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Main Dictionary C

Consolidation

Consolidation, in technical analysis and trading, is a process when security prices move up and down in a distinct range of levels. It is usually represented by rhythmic but short rising and falling of the price, never going out of the pattern levels, which typically indicates a period of indecisiveness in the market. This period of consolidation ends when the price finally leaves the corridor and breaches an upper or lower level, that usually happens after the news release presenting facts affecting the assets or securities in question.

Consolidation in business mainly refers to the process of combining financial resources and instruments of two or more organizations into one, or uniting several entities into a larger organization via processes of mergers or acquisitions.

When talking about accounting, consolidation describes assembling financial statements in a group of companies, resulting in a shared financial report of a parent company and the subsidiaries. In this assembled statement, their financial activities are presented as belonging to one entity. Inner transactions between the parent company and the subsidiaries aren’t reflected in consolidated financial statements because it overviews only the organization’s economic dealings with the unrelated entities.

Periods of Consolidation and their meaning for traders

When there is indecisiveness in the market, there aren’t strong fluctuations of the prices. The change of prices is rather moderate, with a distinct upper level above which the price never goes up, and a lower level, that is never crossed as well during a period of consolidation. So, the price moves within these levels while there are no changes in the market, and this period of consolidation may last for several days, weeks, months, until a trigger event happens. A trigger event might be a news release revealing new crucial information concerning the asset in question, or execution of a large amount of limit orders in a short period of time.

An upper level of a range, withing which the price moves during a period of consolidation, is called a resistance level. The lower level of that range is called a support level. Traders and analytics observe the price movements, define those levels. If one of these levels is breached, it serves as a signal to buy or sell the asset because when the period of consolidation finishes the volatility in the market, especially for the given position, rapidly increases and creates possibilities to gain profits, although it brings new risks at the same time. Traditionally, it’s considered that if the price rises above the resistance level, it will continue to grow further. And, accordingly, if it falls below the supportive level, it will likely go even lower.

Consolidation in accounting

As it has been stated above, consolidation in accounting refers to the process of combining and presenting financial statements of a group of companies as a single statement of one entity. To use consolidated financial statements, a parent company must have control over more than 50% of a subsidiary or own it completely.

In consolidated financial statements, a company’s assets and liabilities converted in accordance with their fair market value are presented. If there’s a difference between the net assets fair market value and their actual price paid by the parent company, this difference is transferred to a goodwill asset account and then to an expense account after a while.

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