suneetk/investopedia_terms huggingface dataset:
# What Is an Open Offer? Definition, Vs. Rights Issue

An open offer is a [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp) offering, similar to a rights issue. In an open offer, a shareholder is allowed to purchase stock at a price that is lower than the current [market price](https://www.investopedia.com/terms/m/market-price.asp). The purpose of such an offer is to raise cash for the company efficiently.

## Understanding Open Offer

An open offer differs from a [rights issue (offering)](https://www.investopedia.com/terms/r/rightsoffering.asp) in that investors are unable to sell the rights that come with their purchases to other parties. In a traditional rights issue, the trading of transferable rights, connected with shares, occurs on the [exchange](https://www.investopedia.com/financial-edge/1212/stock-exchanges-around-the-world.aspx) that currently lists the issuer's common stock (e.g., NYSE or Nasdaq). These can also be listed over the counter (OTC). Some investors see a secondary market offering as a harbinger of bad news as it causes stock [dilution](https://www.investopedia.com/terms/d/dilution.asp). Also, the open offer could signal that the company stock is currently overvalued.

In both a rights issue and open offer, a company allows existing shareholders to purchase additional shares directly from the company in proportion to what they currently own. This is to prevent dilution to existing shareholders. Given the lack of dilution, in contrast with traditional equity issues and secondary offerings, such an issue does not require shareholder approval. This is if the issue is less than 20% of the total shares outstanding.

## Similarities Between a Rights Issue and an Open Offer

Both a rights issue and open offer opportunity generally last for a fixed time period, often 16-30 days. This begins on the day the issuer’s registration statement for the rights offering becomes effective. No federal securities laws mandate a specific time period for a rights issue, however. With both rights issues and open offers, if an investor lets the time period for the opportunity expire, she will not receive any cash.

While rights issues are often also priced at a [subscription](https://www.investopedia.com/terms/s/subscription-price.asp) below the current market price – as with an open offer – these rights are transferable to external investors. Other types of traditional rights issues include a direct rights issue and insured rights offering (also called a standby rights offering). To prepare for any rights offering an issuer must provide official documentation to shareholders, along with marketing materials. The issuer must obtain the exercise certificates and payment from shareholders and file the required Securities and Exchange Commission (SEC) and exchange documentation. (These are key steps but not a comprehensive set as all issues differ.)
# Original Cost: Definition, How It Works, and Example Caculation

## What Is Original Cost?

Original cost is the total price associated with the purchase of an asset. The original cost of an asset takes into consideration all of the items that can be attributed to its purchase and to putting the asset to use. These costs include the purchase price and such factors as [commissions](https://www.investopedia.com/terms/c/commission.asp), transportation, [appraisals](https://www.investopedia.com/terms/a/appraisal.asp), warranties and installation and testing. Original cost can be used to value an asset type, including equipment, [real estate](https://www.investopedia.com/terms/r/realestate.asp) and security instruments.

Original cost is also known as an asset's [cost basis](https://www.investopedia.com/terms/c/costbasis.asp) for tax purposes.

## Understanding Original Cost

Original cost includes all quantifiable facets of a [purchased asset](https://www.investopedia.com/terms/f/ffe.asp). For example, a company purchases of a piece of equipment with a price tag of $20,000. The purchase also involves $1,000 in fees, $700 in shipping and delivery costs, and $3,000 for installation and warranty. The original cost of this piece of equipment would be $20,000 + $1,000 + $700 + $3,000 = $24,700. Also known as [historical cost](https://www.investopedia.com/terms/h/historical-cost.asp), a common term in generally accepted accounting principles ([GAAP](https://www.investopedia.com/terms/g/gaap.asp)), this is the original cost recorded on the balance sheet. The balance sheet and notes to financial statements will separate historical cost [property, plant and equipment (PP&E)](https://www.investopedia.com/terms/p/ppe.asp) and accumulated depreciation of these long-term assets. The difference is known as carrying value.

## Original Cost and Depreciation

Determining an asset's original cost is important in calculating the asset's tax basis. The original cost of an asset encompasses more than the asset's purchase price, and the costs added together can reduce the potential [taxable gain](https://www.investopedia.com/terms/t/taxablegain.asp) on the sale of the asset. The tax basis can be calculated by taking the original cost and subtracting the [accumulated depreciation](https://www.investopedia.com/terms/a/accumulated-depreciation.asp) of the asset.

For the piece of equipment above, suppose accumulated depreciation is $14,700. The carrying value on the company's books would be $10,000 ($24,700 original cost less $14,700 accumulated depreciation). If the company sells the asset for $15,000, it would record a gain on asset sale of $5,000.
# Outcome Bias: What it Means, How it Works

> **Definition**
>
> Outcome bias is a cognitive bias where decisions are based on the results of past events, rather than on the processes and factors that led to those outcomes.

## What Is Outcome Bias?

Outcome bias arises when a decision is based on the outcome of previous events, without regard to how the past events developed. Outcome bias does not involve analysis of factors that lead to a previous event, and instead de-emphasizes the events preceding the outcomes and overemphasizes the outcome. Unlike [hindsight bias](https://www.investopedia.com/terms/h/hindsight-bias.asp), outcome bias does not involve the distortion of past events.

## Understanding Outcome Bias

Outcome bias can be more dangerous than hindsight bias in that it only evaluates actual outcomes. For example, an investor decides to invest in real estate after learning a colleague made a big return on an investment in real estate when interest rates were at a different level. Rather than look at other factors that could have resulted in the colleague’s success, such as the health of the overall economy or performance of real estate, the investor is focusing on the money made by the colleague.

Gamblers also fall prey to outcome bias. While statistically, casinos come out ahead far more regularly, many gamblers use anecdotal "evidence" from friends and acquaintances to justify their continued playing. This outcome bias: that continuing to play could result in winning a large amount of money prevents the gambler from leaving the casino.

In business settings, an overemphasis on "performance" is increasingly creating an outcome-centric culture which often exacerbates people’s fears by creating up a zero-sum game in which people are either succeeding or losing and “winners” quickly get weeded out from “losers.”

As an example, few would argue with the impressive growth of social media companies. During this growth, only a handful of individuals cautioned against the methods by which growth was generated. Upon learning personal and private user data was a significant driver of growth, the outcome bias of social media is on full display. In effect, ethical lapses are generally overlooked during successful outcomes. However, bad outcomes are far more likely to [produce](https://www.hbs.edu/faculty/Publication%20Files/08-080_1751f2c7-abe2-402b-9959-1d8190ebf62a.pdf) active condemnation.
# Overallotment: Definition, Purpose, and Example

> **Definition**
>
> An overallotment, or greenshoe option, is a provision that allows underwriters to sell up to 15% more shares than initially planned during an IPO or follow-on offering to meet high demand or stabilize prices.

## What Is an Overallotment?

An overallotment is an option commonly available to [underwriters](https://www.investopedia.com/terms/u/underwriter.asp) that allows the sale of additional shares that a company plans to issue in an [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) or secondary/follow-on offering. An overallotment option allows underwriters to issue as many as 15% more shares than originally planned. The option can be exercised within 30 days of the offering, and it does not have to be exercised on the same day.

It is also called a "[greenshoe option](https://www.investopedia.com/terms/g/greenshoe.asp)."

## Overallotment Explained

The underwriters of such an offering may elect to exercise the overallotment option when demand for shares is high and shares are trading above the [offering price](https://www.investopedia.com/terms/o/offeringprice.asp). This scenario allows the issuing company to raise additional capital.

Other times, the purpose of issuing extra shares is to stabilize the price of the stock and prevent it from going below the offering price. If the stock price drops below the offering price, the underwriters can buy back some of the shares for less than they were sold for, decreasing the supply and hopefully increasing the price. If the stock rises above the offering price, the overallotment agreement allows the underwriters to buy back the excess shares at the offering price, so that they don't lose money.

## Example of an Overallotment

In March 2017, Snap Inc. offered 200 million shares at $17.00 per share in a much-anticipated IPO. Shortly after placing the original 200 million shares, the underwriters exercised their overallotment option to push another 30 million shares in the market.﻿﻿

> **Article Sources**
>
> 1.  S&P Global. "[Underwriters exercise option in Snap IPO](https://www.spglobal.com/marketintelligence/en/news-insights/trending/wyjyfrrhn9axm-eq9wbsng2)." Accessed Dec. 6, 2020.
# Overhead Ratio: Meaning, Formula, How it Works

![Overhead Ratio](https://www.investopedia.com/thmb/fV9LbBkQ4le6fIpXRwfY86NNxUo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/final7-f96c6229fadf452b9afe937ace71b912.jpg)

*— Investopedia / Jake Shi*

## What Is an Overhead Ratio?

An overhead ratio is a measurement of the operating costs of doing business compared to the company's income. A low overhead ratio indicates that a company is minimizing business expenses that are not directly related to production.

## The Formula for the Overhead Ratio Is

The overhead ratio is arrived at by dividing operating expenses by the sum of taxable [net interest income](https://www.investopedia.com/terms/n/net-interest-income.asp) and operating income. That is:

﻿ $\begin{aligned} &\text{Overhead Ratio} = \frac { \text{Operating Expenses} }{ \text{TII} + \text{Operating Income} } \\ &\textbf{where:} \\ &\text{TII} = \text{Taxable interest income} \\ \end{aligned}$﻿

## The Basics of Overhead Ratios

A company's overhead expenses are the costs that result from its normal, day-to-day business operations. Operating expenses might include office rent, advertising, utilities, insurance, [depreciation](https://www.investopedia.com/terms/d/depreciation.asp), or machinery.

Calculations of overhead exclude costs that are directly related to the production of the goods or services that the company produces.

Thus, in a toy factory, the skilled workers who make the toys and the tools they use to create them are not overhead expenses. But employees of the marketing department and the promotional materials they produce are overhead costs.

### Key Takeaways

*   An overhead ratio is a measurement of the operating costs of doing business compared to the company's income.
*   A low overhead ratio indicates that a company is minimizing business expenses that are not directly related to production.
*   Calculating its overhead ratio helps a company evaluate its costs of doing business compared to the income the business is generating.

## How Overhead Ratios Are Used

Calculating its overhead ratio helps a company evaluate its costs of doing business compared to the income the business is generating. In general, a company strives to achieve the lowest operating expenses possible without sacrificing the quality or competitiveness of its goods or services.

A company also may keep track of its overhead ratio in order to compare it to others in its industry, or its industry as a whole. A higher overhead ratio in comparison to the competition might require some adjustment or at least a rational explanation. For example, a company might determine that maintaining its headquarters in Manhattan or San Francisco has caused it to have a higher overhead ratio than a competitor located in Omaha or Akron.

Cutting expenses has a positive effect on the overhead ratio. However, a company must balance the effect of these cuts with any potential damage to the products or services it sells.
# Political Risk

## What is Political Risk

Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting [investment](https://www.investopedia.com/terms/i/investment.asp) returns could stem from a change in government, legislative bodies, other foreign policymakers or military control. Political risk is also known as "geopolitical risk," and becomes more of a factor as the [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp) of investment gets longer. They are considered a type of [jurisdiction risk](https://www.investopedia.com/terms/j/jurisdiction-risk.asp).

## BREAKING DOWN Political Risk

Political risks are notoriously hard to quantify because there are limited sample sizes or case studies when discussing an individual nation. Some political risks can be insured against through international agencies or other government bodies. The outcome of political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment.

## Types of Political Risks

Aside from business factors arising from the marketplace, businesses are also impacted by political decisions. There are a variety of decisions governments make that can affect individual businesses, industries, and the overall economy. These include taxes, spending, regulation, currency valuation, trade tariffs, labor laws such as the minimum wage, and environmental regulations. The laws, even if just proposed, can have an impact. Regulations can be set at all levels of government, including federal, state and local, as well as in other countries.

Some of the political risks may be found in a company's filings with the Securities and Exchange Commission (SEC) or a prospectus if it is a mutual fund.

## Insuring Against Political Risks

Companies that operate internationally, known as multinational businesses, can [purchase political risk insurance](https://www.investopedia.com/ask/answers/06/politicalrisk.asp) to remove or mitigate certain political risks. This allows management and investors to concentrate on the business fundamentals while knowing losses from political risks are avoided or limited. Typical actions covered include war and terrorism.

## An Example

Wal-Mart Stores Inc. outlined certain political risks it faces in its fiscal 2015 10-K filing with the SEC under its operating risk section. In its risks associated with suppliers, Wal-Mart mentioned potential political and economic instability in the countries that foreign suppliers operate, labor problems, and foreign trade policies and tariffs that could be imposed.

In its regulatory, compliance, reputational and other risks section, the company outlines risk associated with legislative, judicial, regulatory and political/economic risks. Risk factors mentioned include political instability, legal and regulatory constraints, local product safety and environmental laws, tax regulations, local labor laws, trade policies, and currency regulations. Wal-Mart mentioned Brazil specifically, and the complexity of its federal, state and local laws.
# What Is Portfolio Runoff? Definition, How It Works, and Examples

> **Definition**
>
> Portfolio runoff occurs when a portfolio's fixed-term investment assets decline because the proceeds from maturing securities aren’t reinvested.

## What Is Portfolio Runoff?

Portfolio runoff means assets with a finite term are not replaced as they mature.

When the principal invested in a [fixed-income security](https://www.investopedia.com/terms/f/fixed-incomesecurity.asp) with a set maturity is repaid, the investor must decide whether to reinvest it. When the proceeds from matured bonds are not reinvested, a portfolio can be said to be in runoff.

### Key Takeaways

*   Portfolio runoff describes a decline in fixed-term investment assets.
*   Portfolio runoff can occur when proceeds from maturing fixed-term securities are not reinvested.
*   Investment returns decline over time in a portfolio runoff as the asset base generating returns shrinks.
*   Portfolio runoff can allow the Federal Reserve to reduce its balance sheet without selling holdings.

## Balance Sheet Runoff

For a bank or lender, portfolio runoff can occur if it can't make new loans quickly enough to replace the repaid ones it made previously. Runoff can also occur when early prepayments are allowed or as defaults occur.

> **Fast Fact**
>
> Banks can experience runoff when individuals and businesses withdraw capital to invest in other higher-paying investments, thereby reducing the bank's total capital.

In an effort to reduce portfolio runoff, some loans specify [prepayment penalties](https://www.investopedia.com/terms/p/prepaymentpenalty.asp). These provide additional compensation for the lender if the borrower pays off a loan before the end of its term.

## Runoff in Investment Portfolios

Fixed-income investments like [asset-backed securities (ABS)](https://www.investopedia.com/terms/a/asset-backedsecurity.asp) and [mortgage-backed securities (MBS)](https://www.investopedia.com/terms/m/mbs.asp), usually have a fixed maturity date. For MBS, it would be based on the term of [mortgages](https://www.investopedia.com/terms/m/mortgage.asp) bundled to make up the security.

If cash flow from mortgage-backed securities is not reinvested, the income the portfolio generates will decline.

## Federal Reserve Actions

The [Federal Reserve](https://www.investopedia.com/terms/f/federalreservesystem.asp) bought Treasury debt and mortgage-backed securities in [quantitative easing (QE)](https://www.investopedia.com/terms/q/quantitative-easing.asp) programs adopted following the 2008 financial crisis.

To start reducing its balance sheet the Fed doesn't need to sell those securities; it can merely choose not to reinvest some or all of the proceeds as the debt matures and is repaid.  

## Insurance Portfolio Runoff

Just as a fixed-income investor may choose not to reinvest coupon payments or principal repayments, a [reinsurer](https://www.investopedia.com/terms/r/reinsurer.asp) may choose not to write new policies while waiting for those it previously wrote to expire. Its portfolio would then be in runoff.
# Purchase Price In Finance: Effect on Capital Gains

## What Is the Purchase Price?

The purchase price is the price an investor pays for an investment, and the price becomes the investor’s [cost basis](https://www.investopedia.com/terms/c/costbasis.asp) for calculating gain or loss when selling the investment. The purchase price includes any [commission](https://www.investopedia.com/terms/c/commission.asp) or sales charges paid for the investment, and the weighted average cost is used for multiple purchases of the same security.

## Understanding Purchase Price

Assume, for example, an investor buys 100 shares of Ford common stock on three different dates over a five-year period, including 100 shares purchased at a market price of $40, $60 and $80 per share. To determine the cost basis of the purchases, the investor needs to calculate the weighted average cost, which is the total dollar amount of the purchases divided by the number of shares purchased.

At 100 shares each, the dollar amounts of Ford stock purchases are $4,000, $6,000, and $8,000, or a total of $18,000, and the purchase total is divided by 300 shares to equal $60 per share. If the investor adds to the stock position, they can calculate a new weighted average price by adding the dollar amount of the new purchases and the additional shares to the calculation.

The formula can also be adjusted for stock sales if the investor only sells a portion of the holdings. With commission costs added, the investor’s weighted average cost might approximate $62 per share.

## The Differences Between Realized and Unrealized Gains

Investors use the purchase price of an investment to calculate [realized gains](https://www.investopedia.com/terms/r/realizedprofit.asp) or losses for tax purposes, and they report that activity on [Schedule D](https://www.investopedia.com/terms/s/scheduled.asp) of IRS form 1040. An investor reports a realized gain if they sell some or all of their investment holdings. If they sell no securities, the investor has an unrealized gain or loss, which is not reported for tax purposes.

Assume, for example, an investor sells 100 shares of Ford stock at a sale price of $80 per share and uses the weighted average cost of $62 to calculate a realized gain of $18 per share. The investor reports the number of shares, along with the weighted average cost and the sale price per share, on Schedule D. The total realized gain of $1,800 is long term because the investor held the shares for over one year. The $1,800 long-term capital gain is offset by any capital losses, and the net gain is taxable using [capital gains tax](https://www.investopedia.com/terms/c/capital_gains_tax.asp) rates.