the market price for risk term basically falls out of the equation because of market completeness. Or in other words, since we have market completeness, there's a *unique* martingale measure that gives the price for the option. So when you have market completeness, there should be no difference between an equilibrium and a no-arbitrage model - they're one and the same." The best learning technique for me is not to dredge through books in order to gain a better understanding of finance.  This is tedious and causes me to lose interest.  I'm not sure of your tolerance for this type of learning.  I tend to learn in small pieces.  Something piques my interest and I go off reading about that particular topic. May I suggest some alternate methods: Just so everyone knows. A core model refers to a forecast of the Balance Sheet, income statement, and Statement of Cash Flows. From this you can solve for Free Cash Flow to Equity and solve for some more price values, like Sum of Parts. "This is the best tl;dr I could make, [original](https://jacobinmag.com/2017/10/finance-capital-shareholders-profit-market) reduced by 81%. (I'm a bot) ***** &gt; The term financialization is used all over the place, but it&amp;#039;s usually defined in a pretty circular way: financialization means &amp;quot;More finance,&amp;quot; more things controlled by finance.  &gt; The role of finance in enforcing a certain kind of policy on the state, a certain kind of logic, a certain kind of organization - whether it&amp;#039;s the bond market or whoever else we imagine here - is even more clear-cut.  &gt; To me, that&amp;#039;s a narrower, more specific, and maybe more fruitful way of thinking about financialization than just &amp;quot;There&amp;#039;s more finance.""   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/78t6so/the_disruptors_jacobin_magazine_via/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~235206 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **logic**^#1 **More**^#2 **finance**^#3 **way**^#4 **corporation**^#5" Most of stock trading occurs on what is called a secondary market. For example, Microsoft is traded on NASDAQ, which is a stock exchange. An analogy that can be made is that of selling a used car. When you sell a used car to a third person, the maker of your car is unaffected by this transaction and the same goes for stock trading. Still within the same analogy, when the car is first sold, money goes directly to the maker (actually more complicated than that but good enough for our purposes). In the case of stock trading, this is called an Initial Public Offering (IPO) / Seasoned Public Offering (SPO), for most purposes. What this means is that a drop of value on a secondary market does not directly affect earning potential. Let me add some nuance to this. Say this drop from 20$ to 10$ is permanent and this company needs to finance itself through equity (stock) in the future. It is likely that it would not be able to obtain as much financing in this matter and would either 1) have to rely more on debt and raise its cost of capital or 2) obtain less financing overall. This could potentially affect earnings through less cash available from financing. One last note: in any case, financing does not affect earnings except through cost of capital (i.e. interest paid) because it is neither revenue nor expense. Financing obtained from debt increases assets (cash) and liabilities (debt) and financing obtained from stock issuance increases assets (cash) and shareholder equity. You're looking for the amortization calculation. This calculation is essentially solving for the series of cash flows that will yield a zero balance after the specified term, at the given rate for a loan amount. Once you have solved for the payment amount, you can add additional principal amount to each payment period and see the interest payments and time to zero balance drop. **Modigliani–Miller theorem**  The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is a theorem on capital structure, arguably forming the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing stock or selling debt, the Modigliani–Miller theorem is often called the capital structure irrelevance principle.  The key Modigliani-Miller theorem was developed in a world without taxes.  ***  ^[ [^PM](https://www.reddit.com/message/compose?to=kittens_from_space) ^| [^Exclude ^me](https://reddit.com/message/compose?to=WikiTextBot&amp;message=Excludeme&amp;subject=Excludeme) ^| [^Exclude ^from ^subreddit](https://np.reddit.com/r/finance/about/banned) ^| [^FAQ ^/ ^Information](https://np.reddit.com/r/WikiTextBot/wiki/index) ^| [^Source](https://github.com/kittenswolf/WikiTextBot)   ^] ^Downvote ^to ^remove ^| ^v0.27 "I'm searching for a master's thesis topic in equity investment or portfolio management and I'd be grateful if someone could tell me what are the hot ""trends"" going on right now on the market? Any new phenomenons (like the rise of blockchain, etf... but more relate to the equity side) or debates ( the use of the traditional techniques such as Beta to calculate WACC for example ...) ?" "Not to detract from the other answers at all (which are each excellent and useful in their own right), but here's my interpretation of the ideas: Equity is the answer to the question ""Where is the value of the company coming from?""  This might include owner stakes, shareholder stock investments, or outside investments.  In the current moment, it can also be defined as ""Equity = X + Current Income - Current Expenses"" (I'll come back to X). This fits into the standard accounting model of ""Assets - Liabilities = Value (Equity)"", where Assets includes not only bank accounts, but also warehouse inventory, raw materials, etc.; Liabilities are debts, loans, shortfalls in inventory, etc.  Both are abstract categories, whereas Income and Expense are hard dollar amounts.  At the end of the year when the books balance, they should all equal out. Equity up until this point has been an abstract concept, and it's not an account in the traditional (gnucash) sense.  However, it's common practice for businesses to close the books once a year, and to consolidate outstanding balances.  When this happens, Equity ceases to be abstract and becomes a hard value: ""How much is the company worth at this moment?"", which has a definite, numeric value. When the books are opened fresh for a new business year, the Current Income and Current Expense amounts are zeroed out.  In this situation, in order for the big equation to equal out: Assets - Liabilities = X + Income - Expeneses the previous net value of the company must be accounted for.  This is where X comes in, the starting (previous year's) equity.  This allows the Assets and Liabilities to be non-zero, while the (current) Income and Expenses are both still zeroed out.  The account which represents X in gnucash is called ""Equity"", and encompasses not only initial investments, but also the net increase & decreases from previous years.  While the name would more accurately be called ""Starting Equity"", the only problem caused by the naming convention is the confusion of the concept Equity (X + Income - Expenses) with the account X, named ""Equity""." "The complete opposite of ""sunk cost"" is the term ""unrealized gain""; until you sell it, then it is a ""realized gain"". There is also a term ""paper profit"" to point out the ephemeral nature of some of these unrealized gains." "He's calculating portfolio variance. The general formula for the variance of a portfolio composed of two securities looks like this:  where w_a and w_b are the weights of each stock in the portfolio and the sigmas represent the standard deviation/risk of each asset or portfolio.  In the case of perfect positive or negative correlation, applying some algebra to the formula relating covariance to the correlation coefficient (rho, the Greek letter that looks like ""p""):  tells us that the covariance we need in the original formula is simply the product of the standard deviations and the correlation coefficient (-1 in this case).  Combining that result with our original formula yields this calculation:  Technically we've calculated the portfolio's variance and not it's standard deviation/risk, but since the square root of 0 is still 0, that doesn't matter. The Wikipedia article on Modern Portfolio Theory has a section that describes the mathematical methods I used above. The entire article is worth a read, however." Returns reported by mutual funds to shareholders, google, etc. are computed after all the funds' costs, including Therefore the returns you see on google finance are the returns you would actually have gotten. "The definition you cite is correct, but obscure. I prefer a forward looking definition. Consider the real investment. You make an original investment at some point in time. You make a series of further deposits and withdrawals at specified times.  At some point after the last deposit/withdrawal, (the ""end"") the cash value of the investment is determined. Now, find a bank account that pays interest compounded daily. Possibly it should allow overdrafts where it charges the same interest rate. Make deposits and withdrawals to/from this account that match the investment payments in amount and date.  At the ""end"" the value in this bank account is the same as the investment. The bank interest rate that makes this happen is the IRR for the investment..." The IRR is the Discount Rate r* that makes Net Present Value NPV(r*)==0. What this boils down to is two ways of making the same kind of profitability calculation.  You can choose a project with NPV(10%)>0, or you can choose based on IRR>10%, and the idea is you get to the same set of projects.  That's if everything is well behaved mathematically. But that's not the end of this story of finance, math, and alphabet soup. For investments that have multiple positive and negative cash flows, finding that r* becomes solving for the roots of a polynomial in r*, so that there can be multiple roots.  Usually people use the lowest positive root but really it only makes sense for projects where NPV(r)>0 for r<r* and NPV(r)<0 for r>r*.   To try to help with your understanding, you can evaluate a real estate project with r=10%, find the sum future discounted cash flows, which is the NPV, and do the project if NPV>0.   Or, you can take the future cash flows of a project, find the NPV as a function of the rate r, and find r* where NPV(r*)==0. That r* is the IRR.  If IRR=r*>10% and the NPV function is well behaved as above, you can also do the project. When we don't have to worry about multiple roots, the preceding two paragraphs will select the same identical sets of projects as meeting the 10% return requirement.