What Is Aktiengesellschaft (AG)?

AG is an abbreviation of Aktiengesellschaft, which is a German term for a public limited company. This type of company shares are offered to the general public and traded on a public stock exchange. Shareholders’ liability is limited to their investment. The shareholders are not responsible for the company’s debts, and their assets are protected in case the company becomes insolvent. 

Understanding Aktiengesellschaft

Aktiengesellschaft is a German term made up of words meaning share and corporation. An AG is a business owned by shareholders which may be traded on a stock marketplace. Shareholders exercise power over controlling policies at regularly scheduled general meetings. The managing board decides on all operational matters, and the supervisory board carries them out.

German companies that are publicly traded are designated as such by the letters ‘AG’ after the company name. ‘AG’ is an abbreviation for the German word Aktiengesellschaft, which literally translates to ‘stock corporation’ or ‘shares corporation’ in English. AG companies trade publicly on stock exchanges with the majority of companies trading on the DAX.

Some of the largest German AG corporations include its automotive manufacturers:

Establishing an AG

Setting up an AG requires five or more members. An Aktiengesellschaft (AG) is subject to the Stock Corporation Act. This act involves share capital of approximately $56,000, with at least half paid at registration. The business owner will enlist the services of an attorney or bank in preparing documentation for registration.

The Aktiengesellschaft’s name will come from the enterprise’s purpose and contains the word Aktiengesellschaft in its title. The articles of association include the corporation’s name, registered office, share capital, each shareholder’s contribution, and details regarding the shares. A court or notary will authenticate the articles of association. 

The required capital is deposited into a banking account, and the notarized documents and signed application submitted to the Commercial Registry Office. The AG will become a legal entity within seven days if all materials are in order. The Office will issue a certificate of registration, and publish news of the establishment in the Swiss Official Gazette of Commerce.

AG Oversight

An AG has a managing board of one or more members appointed by and reporting to, the supervisory board of three or more members. An Aktiengesellschaft (AG) with a share capital of $3 million or more has two or more managing board members. An AG employing over 500 workers will have employee representatives occupying one-third of the supervisory board. If the employee number exceeds 2,000, employee representatives will fill half of the board. Also, the articles of association may limit the number of members.

Auditors check the corporation’s financial documents. Meeting three or more of the following conditions for two or more years in a row requires an ordinary company audit: the company has more than 50 full-time employees; revenues exceed $2 million, or the balance sheet exceeds $100,000.

GMbH vs. AG

GmbH is another common business extension primarily known for its use in Germany. Like most countries, Germany has two distinct classifications for companies: publicly traded and privately held. While AG refers to public companies, the acronym ‘GmbH’ is used to designate certain private entities and is written after a company’s name. The letters stand for Gesellschaft mit beschränkter Haftung which translated literally, means a ‘company with limited liability.’

What Is Average Propensity to Consume?

Average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation.

In either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average household income, or earnings.

Understanding Average Propensity to Consume

From the broader economic view, a high average propensity to consume is generally good for the economy. When the average propensity to consume is high, consumers are saving less and spending more on goods or services. This increased demand drives economic growth, business expansion, and broad employment.

Low-income households are often seen as having a higher average propensity to consume than high-income households. Low-income households may be forced to spend their entire income on necessities with minimal disposable income remaining to save. Alternatively, high-income households with higher cash flow after their necessities are met typically have a relatively lower average propensity to consume.

Economists often gauge economy forecasts on actions by the middle-income households. The spending and savings patterns of this demographic often indicate a degree of confidence or pessimism about their own personal financial situations and the economy as a whole.

Propensity to Consume vs. Propensity to Save

The sum of the average propensity to consume and the average propensity to save is always equivalent to one. A household or a nation must either spend or save all of its income.

The inverse of the average propensity to consume is the average propensity to save (APS). That figure is simply the total of income minus spending. The result is known as the savings ratio.

Notably, the savings ratio is normally based on its percentage of disposable income, or after-tax income. An individual determining personal propensities to consume and save should probably use the disposable income figure as well for a more realistic measure.

Example of Average Propensity to Consume

Assume a nation’s economy has a gross domestic product (GDP) equivalent to its disposable income of $500 billion for the previous year. The total savings of the economy was $300 billion, and the rest was spent on goods and services.

The nation’s APS is calculated to be 0.60, or $300 billion/$500 billion. This indicates the economy allocated 60% of its disposable income to savings. The average propensity to consume is calculated to be 0.40, or (1 – 0.60). Therefore, the nation spent 40% of its GDP on goods and services.

APS can include saving for retirement, a home purchase, and other long-term investments. As such, it can be a proxy for national financial health.

Special Considerations

The marginal propensity to consume (MPC) is a related concept. It measures the change in the average propensity to consume.

Assume that the nation in the previous example increased its GDP to $700 billion and its consumption of goods and services rose to $375 billion. The economy’s average propensity to consume increased to 53.57%.

The nation’s consumption increased from $200 billion to $375 billion. Alternatively, the nation’s GDP increased from $500 billion to $700 billion. The nation’s marginal propensity to consume is 87.5% ($375 billion – $200 billion) / ($700 billion – $500 billion). The marginal propensity measures the directional trend of how an entity is utilizing its money. In this case, 87.5% of new growth was further consumed.

What Are Animal Spirits?

“Animal spirits” is a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty. In Keynes’s 1936 publication, The General Theory of Employment, Interest, and Money, he speaks of animal spirits as the human emotions that affect consumer confidence.

Today, animal spirits describe the psychological and emotional factors that drive investors to take action when faced with high levels of volatility in the capital markets. The term comes from the Latin spiritus animalis, which means “the breath that awakens the human mind.” In some ways, Keynes’ insights into human behavior predicted the rise of behavioral economics.

Understanding Animal Spirits

The technical concept of spiritus animalis can be traced as far back as 300 B.C., in the fields of human anatomy and medical physiology. There, animal spirits applied to the fluid or spirit present in sensory activities and nerve endings in the brain that resulting in mass psychological phenomena like manias or hysterias.

Animal spirits also appeared in literary culture, where they referred to states of physical courage, gaiety, and exuberance. The literary meaning implies that animal spirits can be high or low depending on an individual’s degree of health and energy.

Animal Spirits in Finance and Economics

Today in finance, the term animal spirits arise in market psychology and behavioral economics. Animal spirits represent the emotions of confidence, hope, fear, and pessimism that can affect financial decision-making, which in turn can fuel or hamper economic growth. If spirits are low, then confidence levels will be low, which will drive down a promising market—even if the market or economy fundamentals are strong. Likewise, if spirits are high, confidence among participants in the economy will be high, and market prices will soar.

The Role of Emotion in Business Decisions

According to the theory behind animal spirits, the decisions of business leaders are based on intuition and the behavior of their competitors rather than on solid analysis. Keynes understood that in times of economic upheaval, irrational thoughts might influence people as they pursue their financial self-interests.

Keynes further posited in The General Theory that trying to estimate the future yield of various industries, companies, or activities using general knowledge and available insight “amounts to little and sometimes to nothing.” He proposed that the only way people can make decisions in an uncertain environment is if animal spirits guide them.

Animal Spirits Enter the 21st Century

In 2009, the term animal spirits returned to popularity when two economists—George A. Akerlof (Nobel laureate and professor of economics at University of California) and Robert J. Shiller (professor of economics at Yale University)—published their book, Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism.

Here, the authors argue that although animal spirits are important, it is equally important that the government actively intervene to control them—via economic policymaking—when necessary. Otherwise, the authors postulate, the spirits might follow their own devices—that is, capitalism could get out of hand, and result in the kind of overindulgence that we saw in the 2008 financial crisis.

Examples of Animal Spirits

The Dotcom Bubble

Animal spirits often manifest as market psychology defined by either fear or greed. For the latter, the term “irrational exuberance” has been used to describe investor enthusiasm that drives asset prices far higher than those assets’ fundamentals justify. Simply tacking on “dotcom” to the name of a company increased its market value to extraordinary levels, with startups showing zero earnings commanding ever-higher share prices.

The crash that followed saw the Nasdaq index, which had risen five-fold between 1995 and 2000, tumble from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct 4, 2002, a 76.81% fall. By the end of 2001, most dot-com stocks had gone bust.

The Great Recession

Another example was the lead-up to the 2008-09 financial crisis and the Great Recession, when the markets were rife with financial innovations. Creative use of both new and existing financial products—like collateralized debt obligations (CDOs)—abounded, particularly in the housing market. Initially, this trend was thought to be positive, that is until the new financial instruments were found to be deceptive and fraudulent. At this point, investor confidence plummeted, a sell-off ensued, and the markets plunged. A clear case of animal spirits run amok.

Critiques of Animal Spirits

“Animal spirits” refers to the tendency for investment prices to rise and fall based on human emotion rather than intrinsic value. This theory, however, has been critiqued by some economists who argue that markets are nonetheless efficient and that individual irrationality washes out in the aggregate. The animal spirits thesis, like behavioral economics, essentially throws a monkey wrench into the assumptions of efficiency and rationality.

Other critics argue that bubbles are not the result of mass psychology, but are due to the over-involvement of central banks and too much regulation, which stymie economic growth and throw markets out of equilibrium. These arguments often stem from Austrian economic theory or libertarianism that asserts that large increases in the money supply (“printed” by governments) are the cause of bubbles and their ultimate demise by encouraging malinvestment.

What Is All Risks?

“All risks” refers to a type of insurance coverage that automatically covers any risk that the contract does not explicitly omit. For example, if an “all risk” homeowner’s policy does not expressly exclude flood coverage, then the house will be covered in the event of flood damage.

This type of policy is found only in the property-casualty market.

Understanding All Risks

Insurance providers generally offer two types of property coverage for homeowners and businesses—named perils and “all risks.” A named perils insurance contract only covers the perils stipulated explicitly in the policy.

For example, an insurance contract might specify that any home loss caused by fire or vandalism will be covered. Therefore, an insured who experiences a loss or damage caused by a flood cannot file a claim to his or her insurance provider, as a flood is not named as a peril under the insurance coverage. Under a named perils policy, the burden of proof is on the insured.

An all risks insurance contract covers the insured from all perils, except the ones specifically excluded from the list. Contrary to a named perils contract, an all risks policy does not name the risks covered, but instead, names the risks not covered. In so doing, any peril not named in the exclusions list is automatically covered.

The most common types of perils excluded from “all risks” include earthquake, war, government seizure or destruction, wear and tear, infestation, pollution, nuclear hazard, and market loss. An individual or business who requires coverage for any excluded event under “all risks” may have the option to pay an additional premium, known as a rider or floater, to have the peril included in the contract.

Burden of Proof

The trigger for coverage under an “all risks” policy is physical loss or damage to property. An insured must prove physical damage or loss has occurred before the burden of proof shifts to the insurer, who then has to prove that an exclusion applies to the coverage.

For example, a small business that experienced a power outage may file a claim citing physical loss. The insurance company, on the other hand, might reject the claim stating that the company experienced a loss of income from a mere loss of property use, which is not the same thing as a physical loss of property.

Special Considerations

Because “all risks” is the most comprehensive type of coverage available and protects the insured from a greater number of possible loss events, it is priced proportionately higher than other types of policies. The cost of this type of insurance should, therefore, be measured against the probability of a claim.

It is possible to have named perils and “all risks” in the same policy. For example, an insured may have a property insurance policy that has all risks coverage on the building and named perils on his personal property. Everyone should read the fine print of any insurance agreement to ensure that they understand what is excluded in the policy.

Also, just because an insurance policy is termed “all risks” does not mean that it covers “all risks” since the exclusions reduce the level of coverage that is offered. Make sure you look for the exclusions in any prospective policy.

The Bottom Line

All risk insurance, also called all risk coverage, is an insurance product that covers any incident that isn’t explicitly mentioned. These policies assume a good deal of risk for the insurer and are less common than named risk coverage, which states exactly what is covered, versus stating only what is to be omitted (which is the case with all risk).