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https://www.investopedia.com/terms/t/trader.asp

What Is a Trader, and What Do Traders Do?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-the-definition-of-a-trader"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> The Definition of a Trader </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A trader is an individual who engages in the buying and selling of assets in any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-market.asp">financial market</a>, either for themself or on behalf of another person or institution. The main difference between a trader and an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investor</a> is the duration for which the person holds the asset. Investors tend to have a longer-term <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timehorizon.asp">time horizon</a>, while traders tend to hold assets for much shorter periods to <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalize.asp">capitalize</a> on short-term trends. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Traders are individuals who engage in the short-term buying and selling of a financial asset for themselves or an institution such as a bank, brokerage firm, or hedge fund.</li><li>Traders use a variety of strategies to generate profits, including scalping, day trading, and swing trading.</li><li>Traders can be contrasted with investors, who seek long-term capital gains rather than short-term profits.</li></ul></div></div></div> <span class="heading-toc" id="toc-the-role-of-a-trader"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> The Role of a Trader </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The main objective of a trader is to generate profits by buying at a low price and selling at a higher price. What they buy and sell are financial assets that include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stocks</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currencypair.asp">currencies</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodities</a>, and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a>. The profit generation is achieved through various approaches such as <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050515/it-better-use-fundamental-analysis-technical-analysis-or-quantitative-analysis-evaluate-longterm.asp">fundamental, technical and quantitative analyses</a>, which aid in identifying market trends and opportunities.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Traders also manage risks associated with their profession, including market risk, credit risk, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/11/understanding-liquidity-risk.asp">liquidity risk</a>. They may use <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/hedging-beginners-guide/">hedging</a> strategies to mitigate these risks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_11-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_12-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Traders play a critical role in providing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> to financial markets. Their activities are essential for the smooth functioning of financial markets and the allocation of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a> to productive uses.<br/></p></div></div></div> <span class="heading-toc" id="toc-skill-requirements-of-traders"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Skill Requirements of Traders </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Traders need to possess several quantitative and qualitative skills to be successful. The skills are a combination of technical, analytical, and behavioral qualities. It is a prerequisite for traders to be experts of the financial markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Traders need to have a deep understanding of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetclasses.asp">asset classes</a>, market dynamics, and various strategies in these markets. Traders have to be analytical. They need to figure out how to process large amounts of data quickly and correctly to make informed decisions about the financial markets in which they trade. Numeracy skills are also important. Traders have to be able to calculate complex financial problems.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Traders also need to be masters of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskmanagement.asp">risk management</a>. They must constantly monitor their current and potential positions to ensure that the risks they take are optimal. Traders must effectively use their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stop-lossorder.asp">stop-loss</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitorder.asp">limit</a> orders to maintain profitability and margins. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Communication is also a key skill for a trader. Their colleagues, clients, bosses, and other stakeholders need to quickly and effectively understand what their trader is saying so that they can make informed decisions. Finally, traders should have high emotional intelligence. Trading is an intense profession, and traders need to effectively manage their emotions in a highly stressful environment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-trading-strategies"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Trading Strategies </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Traders employ many strategies to produce and maintain profitability. Some of these strategies include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/scalping.asp">scalping</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/052815/pros-cons-day-trading-vs-swing-trading.asp">day trading, swing trading</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eventdriven.asp">event trading</a>, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/positiontrader.asp">position trading</a>. It should be noted that no trading strategy is foolproof; there are advantages and disadvantages to any trading strategy. Traders also consider risks when employing their strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Scalping </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Scalping entails the buying and selling of financial instruments such as stocks, futures, currencies, and commodities in quick succession, with the goal of producing small gains on the positions. Scalpers attempt to profit from short-term price movements. The time frame that scalp traders hold positions ranges from seconds to minutes. The risk in scalping lies in the quick generation of successive losses rather than gains.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Day Trading </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The strategy of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/05/011705.asp">day trading</a> involves taking positions in financial assets such as stocks, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures</a>, currencies, and commodities within the same trading day. Day traders tend to hold an abundance of trades over minutes and hours, as they maneuver their transactions through changing market conditions. They tend to amplify their trades through <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leveraged</a> positions. The use of leverage poses an additional risk for day traders.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> Swing Trading </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swingtrading.asp">Swing trading</a> involves profiting from short- to medium-term price movements in various financial instruments such as stocks, futures, currencies, or commodities. Unlike scalpers and day traders, swing traders hold their positions for longer time periods. This can be for several days, weeks, or even months and is dependent on the asset, the trend, and the other existing positions of the swing trader. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Generally, swing trading is considered to be less risky than scalping or day trading because swing traders have more time to make decisions. Nonetheless, there are risks involved. News or events can affect the price trends of the swing trader’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-subheading__text"> Event Trading </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The strategy of event trading entails profiting from short-term price movements triggered from a specific economic or financial event such as mergers or acquisitions, earnings releases, regulatory decisions, inflation data, labor market data, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product (GDP)</a> data. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Event traders need to execute their positions quickly, seconds before the data release, to profit from the position. Also, event traders tend to use leverage to amplify their profits. The use of leverage comes with additional risks to the strategy.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-subheading__text"> Position Trading </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> A position trader or a position trading firm is an individual or entity that buys financial assets for the long term. These professionals hold positions for weeks, months, or even years. The time frame of holding the position is highly dependent on the position trader’s investment thesis as well as the economic and financial market outlook. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>With the longer-term view, position trading is considered to be less risky than the other short-term trading strategies, as these traders have more time to endure the short-term price fluctuations.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div> <span class="heading-toc" id="toc-places-where-traders-perform-their-duties"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> Places Where Traders Perform Their Duties </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Traders tend to work in a variety of places. Those traders who work for themselves may have a home office or may rent one. If that isn’t the case, traders will have roles in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentbank.asp">investment banks</a>, brokerage firms, proprietary trading firms, asset management firms, hedge funds, or exchanges. Traders may work in the physical office or remotely, depending on the nature of the trading activity and the firm’s policies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <span class="heading-toc" id="toc-trader-operations-institution-vs-own-account"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> Trader Operations: Institution vs. Own Account </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Many large financial institutions have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/022416/different-trading-desks-investment-bank.asp">trading rooms</a> where traders are employees who buy and sell a wide range of products on behalf of the company. Each trader is given a limit as to how large of a position they can take, the position’s maximum maturity, and how much of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marktomarket.asp">mark-to-market</a> loss they can have before a position must be closed out. The company has the underlying risk and keeps most of the profit; the trader receives a salary and bonuses. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> On the other hand. most people who trade on their own account work from home or in a small office, and they often use a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountbroker.asp">discount broker</a> and electronic trading platforms. Their limits are dependent on their own cash and credit, but they will often keep all profits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-discount-brokers-an-important-resource-for-traders"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> Discount Brokers: An Important Resource for Traders </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Discount brokerage firms charge significantly lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commission-broker.asp">commissions</a> per transaction but provide little or no financial advice. Individuals can’t trade directly on a stock or commodity exchange on their own account, so using a discount broker is a cost-effective way to gain access to the markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_57-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_58-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Many discount brokers offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaccount.asp">margin accounts</a>, which let traders borrow money from the broker to buy assets. This increases the size of the positions they can take but also increases the potential loss.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Foreign exchange trading platforms match currency buyers and <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seller.asp">sellers</a> in the spot, forward, and options markets. They sharply increase the amount of price information available to individual traders, thus narrowing price spreads and reducing commissions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <span class="heading-toc" id="toc-the-type-of-information-that-traders-use"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-heading__text"> The Type of Information That Traders Use </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Traders use a variety of techniques to source information. This is essential to make informed decisions and be profitable in their activities. The types of information that traders access include fundamental, technical, or market timing, noise, and sentiment. With this information, traders can even develop a contrarian view or find <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/04/111004.asp">arbitrage</a> opportunities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_64-0"> <span class="mntl-sc-block-subheading__text"> Fundamental Information </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Fundamental information, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fundamental/03/022603.asp">fundamentals</a>, refers to data that provide insights into the underlying intrinsic value of the financial asset, such as a stock, bond, future, currency, or commodity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_67-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_68-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Fundamentals are generally gleaned from economic, industry-specific, and financial data and include economic data, industry trends, company news and events, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-statement-analysis.asp">financial statements</a>.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_69-0"> <span class="mntl-sc-block-subheading__text"> Technical and Market-Timing Information </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> When using technical and market-timing information, traders analyze past and current market data to spot patterns and trends. This is to anticipate future price movements in assets such as stocks, bonds, futures, currencies, or commodities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Traders use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> and other market-timing information to identify buying and selling opportunities. They use charting techniques and momentum indicators such as moving averages and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oscillator.asp">oscillators</a> to accomplish this. Examples of market-timing information include economic and financial releases, as well as market sentiment indicators. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_74-0"> <span class="mntl-sc-block-subheading__text"> Noise Trading </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/noisetrader.asp">Noise trading</a> involves making decisions on factors that seem to be helpful but would usually generate profits equivalent to a random choice. Some of these factors can include rumors, gossip, or emotions. Noise can create market imbalances that rational traders can profit from. Also, noise traders are often associated with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailinvestor.asp">retail</a> or inexperienced investors who lack the necessary tools to profit from trading. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-subheading__text"> Sentiment </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketsentiment.asp">Sentiment</a> refers to the overall view of financial market participants. This can be bullish, neutral, or bearish. These views can be toward the financial markets or various assets such as stocks, currencies, or commodities. Market sentiment can be attributed to factors such as economic and financial data, geopolitical events, or company news. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Sentiment indicators are based on data comprising trading volume, price movements, and news coverage of financial instruments or markets. Sentiment is also developed through the quantification of surveys or polls. The data helps to gauge the level of optimism or pessimism in the financial markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-subheading__text"> Contrarian Trading </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contrarian.asp">Contrarian</a> trading involves analyzing market conditions and taking an opposing side of the prevailing consensus view of the financial markets. This is based on the premise that market participants often overreact to events, leading to significant price movements in financial markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Contrarian traders identify <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/121214/what-are-best-indicators-identify-overbought-and-oversold-stocks.asp">overbought or oversold</a> conditions in conjunction with trend reversals. High conviction in the trades are required, as the contrarian view by its very definition is often unpopular. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_87-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_88-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_6-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_6-0"><p>Successful contrarian traders employ a rigorous analytical process to identify potential opportunities and carefully manage risks to avoid significant losses.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-subheading__text"> Arbitrage </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrage.asp">Arbitrage</a> refers to exploiting price discrepancies between two or more instruments or markets. The assumption calls for taking advantage of mispricing in different markets, buying an asset in one market at a lower price and selling the same asset in another market at a higher price, producing a profit. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> These opportunities can occur in stocks, bonds, currencies, and commodities over different exchanges or geographical regions. Arbitrage occurs because of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inefficientmarket.asp">market inefficiencies</a> or temporary imbalances in supply and demand.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <span class="heading-toc" id="toc-becoming-a-trader"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_94-0"> <span class="mntl-sc-block-heading__text"> Becoming a Trader </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> Earning a role as a trader in the financial markets can involve a significant amount of preparation, including education, training, and licensing. Most entry-level trading jobs require at least a bachelor's degree, with employers often seeking graduates who have majored in business, economics, and accounting. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mba.asp">master's in business administration (MBA)</a> may be an important qualification for higher-level positions at trading firms.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> Companies that hire traders generally offer employee training programs that focus on the business and the particular types of assets sold by the firm. Brokers and investment bankers working with registered firms must obtain a license from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/finra.asp">Financial Industry Regulatory Authority (FINRA)</a>, which involves passing a series of examinations to verify their knowledge of the financial markets. Additional professional certifications such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfa.asp">Chartered Financial Analyst (CFA)</a> designation and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/professionaleducation/10/market-technicians-association.asp">Chartered Market Technician (CMT)</a> designation may expand a trader's opportunities and chances for career advancement.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div> <span class="heading-toc" id="toc-salary-and-employment-outlook"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_99-0"> <span class="mntl-sc-block-heading__text"> Salary and Employment Outlook </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Many people may be interested in working as a trader because of the possibility of earning a substantial paycheck. For traders working on their own behalf, generating income will depend on implementing a successful trading strategy and effectively managing risk. Meanwhile, traders working for financial firms may earn a base salary with the potential for a substantial bonus based on their performance.<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> According to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bls.asp">U.S. Bureau of Labor Statistics (BLS)</a>, as of May 2021, the median annual wage came to $62,910 for securities, commodities, and financial services sales agents—a broader category that includes many traders. Those working specifically in securities, commodity contracts, and other financial investments and related activities earn a median annual wage of $98,030.<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> If that level of income seems attractive, there is good news about the employment outlook for the industry, as predictions call for a healthy availability of jobs over the coming years. The BLS estimates that employment for securities, commodities, and financial services sales agents will grow 10% from 2021 to 2031, exceeding the average for all occupations. While competition for these positions may be intense given the necessary skills involved, the BLS estimates that 46,600 job openings per year in this area over the decade.<span class="ql-inline-citation" data-cite="12"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_106-0"><span class="heading-toc" id="toc-why-is-trading-important-in-finance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why is trading important in finance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are several reasons why trading is important in finance. Trading in financial instruments produces price discovery, generates liquidity, brings out capital flows, and aids in price efficiency. Through trading, market participants converge toward the fair value of financial assets. Also, with trading, liquidity is generated, enabling the quick transfer of stocks, bonds, futures, commodities, and currencies.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_108-0"><span class="heading-toc" id="toc-what-is-the-difference-between-trading-and-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the difference between trading and investing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are two major approaches to the financial markets: trading and investing. While they share some similarities, trading and investing differ in terms of time horizon, risk tolerance, and investment style, as well as approach. Trading is short-term in nature, while investing is long-term in nature. With investing, a more passive approach is taken. Investors will adjust their portfolios occasionally to reflect their long-term goals. Trading is much more active, with the frequent buying and selling of securities.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_110-0"><span class="heading-toc" id="toc-what-are-the-asset-types-for-traders"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the asset types for traders?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Stocks, bonds, currencies or foreign exchange, options, futures, commodities, cryptocurrencies, and exchange-traded funds (ETFs) are the most common type of assets that are traded. The asset class is dependent on the traders’ preference, expertise, and the market in which they operate. Also, traders can choose to specialize in one asset class or more, depending on their goals and skills.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_112-0"><span class="heading-toc" id="toc-what-are-the-benefits-of-being-a-trader"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the benefits of being a trader?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are several potential benefits of being a trader. Traders have a high propensity to generate earnings. Traders tend to work in a fast-paced and exciting environment. This would appeal to people who like being in a highly dynamic space. Traders can have the flexibility to work remotely and work nonstandard hours. Traders gain significant exposure to the financial markets, as they have to actively and closely monitor them along with the factors that drive the respective markets.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_114-0"><span class="heading-toc" id="toc-what-are-the-limitations-of-being-a-trader"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the limitations of being a trader?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In any role, there are advantages and disadvantages. For traders, there are a handful of limitations. Trading can be a high-stress and competitive profession, which isn’t suitable for everyone. There is also a risk of financial loss. Moreover, traders work long hours. When markets are in a downturn, there is a high potential for traders to lose their jobs. To be a successful trader, people often need to attain specialized education, training, and experience, which can be time-consuming and expensive.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_116-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> Trading is a highly skilled profession that provides price discovery and liquidity in a multitude of financial markets, including stocks, bonds, currencies, commodities, or derivatives. Traders can either be entrepreneurs or work for investment banks, hedge funds, or proprietary trading firms. Also, they use various strategies and tools to look for opportunities as well as to exploit market inefficiencies or mispricing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> To gain an edge, traders analyze market data and news, as well as economic and financial indicators. Also, traders may use technical analysis, quantitative models, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/algorithm.asp">algorithms</a> to execute their orders. Traders need to have strong analytical, quantitative, and problem-solving skills. Beyond that, they need to be able to manage risks and work under pressure. Successful traders can make huge sums of money, but trading is also associated with sizable risk and potential losses. </p></div>

## The Definition of a Trader A trader is an individual who engages in the buying and selling of assets in any [financial market](https://www.investopedia.com/terms/f/financial-market.asp), either for themself or on behalf of another person or institution. The main difference between a trader and an [investor](https://www.investopedia.com/terms/i/investor.asp) is the duration for which the person holds the asset. Investors tend to have a longer-term [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp), while traders tend to hold assets for much shorter periods to [capitalize](https://www.investopedia.com/terms/c/capitalize.asp) on short-term trends. ### Key Takeaways * Traders are individuals who engage in the short-term buying and selling of a financial asset for themselves or an institution such as a bank, brokerage firm, or hedge fund. * Traders use a variety of strategies to generate profits, including scalping, day trading, and swing trading. * Traders can be contrasted with investors, who seek long-term capital gains rather than short-term profits. ## The Role of a Trader The main objective of a trader is to generate profits by buying at a low price and selling at a higher price. What they buy and sell are financial assets that include [stocks](https://www.investopedia.com/terms/s/stock.asp), [bonds](https://www.investopedia.com/terms/b/bond.asp), [currencies](https://www.investopedia.com/terms/c/currencypair.asp), [commodities](https://www.investopedia.com/terms/c/commodity.asp), and [derivatives](https://www.investopedia.com/terms/d/derivative.asp). The profit generation is achieved through various approaches such as [fundamental, technical and quantitative analyses](https://www.investopedia.com/ask/answers/050515/it-better-use-fundamental-analysis-technical-analysis-or-quantitative-analysis-evaluate-longterm.asp), which aid in identifying market trends and opportunities. Traders also manage risks associated with their profession, including market risk, credit risk, and [liquidity risk](https://www.investopedia.com/articles/trading/11/understanding-liquidity-risk.asp). They may use [hedging](https://www.investopedia.com/trading/hedging-beginners-guide/) strategies to mitigate these risks. ### Traders play a critical role in providing [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) to financial markets. Their activities are essential for the smooth functioning of financial markets and the allocation of [capital](https://www.investopedia.com/terms/c/capital.asp) to productive uses. ## Skill Requirements of Traders Traders need to possess several quantitative and qualitative skills to be successful. The skills are a combination of technical, analytical, and behavioral qualities. It is a prerequisite for traders to be experts of the financial markets. Traders need to have a deep understanding of the [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp), market dynamics, and various strategies in these markets. Traders have to be analytical. They need to figure out how to process large amounts of data quickly and correctly to make informed decisions about the financial markets in which they trade. Numeracy skills are also important. Traders have to be able to calculate complex financial problems. Traders also need to be masters of [risk management](https://www.investopedia.com/terms/r/riskmanagement.asp). They must constantly monitor their current and potential positions to ensure that the risks they take are optimal. Traders must effectively use their [stop-loss](https://www.investopedia.com/terms/s/stop-lossorder.asp) and [limit](https://www.investopedia.com/terms/l/limitorder.asp) orders to maintain profitability and margins. Communication is also a key skill for a trader. Their colleagues, clients, bosses, and other stakeholders need to quickly and effectively understand what their trader is saying so that they can make informed decisions. Finally, traders should have high emotional intelligence. Trading is an intense profession, and traders need to effectively manage their emotions in a highly stressful environment. ## Trading Strategies Traders employ many strategies to produce and maintain profitability. Some of these strategies include [scalping](https://www.investopedia.com/terms/s/scalping.asp), [day trading, swing trading](https://www.investopedia.com/articles/active-trading/052815/pros-cons-day-trading-vs-swing-trading.asp), [event trading](https://www.investopedia.com/terms/e/eventdriven.asp), and [position trading](https://www.investopedia.com/terms/p/positiontrader.asp). It should be noted that no trading strategy is foolproof; there are advantages and disadvantages to any trading strategy. Traders also consider risks when employing their strategies. ### Scalping Scalping entails the buying and selling of financial instruments such as stocks, futures, currencies, and commodities in quick succession, with the goal of producing small gains on the positions. Scalpers attempt to profit from short-term price movements. The time frame that scalp traders hold positions ranges from seconds to minutes. The risk in scalping lies in the quick generation of successive losses rather than gains. ### Day Trading The strategy of [day trading](https://www.investopedia.com/articles/trading/05/011705.asp) involves taking positions in financial assets such as stocks, [futures](https://www.investopedia.com/terms/f/futurescontract.asp), currencies, and commodities within the same trading day. Day traders tend to hold an abundance of trades over minutes and hours, as they maneuver their transactions through changing market conditions. They tend to amplify their trades through [leveraged](https://www.investopedia.com/terms/l/leverage.asp) positions. The use of leverage poses an additional risk for day traders. ### Swing Trading [Swing trading](https://www.investopedia.com/terms/s/swingtrading.asp) involves profiting from short- to medium-term price movements in various financial instruments such as stocks, futures, currencies, or commodities. Unlike scalpers and day traders, swing traders hold their positions for longer time periods. This can be for several days, weeks, or even months and is dependent on the asset, the trend, and the other existing positions of the swing trader. Generally, swing trading is considered to be less risky than scalping or day trading because swing traders have more time to make decisions. Nonetheless, there are risks involved. News or events can affect the price trends of the swing trader’s [portfolio](https://www.investopedia.com/terms/p/portfolio.asp). ### Event Trading The strategy of event trading entails profiting from short-term price movements triggered from a specific economic or financial event such as mergers or acquisitions, earnings releases, regulatory decisions, inflation data, labor market data, or [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) data. Event traders need to execute their positions quickly, seconds before the data release, to profit from the position. Also, event traders tend to use leverage to amplify their profits. The use of leverage comes with additional risks to the strategy. ### Position Trading A position trader or a position trading firm is an individual or entity that buys financial assets for the long term. These professionals hold positions for weeks, months, or even years. The time frame of holding the position is highly dependent on the position trader’s investment thesis as well as the economic and financial market outlook. ### With the longer-term view, position trading is considered to be less risky than the other short-term trading strategies, as these traders have more time to endure the short-term price fluctuations. ## Places Where Traders Perform Their Duties Traders tend to work in a variety of places. Those traders who work for themselves may have a home office or may rent one. If that isn’t the case, traders will have roles in [investment banks](https://www.investopedia.com/terms/i/investmentbank.asp), brokerage firms, proprietary trading firms, asset management firms, hedge funds, or exchanges. Traders may work in the physical office or remotely, depending on the nature of the trading activity and the firm’s policies. ## Trader Operations: Institution vs. Own Account Many large financial institutions have [trading rooms](https://www.investopedia.com/articles/investing/022416/different-trading-desks-investment-bank.asp) where traders are employees who buy and sell a wide range of products on behalf of the company. Each trader is given a limit as to how large of a position they can take, the position’s maximum maturity, and how much of a [mark-to-market](https://www.investopedia.com/terms/m/marktomarket.asp) loss they can have before a position must be closed out. The company has the underlying risk and keeps most of the profit; the trader receives a salary and bonuses. On the other hand. most people who trade on their own account work from home or in a small office, and they often use a [discount broker](https://www.investopedia.com/terms/d/discountbroker.asp) and electronic trading platforms. Their limits are dependent on their own cash and credit, but they will often keep all profits. ## Discount Brokers: An Important Resource for Traders Discount brokerage firms charge significantly lower [commissions](https://www.investopedia.com/terms/c/commission-broker.asp) per transaction but provide little or no financial advice. Individuals can’t trade directly on a stock or commodity exchange on their own account, so using a discount broker is a cost-effective way to gain access to the markets. ### Many discount brokers offer [margin accounts](https://www.investopedia.com/terms/m/marginaccount.asp), which let traders borrow money from the broker to buy assets. This increases the size of the positions they can take but also increases the potential loss. Foreign exchange trading platforms match currency buyers and [sellers](https://www.investopedia.com/terms/s/seller.asp) in the spot, forward, and options markets. They sharply increase the amount of price information available to individual traders, thus narrowing price spreads and reducing commissions. ## The Type of Information That Traders Use Traders use a variety of techniques to source information. This is essential to make informed decisions and be profitable in their activities. The types of information that traders access include fundamental, technical, or market timing, noise, and sentiment. With this information, traders can even develop a contrarian view or find [arbitrage](https://www.investopedia.com/articles/trading/04/111004.asp) opportunities. ### Fundamental Information Fundamental information, or [fundamentals](https://www.investopedia.com/articles/fundamental/03/022603.asp), refers to data that provide insights into the underlying intrinsic value of the financial asset, such as a stock, bond, future, currency, or commodity. ### Fundamentals are generally gleaned from economic, industry-specific, and financial data and include economic data, industry trends, company news and events, and [financial statements](https://www.investopedia.com/terms/f/financial-statement-analysis.asp). ### Technical and Market-Timing Information When using technical and market-timing information, traders analyze past and current market data to spot patterns and trends. This is to anticipate future price movements in assets such as stocks, bonds, futures, currencies, or commodities. Traders use [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) and other market-timing information to identify buying and selling opportunities. They use charting techniques and momentum indicators such as moving averages and [oscillators](https://www.investopedia.com/terms/o/oscillator.asp) to accomplish this. Examples of market-timing information include economic and financial releases, as well as market sentiment indicators. ### Noise Trading [Noise trading](https://www.investopedia.com/terms/n/noisetrader.asp) involves making decisions on factors that seem to be helpful but would usually generate profits equivalent to a random choice. Some of these factors can include rumors, gossip, or emotions. Noise can create market imbalances that rational traders can profit from. Also, noise traders are often associated with [retail](https://www.investopedia.com/terms/r/retailinvestor.asp) or inexperienced investors who lack the necessary tools to profit from trading. ### Sentiment [Sentiment](https://www.investopedia.com/terms/m/marketsentiment.asp) refers to the overall view of financial market participants. This can be bullish, neutral, or bearish. These views can be toward the financial markets or various assets such as stocks, currencies, or commodities. Market sentiment can be attributed to factors such as economic and financial data, geopolitical events, or company news. Sentiment indicators are based on data comprising trading volume, price movements, and news coverage of financial instruments or markets. Sentiment is also developed through the quantification of surveys or polls. The data helps to gauge the level of optimism or pessimism in the financial markets. ### Contrarian Trading [Contrarian](https://www.investopedia.com/terms/c/contrarian.asp) trading involves analyzing market conditions and taking an opposing side of the prevailing consensus view of the financial markets. This is based on the premise that market participants often overreact to events, leading to significant price movements in financial markets. Contrarian traders identify [overbought or oversold](https://www.investopedia.com/ask/answers/121214/what-are-best-indicators-identify-overbought-and-oversold-stocks.asp) conditions in conjunction with trend reversals. High conviction in the trades are required, as the contrarian view by its very definition is often unpopular. ### Successful contrarian traders employ a rigorous analytical process to identify potential opportunities and carefully manage risks to avoid significant losses. ### Arbitrage [Arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) refers to exploiting price discrepancies between two or more instruments or markets. The assumption calls for taking advantage of mispricing in different markets, buying an asset in one market at a lower price and selling the same asset in another market at a higher price, producing a profit. These opportunities can occur in stocks, bonds, currencies, and commodities over different exchanges or geographical regions. Arbitrage occurs because of [market inefficiencies](https://www.investopedia.com/terms/i/inefficientmarket.asp) or temporary imbalances in supply and demand. ## Becoming a Trader Earning a role as a trader in the financial markets can involve a significant amount of preparation, including education, training, and licensing. Most entry-level trading jobs require at least a bachelor's degree, with employers often seeking graduates who have majored in business, economics, and accounting. A [master's in business administration (MBA)](https://www.investopedia.com/terms/m/mba.asp) may be an important qualification for higher-level positions at trading firms. Companies that hire traders generally offer employee training programs that focus on the business and the particular types of assets sold by the firm. Brokers and investment bankers working with registered firms must obtain a license from the [Financial Industry Regulatory Authority (FINRA)](https://www.investopedia.com/terms/f/finra.asp), which involves passing a series of examinations to verify their knowledge of the financial markets. Additional professional certifications such as the [Chartered Financial Analyst (CFA)](https://www.investopedia.com/terms/c/cfa.asp) designation and the [Chartered Market Technician (CMT)](https://www.investopedia.com/articles/professionaleducation/10/market-technicians-association.asp) designation may expand a trader's opportunities and chances for career advancement. ## Salary and Employment Outlook Many people may be interested in working as a trader because of the possibility of earning a substantial paycheck. For traders working on their own behalf, generating income will depend on implementing a successful trading strategy and effectively managing risk. Meanwhile, traders working for financial firms may earn a base salary with the potential for a substantial bonus based on their performance. According to the [U.S. Bureau of Labor Statistics (BLS)](https://www.investopedia.com/terms/b/bls.asp), as of May 2021, the median annual wage came to $62,910 for securities, commodities, and financial services sales agents—a broader category that includes many traders. Those working specifically in securities, commodity contracts, and other financial investments and related activities earn a median annual wage of $98,030. If that level of income seems attractive, there is good news about the employment outlook for the industry, as predictions call for a healthy availability of jobs over the coming years. The BLS estimates that employment for securities, commodities, and financial services sales agents will grow 10% from 2021 to 2031, exceeding the average for all occupations. While competition for these positions may be intense given the necessary skills involved, the BLS estimates that 46,600 job openings per year in this area over the decade. ## Why is trading important in finance? There are several reasons why trading is important in finance. Trading in financial instruments produces price discovery, generates liquidity, brings out capital flows, and aids in price efficiency. Through trading, market participants converge toward the fair value of financial assets. Also, with trading, liquidity is generated, enabling the quick transfer of stocks, bonds, futures, commodities, and currencies. ## What is the difference between trading and investing? There are two major approaches to the financial markets: trading and investing. While they share some similarities, trading and investing differ in terms of time horizon, risk tolerance, and investment style, as well as approach. Trading is short-term in nature, while investing is long-term in nature. With investing, a more passive approach is taken. Investors will adjust their portfolios occasionally to reflect their long-term goals. Trading is much more active, with the frequent buying and selling of securities. ## What are the asset types for traders? Stocks, bonds, currencies or foreign exchange, options, futures, commodities, cryptocurrencies, and exchange-traded funds (ETFs) are the most common type of assets that are traded. The asset class is dependent on the traders’ preference, expertise, and the market in which they operate. Also, traders can choose to specialize in one asset class or more, depending on their goals and skills. ## What are the benefits of being a trader? There are several potential benefits of being a trader. Traders have a high propensity to generate earnings. Traders tend to work in a fast-paced and exciting environment. This would appeal to people who like being in a highly dynamic space. Traders can have the flexibility to work remotely and work nonstandard hours. Traders gain significant exposure to the financial markets, as they have to actively and closely monitor them along with the factors that drive the respective markets. ## What are the limitations of being a trader? In any role, there are advantages and disadvantages. For traders, there are a handful of limitations. Trading can be a high-stress and competitive profession, which isn’t suitable for everyone. There is also a risk of financial loss. Moreover, traders work long hours. When markets are in a downturn, there is a high potential for traders to lose their jobs. To be a successful trader, people often need to attain specialized education, training, and experience, which can be time-consuming and expensive. ## The Bottom Line Trading is a highly skilled profession that provides price discovery and liquidity in a multitude of financial markets, including stocks, bonds, currencies, commodities, or derivatives. Traders can either be entrepreneurs or work for investment banks, hedge funds, or proprietary trading firms. Also, they use various strategies and tools to look for opportunities as well as to exploit market inefficiencies or mispricing. To gain an edge, traders analyze market data and news, as well as economic and financial indicators. Also, traders may use technical analysis, quantitative models, or [algorithms](https://www.investopedia.com/terms/a/algorithm.asp) to execute their orders. Traders need to have strong analytical, quantitative, and problem-solving skills. Beyond that, they need to be able to manage risks and work under pressure. Successful traders can make huge sums of money, but trading is also associated with sizable risk and potential losses.

The Definition of a Trader A trader is an individual who engages in the buying and selling of assets in any financial market, either for themself or on behalf of another person or institution. The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to have a longer-term time horizon, while traders tend to hold assets for much shorter periods to capitalize on short-term trends. Key Takeaways Traders are individuals who engage in the short-term buying and selling of a financial asset for themselves or an institution such as a bank, brokerage firm, or hedge fund.Traders use a variety of strategies to generate profits, including scalping, day trading, and swing trading.Traders can be contrasted with investors, who seek long-term capital gains rather than short-term profits. The Role of a Trader The main objective of a trader is to generate profits by buying at a low price and selling at a higher price. What they buy and sell are financial assets that include stocks, bonds, currencies, commodities, and derivatives. The profit generation is achieved through various approaches such as fundamental, technical and quantitative analyses, which aid in identifying market trends and opportunities. Traders also manage risks associated with their profession, including market risk, credit risk, and liquidity risk. They may use hedging strategies to mitigate these risks. Traders play a critical role in providing liquidity to financial markets. Their activities are essential for the smooth functioning of financial markets and the allocation of capital to productive uses. Skill Requirements of Traders Traders need to possess several quantitative and qualitative skills to be successful. The skills are a combination of technical, analytical, and behavioral qualities. It is a prerequisite for traders to be experts of the financial markets. Traders need to have a deep understanding of the asset classes, market dynamics, and various strategies in these markets. Traders have to be analytical. They need to figure out how to process large amounts of data quickly and correctly to make informed decisions about the financial markets in which they trade. Numeracy skills are also important. Traders have to be able to calculate complex financial problems. Traders also need to be masters of risk management. They must constantly monitor their current and potential positions to ensure that the risks they take are optimal. Traders must effectively use their stop-loss and limit orders to maintain profitability and margins. Communication is also a key skill for a trader. Their colleagues, clients, bosses, and other stakeholders need to quickly and effectively understand what their trader is saying so that they can make informed decisions. Finally, traders should have high emotional intelligence. Trading is an intense profession, and traders need to effectively manage their emotions in a highly stressful environment. Trading Strategies Traders employ many strategies to produce and maintain profitability. Some of these strategies include scalping, day trading, swing trading, event trading, and position trading. It should be noted that no trading strategy is foolproof; there are advantages and disadvantages to any trading strategy. Traders also consider risks when employing their strategies. Scalping Scalping entails the buying and selling of financial instruments such as stocks, futures, currencies, and commodities in quick succession, with the goal of producing small gains on the positions. Scalpers attempt to profit from short-term price movements. The time frame that scalp traders hold positions ranges from seconds to minutes. The risk in scalping lies in the quick generation of successive losses rather than gains. Day Trading The strategy of day trading involves taking positions in financial assets such as stocks, futures, currencies, and commodities within the same trading day. Day traders tend to hold an abundance of trades over minutes and hours, as they maneuver their transactions through changing market conditions. They tend to amplify their trades through leveraged positions. The use of leverage poses an additional risk for day traders. Swing Trading Swing trading involves profiting from short- to medium-term price movements in various financial instruments such as stocks, futures, currencies, or commodities. Unlike scalpers and day traders, swing traders hold their positions for longer time periods. This can be for several days, weeks, or even months and is dependent on the asset, the trend, and the other existing positions of the swing trader. Generally, swing trading is considered to be less risky than scalping or day trading because swing traders have more time to make decisions. Nonetheless, there are risks involved. News or events can affect the price trends of the swing trader’s portfolio. Event Trading The strategy of event trading entails profiting from short-term price movements triggered from a specific economic or financial event such as mergers or acquisitions, earnings releases, regulatory decisions, inflation data, labor market data, or gross domestic product (GDP) data. Event traders need to execute their positions quickly, seconds before the data release, to profit from the position. Also, event traders tend to use leverage to amplify their profits. The use of leverage comes with additional risks to the strategy. Position Trading A position trader or a position trading firm is an individual or entity that buys financial assets for the long term. These professionals hold positions for weeks, months, or even years. The time frame of holding the position is highly dependent on the position trader’s investment thesis as well as the economic and financial market outlook. With the longer-term view, position trading is considered to be less risky than the other short-term trading strategies, as these traders have more time to endure the short-term price fluctuations. Places Where Traders Perform Their Duties Traders tend to work in a variety of places. Those traders who work for themselves may have a home office or may rent one. If that isn’t the case, traders will have roles in investment banks, brokerage firms, proprietary trading firms, asset management firms, hedge funds, or exchanges. Traders may work in the physical office or remotely, depending on the nature of the trading activity and the firm’s policies. Trader Operations: Institution vs. Own Account Many large financial institutions have trading rooms where traders are employees who buy and sell a wide range of products on behalf of the company. Each trader is given a limit as to how large of a position they can take, the position’s maximum maturity, and how much of a mark-to-market loss they can have before a position must be closed out. The company has the underlying risk and keeps most of the profit; the trader receives a salary and bonuses. On the other hand. most people who trade on their own account work from home or in a small office, and they often use a discount broker and electronic trading platforms. Their limits are dependent on their own cash and credit, but they will often keep all profits. Discount Brokers: An Important Resource for Traders Discount brokerage firms charge significantly lower commissions per transaction but provide little or no financial advice. Individuals can’t trade directly on a stock or commodity exchange on their own account, so using a discount broker is a cost-effective way to gain access to the markets. Many discount brokers offer margin accounts, which let traders borrow money from the broker to buy assets. This increases the size of the positions they can take but also increases the potential loss. Foreign exchange trading platforms match currency buyers and sellers in the spot, forward, and options markets. They sharply increase the amount of price information available to individual traders, thus narrowing price spreads and reducing commissions. The Type of Information That Traders Use Traders use a variety of techniques to source information. This is essential to make informed decisions and be profitable in their activities. The types of information that traders access include fundamental, technical, or market timing, noise, and sentiment. With this information, traders can even develop a contrarian view or find arbitrage opportunities. Fundamental Information Fundamental information, or fundamentals, refers to data that provide insights into the underlying intrinsic value of the financial asset, such as a stock, bond, future, currency, or commodity. Fundamentals are generally gleaned from economic, industry-specific, and financial data and include economic data, industry trends, company news and events, and financial statements. Technical and Market-Timing Information When using technical and market-timing information, traders analyze past and current market data to spot patterns and trends. This is to anticipate future price movements in assets such as stocks, bonds, futures, currencies, or commodities. Traders use technical analysis and other market-timing information to identify buying and selling opportunities. They use charting techniques and momentum indicators such as moving averages and oscillators to accomplish this. Examples of market-timing information include economic and financial releases, as well as market sentiment indicators. Noise Trading Noise trading involves making decisions on factors that seem to be helpful but would usually generate profits equivalent to a random choice. Some of these factors can include rumors, gossip, or emotions. Noise can create market imbalances that rational traders can profit from. Also, noise traders are often associated with retail or inexperienced investors who lack the necessary tools to profit from trading. Sentiment Sentiment refers to the overall view of financial market participants. This can be bullish, neutral, or bearish. These views can be toward the financial markets or various assets such as stocks, currencies, or commodities. Market sentiment can be attributed to factors such as economic and financial data, geopolitical events, or company news. Sentiment indicators are based on data comprising trading volume, price movements, and news coverage of financial instruments or markets. Sentiment is also developed through the quantification of surveys or polls. The data helps to gauge the level of optimism or pessimism in the financial markets. Contrarian Trading Contrarian trading involves analyzing market conditions and taking an opposing side of the prevailing consensus view of the financial markets. This is based on the premise that market participants often overreact to events, leading to significant price movements in financial markets. Contrarian traders identify overbought or oversold conditions in conjunction with trend reversals. High conviction in the trades are required, as the contrarian view by its very definition is often unpopular. Successful contrarian traders employ a rigorous analytical process to identify potential opportunities and carefully manage risks to avoid significant losses. Arbitrage Arbitrage refers to exploiting price discrepancies between two or more instruments or markets. The assumption calls for taking advantage of mispricing in different markets, buying an asset in one market at a lower price and selling the same asset in another market at a higher price, producing a profit. These opportunities can occur in stocks, bonds, currencies, and commodities over different exchanges or geographical regions. Arbitrage occurs because of market inefficiencies or temporary imbalances in supply and demand. Becoming a Trader Earning a role as a trader in the financial markets can involve a significant amount of preparation, including education, training, and licensing. Most entry-level trading jobs require at least a bachelor's degree, with employers often seeking graduates who have majored in business, economics, and accounting. A master's in business administration (MBA) may be an important qualification for higher-level positions at trading firms. Companies that hire traders generally offer employee training programs that focus on the business and the particular types of assets sold by the firm. Brokers and investment bankers working with registered firms must obtain a license from the Financial Industry Regulatory Authority (FINRA), which involves passing a series of examinations to verify their knowledge of the financial markets. Additional professional certifications such as the Chartered Financial Analyst (CFA) designation and the Chartered Market Technician (CMT) designation may expand a trader's opportunities and chances for career advancement. Salary and Employment Outlook Many people may be interested in working as a trader because of the possibility of earning a substantial paycheck. For traders working on their own behalf, generating income will depend on implementing a successful trading strategy and effectively managing risk. Meanwhile, traders working for financial firms may earn a base salary with the potential for a substantial bonus based on their performance. According to the U.S. Bureau of Labor Statistics (BLS), as of May 2021, the median annual wage came to $62,910 for securities, commodities, and financial services sales agents—a broader category that includes many traders. Those working specifically in securities, commodity contracts, and other financial investments and related activities earn a median annual wage of $98,030. If that level of income seems attractive, there is good news about the employment outlook for the industry, as predictions call for a healthy availability of jobs over the coming years. The BLS estimates that employment for securities, commodities, and financial services sales agents will grow 10% from 2021 to 2031, exceeding the average for all occupations. While competition for these positions may be intense given the necessary skills involved, the BLS estimates that 46,600 job openings per year in this area over the decade. Why is trading important in finance? There are several reasons why trading is important in finance. Trading in financial instruments produces price discovery, generates liquidity, brings out capital flows, and aids in price efficiency. Through trading, market participants converge toward the fair value of financial assets. Also, with trading, liquidity is generated, enabling the quick transfer of stocks, bonds, futures, commodities, and currencies. What is the difference between trading and investing? There are two major approaches to the financial markets: trading and investing. While they share some similarities, trading and investing differ in terms of time horizon, risk tolerance, and investment style, as well as approach. Trading is short-term in nature, while investing is long-term in nature. With investing, a more passive approach is taken. Investors will adjust their portfolios occasionally to reflect their long-term goals. Trading is much more active, with the frequent buying and selling of securities. What are the asset types for traders? Stocks, bonds, currencies or foreign exchange, options, futures, commodities, cryptocurrencies, and exchange-traded funds (ETFs) are the most common type of assets that are traded. The asset class is dependent on the traders’ preference, expertise, and the market in which they operate. Also, traders can choose to specialize in one asset class or more, depending on their goals and skills. What are the benefits of being a trader? There are several potential benefits of being a trader. Traders have a high propensity to generate earnings. Traders tend to work in a fast-paced and exciting environment. This would appeal to people who like being in a highly dynamic space. Traders can have the flexibility to work remotely and work nonstandard hours. Traders gain significant exposure to the financial markets, as they have to actively and closely monitor them along with the factors that drive the respective markets. What are the limitations of being a trader? In any role, there are advantages and disadvantages. For traders, there are a handful of limitations. Trading can be a high-stress and competitive profession, which isn’t suitable for everyone. There is also a risk of financial loss. Moreover, traders work long hours. When markets are in a downturn, there is a high potential for traders to lose their jobs. To be a successful trader, people often need to attain specialized education, training, and experience, which can be time-consuming and expensive. The Bottom Line Trading is a highly skilled profession that provides price discovery and liquidity in a multitude of financial markets, including stocks, bonds, currencies, commodities, or derivatives. Traders can either be entrepreneurs or work for investment banks, hedge funds, or proprietary trading firms. Also, they use various strategies and tools to look for opportunities as well as to exploit market inefficiencies or mispricing. To gain an edge, traders analyze market data and news, as well as economic and financial indicators. Also, traders may use technical analysis, quantitative models, or algorithms to execute their orders. Traders need to have strong analytical, quantitative, and problem-solving skills. Beyond that, they need to be able to manage risks and work under pressure. Successful traders can make huge sums of money, but trading is also associated with sizable risk and potential losses.

https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp

Estate Taxes: Who Pays? And How Much?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Money or property you inherit may be subject to estate taxes and inheritance taxes, but it's not likely. Most estates are not rich enough to qualify for the federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estatetax.asp">estate tax</a>. The federal estate tax as of the 2023 tax year applies only on the value of an estate that exceeds $12.92 million. In 2024, the exemption rises to $13.61 million. Surviving spouses are exempt.<span class="ql-inline-citation" data-cite="22"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Moreover, most states have neither an estate tax, which is levied on the estate, nor an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inheritancetax.asp">inheritance tax</a>, which is assessed against the recipient of the inheritance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> A dozen states do levy estate taxes and six have inheritance taxes. All set their limits lower than the federal thresholds. The lowest thresholds are $1 million. The highest estate tax rates are 18%.<span class="ql-inline-citation" data-cite="6"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The IRS sets limits on estate values before they are subject to taxation.<span class="ql-inline-citation" data-cite="1"></span></li><li>A dozen states impose their own estate taxes, and six have inheritance taxes, both of which kick in at lower threshold amounts than the federal estate tax.<span class="ql-inline-citation" data-cite="6"></span></li><li>Federal and most state taxes are assessed only on the value of the estate or inheritance that exceeds the threshold amount.</li><li>Surviving spouses are generally exempt from these taxes, regardless of the value of the estate or inheritance.</li><li>To minimize estate taxes, taxpayers whose estates are above the threshold can set up trusts to facilitate the transfer of wealth.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="6"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-estate-taxes-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Estate Taxes: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Estate taxes, whether federal or state, are assessed on the estate's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fairmarketvalue.asp">fair market value</a> (FMV), not on the price the deceased paid.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> That means any appreciation in the estate's assets over time will be taxed, but it protects those who inherit assets that have dropped in value. For example, if a house was bought at $5 million, but its current market value is $4 million, the latter amount will be used for tax purposes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Any part of the estate that is bequeathed to a surviving spouse is not counted in the total amount and isn't subject to estate tax. The right of spouses to leave any amount to each other is known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unlimited-marital-deduction.asp">unlimited marital deduction</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> When the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate's value exceeds the exclusion limit. Other deductions, including charitable donations or any debts or fees that come with the estate, are excluded from the final calculation.<span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-subheading__text"> Declining an Inheritance </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> An heir due to receive money or other assets can choose to decline the inheritance through the use of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fa-profession/091916/how-inheritanceestate-tax-waivers-work.asp">an inheritance or estate waiver</a>. The waiver is a legal document declining the rights to the inheritance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In such an instance, the executor of the will would then name a new beneficiary of the inheritance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> An heir might choose to waive their inheritance to avoid paying taxes or to avoid having to maintain a house or other structure. A person in a bankruptcy proceeding mightchoose to sign a waiver so that the property can't be seized by creditors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> State laws determine how the waivers work. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-state-estate-and-inheritance-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> State Estate and Inheritance Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The number of jurisdictions that have estate or inheritance taxes is declining, as opposition has risen to what some call <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/death-taxes.asp">death taxes</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> That said, a dozen states plus the District of Columbia continue to tax estates, and a half dozen impose inheritance taxes. Maryland collects both.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> As with federal estate tax, these state taxes are collected only above certain thresholds. Even at or above those levels, your relationship to the deceased may spare you from some or all <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inheritance.asp">inheritance</a> tax. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Notably, surviving spouses and descendants of the deceased rarely, if ever, have to pay this tax.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_36-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_37-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">40%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The top federal statutory estate tax rate in 2023.<span class="ql-inline-citation" data-cite="22"></span></p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_38-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/7Besx/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Federal Estate Tax Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-federal-estate-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> Federal Estate Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> As noted above, the Internal Revenue Service (IRS) requires estates with combined gross assets and prior taxable gifts exceeding $12.92 million to file a federal estate tax return and pay the relevant estate tax for the 2023 tax year.<span class="ql-inline-citation" data-cite="22"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The portion of the estate that’s above this $12.92 million limit in 2023 will be taxed at the top federal statutory estate tax rate of 40%. In practice, various discounts, deductions, and loopholes allow skilled tax accountants to reduce the effective rate of taxation to well below that level.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Among those techniques is to take advantage of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/073115/how-cost-basis-calculated-inherited-asset.asp">flexibility over the valuation date</a> of the estate in order to minimize the estate's value or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/costbasis.asp">cost basis</a>.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>State estate taxes are levied by the state in which the deceased was living at the time of death. Inheritance taxes are levied by the state in which the beneficiary lives.</p></div></div></div> <span class="heading-toc" id="toc-state-estate-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> State Estate Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> If you live in a state that has an estate tax, you’re more likely to feel its pinch than you are to pay federal estate tax. The exemptions for state and district estate taxes are all less than half those of the federal assessment. Some go as low, relatively speaking, as $1 million.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> An estate tax is assessed by the state in which the decedent was living at the time of death. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Here are the jurisdictions that have estate taxes. Click on the state's name for further information from the state government on its estate tax. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://portal.ct.gov/DRS/DRS-Forms/Current-Year-Forms/Estate-and-Gift-Tax-CT-706-Series">Connecticut</a> </li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://otr.cfo.dc.gov/node/383922">District of Columbia </a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://tax.hawaii.gov/forms/a1_b3_4estate/">Hawaii</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="http://www.illinoisattorneygeneral.gov/publications/estatetax.html">Illinois</a> </li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://www.maine.gov/revenue/incomeestate/estate/index.htm">Maine</a></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.mass.gov/guides/a-guide-to-estate-taxes">Massachusetts</a> </li> <li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://www.marylandtaxes.gov/individual/estate-inheritance/estate-inheritance-index.php">Maryland</a></li> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="externalLink" href="https://www.tax.ny.gov/pit/estate/etidx.htm">New York</a></li> <li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="externalLink" href="https://www.oregon.gov/DOR/programs/individuals/Pages/estate.aspx">Oregon</a></li> <li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="externalLink" href="https://www.revenue.state.mn.us/estate-tax">Minnesota</a> </li> <li><a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="externalLink" href="https://tax.ri.gov/tax-sections/estate-tax">Rhode Island</a></li> <li><a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="externalLink" href="https://tax.vermont.gov/individuals/estate-and-fiduciary-taxes">Vermont</a> </li> <li><a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="externalLink" href="https://dor.wa.gov/find-taxes-rates/other-taxes/estate-tax">Washington State</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Tax is usually assessed on a sliding basis above these thresholds, much like the income tax brackets. The tax rate is typically about 10% for amounts just over the threshold, and it then rises in steps to about 16%.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> The top estate tax rate is lowest in Connecticut, at 12%, and the highest is in Washington State, where it tops out at 20%.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_62-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/lqUco/2/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Estate and Inheritance Taxes by State"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_64-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_65-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_4-0">18%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>The maximum rate for inheritance tax charged by any state.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div> <span class="heading-toc" id="toc-state-inheritance-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-heading__text"> State Inheritance Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> There is no federal inheritance tax, but states including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania still tax some assets inherited from the estates of deceased persons.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Whether your inheritance will be taxed (and at what rate) depends on its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/value.asp">value</a>, your relationship to the person who passed away, and the prevailing rules and rates where you live.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeinsurance.asp">Life insurance</a> payable to a named <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiary</a> is not typically subject to an inheritance tax, although life insurance payable to the deceased person or their estate is usually subject to an estate tax.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> As with estate tax, an inheritance tax, if due, is applied only to the sum that exceeds the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exemption.asp">exemption</a>. Tax is usually assessed on a sliding basis above those thresholds. Rates typically begin in the single digits and rise to between 15% and 18%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Both the exemption you receive and the rate you’re charged may vary by your relationship to the deceased—more so than with the value of assets you are inheriting.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-subheading__text"> Inheritance Tax Exemptions </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> As a rule, the closer your relationship with the decedent, the lower the rate you'll pay. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Surviving spouses are exempt from inheritance tax in all six states. Domestic partners, too, are exempt in New Jersey.<span class="ql-inline-citation" data-cite="15"></span> Descendants pay no inheritance tax except in Nebraska and Pennsylvania.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> Inheritance tax is assessed by the state in which the person who inherits is living.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_84-0"> <span class="mntl-sc-block-subheading__text"> Spousal Benefits </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Some states offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/widows-exemption.asp">tax reductions for widows</a> and widowers, such as a reduction in property taxes for a certain period of time. For example, in Florida, surviving spouses are entitled to receive a reduction in the taxable value of a property they own by $500 each year, in perpetuity or until they remarry.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Here are the jurisdictions that have inheritance taxes. Click on the state's name for further information on its inheritance tax from the state government: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://tax.iowa.gov/inheritance">Iowa</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://revenue.ky.gov/Individual/Inheritance-Estate-Tax/Pages/default.aspx">Kentucky</a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://marylandtaxes.gov/individual/estate-inheritance/estate-inheritance-tax.php">Maryland</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://nebraskalegislature.gov/laws/statutes.php?statute=77-2001">Nebraska</a></li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://www.state.nj.us/treasury/taxation/inheritance-estate/inheritance.shtml">New Jersey</a></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.revenue.pa.gov/TaxTypes/InheritanceTax/Pages/default.aspx">Pennsylvania</a><br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_91-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_92-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0">Maximize Your Gifts</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Maximizing your gifting potential is another way to reduce estate taxes. In 2023, the annual exclusion for gifts is up to $17,000.<span class="ql-inline-citation" data-cite="22"></span></p></div></div></div> <span class="heading-toc" id="toc-how-to-minimize-estate-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-heading__text"> How to Minimize Estate Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Keep the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/estate_plan_checklist.asp">planning simple</a> and the total amount of the estate below the threshold to minimize estate taxes. For most families, that's easy. For those with estates and inheritances above the threshold, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-form-1041-estates-and-trusts-5211109">setting up trusts</a> that facilitate the transfer of wealth can help ease the tax burden. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> One way to reduce estate tax exposure is to use an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/igdt.asp">intentionally defective grantor trust</a> (IDGT), which is a type of irrevocable trust that allows a trustor to isolate certain trust assets to separate income tax from estate tax treatment on those assets. The grantor pays income taxes on any revenue generated by the assets but the assets can grow tax-free. This way, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grantor.asp">grantor's</a> beneficiaries can avoid <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gifttax.asp">gift taxation</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> You can reduce your estate taxes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/06/transferlifeinsurance.asp">if you own a life insurance policy</a> as well. On their own, life insurance proceeds are income-tax-free at the federal level when they are paid to your beneficiary.<span class="ql-inline-citation" data-cite="21"></span> But when the proceeds are included as part of your taxable estate for estate tax purposes, that might push your estate over the cutoff. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> One way to make sure that doesn't happen is to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transfer.asp">transfer</a> ownership of your policy to another person or entity, including the beneficiary. Another possibility is to set up an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irrevocabletrust.asp">irrevocable life insurance trust</a> (ILIT). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_102-0"><span class="heading-toc" id="toc-what-assets-are-subject-to-estate-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Assets Are Subject to Estate Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>All the assets of a deceased person that are worth $12.92 million or more in 2023 are subject to federal estate taxes. The amount is revised annually.<span class="ql-inline-citation" data-cite="23"></span></p><p>A number of states also charge estate taxes. Each state sets its own rules on exclusions and thresholds for taxation.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_104-0"><span class="heading-toc" id="toc-what-is-the-estate-tax-rate"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Estate Tax Rate?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>On the federal level, the portion of the estate that surpasses $12.92 million in value will be taxed at a rate of 40%, as of the 2023 tax year.<span class="ql-inline-citation" data-cite="22"></span><span class="ql-inline-citation" data-cite="1"></span></p><p>States that tax estates have varying rules, but 18% is the federally-mandated maximum inheritance tax rate that can be charged by any state.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_106-0"><span class="heading-toc" id="toc-what-is-the-difference-between-an-estate-tax-and-an-inheritance-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between an Estate Tax and an Inheritance Tax?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An estate tax is levied on the estate itself, while an inheritance tax is levied against the recipient of an inheritance from an estate.</p><p>When state taxes apply, any estate tax is paid to the state in which the deceased resided, while any inheritance tax is paid to the state in which the recipient of the inheritance lives.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_108-0"><span class="heading-toc" id="toc-do-i-have-to-pay-taxes-on-an-estate"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Have to Pay Taxes on an Estate?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you receive an inheritance from an estate and the assets are worth more than $12.92 million in 2023, you will have to pay inheritance taxes on the amount above that level. The estate tax is levied on the estate itself.<span class="ql-inline-citation" data-cite="1"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_110-0"><span class="heading-toc" id="toc-how-can-i-avoid-estate-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Avoid Estate Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Methods used by the very wealthy to avoid estate taxes include setting up a trust, such as an intentionally defective grantor trust, which separates income tax from estate tax treatment. Also, a life insurance policy can be transferred so that it won't be counted as part of your estate. Strategic use of gifting is yet another tactic.</p><p>All of these strategies are best managed by a professional tax consultant to make sure they are done properly.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_112-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Inheritance taxes are complex and change frequently. Most of us engage with them during a stressful and busy period of our lives. It's wise to prepare for the inevitable by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/101315/are-estate-distributions-taxable.asp">doing some homework in advance</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_115-0"> As long as the estate in question does not have assets exceeding $12.92 million as of the 2023 tax year, you will not owe federal estate or inheritance taxes. However, keep an eye on your state for their current rules since some charge estate taxes or inheritance taxes with lower thresholds.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_116-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> Consider meeting with a lawyer, CPA, or CFP to begin planning your estate and minimizing the tax your beneficiaries will have to pay when they inherit. </p></div>

Money or property you inherit may be subject to estate taxes and inheritance taxes, but it's not likely. Most estates are not rich enough to qualify for the federal [estate tax](https://www.investopedia.com/terms/e/estatetax.asp). The federal estate tax as of the 2023 tax year applies only on the value of an estate that exceeds $12.92 million. In 2024, the exemption rises to $13.61 million. Surviving spouses are exempt. Moreover, most states have neither an estate tax, which is levied on the estate, nor an [inheritance tax](https://www.investopedia.com/terms/i/inheritancetax.asp), which is assessed against the recipient of the inheritance. A dozen states do levy estate taxes and six have inheritance taxes. All set their limits lower than the federal thresholds. The lowest thresholds are $1 million. The highest estate tax rates are 18%. ### Key Takeaways * The IRS sets limits on estate values before they are subject to taxation. * A dozen states impose their own estate taxes, and six have inheritance taxes, both of which kick in at lower threshold amounts than the federal estate tax. * Federal and most state taxes are assessed only on the value of the estate or inheritance that exceeds the threshold amount. * Surviving spouses are generally exempt from these taxes, regardless of the value of the estate or inheritance. * To minimize estate taxes, taxpayers whose estates are above the threshold can set up trusts to facilitate the transfer of wealth. ## Estate Taxes: An Overview Estate taxes, whether federal or state, are assessed on the estate's [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp) (FMV), not on the price the deceased paid. That means any appreciation in the estate's assets over time will be taxed, but it protects those who inherit assets that have dropped in value. For example, if a house was bought at $5 million, but its current market value is $4 million, the latter amount will be used for tax purposes. Any part of the estate that is bequeathed to a surviving spouse is not counted in the total amount and isn't subject to estate tax. The right of spouses to leave any amount to each other is known as the [unlimited marital deduction](https://www.investopedia.com/terms/u/unlimited-marital-deduction.asp). When the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate's value exceeds the exclusion limit. Other deductions, including charitable donations or any debts or fees that come with the estate, are excluded from the final calculation. ### Declining an Inheritance An heir due to receive money or other assets can choose to decline the inheritance through the use of [an inheritance or estate waiver](https://www.investopedia.com/articles/fa-profession/091916/how-inheritanceestate-tax-waivers-work.asp). The waiver is a legal document declining the rights to the inheritance. In such an instance, the executor of the will would then name a new beneficiary of the inheritance. An heir might choose to waive their inheritance to avoid paying taxes or to avoid having to maintain a house or other structure. A person in a bankruptcy proceeding mightchoose to sign a waiver so that the property can't be seized by creditors. State laws determine how the waivers work. ## State Estate and Inheritance Taxes The number of jurisdictions that have estate or inheritance taxes is declining, as opposition has risen to what some call [death taxes](https://www.investopedia.com/terms/d/death-taxes.asp). That said, a dozen states plus the District of Columbia continue to tax estates, and a half dozen impose inheritance taxes. Maryland collects both. As with federal estate tax, these state taxes are collected only above certain thresholds. Even at or above those levels, your relationship to the deceased may spare you from some or all [inheritance](https://www.investopedia.com/terms/i/inheritance.asp) tax. Notably, surviving spouses and descendants of the deceased rarely, if ever, have to pay this tax. ### 40% The top federal statutory estate tax rate in 2023. ## Federal Estate Taxes As noted above, the Internal Revenue Service (IRS) requires estates with combined gross assets and prior taxable gifts exceeding $12.92 million to file a federal estate tax return and pay the relevant estate tax for the 2023 tax year. The portion of the estate that’s above this $12.92 million limit in 2023 will be taxed at the top federal statutory estate tax rate of 40%. In practice, various discounts, deductions, and loopholes allow skilled tax accountants to reduce the effective rate of taxation to well below that level.  Among those techniques is to take advantage of [flexibility over the valuation date](https://www.investopedia.com/ask/answers/073115/how-cost-basis-calculated-inherited-asset.asp) of the estate in order to minimize the estate's value or [cost basis](https://www.investopedia.com/terms/c/costbasis.asp). ### State estate taxes are levied by the state in which the deceased was living at the time of death. Inheritance taxes are levied by the state in which the beneficiary lives. ## State Estate Taxes If you live in a state that has an estate tax, you’re more likely to feel its pinch than you are to pay federal estate tax. The exemptions for state and district estate taxes are all less than half those of the federal assessment. Some go as low, relatively speaking, as $1 million. An estate tax is assessed by the state in which the decedent was living at the time of death. Here are the jurisdictions that have estate taxes. Click on the state's name for further information from the state government on its estate tax. * [Connecticut](https://portal.ct.gov/DRS/DRS-Forms/Current-Year-Forms/Estate-and-Gift-Tax-CT-706-Series) * [District of Columbia](https://otr.cfo.dc.gov/node/383922) * [Hawaii](https://tax.hawaii.gov/forms/a1_b3_4estate/) * [Illinois](http://www.illinoisattorneygeneral.gov/publications/estatetax.html) * [Maine](https://www.maine.gov/revenue/incomeestate/estate/index.htm) * [Massachusetts](https://www.mass.gov/guides/a-guide-to-estate-taxes) * [Maryland](https://www.marylandtaxes.gov/individual/estate-inheritance/estate-inheritance-index.php) * [New York](https://www.tax.ny.gov/pit/estate/etidx.htm) * [Oregon](https://www.oregon.gov/DOR/programs/individuals/Pages/estate.aspx) * [Minnesota](https://www.revenue.state.mn.us/estate-tax) * [Rhode Island](https://tax.ri.gov/tax-sections/estate-tax) * [Vermont](https://tax.vermont.gov/individuals/estate-and-fiduciary-taxes) * [Washington State](https://dor.wa.gov/find-taxes-rates/other-taxes/estate-tax) Tax is usually assessed on a sliding basis above these thresholds, much like the income tax brackets. The tax rate is typically about 10% for amounts just over the threshold, and it then rises in steps to about 16%. The top estate tax rate is lowest in Connecticut, at 12%, and the highest is in Washington State, where it tops out at 20%. ### 18% The maximum rate for inheritance tax charged by any state. ## State Inheritance Taxes There is no federal inheritance tax, but states including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania still tax some assets inherited from the estates of deceased persons. Whether your inheritance will be taxed (and at what rate) depends on its [value](https://www.investopedia.com/terms/v/value.asp), your relationship to the person who passed away, and the prevailing rules and rates where you live. [Life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp) payable to a named [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) is not typically subject to an inheritance tax, although life insurance payable to the deceased person or their estate is usually subject to an estate tax. As with estate tax, an inheritance tax, if due, is applied only to the sum that exceeds the [exemption](https://www.investopedia.com/terms/e/exemption.asp). Tax is usually assessed on a sliding basis above those thresholds. Rates typically begin in the single digits and rise to between 15% and 18%. Both the exemption you receive and the rate you’re charged may vary by your relationship to the deceased—more so than with the value of assets you are inheriting. ### Inheritance Tax Exemptions As a rule, the closer your relationship with the decedent, the lower the rate you'll pay. Surviving spouses are exempt from inheritance tax in all six states. Domestic partners, too, are exempt in New Jersey. Descendants pay no inheritance tax except in Nebraska and Pennsylvania. Inheritance tax is assessed by the state in which the person who inherits is living. ### Spousal Benefits Some states offer [tax reductions for widows](https://www.investopedia.com/terms/w/widows-exemption.asp) and widowers, such as a reduction in property taxes for a certain period of time. For example, in Florida, surviving spouses are entitled to receive a reduction in the taxable value of a property they own by $500 each year, in perpetuity or until they remarry. Here are the jurisdictions that have inheritance taxes. Click on the state's name for further information on its inheritance tax from the state government: * [Iowa](https://tax.iowa.gov/inheritance) * [Kentucky](https://revenue.ky.gov/Individual/Inheritance-Estate-Tax/Pages/default.aspx) * [Maryland](https://marylandtaxes.gov/individual/estate-inheritance/estate-inheritance-tax.php) * [Nebraska](https://nebraskalegislature.gov/laws/statutes.php?statute=77-2001) * [New Jersey](https://www.state.nj.us/treasury/taxation/inheritance-estate/inheritance.shtml) * [Pennsylvania](https://www.revenue.pa.gov/TaxTypes/InheritanceTax/Pages/default.aspx) ### Maximize Your Gifts Maximizing your gifting potential is another way to reduce estate taxes. In 2023, the annual exclusion for gifts is up to $17,000. ## How to Minimize Estate Taxes Keep the [planning simple](https://www.investopedia.com/articles/pf/07/estate_plan_checklist.asp) and the total amount of the estate below the threshold to minimize estate taxes. For most families, that's easy. For those with estates and inheritances above the threshold, [setting up trusts](https://www.investopedia.com/tax-form-1041-estates-and-trusts-5211109) that facilitate the transfer of wealth can help ease the tax burden. One way to reduce estate tax exposure is to use an [intentionally defective grantor trust](https://www.investopedia.com/terms/i/igdt.asp) (IDGT), which is a type of irrevocable trust that allows a trustor to isolate certain trust assets to separate income tax from estate tax treatment on those assets. The grantor pays income taxes on any revenue generated by the assets but the assets can grow tax-free. This way, the [grantor's](https://www.investopedia.com/terms/g/grantor.asp) beneficiaries can avoid [gift taxation](https://www.investopedia.com/terms/g/gifttax.asp). You can reduce your estate taxes [if you own a life insurance policy](https://www.investopedia.com/articles/pf/06/transferlifeinsurance.asp) as well. On their own, life insurance proceeds are income-tax-free at the federal level when they are paid to your beneficiary. But when the proceeds are included as part of your taxable estate for estate tax purposes, that might push your estate over the cutoff. One way to make sure that doesn't happen is to [transfer](https://www.investopedia.com/terms/t/transfer.asp) ownership of your policy to another person or entity, including the beneficiary. Another possibility is to set up an [irrevocable life insurance trust](https://www.investopedia.com/terms/i/irrevocabletrust.asp) (ILIT). ## What Assets Are Subject to Estate Taxes? All the assets of a deceased person that are worth $12.92 million or more in 2023 are subject to federal estate taxes. The amount is revised annually. A number of states also charge estate taxes. Each state sets its own rules on exclusions and thresholds for taxation. ## What Is the Estate Tax Rate? On the federal level, the portion of the estate that surpasses $12.92 million in value will be taxed at a rate of 40%, as of the 2023 tax year. States that tax estates have varying rules, but 18% is the federally-mandated maximum inheritance tax rate that can be charged by any state. ## What Is the Difference Between an Estate Tax and an Inheritance Tax? An estate tax is levied on the estate itself, while an inheritance tax is levied against the recipient of an inheritance from an estate. When state taxes apply, any estate tax is paid to the state in which the deceased resided, while any inheritance tax is paid to the state in which the recipient of the inheritance lives. ## Do I Have to Pay Taxes on an Estate? If you receive an inheritance from an estate and the assets are worth more than $12.92 million in 2023, you will have to pay inheritance taxes on the amount above that level. The estate tax is levied on the estate itself. ## How Can I Avoid Estate Taxes? Methods used by the very wealthy to avoid estate taxes include setting up a trust, such as an intentionally defective grantor trust, which separates income tax from estate tax treatment. Also, a life insurance policy can be transferred so that it won't be counted as part of your estate. Strategic use of gifting is yet another tactic. All of these strategies are best managed by a professional tax consultant to make sure they are done properly. ## The Bottom Line Inheritance taxes are complex and change frequently. Most of us engage with them during a stressful and busy period of our lives. It's wise to prepare for the inevitable by [doing some homework in advance](https://www.investopedia.com/ask/answers/101315/are-estate-distributions-taxable.asp). As long as the estate in question does not have assets exceeding $12.92 million as of the 2023 tax year, you will not owe federal estate or inheritance taxes. However, keep an eye on your state for their current rules since some charge estate taxes or inheritance taxes with lower thresholds. Consider meeting with a lawyer, CPA, or CFP to begin planning your estate and minimizing the tax your beneficiaries will have to pay when they inherit.

Money or property you inherit may be subject to estate taxes and inheritance taxes, but it's not likely. Most estates are not rich enough to qualify for the federal estate tax. The federal estate tax as of the 2023 tax year applies only on the value of an estate that exceeds $12.92 million. In 2024, the exemption rises to $13.61 million. Surviving spouses are exempt. Moreover, most states have neither an estate tax, which is levied on the estate, nor an inheritance tax, which is assessed against the recipient of the inheritance. A dozen states do levy estate taxes and six have inheritance taxes. All set their limits lower than the federal thresholds. The lowest thresholds are $1 million. The highest estate tax rates are 18%. Key Takeaways The IRS sets limits on estate values before they are subject to taxation.A dozen states impose their own estate taxes, and six have inheritance taxes, both of which kick in at lower threshold amounts than the federal estate tax.Federal and most state taxes are assessed only on the value of the estate or inheritance that exceeds the threshold amount.Surviving spouses are generally exempt from these taxes, regardless of the value of the estate or inheritance.To minimize estate taxes, taxpayers whose estates are above the threshold can set up trusts to facilitate the transfer of wealth. Estate Taxes: An Overview Estate taxes, whether federal or state, are assessed on the estate's fair market value (FMV), not on the price the deceased paid. That means any appreciation in the estate's assets over time will be taxed, but it protects those who inherit assets that have dropped in value. For example, if a house was bought at $5 million, but its current market value is $4 million, the latter amount will be used for tax purposes. Any part of the estate that is bequeathed to a surviving spouse is not counted in the total amount and isn't subject to estate tax. The right of spouses to leave any amount to each other is known as the unlimited marital deduction. When the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate's value exceeds the exclusion limit. Other deductions, including charitable donations or any debts or fees that come with the estate, are excluded from the final calculation. Declining an Inheritance An heir due to receive money or other assets can choose to decline the inheritance through the use of an inheritance or estate waiver. The waiver is a legal document declining the rights to the inheritance. In such an instance, the executor of the will would then name a new beneficiary of the inheritance. An heir might choose to waive their inheritance to avoid paying taxes or to avoid having to maintain a house or other structure. A person in a bankruptcy proceeding mightchoose to sign a waiver so that the property can't be seized by creditors. State laws determine how the waivers work. State Estate and Inheritance Taxes The number of jurisdictions that have estate or inheritance taxes is declining, as opposition has risen to what some call death taxes. That said, a dozen states plus the District of Columbia continue to tax estates, and a half dozen impose inheritance taxes. Maryland collects both. As with federal estate tax, these state taxes are collected only above certain thresholds. Even at or above those levels, your relationship to the deceased may spare you from some or all inheritance tax. Notably, surviving spouses and descendants of the deceased rarely, if ever, have to pay this tax. 40% The top federal statutory estate tax rate in 2023. Federal Estate Taxes As noted above, the Internal Revenue Service (IRS) requires estates with combined gross assets and prior taxable gifts exceeding $12.92 million to file a federal estate tax return and pay the relevant estate tax for the 2023 tax year. The portion of the estate that’s above this $12.92 million limit in 2023 will be taxed at the top federal statutory estate tax rate of 40%. In practice, various discounts, deductions, and loopholes allow skilled tax accountants to reduce the effective rate of taxation to well below that level.  Among those techniques is to take advantage of flexibility over the valuation date of the estate in order to minimize the estate's value or cost basis. State estate taxes are levied by the state in which the deceased was living at the time of death. Inheritance taxes are levied by the state in which the beneficiary lives. State Estate Taxes If you live in a state that has an estate tax, you’re more likely to feel its pinch than you are to pay federal estate tax. The exemptions for state and district estate taxes are all less than half those of the federal assessment. Some go as low, relatively speaking, as $1 million. An estate tax is assessed by the state in which the decedent was living at the time of death. Here are the jurisdictions that have estate taxes. Click on the state's name for further information from the state government on its estate tax. Connecticut  District of Columbia Hawaii Illinois  Maine Massachusetts  Maryland New York Oregon Minnesota  Rhode Island Vermont  Washington State Tax is usually assessed on a sliding basis above these thresholds, much like the income tax brackets. The tax rate is typically about 10% for amounts just over the threshold, and it then rises in steps to about 16%. The top estate tax rate is lowest in Connecticut, at 12%, and the highest is in Washington State, where it tops out at 20%. 18% The maximum rate for inheritance tax charged by any state. State Inheritance Taxes There is no federal inheritance tax, but states including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania still tax some assets inherited from the estates of deceased persons. Whether your inheritance will be taxed (and at what rate) depends on its value, your relationship to the person who passed away, and the prevailing rules and rates where you live. Life insurance payable to a named beneficiary is not typically subject to an inheritance tax, although life insurance payable to the deceased person or their estate is usually subject to an estate tax. As with estate tax, an inheritance tax, if due, is applied only to the sum that exceeds the exemption. Tax is usually assessed on a sliding basis above those thresholds. Rates typically begin in the single digits and rise to between 15% and 18%. Both the exemption you receive and the rate you’re charged may vary by your relationship to the deceased—more so than with the value of assets you are inheriting. Inheritance Tax Exemptions As a rule, the closer your relationship with the decedent, the lower the rate you'll pay. Surviving spouses are exempt from inheritance tax in all six states. Domestic partners, too, are exempt in New Jersey. Descendants pay no inheritance tax except in Nebraska and Pennsylvania. Inheritance tax is assessed by the state in which the person who inherits is living. Spousal Benefits Some states offer tax reductions for widows and widowers, such as a reduction in property taxes for a certain period of time. For example, in Florida, surviving spouses are entitled to receive a reduction in the taxable value of a property they own by $500 each year, in perpetuity or until they remarry. Here are the jurisdictions that have inheritance taxes. Click on the state's name for further information on its inheritance tax from the state government: Iowa Kentucky Maryland Nebraska New Jersey Pennsylvania Maximize Your Gifts Maximizing your gifting potential is another way to reduce estate taxes. In 2023, the annual exclusion for gifts is up to $17,000. How to Minimize Estate Taxes Keep the planning simple and the total amount of the estate below the threshold to minimize estate taxes. For most families, that's easy. For those with estates and inheritances above the threshold, setting up trusts that facilitate the transfer of wealth can help ease the tax burden. One way to reduce estate tax exposure is to use an intentionally defective grantor trust (IDGT), which is a type of irrevocable trust that allows a trustor to isolate certain trust assets to separate income tax from estate tax treatment on those assets. The grantor pays income taxes on any revenue generated by the assets but the assets can grow tax-free. This way, the grantor's beneficiaries can avoid gift taxation. You can reduce your estate taxes if you own a life insurance policy as well. On their own, life insurance proceeds are income-tax-free at the federal level when they are paid to your beneficiary. But when the proceeds are included as part of your taxable estate for estate tax purposes, that might push your estate over the cutoff. One way to make sure that doesn't happen is to transfer ownership of your policy to another person or entity, including the beneficiary. Another possibility is to set up an irrevocable life insurance trust (ILIT). What Assets Are Subject to Estate Taxes? All the assets of a deceased person that are worth $12.92 million or more in 2023 are subject to federal estate taxes. The amount is revised annually.A number of states also charge estate taxes. Each state sets its own rules on exclusions and thresholds for taxation. What Is the Estate Tax Rate? On the federal level, the portion of the estate that surpasses $12.92 million in value will be taxed at a rate of 40%, as of the 2023 tax year.States that tax estates have varying rules, but 18% is the federally-mandated maximum inheritance tax rate that can be charged by any state. What Is the Difference Between an Estate Tax and an Inheritance Tax? An estate tax is levied on the estate itself, while an inheritance tax is levied against the recipient of an inheritance from an estate.When state taxes apply, any estate tax is paid to the state in which the deceased resided, while any inheritance tax is paid to the state in which the recipient of the inheritance lives. Do I Have to Pay Taxes on an Estate? If you receive an inheritance from an estate and the assets are worth more than $12.92 million in 2023, you will have to pay inheritance taxes on the amount above that level. The estate tax is levied on the estate itself. How Can I Avoid Estate Taxes? Methods used by the very wealthy to avoid estate taxes include setting up a trust, such as an intentionally defective grantor trust, which separates income tax from estate tax treatment. Also, a life insurance policy can be transferred so that it won't be counted as part of your estate. Strategic use of gifting is yet another tactic.All of these strategies are best managed by a professional tax consultant to make sure they are done properly. The Bottom Line Inheritance taxes are complex and change frequently. Most of us engage with them during a stressful and busy period of our lives. It's wise to prepare for the inevitable by doing some homework in advance. As long as the estate in question does not have assets exceeding $12.92 million as of the 2023 tax year, you will not owe federal estate or inheritance taxes. However, keep an eye on your state for their current rules since some charge estate taxes or inheritance taxes with lower thresholds. Consider meeting with a lawyer, CPA, or CFP to begin planning your estate and minimizing the tax your beneficiaries will have to pay when they inherit.

https://www.investopedia.com/ask/answers/042415/what-are-differences-between-regressive-proportional-and-progressive-taxes.asp

Regressive vs. Proportional vs. Progressive Taxes: What's the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-regressive-vs-proportional-vs-progressive-taxes-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Regressive vs. Proportional vs. Progressive Taxes: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Tax systems in the U.S. fall into three main categories: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regressivetax.asp">Regressive</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proportionaltax.asp">proportional</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/progressivetax.asp">progressive</a>. Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Regressive taxes have a greater impact on lower-income individuals than on the wealthy. A proportional tax, also called a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flattax.asp">flat tax</a>, affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rates and tax liability increasing in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A regressive tax system levies the same percentage on products or goods purchased regardless of the buyer's income and is thought to be disproportionately burdensome on low earners.</li><li>A proportional tax applies the same tax rate to all individuals regardless of income.</li><li>A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more.</li></ul></div></div></div> <span class="heading-toc" id="toc-regressive-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Regressive Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That's because the government assesses tax as a percentage of the asset's value that a taxpayer purchases or owns. This type of tax does not correlate with an individual's earnings or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incometax.asp">income level</a>.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-subheading__text"> Excise Taxes </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Regressive taxes include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/propertytax.asp">property taxes</a>, sales taxes on goods, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/excisetax.asp">excise taxes</a> on consumables, such as gasoline or airfare. Excise taxes are fixed and included in the price of the product or service.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sin_tax.asp">Sin taxes</a>, a subset of excise taxes, are imposed on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodities</a> or activities perceived to be unhealthy or negatively affect society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products.<span class="ql-inline-citation" data-cite="20"></span> Sin tax critics argue that these disproportionately affect those who are less well off.<span class="ql-inline-citation" data-cite="21"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-subheading__text"> Payroll Taxes </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Many also consider Social Security to be a regressive tax. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-security-tax.asp">Social Security tax </a>obligations are capped at a certain level of income called a wage base—$160,200 in 2023. An individual's earnings above this base are not subject to the 6.2% Social Security tax.<span class="ql-inline-citation" data-cite="22"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The annual maximum you can pay in Social Security tax is capped at $9,932.00 in 2023, whether you earn $160,200 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and self-employed individuals must pay both halves on earnings up to the wage base.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees. This is because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/081915/how-social-security-tax-calculated.asp">it's a flat rate for everyone</a>, and the cap limits how much income an individual is taxed regardless of income. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base.</p></div></div></div> <span class="heading-toc" id="toc-proportional-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> Proportional Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A proportional or flat tax system assesses the same tax rate for everyone regardless of income or wealth. This system is meant to create equality between <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaltaxrate.asp">marginal tax rates</a> and average tax rates paid.<span class="ql-inline-citation" data-cite="23"></span> Eleven states use this income tax system as of 2023: Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania, and Utah.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Other examples of proportional taxes include <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/percapita.asp">per capita</a> taxes, gross receipts taxes, and occupational taxes.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Proponents of proportional taxes believe they stimulate the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economy.asp">economy</a> by encouraging people to work more because there is no tax penalty for earning more. They also believe businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-progressive-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Progressive Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Taxes assessed under a progressive system follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rates and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxliability.asp">tax liabilities</a> increase with an individual's wealth. The goal of a progressive tax is to make higher earners pay a larger percentage of taxes than lower-income earners.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> Federal Income Tax </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060515/what-difference-between-state-income-tax-and-federal-income-tax.asp">federal income tax</a> is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places them into a bracket or category, resulting in a higher tax rate once earnings meet a new threshold.<span class="ql-inline-citation" data-cite="18"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeduction.asp">Standard deduction</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/itemizeddeduction.asp">itemized deductions</a> allow individuals to avoid paying taxes on a portion of the income they earn each year.<span class="ql-inline-citation" data-cite="18"></span> The amount of the standard deduction changes from year to year to keep pace with inflation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Progressive Tax Criticisms </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042715/what-are-pros-and-cons-progressive-tax-policy-and-who-benefits-most-it.asp">Progressive tax rates have critics</a>. Some say progressive taxation is a form of inequality, with higher earners paying more to support lower-income earners. The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> In 2022, 40.1% of U.S. citizens did not pay income taxes because they did not earn enough to reach the lowest tax rate, according to the Tax Policy Center.<span class="ql-inline-citation" data-cite="3"></span> Conversely, a 2021 study by White House economists concluded that the 400 wealthiest U.S. families paid an average income tax rate of less than the lowest tax bracket (8.2%) from 2010 to 2018, despite high marginal tax rates.<span class="ql-inline-citation" data-cite="27"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estatetax.asp"><br/>Estate taxes</a> are another example of progressive taxes as they mainly affect <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hnwi.asp">high-net-worth individuals (HNWIs)</a>, and they increase with the size of the estate. Only estates valued at $12.92 million or more are liable for federal estate taxes in 2023.<span class="ql-inline-citation" data-cite="24"></span></p></div></div></div> <span class="heading-toc" id="toc-examples-of-regressive-proportional-and-progressive-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> Examples of Regressive, Proportional, and Progressive Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The following examples of regressive, proportional, and progressive taxes show how they work in practice: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-subheading__text"> Regressive Tax Example </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> If shoppers pay a 6% sales tax on their groceries, whether they earn $30,000 or $130,000 annually, those with lesser incomes pay a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes on consumer goods, 5% of their annual income goes to sales tax. But if they earn $100,000 a year and pay the same $1,000 in sales taxes, this represents only 1% of their income. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-subheading__text"> Proportional Tax Example </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. Someone who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns $250,000 each year would pay $12,500 at that same rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-subheading__text"> Progressive Tax Example </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> In the U.S., income taxes operate under a progressive system. In 2023, federal progressive tax rates range from 10% to 37%. For a single taxpayer, the marginal rate of taxation is: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> <li>37% for incomes over $578,125</li><li>35% for incomes over $231,250 </li><li>32% for incomes over $182,100 </li><li>24% for incomes over $95,375 </li><li>22% for incomes over $44,725 </li><li>12% for incomes over $11,000 </li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2023 does not pay the full 22% rate for their income. Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. This earner's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/effectivetaxrate.asp">effective tax rate</a> is 12%.<span class="ql-inline-citation" data-cite="26"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_65-0"><span class="heading-toc" id="toc-are-income-taxes-progressive-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Income Taxes Progressive Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Income taxes can be both progressive and proportional. Progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes, while individuals are charged the same tax rate regardless of how much income they earn.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-is-the-federal-income-tax-proportional"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is the Federal Income Tax Proportional?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, the federal income tax in the United States is progressive.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-are-regressive-taxes-fair"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Regressive Taxes Fair?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That's because they spend a larger portion of their income on regressive taxes than people who earn more.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-what-taxes-are-considered-regressive"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Taxes Are Considered Regressive?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Regressive taxes are those that are paid regardless of income, such as sales taxes, sin taxes, and property taxes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_73-0"><span class="heading-toc" id="toc-how-do-you-calculate-progressive-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Calculate Progressive Tax?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Progressive tax systems don't charge taxpayers a flat rate. Instead, the percentage you owe increases as your income gets higher. In the U.S., the marginal tax rates are set by the IRS. Here's how you would calculate your income tax burden in 2023: If you are filing as a single taxpayer, you pay 10% on the first $11,000 of income, 12% on any earnings between $11,001 and $44,725, 22% up until $95,375, and so on. The thresholds are different for married couples filing jointly. The highest tax rate of 37% only affects income higher than $578,125 (or $693,750 for married couples filing jointly).<span class="ql-inline-citation" data-cite="26"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_75-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Paying taxes is inevitable. But how much of an impact they have depends on the tax system used and how much you make. Regressive taxes—sales taxes, property taxes, and sin taxes—and proportional taxes have a greater impact on low earners because they spend more of their income on taxation than other taxpayers. But progressive taxes—the federal tax system used in the United States—usually impact high-income earners more than anyone else. </p></div>

## Regressive vs. Proportional vs. Progressive Taxes: An Overview Tax systems in the U.S. fall into three main categories: [Regressive](https://www.investopedia.com/terms/r/regressivetax.asp), [proportional](https://www.investopedia.com/terms/p/proportionaltax.asp), and [progressive](https://www.investopedia.com/terms/p/progressivetax.asp). Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax. Regressive taxes have a greater impact on lower-income individuals than on the wealthy. A proportional tax, also called a [flat tax](https://www.investopedia.com/terms/f/flattax.asp), affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income. A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rates and tax liability increasing in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S. ### Key Takeaways * A regressive tax system levies the same percentage on products or goods purchased regardless of the buyer's income and is thought to be disproportionately burdensome on low earners. * A proportional tax applies the same tax rate to all individuals regardless of income. * A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more. ## Regressive Taxes Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That's because the government assesses tax as a percentage of the asset's value that a taxpayer purchases or owns. This type of tax does not correlate with an individual's earnings or [income level](https://www.investopedia.com/terms/i/incometax.asp). ### Excise Taxes Regressive taxes include [property taxes](https://www.investopedia.com/terms/p/propertytax.asp), sales taxes on goods, and [excise taxes](https://www.investopedia.com/terms/e/excisetax.asp) on consumables, such as gasoline or airfare. Excise taxes are fixed and included in the price of the product or service. [Sin taxes](https://www.investopedia.com/terms/s/sin_tax.asp), a subset of excise taxes, are imposed on [commodities](https://www.investopedia.com/terms/c/commodity.asp) or activities perceived to be unhealthy or negatively affect society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off. ### Payroll Taxes Many also consider Social Security to be a regressive tax. [Social Security tax](https://www.investopedia.com/terms/s/social-security-tax.asp) obligations are capped at a certain level of income called a wage base—$160,200 in 2023. An individual's earnings above this base are not subject to the 6.2% Social Security tax. The annual maximum you can pay in Social Security tax is capped at $9,932.00 in 2023, whether you earn $160,200 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and self-employed individuals must pay both halves on earnings up to the wage base. Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees. This is because [it's a flat rate for everyone](https://www.investopedia.com/ask/answers/081915/how-social-security-tax-calculated.asp), and the cap limits how much income an individual is taxed regardless of income. ### Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base. ## Proportional Taxes A proportional or flat tax system assesses the same tax rate for everyone regardless of income or wealth. This system is meant to create equality between [marginal tax rates](https://www.investopedia.com/terms/m/marginaltaxrate.asp) and average tax rates paid. Eleven states use this income tax system as of 2023: Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania, and Utah. Other examples of proportional taxes include [per capita](https://www.investopedia.com/terms/p/percapita.asp) taxes, gross receipts taxes, and occupational taxes. Proponents of proportional taxes believe they stimulate the [economy](https://www.investopedia.com/terms/e/economy.asp) by encouraging people to work more because there is no tax penalty for earning more. They also believe businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy. ## Progressive Taxes Taxes assessed under a progressive system follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rates and [tax liabilities](https://www.investopedia.com/terms/t/taxliability.asp) increase with an individual's wealth. The goal of a progressive tax is to make higher earners pay a larger percentage of taxes than lower-income earners. ### Federal Income Tax The U.S. [federal income tax](https://www.investopedia.com/ask/answers/060515/what-difference-between-state-income-tax-and-federal-income-tax.asp) is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places them into a bracket or category, resulting in a higher tax rate once earnings meet a new threshold. [Standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp) and [itemized deductions](https://www.investopedia.com/terms/i/itemizeddeduction.asp) allow individuals to avoid paying taxes on a portion of the income they earn each year. The amount of the standard deduction changes from year to year to keep pace with inflation. ### Progressive Tax Criticisms [Progressive tax rates have critics](https://www.investopedia.com/ask/answers/042715/what-are-pros-and-cons-progressive-tax-policy-and-who-benefits-most-it.asp). Some say progressive taxation is a form of inequality, with higher earners paying more to support lower-income earners. The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks. In 2022, 40.1% of U.S. citizens did not pay income taxes because they did not earn enough to reach the lowest tax rate, according to the Tax Policy Center. Conversely, a 2021 study by White House economists concluded that the 400 wealthiest U.S. families paid an average income tax rate of less than the lowest tax bracket (8.2%) from 2010 to 2018, despite high marginal tax rates. ### [Estate taxes](https://www.investopedia.com/terms/e/estatetax.asp) are another example of progressive taxes as they mainly affect [high-net-worth individuals (HNWIs)](https://www.investopedia.com/terms/h/hnwi.asp), and they increase with the size of the estate. Only estates valued at $12.92 million or more are liable for federal estate taxes in 2023. ## Examples of Regressive, Proportional, and Progressive Taxes The following examples of regressive, proportional, and progressive taxes show how they work in practice: ### Regressive Tax Example If shoppers pay a 6% sales tax on their groceries, whether they earn $30,000 or $130,000 annually, those with lesser incomes pay a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes on consumer goods, 5% of their annual income goes to sales tax. But if they earn $100,000 a year and pay the same $1,000 in sales taxes, this represents only 1% of their income. ### Proportional Tax Example Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. Someone who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns $250,000 each year would pay $12,500 at that same rate. ### Progressive Tax Example In the U.S., income taxes operate under a progressive system. In 2023, federal progressive tax rates range from 10% to 37%. For a single taxpayer, the marginal rate of taxation is: * 37% for incomes over $578,125 * 35% for incomes over $231,250 * 32% for incomes over $182,100 * 24% for incomes over $95,375 * 22% for incomes over $44,725 * 12% for incomes over $11,000 The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2023 does not pay the full 22% rate for their income. Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. This earner's [effective tax rate](https://www.investopedia.com/terms/e/effectivetaxrate.asp) is 12%. ## Are Income Taxes Progressive Taxes? Income taxes can be both progressive and proportional. Progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes, while individuals are charged the same tax rate regardless of how much income they earn. ## Is the Federal Income Tax Proportional? No, the federal income tax in the United States is progressive. ## Are Regressive Taxes Fair? Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That's because they spend a larger portion of their income on regressive taxes than people who earn more. ## What Taxes Are Considered Regressive? Regressive taxes are those that are paid regardless of income, such as sales taxes, sin taxes, and property taxes. ## How Do You Calculate Progressive Tax? Progressive tax systems don't charge taxpayers a flat rate. Instead, the percentage you owe increases as your income gets higher. In the U.S., the marginal tax rates are set by the IRS. Here's how you would calculate your income tax burden in 2023: If you are filing as a single taxpayer, you pay 10% on the first $11,000 of income, 12% on any earnings between $11,001 and $44,725, 22% up until $95,375, and so on. The thresholds are different for married couples filing jointly. The highest tax rate of 37% only affects income higher than $578,125 (or $693,750 for married couples filing jointly). ## The Bottom Line Paying taxes is inevitable. But how much of an impact they have depends on the tax system used and how much you make. Regressive taxes—sales taxes, property taxes, and sin taxes—and proportional taxes have a greater impact on low earners because they spend more of their income on taxation than other taxpayers. But progressive taxes—the federal tax system used in the United States—usually impact high-income earners more than anyone else.

Regressive vs. Proportional vs. Progressive Taxes: An Overview Tax systems in the U.S. fall into three main categories: Regressive, proportional, and progressive. Regressive and progressive taxes impact high- and low-income earners differently, whereas proportional taxes do not. Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax. Regressive taxes have a greater impact on lower-income individuals than on the wealthy. A proportional tax, also called a flat tax, affects low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income. A progressive tax has more of a financial impact on higher-income individuals than on low-income earners, with tax rates and tax liability increasing in line with a taxpayer's income. Investment income and estate taxes are examples of progressive taxes in the U.S. Key Takeaways A regressive tax system levies the same percentage on products or goods purchased regardless of the buyer's income and is thought to be disproportionately burdensome on low earners.A proportional tax applies the same tax rate to all individuals regardless of income.A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more. Regressive Taxes Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system. That's because the government assesses tax as a percentage of the asset's value that a taxpayer purchases or owns. This type of tax does not correlate with an individual's earnings or income level. Excise Taxes Regressive taxes include property taxes, sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and included in the price of the product or service. Sin taxes, a subset of excise taxes, are imposed on commodities or activities perceived to be unhealthy or negatively affect society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off. Payroll Taxes Many also consider Social Security to be a regressive tax. Social Security tax obligations are capped at a certain level of income called a wage base—$160,200 in 2023. An individual's earnings above this base are not subject to the 6.2% Social Security tax. The annual maximum you can pay in Social Security tax is capped at $9,932.00 in 2023, whether you earn $160,200 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and self-employed individuals must pay both halves on earnings up to the wage base. Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees. This is because it's a flat rate for everyone, and the cap limits how much income an individual is taxed regardless of income. Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base. Proportional Taxes A proportional or flat tax system assesses the same tax rate for everyone regardless of income or wealth. This system is meant to create equality between marginal tax rates and average tax rates paid. Eleven states use this income tax system as of 2023: Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania, and Utah. Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes. Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more. They also believe businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy. Progressive Taxes Taxes assessed under a progressive system follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rates and tax liabilities increase with an individual's wealth. The goal of a progressive tax is to make higher earners pay a larger percentage of taxes than lower-income earners. Federal Income Tax The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places them into a bracket or category, resulting in a higher tax rate once earnings meet a new threshold. Standard deduction and itemized deductions allow individuals to avoid paying taxes on a portion of the income they earn each year. The amount of the standard deduction changes from year to year to keep pace with inflation. Progressive Tax Criticisms Progressive tax rates have critics. Some say progressive taxation is a form of inequality, with higher earners paying more to support lower-income earners. The marginal tax rates for an individual range from 10% to 37% in 2023, with the wealthiest Americans subject to the highest rate. Others argue that the tax code benefits wealthy individuals who can avoid income tax through tax breaks. In 2022, 40.1% of U.S. citizens did not pay income taxes because they did not earn enough to reach the lowest tax rate, according to the Tax Policy Center. Conversely, a 2021 study by White House economists concluded that the 400 wealthiest U.S. families paid an average income tax rate of less than the lowest tax bracket (8.2%) from 2010 to 2018, despite high marginal tax rates. Estate taxes are another example of progressive taxes as they mainly affect high-net-worth individuals (HNWIs), and they increase with the size of the estate. Only estates valued at $12.92 million or more are liable for federal estate taxes in 2023. Examples of Regressive, Proportional, and Progressive Taxes The following examples of regressive, proportional, and progressive taxes show how they work in practice: Regressive Tax Example If shoppers pay a 6% sales tax on their groceries, whether they earn $30,000 or $130,000 annually, those with lesser incomes pay a greater portion of total income than those who earn more. If someone makes $20,000 a year and pays $1,000 in sales taxes on consumer goods, 5% of their annual income goes to sales tax. But if they earn $100,000 a year and pay the same $1,000 in sales taxes, this represents only 1% of their income. Proportional Tax Example Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. Someone who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns $250,000 each year would pay $12,500 at that same rate. Progressive Tax Example In the U.S., income taxes operate under a progressive system. In 2023, federal progressive tax rates range from 10% to 37%. For a single taxpayer, the marginal rate of taxation is: 37% for incomes over $578,12535% for incomes over $231,250 32% for incomes over $182,100 24% for incomes over $95,375 22% for incomes over $44,725 12% for incomes over $11,000 The tax rates are applied progressively from 10% to 37%. A single taxpayer with a taxable income of $50,000 in 2023 does not pay the full 22% rate for their income. Instead, they pay 10% on the first $11,000 of income, 12% on income from $11,001 to $44,724, and 22% for the amount over $44,725. This earner's effective tax rate is 12%. Are Income Taxes Progressive Taxes? Income taxes can be both progressive and proportional. Progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes, while individuals are charged the same tax rate regardless of how much income they earn. Is the Federal Income Tax Proportional? No, the federal income tax in the United States is progressive. Are Regressive Taxes Fair? Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That's because they spend a larger portion of their income on regressive taxes than people who earn more. What Taxes Are Considered Regressive? Regressive taxes are those that are paid regardless of income, such as sales taxes, sin taxes, and property taxes. How Do You Calculate Progressive Tax? Progressive tax systems don't charge taxpayers a flat rate. Instead, the percentage you owe increases as your income gets higher. In the U.S., the marginal tax rates are set by the IRS. Here's how you would calculate your income tax burden in 2023: If you are filing as a single taxpayer, you pay 10% on the first $11,000 of income, 12% on any earnings between $11,001 and $44,725, 22% up until $95,375, and so on. The thresholds are different for married couples filing jointly. The highest tax rate of 37% only affects income higher than $578,125 (or $693,750 for married couples filing jointly). The Bottom Line Paying taxes is inevitable. But how much of an impact they have depends on the tax system used and how much you make. Regressive taxes—sales taxes, property taxes, and sin taxes—and proportional taxes have a greater impact on low earners because they spend more of their income on taxation than other taxpayers. But progressive taxes—the federal tax system used in the United States—usually impact high-income earners more than anyone else.

https://www.investopedia.com/the-santa-claus-rally-4779941

The Santa Claus Rally

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-the-santa-claus-rally-defined"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> The Santa Claus Rally Defined </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> If there is such a rally, when does it occur? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> There are two schools of thought about the timing<em> </em>of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/santaclauseffect.asp">Santa Claus rally</a> effect on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp">Standard &amp; Poor's (S&amp;P) 500 Index</a>. The first suggests the Santa Claus rally occurs in <em>the week leading up to</em> and ending with Dec. 24, Christmas Eve. The other scenario suggests the Santa Claus rally occurs in the week <em>following </em>Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. The week before Christmas also captures much of the end-of-the-year adjustments from institutional players seeking to close their books before the Christmas holiday. The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> For the purposes of defining when the Santa Claus rally happens—to the extent it does—our research leads us to focus on the week <em>before </em>Christmas to document the potential Santa Claus rally effect. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Quick Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>While widely known and spoken of, we can't confirm that there is a meaningful stock-market rally associated with the Christmas holidays.</li><li>We believe the Santa Claus rally, if any does exist, occurs in the week preceding Dec. 24, not the week after after Christmas through Jan 2.</li><li>Our analysis of the last 20 years shows an average return of 0.385% in the week leading up to Dec. 24.</li><li>Over the last 20 years, there were 13 winning weeks (average 0.65% gain), accompanied by five losing weeks and two unchanged; the latter two categories represented about a third of the period measured.</li><li>We would caution traders not to rely on a December Santa Claus rally as a reliable strategy for easy gains.</li></ul></div></div></div> <span class="heading-toc" id="toc-does-the-santa-claus-rally-exist"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> Does the Santa Claus Rally Exist? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The second major question is whether the Santa Claus rally really even exists. Again, looking at the historical performance of the S&amp;P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> For the average return of the week leading up to Christmas, the so-called Santa Claus rally, we calculated a +0.385% total return, with 13 winning weeks, five losing weeks, and two unchanged weeks. More important, the average winning week gave a +1.85% return, while the losing weeks averaged a -3.28% return, skewing the risk/reward ratio against the trade (being long S&amp;P 500). The range of returns was +5.4% to -10.7%.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Overall, we cannot discern a viable rally period that occurs on a regular or reliable basis around the end-of-year holidays. The graph below shows the weekly returns for the Santa Claus rally period over the last 20 years: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_19-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:53.9%;"> <img alt="sc rally" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/B0Sfru3eMnvDzSfiMmptPRhxtWU=/739x0/filters:no_upscale():max_bytes(150000):strip_icc()/scrally-c86555ba8c394d01953be833ab278128.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/3C1zc0OJAy9HLRu0ax3C4nVBMPg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/scrally-c86555ba8c394d01953be833ab278128.jpg" data-srcset="https://www.investopedia.com/thmb/hY2skWkgAdF5moeYpmfIqqEPQ7k=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/scrally-c86555ba8c394d01953be833ab278128.jpg 750w" data-tracking-container="true" height="399" id="mntl-sc-block-image_1-0" width="739"/> <noscript> <img alt="sc rally" class="img--noscript universal-image__image" height="399" sizes="750px" src="https://www.investopedia.com/thmb/3C1zc0OJAy9HLRu0ax3C4nVBMPg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/scrally-c86555ba8c394d01953be833ab278128.jpg" srcset="https://www.investopedia.com/thmb/hY2skWkgAdF5moeYpmfIqqEPQ7k=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/scrally-c86555ba8c394d01953be833ab278128.jpg 750w" width="739"/> </noscript> </div> </div> </figure> <span class="heading-toc" id="toc-rationalizations-for-the-santa-claus-effect"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Rationalizations for the Santa Claus Effect </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived causes for the rally include an overall, holiday-season spirit, in which retail traders hold an outsize bullish outlook and institutional players tend to step back from the market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Regardless of the reason, any positive return leading up to and after Christmas is likely to be hailed by the financial media as a "Santa Claus rally."<span class="ql-inline-citation" data-cite="2"></span> Traders should be aware of the historical performance of the Santa Claus rally period, and remain wary of getting sucked in by hopes for momentary positive performance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month. The second is specifically the returns from trading the Santa Claus rally belief. Note the negligible returns across all categories. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_27-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:75.7%;"> <img alt="Average and median returns of the Santa Claus rally over the last 26 years" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/-v0XiTiDbi0pKDaOZnW_UPMJ8ns=/725x0/filters:no_upscale():max_bytes(150000):strip_icc()/returns-656cc73795ad4838a4ad8d1eaf96abe1.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/AMMWGks3FBi7G_Erv4zwCGaSb7s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/returns-656cc73795ad4838a4ad8d1eaf96abe1.png" data-srcset="https://www.investopedia.com/thmb/NukKVEmTMKLcSYmSwq2SkeI7N7s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/returns-656cc73795ad4838a4ad8d1eaf96abe1.png 750w" data-tracking-container="true" height="549" id="mntl-sc-block-image_2-0" width="725"/> <noscript> <img alt="Average and median returns of the Santa Claus rally over the last 26 years" class="img--noscript universal-image__image" height="549" sizes="750px" src="https://www.investopedia.com/thmb/AMMWGks3FBi7G_Erv4zwCGaSb7s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/returns-656cc73795ad4838a4ad8d1eaf96abe1.png" srcset="https://www.investopedia.com/thmb/NukKVEmTMKLcSYmSwq2SkeI7N7s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/returns-656cc73795ad4838a4ad8d1eaf96abe1.png 750w" width="725"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia</p></span> </figcaption></figure> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-is-there-really-a-santa-claus-rally"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is There Really a Santa Claus Rally?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Our analysis shows that there is a negligible positive tilt associated with the Santa Claus rally period, namely +0.385% over the last 20 years.<span class="ql-inline-citation" data-cite="1"></span> With that in mind, we think the so-called Santa Claus rally is shaky at best. But that won't stop the financial media and pundits from referring to it, should any positive trading days unfold around the holiday period. In general, traders should be aware of the tenuous nature of making any moves during the holiday season.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-what-is-the-time-period-for-the-santa-claus-rally"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Time Period for the Santa Claus Rally?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are two schools of thought about when the rally can occur. One is that stocks rally in the week between Christmas and New Year's, and that carries into the second day of trading in the New Year, usually Jan 2. The other time-span definition—and our preferred one—is the week leading up to Dec. 24. But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_32-0"><span class="heading-toc" id="toc-what-is-the-rationale-behind-the-santa-claus-rally"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Rationale Behind the Santa Claus Rally?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>To the minimal extent that it exists, the biggest rationale may be that it is simply a matter of positive holiday spirit extending to the stock market for a few days. Most institutional players such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp">hedge funds</a>, corporations, and the like, attend to their year-end position adjustments in the week before Christmas and start looking ahead in to the new year to strategize. There also may be year-end effects at work, such as portfolio rebalancing and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp">tax-loss harvesting</a>, to name a few.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can't expect him to always deliver reliable stock-market gains. </p></div>

## The Santa Claus Rally Defined If there is such a rally, when does it occur? There are two schools of thought about the timingof the [Santa Claus rally](https://www.investopedia.com/terms/s/santaclauseffect.asp) effect on the [Standard & Poor's (S&P) 500 Index](https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp). The first suggests the Santa Claus rally occurs in *the week leading up to* and ending with Dec. 24, Christmas Eve. The other scenario suggests the Santa Claus rally occurs in the week *following* Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. The week before Christmas also captures much of the end-of-the-year adjustments from institutional players seeking to close their books before the Christmas holiday. The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. For the purposes of defining when the Santa Claus rally happens—to the extent it does—our research leads us to focus on the week *before* Christmas to document the potential Santa Claus rally effect. ### Quick Takeaways * While widely known and spoken of, we can't confirm that there is a meaningful stock-market rally associated with the Christmas holidays. * We believe the Santa Claus rally, if any does exist, occurs in the week preceding Dec. 24, not the week after after Christmas through Jan 2. * Our analysis of the last 20 years shows an average return of 0.385% in the week leading up to Dec. 24. * Over the last 20 years, there were 13 winning weeks (average 0.65% gain), accompanied by five losing weeks and two unchanged; the latter two categories represented about a third of the period measured. * We would caution traders not to rely on a December Santa Claus rally as a reliable strategy for easy gains. ## Does the Santa Claus Rally Exist? The second major question is whether the Santa Claus rally really even exists. Again, looking at the historical performance of the S&P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. For the average return of the week leading up to Christmas, the so-called Santa Claus rally, we calculated a +0.385% total return, with 13 winning weeks, five losing weeks, and two unchanged weeks. More important, the average winning week gave a +1.85% return, while the losing weeks averaged a -3.28% return, skewing the risk/reward ratio against the trade (being long S&P 500). The range of returns was +5.4% to -10.7%. Overall, we cannot discern a viable rally period that occurs on a regular or reliable basis around the end-of-year holidays. The graph below shows the weekly returns for the Santa Claus rally period over the last 20 years: ![sc rally]() :max_bytes(150000):strip_icc()/scrally-c86555ba8c394d01953be833ab278128.jpg) ## Rationalizations for the Santa Claus Effect Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived causes for the rally include an overall, holiday-season spirit, in which retail traders hold an outsize bullish outlook and institutional players tend to step back from the market. Regardless of the reason, any positive return leading up to and after Christmas is likely to be hailed by the financial media as a "Santa Claus rally." Traders should be aware of the historical performance of the Santa Claus rally period, and remain wary of getting sucked in by hopes for momentary positive performance. For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month. The second is specifically the returns from trading the Santa Claus rally belief. Note the negligible returns across all categories. ![Average and median returns of the Santa Claus rally over the last 26 years]() :max_bytes(150000):strip_icc()/returns-656cc73795ad4838a4ad8d1eaf96abe1.png) Investopedia ## Is There Really a Santa Claus Rally? Our analysis shows that there is a negligible positive tilt associated with the Santa Claus rally period, namely +0.385% over the last 20 years. With that in mind, we think the so-called Santa Claus rally is shaky at best. But that won't stop the financial media and pundits from referring to it, should any positive trading days unfold around the holiday period. In general, traders should be aware of the tenuous nature of making any moves during the holiday season. ## What Is the Time Period for the Santa Claus Rally? There are two schools of thought about when the rally can occur. One is that stocks rally in the week between Christmas and New Year's, and that carries into the second day of trading in the New Year, usually Jan 2. The other time-span definition—and our preferred one—is the week leading up to Dec. 24. But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself. ## What Is the Rationale Behind the Santa Claus Rally? To the minimal extent that it exists, the biggest rationale may be that it is simply a matter of positive holiday spirit extending to the stock market for a few days. Most institutional players such as [hedge funds](https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp), corporations, and the like, attend to their year-end position adjustments in the week before Christmas and start looking ahead in to the new year to strategize. There also may be year-end effects at work, such as portfolio rebalancing and [tax-loss harvesting](https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp), to name a few. ## The Bottom Line Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can't expect him to always deliver reliable stock-market gains.

The Santa Claus Rally Defined If there is such a rally, when does it occur? There are two schools of thought about the timing of the Santa Claus rally effect on the Standard & Poor's (S&P) 500 Index. The first suggests the Santa Claus rally occurs in the week leading up to and ending with Dec. 24, Christmas Eve. The other scenario suggests the Santa Claus rally occurs in the week following Christmas, up to and including the first two trading days of the New Year. After studying the returns of both scenarios, we believe the Santa Claus rally, to the extent that it exists, occurs in the week leading up to Christmas. The week before Christmas typically has normal to significant volume, compared with the week after Christmas, which is usually marked by generally sideways stock-price movement with small ranges. The week before Christmas also captures much of the end-of-the-year adjustments from institutional players seeking to close their books before the Christmas holiday. The week after Christmas usually comes with much lower volume, suggesting that institutional players have withdrawn from the market for the rest of the year. For the purposes of defining when the Santa Claus rally happens—to the extent it does—our research leads us to focus on the week before Christmas to document the potential Santa Claus rally effect. Quick Takeaways While widely known and spoken of, we can't confirm that there is a meaningful stock-market rally associated with the Christmas holidays.We believe the Santa Claus rally, if any does exist, occurs in the week preceding Dec. 24, not the week after after Christmas through Jan 2.Our analysis of the last 20 years shows an average return of 0.385% in the week leading up to Dec. 24.Over the last 20 years, there were 13 winning weeks (average 0.65% gain), accompanied by five losing weeks and two unchanged; the latter two categories represented about a third of the period measured.We would caution traders not to rely on a December Santa Claus rally as a reliable strategy for easy gains. Does the Santa Claus Rally Exist? The second major question is whether the Santa Claus rally really even exists. Again, looking at the historical performance of the S&P 500 over the last two decades, we conclude that it is nearly a toss-up between a tangible rally and a normal trading week. For the average return of the week leading up to Christmas, the so-called Santa Claus rally, we calculated a +0.385% total return, with 13 winning weeks, five losing weeks, and two unchanged weeks. More important, the average winning week gave a +1.85% return, while the losing weeks averaged a -3.28% return, skewing the risk/reward ratio against the trade (being long S&P 500). The range of returns was +5.4% to -10.7%. Overall, we cannot discern a viable rally period that occurs on a regular or reliable basis around the end-of-year holidays. The graph below shows the weekly returns for the Santa Claus rally period over the last 20 years: Rationalizations for the Santa Claus Effect Over the years, many analysts have tried to speculate about the reasons for the Santa Claus rally. The perceived causes for the rally include an overall, holiday-season spirit, in which retail traders hold an outsize bullish outlook and institutional players tend to step back from the market. Regardless of the reason, any positive return leading up to and after Christmas is likely to be hailed by the financial media as a "Santa Claus rally." Traders should be aware of the historical performance of the Santa Claus rally period, and remain wary of getting sucked in by hopes for momentary positive performance. For reference, the chart below compares the results of trading in any random six-day period in the past 26 years with the results of trading two kinds of six-day groupings. The first is the turn-of-month effect, four sessions at the end of a month and two sessions into the next month. The second is specifically the returns from trading the Santa Claus rally belief. Note the negligible returns across all categories. Investopedia Is There Really a Santa Claus Rally? Our analysis shows that there is a negligible positive tilt associated with the Santa Claus rally period, namely +0.385% over the last 20 years. With that in mind, we think the so-called Santa Claus rally is shaky at best. But that won't stop the financial media and pundits from referring to it, should any positive trading days unfold around the holiday period. In general, traders should be aware of the tenuous nature of making any moves during the holiday season. What Is the Time Period for the Santa Claus Rally? There are two schools of thought about when the rally can occur. One is that stocks rally in the week between Christmas and New Year's, and that carries into the second day of trading in the New Year, usually Jan 2. The other time-span definition—and our preferred one—is the week leading up to Dec. 24. But both time periods show negligible returns at best on average, making the Santa Claus rally something of a myth, just like the jolly old elf himself. What Is the Rationale Behind the Santa Claus Rally? To the minimal extent that it exists, the biggest rationale may be that it is simply a matter of positive holiday spirit extending to the stock market for a few days. Most institutional players such as hedge funds, corporations, and the like, attend to their year-end position adjustments in the week before Christmas and start looking ahead in to the new year to strategize. There also may be year-end effects at work, such as portfolio rebalancing and tax-loss harvesting, to name a few. The Bottom Line Using the week leading up to Dec. 24 over two decades, we find there is no tangible or reliable Santa Claus rally. Whether you count that time period or the week after Dec. 25 up to Jan. 2 of the new year, the returns are negligible, if slightly positive at +0.385%. Traders should be wary of market talk surrounding the notion of a Santa Claus rally, and stay fixed on the current market environment. While we can expect Santa Claus to deliver presents on time, we can't expect him to always deliver reliable stock-market gains.

https://www.investopedia.com/financial-edge/0511/how-gas-prices-affect-the-economy.aspx

How Gas Prices Affect the Economy

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Volatile gas prices have taken center stage in the media as the national average for a gallon of regular gasoline has experienced wild price swings over the past few years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> In the past, geopolitical tensions, hurricane seasons, flooding in the Mississippi, and increased travel <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/demand.asp">demand</a> during the summer driving season were forces pushing prices higher. At the individual level, higher gas prices mean that each of us <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092215/debit-vs-credit-card-paying-gas.asp">pays more at the pump</a>, leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station; higher gas prices have an effect on the broader economy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Inversely, when gas prices fall, it is cheaper to fill up the tank for both households and businesses and really eases costs on transportation-focused industries like airlines and trucking—but it also puts a damper on the domestic oil industry. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In general, higher oil prices are a drag on the economy. Here we will focus on some of the direct and indirect negative effects of high gas prices. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_9-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_10-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>When gas prices rise, it can be a drag on the economy—impacting everything from consumer spending to the price of airline tickets to hiring practices.</li><li>Gas is an important input for transportation, which directly impacts households as they drive, but also businesses that rely on logistics and transportation chains around the globe.</li><li>If discretionary spending is hampered by higher gasoline costs, it can have knock-on effects throughout the broader economy.</li></ul></div></div></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_11-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/hiw8f/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Recent Periods of High Gas Prices"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-retailers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Retailers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> A side effect of high gas prices is that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discretionaryincome.asp" rel="noopener noreferrer">discretionary</a> spending of consumers drops as they spend a relatively larger portion of their income on gasoline. Higher prices also mean that shoppers will tend to drive less—including places like the mall or shopping centers. Indeed, academic and industry studies provide support for this, showing that driving miles are directly tied to gas prices.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> While shoppers may not drive, they do switch to online shopping more when gas prices rise. According to Marin Software, searches for online shopping increase dramatically along with an increase in gas prices.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> However, all retailers are further squeezed as they are forced to pass on the higher expenses they also experience, which are associated with increased shipping costs to consumers. Anything that has to be shipped or transported—from apples to electronics—could cost more as gas prices rise. This is especially true for products, or components for products, that are manufactured overseas. Likewise, many products that contain plastics or synthetic materials are based in part on petroleum and refining. Higher oil prices mean higher prices for these materials too. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <span class="heading-toc" id="toc-public-transportation"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Public Transportation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Higher gas prices can result in noticeable increases in some public transportation ridership. Shared and public transportation may become more appealing if gas prices continue to rise as it provides a more cost-effective alternative to sitting in traffic with expensive fuel in the tank. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> As a historical example, according to the American Public Transportation Association, the Raleigh-Durham-Chapel Hill region of North Carolina saw an 18% increase in riders for the express bus that connects the three cities during April 2011, compared to the same month in 2010—a period that saw gas prices rise sharply. Likewise, during the same period, riders on New Mexico's Rail Runner, a commuter train that provides service between Santa Fe and Albuquerque, increased by 14%.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Not all commuters have the flexibility to make this decision, but for some, it has provided a welcome opportunity to save on weekly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commutingexpenses.asp" rel="noopener noreferrer">commuting expenses</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-auto-industry"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> Auto Industry </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The automobile industry has historically responded to rising gasoline prices by using these periods as opportunities to manufacture smaller, more fuel-efficient cars, such as hybrids and, most recently, all-electric cars that can travel up to 250 miles between charges. Consumers have largely supported this move; sales of hybrids and all-electric vehicles in the United States have been on a strong upward trajectory since 2010, while sales of gas guzzlers like large trucks and SUVs have lagged behind.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-airlines"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> Airlines </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The largest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating-cost.asp" rel="noopener noreferrer">operating cost</a> for airlines, on average, are the companies' fuel expenses and those expenses related to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/procurement.asp" rel="noopener noreferrer">procurement</a> of oil. Fuel costs are such a large part of an airline's overhead percentage-wise that the fluctuating price of oil greatly affects the airline's <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bottomline.asp" rel="noopener noreferrer">bottom line</a>. When gas prices rise, airlines are forced to increase the price offered to travelers for flights, which may discourage non-essential air travel and put a further burden on consumers' wallets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> To protect themselves from volatile oil costs, and sometimes to even take advantage of rising gas prices, airlines commonly engage in the practice of fuel <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp" rel="noopener noreferrer">hedging</a>. They do this by buying or selling the expected future price of oil through a range of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-product.asp" rel="noopener noreferrer">investment products</a>, protecting the airline companies against rising prices. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-jobs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Jobs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Job growth is carefully watched as an indicator of the recovering economy. And some economists warn that rising gas prices could negatively impact an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-recovery.asp" rel="noopener noreferrer">economic recovery</a> in terms of hiring practices. Rising gas prices may force some businesses to re-evaluate their hiring plans, holding off because they are uncertain about the economy's health. Less discretionary spending results in decreased sales, both of which can influence a company's ability to hire. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <span class="heading-toc" id="toc-new-jobs-and-freelancers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> New Jobs and Freelancers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Many job candidates have to weigh prospective positions against the costs associated with the commute. Some workers who have been offered new jobs have been forced to turn down the position simply because the costs to get to and from work would eat up such a large percentage of the salary. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freelancer.asp" rel="noopener noreferrer">Freelancers</a> can also be affected by higher gas prices, limiting the geographical region in which they will do business because commuting costs make it impossible for some gigs to be profitable. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Though economists and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/analyst.asp">analysts</a> may argue about the extent to which gas prices have an effect on the economy, there is, at the least, a correlation between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cci.asp">consumer confidence</a>, spending habits, and gas prices. An August 2020 Gallup poll in the United States, for example, showed that individuals' views of the economy appear to be inversely correlated to the price of gasoline. The poll showed that increases in state gas prices made respondents feel more pessimistic about the economy over the time period in question.<span class="ql-inline-citation" data-cite="4"></span> </p></div>

Volatile gas prices have taken center stage in the media as the national average for a gallon of regular gasoline has experienced wild price swings over the past few years. In the past, geopolitical tensions, hurricane seasons, flooding in the Mississippi, and increased travel [demand](https://www.investopedia.com/terms/d/demand.asp) during the summer driving season were forces pushing prices higher. At the individual level, higher gas prices mean that each of us [pays more at the pump](https://www.investopedia.com/articles/investing/092215/debit-vs-credit-card-paying-gas.asp), leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station; higher gas prices have an effect on the broader economy. Inversely, when gas prices fall, it is cheaper to fill up the tank for both households and businesses and really eases costs on transportation-focused industries like airlines and trucking—but it also puts a damper on the domestic oil industry. In general, higher oil prices are a drag on the economy. Here we will focus on some of the direct and indirect negative effects of high gas prices. ### Key Takeaways * When gas prices rise, it can be a drag on the economy—impacting everything from consumer spending to the price of airline tickets to hiring practices. * Gas is an important input for transportation, which directly impacts households as they drive, but also businesses that rely on logistics and transportation chains around the globe. * If discretionary spending is hampered by higher gasoline costs, it can have knock-on effects throughout the broader economy. ## Retailers A side effect of high gas prices is that the [discretionary](https://www.investopedia.com/terms/d/discretionaryincome.asp) spending of consumers drops as they spend a relatively larger portion of their income on gasoline. Higher prices also mean that shoppers will tend to drive less—including places like the mall or shopping centers. Indeed, academic and industry studies provide support for this, showing that driving miles are directly tied to gas prices. While shoppers may not drive, they do switch to online shopping more when gas prices rise. According to Marin Software, searches for online shopping increase dramatically along with an increase in gas prices. However, all retailers are further squeezed as they are forced to pass on the higher expenses they also experience, which are associated with increased shipping costs to consumers. Anything that has to be shipped or transported—from apples to electronics—could cost more as gas prices rise. This is especially true for products, or components for products, that are manufactured overseas. Likewise, many products that contain plastics or synthetic materials are based in part on petroleum and refining. Higher oil prices mean higher prices for these materials too. ## Public Transportation Higher gas prices can result in noticeable increases in some public transportation ridership. Shared and public transportation may become more appealing if gas prices continue to rise as it provides a more cost-effective alternative to sitting in traffic with expensive fuel in the tank. As a historical example, according to the American Public Transportation Association, the Raleigh-Durham-Chapel Hill region of North Carolina saw an 18% increase in riders for the express bus that connects the three cities during April 2011, compared to the same month in 2010—a period that saw gas prices rise sharply. Likewise, during the same period, riders on New Mexico's Rail Runner, a commuter train that provides service between Santa Fe and Albuquerque, increased by 14%. Not all commuters have the flexibility to make this decision, but for some, it has provided a welcome opportunity to save on weekly [commuting expenses](https://www.investopedia.com/terms/c/commutingexpenses.asp). ## Auto Industry The automobile industry has historically responded to rising gasoline prices by using these periods as opportunities to manufacture smaller, more fuel-efficient cars, such as hybrids and, most recently, all-electric cars that can travel up to 250 miles between charges. Consumers have largely supported this move; sales of hybrids and all-electric vehicles in the United States have been on a strong upward trajectory since 2010, while sales of gas guzzlers like large trucks and SUVs have lagged behind. ## Airlines The largest [operating cost](https://www.investopedia.com/terms/o/operating-cost.asp) for airlines, on average, are the companies' fuel expenses and those expenses related to the [procurement](https://www.investopedia.com/terms/p/procurement.asp) of oil. Fuel costs are such a large part of an airline's overhead percentage-wise that the fluctuating price of oil greatly affects the airline's [bottom line](https://www.investopedia.com/terms/b/bottomline.asp). When gas prices rise, airlines are forced to increase the price offered to travelers for flights, which may discourage non-essential air travel and put a further burden on consumers' wallets. To protect themselves from volatile oil costs, and sometimes to even take advantage of rising gas prices, airlines commonly engage in the practice of fuel [hedging](https://www.investopedia.com/terms/h/hedge.asp). They do this by buying or selling the expected future price of oil through a range of [investment products](https://www.investopedia.com/terms/i/investment-product.asp), protecting the airline companies against rising prices. ## Jobs Job growth is carefully watched as an indicator of the recovering economy. And some economists warn that rising gas prices could negatively impact an [economic recovery](https://www.investopedia.com/terms/e/economic-recovery.asp) in terms of hiring practices. Rising gas prices may force some businesses to re-evaluate their hiring plans, holding off because they are uncertain about the economy's health. Less discretionary spending results in decreased sales, both of which can influence a company's ability to hire. ## New Jobs and Freelancers Many job candidates have to weigh prospective positions against the costs associated with the commute. Some workers who have been offered new jobs have been forced to turn down the position simply because the costs to get to and from work would eat up such a large percentage of the salary. [Freelancers](https://www.investopedia.com/terms/f/freelancer.asp) can also be affected by higher gas prices, limiting the geographical region in which they will do business because commuting costs make it impossible for some gigs to be profitable. ## The Bottom Line Though economists and [analysts](https://www.investopedia.com/terms/a/analyst.asp) may argue about the extent to which gas prices have an effect on the economy, there is, at the least, a correlation between [consumer confidence](https://www.investopedia.com/terms/c/cci.asp), spending habits, and gas prices. An August 2020 Gallup poll in the United States, for example, showed that individuals' views of the economy appear to be inversely correlated to the price of gasoline. The poll showed that increases in state gas prices made respondents feel more pessimistic about the economy over the time period in question.

Volatile gas prices have taken center stage in the media as the national average for a gallon of regular gasoline has experienced wild price swings over the past few years. In the past, geopolitical tensions, hurricane seasons, flooding in the Mississippi, and increased travel demand during the summer driving season were forces pushing prices higher. At the individual level, higher gas prices mean that each of us pays more at the pump, leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station; higher gas prices have an effect on the broader economy. Inversely, when gas prices fall, it is cheaper to fill up the tank for both households and businesses and really eases costs on transportation-focused industries like airlines and trucking—but it also puts a damper on the domestic oil industry. In general, higher oil prices are a drag on the economy. Here we will focus on some of the direct and indirect negative effects of high gas prices. Key Takeaways When gas prices rise, it can be a drag on the economy—impacting everything from consumer spending to the price of airline tickets to hiring practices.Gas is an important input for transportation, which directly impacts households as they drive, but also businesses that rely on logistics and transportation chains around the globe.If discretionary spending is hampered by higher gasoline costs, it can have knock-on effects throughout the broader economy. Retailers A side effect of high gas prices is that the discretionary spending of consumers drops as they spend a relatively larger portion of their income on gasoline. Higher prices also mean that shoppers will tend to drive less—including places like the mall or shopping centers. Indeed, academic and industry studies provide support for this, showing that driving miles are directly tied to gas prices. While shoppers may not drive, they do switch to online shopping more when gas prices rise. According to Marin Software, searches for online shopping increase dramatically along with an increase in gas prices. However, all retailers are further squeezed as they are forced to pass on the higher expenses they also experience, which are associated with increased shipping costs to consumers. Anything that has to be shipped or transported—from apples to electronics—could cost more as gas prices rise. This is especially true for products, or components for products, that are manufactured overseas. Likewise, many products that contain plastics or synthetic materials are based in part on petroleum and refining. Higher oil prices mean higher prices for these materials too. Public Transportation Higher gas prices can result in noticeable increases in some public transportation ridership. Shared and public transportation may become more appealing if gas prices continue to rise as it provides a more cost-effective alternative to sitting in traffic with expensive fuel in the tank. As a historical example, according to the American Public Transportation Association, the Raleigh-Durham-Chapel Hill region of North Carolina saw an 18% increase in riders for the express bus that connects the three cities during April 2011, compared to the same month in 2010—a period that saw gas prices rise sharply. Likewise, during the same period, riders on New Mexico's Rail Runner, a commuter train that provides service between Santa Fe and Albuquerque, increased by 14%. Not all commuters have the flexibility to make this decision, but for some, it has provided a welcome opportunity to save on weekly commuting expenses. Auto Industry The automobile industry has historically responded to rising gasoline prices by using these periods as opportunities to manufacture smaller, more fuel-efficient cars, such as hybrids and, most recently, all-electric cars that can travel up to 250 miles between charges. Consumers have largely supported this move; sales of hybrids and all-electric vehicles in the United States have been on a strong upward trajectory since 2010, while sales of gas guzzlers like large trucks and SUVs have lagged behind. Airlines The largest operating cost for airlines, on average, are the companies' fuel expenses and those expenses related to the procurement of oil. Fuel costs are such a large part of an airline's overhead percentage-wise that the fluctuating price of oil greatly affects the airline's bottom line. When gas prices rise, airlines are forced to increase the price offered to travelers for flights, which may discourage non-essential air travel and put a further burden on consumers' wallets. To protect themselves from volatile oil costs, and sometimes to even take advantage of rising gas prices, airlines commonly engage in the practice of fuel hedging. They do this by buying or selling the expected future price of oil through a range of investment products, protecting the airline companies against rising prices. Jobs Job growth is carefully watched as an indicator of the recovering economy. And some economists warn that rising gas prices could negatively impact an economic recovery in terms of hiring practices. Rising gas prices may force some businesses to re-evaluate their hiring plans, holding off because they are uncertain about the economy's health. Less discretionary spending results in decreased sales, both of which can influence a company's ability to hire. New Jobs and Freelancers Many job candidates have to weigh prospective positions against the costs associated with the commute. Some workers who have been offered new jobs have been forced to turn down the position simply because the costs to get to and from work would eat up such a large percentage of the salary. Freelancers can also be affected by higher gas prices, limiting the geographical region in which they will do business because commuting costs make it impossible for some gigs to be profitable. The Bottom Line Though economists and analysts may argue about the extent to which gas prices have an effect on the economy, there is, at the least, a correlation between consumer confidence, spending habits, and gas prices. An August 2020 Gallup poll in the United States, for example, showed that individuals' views of the economy appear to be inversely correlated to the price of gasoline. The poll showed that increases in state gas prices made respondents feel more pessimistic about the economy over the time period in question.

https://www.investopedia.com/spot-bitcoin-etfs-debut-more-than-usd4-6b-worth-trading-volume-grayscale-dominates-8425484

Spot Bitcoin ETFs Debut: More Than $4.6B Worth Trading Volume, Grayscale Dominates

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Spot bitcoin ETFs had their first day of trading in the U.S. on Thursday.</li><li>While there are currently 10 different spot bitcoin ETFs on the market, Grayscale's GBTC accounted for more than half of all of Thursday's trading volume for these financial products.</li><li>According to one analyst, GBTC's current dominance may be due to investors selling that particular offering for one of the new alternatives.</li><li>Despite the approval of spot bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC), some major financial institutions are declining to offer these products to their clients.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> On the first day of spot bitcoin <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded fund (ETF) </a>trading, Grayscale Bitcoin Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC">GBTC</a>), which is a converted version of an already-existing financial product, dominated the competition. That said, there is reason to believe this could be a temporary phenomenon. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <span class="heading-toc" id="toc-grayscale-takes-the-early-lead-but-it-may-not-last"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Grayscale Takes the Early Lead, But It May Not Last </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> There was more than $4.6 billion worth of trading volume in spot bitcoin ETFs on U.S. exchanges on Thursday, which was the first day the newly approved financial products were allowed to be traded. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Trading volume does not necessarily mean money flowing into these products. Why is that? More than half of the trading involved GBTC; however, this could be a temporary trend caused by GBTC holders selling their holdings in favor of alternative options, according to <em>Bloomberg Intelligence</em> analyst James Seyffart.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> When GBTC is removed, spot bitcoin ETF offerings from Blackrock (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK">BLK</a>) and Fidelity are the other major players in terms of volume, with Blackrock's iShares Bitcoin Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ibit">IBIT</a>) seeing more than $1 billion in trading volume on the day. Fidelity's Wise Origin Bitcoin fund (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FBTC">FBTC</a>) saw greater than $700 million in volume. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> When combined, the offerings from Grayscale, Blackrock, and Fidelity accounted for roughly 87% of the total spot bitcoin ETF trading volume today. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> There are currently 10 different spot bitcoin ETF products approved for trading in the U.S. Hashdex's Bitcoin ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DEFI">DEFI</a>) that received approval to convert from a bitcoin futures ETF to a spot product clarified Thursday that it didn't hold a spot position yet. It will change its name and investment strategy at a later date.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In an interview with CNBC, Galaxy Investment Partners CEO Michael Novogratz shared his view that the battle for spot bitcoin ETF dominance will be between Blackrock, Fidelity, and Invesco, despite the early centralization of activity around GBTC.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-vanguard-stays-on-the-sidelines-ubs-approaches-with-caution"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Vanguard Stays on the Sidelines, UBS Approaches With Caution </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> While <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-are-approved-by-sec-cleared-to-start-trading-thursday-8357670">yesterday's official regulatory approval of spot bitcoin ETFs</a> by the SEC was viewed by many as a landmark moment for the crypto asset from both a regulatory and institutional perspective. Brokerage clients of Fidelity and Charles Schwab (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SCHW">SCHW</a>) have access to the spot bitcoin ETFs but there are still some major financial firms that are limiting their customers' access to this new product. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> "While we continuously evaluate our brokerage offer and evaluate new product entries to the market, spot Bitcoin ETFs will not be available for purchase on the Vanguard platform," said a Vanguard spokesperson in a statement. "We also have no plans to offer Vanguard Bitcoin ETFs or other crypto-related products. Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Other firms took a more measured approach. A source close to UBS (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ubs">UBS</a>) said that the company is allowing its clients access to "more than half" but not all of the spot bitcoin ETFs available. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> While it is unclear which ETFs are available to UBS customers, trades will be allowed only if certain conditions are met. Those include trades that are unsolicited (initiated by the client and not sought by the advisor), made from a brokerage account as opposed to an advisory account and in line with the client's risk tolerance, among other factors. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * Spot bitcoin ETFs had their first day of trading in the U.S. on Thursday. * While there are currently 10 different spot bitcoin ETFs on the market, Grayscale's GBTC accounted for more than half of all of Thursday's trading volume for these financial products. * According to one analyst, GBTC's current dominance may be due to investors selling that particular offering for one of the new alternatives. * Despite the approval of spot bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC), some major financial institutions are declining to offer these products to their clients. On the first day of spot bitcoin [exchange-traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp) trading, Grayscale Bitcoin Trust ([GBTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC)), which is a converted version of an already-existing financial product, dominated the competition. That said, there is reason to believe this could be a temporary phenomenon. ## Grayscale Takes the Early Lead, But It May Not Last There was more than $4.6 billion worth of trading volume in spot bitcoin ETFs on U.S. exchanges on Thursday, which was the first day the newly approved financial products were allowed to be traded. Trading volume does not necessarily mean money flowing into these products. Why is that? More than half of the trading involved GBTC; however, this could be a temporary trend caused by GBTC holders selling their holdings in favor of alternative options, according to *Bloomberg Intelligence* analyst James Seyffart. When GBTC is removed, spot bitcoin ETF offerings from Blackrock ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK)) and Fidelity are the other major players in terms of volume, with Blackrock's iShares Bitcoin Trust ([IBIT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ibit)) seeing more than $1 billion in trading volume on the day. Fidelity's Wise Origin Bitcoin fund ([FBTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FBTC)) saw greater than $700 million in volume. When combined, the offerings from Grayscale, Blackrock, and Fidelity accounted for roughly 87% of the total spot bitcoin ETF trading volume today. There are currently 10 different spot bitcoin ETF products approved for trading in the U.S. Hashdex's Bitcoin ETF ([DEFI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DEFI)) that received approval to convert from a bitcoin futures ETF to a spot product clarified Thursday that it didn't hold a spot position yet. It will change its name and investment strategy at a later date. In an interview with CNBC, Galaxy Investment Partners CEO Michael Novogratz shared his view that the battle for spot bitcoin ETF dominance will be between Blackrock, Fidelity, and Invesco, despite the early centralization of activity around GBTC. ## Vanguard Stays on the Sidelines, UBS Approaches With Caution While [yesterday's official regulatory approval of spot bitcoin ETFs](https://www.investopedia.com/spot-bitcoin-etfs-are-approved-by-sec-cleared-to-start-trading-thursday-8357670) by the SEC was viewed by many as a landmark moment for the crypto asset from both a regulatory and institutional perspective. Brokerage clients of Fidelity and Charles Schwab ([SCHW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SCHW)) have access to the spot bitcoin ETFs but there are still some major financial firms that are limiting their customers' access to this new product. "While we continuously evaluate our brokerage offer and evaluate new product entries to the market, spot Bitcoin ETFs will not be available for purchase on the Vanguard platform," said a Vanguard spokesperson in a statement. "We also have no plans to offer Vanguard Bitcoin ETFs or other crypto-related products. Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio." Other firms took a more measured approach. A source close to UBS ([UBS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ubs)) said that the company is allowing its clients access to "more than half" but not all of the spot bitcoin ETFs available. While it is unclear which ETFs are available to UBS customers, trades will be allowed only if certain conditions are met. Those include trades that are unsolicited (initiated by the client and not sought by the advisor), made from a brokerage account as opposed to an advisory account and in line with the client's risk tolerance, among other factors. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways Spot bitcoin ETFs had their first day of trading in the U.S. on Thursday.While there are currently 10 different spot bitcoin ETFs on the market, Grayscale's GBTC accounted for more than half of all of Thursday's trading volume for these financial products.According to one analyst, GBTC's current dominance may be due to investors selling that particular offering for one of the new alternatives.Despite the approval of spot bitcoin ETFs by the U.S. Securities and Exchange Commission (SEC), some major financial institutions are declining to offer these products to their clients. On the first day of spot bitcoin exchange-traded fund (ETF) trading, Grayscale Bitcoin Trust (GBTC), which is a converted version of an already-existing financial product, dominated the competition. That said, there is reason to believe this could be a temporary phenomenon. Grayscale Takes the Early Lead, But It May Not Last There was more than $4.6 billion worth of trading volume in spot bitcoin ETFs on U.S. exchanges on Thursday, which was the first day the newly approved financial products were allowed to be traded. Trading volume does not necessarily mean money flowing into these products. Why is that? More than half of the trading involved GBTC; however, this could be a temporary trend caused by GBTC holders selling their holdings in favor of alternative options, according to Bloomberg Intelligence analyst James Seyffart. When GBTC is removed, spot bitcoin ETF offerings from Blackrock (BLK) and Fidelity are the other major players in terms of volume, with Blackrock's iShares Bitcoin Trust (IBIT) seeing more than $1 billion in trading volume on the day. Fidelity's Wise Origin Bitcoin fund (FBTC) saw greater than $700 million in volume. When combined, the offerings from Grayscale, Blackrock, and Fidelity accounted for roughly 87% of the total spot bitcoin ETF trading volume today. There are currently 10 different spot bitcoin ETF products approved for trading in the U.S. Hashdex's Bitcoin ETF (DEFI) that received approval to convert from a bitcoin futures ETF to a spot product clarified Thursday that it didn't hold a spot position yet. It will change its name and investment strategy at a later date. In an interview with CNBC, Galaxy Investment Partners CEO Michael Novogratz shared his view that the battle for spot bitcoin ETF dominance will be between Blackrock, Fidelity, and Invesco, despite the early centralization of activity around GBTC. Vanguard Stays on the Sidelines, UBS Approaches With Caution While yesterday's official regulatory approval of spot bitcoin ETFs by the SEC was viewed by many as a landmark moment for the crypto asset from both a regulatory and institutional perspective. Brokerage clients of Fidelity and Charles Schwab (SCHW) have access to the spot bitcoin ETFs but there are still some major financial firms that are limiting their customers' access to this new product. "While we continuously evaluate our brokerage offer and evaluate new product entries to the market, spot Bitcoin ETFs will not be available for purchase on the Vanguard platform," said a Vanguard spokesperson in a statement. "We also have no plans to offer Vanguard Bitcoin ETFs or other crypto-related products. Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio." Other firms took a more measured approach. A source close to UBS (UBS) said that the company is allowing its clients access to "more than half" but not all of the spot bitcoin ETFs available. While it is unclear which ETFs are available to UBS customers, trades will be allowed only if certain conditions are met. Those include trades that are unsolicited (initiated by the client and not sought by the advisor), made from a brokerage account as opposed to an advisory account and in line with the client's risk tolerance, among other factors. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/terms/s/stockahead.asp

Stock Ahead: What It is, How It Works, Example

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-stock-ahead"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What is Stock Ahead? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Stock ahead refers to a situation in which an order is placed, but not executed, because of a previously sent order involving the same price. Depending on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchange.asp">exchange's</a> priority rules, this can also happen when two bids or offers are made with identical prices. The orders are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/queuing-theory.asp">placed in a queue</a>, and are filled according to the exchange's priority rules when liquidity at that price is available. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Each exchange has rules for which order takes priority when two (or more) orders come in at the same time for the same price.</li><li>Stock ahead refers to shares that are ahead of other orders in terms of getting filled.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-stock-ahead"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Stock Ahead </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Stock ahead refers to the queue of orders waiting to be executed. Five traders may place a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitorder.asp" rel="noopener noreferrer">limit order</a> at the same price. Their orders form a lineup. The person who placed their order first is the front of the line, and will be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fill.asp" rel="noopener noreferrer">filled</a> first when liquidity is available at that price. The second order received will be filled second, and the third order, third, and so on. Anyone who isn't first in line has "stock ahead" of them that needs to filled before their order is filled. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Different exchanges have different priority rules. Some are based on the time in which orders are received, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp" rel="noopener noreferrer">Nasdaq</a>, as mentioned above. This is fairly straightforward: the first person at that price gets filled first when shares are available.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Other markets may use a hybrid system. For example, on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp" rel="noopener noreferrer">New York Stock Exchange</a> (NYSE), the first person in line gets most of the shares, but other orders at that level also get some shares. For example, there may be five sellers on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ask.asp" rel="noopener noreferrer">offer</a>. If a market buy order comes in, the first in line gets the most, but the other four sell orders also get a small piece of the buy order (filling or partially filling their sell order).<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Stock ahead typically refers to limit orders where a specific price is requested. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketorder.asp" rel="noopener noreferrer">Market orders</a> will fill at any price available, usually instantly, and therefore don't have any stock ahead of them. There are priority rules for that as well, which will vary by exchange, if two market orders are received at the exact same time. NYSE executes the bigger order first.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-example-of-stock-ahead-on-nasdaq"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Example of Stock Ahead on Nasdaq </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Bert places a limit order to sell 100 shares of Apple (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl" rel="noopener noreferrer">AAPL</a>) stock for $250 per share. While his order is waiting, Ernie sends a limit order to sell 1,000 shares of Apple stock for the same price. When the price rises to near $250, assume that someone places a buy order for 100 shares at $250. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Since the buy order is for 100 shares, and Bert was selling at $250 first, his 100 shares will be filled. Ernie is left selling his 1,000 shares at $250, but he is now first in line. Apple is listed on the Nasdaq stock exchange, which fills orders based on the time they are received.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If Jill places an order to sell 500 shares at $250, she will need to wait until Ernie is able to sell his 1,000 shares. Once someone has bought the 1,000 shares from Ernie, then Jill will get filled with subsequent buy orders (to fill her sell order). Until this happens, Jill has stock ahead of her. </p></div>

## What is Stock Ahead? Stock ahead refers to a situation in which an order is placed, but not executed, because of a previously sent order involving the same price. Depending on the [exchange's](https://www.investopedia.com/terms/e/exchange.asp) priority rules, this can also happen when two bids or offers are made with identical prices. The orders are [placed in a queue](https://www.investopedia.com/terms/q/queuing-theory.asp), and are filled according to the exchange's priority rules when liquidity at that price is available. ### Key Takeaways * Each exchange has rules for which order takes priority when two (or more) orders come in at the same time for the same price. * Stock ahead refers to shares that are ahead of other orders in terms of getting filled. ## Understanding Stock Ahead Stock ahead refers to the queue of orders waiting to be executed. Five traders may place a [limit order](https://www.investopedia.com/terms/l/limitorder.asp) at the same price. Their orders form a lineup. The person who placed their order first is the front of the line, and will be [filled](https://www.investopedia.com/terms/f/fill.asp) first when liquidity is available at that price. The second order received will be filled second, and the third order, third, and so on. Anyone who isn't first in line has "stock ahead" of them that needs to filled before their order is filled. Different exchanges have different priority rules. Some are based on the time in which orders are received, such as [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp), as mentioned above. This is fairly straightforward: the first person at that price gets filled first when shares are available. Other markets may use a hybrid system. For example, on the [New York Stock Exchange](https://www.investopedia.com/terms/n/nyse.asp) (NYSE), the first person in line gets most of the shares, but other orders at that level also get some shares. For example, there may be five sellers on the [offer](https://www.investopedia.com/terms/a/ask.asp). If a market buy order comes in, the first in line gets the most, but the other four sell orders also get a small piece of the buy order (filling or partially filling their sell order). Stock ahead typically refers to limit orders where a specific price is requested. [Market orders](https://www.investopedia.com/terms/m/marketorder.asp) will fill at any price available, usually instantly, and therefore don't have any stock ahead of them. There are priority rules for that as well, which will vary by exchange, if two market orders are received at the exact same time. NYSE executes the bigger order first. ## Example of Stock Ahead on Nasdaq Bert places a limit order to sell 100 shares of Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) stock for $250 per share. While his order is waiting, Ernie sends a limit order to sell 1,000 shares of Apple stock for the same price. When the price rises to near $250, assume that someone places a buy order for 100 shares at $250. Since the buy order is for 100 shares, and Bert was selling at $250 first, his 100 shares will be filled. Ernie is left selling his 1,000 shares at $250, but he is now first in line. Apple is listed on the Nasdaq stock exchange, which fills orders based on the time they are received. If Jill places an order to sell 500 shares at $250, she will need to wait until Ernie is able to sell his 1,000 shares. Once someone has bought the 1,000 shares from Ernie, then Jill will get filled with subsequent buy orders (to fill her sell order). Until this happens, Jill has stock ahead of her.

What is Stock Ahead? Stock ahead refers to a situation in which an order is placed, but not executed, because of a previously sent order involving the same price. Depending on the exchange's priority rules, this can also happen when two bids or offers are made with identical prices. The orders are placed in a queue, and are filled according to the exchange's priority rules when liquidity at that price is available. Key Takeaways Each exchange has rules for which order takes priority when two (or more) orders come in at the same time for the same price.Stock ahead refers to shares that are ahead of other orders in terms of getting filled. Understanding Stock Ahead Stock ahead refers to the queue of orders waiting to be executed. Five traders may place a limit order at the same price. Their orders form a lineup. The person who placed their order first is the front of the line, and will be filled first when liquidity is available at that price. The second order received will be filled second, and the third order, third, and so on. Anyone who isn't first in line has "stock ahead" of them that needs to filled before their order is filled. Different exchanges have different priority rules. Some are based on the time in which orders are received, such as Nasdaq, as mentioned above. This is fairly straightforward: the first person at that price gets filled first when shares are available. Other markets may use a hybrid system. For example, on the New York Stock Exchange (NYSE), the first person in line gets most of the shares, but other orders at that level also get some shares. For example, there may be five sellers on the offer. If a market buy order comes in, the first in line gets the most, but the other four sell orders also get a small piece of the buy order (filling or partially filling their sell order). Stock ahead typically refers to limit orders where a specific price is requested. Market orders will fill at any price available, usually instantly, and therefore don't have any stock ahead of them. There are priority rules for that as well, which will vary by exchange, if two market orders are received at the exact same time. NYSE executes the bigger order first. Example of Stock Ahead on Nasdaq Bert places a limit order to sell 100 shares of Apple (AAPL) stock for $250 per share. While his order is waiting, Ernie sends a limit order to sell 1,000 shares of Apple stock for the same price. When the price rises to near $250, assume that someone places a buy order for 100 shares at $250. Since the buy order is for 100 shares, and Bert was selling at $250 first, his 100 shares will be filled. Ernie is left selling his 1,000 shares at $250, but he is now first in line. Apple is listed on the Nasdaq stock exchange, which fills orders based on the time they are received. If Jill places an order to sell 500 shares at $250, she will need to wait until Ernie is able to sell his 1,000 shares. Once someone has bought the 1,000 shares from Ernie, then Jill will get filled with subsequent buy orders (to fill her sell order). Until this happens, Jill has stock ahead of her.

https://www.investopedia.com/terms/r/requiredrateofreturn.asp

Required Rate of Return (RRR): Definition and Examples

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-required-rate-of-return-rrr"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Required Rate of Return (RRR)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The required <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rate of return</a> (RRR) is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The RRR is also known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hurdlerate.asp">hurdle rate</a>, which like RRR, denotes the appropriate compensation needed for the level of risk present. Riskier projects usually have higher hurdle rates, or RRRs, than those that are less risky. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The required rate of return is the minimum return an investor will accept for owning a company's stock, to compensate them for a given level of risk.</li><li>To accurately calculate the RRR and improve its utility, the investor must also consider his or her cost of capital, the return available from other competing investments, and inflation. </li><li>The RRR is a subjective minimum rate of return; this means that a retiree will have a lower risk tolerance and therefore accept a smaller return than an investor who recently graduated college and may have a higher appetite for risk.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Required Rate of Return (RRR)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/iofISIBBy26segvX0eeME0dz8m4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/requiredrateofreturn.asp-final-2098c3708aa64fe3ab723ba824293536.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/iofISIBBy26segvX0eeME0dz8m4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/requiredrateofreturn.asp-final-2098c3708aa64fe3ab723ba824293536.png" data-srcset="https://www.investopedia.com/thmb/xuVd2su0Bfga_zbalHV1ubUQQBM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/requiredrateofreturn.asp-final-2098c3708aa64fe3ab723ba824293536.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Required Rate of Return (RRR)" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/iofISIBBy26segvX0eeME0dz8m4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/requiredrateofreturn.asp-final-2098c3708aa64fe3ab723ba824293536.png" srcset="https://www.investopedia.com/thmb/xuVd2su0Bfga_zbalHV1ubUQQBM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/requiredrateofreturn.asp-final-2098c3708aa64fe3ab723ba824293536.png 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jessica Olah</p></span> </figcaption></figure> <span class="heading-toc" id="toc-2-methods-to-calculate-the-required-rate-of-return-rrr"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> 2 Methods to Calculate the Required Rate of Return (RRR) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> There are a couple of ways to calculate the required rate of return—either using the dividend discount model (DDM), or the capital asset pricing model (CAPM). The choice of model used to calculate the RRR depends on the situation for which it is being used. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-subheading__text"> Calculating RRR Using the Dividend Discount Model </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> If an investor is considering buying equity shares in a company that pays dividends, the dividend discount model is ideal. A popular variation of the dividend discount model is also known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gordongrowthmodel.asp">Gordon Growth Model</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The dividend-discount model calculates the RRR for equity of a dividend-paying stock by utilizing the current stock price, the dividend payment per share, and the forecasted dividend growth rate. The formula is as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <strong>RRR =  (Expected dividend payment / Share Price) + Forecasted dividend growth rate       </strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> To calculate RRR using the dividend discount model: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li>Take the expected dividend payment and divide it by the current stock price.</li><li>Add the result to the forecasted dividend growth rate.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-inlinevideo mntl-sc-block-inlinevideo mntl-block has-details inline-video" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block-inlinevideo__video-container mntl-block" id="mntl-sc-block-inlinevideo__video-container_1-0"><div class="comp mntl-sc-block-inlinevideo__video mntl-jwplayer mm-video lazyload aspectratio-16:9" data-bgset="https://cdn.jwplayer.com/v2/media/bllq9Pkd/poster.jpg?width=720" data-sizes="auto" id="mntl-sc-block-inlinevideo__video_1-0"></div></div> <h4 class="comp mntl-sc-block-inlinevideo__title mntl-text-block" id="mntl-sc-block-inlinevideo__title_1-0">How to Calculate Required Rate of Return</h4></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Calculating RRR Using the Capital Asset Pricing Model (CAPM) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Another way to calculate RRR is to use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM), which is typically used by investors for stocks that do not pay dividends. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The CAPM model of calculating RRR uses the beta of an asset. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">Beta</a> is the risk coefficient of the holding. In other words, beta attempts to measure the riskiness of a stock or investment over time. Stocks with betas greater than 1 are considered riskier than the overall market (often represented by a benchmark equity index, such as the S&amp;P 500 in the U.S., or the TSX Composite in Canada), whereas stocks with betas less than 1 are considered less risky than the overall market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The formula also uses the risk-free rate of return, which is typically the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012015/how-do-i-calculate-yield-maturity-excel.asp">yield</a> on short-term U.S. Treasury securities. The final variable is the market rate of return, which is typically the annual return of the S&amp;P 500 index. The formula for RRR using the CAPM model is as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <strong>RRR =  Risk-free rate of return + <em>Beta </em>X (Market rate of return - Risk-free rate of return)       </strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> To calculate RRR using the CAPM: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <li>Subtract the risk-free rate of return from the market rate of return.</li><li>Multiply the above figure by the beta of the security.</li><li>Add this result to the risk-free rate to determine the required rate of return.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <span class="heading-toc" id="toc-what-does-the-required-rate-of-return-tell-you"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> What Does the Required Rate of Return Tell You? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fundamental-analysis/11/calculating-required-rate-of-return.asp">The required rate of return</a> RRR is a key concept in equity valuation and corporate finance. It's a difficult metric to pinpoint due to the different investment goals and risk tolerances of individual investors and companies. Risk-return preferences, inflation expectations, and a company’s capital structure all play a role in determining the company's own required rate. Each one of these and other factors can have major effects on a security's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intrinsicvalue.asp">intrinsic value</a>.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> For investors using the CAPM formula, the required rate of return for a stock with a high beta relative to the market should have a higher RRR. The higher RRR relative to other investments with low betas is necessary to compensate investors for the added level of risk associated with investing in the higher beta stock. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> In other words, RRR is in part calculated by adding the risk premium to the expected risk-free rate of return to account for the added volatility and subsequent risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> For capital projects, RRR is useful in determining whether to pursue one project versus another. The RRR is what's needed to go ahead with the project although some projects might not meet the RRR but are in the long-term best interests of the company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> To accurately calculate the RRR and make it more meaningful, the investor must also consider their cost of capital, as well as the return available from other competing investments. In addition, inflation must also be factored into RRR analysis so as to obtain the real (or inflation-adjusted) rate of return. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <span class="heading-toc" id="toc-example-of-rrr-using-the-dividend-discount-model-ddm"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> Example of RRR Using the Dividend Discount Model (DDM) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> A company is expected to pay an annual dividend of $3 next year, and its stock is currently trading at $100 a share. The company has been steadily raising its dividend each year at a 4% growth rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> <li><strong>RRR = 7% or (($3 expected dividend / $100 per share) + 4% growth rate)</strong></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-example-of-rrr-using-the-capital-asset-pricing-model-capm"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> Example of RRR Using the Capital Asset Pricing Model (CAPM) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> In the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM), RRR can be calculated using the beta of a security, or risk coefficient, as well as the excess return that investing in the stock pays over a risk-free rate (called the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equityriskpremium.asp">equity risk premium</a>). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Assume the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> <li>The current risk-free rate is 2% on a short-term U.S. Treasury.</li><li>The long-term average rate of return for the market is 10%.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Let's say Company A has a beta of 1.50, meaning that it is riskier than the overall market (which has a beta of 1). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> To invest in Company A, RRR = 14% or (2% + 1.50 X (10% - 2%)) </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Company B has a beta of 0.50, which implies that it is less risky than the overall market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> To invest in Company B, RRR = 6% or (2% + 0.50 X (10% - 2%)) </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Thus, an investor evaluating the merits of investing in Company A versus Company B would require a significantly higher rate of return from Company A because of its much higher beta. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <span class="heading-toc" id="toc-required-rate-of-return-vs-cost-of-capital"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> Required Rate of Return vs. Cost of Capital </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Although the required rate of return is used in capital budgeting projects, RRR is not the same level of return that's needed to cover the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/costofcapital.asp">cost of capital</a>. The cost of capital is the minimum return needed to cover the cost of debt and equity issuance to raise funds for the project. The cost of capital is the lowest return needed to account for the capital structure. The RRR should always be higher than the cost of capital. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <span class="heading-toc" id="toc-limitations-of-the-required-rate-of-return"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_74-0"> <span class="mntl-sc-block-heading__text"> Limitations of the Required Rate of Return </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> The RRR calculation does not factor in inflation expectations since rising prices erode investment gains. However, inflation expectations are subjective and can be wrong. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Also, the RRR will vary between investors with different risk tolerance levels. A retiree will have a lower risk tolerance than an investor who recently graduated college. As a result, the RRR is a subjective rate of return. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> RRR does not factor in the liquidity of an investment. If an investment can't be sold for a period of time, the security will likely carry a higher risk than one that's more liquid. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Also, comparing stocks in different industries can be difficult since the risk or beta will be different. As with any financial ratio or metric, it's best to utilize multiple ratios in your analysis when considering investment opportunities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_83-0"><span class="heading-toc" id="toc-what-is-the-difference-between-the-internal-rate-of-return-and-the-required-rate-of-return"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between the Internal Rate of Return and the Required Rate of Return?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The internal rate of return looks at the investment's annual growth rate, stating that an investment should be pursued if this rate is greater than the minimum required rate of return.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_85-0"><span class="heading-toc" id="toc-should-the-required-rate-of-return-be-high-or-low"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should the Required Rate of Return Be High or Low?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The inherent risks of an investment or project are determined through its required rate of return, and thus, a high RRR indicates higher risks while a low RRR implies minimal risks.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_87-0"><span class="heading-toc" id="toc-what-is-considered-a-good-return-on-an-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Considered a Good Return on an Investment?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A good return on investment is generally considered to be approximately 7% per year or higher, which is also the average annual return of the S&amp;P 500, adjusting for inflation.</p><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> The required rate of return tells investors whether to expand or take on new projects, venture into an investment, or buy the stocks of a company. The RRR determines the inherent risks of an investment, and it can vary between investors with different risk tolerance levels. The RRR can be used as a benchmark of minimum acceptable return when compared to the cost and returns of other similar investment opportunities.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Different models can be used to calculate the required rate of return for an investment opportunity or project, but any calculation does not factor in inflation expectations or the liquidity of an investment.<br/> </p></div>

## What Is Required Rate of Return (RRR)? The required [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) (RRR) is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects. The RRR is also known as the [hurdle rate](https://www.investopedia.com/terms/h/hurdlerate.asp), which like RRR, denotes the appropriate compensation needed for the level of risk present. Riskier projects usually have higher hurdle rates, or RRRs, than those that are less risky. ### Key Takeaways * The required rate of return is the minimum return an investor will accept for owning a company's stock, to compensate them for a given level of risk. * To accurately calculate the RRR and improve its utility, the investor must also consider his or her cost of capital, the return available from other competing investments, and inflation. * The RRR is a subjective minimum rate of return; this means that a retiree will have a lower risk tolerance and therefore accept a smaller return than an investor who recently graduated college and may have a higher appetite for risk. ![Required Rate of Return (RRR)]() :max_bytes(150000):strip_icc()/requiredrateofreturn.asp-final-2098c3708aa64fe3ab723ba824293536.png) Investopedia / Jessica Olah ## 2 Methods to Calculate the Required Rate of Return (RRR) There are a couple of ways to calculate the required rate of return—either using the dividend discount model (DDM), or the capital asset pricing model (CAPM). The choice of model used to calculate the RRR depends on the situation for which it is being used. ### Calculating RRR Using the Dividend Discount Model If an investor is considering buying equity shares in a company that pays dividends, the dividend discount model is ideal. A popular variation of the dividend discount model is also known as the [Gordon Growth Model](https://www.investopedia.com/terms/g/gordongrowthmodel.asp). The dividend-discount model calculates the RRR for equity of a dividend-paying stock by utilizing the current stock price, the dividend payment per share, and the forecasted dividend growth rate. The formula is as follows: **RRR =  (Expected dividend payment / Share Price) + Forecasted dividend growth rate** To calculate RRR using the dividend discount model: 1. Take the expected dividend payment and divide it by the current stock price. 2. Add the result to the forecasted dividend growth rate. #### How to Calculate Required Rate of Return ### Calculating RRR Using the Capital Asset Pricing Model (CAPM) Another way to calculate RRR is to use the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM), which is typically used by investors for stocks that do not pay dividends. The CAPM model of calculating RRR uses the beta of an asset. [Beta](https://www.investopedia.com/terms/b/beta.asp) is the risk coefficient of the holding. In other words, beta attempts to measure the riskiness of a stock or investment over time. Stocks with betas greater than 1 are considered riskier than the overall market (often represented by a benchmark equity index, such as the S&P 500 in the U.S., or the TSX Composite in Canada), whereas stocks with betas less than 1 are considered less risky than the overall market. The formula also uses the risk-free rate of return, which is typically the [yield](https://www.investopedia.com/ask/answers/012015/how-do-i-calculate-yield-maturity-excel.asp) on short-term U.S. Treasury securities. The final variable is the market rate of return, which is typically the annual return of the S&P 500 index. The formula for RRR using the CAPM model is as follows: **RRR =  Risk-free rate of return + *Beta* X (Market rate of return - Risk-free rate of return)** To calculate RRR using the CAPM: 1. Subtract the risk-free rate of return from the market rate of return. 2. Multiply the above figure by the beta of the security. 3. Add this result to the risk-free rate to determine the required rate of return. ## What Does the Required Rate of Return Tell You? [The required rate of return](https://www.investopedia.com/articles/fundamental-analysis/11/calculating-required-rate-of-return.asp) RRR is a key concept in equity valuation and corporate finance. It's a difficult metric to pinpoint due to the different investment goals and risk tolerances of individual investors and companies. Risk-return preferences, inflation expectations, and a company’s capital structure all play a role in determining the company's own required rate. Each one of these and other factors can have major effects on a security's [intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp).  For investors using the CAPM formula, the required rate of return for a stock with a high beta relative to the market should have a higher RRR. The higher RRR relative to other investments with low betas is necessary to compensate investors for the added level of risk associated with investing in the higher beta stock. In other words, RRR is in part calculated by adding the risk premium to the expected risk-free rate of return to account for the added volatility and subsequent risk. For capital projects, RRR is useful in determining whether to pursue one project versus another. The RRR is what's needed to go ahead with the project although some projects might not meet the RRR but are in the long-term best interests of the company. To accurately calculate the RRR and make it more meaningful, the investor must also consider their cost of capital, as well as the return available from other competing investments. In addition, inflation must also be factored into RRR analysis so as to obtain the real (or inflation-adjusted) rate of return. ## Example of RRR Using the Dividend Discount Model (DDM) A company is expected to pay an annual dividend of $3 next year, and its stock is currently trading at $100 a share. The company has been steadily raising its dividend each year at a 4% growth rate. * **RRR = 7% or (($3 expected dividend / $100 per share) + 4% growth rate)** ## Example of RRR Using the Capital Asset Pricing Model (CAPM) In the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM), RRR can be calculated using the beta of a security, or risk coefficient, as well as the excess return that investing in the stock pays over a risk-free rate (called the [equity risk premium](https://www.investopedia.com/terms/e/equityriskpremium.asp)). Assume the following: * The current risk-free rate is 2% on a short-term U.S. Treasury. * The long-term average rate of return for the market is 10%. Let's say Company A has a beta of 1.50, meaning that it is riskier than the overall market (which has a beta of 1). To invest in Company A, RRR = 14% or (2% + 1.50 X (10% - 2%)) Company B has a beta of 0.50, which implies that it is less risky than the overall market. To invest in Company B, RRR = 6% or (2% + 0.50 X (10% - 2%)) Thus, an investor evaluating the merits of investing in Company A versus Company B would require a significantly higher rate of return from Company A because of its much higher beta. ## Required Rate of Return vs. Cost of Capital Although the required rate of return is used in capital budgeting projects, RRR is not the same level of return that's needed to cover the [cost of capital](https://www.investopedia.com/terms/c/costofcapital.asp). The cost of capital is the minimum return needed to cover the cost of debt and equity issuance to raise funds for the project. The cost of capital is the lowest return needed to account for the capital structure. The RRR should always be higher than the cost of capital. ## Limitations of the Required Rate of Return The RRR calculation does not factor in inflation expectations since rising prices erode investment gains. However, inflation expectations are subjective and can be wrong. Also, the RRR will vary between investors with different risk tolerance levels. A retiree will have a lower risk tolerance than an investor who recently graduated college. As a result, the RRR is a subjective rate of return. RRR does not factor in the liquidity of an investment. If an investment can't be sold for a period of time, the security will likely carry a higher risk than one that's more liquid. Also, comparing stocks in different industries can be difficult since the risk or beta will be different. As with any financial ratio or metric, it's best to utilize multiple ratios in your analysis when considering investment opportunities. ## What Is the Difference Between the Internal Rate of Return and the Required Rate of Return? The internal rate of return looks at the investment's annual growth rate, stating that an investment should be pursued if this rate is greater than the minimum required rate of return. ## Should the Required Rate of Return Be High or Low? The inherent risks of an investment or project are determined through its required rate of return, and thus, a high RRR indicates higher risks while a low RRR implies minimal risks. ## What Is Considered a Good Return on an Investment? A good return on investment is generally considered to be approximately 7% per year or higher, which is also the average annual return of the S&P 500, adjusting for inflation. ## The Bottom Line The required rate of return tells investors whether to expand or take on new projects, venture into an investment, or buy the stocks of a company. The RRR determines the inherent risks of an investment, and it can vary between investors with different risk tolerance levels. The RRR can be used as a benchmark of minimum acceptable return when compared to the cost and returns of other similar investment opportunities. Different models can be used to calculate the required rate of return for an investment opportunity or project, but any calculation does not factor in inflation expectations or the liquidity of an investment.

What Is Required Rate of Return (RRR)? The required rate of return (RRR) is the minimum return an investor will accept for owning a company's stock, as compensation for a given level of risk associated with holding the stock. The RRR is also used in corporate finance to analyze the profitability of potential investment projects. The RRR is also known as the hurdle rate, which like RRR, denotes the appropriate compensation needed for the level of risk present. Riskier projects usually have higher hurdle rates, or RRRs, than those that are less risky. Key Takeaways The required rate of return is the minimum return an investor will accept for owning a company's stock, to compensate them for a given level of risk.To accurately calculate the RRR and improve its utility, the investor must also consider his or her cost of capital, the return available from other competing investments, and inflation. The RRR is a subjective minimum rate of return; this means that a retiree will have a lower risk tolerance and therefore accept a smaller return than an investor who recently graduated college and may have a higher appetite for risk. Investopedia / Jessica Olah 2 Methods to Calculate the Required Rate of Return (RRR) There are a couple of ways to calculate the required rate of return—either using the dividend discount model (DDM), or the capital asset pricing model (CAPM). The choice of model used to calculate the RRR depends on the situation for which it is being used. Calculating RRR Using the Dividend Discount Model If an investor is considering buying equity shares in a company that pays dividends, the dividend discount model is ideal. A popular variation of the dividend discount model is also known as the Gordon Growth Model. The dividend-discount model calculates the RRR for equity of a dividend-paying stock by utilizing the current stock price, the dividend payment per share, and the forecasted dividend growth rate. The formula is as follows: RRR =  (Expected dividend payment / Share Price) + Forecasted dividend growth rate       To calculate RRR using the dividend discount model: Take the expected dividend payment and divide it by the current stock price.Add the result to the forecasted dividend growth rate. How to Calculate Required Rate of Return Calculating RRR Using the Capital Asset Pricing Model (CAPM) Another way to calculate RRR is to use the capital asset pricing model (CAPM), which is typically used by investors for stocks that do not pay dividends. The CAPM model of calculating RRR uses the beta of an asset. Beta is the risk coefficient of the holding. In other words, beta attempts to measure the riskiness of a stock or investment over time. Stocks with betas greater than 1 are considered riskier than the overall market (often represented by a benchmark equity index, such as the S&P 500 in the U.S., or the TSX Composite in Canada), whereas stocks with betas less than 1 are considered less risky than the overall market. The formula also uses the risk-free rate of return, which is typically the yield on short-term U.S. Treasury securities. The final variable is the market rate of return, which is typically the annual return of the S&P 500 index. The formula for RRR using the CAPM model is as follows: RRR =  Risk-free rate of return + Beta X (Market rate of return - Risk-free rate of return)       To calculate RRR using the CAPM: Subtract the risk-free rate of return from the market rate of return.Multiply the above figure by the beta of the security.Add this result to the risk-free rate to determine the required rate of return. What Does the Required Rate of Return Tell You? The required rate of return RRR is a key concept in equity valuation and corporate finance. It's a difficult metric to pinpoint due to the different investment goals and risk tolerances of individual investors and companies. Risk-return preferences, inflation expectations, and a company’s capital structure all play a role in determining the company's own required rate. Each one of these and other factors can have major effects on a security's intrinsic value.  For investors using the CAPM formula, the required rate of return for a stock with a high beta relative to the market should have a higher RRR. The higher RRR relative to other investments with low betas is necessary to compensate investors for the added level of risk associated with investing in the higher beta stock. In other words, RRR is in part calculated by adding the risk premium to the expected risk-free rate of return to account for the added volatility and subsequent risk. For capital projects, RRR is useful in determining whether to pursue one project versus another. The RRR is what's needed to go ahead with the project although some projects might not meet the RRR but are in the long-term best interests of the company. To accurately calculate the RRR and make it more meaningful, the investor must also consider their cost of capital, as well as the return available from other competing investments. In addition, inflation must also be factored into RRR analysis so as to obtain the real (or inflation-adjusted) rate of return. Example of RRR Using the Dividend Discount Model (DDM) A company is expected to pay an annual dividend of $3 next year, and its stock is currently trading at $100 a share. The company has been steadily raising its dividend each year at a 4% growth rate. RRR = 7% or (($3 expected dividend / $100 per share) + 4% growth rate) Example of RRR Using the Capital Asset Pricing Model (CAPM) In the capital asset pricing model (CAPM), RRR can be calculated using the beta of a security, or risk coefficient, as well as the excess return that investing in the stock pays over a risk-free rate (called the equity risk premium). Assume the following: The current risk-free rate is 2% on a short-term U.S. Treasury.The long-term average rate of return for the market is 10%. Let's say Company A has a beta of 1.50, meaning that it is riskier than the overall market (which has a beta of 1). To invest in Company A, RRR = 14% or (2% + 1.50 X (10% - 2%)) Company B has a beta of 0.50, which implies that it is less risky than the overall market. To invest in Company B, RRR = 6% or (2% + 0.50 X (10% - 2%)) Thus, an investor evaluating the merits of investing in Company A versus Company B would require a significantly higher rate of return from Company A because of its much higher beta. Required Rate of Return vs. Cost of Capital Although the required rate of return is used in capital budgeting projects, RRR is not the same level of return that's needed to cover the cost of capital. The cost of capital is the minimum return needed to cover the cost of debt and equity issuance to raise funds for the project. The cost of capital is the lowest return needed to account for the capital structure. The RRR should always be higher than the cost of capital. Limitations of the Required Rate of Return The RRR calculation does not factor in inflation expectations since rising prices erode investment gains. However, inflation expectations are subjective and can be wrong. Also, the RRR will vary between investors with different risk tolerance levels. A retiree will have a lower risk tolerance than an investor who recently graduated college. As a result, the RRR is a subjective rate of return. RRR does not factor in the liquidity of an investment. If an investment can't be sold for a period of time, the security will likely carry a higher risk than one that's more liquid. Also, comparing stocks in different industries can be difficult since the risk or beta will be different. As with any financial ratio or metric, it's best to utilize multiple ratios in your analysis when considering investment opportunities. What Is the Difference Between the Internal Rate of Return and the Required Rate of Return? The internal rate of return looks at the investment's annual growth rate, stating that an investment should be pursued if this rate is greater than the minimum required rate of return. Should the Required Rate of Return Be High or Low? The inherent risks of an investment or project are determined through its required rate of return, and thus, a high RRR indicates higher risks while a low RRR implies minimal risks. What Is Considered a Good Return on an Investment? A good return on investment is generally considered to be approximately 7% per year or higher, which is also the average annual return of the S&P 500, adjusting for inflation. The Bottom Line The required rate of return tells investors whether to expand or take on new projects, venture into an investment, or buy the stocks of a company. The RRR determines the inherent risks of an investment, and it can vary between investors with different risk tolerance levels. The RRR can be used as a benchmark of minimum acceptable return when compared to the cost and returns of other similar investment opportunities. Different models can be used to calculate the required rate of return for an investment opportunity or project, but any calculation does not factor in inflation expectations or the liquidity of an investment.

https://www.investopedia.com/the-express-podcast-episode-158-8362496

The Geopolitical and Economic Impact of the War in Israel on the Middle East

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block megaphone" id="mntl-sc-block_1-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://playlist.megaphone.fm/?e=MERE6089214561" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="The Geopolitical and Economic Impact of the War in Israel on the Middle East"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <strong>Subscribe Now</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197" rel="nofollow">Apple Podcasts</a> / <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9" rel="nofollow">Spotify</a> / <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver">Google Podcasts</a> / <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://player.fm/series/2836180">PlayerFM</a><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The attack on Israel came at a critical time in the Middle East as the country was forming new economic alliances with Saudi Arabia and other nations that would reshape the geopolitical landscape in the region. Professor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lancaster.ac.uk/ppr/people/simon-mabon">Simon Mabon</a> of Lancaster University explains how that was playing out, and what might come next as Israeli forces enter Gaza ahead of a cold winter. Plus, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ustreasury.asp">U.S. Treasury</a> is having a hard time selling long bonds, but new, opportunistic buyers are circling, and they are playing an entirely different game. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

**Subscribe Now**: [Apple Podcasts](https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197) / [Spotify](https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9) / [Google Podcasts](https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver) / [PlayerFM](https://player.fm/series/2836180) The attack on Israel came at a critical time in the Middle East as the country was forming new economic alliances with Saudi Arabia and other nations that would reshape the geopolitical landscape in the region. Professor [Simon Mabon](https://www.lancaster.ac.uk/ppr/people/simon-mabon) of Lancaster University explains how that was playing out, and what might come next as Israeli forces enter Gaza ahead of a cold winter. Plus, the [U.S. Treasury](https://www.investopedia.com/terms/u/ustreasury.asp) is having a hard time selling long bonds, but new, opportunistic buyers are circling, and they are playing an entirely different game. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM The attack on Israel came at a critical time in the Middle East as the country was forming new economic alliances with Saudi Arabia and other nations that would reshape the geopolitical landscape in the region. Professor Simon Mabon of Lancaster University explains how that was playing out, and what might come next as Israeli forces enter Gaza ahead of a cold winter. Plus, the U.S. Treasury is having a hard time selling long bonds, but new, opportunistic buyers are circling, and they are playing an entirely different game. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/terms/a/averagereturn.asp

Average Return: Meaning, Calculations and Examples

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-average-return"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Average Return? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The average return is the simple mathematical average of a series of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/return.asp">returns</a> generated over a specified period of time. An average return is calculated the same way that a simple average is calculated for any set of numbers. The numbers are added together into a single sum, then the sum is divided by the count of the numbers in the set. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The average return is the simple mathematical average of a series of returns generated over a specified period of time.</li><li>The average return can help measure the past performance of a security or portfolio.</li><li>The average return is not the same as an annualized return, as it ignores compounding.</li><li>The geometric average is always lower than the average return.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-average-return"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Average Return </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> There are several return measures and ways to calculate them. For the arithmetic average return, one takes the sum of the returns and divides it by the number of return figures. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <span data-value="\text{Average Return} = \dfrac{\text{Sum of Returns}}{\text{Number of Returns}}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mrow> <mtext> Average Return </mtext> <mo> = </mo> <mstyle> <mfrac> <mtext> Sum of Returns </mtext> <mtext> Number of Returns </mtext> </mfrac> </mstyle> </mrow> <annotation encoding="application/x-tex"> \text{Average Return} = \dfrac{\text{Sum of Returns}}{\text{Number of Returns}} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">Average Return</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">Number of Returns</span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">Sum of Returns</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The average return tells an investor or analyst what the returns for a stock or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> have been in the past, or what the returns of a portfolio of companies are. The average return is not the same as an annualized return, as it ignores <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-average-return-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Average Return Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> One example of average return is the simple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arithmeticmean.asp">arithmetic mean</a>. For instance, suppose an investment returns the following annually over a period of five full years: 10%, 15%, 10%, 0%, and 5%. To calculate the average return for the investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an annual average return of 8%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Now, let’s look at a real-life example. Shares of Walmart returned 9.1% in 2014, lost 28.6% in 2015, gained 12.8% in 2016, gained 42.9% in 2017, and lost 5.7% in 2018. The average return of Walmart over those five years is 6.1%, or 30.5% divided by 5 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-calculating-returns-from-growth"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Calculating Returns From Growth </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The simple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthrates.asp">growth rate</a> is a function of the beginning and ending values or balances. It is calculated by subtracting the ending value from the beginning value and then dividing by the beginning value. The formula is as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <span data-value="\begin{aligned} &amp;\text{Growth Rate} = \dfrac{\text{BV} -\text{EV}}{\text{BV}}\\ &amp;\textbf{where:}\\ &amp;\text{BV} = \text{Beginning Value}\\ &amp;\text{EV} = \text{Ending Value}\\ \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Growth Rate </mtext> <mo> = </mo> <mfrac> <mrow> <mtext> BV </mtext> <mo> − </mo> <mtext> EV </mtext> </mrow> <mtext> BV </mtext> </mfrac> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> where: </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> BV </mtext> <mo> = </mo> <mtext> Beginning Value </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> EV </mtext> <mo> = </mo> <mtext> Ending Value </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned} &amp;\text{Growth Rate} = \dfrac{\text{BV} -\text{EV}}{\text{BV}}\\ &amp;\textbf{where:}\\ &amp;\text{BV} = \text{Beginning Value}\\ &amp;\text{EV} = \text{Ending Value}\\ \end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Growth Rate</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">BV</span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">BV</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord text"><span class="mord">EV</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord textbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">BV</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Beginning Value</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">EV</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Ending Value</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> For example, if you invest $10,000 in a company and the stock price increases from $50 to $100, then the return can be calculated by taking the difference between $100 and $50 and dividing by $50. The answer is 100%, which means you now have $20,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The simple average of returns is an easy calculation, but it is not very accurate. For more accurate calculations of returns, analysts and investors also frequently use the geometric mean or the money-weighted rate of return.</p></div></div></div> <span class="heading-toc" id="toc-average-return-alternatives"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> Average Return Alternatives </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Geometric Average </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> When looking at average historical returns, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/geometricmean.asp">geometric average</a> is a more precise calculation. The geometric mean is always lower than the average return. One benefit of using the geometric mean is that the actual amounts invested need not be known. The calculation focuses entirely on the return figures themselves and presents an apples-to-apples comparison when looking at two or more investments’ performances over more various time periods. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The geometric average return is sometimes called the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/time-weightedror.asp">time-weighted rate of return (TWR)</a> because it eliminates the distorting effects on growth rates created by various inflows and outflows of money into an account over time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-subheading__text"> Money-Weighted Rate of Return (MWRR) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Alternatively, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-weighted-return.asp">money-weighted rate of return (MWRR)</a> incorporates the size and timing of cash flows, making it an effective measure for returns on a portfolio that has received deposits, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reinvestment.asp">dividend reinvestments</a>, and/or interest payments, or has had withdrawals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The MWRR is equivalent to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irr.asp">internal rate of return (IRR)</a>, where the net present value equals zero. </p></div>

## What Is Average Return? The average return is the simple mathematical average of a series of [returns](https://www.investopedia.com/terms/r/return.asp) generated over a specified period of time. An average return is calculated the same way that a simple average is calculated for any set of numbers. The numbers are added together into a single sum, then the sum is divided by the count of the numbers in the set. ### Key Takeaways * The average return is the simple mathematical average of a series of returns generated over a specified period of time. * The average return can help measure the past performance of a security or portfolio. * The average return is not the same as an annualized return, as it ignores compounding. * The geometric average is always lower than the average return. ## Understanding Average Return There are several return measures and ways to calculate them. For the arithmetic average return, one takes the sum of the returns and divides it by the number of return figures. Average Return = Sum of Returns Number of Returns \text{Average Return} = \dfrac{\text{Sum of Returns}}{\text{Number of Returns}} Average Return=Number of ReturnsSum of Returns​ The average return tells an investor or analyst what the returns for a stock or [security](https://www.investopedia.com/terms/s/security.asp) have been in the past, or what the returns of a portfolio of companies are. The average return is not the same as an annualized return, as it ignores [compounding](https://www.investopedia.com/terms/c/compounding.asp). ## Average Return Example One example of average return is the simple [arithmetic mean](https://www.investopedia.com/terms/a/arithmeticmean.asp). For instance, suppose an investment returns the following annually over a period of five full years: 10%, 15%, 10%, 0%, and 5%. To calculate the average return for the investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an annual average return of 8%. Now, let’s look at a real-life example. Shares of Walmart returned 9.1% in 2014, lost 28.6% in 2015, gained 12.8% in 2016, gained 42.9% in 2017, and lost 5.7% in 2018. The average return of Walmart over those five years is 6.1%, or 30.5% divided by 5 years. ## Calculating Returns From Growth The simple [growth rate](https://www.investopedia.com/terms/g/growthrates.asp) is a function of the beginning and ending values or balances. It is calculated by subtracting the ending value from the beginning value and then dividing by the beginning value. The formula is as follows: Growth Rate = BV − EV BV where: BV = Beginning Value EV = Ending Value \begin{aligned} &\text{Growth Rate} = \dfrac{\text{BV} -\text{EV}}{\text{BV}}\\ &\textbf{where:}\\ &\text{BV} = \text{Beginning Value}\\ &\text{EV} = \text{Ending Value}\\ \end{aligned} ​Growth Rate=BVBV−EV​where:BV=Beginning ValueEV=Ending Value​ For example, if you invest $10,000 in a company and the stock price increases from $50 to $100, then the return can be calculated by taking the difference between $100 and $50 and dividing by $50. The answer is 100%, which means you now have $20,000. ### The simple average of returns is an easy calculation, but it is not very accurate. For more accurate calculations of returns, analysts and investors also frequently use the geometric mean or the money-weighted rate of return. ## Average Return Alternatives ### Geometric Average When looking at average historical returns, the [geometric average](https://www.investopedia.com/terms/g/geometricmean.asp) is a more precise calculation. The geometric mean is always lower than the average return. One benefit of using the geometric mean is that the actual amounts invested need not be known. The calculation focuses entirely on the return figures themselves and presents an apples-to-apples comparison when looking at two or more investments’ performances over more various time periods. The geometric average return is sometimes called the [time-weighted rate of return (TWR)](https://www.investopedia.com/terms/t/time-weightedror.asp) because it eliminates the distorting effects on growth rates created by various inflows and outflows of money into an account over time. ### Money-Weighted Rate of Return (MWRR) Alternatively, the [money-weighted rate of return (MWRR)](https://www.investopedia.com/terms/m/money-weighted-return.asp) incorporates the size and timing of cash flows, making it an effective measure for returns on a portfolio that has received deposits, [dividend reinvestments](https://www.investopedia.com/terms/r/reinvestment.asp), and/or interest payments, or has had withdrawals. The MWRR is equivalent to the [internal rate of return (IRR)](https://www.investopedia.com/terms/i/irr.asp), where the net present value equals zero.

What Is Average Return? The average return is the simple mathematical average of a series of returns generated over a specified period of time. An average return is calculated the same way that a simple average is calculated for any set of numbers. The numbers are added together into a single sum, then the sum is divided by the count of the numbers in the set. Key Takeaways The average return is the simple mathematical average of a series of returns generated over a specified period of time.The average return can help measure the past performance of a security or portfolio.The average return is not the same as an annualized return, as it ignores compounding.The geometric average is always lower than the average return. Understanding Average Return There are several return measures and ways to calculate them. For the arithmetic average return, one takes the sum of the returns and divides it by the number of return figures. Average Return = Sum of Returns Number of Returns \text{Average Return} = \dfrac{\text{Sum of Returns}}{\text{Number of Returns}} Average Return=Number of ReturnsSum of Returns​ The average return tells an investor or analyst what the returns for a stock or security have been in the past, or what the returns of a portfolio of companies are. The average return is not the same as an annualized return, as it ignores compounding. Average Return Example One example of average return is the simple arithmetic mean. For instance, suppose an investment returns the following annually over a period of five full years: 10%, 15%, 10%, 0%, and 5%. To calculate the average return for the investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an annual average return of 8%. Now, let’s look at a real-life example. Shares of Walmart returned 9.1% in 2014, lost 28.6% in 2015, gained 12.8% in 2016, gained 42.9% in 2017, and lost 5.7% in 2018. The average return of Walmart over those five years is 6.1%, or 30.5% divided by 5 years. Calculating Returns From Growth The simple growth rate is a function of the beginning and ending values or balances. It is calculated by subtracting the ending value from the beginning value and then dividing by the beginning value. The formula is as follows: Growth Rate = BV − EV BV where: BV = Beginning Value EV = Ending Value \begin{aligned} &\text{Growth Rate} = \dfrac{\text{BV} -\text{EV}}{\text{BV}}\\ &\textbf{where:}\\ &\text{BV} = \text{Beginning Value}\\ &\text{EV} = \text{Ending Value}\\ \end{aligned} ​Growth Rate=BVBV−EV​where:BV=Beginning ValueEV=Ending Value​ For example, if you invest $10,000 in a company and the stock price increases from $50 to $100, then the return can be calculated by taking the difference between $100 and $50 and dividing by $50. The answer is 100%, which means you now have $20,000. The simple average of returns is an easy calculation, but it is not very accurate. For more accurate calculations of returns, analysts and investors also frequently use the geometric mean or the money-weighted rate of return. Average Return Alternatives Geometric Average When looking at average historical returns, the geometric average is a more precise calculation. The geometric mean is always lower than the average return. One benefit of using the geometric mean is that the actual amounts invested need not be known. The calculation focuses entirely on the return figures themselves and presents an apples-to-apples comparison when looking at two or more investments’ performances over more various time periods. The geometric average return is sometimes called the time-weighted rate of return (TWR) because it eliminates the distorting effects on growth rates created by various inflows and outflows of money into an account over time. Money-Weighted Rate of Return (MWRR) Alternatively, the money-weighted rate of return (MWRR) incorporates the size and timing of cash flows, making it an effective measure for returns on a portfolio that has received deposits, dividend reinvestments, and/or interest payments, or has had withdrawals. The MWRR is equivalent to the internal rate of return (IRR), where the net present value equals zero.

https://www.investopedia.com/how-to-choose-a-bank-5183999

How to Choose a Bank

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The three most important factors when choosing a bank for checking and savings accounts are the type of bank, the rates and fees it charges, and the extra features it offers. Different banks offer widely different levels of service, charge different levels of fees, and will pay you significantly different amounts of interest on your money. This means that finding the best bank or the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-banks-5190371">best online bank</a> for you is rarely a one-off process. You may have to choose a new bank several times throughout your lifetime, too, as your financial and investment goals evolve. The good news is that there is no limit to the number of bank accounts you can hold, nor how frequently you switch. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>Three main types of financial institutions can reasonably be referred to as a banks: traditional brick-and-mortar banks, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-banks-5190371">online banks</a>, and credit unions.</li> <li>Take a look beyond all the marketing hype, and you’ll see that most bank accounts can be distinguished by the fees they charge and the interest rates they pay.</li> <li>Peace of mind is arguably the most important service offered by any bank and should be an important part of your choice.</li> <li>As you evaluate your bank account, understand that you can have accounts at different banks at different times.</li> <li>Also, in many cases, it may be free to very low cost to close an account if you are no longer happy with your bank.</li> </ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Factors in Choosing a Bank" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/BVgNxv18qO_xzpVoKA55HvBzYYk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-to-choose-a-bank-5183999_V3-377dc97d93214537854b8291c3dcafaa.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/BVgNxv18qO_xzpVoKA55HvBzYYk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-to-choose-a-bank-5183999_V3-377dc97d93214537854b8291c3dcafaa.png" data-srcset="https://www.investopedia.com/thmb/YxtNLizCC4Es8d2x-brjb184SeU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-to-choose-a-bank-5183999_V3-377dc97d93214537854b8291c3dcafaa.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Factors in Choosing a Bank" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/BVgNxv18qO_xzpVoKA55HvBzYYk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-to-choose-a-bank-5183999_V3-377dc97d93214537854b8291c3dcafaa.png" srcset="https://www.investopedia.com/thmb/YxtNLizCC4Es8d2x-brjb184SeU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-to-choose-a-bank-5183999_V3-377dc97d93214537854b8291c3dcafaa.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Ellen Lindner</p></span> </figcaption></figure> <span class="heading-toc" id="toc-types-of-banks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Types of Banks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The first and most fundamental factor in choosing a bank is the type of institution that is right for you. There are at least three distinct types of financial institutions that can reasonably be referred to as a bank, each of them offering a unique set of advantages and disadvantages. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-subheading__text"> Traditional Banks </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialbank.asp">Traditional banks</a> are what most people think of when they think of a bank. These banks offer services to their customers largely through a network of brick-and-mortar offices and provide ATMs to both their own customers and those of other banks. Many have also started offering online banking services for paying bills and making deposits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Although these banks have been around the longest, today there are fewer reasons to choose a traditional bank over its online competitors or credit unions. As we’ll see, both of these institutions offer lower fees than traditional banks do. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> That said, you may prefer to do your banking in person. If you have a question or a problem, you can go into your local branch and talk to someone about it. This could make a traditional bank the right choice for you. But it’s still worthwhile checking out the other options that are available to you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>If you choose a traditional or online bank, be sure to select one that is insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a>, which covers $250,000 for each depositor, per account category.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-subheading__text"> Online Banks </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/onlinebanking.asp">Online banks</a> were relatively rare 20 years ago, but their popularity has grown over time, making them direct competitors for traditional banks today. Because online banks have fewer or no physical branches, their overhead costs are far lower than those of traditional banks, and that means their fees are typically far lower, too. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> That said, many people find the customer services offered by purely online banks frustrating. The industry is aware of this. The best online banks now offer extensive customer support options, but you still won’t be able to walk into a branch to talk to a bank employee in person. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> In recent years, the dividing line between online banks and traditional banks has become increasingly blurred, as the digital services and tools offered by the latter have become more advanced. This means that it may be possible to enjoy the advantages of a traditional branch while still accessing the convenience of digital banking. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Credit Unions </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">Credit unions</a> are often overlooked as an alternative to traditional and online banks, but they have advantages that can make them a good choice.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> First, credit unions are not-for-profit financial cooperatives. That means they are member-owned, so profits are returned to their members via lower fees and higher interest rates on deposit accounts. By contrast, publicly owned traditional banks must meet revenue goals and are beholden to shareholders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Second, most credit unions maintain genuine relationships with their local communities. If you want a bank that gives something back to your community, a credit union may be the natural choice for you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> However, credit unions can have fairly stringent rules for members to access services, and not all of them offer features like online banking. This may make one a less-than-optimal choice for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/checkingaccount.asp">checking account</a> that you need to access and work with on a regular basis. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_34-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_35-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>If you opt to bank with a credit union, make sure that it has been insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua.asp">National Credit Union Administration (NCUA)</a>. Like the FDIC, it insures up to $250,000 for each depositor annually.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div> <span class="heading-toc" id="toc-fees-and-interest-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-heading__text"> Fees and Interest Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The next factor to consider in choosing where to bank is an institution's fees and the interest rates it offers. Most people will have two basic accounts: a checking account and a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings account</a>. The features you need for each type of account will vary, and very often it makes sense to have these accounts at different institutions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Banking Fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Most banks will charge a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-fees.asp">monthly fee</a> to maintain a checking account, but these fees can vary widely. And a bank may waive or lower them if you meet certain criteria, such as meeting and maintaining a minimum balance requirement or setting up direct deposit for your paychecks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> To keep these fees to a minimum, it's important to understand what a bank will actually charge you for using a checking account. Ask about its common charges, which may include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> <li>Monthly maintenance fees</li><li>Overdraft fees</li><li>Statement fees</li><li>Stop payment fees</li><li>Returned check fees</li><li>Wire transfer fees</li><li>Cashier’s check fees</li><li>Certified check fees</li><li>Out-of-network ATM fees</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Fees are by far the largest distinguishing factor among checking accounts. All else being equal, you should choose the checking account with the lowest charges. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-subheading__text"> Interest Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> For your savings account, look for a different set of features. You shouldn't need to access a savings account as frequently as you do a checking account, so it’s unlikely that you will need app or online banking services. As long as you don't make frequent withdrawals, most savings accounts don’t come with high fees. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Instead, the primary way that these deposit accounts differ is in the interest rates they pay. These can vary widely, and the best rates are often those offered by credit unions or online banks. Shop around to find the best interest rate for your savings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-extra-features"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> Extra Features </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> The two factors we’ve considered so far—the type of institution you choose and the amount it will cost you in fees or lost interest—are the most fundamental aspects of choosing a bank. However, most banks will also offer a range of other services, discounts, or features that may be crucial for you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Because everyone’s needs are different, take some time to think about how you use the accounts you currently have and where you are losing money in fees or time. Then look for a bank that's a better fit. Important factors might include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li><strong>Online and app-based banking.</strong> Most banks now offer these options. If you are using your account a lot—particularly for setting up new payments or managing standing orders—a full-featured online service can save you a lot of time.</li><li><strong>Local branches and ATMs.</strong> Even if you deal with your bank primarily online, there may still be times when it's easier to visit a branch. For many people, having a local bank branch—at least for their checking account—is a must. Similarly, a network of ATM machines may be important to you—say, if you travel frequently and need ready access to cash while on the road.</li><li><strong>Security.</strong> Though most banks are insured against loss, they still vary when it comes to the level of security they offer for online services. A quick scan of the news to see which banks have recently experienced security breaches may help you rule out a bank in this regard.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> This last point is related to another—that ultimately, the bank you choose should be one you trust. Many people still make their bank decision based on the company that their parents bank with, or merely because they trust the name and reputation of a large national bank. There is nothing wrong with that—peace of mind is arguably the most important service offered by any bank and should be part of your decision-making process. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_62-0"><span class="heading-toc" id="toc-what-are-the-different-types-of-banks-available"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Different Types of Banks Available?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are various types of banks, including commercial banks, credit unions, online banks, and investment banks. The best type for you depends on factors like your banking needs, preferences, and financial goals. Commercial banks offer a wide range of services, credit unions focus on community and member benefits, online banks provide convenience, and investment banks cater to more complex financial transactions.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-why-is-it-important-to-assess-a-banks-reputation"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is It Important to Assess a Bank's Reputation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Assessing a bank's reputation and financial stability is crucial. Look for information on their track record, customer reviews, ratings from reputable agencies, and financial statements. Consider factors like the bank's longevity, market presence, profitability, and capital adequacy ratios to gauge its stability and ability to meet its financial obligations.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-do-all-banks-offer-online-and-mobile-banking-services"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do All Banks Offer Online and Mobile Banking Services?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Online and mobile banking services can simplify your banking experience, though not all banks may offer such solutions. Check if the bank provides online capabilities or mobile apps. This limitation may be especially true for smaller or more rural banks that have not yet invested in technological infrastructure.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-what-fees-can-i-expect-when-opening-an-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Fees Can I Expect When Opening an Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Understanding the fee structure is essential to avoid unexpected charges. Inquire about fees for ATM withdrawals, account maintenance, paper statements, overdrafts, and wire transfers. Compare fee schedules among different banks to find the most cost-effective option that aligns with your anticipated banking activities.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> A good bank is one that gives you easy access to your money, doesn't charge exorbitant fees, offers good interest rates, have online and app-based banking services, provides excellent customer service, and is trustworthy with your money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Make a list, rank some options against these criteria, and see which bank or credit union comes out on top. Just remember. You can always change your mind later or open a second account if your first choice ends up not being optimal for you. </p></div>

The three most important factors when choosing a bank for checking and savings accounts are the type of bank, the rates and fees it charges, and the extra features it offers. Different banks offer widely different levels of service, charge different levels of fees, and will pay you significantly different amounts of interest on your money. This means that finding the best bank or the [best online bank](https://www.investopedia.com/best-online-banks-5190371) for you is rarely a one-off process. You may have to choose a new bank several times throughout your lifetime, too, as your financial and investment goals evolve. The good news is that there is no limit to the number of bank accounts you can hold, nor how frequently you switch. ### Key Takeaways * Three main types of financial institutions can reasonably be referred to as a banks: traditional brick-and-mortar banks, [online banks](https://www.investopedia.com/best-online-banks-5190371), and credit unions. * Take a look beyond all the marketing hype, and you’ll see that most bank accounts can be distinguished by the fees they charge and the interest rates they pay. * Peace of mind is arguably the most important service offered by any bank and should be an important part of your choice. * As you evaluate your bank account, understand that you can have accounts at different banks at different times. * Also, in many cases, it may be free to very low cost to close an account if you are no longer happy with your bank. ![Factors in Choosing a Bank]() :max_bytes(150000):strip_icc()/how-to-choose-a-bank-5183999_V3-377dc97d93214537854b8291c3dcafaa.png) Investopedia / Ellen Lindner ## Types of Banks The first and most fundamental factor in choosing a bank is the type of institution that is right for you. There are at least three distinct types of financial institutions that can reasonably be referred to as a bank, each of them offering a unique set of advantages and disadvantages. ### Traditional Banks [Traditional banks](https://www.investopedia.com/terms/c/commercialbank.asp) are what most people think of when they think of a bank. These banks offer services to their customers largely through a network of brick-and-mortar offices and provide ATMs to both their own customers and those of other banks. Many have also started offering online banking services for paying bills and making deposits. Although these banks have been around the longest, today there are fewer reasons to choose a traditional bank over its online competitors or credit unions. As we’ll see, both of these institutions offer lower fees than traditional banks do. That said, you may prefer to do your banking in person. If you have a question or a problem, you can go into your local branch and talk to someone about it. This could make a traditional bank the right choice for you. But it’s still worthwhile checking out the other options that are available to you. ### If you choose a traditional or online bank, be sure to select one that is insured by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp), which covers $250,000 for each depositor, per account category. ### Online Banks [Online banks](https://www.investopedia.com/terms/o/onlinebanking.asp) were relatively rare 20 years ago, but their popularity has grown over time, making them direct competitors for traditional banks today. Because online banks have fewer or no physical branches, their overhead costs are far lower than those of traditional banks, and that means their fees are typically far lower, too. That said, many people find the customer services offered by purely online banks frustrating. The industry is aware of this. The best online banks now offer extensive customer support options, but you still won’t be able to walk into a branch to talk to a bank employee in person. In recent years, the dividing line between online banks and traditional banks has become increasingly blurred, as the digital services and tools offered by the latter have become more advanced. This means that it may be possible to enjoy the advantages of a traditional branch while still accessing the convenience of digital banking. ### Credit Unions [Credit unions](https://www.investopedia.com/terms/c/creditunion.asp) are often overlooked as an alternative to traditional and online banks, but they have advantages that can make them a good choice.  First, credit unions are not-for-profit financial cooperatives. That means they are member-owned, so profits are returned to their members via lower fees and higher interest rates on deposit accounts. By contrast, publicly owned traditional banks must meet revenue goals and are beholden to shareholders. Second, most credit unions maintain genuine relationships with their local communities. If you want a bank that gives something back to your community, a credit union may be the natural choice for you. However, credit unions can have fairly stringent rules for members to access services, and not all of them offer features like online banking. This may make one a less-than-optimal choice for a [checking account](https://www.investopedia.com/terms/c/checkingaccount.asp) that you need to access and work with on a regular basis. ### If you opt to bank with a credit union, make sure that it has been insured by the [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp). Like the FDIC, it insures up to $250,000 for each depositor annually. ## Fees and Interest Rates The next factor to consider in choosing where to bank is an institution's fees and the interest rates it offers. Most people will have two basic accounts: a checking account and a [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp). The features you need for each type of account will vary, and very often it makes sense to have these accounts at different institutions. ### Banking Fees Most banks will charge a [monthly fee](https://www.investopedia.com/terms/b/bank-fees.asp) to maintain a checking account, but these fees can vary widely. And a bank may waive or lower them if you meet certain criteria, such as meeting and maintaining a minimum balance requirement or setting up direct deposit for your paychecks. To keep these fees to a minimum, it's important to understand what a bank will actually charge you for using a checking account. Ask about its common charges, which may include: * Monthly maintenance fees * Overdraft fees * Statement fees * Stop payment fees * Returned check fees * Wire transfer fees * Cashier’s check fees * Certified check fees * Out-of-network ATM fees Fees are by far the largest distinguishing factor among checking accounts. All else being equal, you should choose the checking account with the lowest charges. ### Interest Rates For your savings account, look for a different set of features. You shouldn't need to access a savings account as frequently as you do a checking account, so it’s unlikely that you will need app or online banking services. As long as you don't make frequent withdrawals, most savings accounts don’t come with high fees. Instead, the primary way that these deposit accounts differ is in the interest rates they pay. These can vary widely, and the best rates are often those offered by credit unions or online banks. Shop around to find the best interest rate for your savings. ## Extra Features The two factors we’ve considered so far—the type of institution you choose and the amount it will cost you in fees or lost interest—are the most fundamental aspects of choosing a bank. However, most banks will also offer a range of other services, discounts, or features that may be crucial for you. Because everyone’s needs are different, take some time to think about how you use the accounts you currently have and where you are losing money in fees or time. Then look for a bank that's a better fit. Important factors might include: * **Online and app-based banking.** Most banks now offer these options. If you are using your account a lot—particularly for setting up new payments or managing standing orders—a full-featured online service can save you a lot of time. * **Local branches and ATMs.** Even if you deal with your bank primarily online, there may still be times when it's easier to visit a branch. For many people, having a local bank branch—at least for their checking account—is a must. Similarly, a network of ATM machines may be important to you—say, if you travel frequently and need ready access to cash while on the road. * **Security.** Though most banks are insured against loss, they still vary when it comes to the level of security they offer for online services. A quick scan of the news to see which banks have recently experienced security breaches may help you rule out a bank in this regard. This last point is related to another—that ultimately, the bank you choose should be one you trust. Many people still make their bank decision based on the company that their parents bank with, or merely because they trust the name and reputation of a large national bank. There is nothing wrong with that—peace of mind is arguably the most important service offered by any bank and should be part of your decision-making process. ## What Are the Different Types of Banks Available? There are various types of banks, including commercial banks, credit unions, online banks, and investment banks. The best type for you depends on factors like your banking needs, preferences, and financial goals. Commercial banks offer a wide range of services, credit unions focus on community and member benefits, online banks provide convenience, and investment banks cater to more complex financial transactions. ## Why Is It Important to Assess a Bank's Reputation? Assessing a bank's reputation and financial stability is crucial. Look for information on their track record, customer reviews, ratings from reputable agencies, and financial statements. Consider factors like the bank's longevity, market presence, profitability, and capital adequacy ratios to gauge its stability and ability to meet its financial obligations. ## Do All Banks Offer Online and Mobile Banking Services? Online and mobile banking services can simplify your banking experience, though not all banks may offer such solutions. Check if the bank provides online capabilities or mobile apps. This limitation may be especially true for smaller or more rural banks that have not yet invested in technological infrastructure. ## What Fees Can I Expect When Opening an Account? Understanding the fee structure is essential to avoid unexpected charges. Inquire about fees for ATM withdrawals, account maintenance, paper statements, overdrafts, and wire transfers. Compare fee schedules among different banks to find the most cost-effective option that aligns with your anticipated banking activities. ## The Bottom Line A good bank is one that gives you easy access to your money, doesn't charge exorbitant fees, offers good interest rates, have online and app-based banking services, provides excellent customer service, and is trustworthy with your money. Make a list, rank some options against these criteria, and see which bank or credit union comes out on top. Just remember. You can always change your mind later or open a second account if your first choice ends up not being optimal for you.

The three most important factors when choosing a bank for checking and savings accounts are the type of bank, the rates and fees it charges, and the extra features it offers. Different banks offer widely different levels of service, charge different levels of fees, and will pay you significantly different amounts of interest on your money. This means that finding the best bank or the best online bank for you is rarely a one-off process. You may have to choose a new bank several times throughout your lifetime, too, as your financial and investment goals evolve. The good news is that there is no limit to the number of bank accounts you can hold, nor how frequently you switch. Key Takeaways Three main types of financial institutions can reasonably be referred to as a banks: traditional brick-and-mortar banks, online banks, and credit unions. Take a look beyond all the marketing hype, and you’ll see that most bank accounts can be distinguished by the fees they charge and the interest rates they pay. Peace of mind is arguably the most important service offered by any bank and should be an important part of your choice. As you evaluate your bank account, understand that you can have accounts at different banks at different times. Also, in many cases, it may be free to very low cost to close an account if you are no longer happy with your bank. Investopedia / Ellen Lindner Types of Banks The first and most fundamental factor in choosing a bank is the type of institution that is right for you. There are at least three distinct types of financial institutions that can reasonably be referred to as a bank, each of them offering a unique set of advantages and disadvantages. Traditional Banks Traditional banks are what most people think of when they think of a bank. These banks offer services to their customers largely through a network of brick-and-mortar offices and provide ATMs to both their own customers and those of other banks. Many have also started offering online banking services for paying bills and making deposits. Although these banks have been around the longest, today there are fewer reasons to choose a traditional bank over its online competitors or credit unions. As we’ll see, both of these institutions offer lower fees than traditional banks do. That said, you may prefer to do your banking in person. If you have a question or a problem, you can go into your local branch and talk to someone about it. This could make a traditional bank the right choice for you. But it’s still worthwhile checking out the other options that are available to you. If you choose a traditional or online bank, be sure to select one that is insured by the Federal Deposit Insurance Corporation (FDIC), which covers $250,000 for each depositor, per account category. Online Banks Online banks were relatively rare 20 years ago, but their popularity has grown over time, making them direct competitors for traditional banks today. Because online banks have fewer or no physical branches, their overhead costs are far lower than those of traditional banks, and that means their fees are typically far lower, too. That said, many people find the customer services offered by purely online banks frustrating. The industry is aware of this. The best online banks now offer extensive customer support options, but you still won’t be able to walk into a branch to talk to a bank employee in person. In recent years, the dividing line between online banks and traditional banks has become increasingly blurred, as the digital services and tools offered by the latter have become more advanced. This means that it may be possible to enjoy the advantages of a traditional branch while still accessing the convenience of digital banking. Credit Unions Credit unions are often overlooked as an alternative to traditional and online banks, but they have advantages that can make them a good choice.  First, credit unions are not-for-profit financial cooperatives. That means they are member-owned, so profits are returned to their members via lower fees and higher interest rates on deposit accounts. By contrast, publicly owned traditional banks must meet revenue goals and are beholden to shareholders. Second, most credit unions maintain genuine relationships with their local communities. If you want a bank that gives something back to your community, a credit union may be the natural choice for you. However, credit unions can have fairly stringent rules for members to access services, and not all of them offer features like online banking. This may make one a less-than-optimal choice for a checking account that you need to access and work with on a regular basis. If you opt to bank with a credit union, make sure that it has been insured by the National Credit Union Administration (NCUA). Like the FDIC, it insures up to $250,000 for each depositor annually. Fees and Interest Rates The next factor to consider in choosing where to bank is an institution's fees and the interest rates it offers. Most people will have two basic accounts: a checking account and a savings account. The features you need for each type of account will vary, and very often it makes sense to have these accounts at different institutions. Banking Fees Most banks will charge a monthly fee to maintain a checking account, but these fees can vary widely. And a bank may waive or lower them if you meet certain criteria, such as meeting and maintaining a minimum balance requirement or setting up direct deposit for your paychecks. To keep these fees to a minimum, it's important to understand what a bank will actually charge you for using a checking account. Ask about its common charges, which may include: Monthly maintenance feesOverdraft feesStatement feesStop payment feesReturned check feesWire transfer feesCashier’s check feesCertified check feesOut-of-network ATM fees Fees are by far the largest distinguishing factor among checking accounts. All else being equal, you should choose the checking account with the lowest charges. Interest Rates For your savings account, look for a different set of features. You shouldn't need to access a savings account as frequently as you do a checking account, so it’s unlikely that you will need app or online banking services. As long as you don't make frequent withdrawals, most savings accounts don’t come with high fees. Instead, the primary way that these deposit accounts differ is in the interest rates they pay. These can vary widely, and the best rates are often those offered by credit unions or online banks. Shop around to find the best interest rate for your savings. Extra Features The two factors we’ve considered so far—the type of institution you choose and the amount it will cost you in fees or lost interest—are the most fundamental aspects of choosing a bank. However, most banks will also offer a range of other services, discounts, or features that may be crucial for you. Because everyone’s needs are different, take some time to think about how you use the accounts you currently have and where you are losing money in fees or time. Then look for a bank that's a better fit. Important factors might include: Online and app-based banking. Most banks now offer these options. If you are using your account a lot—particularly for setting up new payments or managing standing orders—a full-featured online service can save you a lot of time.Local branches and ATMs. Even if you deal with your bank primarily online, there may still be times when it's easier to visit a branch. For many people, having a local bank branch—at least for their checking account—is a must. Similarly, a network of ATM machines may be important to you—say, if you travel frequently and need ready access to cash while on the road.Security. Though most banks are insured against loss, they still vary when it comes to the level of security they offer for online services. A quick scan of the news to see which banks have recently experienced security breaches may help you rule out a bank in this regard. This last point is related to another—that ultimately, the bank you choose should be one you trust. Many people still make their bank decision based on the company that their parents bank with, or merely because they trust the name and reputation of a large national bank. There is nothing wrong with that—peace of mind is arguably the most important service offered by any bank and should be part of your decision-making process. What Are the Different Types of Banks Available? There are various types of banks, including commercial banks, credit unions, online banks, and investment banks. The best type for you depends on factors like your banking needs, preferences, and financial goals. Commercial banks offer a wide range of services, credit unions focus on community and member benefits, online banks provide convenience, and investment banks cater to more complex financial transactions. Why Is It Important to Assess a Bank's Reputation? Assessing a bank's reputation and financial stability is crucial. Look for information on their track record, customer reviews, ratings from reputable agencies, and financial statements. Consider factors like the bank's longevity, market presence, profitability, and capital adequacy ratios to gauge its stability and ability to meet its financial obligations. Do All Banks Offer Online and Mobile Banking Services? Online and mobile banking services can simplify your banking experience, though not all banks may offer such solutions. Check if the bank provides online capabilities or mobile apps. This limitation may be especially true for smaller or more rural banks that have not yet invested in technological infrastructure. What Fees Can I Expect When Opening an Account? Understanding the fee structure is essential to avoid unexpected charges. Inquire about fees for ATM withdrawals, account maintenance, paper statements, overdrafts, and wire transfers. Compare fee schedules among different banks to find the most cost-effective option that aligns with your anticipated banking activities. The Bottom Line A good bank is one that gives you easy access to your money, doesn't charge exorbitant fees, offers good interest rates, have online and app-based banking services, provides excellent customer service, and is trustworthy with your money. Make a list, rank some options against these criteria, and see which bank or credit union comes out on top. Just remember. You can always change your mind later or open a second account if your first choice ends up not being optimal for you.

https://www.investopedia.com/ftx-s-new-plan-could-see-almost-all-customers-get-back-more-than-they-lost-on-the-crypto-exchange-8645251

FTX's New Plan Could Give 98% of Crypto Customers Back More Than They Lost

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A new restructuring plan from the fallen FTX cryptocurrency exchange is expected to give 98% of its creditors more than 118% of allowed claims.</li><li>The plan follows a previous offer in October 2023 that allowed investors access to 90% of their assets left on the bankrupt exchange.<br/></li><li>FTX founder and CEO Sam Bankman-Fried was sentenced in late March to 25 years in prison for his part in the exchange's downfall.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Bankrupt cryptocurrency exchange FTX announced a new restructuring plan that, if approved, could finally give most of its customers access to money they lost—plus interest.<span class="ql-inline-citation" data-cite="1"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <span class="heading-toc" id="toc-whats-in-ftxs-new-plan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What's in FTX's New Plan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The new plan provides for 98% of all customers, including those holding claims of $50,000 or less, to receive up to 118% of their allowed claims within 60 days. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ftx-exchange-5200842">FTX</a> forecasts that the total value of assets collected, converted to cash, and available for creditors will be between $14.5 billion and $16.3 billion. FTX owes more than $11 billion to its customers.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The plan will require approval from the U.S. Bankruptcy Court for the District Court of Delaware. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> John J. Ray III, chief restructuring officer of FTX, said: "We are pleased to be in a position to propose a Chapter 11 plan that contemplates the return of 100% of bankruptcy claim amounts plus interest for non-governmental <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditor.asp">creditors</a>." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-how-is-this-plan-different-from-the-one-before"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> How Is This Plan Different From the One Before? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> A previous plan <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-ftx-plan-to-refund-90-percent-of-recovered-assets-doesnt-add-up-to-90-percent-of-what-customers-lost-8362556">proposed refunding up to 90%</a> of distributable assets to customers. The recovered assets were those held by the company in various entities in the Bahamas, Australia, and the U.S. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Investors who withdrew more than $250,000 from the exchange in the nine days before its collapse were expected to pay a 15% fee on the value of the funds to avoid potential <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clawback.asp">clawback</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-its-more-than-they-lost-but-is-it-enough"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> It's More Than They Lost, But Is It Enough? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> One of the biggest criticisms of any FTX plans to repay its customers' lost funds is that it's returning money in dollars based on Nov. 11, 2022, cryptocurrency prices, not the cryptocurrency itself or repaying at its current value, which has appreciated greatly. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> For example, bitcoin (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD">BTC</a>) was trading roughly around $17,000 on Nov. 11, 2022; today, its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp">price</a> is more than 3.5 times that at about $62,500.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> FTX <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-went-wrong-with-ftx-6828447">collapsed</a> and filed for bankruptcy in November 2022 after <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commingling.asp">commingling</a> of customer funds between FTX and its Alameda Research investment arm meant customers were unable to withdraw more than $8 billion in investments that had been used for other purposes. Former FTX CEO Bankman-Fried was <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sam-bankman-fried-former-ftx-ceo-sentenced-25-years-in-prison-for-crypto-fraud-8621556">sentenced</a> to 25 years in prison for crypto fraud in late March. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * A new restructuring plan from the fallen FTX cryptocurrency exchange is expected to give 98% of its creditors more than 118% of allowed claims. * The plan follows a previous offer in October 2023 that allowed investors access to 90% of their assets left on the bankrupt exchange. * FTX founder and CEO Sam Bankman-Fried was sentenced in late March to 25 years in prison for his part in the exchange's downfall. Bankrupt cryptocurrency exchange FTX announced a new restructuring plan that, if approved, could finally give most of its customers access to money they lost—plus interest. ## What's in FTX's New Plan? The new plan provides for 98% of all customers, including those holding claims of $50,000 or less, to receive up to 118% of their allowed claims within 60 days. [FTX](https://www.investopedia.com/ftx-exchange-5200842) forecasts that the total value of assets collected, converted to cash, and available for creditors will be between $14.5 billion and $16.3 billion. FTX owes more than $11 billion to its customers. The plan will require approval from the U.S. Bankruptcy Court for the District Court of Delaware. John J. Ray III, chief restructuring officer of FTX, said: "We are pleased to be in a position to propose a Chapter 11 plan that contemplates the return of 100% of bankruptcy claim amounts plus interest for non-governmental [creditors](https://www.investopedia.com/terms/c/creditor.asp)." ## How Is This Plan Different From the One Before? A previous plan [proposed refunding up to 90%](https://www.investopedia.com/why-ftx-plan-to-refund-90-percent-of-recovered-assets-doesnt-add-up-to-90-percent-of-what-customers-lost-8362556) of distributable assets to customers. The recovered assets were those held by the company in various entities in the Bahamas, Australia, and the U.S. Investors who withdrew more than $250,000 from the exchange in the nine days before its collapse were expected to pay a 15% fee on the value of the funds to avoid potential [clawback](https://www.investopedia.com/terms/c/clawback.asp). ## It's More Than They Lost, But Is It Enough? One of the biggest criticisms of any FTX plans to repay its customers' lost funds is that it's returning money in dollars based on Nov. 11, 2022, cryptocurrency prices, not the cryptocurrency itself or repaying at its current value, which has appreciated greatly. For example, bitcoin ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD)) was trading roughly around $17,000 on Nov. 11, 2022; today, its [price](https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp) is more than 3.5 times that at about $62,500. FTX [collapsed](https://www.investopedia.com/what-went-wrong-with-ftx-6828447) and filed for bankruptcy in November 2022 after [commingling](https://www.investopedia.com/terms/c/commingling.asp) of customer funds between FTX and its Alameda Research investment arm meant customers were unable to withdraw more than $8 billion in investments that had been used for other purposes. Former FTX CEO Bankman-Fried was [sentenced](https://www.investopedia.com/sam-bankman-fried-former-ftx-ceo-sentenced-25-years-in-prison-for-crypto-fraud-8621556) to 25 years in prison for crypto fraud in late March. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways A new restructuring plan from the fallen FTX cryptocurrency exchange is expected to give 98% of its creditors more than 118% of allowed claims.The plan follows a previous offer in October 2023 that allowed investors access to 90% of their assets left on the bankrupt exchange.FTX founder and CEO Sam Bankman-Fried was sentenced in late March to 25 years in prison for his part in the exchange's downfall. Bankrupt cryptocurrency exchange FTX announced a new restructuring plan that, if approved, could finally give most of its customers access to money they lost—plus interest. What's in FTX's New Plan? The new plan provides for 98% of all customers, including those holding claims of $50,000 or less, to receive up to 118% of their allowed claims within 60 days. FTX forecasts that the total value of assets collected, converted to cash, and available for creditors will be between $14.5 billion and $16.3 billion. FTX owes more than $11 billion to its customers. The plan will require approval from the U.S. Bankruptcy Court for the District Court of Delaware. John J. Ray III, chief restructuring officer of FTX, said: "We are pleased to be in a position to propose a Chapter 11 plan that contemplates the return of 100% of bankruptcy claim amounts plus interest for non-governmental creditors." How Is This Plan Different From the One Before? A previous plan proposed refunding up to 90% of distributable assets to customers. The recovered assets were those held by the company in various entities in the Bahamas, Australia, and the U.S. Investors who withdrew more than $250,000 from the exchange in the nine days before its collapse were expected to pay a 15% fee on the value of the funds to avoid potential clawback. It's More Than They Lost, But Is It Enough? One of the biggest criticisms of any FTX plans to repay its customers' lost funds is that it's returning money in dollars based on Nov. 11, 2022, cryptocurrency prices, not the cryptocurrency itself or repaying at its current value, which has appreciated greatly. For example, bitcoin (BTC) was trading roughly around $17,000 on Nov. 11, 2022; today, its price is more than 3.5 times that at about $62,500. FTX collapsed and filed for bankruptcy in November 2022 after commingling of customer funds between FTX and its Alameda Research investment arm meant customers were unable to withdraw more than $8 billion in investments that had been used for other purposes. Former FTX CEO Bankman-Fried was sentenced to 25 years in prison for crypto fraud in late March. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/mortgage-rates-edge-down-8602116

Mortgage Rates Edge Down, Feb. 29, 2024

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Rates on 30-year mortgages continue to waver below the peak they registered last week, with the flagship average dipping slightly Wednesday to 7.42%. Most other loan types saw rates hold steady or move just minimally. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Because rates vary widely across lenders, it's always smart to shop around for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">your best mortgage option</a> and compare rates regularly, no matter the type of home loan you're seeking. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_5-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.42%</td> <td>7.93%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.49%</td> <td>7.85%</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>6.95%</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.77%</td> <td>6.94%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.68%</td> <td>7.77%</td> </tr> </tbody> </table> <figcaption>National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_7-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> After shooting up last week to 7.48%, the highest level since Dec. 1, rates on 30-year new purchase mortgages have been wavering a bit below that mark. Wednesday saw the 30-year average subtract 2 basis points, dropping the average to 7.42%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Given that 30-year rates dipped into 6% territory at the start of February, the current average is elevated. But rates are still significantly cheaper than October, when the flagship average notched a historic 23-year peak of 8.45%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_14-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/ephXR/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="History of 30y average since Jun 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_17-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> For a second day, rates on 15-year new purchase loans tacked on a single basis point, bumping Wednesday's 15-year average up to 6.77%. That's two-thirds of a percentage point more expensive than we saw just before the new year, when 15-year rates sank to a seven-month low of 6.10%. But last October, 15-year rates soared to a 7.59% peak—their highest level since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> After jumping Tuesday to a three-month-high, jumbo 30-year rates held steady yesterday at 6.95%. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Most other new purchase averages showed little movement Wednesday. The only notable mover was VA 30-year loans, whose average climbed 9 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_25-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.42%</td> <td>-0.02</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.49%</td> <td>-0.05</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.28%</td> <td>+0.09</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.30%</td> <td>-0.02</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.77%</td> <td>+0.01</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.86%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.68%</td> <td>-0.01</td> </tr> <tr> <td>10/6 ARM</td> <td>7.55%</td> <td>+0.01</td> </tr> <tr> <td>7/6 ARM</td> <td>7.55%</td> <td>-0.03</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.45%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.68%</td> <td>-0.02</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_27-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/G0zfx/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and this week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Most refinancing averages were also generally flat Wednesday, though some averages moved more dramatically than their new purchase counterparts. For instance, instead of edging down, the 30-year refi average rose, adding 8 basis points. That stretches the spread between 30-year new purchase and refi rates to 51 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The 15-year refi average meanwhile moved just a single basis point, while the jumbo 30-year refi average marked time after Tuesday jumping an eighth of a point. Wednesday's biggest refi mover was FHA 30-year refi loans, whose average plunged 23 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_39-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 168px;"></colgroup> <colgroup span="1" style="width: 153px;"></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - Refinance</th> </tr> <tr> <th>Loan Type</th> <th><b>Refinance Rates</b></th> <th>Daily Change</th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.93%</td> <td>+0.08</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.85%</td> <td>-0.23</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.55%</td> <td>-0.02</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.64%</td> <td>-0.03</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.94%</td> <td>-0.01</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>7.03%</td> <td>+0.11</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.85%</td> <td>-0.01</td> </tr> <tr> <td>10/6 ARM</td> <td>7.71%</td> <td>+0.01</td> </tr> <tr> <td>7/6 ARM</td> <td>7.90%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.77%</td> <td>No Change</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_43-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_44-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here.</p></div></div></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_45-0"><div class="comp mortgage-loan-calculator mntl-block" data-defer="load" id="mortgage-loan-calculator_1-0"></div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-lowest-mortgage-rates-by-state"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> Lowest Mortgage Rates by State </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The states with the cheapest 30-year new purchase rates were Mississippi, Louisiana, Vermont, Hawaii, and Iowa, while the states with the most expensive rates were Alabama, Minnesota, Georgia, Oregon, Arizona, and Idaho. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_52-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/qpwtM/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="State-by-state average minimum rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <li>The level and direction of the bond market, especially 10-year Treasury yields</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li> <li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/jerome-powell-5210572">Jerome Powell</a> stated that inflation is still too high, and they will therefore proceed cautiously on deciding <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695">when to make the first rate cut</a>. Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%.<span class="ql-inline-citation" data-cite="5"></span> But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value ratio (LTV)</a> of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>

Rates on 30-year mortgages continue to waver below the peak they registered last week, with the flagship average dipping slightly Wednesday to 7.42%. Most other loan types saw rates hold steady or move just minimally. Because rates vary widely across lenders, it's always smart to shop around for [your best mortgage option](https://www.investopedia.com/mortgage-rates-5094943) and compare rates regularly, no matter the type of home loan you're seeking. | National Averages of Lenders' Best Rates | | | | --- | --- | --- | | **Loan Type** | **New Purchase** | **Refinance** | | 30-Year Fixed | 7.42% | 7.93% | | FHA 30-Year Fixed | 7.49% | 7.85% | | Jumbo 30-Year Fixed | 6.95% | 6.95% | | 15-Year Fixed | 6.77% | 6.94% | | 5/6 ARM | 7.68% | 7.77% | National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. ## Today's Mortgage Rate Averages: New Purchase After shooting up last week to 7.48%, the highest level since Dec. 1, rates on 30-year new purchase mortgages have been wavering a bit below that mark. Wednesday saw the 30-year average subtract 2 basis points, dropping the average to 7.42%. Given that 30-year rates dipped into 6% territory at the start of February, the current average is elevated. But rates are still significantly cheaper than October, when the flagship average notched a historic 23-year peak of 8.45%. [Compare the Best Mortgage Rates Today - May 21, 2024](https://www.investopedia.com/mortgage-rates-5094943) For a second day, rates on 15-year new purchase loans tacked on a single basis point, bumping Wednesday's 15-year average up to 6.77%. That's two-thirds of a percentage point more expensive than we saw just before the new year, when 15-year rates sank to a seven-month low of 6.10%. But last October, 15-year rates soared to a 7.59% peak—their highest level since 2000. After jumping Tuesday to a three-month-high, jumbo 30-year rates held steady yesterday at 6.95%. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. Most other new purchase averages showed little movement Wednesday. The only notable mover was VA 30-year loans, whose average climbed 9 basis points. | National Averages of Lenders' Best Rates - New Purchase | | | | --- | --- | --- | | Loan Type | **New Purchase Rates** | **Daily Change** | | 30-Year Fixed | 7.42% | -0.02 | | FHA 30-Year Fixed | 7.49% | -0.05 | | VA 30-Year Fixed | 7.28% | +0.09 | | Jumbo 30-Year Fixed | 6.95% | No Change | | 20-Year Fixed | 7.30% | -0.02 | | 15-Year Fixed | 6.77% | +0.01 | | FHA 15-Year Fixed | 6.86% | +0.01 | | Jumbo 15-Year Fixed | 6.78% | No Change | | 10-Year Fixed | 6.68% | -0.01 | | 10/6 ARM | 7.55% | +0.01 | | 7/6 ARM | 7.55% | -0.03 | | Jumbo 7/6 ARM | 6.45% | No Change | | 5/6 ARM | 7.68% | -0.02 | | Jumbo 5/6 ARM | 6.55% | No Change | ## The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and this week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a *weekly* average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with [discount points](https://www.investopedia.com/terms/d/discountpoints.asp), while Investopedia’s averages only include zero-point loans. ## Today's Mortgage Rate Averages: Refinancing Most refinancing averages were also generally flat Wednesday, though some averages moved more dramatically than their new purchase counterparts. For instance, instead of edging down, the 30-year refi average rose, adding 8 basis points. That stretches the spread between 30-year new purchase and refi rates to 51 basis points. The 15-year refi average meanwhile moved just a single basis point, while the jumbo 30-year refi average marked time after Tuesday jumping an eighth of a point. Wednesday's biggest refi mover was FHA 30-year refi loans, whose average plunged 23 basis points. | National Averages of Lenders' Best Rates - Refinance | | | | --- | --- | --- | | Loan Type | **Refinance Rates** | Daily Change | | 30-Year Fixed | 7.93% | +0.08 | | FHA 30-Year Fixed | 7.85% | -0.23 | | VA 30-Year Fixed | 7.55% | -0.02 | | Jumbo 30-Year Fixed | 6.95% | No Change | | 20-Year Fixed | 7.64% | -0.03 | | 15-Year Fixed | 6.94% | -0.01 | | FHA 15-Year Fixed | 7.03% | +0.11 | | Jumbo 15-Year Fixed | 6.78% | No Change | | 10-Year Fixed | 6.85% | -0.01 | | 10/6 ARM | 7.71% | +0.01 | | 7/6 ARM | 7.90% | +0.01 | | Jumbo 7/6 ARM | 6.55% | No Change | | 5/6 ARM | 7.77% | No Change | | Jumbo 5/6 ARM | 6.55% | No Change | Calculate monthly payments for different loan scenarios with our [Mortgage Calculator](https://www.investopedia.com/mortgage-calculator-5084794). ### The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. ## Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Louisiana, Vermont, Hawaii, and Iowa, while the states with the most expensive rates were Alabama, Minnesota, Georgia, Oregon, Arizona, and Idaho. ## What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: * The level and direction of the bond market, especially 10-year Treasury yields * The [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservebank.asp) current monetary policy, especially as it relates to bond buying and funding government-backed mortgages * Competition between [mortgage lenders and across loan types](https://www.investopedia.com/best-mortgage-lenders-5076852) Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This [bond-buying policy](https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp) is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair [Jerome Powell](https://www.investopedia.com/jerome-powell-5210572) stated that inflation is still too high, and they will therefore proceed cautiously on deciding [when to make the first rate cut](https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695). Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%. But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. ## How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a [loan-to-value ratio (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

Rates on 30-year mortgages continue to waver below the peak they registered last week, with the flagship average dipping slightly Wednesday to 7.42%. Most other loan types saw rates hold steady or move just minimally. Because rates vary widely across lenders, it's always smart to shop around for your best mortgage option and compare rates regularly, no matter the type of home loan you're seeking. National Averages of Lenders' Best Rates Loan Type New Purchase Refinance 30-Year Fixed 7.42% 7.93% FHA 30-Year Fixed 7.49% 7.85% Jumbo 30-Year Fixed 6.95% 6.95% 15-Year Fixed 6.77% 6.94% 5/6 ARM 7.68% 7.77% National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. Today's Mortgage Rate Averages: New Purchase After shooting up last week to 7.48%, the highest level since Dec. 1, rates on 30-year new purchase mortgages have been wavering a bit below that mark. Wednesday saw the 30-year average subtract 2 basis points, dropping the average to 7.42%. Given that 30-year rates dipped into 6% territory at the start of February, the current average is elevated. But rates are still significantly cheaper than October, when the flagship average notched a historic 23-year peak of 8.45%. Compare the Best Mortgage Rates Today - May 21, 2024 For a second day, rates on 15-year new purchase loans tacked on a single basis point, bumping Wednesday's 15-year average up to 6.77%. That's two-thirds of a percentage point more expensive than we saw just before the new year, when 15-year rates sank to a seven-month low of 6.10%. But last October, 15-year rates soared to a 7.59% peak—their highest level since 2000. After jumping Tuesday to a three-month-high, jumbo 30-year rates held steady yesterday at 6.95%. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. Most other new purchase averages showed little movement Wednesday. The only notable mover was VA 30-year loans, whose average climbed 9 basis points. National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.42% -0.02 FHA 30-Year Fixed 7.49% -0.05 VA 30-Year Fixed 7.28% +0.09 Jumbo 30-Year Fixed 6.95% No Change 20-Year Fixed 7.30% -0.02 15-Year Fixed 6.77% +0.01 FHA 15-Year Fixed 6.86% +0.01 Jumbo 15-Year Fixed 6.78% No Change 10-Year Fixed 6.68% -0.01 10/6 ARM 7.55% +0.01 7/6 ARM 7.55% -0.03 Jumbo 7/6 ARM 6.45% No Change 5/6 ARM 7.68% -0.02 Jumbo 5/6 ARM 6.55% No Change The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and this week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a weekly average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with discount points, while Investopedia’s averages only include zero-point loans. Today's Mortgage Rate Averages: Refinancing Most refinancing averages were also generally flat Wednesday, though some averages moved more dramatically than their new purchase counterparts. For instance, instead of edging down, the 30-year refi average rose, adding 8 basis points. That stretches the spread between 30-year new purchase and refi rates to 51 basis points. The 15-year refi average meanwhile moved just a single basis point, while the jumbo 30-year refi average marked time after Tuesday jumping an eighth of a point. Wednesday's biggest refi mover was FHA 30-year refi loans, whose average plunged 23 basis points. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 7.93% +0.08 FHA 30-Year Fixed 7.85% -0.23 VA 30-Year Fixed 7.55% -0.02 Jumbo 30-Year Fixed 6.95% No Change 20-Year Fixed 7.64% -0.03 15-Year Fixed 6.94% -0.01 FHA 15-Year Fixed 7.03% +0.11 Jumbo 15-Year Fixed 6.78% No Change 10-Year Fixed 6.85% -0.01 10/6 ARM 7.71% +0.01 7/6 ARM 7.90% +0.01 Jumbo 7/6 ARM 6.55% No Change 5/6 ARM 7.77% No Change Jumbo 5/6 ARM 6.55% No Change Calculate monthly payments for different loan scenarios with our Mortgage Calculator. The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Louisiana, Vermont, Hawaii, and Iowa, while the states with the most expensive rates were Alabama, Minnesota, Georgia, Oregon, Arizona, and Idaho. What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: The level and direction of the bond market, especially 10-year Treasury yields The Federal Reserve's current monetary policy, especially as it relates to bond buying and funding government-backed mortgages Competition between mortgage lenders and across loan types Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This bond-buying policy is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the federal funds rate to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair Jerome Powell stated that inflation is still too high, and they will therefore proceed cautiously on deciding when to make the first rate cut. Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%. But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a loan-to-value ratio (LTV) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

https://www.investopedia.com/kucoin-execs-charged-with-bank-secrecy-act-and-unlicensed-money-transmission-offenses-8620502

KuCoin, Execs Charged With Bank Secrecy Act and Unlicensed Money Transmission Offenses

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Cryptocurrency exchange KuCoin and two of its founders have been charged with violations of the Bank Secrecy Act.</li><li>The exchange is accused of skirting U.S. regulations in an effort to quickly expand its user base.</li><li>KuCoin is said to have received more than $5 billion and sent more than $4 billion of suspicious funds.</li><li>The lawsuit against KuCoin is similar to past charges against crypto exchanges BitMEX and Binance.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Global cryptocurrency exchange KuCoin and two of its founders have been indicted on criminal charges of operating without a license for transmitting money and failing to establish an anti-money laundering (AML) program in accordance with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank_secrecy_act.asp">Bank Secrecy Act (BSA</a>).<span class="ql-inline-citation" data-cite="2"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> KuCoin is accused by the U.S. Attorney's Office for the Southern District of New York of neglecting to verify the identities of its customers adequately or to report any suspicious activities. The BSA mandates that financial platforms implement stringent measures for identifying their customers and reporting any transactions that could suggest criminal activities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Other international crypto exchanges, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-exchange-binance-charged-with-money-laundering-fined-usd4-3-billion-8405545">Binance</a> and BitMEX, have faced similar charges in the past.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> KuCoin's founders, Chun Gan and Ke Tang, are alleged to have concealed their platform's significant engagement with U.S. traders. According to U.S. authorities Tuesday, this strategy allowed KuCoin to amass more than 30 million customers and billions of dollars in daily trades because it didn't follow the legal obligations in place for financial institutions operating within or targeting the U.S. market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Overall, KuCoin is accused of facilitating the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aml.asp">laundering</a> of more than $5 billion in suspicious funds via deposits and $4 billion via withdrawals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> “As [Tuesday's] Indictment alleges, KuCoin and its founders deliberately sought to conceal the fact that substantial numbers of U.S. users were trading on KuCoin’s platform," U.S. Attorney Damian Williams said in a statement. "Indeed, KuCoin allegedly took advantage of its sizeable U.S. customer base to become one of the world’s largest cryptocurrency derivatives and spot exchanges, with billions of dollars of daily trades and trillions of dollars of annual trade volume."<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The charges also underscore an allegedly deliberate attempt by KuCoin and its founders to operate outside of the global financial regulatory structure. By actively disguising the presence of its U.S. clientele and misleading investors about the geographic distribution of its customer base, KuCoin sought exemption from the stringent AML and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/knowyourclient.asp">Know Your Customer (KYC)</a> requirements, the charges allege. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> This evasion of legal duties was alleged to have continued until the company was confronted with a federal criminal investigation, after which it implemented a KYC process in July 2023—albeit one that applied only to new customers, leaving a vast number of existing users, including those in the U.S., unverified, according to the indictment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Last December, KuCoin reached a $22 million settlement over charges of operating an unregistered exchange from New York Attorney General Letitia James.<span class="ql-inline-citation" data-cite="1"></span> Notably, that case referred to ether as a security, which has recently been disclosed as a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cryptocurrency-market-news-sec-wants-to-define-ether-as-a-security-bitcoin-plummets-8619749">new area of focus</a> for the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission (SEC</a>). </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * Cryptocurrency exchange KuCoin and two of its founders have been charged with violations of the Bank Secrecy Act. * The exchange is accused of skirting U.S. regulations in an effort to quickly expand its user base. * KuCoin is said to have received more than $5 billion and sent more than $4 billion of suspicious funds. * The lawsuit against KuCoin is similar to past charges against crypto exchanges BitMEX and Binance. Global cryptocurrency exchange KuCoin and two of its founders have been indicted on criminal charges of operating without a license for transmitting money and failing to establish an anti-money laundering (AML) program in accordance with the [Bank Secrecy Act (BSA](https://www.investopedia.com/terms/b/bank_secrecy_act.asp)). KuCoin is accused by the U.S. Attorney's Office for the Southern District of New York of neglecting to verify the identities of its customers adequately or to report any suspicious activities. The BSA mandates that financial platforms implement stringent measures for identifying their customers and reporting any transactions that could suggest criminal activities. Other international crypto exchanges, such as [Binance](https://www.investopedia.com/crypto-exchange-binance-charged-with-money-laundering-fined-usd4-3-billion-8405545) and BitMEX, have faced similar charges in the past. KuCoin's founders, Chun Gan and Ke Tang, are alleged to have concealed their platform's significant engagement with U.S. traders. According to U.S. authorities Tuesday, this strategy allowed KuCoin to amass more than 30 million customers and billions of dollars in daily trades because it didn't follow the legal obligations in place for financial institutions operating within or targeting the U.S. market. Overall, KuCoin is accused of facilitating the [laundering](https://www.investopedia.com/terms/a/aml.asp) of more than $5 billion in suspicious funds via deposits and $4 billion via withdrawals. “As [Tuesday's] Indictment alleges, KuCoin and its founders deliberately sought to conceal the fact that substantial numbers of U.S. users were trading on KuCoin’s platform," U.S. Attorney Damian Williams said in a statement. "Indeed, KuCoin allegedly took advantage of its sizeable U.S. customer base to become one of the world’s largest cryptocurrency derivatives and spot exchanges, with billions of dollars of daily trades and trillions of dollars of annual trade volume." The charges also underscore an allegedly deliberate attempt by KuCoin and its founders to operate outside of the global financial regulatory structure. By actively disguising the presence of its U.S. clientele and misleading investors about the geographic distribution of its customer base, KuCoin sought exemption from the stringent AML and [Know Your Customer (KYC)](https://www.investopedia.com/terms/k/knowyourclient.asp) requirements, the charges allege. This evasion of legal duties was alleged to have continued until the company was confronted with a federal criminal investigation, after which it implemented a KYC process in July 2023—albeit one that applied only to new customers, leaving a vast number of existing users, including those in the U.S., unverified, according to the indictment. Last December, KuCoin reached a $22 million settlement over charges of operating an unregistered exchange from New York Attorney General Letitia James. Notably, that case referred to ether as a security, which has recently been disclosed as a [new area of focus](https://www.investopedia.com/cryptocurrency-market-news-sec-wants-to-define-ether-as-a-security-bitcoin-plummets-8619749) for the [Securities and Exchange Commission (SEC](https://www.investopedia.com/terms/s/sec.asp)). Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways Cryptocurrency exchange KuCoin and two of its founders have been charged with violations of the Bank Secrecy Act.The exchange is accused of skirting U.S. regulations in an effort to quickly expand its user base.KuCoin is said to have received more than $5 billion and sent more than $4 billion of suspicious funds.The lawsuit against KuCoin is similar to past charges against crypto exchanges BitMEX and Binance. Global cryptocurrency exchange KuCoin and two of its founders have been indicted on criminal charges of operating without a license for transmitting money and failing to establish an anti-money laundering (AML) program in accordance with the Bank Secrecy Act (BSA). KuCoin is accused by the U.S. Attorney's Office for the Southern District of New York of neglecting to verify the identities of its customers adequately or to report any suspicious activities. The BSA mandates that financial platforms implement stringent measures for identifying their customers and reporting any transactions that could suggest criminal activities. Other international crypto exchanges, such as Binance and BitMEX, have faced similar charges in the past. KuCoin's founders, Chun Gan and Ke Tang, are alleged to have concealed their platform's significant engagement with U.S. traders. According to U.S. authorities Tuesday, this strategy allowed KuCoin to amass more than 30 million customers and billions of dollars in daily trades because it didn't follow the legal obligations in place for financial institutions operating within or targeting the U.S. market. Overall, KuCoin is accused of facilitating the laundering of more than $5 billion in suspicious funds via deposits and $4 billion via withdrawals. “As [Tuesday's] Indictment alleges, KuCoin and its founders deliberately sought to conceal the fact that substantial numbers of U.S. users were trading on KuCoin’s platform," U.S. Attorney Damian Williams said in a statement. "Indeed, KuCoin allegedly took advantage of its sizeable U.S. customer base to become one of the world’s largest cryptocurrency derivatives and spot exchanges, with billions of dollars of daily trades and trillions of dollars of annual trade volume." The charges also underscore an allegedly deliberate attempt by KuCoin and its founders to operate outside of the global financial regulatory structure. By actively disguising the presence of its U.S. clientele and misleading investors about the geographic distribution of its customer base, KuCoin sought exemption from the stringent AML and Know Your Customer (KYC) requirements, the charges allege. This evasion of legal duties was alleged to have continued until the company was confronted with a federal criminal investigation, after which it implemented a KYC process in July 2023—albeit one that applied only to new customers, leaving a vast number of existing users, including those in the U.S., unverified, according to the indictment. Last December, KuCoin reached a $22 million settlement over charges of operating an unregistered exchange from New York Attorney General Letitia James. Notably, that case referred to ether as a security, which has recently been disclosed as a new area of focus for the Securities and Exchange Commission (SEC). Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/terms/g/guarantor.asp

What Is a Guarantor? Definition, Example, and Responsibilities

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-guarantor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Guarantor? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A guarantor is a financial term describing an individual who promises to pay a borrower's debt if the borrower defaults on their loan obligation. Guarantors <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pledgedasset.asp">pledge their own assets</a> as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan. The term "guarantor" is often interchanged with the term "surety." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A guarantor guarantees to pay a borrower's debt if the borrower defaults on a loan obligation.</li><li>The guarantor guarantees a loan by pledging their assets as collateral.</li><li>A guarantor alternatively describes someone who verifies the identity of an individual attempting to land a job or secure a passport.</li><li>Unlike a co-signer, a guarantor has no claim to the asset purchased by the borrower.</li><li>If the borrower defaults on their loan, then the guarantor is liable for the outstanding obligation, which they must meet, otherwise, legal action may be brought against them.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-guarantor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding a Guarantor </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A guarantor is typically over the age of 18 and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principalresidence.asp" rel="noopener noreferrer">resides in the country</a> where the payment agreement occurs. Guarantors generally exhibit exemplary credit histories and sufficient income to cover the loan payments if and when the borrower <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp" rel="noopener noreferrer">defaults</a>, at which time the guarantor's assets may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional interest owed or penalty costs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-types-of-guarantors"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Types of Guarantors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> There are many different scenarios in which a guarantor would need to be used. This ranges from assisting people with poor credit histories to simply assisting those without a high enough income. Guarantors also don't necessarily need to be liable for the entire monetary obligation in the guarantee. Below are different situations that would require a guarantor as well as the type of guarantor in a specific guarantee. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-subheading__text"> Guarantors as Certifiers </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> In addition to pledging their assets as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp" rel="noopener noreferrer">collateral</a> against loans, guarantors may also help individuals land jobs and secure passport documents. In these situations, guarantors certify that they personally know the applicants and corroborate their identities by confirming photo IDs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> Limited vs. Unlimited </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited concerning timetables and levels of financial involvement. Case in point: a limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> A limited guarantor may also only be responsible for backing a certain percentage of the loan, referred to as a penal sum. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-subheading__text"> Other Contexts for Guarantors </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Guarantors aren't solely used by borrowers with poor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp" rel="noopener noreferrer">credit histories</a>. Pointedly: landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the lease agreement. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <span class="heading-toc" id="toc-guarantors-vs-co-signers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> Guarantors vs. Co-signers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> A guarantor differs from a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_sign.asp">co-signer</a>, who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender's requirement. This differs from guarantors, who step in only when borrowers have sufficient income but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> However, in the event the borrower has a claim against a third party that has caused the default, the guarantor has the right to invoke a process called "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subrogation.asp">subrogation</a>" ("step into the shoes of the borrower") to recover damages. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> For example, in a rental agreement, a co-signer would be responsible for the rent from day one, whereas a guarantor would only be responsible for the rent if the renter fails to make a payment. This also applies to any loan. Guarantors are only notified when the borrower defaults, not for any payment before that. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_30-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_31-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>In the event of a default, the guarantor’s credit history may be adversely affected, which may limit their chances of securing loans in the future.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In essence, a co-signer takes on more financial responsibility than a guarantor does as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/joint_liability.asp">a co-signer is equally responsible</a> from the onset of the agreement, whereas a guarantor is only responsible once the primary party to the contract fails to meet their obligation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-advantages-and-disadvantages-of-guarantors"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Advantages and Disadvantages of Guarantors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> In an agreement with a guarantor, the advantages usually lie with the primary party in the contract, whereas the disadvantages usually lie with the guarantor. Having a guarantor means that the loan or agreement has a higher chance of being approved and much more quickly. Most likely, it can allow for borrowing more and receiving a better interest rate. Though loans with guarantors tend to have higher interest rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_38-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>In a rental agreement, one way to avoid needing a guarantor is by paying a few months of rent upfront if you are in a position to do so.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The disadvantages lie with the guarantor. If the person you are guaranteeing fails to pay their obligations, then you are on the hook for the amount. If you are not in the financial situation to make the payments, then you are still liable for the amount and your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp" rel="noopener noreferrer">credit score</a> will be negatively impacted and legal action may be taken against you. Also, if you guarantee a loan then your ability to borrow additional money for something else is limited because you are tied to an existing obligation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_41-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_42-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>Helps a borrower obtain a loan or a rental much easier.</p></li> <li><p>Allows for the ability to borrow a higher amount.</p></li> <li><p>Can help the borrower improve their credit history.</p></li> </ul> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>The guarantor may be liable for the outstanding obligation.</p></li> <li><p>The guarantor's credit score could be negatively impacted.</p></li> <li><p>The ability to obtain another loan for a separate use is limited.</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-is-a-guarantor-a-co-signer"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Guarantor a Co-signer?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Though the terms are used interchangeably, they are both different. A co-signer takes on equal responsibility in an agreement, co-owns the asset, and is responsible for payments from the start of the agreement. A guarantor is only responsible for payments once the primary party of the agreement defaults and is then notified by the lender. A co-signer has more financial responsibility than a guarantor.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-is-a-parent-a-guarantor"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Parent a Guarantor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A parent can act as a guarantor and often does for a child for their child's first rental property, as the child's income is usually not high enough at a young age.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-how-do-you-qualify-as-a-guarantor"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Qualify As a Guarantor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Different agreements and different lenders have different requirements for a guarantor. At the minimum, a guarantor will need to have a high credit score without any issues in their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a>. They will also have to have an income that is a certain multiple of the monthly or annual payments.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-how-much-do-you-need-to-earn-to-be-a-guarantor"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Do You Need to Earn to Be a Guarantor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There is no specific amount that an individual needs to earn to be a guarantor. The amount relates directly to the loan in question or the rent on a property. For rental agreements, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/landlord.asp">landlords</a> usually expect the guarantor to have an annual income that is at least 40 times the monthly rent.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_52-0"><span class="heading-toc" id="toc-what-happens-if-a-guarantor-cannot-pay"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens If a Guarantor Cannot Pay?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If a guarantor cannot pay, both they and the tenant are liable for the obligations. The lender will begin collection proceedings against both the guarantor and the tenant, which will adversely impact the credit profile of both.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> A guarantor is an individual that agrees to pay a borrower's debt if the borrower defaults on their obligation. A guarantor is not a primary party to the agreement but is considered to be an additional comfort for a lender. A guarantor will have a strong credit score and earn sufficient income to meet the obligation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Having a guarantor on a loan agreement greatly benefits the borrower. It allows for an agreement to be approved much faster and often at a higher amount. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> In the event a borrower defaults, the guarantor must meet the obligation. If they do not, they are still liable and can have a lawsuit brought against them for the outstanding amount. They will also see a negative hit on their credit score. </p></div>

## What Is a Guarantor? A guarantor is a financial term describing an individual who promises to pay a borrower's debt if the borrower defaults on their loan obligation. Guarantors [pledge their own assets](https://www.investopedia.com/terms/p/pledgedasset.asp) as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan. The term "guarantor" is often interchanged with the term "surety." ### Key Takeaways * A guarantor guarantees to pay a borrower's debt if the borrower defaults on a loan obligation. * The guarantor guarantees a loan by pledging their assets as collateral. * A guarantor alternatively describes someone who verifies the identity of an individual attempting to land a job or secure a passport. * Unlike a co-signer, a guarantor has no claim to the asset purchased by the borrower. * If the borrower defaults on their loan, then the guarantor is liable for the outstanding obligation, which they must meet, otherwise, legal action may be brought against them. ## Understanding a Guarantor A guarantor is typically over the age of 18 and [resides in the country](https://www.investopedia.com/terms/p/principalresidence.asp) where the payment agreement occurs. Guarantors generally exhibit exemplary credit histories and sufficient income to cover the loan payments if and when the borrower [defaults](https://www.investopedia.com/terms/d/default2.asp), at which time the guarantor's assets may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional interest owed or penalty costs. ## Types of Guarantors There are many different scenarios in which a guarantor would need to be used. This ranges from assisting people with poor credit histories to simply assisting those without a high enough income. Guarantors also don't necessarily need to be liable for the entire monetary obligation in the guarantee. Below are different situations that would require a guarantor as well as the type of guarantor in a specific guarantee. ### Guarantors as Certifiers In addition to pledging their assets as [collateral](https://www.investopedia.com/terms/c/collateral.asp) against loans, guarantors may also help individuals land jobs and secure passport documents. In these situations, guarantors certify that they personally know the applicants and corroborate their identities by confirming photo IDs. ### Limited vs. Unlimited As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited concerning timetables and levels of financial involvement. Case in point: a limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting. A limited guarantor may also only be responsible for backing a certain percentage of the loan, referred to as a penal sum. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract. ### Other Contexts for Guarantors Guarantors aren't solely used by borrowers with poor [credit histories](https://www.investopedia.com/terms/c/credit-history.asp). Pointedly: landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the lease agreement. ## Guarantors vs. Co-signers A guarantor differs from a [co-signer](https://www.investopedia.com/terms/c/co_sign.asp), who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender's requirement. This differs from guarantors, who step in only when borrowers have sufficient income but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower. However, in the event the borrower has a claim against a third party that has caused the default, the guarantor has the right to invoke a process called "[subrogation](https://www.investopedia.com/terms/s/subrogation.asp)" ("step into the shoes of the borrower") to recover damages. For example, in a rental agreement, a co-signer would be responsible for the rent from day one, whereas a guarantor would only be responsible for the rent if the renter fails to make a payment. This also applies to any loan. Guarantors are only notified when the borrower defaults, not for any payment before that. ### In the event of a default, the guarantor’s credit history may be adversely affected, which may limit their chances of securing loans in the future. In essence, a co-signer takes on more financial responsibility than a guarantor does as [a co-signer is equally responsible](https://www.investopedia.com/terms/j/joint_liability.asp) from the onset of the agreement, whereas a guarantor is only responsible once the primary party to the contract fails to meet their obligation. ## Advantages and Disadvantages of Guarantors In an agreement with a guarantor, the advantages usually lie with the primary party in the contract, whereas the disadvantages usually lie with the guarantor. Having a guarantor means that the loan or agreement has a higher chance of being approved and much more quickly. Most likely, it can allow for borrowing more and receiving a better interest rate. Though loans with guarantors tend to have higher interest rates. ### In a rental agreement, one way to avoid needing a guarantor is by paying a few months of rent upfront if you are in a position to do so. The disadvantages lie with the guarantor. If the person you are guaranteeing fails to pay their obligations, then you are on the hook for the amount. If you are not in the financial situation to make the payments, then you are still liable for the amount and your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) will be negatively impacted and legal action may be taken against you. Also, if you guarantee a loan then your ability to borrow additional money for something else is limited because you are tied to an existing obligation. Pros * Helps a borrower obtain a loan or a rental much easier. * Allows for the ability to borrow a higher amount. * Can help the borrower improve their credit history. Cons * The guarantor may be liable for the outstanding obligation. * The guarantor's credit score could be negatively impacted. * The ability to obtain another loan for a separate use is limited. ## Is a Guarantor a Co-signer? Though the terms are used interchangeably, they are both different. A co-signer takes on equal responsibility in an agreement, co-owns the asset, and is responsible for payments from the start of the agreement. A guarantor is only responsible for payments once the primary party of the agreement defaults and is then notified by the lender. A co-signer has more financial responsibility than a guarantor. ## Is a Parent a Guarantor? A parent can act as a guarantor and often does for a child for their child's first rental property, as the child's income is usually not high enough at a young age. ## How Do You Qualify As a Guarantor? Different agreements and different lenders have different requirements for a guarantor. At the minimum, a guarantor will need to have a high credit score without any issues in their [credit report](https://www.investopedia.com/terms/c/creditreport.asp). They will also have to have an income that is a certain multiple of the monthly or annual payments. ## How Much Do You Need to Earn to Be a Guarantor? There is no specific amount that an individual needs to earn to be a guarantor. The amount relates directly to the loan in question or the rent on a property. For rental agreements, [landlords](https://www.investopedia.com/terms/l/landlord.asp) usually expect the guarantor to have an annual income that is at least 40 times the monthly rent. ## What Happens If a Guarantor Cannot Pay? If a guarantor cannot pay, both they and the tenant are liable for the obligations. The lender will begin collection proceedings against both the guarantor and the tenant, which will adversely impact the credit profile of both. ## The Bottom Line A guarantor is an individual that agrees to pay a borrower's debt if the borrower defaults on their obligation. A guarantor is not a primary party to the agreement but is considered to be an additional comfort for a lender. A guarantor will have a strong credit score and earn sufficient income to meet the obligation. Having a guarantor on a loan agreement greatly benefits the borrower. It allows for an agreement to be approved much faster and often at a higher amount. In the event a borrower defaults, the guarantor must meet the obligation. If they do not, they are still liable and can have a lawsuit brought against them for the outstanding amount. They will also see a negative hit on their credit score.

What Is a Guarantor? A guarantor is a financial term describing an individual who promises to pay a borrower's debt if the borrower defaults on their loan obligation. Guarantors pledge their own assets as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan. The term "guarantor" is often interchanged with the term "surety." Key Takeaways A guarantor guarantees to pay a borrower's debt if the borrower defaults on a loan obligation.The guarantor guarantees a loan by pledging their assets as collateral.A guarantor alternatively describes someone who verifies the identity of an individual attempting to land a job or secure a passport.Unlike a co-signer, a guarantor has no claim to the asset purchased by the borrower.If the borrower defaults on their loan, then the guarantor is liable for the outstanding obligation, which they must meet, otherwise, legal action may be brought against them. Understanding a Guarantor A guarantor is typically over the age of 18 and resides in the country where the payment agreement occurs. Guarantors generally exhibit exemplary credit histories and sufficient income to cover the loan payments if and when the borrower defaults, at which time the guarantor's assets may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional interest owed or penalty costs. Types of Guarantors There are many different scenarios in which a guarantor would need to be used. This ranges from assisting people with poor credit histories to simply assisting those without a high enough income. Guarantors also don't necessarily need to be liable for the entire monetary obligation in the guarantee. Below are different situations that would require a guarantor as well as the type of guarantor in a specific guarantee. Guarantors as Certifiers In addition to pledging their assets as collateral against loans, guarantors may also help individuals land jobs and secure passport documents. In these situations, guarantors certify that they personally know the applicants and corroborate their identities by confirming photo IDs. Limited vs. Unlimited As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited concerning timetables and levels of financial involvement. Case in point: a limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting. A limited guarantor may also only be responsible for backing a certain percentage of the loan, referred to as a penal sum. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract. Other Contexts for Guarantors Guarantors aren't solely used by borrowers with poor credit histories. Pointedly: landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the lease agreement. Guarantors vs. Co-signers A guarantor differs from a co-signer, who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender's requirement. This differs from guarantors, who step in only when borrowers have sufficient income but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower. However, in the event the borrower has a claim against a third party that has caused the default, the guarantor has the right to invoke a process called "subrogation" ("step into the shoes of the borrower") to recover damages. For example, in a rental agreement, a co-signer would be responsible for the rent from day one, whereas a guarantor would only be responsible for the rent if the renter fails to make a payment. This also applies to any loan. Guarantors are only notified when the borrower defaults, not for any payment before that. In the event of a default, the guarantor’s credit history may be adversely affected, which may limit their chances of securing loans in the future. In essence, a co-signer takes on more financial responsibility than a guarantor does as a co-signer is equally responsible from the onset of the agreement, whereas a guarantor is only responsible once the primary party to the contract fails to meet their obligation. Advantages and Disadvantages of Guarantors In an agreement with a guarantor, the advantages usually lie with the primary party in the contract, whereas the disadvantages usually lie with the guarantor. Having a guarantor means that the loan or agreement has a higher chance of being approved and much more quickly. Most likely, it can allow for borrowing more and receiving a better interest rate. Though loans with guarantors tend to have higher interest rates. In a rental agreement, one way to avoid needing a guarantor is by paying a few months of rent upfront if you are in a position to do so. The disadvantages lie with the guarantor. If the person you are guaranteeing fails to pay their obligations, then you are on the hook for the amount. If you are not in the financial situation to make the payments, then you are still liable for the amount and your credit score will be negatively impacted and legal action may be taken against you. Also, if you guarantee a loan then your ability to borrow additional money for something else is limited because you are tied to an existing obligation. Pros Helps a borrower obtain a loan or a rental much easier. Allows for the ability to borrow a higher amount. Can help the borrower improve their credit history. Cons The guarantor may be liable for the outstanding obligation. The guarantor's credit score could be negatively impacted. The ability to obtain another loan for a separate use is limited. Is a Guarantor a Co-signer? Though the terms are used interchangeably, they are both different. A co-signer takes on equal responsibility in an agreement, co-owns the asset, and is responsible for payments from the start of the agreement. A guarantor is only responsible for payments once the primary party of the agreement defaults and is then notified by the lender. A co-signer has more financial responsibility than a guarantor. Is a Parent a Guarantor? A parent can act as a guarantor and often does for a child for their child's first rental property, as the child's income is usually not high enough at a young age. How Do You Qualify As a Guarantor? Different agreements and different lenders have different requirements for a guarantor. At the minimum, a guarantor will need to have a high credit score without any issues in their credit report. They will also have to have an income that is a certain multiple of the monthly or annual payments. How Much Do You Need to Earn to Be a Guarantor? There is no specific amount that an individual needs to earn to be a guarantor. The amount relates directly to the loan in question or the rent on a property. For rental agreements, landlords usually expect the guarantor to have an annual income that is at least 40 times the monthly rent. What Happens If a Guarantor Cannot Pay? If a guarantor cannot pay, both they and the tenant are liable for the obligations. The lender will begin collection proceedings against both the guarantor and the tenant, which will adversely impact the credit profile of both. The Bottom Line A guarantor is an individual that agrees to pay a borrower's debt if the borrower defaults on their obligation. A guarantor is not a primary party to the agreement but is considered to be an additional comfort for a lender. A guarantor will have a strong credit score and earn sufficient income to meet the obligation. Having a guarantor on a loan agreement greatly benefits the borrower. It allows for an agreement to be approved much faster and often at a higher amount. In the event a borrower defaults, the guarantor must meet the obligation. If they do not, they are still liable and can have a lawsuit brought against them for the outstanding amount. They will also see a negative hit on their credit score.

https://www.investopedia.com/ask/answers/08/swiss-bank-account.asp

How to Open a Swiss Bank Account and Advantages in Having One

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The Swiss Banking Act of 1934 made it criminal for Swiss banks to disclose the name of an account holder. Similar to the confidentiality protections between doctors and patients or lawyers and their clients, these protections are the primary reason that Swiss bank accounts are so popular with wealthy banking customers around the world. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Swiss banks employ a strict level of scrutiny in evaluating official documentation of your identity.</li><li>Nonresidents of Switzerland must be at least 18 years old to open a Swiss bank account, and that's about the only restriction.</li><li>The main benefits of Swiss bank accounts include low levels of financial risk and high levels of privacy.</li><li>Swiss law prevents the bank from disclosing any information regarding an account (even its existence) without the depositor's permission, except in cases where severe criminal activity is suspected.</li></ul></div></div></div> <span class="heading-toc" id="toc-opening-a-swiss-bank-account"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Opening a Swiss Bank Account </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Surprisingly, opening a Swiss bank account is not that much different from opening a standard bank account. You have to fill out forms and provide documentation that proves who you are and what you do. However, due to some special circumstances regarding privacy, the level of scrutiny over providing official documentation of your identity is more strict. For example, you may need to show your official passport to provide your identity, whereas a driver's license would probably suffice in the U.S. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> There are also different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-balance.asp">minimum balance</a> requirements depending on the type of account you want. These can range from a few thousand dollars to millions of dollars. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <span class="heading-toc" id="toc-swiss-bank-accounts-and-nonresidents-of-switzerland"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Swiss Bank Accounts and Nonresidents of Switzerland </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Nonresidents of Switzerland must be at least 18 years old to open a Swiss bank account, and that's about the only restriction. Account holders can choose their currency—most hold their funds in Swiss francs, U.S. dollars, euros, or British Pound Sterling. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> There's usually no minimum balance required to open an account, but once an account holder deposits funds, there is typically a minimum balance requirement, which varies according to the bank. If you don't have that much idle cash, you might be better off looking for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best savings accounts</a> in your own country. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Swiss anti-money-laundering laws require a prospective Swiss bank account holder to provide several documents to open an account. These include authenticated copies of your passport and documents explaining your profession, such as tax returns, company documents, professional licenses, etc.; proof of the source of your funds; and other typical personal information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">$3.9 trillion</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The total value of all assets in the Swiss banking sector, as of 2021. That's 520% of Switzerland's GDP.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-benefits-of-swiss-bank-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Benefits of Swiss Bank Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Some benefits of Swiss bank accounts are the low levels of financial risk and high levels of privacy. The Swiss economy has been known to be very stable, and the country has not been part of any major conflicts for some time.<span class="ql-inline-citation" data-cite="3"></span> Furthermore, Swiss law requires that banks have high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/pros-cons-foreign-market-investing/">capital requirements</a> and strong depositor protection, which protects deposits from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-crisis.asp">financial crises</a> and conflicts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Accounts held in Swiss Francs will earn a small amount of interest, but they'll also have to pay the Swiss withholding tax. For this reason, most foreign account holders have their Swiss bank account in another currency. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Swiss law states that the bank can't disclose any information regarding an account (even its existence) without the depositor's permission. The only way information will be revealed is if a government agency says that a depositor is involved in a criminal act or some other financial issue (like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcies</a>, divorces, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inheritance.asp">inheritances</a>). Furthermore, Swiss anti-money-laundering regulations also require depositors to provide proof regarding the origin of the funds they are placing in their accounts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_26-0"><span class="heading-toc" id="toc-how-do-you-open-a-swiss-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Open a Swiss Bank Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Non-residents of Switzerland must be over age 18 and will need to provide their passport and other identification documents when they open an account, along with documentation showing their profession and the source of their funds. These documents are closely scrutinized in order to prevent money-laundering.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-can-you-hide-money-in-a-swiss-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Hide Money in a Swiss Bank Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While Swiss banks were once synonymous with money laundering and tax evasion, the opportunity for illegal activity diminished after Switzerland began exchanging information about account holders with other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.oecd.org/tax/transparency/AEOI-Implementation-Report-2018.pdf">OECD</a> nations in 2018. While Swiss banking laws still afford a high degree of privacy, it is now much less practical to use them for illegal purposes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-how-much-does-a-swiss-bank-account-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does a Swiss Bank Account Cost?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Swiss banks may have a monthly charge for account holders, as well as minimum balance requirements. Requirements will vary from bank to bank.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Popular culture has made Swiss banks synonymous with espionage and hidden wealth. While the country's banking secrecy laws still afford a high degree of privacy, strict anti-money laundering laws make the country a much less practical haven for ill-gotten wealth. Anyone over 18 is free to open a Swiss bank account, provided that they can provide identity documents and demonstrate the source of their wealth. </p></div>

The Swiss Banking Act of 1934 made it criminal for Swiss banks to disclose the name of an account holder. Similar to the confidentiality protections between doctors and patients or lawyers and their clients, these protections are the primary reason that Swiss bank accounts are so popular with wealthy banking customers around the world. ### Key Takeaways * Swiss banks employ a strict level of scrutiny in evaluating official documentation of your identity. * Nonresidents of Switzerland must be at least 18 years old to open a Swiss bank account, and that's about the only restriction. * The main benefits of Swiss bank accounts include low levels of financial risk and high levels of privacy. * Swiss law prevents the bank from disclosing any information regarding an account (even its existence) without the depositor's permission, except in cases where severe criminal activity is suspected. ## Opening a Swiss Bank Account Surprisingly, opening a Swiss bank account is not that much different from opening a standard bank account. You have to fill out forms and provide documentation that proves who you are and what you do. However, due to some special circumstances regarding privacy, the level of scrutiny over providing official documentation of your identity is more strict. For example, you may need to show your official passport to provide your identity, whereas a driver's license would probably suffice in the U.S. There are also different [minimum balance](https://www.investopedia.com/terms/m/minimum-balance.asp) requirements depending on the type of account you want. These can range from a few thousand dollars to millions of dollars. ## Swiss Bank Accounts and Nonresidents of Switzerland Nonresidents of Switzerland must be at least 18 years old to open a Swiss bank account, and that's about the only restriction. Account holders can choose their currency—most hold their funds in Swiss francs, U.S. dollars, euros, or British Pound Sterling. There's usually no minimum balance required to open an account, but once an account holder deposits funds, there is typically a minimum balance requirement, which varies according to the bank. If you don't have that much idle cash, you might be better off looking for the [best savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) in your own country. Swiss anti-money-laundering laws require a prospective Swiss bank account holder to provide several documents to open an account. These include authenticated copies of your passport and documents explaining your profession, such as tax returns, company documents, professional licenses, etc.; proof of the source of your funds; and other typical personal information. ### $3.9 trillion The total value of all assets in the Swiss banking sector, as of 2021. That's 520% of Switzerland's GDP. ## Benefits of Swiss Bank Accounts Some benefits of Swiss bank accounts are the low levels of financial risk and high levels of privacy. The Swiss economy has been known to be very stable, and the country has not been part of any major conflicts for some time. Furthermore, Swiss law requires that banks have high [capital requirements](https://www.investopedia.com/investing/pros-cons-foreign-market-investing/) and strong depositor protection, which protects deposits from [financial crises](https://www.investopedia.com/terms/f/financial-crisis.asp) and conflicts. Accounts held in Swiss Francs will earn a small amount of interest, but they'll also have to pay the Swiss withholding tax. For this reason, most foreign account holders have their Swiss bank account in another currency. Swiss law states that the bank can't disclose any information regarding an account (even its existence) without the depositor's permission. The only way information will be revealed is if a government agency says that a depositor is involved in a criminal act or some other financial issue (like [bankruptcies](https://www.investopedia.com/terms/b/bankruptcy.asp), divorces, or [inheritances](https://www.investopedia.com/terms/i/inheritance.asp)). Furthermore, Swiss anti-money-laundering regulations also require depositors to provide proof regarding the origin of the funds they are placing in their accounts. ## How Do You Open a Swiss Bank Account? Non-residents of Switzerland must be over age 18 and will need to provide their passport and other identification documents when they open an account, along with documentation showing their profession and the source of their funds. These documents are closely scrutinized in order to prevent money-laundering. ## Can You Hide Money in a Swiss Bank Account? While Swiss banks were once synonymous with money laundering and tax evasion, the opportunity for illegal activity diminished after Switzerland began exchanging information about account holders with other [OECD](https://www.oecd.org/tax/transparency/AEOI-Implementation-Report-2018.pdf) nations in 2018. While Swiss banking laws still afford a high degree of privacy, it is now much less practical to use them for illegal purposes. ## How Much Does a Swiss Bank Account Cost? Swiss banks may have a monthly charge for account holders, as well as minimum balance requirements. Requirements will vary from bank to bank. ## The Bottom Line Popular culture has made Swiss banks synonymous with espionage and hidden wealth. While the country's banking secrecy laws still afford a high degree of privacy, strict anti-money laundering laws make the country a much less practical haven for ill-gotten wealth. Anyone over 18 is free to open a Swiss bank account, provided that they can provide identity documents and demonstrate the source of their wealth.

The Swiss Banking Act of 1934 made it criminal for Swiss banks to disclose the name of an account holder. Similar to the confidentiality protections between doctors and patients or lawyers and their clients, these protections are the primary reason that Swiss bank accounts are so popular with wealthy banking customers around the world. Key Takeaways Swiss banks employ a strict level of scrutiny in evaluating official documentation of your identity.Nonresidents of Switzerland must be at least 18 years old to open a Swiss bank account, and that's about the only restriction.The main benefits of Swiss bank accounts include low levels of financial risk and high levels of privacy.Swiss law prevents the bank from disclosing any information regarding an account (even its existence) without the depositor's permission, except in cases where severe criminal activity is suspected. Opening a Swiss Bank Account Surprisingly, opening a Swiss bank account is not that much different from opening a standard bank account. You have to fill out forms and provide documentation that proves who you are and what you do. However, due to some special circumstances regarding privacy, the level of scrutiny over providing official documentation of your identity is more strict. For example, you may need to show your official passport to provide your identity, whereas a driver's license would probably suffice in the U.S. There are also different minimum balance requirements depending on the type of account you want. These can range from a few thousand dollars to millions of dollars. Swiss Bank Accounts and Nonresidents of Switzerland Nonresidents of Switzerland must be at least 18 years old to open a Swiss bank account, and that's about the only restriction. Account holders can choose their currency—most hold their funds in Swiss francs, U.S. dollars, euros, or British Pound Sterling. There's usually no minimum balance required to open an account, but once an account holder deposits funds, there is typically a minimum balance requirement, which varies according to the bank. If you don't have that much idle cash, you might be better off looking for the best savings accounts in your own country. Swiss anti-money-laundering laws require a prospective Swiss bank account holder to provide several documents to open an account. These include authenticated copies of your passport and documents explaining your profession, such as tax returns, company documents, professional licenses, etc.; proof of the source of your funds; and other typical personal information. $3.9 trillion The total value of all assets in the Swiss banking sector, as of 2021. That's 520% of Switzerland's GDP. Benefits of Swiss Bank Accounts Some benefits of Swiss bank accounts are the low levels of financial risk and high levels of privacy. The Swiss economy has been known to be very stable, and the country has not been part of any major conflicts for some time. Furthermore, Swiss law requires that banks have high capital requirements and strong depositor protection, which protects deposits from financial crises and conflicts. Accounts held in Swiss Francs will earn a small amount of interest, but they'll also have to pay the Swiss withholding tax. For this reason, most foreign account holders have their Swiss bank account in another currency. Swiss law states that the bank can't disclose any information regarding an account (even its existence) without the depositor's permission. The only way information will be revealed is if a government agency says that a depositor is involved in a criminal act or some other financial issue (like bankruptcies, divorces, or inheritances). Furthermore, Swiss anti-money-laundering regulations also require depositors to provide proof regarding the origin of the funds they are placing in their accounts. How Do You Open a Swiss Bank Account? Non-residents of Switzerland must be over age 18 and will need to provide their passport and other identification documents when they open an account, along with documentation showing their profession and the source of their funds. These documents are closely scrutinized in order to prevent money-laundering. Can You Hide Money in a Swiss Bank Account? While Swiss banks were once synonymous with money laundering and tax evasion, the opportunity for illegal activity diminished after Switzerland began exchanging information about account holders with other OECD nations in 2018. While Swiss banking laws still afford a high degree of privacy, it is now much less practical to use them for illegal purposes. How Much Does a Swiss Bank Account Cost? Swiss banks may have a monthly charge for account holders, as well as minimum balance requirements. Requirements will vary from bank to bank. The Bottom Line Popular culture has made Swiss banks synonymous with espionage and hidden wealth. While the country's banking secrecy laws still afford a high degree of privacy, strict anti-money laundering laws make the country a much less practical haven for ill-gotten wealth. Anyone over 18 is free to open a Swiss bank account, provided that they can provide identity documents and demonstrate the source of their wealth.

https://www.investopedia.com/terms/b/batting-average.asp

Batting Average: What it is, How it Works

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-batting-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Batting Average? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term batting average refers to a statistical technique used to measure an investment manager's ability to meet or beat an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">index</a>. The higher the batting average, the better. The highest number possible average would be 100% while the lowest is 0%. The term comes from baseball where players are ranked by batting average among other statistics.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Batting average is a statistical method that measures an investment manager's ability to meet or beat the returns of a benchmark index.</li><li>Successful investment managers need to achieve a minimum threshold batting average of 50%.</li><li>The batting average is a big component of the information coefficient, which evaluates a manager's predictions compared to actual results.</li><li>The information ratio is a similar measure of a money manager's success that measures portfolio returns beyond the returns of the benchmark compared to the volatility of those returns.</li><li>One disadvantage of relying on batting average is that it focuses only on returns and does not take into consideration the level of risk taken by a manager to achieve those returns.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-batting-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding the Batting Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The term batting average originates from baseball. A player's batting average represents the percentage of their hits while at bat. In finance, an investment manager's batting average refers to a statistical measure of their performance whether they outperform or underperform the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> While a season batting average of 0.300 (30%) or higher is considered an excellent achievement in baseball, the same cannot be said for investing. A batting average of 50% is used as a minimum threshold for measuring investment success. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-manager.asp">investment manager</a> who outperforms the market in 15 out of a possible 30 days would have a statistical batting average of 50%. The longer the period taken in the sample size, the more <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/statistically_significant.asp">statistically significant</a> the measure becomes. Many <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/analyst.asp">analysts</a> use this simple calculation in their broader assessments of individual investment managers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Manager batting averages can be calculated by dividing the number of days, months, or quarters in which the manager beats or matches the index by the total number of days, months, or quarters in the period of question and multiplying that factor by 100. A batting average of 100% means the manager <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/beating-the-market.asp">outperforms the benchmark</a> during every single period. Conversely, a batting average of 0% means the manager never once outperformed their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a>.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There are other baseball references that made their way into the world of investing over time. In his book, <em>One Up on Wall Street</em>, legendary fund manager Peter Lynch introduced the term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenbagger.asp">tenbagger</a>, which refers to an investment that returns ten times its original purchase price or has the potential to do so. An avid baseball fan, Lynch came up with the phrase because the word <em>bag</em> is baseball slang for a base. To score a <em>tenbagger</em> is like hitting two home runs and a double, or the investing equivalent of racking up a very impressive gain.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Famed investor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/08/buffett-style.asp">Warren Buffet</a> is fond of using baseball analogies when talking about investing and cautions investors not to swing at every pitch (or investment). Instead, he urges investors to focus on investing within their circle of competence, a concept he first described in his 1996 shareholder letter.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-batting-average-vs-information-coefficient-ic"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Batting Average vs. Information Coefficient (IC) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The batting average is a major component of another key metric: the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/information-coefficient.asp">information coefficient (IC)</a>. This is a statistical measure that is used to evaluate an investment or portfolio manager's forecasts with their actual results. This is typically done with predicted and actual stock results. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> This metric is calculated using the following formula: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <strong>IC </strong>= (2 x Proportion Correct) - 1 </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <em>Where: </em> </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> <em>Proportion Correct represents the proportion of correct predictions made by the manager</em> </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> As such, a professional's information coefficient can range from 1.0 to -1.0. An IC of -1 means that the forecasts don't match an individual's financial results while an IC of 1 means both are perfectly matched.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <span class="heading-toc" id="toc-batting-average-vs-information-ratio-ir"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-heading__text"> Batting Average vs. Information Ratio (IR) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/informationratio.asp">information ratio (IR)</a> is a similar measure of the performance of money managers. The IR measures portfolio returns beyond the returns of the benchmark compared to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> of those returns. The IR not only measures the investment manager's ability to generate high returns relative to the benchmark, but it also endeavors to identify the manager's performance consistency. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The calculation includes a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trackingerror.asp">tracking error</a> that shows how consistently the manager can achieve portfolio returns that track the index. A low tracking error means the manager consistently beats the index performance, while a high tracking error signals the manager's returns are more volatile and not consistently beating the benchmark. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> However, the IR does not easily string together a series of successes or failures, which are helpful when assessing final investment outcomes. The batting average overcomes this shortcoming by answering: Does an investment manager win or lose most investment bets? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The information ratio and the batting average are two commonly quoted measures of investment success, but these measures have shortcomings. The IR contains no information about higher moments, and the batting average contains only directional information.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-limitations-of-batting-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> Limitations of Batting Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> An investment manager's batting average suffers from two primary limitations. First, the batting average focuses only on returns and does not take into consideration the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskmanagement.asp">level of risk</a> taken by a manager in achieving returns. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Second, the batting average does not factor in the scale of any potential outperformance. A manager may outperform the benchmark by, say, 0.1% for 10 months, but in the 11th month fall short of the benchmark by 3.50%. In such a case the batting average would be 90.90%, but the manager would have dramatically <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underperform.asp">underperformed</a> their benchmark.<br/> </p></div>

## What Is Batting Average? The term batting average refers to a statistical technique used to measure an investment manager's ability to meet or beat an [index](https://www.investopedia.com/terms/i/index.asp). The higher the batting average, the better. The highest number possible average would be 100% while the lowest is 0%. The term comes from baseball where players are ranked by batting average among other statistics. ### Key Takeaways * Batting average is a statistical method that measures an investment manager's ability to meet or beat the returns of a benchmark index. * Successful investment managers need to achieve a minimum threshold batting average of 50%. * The batting average is a big component of the information coefficient, which evaluates a manager's predictions compared to actual results. * The information ratio is a similar measure of a money manager's success that measures portfolio returns beyond the returns of the benchmark compared to the volatility of those returns. * One disadvantage of relying on batting average is that it focuses only on returns and does not take into consideration the level of risk taken by a manager to achieve those returns. ## Understanding the Batting Average The term batting average originates from baseball. A player's batting average represents the percentage of their hits while at bat. In finance, an investment manager's batting average refers to a statistical measure of their performance whether they outperform or underperform the [benchmark](https://www.investopedia.com/terms/b/benchmark.asp). While a season batting average of 0.300 (30%) or higher is considered an excellent achievement in baseball, the same cannot be said for investing. A batting average of 50% is used as a minimum threshold for measuring investment success. An [investment manager](https://www.investopedia.com/terms/i/investment-manager.asp) who outperforms the market in 15 out of a possible 30 days would have a statistical batting average of 50%. The longer the period taken in the sample size, the more [statistically significant](https://www.investopedia.com/terms/s/statistically_significant.asp) the measure becomes. Many [analysts](https://www.investopedia.com/terms/a/analyst.asp) use this simple calculation in their broader assessments of individual investment managers. Manager batting averages can be calculated by dividing the number of days, months, or quarters in which the manager beats or matches the index by the total number of days, months, or quarters in the period of question and multiplying that factor by 100. A batting average of 100% means the manager [outperforms the benchmark](https://www.investopedia.com/ask/answers/12/beating-the-market.asp) during every single period. Conversely, a batting average of 0% means the manager never once outperformed their [benchmark](https://www.investopedia.com/terms/b/benchmark.asp). ## Special Considerations There are other baseball references that made their way into the world of investing over time. In his book, *One Up on Wall Street*, legendary fund manager Peter Lynch introduced the term [tenbagger](https://www.investopedia.com/terms/t/tenbagger.asp), which refers to an investment that returns ten times its original purchase price or has the potential to do so. An avid baseball fan, Lynch came up with the phrase because the word *bag* is baseball slang for a base. To score a *tenbagger* is like hitting two home runs and a double, or the investing equivalent of racking up a very impressive gain. ### Famed investor [Warren Buffet](https://www.investopedia.com/articles/stocks/08/buffett-style.asp) is fond of using baseball analogies when talking about investing and cautions investors not to swing at every pitch (or investment). Instead, he urges investors to focus on investing within their circle of competence, a concept he first described in his 1996 shareholder letter. ## Batting Average vs. Information Coefficient (IC) The batting average is a major component of another key metric: the [information coefficient (IC)](https://www.investopedia.com/terms/i/information-coefficient.asp). This is a statistical measure that is used to evaluate an investment or portfolio manager's forecasts with their actual results. This is typically done with predicted and actual stock results. This metric is calculated using the following formula: > **IC** = (2 x Proportion Correct) - 1 > *Where:* > *Proportion Correct represents the proportion of correct predictions made by the manager* As such, a professional's information coefficient can range from 1.0 to -1.0. An IC of -1 means that the forecasts don't match an individual's financial results while an IC of 1 means both are perfectly matched. ## Batting Average vs. Information Ratio (IR) The [information ratio (IR)](https://www.investopedia.com/terms/i/informationratio.asp) is a similar measure of the performance of money managers. The IR measures portfolio returns beyond the returns of the benchmark compared to the [volatility](https://www.investopedia.com/terms/v/volatility.asp) of those returns. The IR not only measures the investment manager's ability to generate high returns relative to the benchmark, but it also endeavors to identify the manager's performance consistency. The calculation includes a [tracking error](https://www.investopedia.com/terms/t/trackingerror.asp) that shows how consistently the manager can achieve portfolio returns that track the index. A low tracking error means the manager consistently beats the index performance, while a high tracking error signals the manager's returns are more volatile and not consistently beating the benchmark. However, the IR does not easily string together a series of successes or failures, which are helpful when assessing final investment outcomes. The batting average overcomes this shortcoming by answering: Does an investment manager win or lose most investment bets? The information ratio and the batting average are two commonly quoted measures of investment success, but these measures have shortcomings. The IR contains no information about higher moments, and the batting average contains only directional information. ## Limitations of Batting Average An investment manager's batting average suffers from two primary limitations. First, the batting average focuses only on returns and does not take into consideration the [level of risk](https://www.investopedia.com/terms/r/riskmanagement.asp) taken by a manager in achieving returns. Second, the batting average does not factor in the scale of any potential outperformance. A manager may outperform the benchmark by, say, 0.1% for 10 months, but in the 11th month fall short of the benchmark by 3.50%. In such a case the batting average would be 90.90%, but the manager would have dramatically [underperformed](https://www.investopedia.com/terms/u/underperform.asp) their benchmark.

What Is Batting Average? The term batting average refers to a statistical technique used to measure an investment manager's ability to meet or beat an index. The higher the batting average, the better. The highest number possible average would be 100% while the lowest is 0%. The term comes from baseball where players are ranked by batting average among other statistics. Key Takeaways Batting average is a statistical method that measures an investment manager's ability to meet or beat the returns of a benchmark index.Successful investment managers need to achieve a minimum threshold batting average of 50%.The batting average is a big component of the information coefficient, which evaluates a manager's predictions compared to actual results.The information ratio is a similar measure of a money manager's success that measures portfolio returns beyond the returns of the benchmark compared to the volatility of those returns.One disadvantage of relying on batting average is that it focuses only on returns and does not take into consideration the level of risk taken by a manager to achieve those returns. Understanding the Batting Average The term batting average originates from baseball. A player's batting average represents the percentage of their hits while at bat. In finance, an investment manager's batting average refers to a statistical measure of their performance whether they outperform or underperform the benchmark. While a season batting average of 0.300 (30%) or higher is considered an excellent achievement in baseball, the same cannot be said for investing. A batting average of 50% is used as a minimum threshold for measuring investment success. An investment manager who outperforms the market in 15 out of a possible 30 days would have a statistical batting average of 50%. The longer the period taken in the sample size, the more statistically significant the measure becomes. Many analysts use this simple calculation in their broader assessments of individual investment managers. Manager batting averages can be calculated by dividing the number of days, months, or quarters in which the manager beats or matches the index by the total number of days, months, or quarters in the period of question and multiplying that factor by 100. A batting average of 100% means the manager outperforms the benchmark during every single period. Conversely, a batting average of 0% means the manager never once outperformed their benchmark. Special Considerations There are other baseball references that made their way into the world of investing over time. In his book, One Up on Wall Street, legendary fund manager Peter Lynch introduced the term tenbagger, which refers to an investment that returns ten times its original purchase price or has the potential to do so. An avid baseball fan, Lynch came up with the phrase because the word bag is baseball slang for a base. To score a tenbagger is like hitting two home runs and a double, or the investing equivalent of racking up a very impressive gain. Famed investor Warren Buffet is fond of using baseball analogies when talking about investing and cautions investors not to swing at every pitch (or investment). Instead, he urges investors to focus on investing within their circle of competence, a concept he first described in his 1996 shareholder letter. Batting Average vs. Information Coefficient (IC) The batting average is a major component of another key metric: the information coefficient (IC). This is a statistical measure that is used to evaluate an investment or portfolio manager's forecasts with their actual results. This is typically done with predicted and actual stock results. This metric is calculated using the following formula: IC = (2 x Proportion Correct) - 1 Where: Proportion Correct represents the proportion of correct predictions made by the manager As such, a professional's information coefficient can range from 1.0 to -1.0. An IC of -1 means that the forecasts don't match an individual's financial results while an IC of 1 means both are perfectly matched. Batting Average vs. Information Ratio (IR) The information ratio (IR) is a similar measure of the performance of money managers. The IR measures portfolio returns beyond the returns of the benchmark compared to the volatility of those returns. The IR not only measures the investment manager's ability to generate high returns relative to the benchmark, but it also endeavors to identify the manager's performance consistency. The calculation includes a tracking error that shows how consistently the manager can achieve portfolio returns that track the index. A low tracking error means the manager consistently beats the index performance, while a high tracking error signals the manager's returns are more volatile and not consistently beating the benchmark. However, the IR does not easily string together a series of successes or failures, which are helpful when assessing final investment outcomes. The batting average overcomes this shortcoming by answering: Does an investment manager win or lose most investment bets? The information ratio and the batting average are two commonly quoted measures of investment success, but these measures have shortcomings. The IR contains no information about higher moments, and the batting average contains only directional information. Limitations of Batting Average An investment manager's batting average suffers from two primary limitations. First, the batting average focuses only on returns and does not take into consideration the level of risk taken by a manager in achieving returns. Second, the batting average does not factor in the scale of any potential outperformance. A manager may outperform the benchmark by, say, 0.1% for 10 months, but in the 11th month fall short of the benchmark by 3.50%. In such a case the batting average would be 90.90%, but the manager would have dramatically underperformed their benchmark.

https://www.investopedia.com/ask/answers/111915/does-netspend-work-paypal.asp

Does Netspend Work With PayPal?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> There are 325 million active PayPal account holders who use the service online, through the app, or on their mobile devices. To simplify use, PayPal also has partnered with different payment companies around the world, including Netspend. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> A PayPal account can be linked to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111915/how-do-netspend-cards-work.asp">Netspend</a> account and its prepaid card, and vice versa. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/paypal.asp">PayPal</a> allows Netspend customers to add money to their PayPal cards at <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111915/where-can-you-buy-netspend-reload-packs.asp">Netspend Reload Network locations</a> nationwide. Find out more about Netspend and how the process works with PayPal.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Prepaid Netspend accounts work with PayPal by linking both accounts.</li><li>Netspend users can reload their accounts either online or at more than 100,000 Netspend Reload Network locations nationwide.</li><li>PayPal doesn't charge Netspend customers fees.</li><li>Funds added to Netspend accounts are typically available within two to three business days.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-netspend"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> What Is Netspend? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Netspend is a U.S. corporation that offers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111915/how-do-netspend-cards-work.asp">prepaid debit Visa and MasterCards</a> to about 68 million consumers across the country.<span class="ql-inline-citation" data-cite="2"></span> Users can use their cards anywhere Visa and MasterCard is accepted, pay bills, and transfer funds to others using their cards. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Netspend also offers gift cards that can't be replenished and travel cards that can be reloaded for a certain number of times.<span class="ql-inline-citation" data-cite="3"></span> Existing customers can also open savings accounts in conjunction with the Netspend prepaid debit cards.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Users can reload their Netspend <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">debit cards</a> with cash, which generally costs a $3.95 fee.<span class="ql-inline-citation" data-cite="4"></span> Reloading can also be done with funds from bank accounts and other financial service providers, such as PayPal, with which it established a partnership in 2011.<span class="ql-inline-citation" data-cite="2"></span> Netspend prepaid cardholders can also have their paychecks, tax refunds, and other benefits such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/socialsecurity.asp">Social Security</a> deposited directly to their Netspend accounts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-netspend-and-paypal"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> Netspend and Paypal </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> While PayPal also offers its own line of MasterCard prepaid cards, it cooperates closely with other debit card providers like Netspend. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> PayPal allows its customers to replenish their prepaid card balances at more than 100,000 Netspend Reload Network locations nationwide. Netspend reload locations are typically available at participating grocery stores, gas stations, check-cashing stores, and MoneyGram, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/081715/sending-money-moneygram-vs-western-union.asp">Western Union</a> locations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>PayPal customers can replenish their prepaid card balances at Netspend Reload Network locations nationwide.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Likewise, Netspend cardholders can use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/011215/which-safer-paypal-or-credit-card.asp">PayPal</a> to replenish their cards. This requires the user to link both accounts. To link the card, you must log on to the PayPal website, click the wallet tab, and click on the "link a card or bank" tab. After that, click on the "link a debit or credit card tab," fill in your card information, and click the link card button. PayPal may require verification to confirm the card. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> In this case, PayPal doesn't charge NetSpend customers fees, and funds added to Netspend accounts are typically available within two to three business days.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> PayPal also has special offers and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-back.asp">cash-back</a> rewards on its prepaid MasterCard cards that are sponsored by Netspend. PayPal sends reward offers based on their prepaid cardholders' shopping habits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_27-0"><span class="heading-toc" id="toc-what-prepaid-cards-work-with-paypal"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Prepaid Cards Work With PayPal?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Anywhere in the U.S. where <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-paypal-makes-money-5094794">PayPal</a> is accepted you can use prepaid gift cards that have a Visa, MasterCard, American Express, or Discover logo on them. These can include Netspend gift cards. PayPal says this policy doesn't apply to merchant-specific gift cards, which don't have a Visa, MasterCard, American Express, or Discover logo.<span class="ql-inline-citation" data-cite="5"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-how-can-i-transfer-money-to-netspend-using-my-paypal-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Transfer Money to Netspend Using My PayPal Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>PayPal users can transfer funds from their PayPal account to their Netspend card account. To do so, log in to your Paypal account and go to "Send and Request" in the top navigation bar and then "Send to Bank Account." Enter the amount that you will be sending and then select "Debit Card Deposit." Enter the verification details that PayPal requests (name, address, date of birth) and select from where you would like to transfer funds onto your Netspend Card (such as from a credit card, debit card, or your bank account). Fees do apply and vary, depending on which options you choose.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-does-paypal-charge-a-fee-when-netspend-customers-use-it"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does PayPal Charge a Fee When Netspend Customers Use It?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>PayPal doesn't charge Netspend customers fees for use.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_33-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Netspend and PayPal" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/0OcJaM8GtQvnC5ghJhSDoBmZjOQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/does-netspend-work-paypal.asp-Final-aa12d63340ba47958e14f6aed2b00998.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/0OcJaM8GtQvnC5ghJhSDoBmZjOQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/does-netspend-work-paypal.asp-Final-aa12d63340ba47958e14f6aed2b00998.jpg" data-srcset="https://www.investopedia.com/thmb/qAGpV0_inwBA5t6KT91x-7FInas=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/does-netspend-work-paypal.asp-Final-aa12d63340ba47958e14f6aed2b00998.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Netspend and PayPal" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/0OcJaM8GtQvnC5ghJhSDoBmZjOQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/does-netspend-work-paypal.asp-Final-aa12d63340ba47958e14f6aed2b00998.jpg" srcset="https://www.investopedia.com/thmb/qAGpV0_inwBA5t6KT91x-7FInas=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/does-netspend-work-paypal.asp-Final-aa12d63340ba47958e14f6aed2b00998.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Yurle Villegas</p></span> </figcaption></figure> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Prepaid Netspend accounts work with PayPal when the two accounts are linked. Netspend users can reload their accounts using PayPal online or at one of the more than 100,000 Netspend Reload Network locations nationwide. PayPal doesn't charge Netspend customers fees when they transact with PayPal. </p></div>

There are 325 million active PayPal account holders who use the service online, through the app, or on their mobile devices. To simplify use, PayPal also has partnered with different payment companies around the world, including Netspend. A PayPal account can be linked to a [Netspend](https://www.investopedia.com/ask/answers/111915/how-do-netspend-cards-work.asp) account and its prepaid card, and vice versa. [PayPal](https://www.investopedia.com/terms/p/paypal.asp) allows Netspend customers to add money to their PayPal cards at [Netspend Reload Network locations](https://www.investopedia.com/ask/answers/111915/where-can-you-buy-netspend-reload-packs.asp) nationwide. Find out more about Netspend and how the process works with PayPal. ### Key Takeaways * Prepaid Netspend accounts work with PayPal by linking both accounts. * Netspend users can reload their accounts either online or at more than 100,000 Netspend Reload Network locations nationwide. * PayPal doesn't charge Netspend customers fees. * Funds added to Netspend accounts are typically available within two to three business days. ## What Is Netspend? Netspend is a U.S. corporation that offers [prepaid debit Visa and MasterCards](https://www.investopedia.com/ask/answers/111915/how-do-netspend-cards-work.asp) to about 68 million consumers across the country. Users can use their cards anywhere Visa and MasterCard is accepted, pay bills, and transfer funds to others using their cards. Netspend also offers gift cards that can't be replenished and travel cards that can be reloaded for a certain number of times. Existing customers can also open savings accounts in conjunction with the Netspend prepaid debit cards. Users can reload their Netspend [debit cards](https://www.investopedia.com/terms/d/debitcard.asp) with cash, which generally costs a $3.95 fee. Reloading can also be done with funds from bank accounts and other financial service providers, such as PayPal, with which it established a partnership in 2011. Netspend prepaid cardholders can also have their paychecks, tax refunds, and other benefits such as [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp) deposited directly to their Netspend accounts. ## Netspend and Paypal While PayPal also offers its own line of MasterCard prepaid cards, it cooperates closely with other debit card providers like Netspend. PayPal allows its customers to replenish their prepaid card balances at more than 100,000 Netspend Reload Network locations nationwide. Netspend reload locations are typically available at participating grocery stores, gas stations, check-cashing stores, and MoneyGram, and [Western Union](https://www.investopedia.com/articles/personal-finance/081715/sending-money-moneygram-vs-western-union.asp) locations. ### PayPal customers can replenish their prepaid card balances at Netspend Reload Network locations nationwide. Likewise, Netspend cardholders can use [PayPal](https://www.investopedia.com/articles/personal-finance/011215/which-safer-paypal-or-credit-card.asp) to replenish their cards. This requires the user to link both accounts. To link the card, you must log on to the PayPal website, click the wallet tab, and click on the "link a card or bank" tab. After that, click on the "link a debit or credit card tab," fill in your card information, and click the link card button. PayPal may require verification to confirm the card. In this case, PayPal doesn't charge NetSpend customers fees, and funds added to Netspend accounts are typically available within two to three business days. PayPal also has special offers and [cash-back](https://www.investopedia.com/terms/c/cash-back.asp) rewards on its prepaid MasterCard cards that are sponsored by Netspend. PayPal sends reward offers based on their prepaid cardholders' shopping habits. ## What Prepaid Cards Work With PayPal? Anywhere in the U.S. where [PayPal](https://www.investopedia.com/how-paypal-makes-money-5094794) is accepted you can use prepaid gift cards that have a Visa, MasterCard, American Express, or Discover logo on them. These can include Netspend gift cards. PayPal says this policy doesn't apply to merchant-specific gift cards, which don't have a Visa, MasterCard, American Express, or Discover logo. ## How Can I Transfer Money to Netspend Using My PayPal Account? PayPal users can transfer funds from their PayPal account to their Netspend card account. To do so, log in to your Paypal account and go to "Send and Request" in the top navigation bar and then "Send to Bank Account." Enter the amount that you will be sending and then select "Debit Card Deposit." Enter the verification details that PayPal requests (name, address, date of birth) and select from where you would like to transfer funds onto your Netspend Card (such as from a credit card, debit card, or your bank account). Fees do apply and vary, depending on which options you choose. ## Does PayPal Charge a Fee When Netspend Customers Use It? PayPal doesn't charge Netspend customers fees for use. ![Netspend and PayPal]() :max_bytes(150000):strip_icc()/does-netspend-work-paypal.asp-Final-aa12d63340ba47958e14f6aed2b00998.jpg) Investopedia / Yurle Villegas ## The Bottom Line Prepaid Netspend accounts work with PayPal when the two accounts are linked. Netspend users can reload their accounts using PayPal online or at one of the more than 100,000 Netspend Reload Network locations nationwide. PayPal doesn't charge Netspend customers fees when they transact with PayPal.

There are 325 million active PayPal account holders who use the service online, through the app, or on their mobile devices. To simplify use, PayPal also has partnered with different payment companies around the world, including Netspend. A PayPal account can be linked to a Netspend account and its prepaid card, and vice versa. PayPal allows Netspend customers to add money to their PayPal cards at Netspend Reload Network locations nationwide. Find out more about Netspend and how the process works with PayPal. Key Takeaways Prepaid Netspend accounts work with PayPal by linking both accounts.Netspend users can reload their accounts either online or at more than 100,000 Netspend Reload Network locations nationwide.PayPal doesn't charge Netspend customers fees.Funds added to Netspend accounts are typically available within two to three business days. What Is Netspend? Netspend is a U.S. corporation that offers prepaid debit Visa and MasterCards to about 68 million consumers across the country. Users can use their cards anywhere Visa and MasterCard is accepted, pay bills, and transfer funds to others using their cards. Netspend also offers gift cards that can't be replenished and travel cards that can be reloaded for a certain number of times. Existing customers can also open savings accounts in conjunction with the Netspend prepaid debit cards. Users can reload their Netspend debit cards with cash, which generally costs a $3.95 fee. Reloading can also be done with funds from bank accounts and other financial service providers, such as PayPal, with which it established a partnership in 2011. Netspend prepaid cardholders can also have their paychecks, tax refunds, and other benefits such as Social Security deposited directly to their Netspend accounts. Netspend and Paypal While PayPal also offers its own line of MasterCard prepaid cards, it cooperates closely with other debit card providers like Netspend. PayPal allows its customers to replenish their prepaid card balances at more than 100,000 Netspend Reload Network locations nationwide. Netspend reload locations are typically available at participating grocery stores, gas stations, check-cashing stores, and MoneyGram, and Western Union locations. PayPal customers can replenish their prepaid card balances at Netspend Reload Network locations nationwide. Likewise, Netspend cardholders can use PayPal to replenish their cards. This requires the user to link both accounts. To link the card, you must log on to the PayPal website, click the wallet tab, and click on the "link a card or bank" tab. After that, click on the "link a debit or credit card tab," fill in your card information, and click the link card button. PayPal may require verification to confirm the card. In this case, PayPal doesn't charge NetSpend customers fees, and funds added to Netspend accounts are typically available within two to three business days. PayPal also has special offers and cash-back rewards on its prepaid MasterCard cards that are sponsored by Netspend. PayPal sends reward offers based on their prepaid cardholders' shopping habits. What Prepaid Cards Work With PayPal? Anywhere in the U.S. where PayPal is accepted you can use prepaid gift cards that have a Visa, MasterCard, American Express, or Discover logo on them. These can include Netspend gift cards. PayPal says this policy doesn't apply to merchant-specific gift cards, which don't have a Visa, MasterCard, American Express, or Discover logo. How Can I Transfer Money to Netspend Using My PayPal Account? PayPal users can transfer funds from their PayPal account to their Netspend card account. To do so, log in to your Paypal account and go to "Send and Request" in the top navigation bar and then "Send to Bank Account." Enter the amount that you will be sending and then select "Debit Card Deposit." Enter the verification details that PayPal requests (name, address, date of birth) and select from where you would like to transfer funds onto your Netspend Card (such as from a credit card, debit card, or your bank account). Fees do apply and vary, depending on which options you choose. Does PayPal Charge a Fee When Netspend Customers Use It? PayPal doesn't charge Netspend customers fees for use. Investopedia / Yurle Villegas The Bottom Line Prepaid Netspend accounts work with PayPal when the two accounts are linked. Netspend users can reload their accounts using PayPal online or at one of the more than 100,000 Netspend Reload Network locations nationwide. PayPal doesn't charge Netspend customers fees when they transact with PayPal.

https://www.investopedia.com/terms/r/retirement-planning.asp

What Is Retirement Planning? Steps, Stages, and What to Consider

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-retirement-planning"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Retirement Planning? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Creating a retirement plan begins with determining your long-term financial goals and tolerance for risk, and then starting to take action to reach those goals. The process can begin any time during your working years, but the earlier the better. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The process of creating a retirement plan includes identifying your income sources, adding up your expenses, putting a savings plan into effect, and managing your assets. By estimating your future cash flows, you can judge whether your retirement income goal is realistic. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Needless to say, a retirement plan is not a static document. You'll need to update it from time to time as well as review it to monitor your progress. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>It is never too early or too late to start a retirement plan.</li><li>A retirement plan is a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement.</li><li>A key part of a retirement plan is taking advantage of one of the government-approved investment vehicles, such as an individual retirement account (IRAs) or a 401(k) account, which offer tax advantages to retirement savers.</li><li>Your retirement plan needs to take into account your estimated future expenses, liabilities, and life expectancy.</li></ul></div></div></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">What Is a Retirement Plan?</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A retirement plan may be seen as a roadmap to a comfortable life after work. It entails accumulating enough money to pay for the lifestyle you want to enjoy in the future. Your retirement plan may well change over time, but the earlier you get started the better.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-inlinevideo mntl-sc-block-inlinevideo mntl-block has-details inline-video" id="mntl-sc-block_12-0"><div class="comp mntl-sc-block-inlinevideo__video-container mntl-block" id="mntl-sc-block-inlinevideo__video-container_1-0"><div class="comp mntl-sc-block-inlinevideo__video mntl-jwplayer mm-video lazyload aspectratio-16:9" data-bgset="https://cdn.jwplayer.com/v2/media/52p1aWHg/poster.jpg?width=720" data-sizes="auto" id="mntl-sc-block-inlinevideo__video_1-0"></div></div> <h4 class="comp mntl-sc-block-inlinevideo__title mntl-text-block" id="mntl-sc-block-inlinevideo__title_1-0">8 Essential Tips For Retirement Saving</h4></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-how-retirement-planning-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> How Retirement Planning Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> A retirement plan is your preparation for a good life after you're done working to pay the bills, or at least done working a full-time job. But it's not all about money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The non-financial aspects include lifestyle choices such as how you want to spend your time in retirement and where you'll live. A holistic approach to retirement planning considers all these areas. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The goals for your retirement plan will change in focus over time: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li>Early in a person’s working life, your contribution to retirement savings may be modest. The reward is 40-plus years of investment growth.</li><li>During the middle of your career, when your income may be at its peak, you might set specific income or asset targets and take steps toward achieving them.</li><li>Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying into your retirement account(s). Instead, you start collecting the rewards of decades of savings.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Some retirement plans change depending on where you are. The United States and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/11/difference-retiring-canada-america.asp">Canada</a> each have unique systems of workplace-sponsored plans.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div> <span class="heading-toc" id="toc-how-much-do-you-need-to-retire"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> How Much Do You Need to Retire? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Your magic number, which is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/112915/how-much-money-do-you-need-retire-56.asp">amount you need to retire comfortably</a>, is highly personalized. But there are rules of thumb that can give you an idea of how much to save. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <li>People used to say that you need around $1 million to retire comfortably.</li><li>Other professionals use the 80% rule, which states that you need 80% of your current income to live comfortably after retiring. So if you made $100,000 per year, you would need savings that produce $80,000 per year for roughly 20 years, or a total of $1.6 million.</li><li>Others say most of us aren’t saving anywhere near enough to meet those benchmarks and should adjust our lifestyles accordingly.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-subheading__text"> Estimating Expenses </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Your post-retirement expenses largely determine that "magic number." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> It's a good idea to create a retirement budget, calculating estimated costs for housing, health insurance, food, clothing, and transportation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> And since you'll have more free time on your hands, you may also want to factor in the cost of entertainment, hobbies, and travel. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> It may be hard to come up with concrete figures, but a reasonable estimate will be helpful. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-steps-to-retirement-planning"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-heading__text"> Steps to Retirement Planning </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Regardless of where you are in life, there are several key <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-analysis/090216/7-steps-create-10-year-retirement-plan.asp">steps that apply to almost everyone</a> during their retirement planning. The following are some of the most common: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <li>Come up with a plan. This includes deciding when you want to start saving when you want to retire, and how much you'd like to save for your ultimate goal.</li> <li>Decide how much you'll set aside each month. Using automatic deductions takes away the guesswork, keeps you on track, and takes away <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/how-sabotage-your-retirement/">the temptation to stop or forget</a> depositing money on your own.</li> <li>Choose the right accounts for you. Invest in a 401(k) or similar account if your employer offers that option. If the company offers an employer match and you don't sign up, you're giving away free money. Whether or not there's an employer match, you're getting a good deal tax-wise.</li> <li>Check on your investments from time to time and make adjustments. This is especially important after a big event, like marriage or a baby.<br/></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <span class="heading-toc" id="toc-retirement-plans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-heading__text"> Retirement Plans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Tax-advantaged retirement savings plans have become the keystone of long-term savings for Americans. You should have access to one or more of these plans depending on how you earn a living. Each has its own rules and regulations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-subheading__text"> Employer-Sponspored Plans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Most large companies offer their employees <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k)</a> plans. Nonprofit employers have similar <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/403bplan.asp">403(b)</a> plans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> An up-front benefit of these <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qrp.asp">qualified retirement plans</a> is that your employer has the option to match what you invest up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that amount, depositing the sum into your retirement account along with your contribution. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> You can contribute more than the amount that will earn the employer match. Some experts recommend contributing upwards of 10%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-subheading__text"> 401(k) Limits </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> The maximum is revised yearly by the IRS Participants can contribute up to $23,000 in 2024 to a 401(k) or 403(b), some of which may be added to with an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/112315/how-401k-matching-works.asp">employer match.</a> People over age 50 can contribute an extra $7,500 per year as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/catchupcontribution.asp">catch-up contribution</a> in 2024.<span class="ql-inline-citation" data-cite="35"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> These accounts can earn a much higher rate of return than a savings account (although the investments are not free of risk). The funds in the account, if it is a traditional account rather than a Roth account, are not taxed until you withdraw them. Since your contributions are taken off your gross income, you will get an immediate income tax break. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Those who are on the cusp of a higher tax bracket might consider contributing enough to lower their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxliability.asp">tax liability</a>.<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-subheading__text"> Traditional Individual Retirement Accounts (IRAs) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> The traditional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account</a> (IRA) is similar to a 401(k) plan but it can be obtained at virtually any bank or brokerage. It is primarily for self-employed people and others who have no access to a 401(k), but anyone with earned income can invest in an IRA. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> The money you save in an IRA is deducted from your income for the year, lowering your taxable income and, therefore, your tax liability. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> The tax benefit to this kind of account is upfront. So when it comes time to take distributions from the account, you are subject to your standard tax rate at that time. Keep in mind, though, that the money grows on a tax-deferred basis. There are no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital_gains_tax.asp">capital gains</a> or dividend taxes that are assessed on the balance of your account until you begin making withdrawals.<span class="ql-inline-citation" data-cite="26"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-subheading__text"> IRA Limits </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The IRS sets limits on how much you can contribute to a traditional IRA each year. The limit for 2024 is $7,000. People who are 50 and older can invest an additional $1,000 for a total of $8,000 in 2024.<span class="ql-inline-citation" data-cite="35"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/distribution.asp">Distributions</a> must be taken at age 72 and can be taken as early as 59½. You will owe taxes on the withdrawal at your regular income tax rate for that year.<span class="ql-inline-citation" data-cite="27"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-subheading__text"> Roth Individual Retirement Account (IRA) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRA</a> is funded with post-tax dollars. This is a great variation on the IRA, with a little more pain upfront for a lot of gain down the road. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> The Roth IRA eliminates the immediate tax deduction of the traditional IRA. The money you pay into it is taxed in that year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> However, you should owe no taxes when you start withdrawing money, either on the amount you put in or the investment gains it accrued. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Starting a Roth IRA early can pay off big time in the long run, even if you don’t have a lot of money to invest at first. Remember, the longer the money sits in a retirement account, the more tax-free interest is earned. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-subheading__text"> Roth Limits </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> The 2024 contribution limit for either IRA (Roth or traditional) is $7,000 a year, or $8,000 if you are over age 50. A Roth has other restrictions, related to income. For instance: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <li>A single filer can contribute the full amount only if they make $146,000 or less annually, as of the 2024 tax year.</li><li>After that, you can invest to a lesser degree, up to an annual income of $161,000 in 2024.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Note that the income limits are higher for married couples filing jointly.<span class="ql-inline-citation" data-cite="35"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> As with a 401(k), a Roth IRA has some penalties associated with taking money out <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp">before you hit retirement age</a>. But there are a few notable exceptions that may be useful in an emergency. First, you can always withdraw the money you invested (but not the gains it earned) without paying a penalty.<span class="ql-inline-citation" data-cite="30"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_91-0"> <span class="mntl-sc-block-subheading__text"> SIMPLE Individual Retirement Account (IRA) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/simple-ira.asp">SIMPLE IRA</a> is a retirement account available to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/120314/top-retirement-strategies-small-business-owners.asp">employees of small businesses</a>. It's an alternative to the 401(k), which is expensive for an employer to manage. It works the same way a 401(k) does, allowing employees to save money automatically through payroll deductions with the option of an employer match. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> This amount is capped at 3% of an employee's annual salary. The annual contribution limit for a SIMPLE IRA is $16,000 in 2024. Catch-up contributions of $3,500 allow employees 50 or older to bump that limit up to $19,500 in 2024.<span class="ql-inline-citation" data-cite="35"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_96-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_97-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Once you set up a retirement account, the question becomes where to invest the money. You will be offered a choice, usually among mutual funds and exchange-traded funds (ETFs). Many also offer target-date funds, which automatically alter your selections over time, allocating more money towards conservative choices as you approach retirement age.<br/></p></div></div></div> <span class="heading-toc" id="toc-stages-of-retirement-planning"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_98-0"> <span class="mntl-sc-block-heading__text"> Stages of Retirement Planning </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> Below are some guidelines for successful retirement planning at different stages of your life. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_101-0"> <span class="mntl-sc-block-subheading__text"> Young Adulthood (Ages 21–35) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> Those embarking on adult life may not have a lot of money free to invest, but they do have time to let <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/12/best-investments-for-young-people.asp">investments mature</a>, which is a critical piece of retirement savings. This is the principle of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">Compound interest</a> allows interest to earn interest, and the more time you have, the more interest you will earn. If you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing until age 45, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-savings-tips-25-34-year-olds-7556362">thanks to the joys of compounding</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> You might be able to invest more money in the future, but you’ll never be able to make up for that lost time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_108-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_109-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Some federal agencies and uniformed services offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/thrift_savings_plan.asp">thrift savings plans</a>.<span class="ql-inline-citation" data-cite="22"></span></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_110-0"> <span class="mntl-sc-block-subheading__text"> Early Midlife (Ages 36–50) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_111-0"> Early midlife tends to bring financial strains, including mortgages, student loans, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance-premium.asp">insurance premiums</a>, and credit card debt. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_112-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Still, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_115-0"> People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs that their employers offer. They should also try to max out contributions to a 401(k) or Roth IRA (you can have both at the same time). For those ineligible for a Roth IRA, consider a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/traditionalira.asp">traditional IRA</a>. As with your 401(k), this is funded with pretax dollars, and the assets within it grow tax-deferred. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_116-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> Some employer-sponsored plans offer a Roth option to set aside after-tax retirement contributions. You are limited to the same annual limit, but there are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roth401k.asp">no income limitations</a> as with a Roth IRA.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> Finally, don’t neglect life insurance and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/disability-insurance.asp">disability insurance</a>. You want to ensure that your family can survive financially without pulling from retirement savings should something happen to you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_121-0"> <span class="mntl-sc-block-subheading__text"> Later Midlife (Ages 50–65) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_122-0"> As you approach retirement, your investment accounts should become more conservative. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/020515/are-treasury-bills-good-investment-retirement-savings.asp">Treasury bills (T-bills)</a> are one of the most conservative investments, although their returns are also low compared to other investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_123-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> People in this age group have a few advantages. These often include higher wages as well as more disposable income than younger savers.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_125-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> It's never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 a year to your traditional or Roth IRA and an additional $7,500 a year to your 401(k) in 2024.<span class="ql-inline-citation" data-cite="35"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_127-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_128-0"> <span class="mntl-sc-block-subheading__text"> Other Investments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_129-0"> Those who have maxed out their tax-incentivized retirement savings options can consider other forms of investment to supplement your retirement savings. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit</a> (CDs), blue-chip stocks, or real estate investments (like a vacation home that you rent out) can be reasonably safe ways to add to your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nestegg.asp">nest egg</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_130-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_131-0"> You can also begin to get a sense of what your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-security-benefits.asp">Social Security benefits</a> will be and at what age it makes sense to start taking them. Eligibility for early benefits starts at age 62, but the retirement age for full benefits is 66.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_132-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_133-0"> This is the time to look into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/ltcinsurance.asp">long-term care insurance</a>, which will help cover the costs of a nursing home or home care should you need it in your advanced years. If you don't properly plan for health-related expenses, especially unexpected ones, they can decimate your savings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_134-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_135-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_136-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_6-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_6-0"><p>The Social Security Administration (SSA) offers an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.ssa.gov/prepare/plan-retirement">online calculator</a> to estimate your eventual monthly payment.</p></div></div></div> <span class="heading-toc" id="toc-other-aspects-of-retirement-planning"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_137-0"> <span class="mntl-sc-block-heading__text"> Other Aspects of Retirement Planning </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_138-0"> Retirement planning includes a lot more than simply how much you will save and how much you need. It takes into account your complete financial picture. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_139-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_140-0"> <span class="mntl-sc-block-subheading__text"> Your Home </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_141-0"> For most Americans, the single biggest asset they own is their home. How does that fit into your retirement plan? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_142-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_143-0"> A home was considered an asset in the past, but since the housing market crash, planners see it as less of an asset than they once did. With the popularity of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeequityloan.asp">home equity loans</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/">home equity lines of credit</a> (HELOCs), many homeowners are <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/07/mortgages_in_retirement.asp">entering retirement in mortgage debt</a> instead of well above water. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_144-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_145-0"> Once you retire, there’s also the question of whether you should sell your home and downsize. If you still live in the home where you raised a family, it might be bigger and costlier than you need or want. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_146-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_147-0"> Your retirement plan should include an unbiased look at your home and what to do with it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_148-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_149-0"> <span class="mntl-sc-block-subheading__text"> Estate Planning </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_150-0"> Your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate plan</a> addresses what happens to your assets after you die. It should include a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/will.asp">will</a> that lays out your plans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_151-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_152-0"> But even before that, you should set up a trust or use some other strategy to keep as much of it as possible shielded from estate taxes.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_153-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_154-0"> As of 2024, the first $13.61 million of an estate is exempt from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estatetax.asp">estate taxes</a> (up from $12.92 million for 2023), but many people are finding ways to leave their money to their children in a way that doesn’t pay them in a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lump-sum-payment.asp">lump sum</a>.<span class="ql-inline-citation" data-cite="31"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_155-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_156-0"> There may also be changes coming down the pipeline in Congress regarding estate taxes, as the estate tax amount is scheduled to drop to $5 million in 2026.<span class="ql-inline-citation" data-cite="21"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_157-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_158-0"> <span class="mntl-sc-block-subheading__text"> Tax Efficiency </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_159-0"> Once you reach retirement age and begin taking distributions, taxes become a bigger problem. Most of your retirement accounts are taxed as ordinary income tax. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_160-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_161-0"> That’s one good argument for considering a Roth IRA or a Roth 401(k), as both allow you to pay taxes upfront rather than upon withdrawal.<span class="ql-inline-citation" data-cite="34"></span><span class="ql-inline-citation" data-cite="33"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_162-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_163-0"> If you believe you will have a higher taxable income later in life, it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_164-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_165-0"> <span class="mntl-sc-block-subheading__text"> Medical Insurance </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_166-0"> Medical expenses tend to increase with age. You will have government-sponsored <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medicare.asp">Medicare</a> coverage at a modest cost to you, but many supplement its coverage with a Medicare Advantage or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medigap-insurance.asp">Medigap</a> policy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_167-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_168-0"> Your choices are many and complex. It's a good idea to start checking out your options well in advance of retiring.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_169-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_170-0"><span class="heading-toc" id="toc-how-do-i-start-a-retirement-plan"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Start a Retirement Plan?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Retirement planning isn't difficult. It's as easy as setting aside some money every month—and every little bit counts.</p><p>You can start with a tax-advantaged savings plan, either a 401(k) through an employer or an IRA through a bank or brokerage firm.</p><p>You may also want to consider talking to a professional, such as a financial planner or investment broker who can steer you in the right direction.</p><p>The earlier you start, the better. That's because your investments grow over time by earning interest. And you'll earn interest on that interest.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_171-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_172-0"><span class="heading-toc" id="toc-why-is-a-retirement-plan-so-important"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is a Retirement Plan So Important?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A retirement plan helps you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp#toc-when-to-start-spending">sock away enough money to maintain the same lifestyle</a> you currently have after you retire. While you may work part-time or pick up the odd gig here or there, it probably won't be enough to sustain your current lifestyle. Social Security benefits will only take you so far. That's why it's important to have a viable long-term plan for a financially comfortable retirement.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_173-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_174-0"><span class="heading-toc" id="toc-what-are-the-main-pieces-of-a-retirement-plan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Main Pieces of a Retirement Plan?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A retirement plan is about accumulating enough money to enable you to enjoy a comfortable life after work. There are a couple of key issues to keep in mind:</p><ul><li>Consider how to minimize the taxes you owe on your retirement income. One way to do this is to sock away money in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp#:~:text=A%20Roth%20IRA%20is%20a%20special%20individual%20retirement%20account%20%28IRA,than%20they%20are%20right%20now.">Roth account</a> or convert your traditional account to a Roth before you retire.</li><li>Don't overlook estate planning. You're taking care of your loved ones as you take care of yourself.</li></ul></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_175-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_176-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_177-0"> Everyone dreams of the day they can finally say goodbye to the workforce. But doing so costs money. That's where retirement planning comes into play. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_178-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_179-0"> It doesn't matter at what point you are in your life. Setting aside money now means you'll have less to worry about later. </p></div>

## What Is Retirement Planning? Creating a retirement plan begins with determining your long-term financial goals and tolerance for risk, and then starting to take action to reach those goals. The process can begin any time during your working years, but the earlier the better. The process of creating a retirement plan includes identifying your income sources, adding up your expenses, putting a savings plan into effect, and managing your assets. By estimating your future cash flows, you can judge whether your retirement income goal is realistic. Needless to say, a retirement plan is not a static document. You'll need to update it from time to time as well as review it to monitor your progress. ### Key Takeaways * It is never too early or too late to start a retirement plan. * A retirement plan is a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement. * A key part of a retirement plan is taking advantage of one of the government-approved investment vehicles, such as an individual retirement account (IRAs) or a 401(k) account, which offer tax advantages to retirement savers. * Your retirement plan needs to take into account your estimated future expenses, liabilities, and life expectancy. ### What Is a Retirement Plan? A retirement plan may be seen as a roadmap to a comfortable life after work. It entails accumulating enough money to pay for the lifestyle you want to enjoy in the future. Your retirement plan may well change over time, but the earlier you get started the better. #### 8 Essential Tips For Retirement Saving ## How Retirement Planning Works A retirement plan is your preparation for a good life after you're done working to pay the bills, or at least done working a full-time job. But it's not all about money. The non-financial aspects include lifestyle choices such as how you want to spend your time in retirement and where you'll live. A holistic approach to retirement planning considers all these areas. The goals for your retirement plan will change in focus over time: * Early in a person’s working life, your contribution to retirement savings may be modest. The reward is 40-plus years of investment growth. * During the middle of your career, when your income may be at its peak, you might set specific income or asset targets and take steps toward achieving them. * Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying into your retirement account(s). Instead, you start collecting the rewards of decades of savings. ### Some retirement plans change depending on where you are. The United States and [Canada](https://www.investopedia.com/articles/retirement/11/difference-retiring-canada-america.asp) each have unique systems of workplace-sponsored plans. ## How Much Do You Need to Retire? Your magic number, which is the [amount you need to retire comfortably](https://www.investopedia.com/articles/personal-finance/112915/how-much-money-do-you-need-retire-56.asp), is highly personalized. But there are rules of thumb that can give you an idea of how much to save. * People used to say that you need around $1 million to retire comfortably. * Other professionals use the 80% rule, which states that you need 80% of your current income to live comfortably after retiring. So if you made $100,000 per year, you would need savings that produce $80,000 per year for roughly 20 years, or a total of $1.6 million. * Others say most of us aren’t saving anywhere near enough to meet those benchmarks and should adjust our lifestyles accordingly. ### Estimating Expenses Your post-retirement expenses largely determine that "magic number." It's a good idea to create a retirement budget, calculating estimated costs for housing, health insurance, food, clothing, and transportation. And since you'll have more free time on your hands, you may also want to factor in the cost of entertainment, hobbies, and travel. It may be hard to come up with concrete figures, but a reasonable estimate will be helpful. ## Steps to Retirement Planning Regardless of where you are in life, there are several key [steps that apply to almost everyone](https://www.investopedia.com/articles/financial-analysis/090216/7-steps-create-10-year-retirement-plan.asp) during their retirement planning. The following are some of the most common: 1. Come up with a plan. This includes deciding when you want to start saving when you want to retire, and how much you'd like to save for your ultimate goal. 2. Decide how much you'll set aside each month. Using automatic deductions takes away the guesswork, keeps you on track, and takes away [the temptation to stop or forget](https://www.investopedia.com/retirement/how-sabotage-your-retirement/) depositing money on your own. 3. Choose the right accounts for you. Invest in a 401(k) or similar account if your employer offers that option. If the company offers an employer match and you don't sign up, you're giving away free money. Whether or not there's an employer match, you're getting a good deal tax-wise. 4. Check on your investments from time to time and make adjustments. This is especially important after a big event, like marriage or a baby. ## Retirement Plans Tax-advantaged retirement savings plans have become the keystone of long-term savings for Americans. You should have access to one or more of these plans depending on how you earn a living. Each has its own rules and regulations. ### Employer-Sponspored Plans Most large companies offer their employees [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) plans. Nonprofit employers have similar [403(b)](https://www.investopedia.com/terms/1/403bplan.asp) plans. An up-front benefit of these [qualified retirement plans](https://www.investopedia.com/terms/q/qrp.asp) is that your employer has the option to match what you invest up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that amount, depositing the sum into your retirement account along with your contribution. You can contribute more than the amount that will earn the employer match. Some experts recommend contributing upwards of 10%. ### 401(k) Limits The maximum is revised yearly by the IRS Participants can contribute up to $23,000 in 2024 to a 401(k) or 403(b), some of which may be added to with an [employer match.](https://www.investopedia.com/articles/personal-finance/112315/how-401k-matching-works.asp) People over age 50 can contribute an extra $7,500 per year as a [catch-up contribution](https://www.investopedia.com/terms/c/catchupcontribution.asp) in 2024. These accounts can earn a much higher rate of return than a savings account (although the investments are not free of risk). The funds in the account, if it is a traditional account rather than a Roth account, are not taxed until you withdraw them. Since your contributions are taken off your gross income, you will get an immediate income tax break. Those who are on the cusp of a higher tax bracket might consider contributing enough to lower their [tax liability](https://www.investopedia.com/terms/t/taxliability.asp). ### Traditional Individual Retirement Accounts (IRAs) The traditional [individual retirement account](https://www.investopedia.com/terms/i/ira.asp) (IRA) is similar to a 401(k) plan but it can be obtained at virtually any bank or brokerage. It is primarily for self-employed people and others who have no access to a 401(k), but anyone with earned income can invest in an IRA. The money you save in an IRA is deducted from your income for the year, lowering your taxable income and, therefore, your tax liability. The tax benefit to this kind of account is upfront. So when it comes time to take distributions from the account, you are subject to your standard tax rate at that time. Keep in mind, though, that the money grows on a tax-deferred basis. There are no [capital gains](https://www.investopedia.com/terms/c/capital_gains_tax.asp) or dividend taxes that are assessed on the balance of your account until you begin making withdrawals. ### IRA Limits The IRS sets limits on how much you can contribute to a traditional IRA each year. The limit for 2024 is $7,000. People who are 50 and older can invest an additional $1,000 for a total of $8,000 in 2024. [Distributions](https://www.investopedia.com/terms/d/distribution.asp) must be taken at age 72 and can be taken as early as 59½. You will owe taxes on the withdrawal at your regular income tax rate for that year. ### Roth Individual Retirement Account (IRA) A [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) is funded with post-tax dollars. This is a great variation on the IRA, with a little more pain upfront for a lot of gain down the road. The Roth IRA eliminates the immediate tax deduction of the traditional IRA. The money you pay into it is taxed in that year. However, you should owe no taxes when you start withdrawing money, either on the amount you put in or the investment gains it accrued. Starting a Roth IRA early can pay off big time in the long run, even if you don’t have a lot of money to invest at first. Remember, the longer the money sits in a retirement account, the more tax-free interest is earned. ### Roth Limits The 2024 contribution limit for either IRA (Roth or traditional) is $7,000 a year, or $8,000 if you are over age 50. A Roth has other restrictions, related to income. For instance: * A single filer can contribute the full amount only if they make $146,000 or less annually, as of the 2024 tax year. * After that, you can invest to a lesser degree, up to an annual income of $161,000 in 2024. Note that the income limits are higher for married couples filing jointly. As with a 401(k), a Roth IRA has some penalties associated with taking money out [before you hit retirement age](https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp). But there are a few notable exceptions that may be useful in an emergency. First, you can always withdraw the money you invested (but not the gains it earned) without paying a penalty. ### SIMPLE Individual Retirement Account (IRA) The [SIMPLE IRA](https://www.investopedia.com/terms/s/simple-ira.asp) is a retirement account available to [employees of small businesses](https://www.investopedia.com/articles/personal-finance/120314/top-retirement-strategies-small-business-owners.asp). It's an alternative to the 401(k), which is expensive for an employer to manage. It works the same way a 401(k) does, allowing employees to save money automatically through payroll deductions with the option of an employer match. This amount is capped at 3% of an employee's annual salary. The annual contribution limit for a SIMPLE IRA is $16,000 in 2024. Catch-up contributions of $3,500 allow employees 50 or older to bump that limit up to $19,500 in 2024. ### Once you set up a retirement account, the question becomes where to invest the money. You will be offered a choice, usually among mutual funds and exchange-traded funds (ETFs). Many also offer target-date funds, which automatically alter your selections over time, allocating more money towards conservative choices as you approach retirement age. ## Stages of Retirement Planning Below are some guidelines for successful retirement planning at different stages of your life. ### Young Adulthood (Ages 21–35) Those embarking on adult life may not have a lot of money free to invest, but they do have time to let [investments mature](https://www.investopedia.com/articles/younginvestors/12/best-investments-for-young-people.asp), which is a critical piece of retirement savings. This is the principle of [compounding](https://www.investopedia.com/terms/c/compounding.asp). [Compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp) allows interest to earn interest, and the more time you have, the more interest you will earn. If you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing until age 45, [thanks to the joys of compounding](https://www.investopedia.com/retirement-savings-tips-25-34-year-olds-7556362). You might be able to invest more money in the future, but you’ll never be able to make up for that lost time. ### Some federal agencies and uniformed services offer [thrift savings plans](https://www.investopedia.com/terms/t/thrift_savings_plan.asp). ### Early Midlife (Ages 36–50) Early midlife tends to bring financial strains, including mortgages, student loans, [insurance premiums](https://www.investopedia.com/terms/i/insurance-premium.asp), and credit card debt. Still, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings. People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs that their employers offer. They should also try to max out contributions to a 401(k) or Roth IRA (you can have both at the same time). For those ineligible for a Roth IRA, consider a [traditional IRA](https://www.investopedia.com/terms/t/traditionalira.asp). As with your 401(k), this is funded with pretax dollars, and the assets within it grow tax-deferred. Some employer-sponsored plans offer a Roth option to set aside after-tax retirement contributions. You are limited to the same annual limit, but there are [no income limitations](https://www.investopedia.com/terms/r/roth401k.asp) as with a Roth IRA. Finally, don’t neglect life insurance and [disability insurance](https://www.investopedia.com/terms/d/disability-insurance.asp). You want to ensure that your family can survive financially without pulling from retirement savings should something happen to you. ### Later Midlife (Ages 50–65) As you approach retirement, your investment accounts should become more conservative. [Treasury bills (T-bills)](https://www.investopedia.com/ask/answers/020515/are-treasury-bills-good-investment-retirement-savings.asp) are one of the most conservative investments, although their returns are also low compared to other investments. People in this age group have a few advantages. These often include higher wages as well as more disposable income than younger savers. It's never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 a year to your traditional or Roth IRA and an additional $7,500 a year to your 401(k) in 2024. ### Other Investments Those who have maxed out their tax-incentivized retirement savings options can consider other forms of investment to supplement your retirement savings. [Certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CDs), blue-chip stocks, or real estate investments (like a vacation home that you rent out) can be reasonably safe ways to add to your [nest egg](https://www.investopedia.com/terms/n/nestegg.asp). You can also begin to get a sense of what your [Social Security benefits](https://www.investopedia.com/terms/s/social-security-benefits.asp) will be and at what age it makes sense to start taking them. Eligibility for early benefits starts at age 62, but the retirement age for full benefits is 66. This is the time to look into [long-term care insurance](https://www.investopedia.com/terms/l/ltcinsurance.asp), which will help cover the costs of a nursing home or home care should you need it in your advanced years. If you don't properly plan for health-related expenses, especially unexpected ones, they can decimate your savings. ### The Social Security Administration (SSA) offers an [online calculator](https://www.ssa.gov/prepare/plan-retirement) to estimate your eventual monthly payment. ## Other Aspects of Retirement Planning Retirement planning includes a lot more than simply how much you will save and how much you need. It takes into account your complete financial picture. ### Your Home For most Americans, the single biggest asset they own is their home. How does that fit into your retirement plan? A home was considered an asset in the past, but since the housing market crash, planners see it as less of an asset than they once did. With the popularity of [home equity loans](https://www.investopedia.com/terms/h/homeequityloan.asp) and [home equity lines of credit](https://www.investopedia.com/mortgage/heloc/) (HELOCs), many homeowners are [entering retirement in mortgage debt](https://www.investopedia.com/articles/retirement/07/mortgages_in_retirement.asp) instead of well above water. Once you retire, there’s also the question of whether you should sell your home and downsize. If you still live in the home where you raised a family, it might be bigger and costlier than you need or want. Your retirement plan should include an unbiased look at your home and what to do with it. ### Estate Planning Your [estate plan](https://www.investopedia.com/terms/e/estateplanning.asp) addresses what happens to your assets after you die. It should include a [will](https://www.investopedia.com/terms/w/will.asp) that lays out your plans. But even before that, you should set up a trust or use some other strategy to keep as much of it as possible shielded from estate taxes.  As of 2024, the first $13.61 million of an estate is exempt from [estate taxes](https://www.investopedia.com/terms/e/estatetax.asp) (up from $12.92 million for 2023), but many people are finding ways to leave their money to their children in a way that doesn’t pay them in a [lump sum](https://www.investopedia.com/terms/l/lump-sum-payment.asp). There may also be changes coming down the pipeline in Congress regarding estate taxes, as the estate tax amount is scheduled to drop to $5 million in 2026. ### Tax Efficiency Once you reach retirement age and begin taking distributions, taxes become a bigger problem. Most of your retirement accounts are taxed as ordinary income tax. That’s one good argument for considering a Roth IRA or a Roth 401(k), as both allow you to pay taxes upfront rather than upon withdrawal. If you believe you will have a higher taxable income later in life, it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations. ### Medical Insurance Medical expenses tend to increase with age. You will have government-sponsored [Medicare](https://www.investopedia.com/terms/m/medicare.asp) coverage at a modest cost to you, but many supplement its coverage with a Medicare Advantage or [Medigap](https://www.investopedia.com/terms/m/medigap-insurance.asp) policy. Your choices are many and complex. It's a good idea to start checking out your options well in advance of retiring. ## How Do I Start a Retirement Plan? Retirement planning isn't difficult. It's as easy as setting aside some money every month—and every little bit counts. You can start with a tax-advantaged savings plan, either a 401(k) through an employer or an IRA through a bank or brokerage firm. You may also want to consider talking to a professional, such as a financial planner or investment broker who can steer you in the right direction. The earlier you start, the better. That's because your investments grow over time by earning interest. And you'll earn interest on that interest. ## Why Is a Retirement Plan So Important? A retirement plan helps you [sock away enough money to maintain the same lifestyle](https://www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp#toc-when-to-start-spending) you currently have after you retire. While you may work part-time or pick up the odd gig here or there, it probably won't be enough to sustain your current lifestyle. Social Security benefits will only take you so far. That's why it's important to have a viable long-term plan for a financially comfortable retirement. ## What Are the Main Pieces of a Retirement Plan? A retirement plan is about accumulating enough money to enable you to enjoy a comfortable life after work. There are a couple of key issues to keep in mind: * Consider how to minimize the taxes you owe on your retirement income. One way to do this is to sock away money in a [Roth account](https://www.investopedia.com/terms/r/rothira.asp#:~:text=A%20Roth%20IRA%20is%20a%20special%20individual%20retirement%20account%20%28IRA,than%20they%20are%20right%20now.) or convert your traditional account to a Roth before you retire. * Don't overlook estate planning. You're taking care of your loved ones as you take care of yourself. ## The Bottom Line Everyone dreams of the day they can finally say goodbye to the workforce. But doing so costs money. That's where retirement planning comes into play. It doesn't matter at what point you are in your life. Setting aside money now means you'll have less to worry about later.

What Is Retirement Planning? Creating a retirement plan begins with determining your long-term financial goals and tolerance for risk, and then starting to take action to reach those goals. The process can begin any time during your working years, but the earlier the better. The process of creating a retirement plan includes identifying your income sources, adding up your expenses, putting a savings plan into effect, and managing your assets. By estimating your future cash flows, you can judge whether your retirement income goal is realistic. Needless to say, a retirement plan is not a static document. You'll need to update it from time to time as well as review it to monitor your progress. Key Takeaways It is never too early or too late to start a retirement plan.A retirement plan is a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement.A key part of a retirement plan is taking advantage of one of the government-approved investment vehicles, such as an individual retirement account (IRAs) or a 401(k) account, which offer tax advantages to retirement savers.Your retirement plan needs to take into account your estimated future expenses, liabilities, and life expectancy. What Is a Retirement Plan? A retirement plan may be seen as a roadmap to a comfortable life after work. It entails accumulating enough money to pay for the lifestyle you want to enjoy in the future. Your retirement plan may well change over time, but the earlier you get started the better. 8 Essential Tips For Retirement Saving How Retirement Planning Works A retirement plan is your preparation for a good life after you're done working to pay the bills, or at least done working a full-time job. But it's not all about money. The non-financial aspects include lifestyle choices such as how you want to spend your time in retirement and where you'll live. A holistic approach to retirement planning considers all these areas. The goals for your retirement plan will change in focus over time: Early in a person’s working life, your contribution to retirement savings may be modest. The reward is 40-plus years of investment growth.During the middle of your career, when your income may be at its peak, you might set specific income or asset targets and take steps toward achieving them.Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying into your retirement account(s). Instead, you start collecting the rewards of decades of savings. Some retirement plans change depending on where you are. The United States and Canada each have unique systems of workplace-sponsored plans. How Much Do You Need to Retire? Your magic number, which is the amount you need to retire comfortably, is highly personalized. But there are rules of thumb that can give you an idea of how much to save. People used to say that you need around $1 million to retire comfortably.Other professionals use the 80% rule, which states that you need 80% of your current income to live comfortably after retiring. So if you made $100,000 per year, you would need savings that produce $80,000 per year for roughly 20 years, or a total of $1.6 million.Others say most of us aren’t saving anywhere near enough to meet those benchmarks and should adjust our lifestyles accordingly. Estimating Expenses Your post-retirement expenses largely determine that "magic number." It's a good idea to create a retirement budget, calculating estimated costs for housing, health insurance, food, clothing, and transportation. And since you'll have more free time on your hands, you may also want to factor in the cost of entertainment, hobbies, and travel. It may be hard to come up with concrete figures, but a reasonable estimate will be helpful. Steps to Retirement Planning Regardless of where you are in life, there are several key steps that apply to almost everyone during their retirement planning. The following are some of the most common: Come up with a plan. This includes deciding when you want to start saving when you want to retire, and how much you'd like to save for your ultimate goal. Decide how much you'll set aside each month. Using automatic deductions takes away the guesswork, keeps you on track, and takes away the temptation to stop or forget depositing money on your own. Choose the right accounts for you. Invest in a 401(k) or similar account if your employer offers that option. If the company offers an employer match and you don't sign up, you're giving away free money. Whether or not there's an employer match, you're getting a good deal tax-wise. Check on your investments from time to time and make adjustments. This is especially important after a big event, like marriage or a baby. Retirement Plans Tax-advantaged retirement savings plans have become the keystone of long-term savings for Americans. You should have access to one or more of these plans depending on how you earn a living. Each has its own rules and regulations. Employer-Sponspored Plans Most large companies offer their employees 401(k) plans. Nonprofit employers have similar 403(b) plans. An up-front benefit of these qualified retirement plans is that your employer has the option to match what you invest up to a certain amount. For example, if you contribute 3% of your annual income to your plan account, your employer may match that amount, depositing the sum into your retirement account along with your contribution. You can contribute more than the amount that will earn the employer match. Some experts recommend contributing upwards of 10%. 401(k) Limits The maximum is revised yearly by the IRS Participants can contribute up to $23,000 in 2024 to a 401(k) or 403(b), some of which may be added to with an employer match. People over age 50 can contribute an extra $7,500 per year as a catch-up contribution in 2024. These accounts can earn a much higher rate of return than a savings account (although the investments are not free of risk). The funds in the account, if it is a traditional account rather than a Roth account, are not taxed until you withdraw them. Since your contributions are taken off your gross income, you will get an immediate income tax break. Those who are on the cusp of a higher tax bracket might consider contributing enough to lower their tax liability. Traditional Individual Retirement Accounts (IRAs) The traditional individual retirement account (IRA) is similar to a 401(k) plan but it can be obtained at virtually any bank or brokerage. It is primarily for self-employed people and others who have no access to a 401(k), but anyone with earned income can invest in an IRA. The money you save in an IRA is deducted from your income for the year, lowering your taxable income and, therefore, your tax liability. The tax benefit to this kind of account is upfront. So when it comes time to take distributions from the account, you are subject to your standard tax rate at that time. Keep in mind, though, that the money grows on a tax-deferred basis. There are no capital gains or dividend taxes that are assessed on the balance of your account until you begin making withdrawals. IRA Limits The IRS sets limits on how much you can contribute to a traditional IRA each year. The limit for 2024 is $7,000. People who are 50 and older can invest an additional $1,000 for a total of $8,000 in 2024. Distributions must be taken at age 72 and can be taken as early as 59½. You will owe taxes on the withdrawal at your regular income tax rate for that year. Roth Individual Retirement Account (IRA) A Roth IRA is funded with post-tax dollars. This is a great variation on the IRA, with a little more pain upfront for a lot of gain down the road. The Roth IRA eliminates the immediate tax deduction of the traditional IRA. The money you pay into it is taxed in that year. However, you should owe no taxes when you start withdrawing money, either on the amount you put in or the investment gains it accrued. Starting a Roth IRA early can pay off big time in the long run, even if you don’t have a lot of money to invest at first. Remember, the longer the money sits in a retirement account, the more tax-free interest is earned. Roth Limits The 2024 contribution limit for either IRA (Roth or traditional) is $7,000 a year, or $8,000 if you are over age 50. A Roth has other restrictions, related to income. For instance: A single filer can contribute the full amount only if they make $146,000 or less annually, as of the 2024 tax year.After that, you can invest to a lesser degree, up to an annual income of $161,000 in 2024. Note that the income limits are higher for married couples filing jointly. As with a 401(k), a Roth IRA has some penalties associated with taking money out before you hit retirement age. But there are a few notable exceptions that may be useful in an emergency. First, you can always withdraw the money you invested (but not the gains it earned) without paying a penalty. SIMPLE Individual Retirement Account (IRA) The SIMPLE IRA is a retirement account available to employees of small businesses. It's an alternative to the 401(k), which is expensive for an employer to manage. It works the same way a 401(k) does, allowing employees to save money automatically through payroll deductions with the option of an employer match. This amount is capped at 3% of an employee's annual salary. The annual contribution limit for a SIMPLE IRA is $16,000 in 2024. Catch-up contributions of $3,500 allow employees 50 or older to bump that limit up to $19,500 in 2024. Once you set up a retirement account, the question becomes where to invest the money. You will be offered a choice, usually among mutual funds and exchange-traded funds (ETFs). Many also offer target-date funds, which automatically alter your selections over time, allocating more money towards conservative choices as you approach retirement age. Stages of Retirement Planning Below are some guidelines for successful retirement planning at different stages of your life. Young Adulthood (Ages 21–35) Those embarking on adult life may not have a lot of money free to invest, but they do have time to let investments mature, which is a critical piece of retirement savings. This is the principle of compounding. Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. If you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing until age 45, thanks to the joys of compounding. You might be able to invest more money in the future, but you’ll never be able to make up for that lost time. Some federal agencies and uniformed services offer thrift savings plans. Early Midlife (Ages 36–50) Early midlife tends to bring financial strains, including mortgages, student loans, insurance premiums, and credit card debt. Still, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings. People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs that their employers offer. They should also try to max out contributions to a 401(k) or Roth IRA (you can have both at the same time). For those ineligible for a Roth IRA, consider a traditional IRA. As with your 401(k), this is funded with pretax dollars, and the assets within it grow tax-deferred. Some employer-sponsored plans offer a Roth option to set aside after-tax retirement contributions. You are limited to the same annual limit, but there are no income limitations as with a Roth IRA. Finally, don’t neglect life insurance and disability insurance. You want to ensure that your family can survive financially without pulling from retirement savings should something happen to you. Later Midlife (Ages 50–65) As you approach retirement, your investment accounts should become more conservative. Treasury bills (T-bills) are one of the most conservative investments, although their returns are also low compared to other investments. People in this age group have a few advantages. These often include higher wages as well as more disposable income than younger savers. It's never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 a year to your traditional or Roth IRA and an additional $7,500 a year to your 401(k) in 2024. Other Investments Those who have maxed out their tax-incentivized retirement savings options can consider other forms of investment to supplement your retirement savings. Certificates of deposit (CDs), blue-chip stocks, or real estate investments (like a vacation home that you rent out) can be reasonably safe ways to add to your nest egg. You can also begin to get a sense of what your Social Security benefits will be and at what age it makes sense to start taking them. Eligibility for early benefits starts at age 62, but the retirement age for full benefits is 66. This is the time to look into long-term care insurance, which will help cover the costs of a nursing home or home care should you need it in your advanced years. If you don't properly plan for health-related expenses, especially unexpected ones, they can decimate your savings. The Social Security Administration (SSA) offers an online calculator to estimate your eventual monthly payment. Other Aspects of Retirement Planning Retirement planning includes a lot more than simply how much you will save and how much you need. It takes into account your complete financial picture. Your Home For most Americans, the single biggest asset they own is their home. How does that fit into your retirement plan? A home was considered an asset in the past, but since the housing market crash, planners see it as less of an asset than they once did. With the popularity of home equity loans and home equity lines of credit (HELOCs), many homeowners are entering retirement in mortgage debt instead of well above water. Once you retire, there’s also the question of whether you should sell your home and downsize. If you still live in the home where you raised a family, it might be bigger and costlier than you need or want. Your retirement plan should include an unbiased look at your home and what to do with it. Estate Planning Your estate plan addresses what happens to your assets after you die. It should include a will that lays out your plans. But even before that, you should set up a trust or use some other strategy to keep as much of it as possible shielded from estate taxes.  As of 2024, the first $13.61 million of an estate is exempt from estate taxes (up from $12.92 million for 2023), but many people are finding ways to leave their money to their children in a way that doesn’t pay them in a lump sum. There may also be changes coming down the pipeline in Congress regarding estate taxes, as the estate tax amount is scheduled to drop to $5 million in 2026. Tax Efficiency Once you reach retirement age and begin taking distributions, taxes become a bigger problem. Most of your retirement accounts are taxed as ordinary income tax. That’s one good argument for considering a Roth IRA or a Roth 401(k), as both allow you to pay taxes upfront rather than upon withdrawal. If you believe you will have a higher taxable income later in life, it may make sense to do a Roth conversion. An accountant or financial planner can help you work through such tax considerations. Medical Insurance Medical expenses tend to increase with age. You will have government-sponsored Medicare coverage at a modest cost to you, but many supplement its coverage with a Medicare Advantage or Medigap policy. Your choices are many and complex. It's a good idea to start checking out your options well in advance of retiring. How Do I Start a Retirement Plan? Retirement planning isn't difficult. It's as easy as setting aside some money every month—and every little bit counts.You can start with a tax-advantaged savings plan, either a 401(k) through an employer or an IRA through a bank or brokerage firm.You may also want to consider talking to a professional, such as a financial planner or investment broker who can steer you in the right direction.The earlier you start, the better. That's because your investments grow over time by earning interest. And you'll earn interest on that interest. Why Is a Retirement Plan So Important? A retirement plan helps you sock away enough money to maintain the same lifestyle you currently have after you retire. While you may work part-time or pick up the odd gig here or there, it probably won't be enough to sustain your current lifestyle. Social Security benefits will only take you so far. That's why it's important to have a viable long-term plan for a financially comfortable retirement. What Are the Main Pieces of a Retirement Plan? A retirement plan is about accumulating enough money to enable you to enjoy a comfortable life after work. There are a couple of key issues to keep in mind:Consider how to minimize the taxes you owe on your retirement income. One way to do this is to sock away money in a Roth account or convert your traditional account to a Roth before you retire.Don't overlook estate planning. You're taking care of your loved ones as you take care of yourself. The Bottom Line Everyone dreams of the day they can finally say goodbye to the workforce. But doing so costs money. That's where retirement planning comes into play. It doesn't matter at what point you are in your life. Setting aside money now means you'll have less to worry about later.

https://www.investopedia.com/credit-card-debt-has-made-a-huge-comeback-8382621

Credit Card Debt Has Made a Huge Comeback

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Credit card debt surged in 2022, with debt per cardholder hitting pre-pandemic levels, a government report found.<br/></li><li>Pandemic-era relief programs helped borrowers repay debt, and their expiration in 2022 made them go more into debt to cover their expenses.<br/></li><li>These borrowers may be especially hurt by today's high interest rates on credit cards.<br/></li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The economic boom that the U.S. economy experienced in 2022 came hand-in-hand with a resurgence in credit card debt.<br/><br/>The average consumer had $5,289 in credit card debt the fourth quarter of 2022, just $4 shy of the pre-pandemic peak in 2019, according to a report released Wednesday by the Consumer Financial Protection Bureau, the government’s consumer watchdog agency. Credit card debt plunged in the pandemic, hitting its lowest since at least 2013 before bouncing back, as the chart below shows.<span class="ql-inline-citation" data-cite="1"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_5-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/NwIVi/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Credit Card Debt Came Roaring Back In 2022"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The report highlights how the end of pandemic-era government relief programs has affected the most financially precarious households. Direct cash payments in the form of stimulus checks, rental relief, and the expanded child tax credits helped many people stabilize their budgets and pay down credit card debt.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> When those programs ended, credit card debt swelled. Overall <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/cut-credit-debt.asp">card debt </a>passed $1 trillion for the first time, and one in ten cardholders were charged more in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-do-credit-card-payments-work-5069924">interest and fees </a>than they paid toward principal each year.<br/><br/>The data indicates “a pattern of persistent indebtedness that could become increasingly difficult for some consumers to escape,” the bureau said in the report.<br/><br/>The problem could be worsened by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-card-interest-rate-5076674">rising interest rates on credit cards</a>, which have been pushed up by the Federal Reserve’s <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-flat-but-future-hikes-still-on-the-table-7972170">campaign of anti-inflation interest rate hikes</a>, the bureau said. <br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * Credit card debt surged in 2022, with debt per cardholder hitting pre-pandemic levels, a government report found. * Pandemic-era relief programs helped borrowers repay debt, and their expiration in 2022 made them go more into debt to cover their expenses. * These borrowers may be especially hurt by today's high interest rates on credit cards. The economic boom that the U.S. economy experienced in 2022 came hand-in-hand with a resurgence in credit card debt. The average consumer had $5,289 in credit card debt the fourth quarter of 2022, just $4 shy of the pre-pandemic peak in 2019, according to a report released Wednesday by the Consumer Financial Protection Bureau, the government’s consumer watchdog agency. Credit card debt plunged in the pandemic, hitting its lowest since at least 2013 before bouncing back, as the chart below shows. The report highlights how the end of pandemic-era government relief programs has affected the most financially precarious households. Direct cash payments in the form of stimulus checks, rental relief, and the expanded child tax credits helped many people stabilize their budgets and pay down credit card debt.  When those programs ended, credit card debt swelled. Overall [card debt](https://www.investopedia.com/articles/pf/07/cut-credit-debt.asp) passed $1 trillion for the first time, and one in ten cardholders were charged more in [interest and fees](https://www.investopedia.com/how-do-credit-card-payments-work-5069924) than they paid toward principal each year. The data indicates “a pattern of persistent indebtedness that could become increasingly difficult for some consumers to escape,” the bureau said in the report. The problem could be worsened by [rising interest rates on credit cards](https://www.investopedia.com/average-credit-card-interest-rate-5076674), which have been pushed up by the Federal Reserve’s [campaign of anti-inflation interest rate hikes](https://www.investopedia.com/fed-holds-interest-rate-flat-but-future-hikes-still-on-the-table-7972170), the bureau said.  Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways Credit card debt surged in 2022, with debt per cardholder hitting pre-pandemic levels, a government report found.Pandemic-era relief programs helped borrowers repay debt, and their expiration in 2022 made them go more into debt to cover their expenses.These borrowers may be especially hurt by today's high interest rates on credit cards. The economic boom that the U.S. economy experienced in 2022 came hand-in-hand with a resurgence in credit card debt.The average consumer had $5,289 in credit card debt the fourth quarter of 2022, just $4 shy of the pre-pandemic peak in 2019, according to a report released Wednesday by the Consumer Financial Protection Bureau, the government’s consumer watchdog agency. Credit card debt plunged in the pandemic, hitting its lowest since at least 2013 before bouncing back, as the chart below shows. The report highlights how the end of pandemic-era government relief programs has affected the most financially precarious households. Direct cash payments in the form of stimulus checks, rental relief, and the expanded child tax credits helped many people stabilize their budgets and pay down credit card debt.  When those programs ended, credit card debt swelled. Overall card debt passed $1 trillion for the first time, and one in ten cardholders were charged more in interest and fees than they paid toward principal each year.The data indicates “a pattern of persistent indebtedness that could become increasingly difficult for some consumers to escape,” the bureau said in the report.The problem could be worsened by rising interest rates on credit cards, which have been pushed up by the Federal Reserve’s campaign of anti-inflation interest rate hikes, the bureau said.  Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/apple-q2-fy-2024-earnings-preview-what-you-need-to-know-8636823

What You Need To Know Ahead of Apple's Earnings Report

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <em>UPDATE—May 2, 2024: This article has been updated to reflect more recent share price information.</em> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Apple is set to report earnings for its fiscal second quarter of 2024 on Thursday after the closing bell.</li><li>Analysts expect the iPhone maker to report that revenue and earnings declined from the year-ago period.</li><li>Apple will report iPhone sales, which could provide insight into the company's performance in China amid increased competition.</li><li>Apple also could provide updates related to its artificial intelligence plans.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Apple (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>) is set to report second-quarter earnings after the bell on Thursday, with investors likely to be watching for iPhone sales numbers and potential updates related to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a>.<span class="ql-inline-citation" data-cite="3"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Analysts project Apple's revenue to be $90.36 billion for the fiscal second quarter of 2024, down from the previous quarter and the same period in 2023, according to consensus estimates compiled by Visible Alpha. Historically, Apple has typically reported a boost to sales in its fiscal first quarter, due to seasonal holiday demand.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Net income is expected to be $23.26 billion, down from the first quarter and the year-ago period, when the company recorded net income at $24.16 billion. Analysts expect diluted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eps.asp">earnings per share (EPS)</a> to come in at $1.50 for the second quarter, down slightly from the same period a year earlier.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_11-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td></td> <td>Analyst Estimates for Q2 FY 2024</td> <td>Q1 FY 2024</td> <td>Q2 FY 2023</td> </tr> <tr> <td>Revenue</td> <td>$90.36 billion</td> <td>$119.58 billion</td> <td>$94.84 billion</td> </tr> <tr> <td>Diluted Earnings Per Share</td> <td>$1.50</td> <td>$2.18</td> <td>$1.52</td> </tr> <tr> <td>Net Income</td> <td>$23.26 billion</td> <td>$33.92 billion</td> <td>$24.16 billion</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-key-metric-soft-iphone-sales-in-china"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Key Metric: Soft iPhone Sales in China </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Investors will be watching for iPhone sales figures, with a focus on China as sales there have plunged in the face of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/apple-s-china-iphone-sales-plunge-19-percent-in-first-quarter-as-huawei-catches-up-8637375">rising competition</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Analysts project Apple to report selling 51.6 million iPhone units in the second quarter, according to consensus estimates compiled by Visible Alpha, a decline from the 58 million reported in the year-ago period. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> CFRA analyst Angelo Zino wrote that "investors will likely focus on China results," saying that "on China, we expect a 15% decline, worse than expected," though he noted it may be "largely factored into the lower revised guidance back in February, while revenue across other geographies will be stable."<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Melius Research analysts noted that with "guide for June likely muted" and "China issues to persist," the iPhone maker needs "to give us something to look forward to."<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Zino said CFRA expects Apple "to announce a new $90B <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp">buyback</a> and 3% dividend hike," which could positively affect investor sentiment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-business-spotlight-updates-on-apples-ai-play"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Business Spotlight: Updates on Apple's AI Play </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Unlike many of its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-we-learned-from-big-tech-earnings-last-week-meta-microsoft-alphabet-8639439">big tech peers</a>, Apple has been tight-lipped about its AI-related initiatives, leaving room for uncertainty about how the iPhone maker will leverage the emerging tech. Investors will be watching closely for any word Thursday on Apple's AI strategy in the company's earnings release and call. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Apple CEO Tim Cook <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/4-key-takeaways-from-apple-fiscal-q1-2024-earnings-call-8557738">said in February</a> that the company has "some things that we're incredibly excited about, that we'll be talking about later this year." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Apple could also provide details following reports in March that it <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/apple-reportedly-buys-darwinai-iphone-makers-push-into-ai-race-8609333">bought DarwinAI</a>, a Canadian AI startup. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Analysts have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/apple-stock-jumps-after-bank-of-america-upgrade-citing-likely-ai-related-boost-for-iphones-8431769">highlighted</a> that Apple could be positioned to gain from an accelerated iPhone upgrade cycle as AI capabilities are integrated into the devices, but the company hasn't made its plans for this clear.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Apple's stock price has lost about 11% since the start of 2024, trading at $171.33 as of<strong> </strong>10 a.m. ET Thursday ahead of the company's earnings release.<br> </br></p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

*UPDATE—May 2, 2024: This article has been updated to reflect more recent share price information.* ### Key Takeaways * Apple is set to report earnings for its fiscal second quarter of 2024 on Thursday after the closing bell. * Analysts expect the iPhone maker to report that revenue and earnings declined from the year-ago period. * Apple will report iPhone sales, which could provide insight into the company's performance in China amid increased competition. * Apple also could provide updates related to its artificial intelligence plans. Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) is set to report second-quarter earnings after the bell on Thursday, with investors likely to be watching for iPhone sales numbers and potential updates related to [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp). Analysts project Apple's revenue to be $90.36 billion for the fiscal second quarter of 2024, down from the previous quarter and the same period in 2023, according to consensus estimates compiled by Visible Alpha. Historically, Apple has typically reported a boost to sales in its fiscal first quarter, due to seasonal holiday demand. Net income is expected to be $23.26 billion, down from the first quarter and the year-ago period, when the company recorded net income at $24.16 billion. Analysts expect diluted [earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) to come in at $1.50 for the second quarter, down slightly from the same period a year earlier. | | Analyst Estimates for Q2 FY 2024 | Q1 FY 2024 | Q2 FY 2023 | | --- | --- | --- | --- | | Revenue | $90.36 billion | $119.58 billion | $94.84 billion | | Diluted Earnings Per Share | $1.50 | $2.18 | $1.52 | | Net Income | $23.26 billion | $33.92 billion | $24.16 billion | ## Key Metric: Soft iPhone Sales in China Investors will be watching for iPhone sales figures, with a focus on China as sales there have plunged in the face of [rising competition](https://www.investopedia.com/apple-s-china-iphone-sales-plunge-19-percent-in-first-quarter-as-huawei-catches-up-8637375). Analysts project Apple to report selling 51.6 million iPhone units in the second quarter, according to consensus estimates compiled by Visible Alpha, a decline from the 58 million reported in the year-ago period. CFRA analyst Angelo Zino wrote that "investors will likely focus on China results," saying that "on China, we expect a 15% decline, worse than expected," though he noted it may be "largely factored into the lower revised guidance back in February, while revenue across other geographies will be stable." Melius Research analysts noted that with "guide for June likely muted" and "China issues to persist," the iPhone maker needs "to give us something to look forward to." Zino said CFRA expects Apple "to announce a new $90B [buyback](https://www.investopedia.com/terms/b/buyback.asp) and 3% dividend hike," which could positively affect investor sentiment. ## Business Spotlight: Updates on Apple's AI Play Unlike many of its [big tech peers](https://www.investopedia.com/what-we-learned-from-big-tech-earnings-last-week-meta-microsoft-alphabet-8639439), Apple has been tight-lipped about its AI-related initiatives, leaving room for uncertainty about how the iPhone maker will leverage the emerging tech. Investors will be watching closely for any word Thursday on Apple's AI strategy in the company's earnings release and call. Apple CEO Tim Cook [said in February](https://www.investopedia.com/4-key-takeaways-from-apple-fiscal-q1-2024-earnings-call-8557738) that the company has "some things that we're incredibly excited about, that we'll be talking about later this year." Apple could also provide details following reports in March that it [bought DarwinAI](https://www.investopedia.com/apple-reportedly-buys-darwinai-iphone-makers-push-into-ai-race-8609333), a Canadian AI startup. Analysts have [highlighted](https://www.investopedia.com/apple-stock-jumps-after-bank-of-america-upgrade-citing-likely-ai-related-boost-for-iphones-8431769) that Apple could be positioned to gain from an accelerated iPhone upgrade cycle as AI capabilities are integrated into the devices, but the company hasn't made its plans for this clear. Apple's stock price has lost about 11% since the start of 2024, trading at $171.33 as of10 a.m. ET Thursday ahead of the company's earnings release. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

UPDATE—May 2, 2024: This article has been updated to reflect more recent share price information. Key Takeaways Apple is set to report earnings for its fiscal second quarter of 2024 on Thursday after the closing bell.Analysts expect the iPhone maker to report that revenue and earnings declined from the year-ago period.Apple will report iPhone sales, which could provide insight into the company's performance in China amid increased competition.Apple also could provide updates related to its artificial intelligence plans. Apple (AAPL) is set to report second-quarter earnings after the bell on Thursday, with investors likely to be watching for iPhone sales numbers and potential updates related to artificial intelligence (AI). Analysts project Apple's revenue to be $90.36 billion for the fiscal second quarter of 2024, down from the previous quarter and the same period in 2023, according to consensus estimates compiled by Visible Alpha. Historically, Apple has typically reported a boost to sales in its fiscal first quarter, due to seasonal holiday demand. Net income is expected to be $23.26 billion, down from the first quarter and the year-ago period, when the company recorded net income at $24.16 billion. Analysts expect diluted earnings per share (EPS) to come in at $1.50 for the second quarter, down slightly from the same period a year earlier. Analyst Estimates for Q2 FY 2024 Q1 FY 2024 Q2 FY 2023 Revenue $90.36 billion $119.58 billion $94.84 billion Diluted Earnings Per Share $1.50 $2.18 $1.52 Net Income $23.26 billion $33.92 billion $24.16 billion Key Metric: Soft iPhone Sales in China Investors will be watching for iPhone sales figures, with a focus on China as sales there have plunged in the face of rising competition. Analysts project Apple to report selling 51.6 million iPhone units in the second quarter, according to consensus estimates compiled by Visible Alpha, a decline from the 58 million reported in the year-ago period. CFRA analyst Angelo Zino wrote that "investors will likely focus on China results," saying that "on China, we expect a 15% decline, worse than expected," though he noted it may be "largely factored into the lower revised guidance back in February, while revenue across other geographies will be stable." Melius Research analysts noted that with "guide for June likely muted" and "China issues to persist," the iPhone maker needs "to give us something to look forward to." Zino said CFRA expects Apple "to announce a new $90B buyback and 3% dividend hike," which could positively affect investor sentiment. Business Spotlight: Updates on Apple's AI Play Unlike many of its big tech peers, Apple has been tight-lipped about its AI-related initiatives, leaving room for uncertainty about how the iPhone maker will leverage the emerging tech. Investors will be watching closely for any word Thursday on Apple's AI strategy in the company's earnings release and call. Apple CEO Tim Cook said in February that the company has "some things that we're incredibly excited about, that we'll be talking about later this year." Apple could also provide details following reports in March that it bought DarwinAI, a Canadian AI startup. Analysts have highlighted that Apple could be positioned to gain from an accelerated iPhone upgrade cycle as AI capabilities are integrated into the devices, but the company hasn't made its plans for this clear. Apple's stock price has lost about 11% since the start of 2024, trading at $171.33 as of 10 a.m. ET Thursday ahead of the company's earnings release. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/top-mid-cap-financials-5235297

Top Mid-Cap Financials

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> When investors are asked to think of the U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_sector.asp">financial sector</a>, the largest names such as JPMorgan Chase &amp; Co. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=jpm">JPM</a>), the Goldman Sachs Group, Inc. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=gs">GS</a>), Bank of America Corporation (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac">BAC</a>), and Citigroup Inc. (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=c">C</a>), will often be the types of companies that automatically spring to mind. What is usually further down on the list of popular investment candidates are medium-sized players such as regional banks, diversified banks, and property and casualty insurance companies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The group of financials that currently occupy the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/midcapstock.asp">mid-cap</a> segment have an average <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market capitalization</a> of $5.66 billion and can range anywhere between $1.6 billion to $12.5 billion, as measured by the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp-midcap-400-index.asp">S&amp;P MidCap 400 Index</a>.<span class="ql-inline-citation" data-cite="5"></span> In the case of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/large-cap.asp">large-cap</a> financials, as represented by the holdings of the Financial Select Sector SPDR Fund (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=xlf">XLF</a>), the average market cap is approximately $66 billion and will range from around $10 billion, which is the upper end of the mid-cap segment, up to $763 billion.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> In this article, we look at several of the top financial companies from within the mid-cap range and discuss why this niche segment of the market deserves a closer look. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The mid-cap financial segment of the market offers investors a unique set of growth prospects with reasonable levels of risk.</li><li>The average market capitalization of a mid-cap financial company is $5.66 billion, with market caps ranging anywhere between $1.6 billion and $12.5 billion.</li><li>Mid-cap financials often outperform their large-cap counterparts during periods of rising prices, but they can also fall faster during bearish periods. This behavior is common in the mid-cap segment and is a risk factor that should be considered before investing.</li></ul></div></div></div> <span class="heading-toc" id="toc-identifying-top-mid-cap-financial-stocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Identifying Top Mid-Cap Financial Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Investors who are interested in researching the mid-cap financials sector may want to consider checking into the holdings of an index such as the S&amp;P MidCap 400 Financials. The index comprises 61 holdings from across the United States, which are also the holdings from within the broader S&amp;P 400 Index that are classified as members of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gics.asp">Global Industry Classification Standard (GICS)</a> Financials sector.<span class="ql-inline-citation" data-cite="5"></span> For savvy investors, the 61 holdings can be screened based on any set of criteria that aligns with one's investment strategy, goals, and risk tolerance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For the purposes of this article, we've gathered the top 50 holdings of the five most popular mid-cap <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> based on net assets and then sorted the list based on the amount of capital invested into the companies from within the various sectors. The list below shows the top 10 financial companies based on allocated capital within these five funds: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> ·Arthur J Gallagher &amp; Co. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ajg">AJG</a>)<br/>·Webster Financial Corporation (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=wbs">WBS</a>)<br/>· Alleghany Corporation (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=y">Y</a>)<br/>· First Horizon Corporation (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fhn">FHN</a>)<br/>· Fifth Third Bancorp (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fitb">FITB</a>)<br/>· Ameriprise Financial Inc. (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=amp">AMP</a>)<br/>· MSCI Inc. (<a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=msci">MSCI</a>)<br/>· Discover Financial Services (<a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=dfs">DFS</a>)<br/>· East West Bancorp Inc. (<a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ewbc">EWBC</a>)<br/>· American Financial Group Inc. (<a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=afg">AFG</a>)<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-webster-financial-corporation-wbs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Webster Financial Corporation (WBS) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Webster Financial Corporation (WBS) is a regional bank that provides financial services for clients in the northeastern part of the United States. Aside from offering the types of services common to commercial and consumer banking, the company has grown into one of the largest providers of employee benefits solutions.<span class="ql-inline-citation" data-cite="1"></span> Webster Financial has a market capitalization of approximately $9 billion as of April 18, 2022, and has a strong track record of consistent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a> payments dating back to 1987.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Looking at the weekly chart below, you can see that the stock has handily outperformed the Financial Select Sector SPDR Fund (XLF), a popular ETF used to track the performance of the financials within the S&amp;P 500, since 2008. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-do-mid-cap-stocks-perform-during-bull-markets-5224692">Bullish investors</a> would look for this type of strong relative performance to continue, while other types of investors, such as those that buy and sell based on chart patterns, may choose to wait for the performance of WBS to converge with that of the ETF. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pairstrade.asp">pairs trading strategy</a> would look to profit from a return to the type of divergence between the two assets that has been common since 2009. Regardless of one's investment strategy, the strong relative performance of this regional bank suggests that it could be worth a closer look. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_21-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:53.1%;"> <img alt="Relative performance between Webster Financial Corp. and the Financial Select Sector SPDR Fund (XLF)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/3kUMDAz4wodTGJl5bHjENaiBP1Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WBS_041722-83d8f6b1e19b4389b02ad2fd75a99840.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/3kUMDAz4wodTGJl5bHjENaiBP1Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WBS_041722-83d8f6b1e19b4389b02ad2fd75a99840.png" data-srcset="https://www.investopedia.com/thmb/Rmd72tJL-4n5UicTmNg2gAV1nLU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/WBS_041722-83d8f6b1e19b4389b02ad2fd75a99840.png 750w" data-tracking-container="true" height="848" id="mntl-sc-block-image_1-0" width="1594"/> <noscript> <img alt="Relative performance between Webster Financial Corp. and the Financial Select Sector SPDR Fund (XLF)" class="img--noscript universal-image__image" height="848" sizes="750px" src="https://www.investopedia.com/thmb/3kUMDAz4wodTGJl5bHjENaiBP1Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WBS_041722-83d8f6b1e19b4389b02ad2fd75a99840.png" srcset="https://www.investopedia.com/thmb/Rmd72tJL-4n5UicTmNg2gAV1nLU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/WBS_041722-83d8f6b1e19b4389b02ad2fd75a99840.png 750w" width="1594"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>TradingView.com</p></span> </figcaption></figure> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Investors can get broad exposure to the regional bank's subsector by investing in a targeted ETF such as the SPDR S&amp;P Regional Banking ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=kre">KRE</a>) or the iShares U.S. Regional Banks ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=iat">IAT</a>).</p></div></div></div> <span class="heading-toc" id="toc-east-west-bancorp-inc-ewbc"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> East West Bancorp, Inc. (EWBC) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> East West Bancorp, Inc. (EWBC) is a mid-cap full-service commercial bank with more than 120 locations in key cities within the United States and China.<span class="ql-inline-citation" data-cite="7"></span> Fundamentally, the company has a market capitalization of approximately $10.6 billion and has posted compounded growth rates in total loans, total deposits, and total assets of 7%, 11%, and 10%, respectively, between Dec. 31, 2016, and Dec. 31, 2021.<span class="ql-inline-citation" data-cite="3"></span> Strong growth in key metrics along with a modest market cap suggests that this financial stock will likely make its way onto the watchlists of both <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valueinvesting.asp">value</a> and <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthinvesting.asp">growth investors</a> over the years ahead. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Looking at the weekly chart, it is interesting to note how the price has strongly outperformed during periods of rising prices but how it has also underperformed when prices were falling. This type of behavior is common for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-do-mid-caps-perform-during-bear-markets-5224694">mid-cap companies in bearish market scenarios</a> and is something for risk-averse investors to consider. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_29-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:49.6%;"> <img alt="Relative performance between EWBC and XLF between 2011 and 2022. " class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/ZDrA8Kl_5x0XMbJ-H8HTFhHj_Fs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/EWBC_041722-978e576ad0b7441196687a3675cb9435.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ZDrA8Kl_5x0XMbJ-H8HTFhHj_Fs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/EWBC_041722-978e576ad0b7441196687a3675cb9435.png" data-srcset="https://www.investopedia.com/thmb/USss1uI1j7FLUozv6sY348gPNXg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/EWBC_041722-978e576ad0b7441196687a3675cb9435.png 750w" data-tracking-container="true" height="791" id="mntl-sc-block-image_2-0" width="1594"/> <noscript> <img alt="Relative performance between EWBC and XLF between 2011 and 2022. " class="img--noscript universal-image__image" height="791" sizes="750px" src="https://www.investopedia.com/thmb/ZDrA8Kl_5x0XMbJ-H8HTFhHj_Fs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/EWBC_041722-978e576ad0b7441196687a3675cb9435.png" srcset="https://www.investopedia.com/thmb/USss1uI1j7FLUozv6sY348gPNXg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/EWBC_041722-978e576ad0b7441196687a3675cb9435.png 750w" width="1594"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>TradingView.com</p></span> </figcaption></figure> <span class="heading-toc" id="toc-american-financial-group-inc-afg"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> American Financial Group, Inc. (AFG) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> American Financial Group, Inc. (AFG) has a long and proud history dating back to 1872, when it was founded as Great American Insurance Company.<span class="ql-inline-citation" data-cite="8"></span> While its name may have changed, the company's focus on insurance has not. American Financial Group has a market capitalization of approximately $12.5 billion and has over 7,500 employees in approximately 120 office locations around the globe.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Looking at the weekly chart below, you can see that the stock has strongly outperformed the XLF ETF over the past decade. Again, like the case of East West Bancorp mentioned above, the stock price of American Financial Group has strongly outperformed during periods of rising prices, but it also carries higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> and sees periods of underperformance during bearish market scenarios, which is something to consider from a risk-management perspective. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_35-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:49.6%;"> <img alt="Relative performance of AFG and XLF between during 2012 and 2022. " class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/e2iAkWzGercaky7O1XCt5D0lZYA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AFG_041722-14dbb92a8467426d8e1ff9f9e27b019f.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/e2iAkWzGercaky7O1XCt5D0lZYA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AFG_041722-14dbb92a8467426d8e1ff9f9e27b019f.png" data-srcset="https://www.investopedia.com/thmb/OgzQiPyDJIw2MRHs-I0KjWvrbIg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/AFG_041722-14dbb92a8467426d8e1ff9f9e27b019f.png 750w" data-tracking-container="true" height="791" id="mntl-sc-block-image_3-0" width="1594"/> <noscript> <img alt="Relative performance of AFG and XLF between during 2012 and 2022. " class="img--noscript universal-image__image" height="791" sizes="750px" src="https://www.investopedia.com/thmb/e2iAkWzGercaky7O1XCt5D0lZYA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AFG_041722-14dbb92a8467426d8e1ff9f9e27b019f.png" srcset="https://www.investopedia.com/thmb/OgzQiPyDJIw2MRHs-I0KjWvrbIg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/AFG_041722-14dbb92a8467426d8e1ff9f9e27b019f.png 750w" width="1594"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_3-0"> <span class="figure-article-caption-owner"><p>TradingView.com</p></span> </figcaption></figure> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-types-of-companies-come-from-the-financials-sector"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Types of Companies Come From the Financials Sector?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The financial services sector is made up of many smaller subsectors. Banks are the largest part of this segment, making up most of the sector. Remaining subsectors include insurance providers, capital markets, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate investment trusts (REITs)</a>, consumer finance, and diversified financial services, to name a few.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-why-is-the-financial-sector-important"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is the Financial Sector Important?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The financial sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms. Companies within this sector set the parameters for citizens and businesses when it comes to the terms around the borrowing and lending of capital. A strong financial sector is a sign of a healthy economy.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> When it comes to investing in the financial sector, most investor attention gets directed toward the largest names in the market. While investing in a relatively unknown medium-sized regional banks or insurance companies may not sound as appealing as owning shares of global investment banks, the relative performance of the group, as shown in the charts above, suggests that there are significant returns available to those who are willing to do the research and buy into stocks that fly under the radar. </p></div>

When investors are asked to think of the U.S. [financial sector](https://www.investopedia.com/terms/f/financial_sector.asp), the largest names such as JPMorgan Chase & Co. ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=jpm)), the Goldman Sachs Group, Inc. ([GS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=gs)), Bank of America Corporation ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac)), and Citigroup Inc. ([C](https://www.investopedia.com/markets/quote?tvwidgetsymbol=c)), will often be the types of companies that automatically spring to mind. What is usually further down on the list of popular investment candidates are medium-sized players such as regional banks, diversified banks, and property and casualty insurance companies. The group of financials that currently occupy the [mid-cap](https://www.investopedia.com/terms/m/midcapstock.asp) segment have an average [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) of $5.66 billion and can range anywhere between $1.6 billion to $12.5 billion, as measured by the [S&P MidCap 400 Index](https://www.investopedia.com/terms/s/sp-midcap-400-index.asp). In the case of [large-cap](https://www.investopedia.com/terms/l/large-cap.asp) financials, as represented by the holdings of the Financial Select Sector SPDR Fund ([XLF](https://www.investopedia.com/markets/quote?tvwidgetsymbol=xlf)), the average market cap is approximately $66 billion and will range from around $10 billion, which is the upper end of the mid-cap segment, up to $763 billion. In this article, we look at several of the top financial companies from within the mid-cap range and discuss why this niche segment of the market deserves a closer look. ### Key Takeaways * The mid-cap financial segment of the market offers investors a unique set of growth prospects with reasonable levels of risk. * The average market capitalization of a mid-cap financial company is $5.66 billion, with market caps ranging anywhere between $1.6 billion and $12.5 billion. * Mid-cap financials often outperform their large-cap counterparts during periods of rising prices, but they can also fall faster during bearish periods. This behavior is common in the mid-cap segment and is a risk factor that should be considered before investing. ## Identifying Top Mid-Cap Financial Stocks Investors who are interested in researching the mid-cap financials sector may want to consider checking into the holdings of an index such as the S&P MidCap 400 Financials. The index comprises 61 holdings from across the United States, which are also the holdings from within the broader S&P 400 Index that are classified as members of the [Global Industry Classification Standard (GICS)](https://www.investopedia.com/terms/g/gics.asp) Financials sector. For savvy investors, the 61 holdings can be screened based on any set of criteria that aligns with one's investment strategy, goals, and risk tolerance. For the purposes of this article, we've gathered the top 50 holdings of the five most popular mid-cap [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) based on net assets and then sorted the list based on the amount of capital invested into the companies from within the various sectors. The list below shows the top 10 financial companies based on allocated capital within these five funds: ·Arthur J Gallagher & Co. ([AJG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ajg)) ·Webster Financial Corporation ([WBS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wbs)) · Alleghany Corporation ([Y](https://www.investopedia.com/markets/quote?tvwidgetsymbol=y)) · First Horizon Corporation ([FHN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fhn)) · Fifth Third Bancorp ([FITB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fitb)) · Ameriprise Financial Inc. ([AMP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amp)) · MSCI Inc. ([MSCI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msci)) · Discover Financial Services ([DFS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=dfs)) · East West Bancorp Inc. ([EWBC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ewbc)) · American Financial Group Inc. ([AFG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=afg)) ## Webster Financial Corporation (WBS) Webster Financial Corporation (WBS) is a regional bank that provides financial services for clients in the northeastern part of the United States. Aside from offering the types of services common to commercial and consumer banking, the company has grown into one of the largest providers of employee benefits solutions. Webster Financial has a market capitalization of approximately $9 billion as of April 18, 2022, and has a strong track record of consistent [dividend](https://www.investopedia.com/terms/d/dividend.asp) payments dating back to 1987. Looking at the weekly chart below, you can see that the stock has handily outperformed the Financial Select Sector SPDR Fund (XLF), a popular ETF used to track the performance of the financials within the S&P 500, since 2008. [Bullish investors](https://www.investopedia.com/how-do-mid-cap-stocks-perform-during-bull-markets-5224692) would look for this type of strong relative performance to continue, while other types of investors, such as those that buy and sell based on chart patterns, may choose to wait for the performance of WBS to converge with that of the ETF. A [pairs trading strategy](https://www.investopedia.com/terms/p/pairstrade.asp) would look to profit from a return to the type of divergence between the two assets that has been common since 2009. Regardless of one's investment strategy, the strong relative performance of this regional bank suggests that it could be worth a closer look. ![Relative performance between Webster Financial Corp. and the Financial Select Sector SPDR Fund (XLF)]() :max_bytes(150000):strip_icc()/WBS_041722-83d8f6b1e19b4389b02ad2fd75a99840.png) TradingView.com ### Important Investors can get broad exposure to the regional bank's subsector by investing in a targeted ETF such as the SPDR S&P Regional Banking ETF ([KRE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=kre)) or the iShares U.S. Regional Banks ETF ([IAT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=iat)). ## East West Bancorp, Inc. (EWBC) East West Bancorp, Inc. (EWBC) is a mid-cap full-service commercial bank with more than 120 locations in key cities within the United States and China. Fundamentally, the company has a market capitalization of approximately $10.6 billion and has posted compounded growth rates in total loans, total deposits, and total assets of 7%, 11%, and 10%, respectively, between Dec. 31, 2016, and Dec. 31, 2021. Strong growth in key metrics along with a modest market cap suggests that this financial stock will likely make its way onto the watchlists of both [value](https://www.investopedia.com/terms/v/valueinvesting.asp) and [growth investors](https://www.investopedia.com/terms/g/growthinvesting.asp) over the years ahead. Looking at the weekly chart, it is interesting to note how the price has strongly outperformed during periods of rising prices but how it has also underperformed when prices were falling. This type of behavior is common for [mid-cap companies in bearish market scenarios](https://www.investopedia.com/how-do-mid-caps-perform-during-bear-markets-5224694) and is something for risk-averse investors to consider. ![Relative performance between EWBC and XLF between 2011 and 2022. ]() :max_bytes(150000):strip_icc()/EWBC_041722-978e576ad0b7441196687a3675cb9435.png) TradingView.com ## American Financial Group, Inc. (AFG) American Financial Group, Inc. (AFG) has a long and proud history dating back to 1872, when it was founded as Great American Insurance Company. While its name may have changed, the company's focus on insurance has not. American Financial Group has a market capitalization of approximately $12.5 billion and has over 7,500 employees in approximately 120 office locations around the globe. Looking at the weekly chart below, you can see that the stock has strongly outperformed the XLF ETF over the past decade. Again, like the case of East West Bancorp mentioned above, the stock price of American Financial Group has strongly outperformed during periods of rising prices, but it also carries higher [volatility](https://www.investopedia.com/terms/v/volatility.asp) and sees periods of underperformance during bearish market scenarios, which is something to consider from a risk-management perspective. ![Relative performance of AFG and XLF between during 2012 and 2022. ]() :max_bytes(150000):strip_icc()/AFG_041722-14dbb92a8467426d8e1ff9f9e27b019f.png) TradingView.com ## What Types of Companies Come From the Financials Sector? The financial services sector is made up of many smaller subsectors. Banks are the largest part of this segment, making up most of the sector. Remaining subsectors include insurance providers, capital markets, [real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp), consumer finance, and diversified financial services, to name a few. ## Why Is the Financial Sector Important? The financial sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms. Companies within this sector set the parameters for citizens and businesses when it comes to the terms around the borrowing and lending of capital. A strong financial sector is a sign of a healthy economy. ## The Bottom Line When it comes to investing in the financial sector, most investor attention gets directed toward the largest names in the market. While investing in a relatively unknown medium-sized regional banks or insurance companies may not sound as appealing as owning shares of global investment banks, the relative performance of the group, as shown in the charts above, suggests that there are significant returns available to those who are willing to do the research and buy into stocks that fly under the radar.

When investors are asked to think of the U.S. financial sector, the largest names such as JPMorgan Chase & Co. (JPM), the Goldman Sachs Group, Inc. (GS), Bank of America Corporation (BAC), and Citigroup Inc. (C), will often be the types of companies that automatically spring to mind. What is usually further down on the list of popular investment candidates are medium-sized players such as regional banks, diversified banks, and property and casualty insurance companies. The group of financials that currently occupy the mid-cap segment have an average market capitalization of $5.66 billion and can range anywhere between $1.6 billion to $12.5 billion, as measured by the S&P MidCap 400 Index. In the case of large-cap financials, as represented by the holdings of the Financial Select Sector SPDR Fund (XLF), the average market cap is approximately $66 billion and will range from around $10 billion, which is the upper end of the mid-cap segment, up to $763 billion. In this article, we look at several of the top financial companies from within the mid-cap range and discuss why this niche segment of the market deserves a closer look. Key Takeaways The mid-cap financial segment of the market offers investors a unique set of growth prospects with reasonable levels of risk.The average market capitalization of a mid-cap financial company is $5.66 billion, with market caps ranging anywhere between $1.6 billion and $12.5 billion.Mid-cap financials often outperform their large-cap counterparts during periods of rising prices, but they can also fall faster during bearish periods. This behavior is common in the mid-cap segment and is a risk factor that should be considered before investing. Identifying Top Mid-Cap Financial Stocks Investors who are interested in researching the mid-cap financials sector may want to consider checking into the holdings of an index such as the S&P MidCap 400 Financials. The index comprises 61 holdings from across the United States, which are also the holdings from within the broader S&P 400 Index that are classified as members of the Global Industry Classification Standard (GICS) Financials sector. For savvy investors, the 61 holdings can be screened based on any set of criteria that aligns with one's investment strategy, goals, and risk tolerance. For the purposes of this article, we've gathered the top 50 holdings of the five most popular mid-cap exchange-traded funds (ETFs) based on net assets and then sorted the list based on the amount of capital invested into the companies from within the various sectors. The list below shows the top 10 financial companies based on allocated capital within these five funds: ·Arthur J Gallagher & Co. (AJG)·Webster Financial Corporation (WBS)· Alleghany Corporation (Y)· First Horizon Corporation (FHN)· Fifth Third Bancorp (FITB)· Ameriprise Financial Inc. (AMP)· MSCI Inc. (MSCI)· Discover Financial Services (DFS)· East West Bancorp Inc. (EWBC)· American Financial Group Inc. (AFG) Webster Financial Corporation (WBS) Webster Financial Corporation (WBS) is a regional bank that provides financial services for clients in the northeastern part of the United States. Aside from offering the types of services common to commercial and consumer banking, the company has grown into one of the largest providers of employee benefits solutions. Webster Financial has a market capitalization of approximately $9 billion as of April 18, 2022, and has a strong track record of consistent dividend payments dating back to 1987. Looking at the weekly chart below, you can see that the stock has handily outperformed the Financial Select Sector SPDR Fund (XLF), a popular ETF used to track the performance of the financials within the S&P 500, since 2008. Bullish investors would look for this type of strong relative performance to continue, while other types of investors, such as those that buy and sell based on chart patterns, may choose to wait for the performance of WBS to converge with that of the ETF. A pairs trading strategy would look to profit from a return to the type of divergence between the two assets that has been common since 2009. Regardless of one's investment strategy, the strong relative performance of this regional bank suggests that it could be worth a closer look. TradingView.com Important Investors can get broad exposure to the regional bank's subsector by investing in a targeted ETF such as the SPDR S&P Regional Banking ETF (KRE) or the iShares U.S. Regional Banks ETF (IAT). East West Bancorp, Inc. (EWBC) East West Bancorp, Inc. (EWBC) is a mid-cap full-service commercial bank with more than 120 locations in key cities within the United States and China. Fundamentally, the company has a market capitalization of approximately $10.6 billion and has posted compounded growth rates in total loans, total deposits, and total assets of 7%, 11%, and 10%, respectively, between Dec. 31, 2016, and Dec. 31, 2021. Strong growth in key metrics along with a modest market cap suggests that this financial stock will likely make its way onto the watchlists of both value and growth investors over the years ahead. Looking at the weekly chart, it is interesting to note how the price has strongly outperformed during periods of rising prices but how it has also underperformed when prices were falling. This type of behavior is common for mid-cap companies in bearish market scenarios and is something for risk-averse investors to consider. TradingView.com American Financial Group, Inc. (AFG) American Financial Group, Inc. (AFG) has a long and proud history dating back to 1872, when it was founded as Great American Insurance Company. While its name may have changed, the company's focus on insurance has not. American Financial Group has a market capitalization of approximately $12.5 billion and has over 7,500 employees in approximately 120 office locations around the globe. Looking at the weekly chart below, you can see that the stock has strongly outperformed the XLF ETF over the past decade. Again, like the case of East West Bancorp mentioned above, the stock price of American Financial Group has strongly outperformed during periods of rising prices, but it also carries higher volatility and sees periods of underperformance during bearish market scenarios, which is something to consider from a risk-management perspective. TradingView.com What Types of Companies Come From the Financials Sector? The financial services sector is made up of many smaller subsectors. Banks are the largest part of this segment, making up most of the sector. Remaining subsectors include insurance providers, capital markets, real estate investment trusts (REITs), consumer finance, and diversified financial services, to name a few. Why Is the Financial Sector Important? The financial sector comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms. Companies within this sector set the parameters for citizens and businesses when it comes to the terms around the borrowing and lending of capital. A strong financial sector is a sign of a healthy economy. The Bottom Line When it comes to investing in the financial sector, most investor attention gets directed toward the largest names in the market. While investing in a relatively unknown medium-sized regional banks or insurance companies may not sound as appealing as owning shares of global investment banks, the relative performance of the group, as shown in the charts above, suggests that there are significant returns available to those who are willing to do the research and buy into stocks that fly under the radar.

https://www.investopedia.com/ask/answers/081114/how-does-warren-buffett-choose-what-companies-buy.asp

How Does Warren Buffett Choose His Stocks?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Fellow investors have long praised—and envied—<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-theory/08/buffetts-road-to-riches.asp">Warren Buffett's</a> seemingly uncanny ability to pick stocks. By steadfastly following certain investing principles, he has amassed a net worth estimated at $118 billion.<span class="ql-inline-citation" data-cite="10"></span> So what exactly does he look for in a stock? Here are some clues. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>In picking stocks, Warren Buffett looks for companies that have provided a good return on equity over many years, particularly when compared to rival companies in the same industry.</li><li>Buffett also reviews a company's profit margins to ensure they are healthy and growing.</li><li>Buffett prefers companies that have a unique product or service that gives them a competitive advantage.</li><li>As a value investor, he seeks out stocks that are undervalued relative to the company's intrinsic worth.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Warren Buffett" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/m_qnrSzTp1DU4tspqc0aldl0zHY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/buffetts-road-to-riches-1ea46b565e2a4f8ebf496cfa64c00d0b.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/m_qnrSzTp1DU4tspqc0aldl0zHY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/buffetts-road-to-riches-1ea46b565e2a4f8ebf496cfa64c00d0b.png" data-srcset="https://www.investopedia.com/thmb/Hko3e1KG-yHh7qhYs16NmMuI1WA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/buffetts-road-to-riches-1ea46b565e2a4f8ebf496cfa64c00d0b.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Warren Buffett" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/m_qnrSzTp1DU4tspqc0aldl0zHY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/buffetts-road-to-riches-1ea46b565e2a4f8ebf496cfa64c00d0b.png" srcset="https://www.investopedia.com/thmb/Hko3e1KG-yHh7qhYs16NmMuI1WA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/buffetts-road-to-riches-1ea46b565e2a4f8ebf496cfa64c00d0b.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Alison Czinkota / Investopedia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-warren-buffetts-value-investing-approach"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Warren Buffett's Value Investing Approach </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Warren Buffett belongs to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valueinvesting.asp">value investing</a> school, popularized by his mentor <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bengraham.asp">Benjamin Graham</a>. Value investing focuses on the intrinsic value of a particular stock rather than technical indicators, such as moving averages, volume, or momentum. Determining intrinsic value is an exercise in understanding a company's financials, especially official filings such as earnings and income statements.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> In making investments for his <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdingcompany.asp">holding company</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/berkshire-hathaway.asp">Berkshire Hathaway</a>, Buffett follows a longtime and well-publicized strategy, seeking out the shares of businesses with consistent earning power, a good <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnonequity.asp">return on equity (ROE)</a>, and capable management—and that are also sensibly priced, if not underpriced).<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> To help guide him in these decisions, Buffett asks several key questions: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-how-has-the-company-performed"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> How Has the Company Performed? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Companies that have been providing a reliable return on equity (ROE) for many years are more desirable than those that have had only a short period of solid returns, in Buffett's view. And the greater the number of years of good ROE, the better. In order to gauge historical performance, an investor should review at least five to 10 years of a company's ROE, he maintains. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When looking at a company's historic return on equity (ROE), it's also essential to compare it with the ROE of the company's top competitors in the same industry.</p></div></div></div> <span class="heading-toc" id="toc-how-much-debt-does-the-company-have"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> How Much Debt Does the Company Have? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Having a large <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtequityratio.asp">ratio of debt to equity</a> should raise a red flag, especially if earnings growth has coincided with adding on more debt, such as through acquisitions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Instead, Buffett prefers earnings growth to come from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholdersequity.asp">shareholders' equity</a> (SE). A company with positive shareholders' equity is generating enough cash flow to cover its liabilities and not relying on debt to keep it growing or afloat. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <span class="heading-toc" id="toc-how-are-the-companys-profit-margins"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> How Are the Company's Profit Margins? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Buffett looks for companies that have a good <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp">profit margin</a>, especially those whose profit margins are growing. As is the case with ROE, he looks at the profit margin over several years to discount short-term trends. For a company to stay on Buffett's radar, its management should be adept at growing profit margins <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/year-over-year.asp">year-over-year</a>, a sign that it is also good at controlling <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating-cost.asp">operating costs</a>.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <span class="heading-toc" id="toc-how-unique-are-the-companys-products"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> How Unique Are the Company's Products? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Buffett considers companies whose products and services can be easily substituted for riskier than companies with more unique offerings. For example, an oil company whose principal product is crude oil may be vulnerable to competitive forces because clients can buy crude oil from any number of other sources, not to mention alternative types of energy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> However, if the company has unique access to a more desirable grade of oil that many businesses need, that might make it an investment worth looking at. In this case, the company's desirable grade of oil could be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/competitive_advantage.asp">competitive advantage</a> that will help produce profits year after year.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> In a similar vein, Buffett has long been a major investor in Coca-Cola. While there are many colas and other soft drinks on the market, there is only one Coke. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Reflecting on that investment in Berkshire Hathaway's 2022 annual report, Buffett wrote, "In August 1994—yes, 1994—Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion—then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie [<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/charlie-munger.asp">Charlie Munger</a>, Buffett's longtime business partner] and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow."<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-how-much-of-a-discount-are-shares-trading-at"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> How Much of a Discount Are Shares Trading At? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> This is the crux of value investing: finding companies that have good fundamentals but are trading below where they should be. And the greater the discount, the more room for profitability. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Put another way, the goal for value investors like Buffett is to discover companies that are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/undervalued.asp">undervalued</a> compared to their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intrinsicvalue.asp">intrinsic value</a>. While there is no exact formula for calculating intrinsic value, investors can look at a variety of factors—such as management strength and future earnings potential—to gauge it.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-what-is-growth-investing-vs-value-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Growth Investing vs. Value Investing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Unlike value investors who seek out solid (but sometimes humdrum) companies that may be selling for less than they are worth, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthinvesting.asp">growth investors</a> look for companies with unusually strong growth prospects, almost regardless of their current price. Growth investors often put their money on young, seemingly hot companies, while value investors tend to favor long-established ones.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-are-warren-buffetts-largest-stock-holdings"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Warren Buffett's Largest Stock Holdings?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Through his company, Berkshire Hathaway, Buffett's five largest holdings as of December 31, 2022 were (in order of aggregate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fairvalue.asp">fair value</a>): Apple, Bank of America, Chevron, Coca-Cola, and American Express.<span class="ql-inline-citation" data-cite="12"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-is-warren-buffets-most-important-investing-principle"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Warren Buffet's Most Important Investing Principle?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/031115/what-did-warren-buffett-mean-when-he-said-diversification-protection-against-ignorance-it-makes.asp">Warren Buffett has articulated many investing principles</a> over the years, but one of the most important is investing in yourself. That includes investing the time to become a better investor. He also advocates other prudent financial practices, such as regular saving, not spending beyond your means, avoiding credit card debt, and reinvesting your profits.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Beyond his value-oriented style, Buffett is also known as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/03/071803.asp">buy-and-hold</a> investor. He is not interested in selling stock in the near term to reap quick profits, but chooses stocks that he believes offer solid prospects for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/longtermgrowth.asp">long-term growth</a>. His record as an investor speaks for itself. </p></div>

Fellow investors have long praised—and envied—[Warren Buffett's](https://www.investopedia.com/articles/financial-theory/08/buffetts-road-to-riches.asp) seemingly uncanny ability to pick stocks. By steadfastly following certain investing principles, he has amassed a net worth estimated at $118 billion. So what exactly does he look for in a stock? Here are some clues. ### Key Takeaways * In picking stocks, Warren Buffett looks for companies that have provided a good return on equity over many years, particularly when compared to rival companies in the same industry. * Buffett also reviews a company's profit margins to ensure they are healthy and growing. * Buffett prefers companies that have a unique product or service that gives them a competitive advantage. * As a value investor, he seeks out stocks that are undervalued relative to the company's intrinsic worth. ![Warren Buffett]() :max_bytes(150000):strip_icc()/buffetts-road-to-riches-1ea46b565e2a4f8ebf496cfa64c00d0b.png) Alison Czinkota / Investopedia ## Warren Buffett's Value Investing Approach Warren Buffett belongs to the [value investing](https://www.investopedia.com/terms/v/valueinvesting.asp) school, popularized by his mentor [Benjamin Graham](https://www.investopedia.com/terms/b/bengraham.asp). Value investing focuses on the intrinsic value of a particular stock rather than technical indicators, such as moving averages, volume, or momentum. Determining intrinsic value is an exercise in understanding a company's financials, especially official filings such as earnings and income statements. In making investments for his [holding company](https://www.investopedia.com/terms/h/holdingcompany.asp), [Berkshire Hathaway](https://www.investopedia.com/terms/b/berkshire-hathaway.asp), Buffett follows a longtime and well-publicized strategy, seeking out the shares of businesses with consistent earning power, a good [return on equity (ROE)](https://www.investopedia.com/terms/r/returnonequity.asp), and capable management—and that are also sensibly priced, if not underpriced). To help guide him in these decisions, Buffett asks several key questions: ## How Has the Company Performed? Companies that have been providing a reliable return on equity (ROE) for many years are more desirable than those that have had only a short period of solid returns, in Buffett's view. And the greater the number of years of good ROE, the better. In order to gauge historical performance, an investor should review at least five to 10 years of a company's ROE, he maintains. ### When looking at a company's historic return on equity (ROE), it's also essential to compare it with the ROE of the company's top competitors in the same industry. ## How Much Debt Does the Company Have? Having a large [ratio of debt to equity](https://www.investopedia.com/terms/d/debtequityratio.asp) should raise a red flag, especially if earnings growth has coincided with adding on more debt, such as through acquisitions. Instead, Buffett prefers earnings growth to come from [shareholders' equity](https://www.investopedia.com/terms/s/shareholdersequity.asp) (SE). A company with positive shareholders' equity is generating enough cash flow to cover its liabilities and not relying on debt to keep it growing or afloat. ## How Are the Company's Profit Margins? Buffett looks for companies that have a good [profit margin](https://www.investopedia.com/terms/p/profitmargin.asp), especially those whose profit margins are growing. As is the case with ROE, he looks at the profit margin over several years to discount short-term trends. For a company to stay on Buffett's radar, its management should be adept at growing profit margins [year-over-year](https://www.investopedia.com/terms/y/year-over-year.asp), a sign that it is also good at controlling [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp). ## How Unique Are the Company's Products? Buffett considers companies whose products and services can be easily substituted for riskier than companies with more unique offerings. For example, an oil company whose principal product is crude oil may be vulnerable to competitive forces because clients can buy crude oil from any number of other sources, not to mention alternative types of energy. However, if the company has unique access to a more desirable grade of oil that many businesses need, that might make it an investment worth looking at. In this case, the company's desirable grade of oil could be a [competitive advantage](https://www.investopedia.com/terms/c/competitive_advantage.asp) that will help produce profits year after year. In a similar vein, Buffett has long been a major investor in Coca-Cola. While there are many colas and other soft drinks on the market, there is only one Coke. Reflecting on that investment in Berkshire Hathaway's 2022 annual report, Buffett wrote, "In August 1994—yes, 1994—Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion—then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie [[Charlie Munger](https://www.investopedia.com/terms/c/charlie-munger.asp), Buffett's longtime business partner] and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow." ## How Much of a Discount Are Shares Trading At? This is the crux of value investing: finding companies that have good fundamentals but are trading below where they should be. And the greater the discount, the more room for profitability. Put another way, the goal for value investors like Buffett is to discover companies that are [undervalued](https://www.investopedia.com/terms/u/undervalued.asp) compared to their [intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp). While there is no exact formula for calculating intrinsic value, investors can look at a variety of factors—such as management strength and future earnings potential—to gauge it. ## What Is Growth Investing vs. Value Investing? Unlike value investors who seek out solid (but sometimes humdrum) companies that may be selling for less than they are worth, [growth investors](https://www.investopedia.com/terms/g/growthinvesting.asp) look for companies with unusually strong growth prospects, almost regardless of their current price. Growth investors often put their money on young, seemingly hot companies, while value investors tend to favor long-established ones. ## What Are Warren Buffett's Largest Stock Holdings? Through his company, Berkshire Hathaway, Buffett's five largest holdings as of December 31, 2022 were (in order of aggregate [fair value](https://www.investopedia.com/terms/f/fairvalue.asp)): Apple, Bank of America, Chevron, Coca-Cola, and American Express. ## What Is Warren Buffet's Most Important Investing Principle? [Warren Buffett has articulated many investing principles](https://www.investopedia.com/ask/answers/031115/what-did-warren-buffett-mean-when-he-said-diversification-protection-against-ignorance-it-makes.asp) over the years, but one of the most important is investing in yourself. That includes investing the time to become a better investor. He also advocates other prudent financial practices, such as regular saving, not spending beyond your means, avoiding credit card debt, and reinvesting your profits. ## The Bottom Line Beyond his value-oriented style, Buffett is also known as a [buy-and-hold](https://www.investopedia.com/ask/answers/03/071803.asp) investor. He is not interested in selling stock in the near term to reap quick profits, but chooses stocks that he believes offer solid prospects for [long-term growth](https://www.investopedia.com/terms/l/longtermgrowth.asp). His record as an investor speaks for itself.

Fellow investors have long praised—and envied—Warren Buffett's seemingly uncanny ability to pick stocks. By steadfastly following certain investing principles, he has amassed a net worth estimated at $118 billion. So what exactly does he look for in a stock? Here are some clues. Key Takeaways In picking stocks, Warren Buffett looks for companies that have provided a good return on equity over many years, particularly when compared to rival companies in the same industry.Buffett also reviews a company's profit margins to ensure they are healthy and growing.Buffett prefers companies that have a unique product or service that gives them a competitive advantage.As a value investor, he seeks out stocks that are undervalued relative to the company's intrinsic worth. Alison Czinkota / Investopedia Warren Buffett's Value Investing Approach Warren Buffett belongs to the value investing school, popularized by his mentor Benjamin Graham. Value investing focuses on the intrinsic value of a particular stock rather than technical indicators, such as moving averages, volume, or momentum. Determining intrinsic value is an exercise in understanding a company's financials, especially official filings such as earnings and income statements. In making investments for his holding company, Berkshire Hathaway, Buffett follows a longtime and well-publicized strategy, seeking out the shares of businesses with consistent earning power, a good return on equity (ROE), and capable management—and that are also sensibly priced, if not underpriced). To help guide him in these decisions, Buffett asks several key questions: How Has the Company Performed? Companies that have been providing a reliable return on equity (ROE) for many years are more desirable than those that have had only a short period of solid returns, in Buffett's view. And the greater the number of years of good ROE, the better. In order to gauge historical performance, an investor should review at least five to 10 years of a company's ROE, he maintains. When looking at a company's historic return on equity (ROE), it's also essential to compare it with the ROE of the company's top competitors in the same industry. How Much Debt Does the Company Have? Having a large ratio of debt to equity should raise a red flag, especially if earnings growth has coincided with adding on more debt, such as through acquisitions. Instead, Buffett prefers earnings growth to come from shareholders' equity (SE). A company with positive shareholders' equity is generating enough cash flow to cover its liabilities and not relying on debt to keep it growing or afloat. How Are the Company's Profit Margins? Buffett looks for companies that have a good profit margin, especially those whose profit margins are growing. As is the case with ROE, he looks at the profit margin over several years to discount short-term trends. For a company to stay on Buffett's radar, its management should be adept at growing profit margins year-over-year, a sign that it is also good at controlling operating costs. How Unique Are the Company's Products? Buffett considers companies whose products and services can be easily substituted for riskier than companies with more unique offerings. For example, an oil company whose principal product is crude oil may be vulnerable to competitive forces because clients can buy crude oil from any number of other sources, not to mention alternative types of energy. However, if the company has unique access to a more desirable grade of oil that many businesses need, that might make it an investment worth looking at. In this case, the company's desirable grade of oil could be a competitive advantage that will help produce profits year after year. In a similar vein, Buffett has long been a major investor in Coca-Cola. While there are many colas and other soft drinks on the market, there is only one Coke. Reflecting on that investment in Berkshire Hathaway's 2022 annual report, Buffett wrote, "In August 1994—yes, 1994—Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion—then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie [Charlie Munger, Buffett's longtime business partner] and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow." How Much of a Discount Are Shares Trading At? This is the crux of value investing: finding companies that have good fundamentals but are trading below where they should be. And the greater the discount, the more room for profitability. Put another way, the goal for value investors like Buffett is to discover companies that are undervalued compared to their intrinsic value. While there is no exact formula for calculating intrinsic value, investors can look at a variety of factors—such as management strength and future earnings potential—to gauge it. What Is Growth Investing vs. Value Investing? Unlike value investors who seek out solid (but sometimes humdrum) companies that may be selling for less than they are worth, growth investors look for companies with unusually strong growth prospects, almost regardless of their current price. Growth investors often put their money on young, seemingly hot companies, while value investors tend to favor long-established ones. What Are Warren Buffett's Largest Stock Holdings? Through his company, Berkshire Hathaway, Buffett's five largest holdings as of December 31, 2022 were (in order of aggregate fair value): Apple, Bank of America, Chevron, Coca-Cola, and American Express. What Is Warren Buffet's Most Important Investing Principle? Warren Buffett has articulated many investing principles over the years, but one of the most important is investing in yourself. That includes investing the time to become a better investor. He also advocates other prudent financial practices, such as regular saving, not spending beyond your means, avoiding credit card debt, and reinvesting your profits. The Bottom Line Beyond his value-oriented style, Buffett is also known as a buy-and-hold investor. He is not interested in selling stock in the near term to reap quick profits, but chooses stocks that he believes offer solid prospects for long-term growth. His record as an investor speaks for itself.

https://www.investopedia.com/terms/i/international-beta.asp

International Beta: Meaning, Formula, FAQs

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-international-beta"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is International Beta? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> International beta (also known as "global beta") is a measure of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systematicrisk.asp">systematic risk</a> or volatility of a stock or portfolio in relation to a global market, rather than a domestic market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>International beta qualifies the systematic risk of a stock or portfolio in relation to the global market of equities, and not a country-specific benchmark like the S&amp;P 500.</li><li>International beta is especially relevant for companies with worldwide operations—whose stocks are influenced by international factors.</li><li>Global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-international-beta"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding International Beta </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The concept of international beta is particularly relevant in the case of large multinational companies with worldwide operations that have share prices more closely correlated with a global equity index than with the benchmark equity index in their country of domicile. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Investors can use the basic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM) to determine the expected return on an asset based on its domestic <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">beta</a> and expected domestic market return. Similarly, the global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index, such as the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/msci-acwi-exus.asp">Morgan Stanley World Index</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The term "international beta" in the context of finance or portfolio theory should not be confused with international beta testing, which refers to the testing of software products in international markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> As noted above the global capital asset pricing model (CAPM) can help investors calculate expected returns on an asset, based on its international beta. The global CAPM extends the concept of the traditional capital asset pricing model (CAPM) by incorporating <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-exchange.asp">foreign exchange</a> risks (generally with a foreign currency risk premium). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> The global CAPM expands upon the traditional CAPM equation: </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <span data-value="\begin{aligned}&amp;\overline{r_a}=r_f+\beta_a(\overline{r}_m-r_f)\\&amp;\textbf{where:}\\&amp;r_f=\text{risk free rate}\\&amp;\beta_a=\text{beta of the security}\\&amp;\bar{r}_m=\text{expected market return}\end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mover> <msub> <mi> r </mi> <mi> a </mi> </msub> <mo> ‾ </mo> </mover> <mo> = </mo> <msub> <mi> r </mi> <mi> f </mi> </msub> <mo> + </mo> <msub> <mi> β </mi> <mi> a </mi> </msub> <mo> ( </mo> <msub> <mover> <mi> r </mi> <mo> ‾ </mo> </mover> <mi> m </mi> </msub> <mo> − </mo> <msub> <mi> r </mi> <mi> f </mi> </msub> <mo> ) </mo> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> where: </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <msub> <mi> r </mi> <mi> f </mi> </msub> <mo> = </mo> <mtext> risk free rate </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <msub> <mi> β </mi> <mi> a </mi> </msub> <mo> = </mo> <mtext> beta of the security </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <msub> <mover> <mi> r </mi> <mo> ˉ </mo> </mover> <mi> m </mi> </msub> <mo> = </mo> <mtext> expected market return </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned}&amp;\overline{r_a}=r_f+\beta_a(\overline{r}_m-r_f)\\&amp;\textbf{where:}\\&amp;r_f=\text{risk free rate}\\&amp;\beta_a=\text{beta of the security}\\&amp;\bar{r}_m=\text{expected market return}\end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord overline"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">r</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">a</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="overline-line"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mord mathdefault">r</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">f</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord"><span class="mord mathdefault">β</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">a</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mopen">(</span><span class="mord"><span class="mord overline"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathdefault">r</span></span></span><span class=""><span class="pstrut"></span><span class="overline-line"></span></span></span></span></span></span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">m</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord"><span class="mord mathdefault">r</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">f</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mclose">)</span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord textbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathdefault">r</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">f</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">risk free rate</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathdefault">β</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">a</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">beta of the security</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord accent"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathdefault">r</span></span></span><span class=""><span class="pstrut"></span><span class="accent-body"><span class="mord">ˉ</span></span></span></span></span></span></span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathdefault mtight">m</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">expected market return</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/international-capm.asp">international CAPM</a> (ICAPM), in addition to getting compensated for the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timevalueofmoney.asp">time value of money</a> and the premium for deciding to take on market risk, investors are also rewarded for direct and indirect exposure to foreign currency. The ICAPM allows investors to account for the sensitivity to changes in foreign currency when investors hold an asset. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <span class="heading-toc" id="toc-international-beta-and-the-morgan-stanley-world-index"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> International Beta and the Morgan Stanley World Index </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The Morgan Stanley Capital International All Country World Index Ex-U.S. (MSCI ACWI Ex-U.S.) can help investors who <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> their U.S. and international stocks separately. The MSCI ACWE Ex-U.S. index provides a way to monitor international exposure apart from U.S. investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The top ten holdings of the MSCI ACWI Ex-U.S. as of Sept. 30, 2022, were as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <li>Taiwan Semiconductor Mfg.</li><li>Nestle</li><li>Roche Holding Genuss</li><li>Tencent Holdings (CN)</li><li>Shell</li><li>Samsung Electronics Co.</li><li>ASML Hldg.</li><li>Astrazeneca</li><li>Novo Nordisk B</li><li>Novartis</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> These holdings span China, Japan, United Kingdom, France, Canada among other nations. Country weights include: Japan (14.1%), China (9.2%), United Kingdom (9.7%), France (7.1%), Canada (8.3%) and Other (51.67%).<span class="ql-inline-citation" data-cite="1"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-is-beta"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Beta?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Beta measures a stock's price volatility against that of a domestic index. In the U.S., beta is measured against the S&amp;P 500 (which has a beta of 1.00). A beta greater than one means that the stock tends to move faster than the broader market (either up moves or down moves). A beta lower than one instead means the share prices are relatively less volatile.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-why-use-an-international-beta"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Use an International Beta?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Instead of referencing the S&amp;P 500, the international beta sets a stock's price movements in relation to a worldwide index of stocks. Companies with global operations, or which rely a great deal on foreign exports, may have share prices that are better represented by such an index rather than S&amp;P 500.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-what-is-international-capm"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is International CAPM?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>ICAPM is a way to calculate the relative risk/return profile of a security against a comprehensive basket of global equities. International CAPM extends beyond the traditional CAPM by compensating investors for foreign currency exposure. International beta is derived from the ICAPM model.</p></div> </div></div>

## What Is International Beta? International beta (also known as "global beta") is a measure of the [systematic risk](https://www.investopedia.com/terms/s/systematicrisk.asp) or volatility of a stock or portfolio in relation to a global market, rather than a domestic market. ### Key Takeaways * International beta qualifies the systematic risk of a stock or portfolio in relation to the global market of equities, and not a country-specific benchmark like the S&P 500. * International beta is especially relevant for companies with worldwide operations—whose stocks are influenced by international factors. * Global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index. ## Understanding International Beta The concept of international beta is particularly relevant in the case of large multinational companies with worldwide operations that have share prices more closely correlated with a global equity index than with the benchmark equity index in their country of domicile. Investors can use the basic [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM) to determine the expected return on an asset based on its domestic [beta](https://www.investopedia.com/terms/b/beta.asp) and expected domestic market return. Similarly, the global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index, such as the [Morgan Stanley World Index](https://www.investopedia.com/terms/m/msci-acwi-exus.asp). The term "international beta" in the context of finance or portfolio theory should not be confused with international beta testing, which refers to the testing of software products in international markets. As noted above the global capital asset pricing model (CAPM) can help investors calculate expected returns on an asset, based on its international beta. The global CAPM extends the concept of the traditional capital asset pricing model (CAPM) by incorporating [foreign exchange](https://www.investopedia.com/terms/f/foreign-exchange.asp) risks (generally with a foreign currency risk premium). ### The global CAPM expands upon the traditional CAPM equation: r a ‾ = r f + β a ( r ‾ m − r f ) where: r f = risk free rate β a = beta of the security r ˉ m = expected market return \begin{aligned}&\overline{r\_a}=r\_f+\beta\_a(\overline{r}\_m-r\_f)\\&\textbf{where:}\\&r\_f=\text{risk free rate}\\&\beta\_a=\text{beta of the security}\\&\bar{r}\_m=\text{expected market return}\end{aligned} ​ra​​=rf​+βa​(rm​−rf​)where:rf​=risk free rateβa​=beta of the securityrˉm​=expected market return​ In the [international CAPM](https://www.investopedia.com/terms/i/international-capm.asp) (ICAPM), in addition to getting compensated for the [time value of money](https://www.investopedia.com/terms/t/timevalueofmoney.asp) and the premium for deciding to take on market risk, investors are also rewarded for direct and indirect exposure to foreign currency. The ICAPM allows investors to account for the sensitivity to changes in foreign currency when investors hold an asset. ## International Beta and the Morgan Stanley World Index The Morgan Stanley Capital International All Country World Index Ex-U.S. (MSCI ACWI Ex-U.S.) can help investors who [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) their U.S. and international stocks separately. The MSCI ACWE Ex-U.S. index provides a way to monitor international exposure apart from U.S. investments. The top ten holdings of the MSCI ACWI Ex-U.S. as of Sept. 30, 2022, were as follows: * Taiwan Semiconductor Mfg. * Nestle * Roche Holding Genuss * Tencent Holdings (CN) * Shell * Samsung Electronics Co. * ASML Hldg. * Astrazeneca * Novo Nordisk B * Novartis These holdings span China, Japan, United Kingdom, France, Canada among other nations. Country weights include: Japan (14.1%), China (9.2%), United Kingdom (9.7%), France (7.1%), Canada (8.3%) and Other (51.67%). ## What Is Beta? Beta measures a stock's price volatility against that of a domestic index. In the U.S., beta is measured against the S&P 500 (which has a beta of 1.00). A beta greater than one means that the stock tends to move faster than the broader market (either up moves or down moves). A beta lower than one instead means the share prices are relatively less volatile. ## Why Use an International Beta? Instead of referencing the S&P 500, the international beta sets a stock's price movements in relation to a worldwide index of stocks. Companies with global operations, or which rely a great deal on foreign exports, may have share prices that are better represented by such an index rather than S&P 500. ## What Is International CAPM? ICAPM is a way to calculate the relative risk/return profile of a security against a comprehensive basket of global equities. International CAPM extends beyond the traditional CAPM by compensating investors for foreign currency exposure. International beta is derived from the ICAPM model.

What Is International Beta? International beta (also known as "global beta") is a measure of the systematic risk or volatility of a stock or portfolio in relation to a global market, rather than a domestic market. Key Takeaways International beta qualifies the systematic risk of a stock or portfolio in relation to the global market of equities, and not a country-specific benchmark like the S&P 500.International beta is especially relevant for companies with worldwide operations—whose stocks are influenced by international factors.Global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index. Understanding International Beta The concept of international beta is particularly relevant in the case of large multinational companies with worldwide operations that have share prices more closely correlated with a global equity index than with the benchmark equity index in their country of domicile. Investors can use the basic capital asset pricing model (CAPM) to determine the expected return on an asset based on its domestic beta and expected domestic market return. Similarly, the global CAPM can be used to calculate expected returns on an asset based on its international beta and expected return from a global index, such as the Morgan Stanley World Index. The term "international beta" in the context of finance or portfolio theory should not be confused with international beta testing, which refers to the testing of software products in international markets. As noted above the global capital asset pricing model (CAPM) can help investors calculate expected returns on an asset, based on its international beta. The global CAPM extends the concept of the traditional capital asset pricing model (CAPM) by incorporating foreign exchange risks (generally with a foreign currency risk premium). The global CAPM expands upon the traditional CAPM equation: r a ‾ = r f + β a ( r ‾ m − r f ) where: r f = risk free rate β a = beta of the security r ˉ m = expected market return \begin{aligned}&\overline{r_a}=r_f+\beta_a(\overline{r}_m-r_f)\\&\textbf{where:}\\&r_f=\text{risk free rate}\\&\beta_a=\text{beta of the security}\\&\bar{r}_m=\text{expected market return}\end{aligned} ​ra​​=rf​+βa​(rm​−rf​)where:rf​=risk free rateβa​=beta of the securityrˉm​=expected market return​ In the international CAPM (ICAPM), in addition to getting compensated for the time value of money and the premium for deciding to take on market risk, investors are also rewarded for direct and indirect exposure to foreign currency. The ICAPM allows investors to account for the sensitivity to changes in foreign currency when investors hold an asset. International Beta and the Morgan Stanley World Index The Morgan Stanley Capital International All Country World Index Ex-U.S. (MSCI ACWI Ex-U.S.) can help investors who benchmark their U.S. and international stocks separately. The MSCI ACWE Ex-U.S. index provides a way to monitor international exposure apart from U.S. investments. The top ten holdings of the MSCI ACWI Ex-U.S. as of Sept. 30, 2022, were as follows: Taiwan Semiconductor Mfg.NestleRoche Holding GenussTencent Holdings (CN)ShellSamsung Electronics Co.ASML Hldg.AstrazenecaNovo Nordisk BNovartis These holdings span China, Japan, United Kingdom, France, Canada among other nations. Country weights include: Japan (14.1%), China (9.2%), United Kingdom (9.7%), France (7.1%), Canada (8.3%) and Other (51.67%). What Is Beta? Beta measures a stock's price volatility against that of a domestic index. In the U.S., beta is measured against the S&P 500 (which has a beta of 1.00). A beta greater than one means that the stock tends to move faster than the broader market (either up moves or down moves). A beta lower than one instead means the share prices are relatively less volatile. Why Use an International Beta? Instead of referencing the S&P 500, the international beta sets a stock's price movements in relation to a worldwide index of stocks. Companies with global operations, or which rely a great deal on foreign exports, may have share prices that are better represented by such an index rather than S&P 500. What Is International CAPM? ICAPM is a way to calculate the relative risk/return profile of a security against a comprehensive basket of global equities. International CAPM extends beyond the traditional CAPM by compensating investors for foreign currency exposure. International beta is derived from the ICAPM model.

https://www.investopedia.com/terms/d/dualclassstock.asp

Dual Class Stock: Definition, Structure, and Controversy

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-dual-class-stock"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Dual Class Stock? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A dual class stock is when a company issues two <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/share_class.asp">share classes</a>. A dual class stock structure can consist of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/classashares.asp">Class A </a>and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/classbshares.asp">Class B</a> shares, for example. These shares can differ in terms of voting rights and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a> payments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> When multiple share classes of stock are issued, typically one class is offered to the general public, while the other is offered to company founders, executives, and family. The class offered to the general public often has limited or no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/votingright.asp">voting rights</a>, while the class available to founders and executives has more voting power and often provides for majority control of the company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A company or stock with a dual-class structure has two or more classes of shares with different voting rights.</li><li>Typically insiders are given access to a class of shares that provide greater control and voting rights, while the general public is offered a class of shares with little or no voting rights.</li><li>Supporters say these types of structures allow the people who founded and currently run the company to think long-term, rather than be at the mercy of shorter-term-oriented investors who want to see bigger profits right away.</li><li>Dual-class structures are controversial because they do not allow public shareholders a say in running the company and distribute risk unequally.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-dual-class-stock"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding a Dual Class Stock </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Dual class stock is designed to give specific shareholders voting control. Classes of stock with unequal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/votingshares.asp">voting shares</a> may be created to satisfy owners who don't want to give up control, but do want the public <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equitymarket.asp#axzz1iJWkopEg">equity market</a> to provide financing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In most cases, these so-called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/company-multiple-share-classes-super-voting-shares/">super-voting</a> shares are not publicly traded and company founders and their families are most commonly the controlling groups in dual-class companies. Although there is no standard nomenclature for multiple share classes, Class A shares are normally superior to Class B shares. In other cases, though, the reverse is true. That's why investors should research the details of a company's share classes if they are considering investing in a firm with more than one class of shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Well-known companies, such as Ford and Warren Buffett's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/berkshire-hathaway.asp">Berkshire Hathaway</a>, have dual class stock structures, which provide founders, executives, and families the ability to control majority voting power with a relatively small percentage of total <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equity.asp">equity</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The dual-class structure at Ford, for instance, gives the Ford family control of 40% of the voting power, while owning a small percentage of the company's total equity.<span class="ql-inline-citation" data-cite="1"></span> An extreme example is Echostar Communications CEO Charlie Ergen, who controls around 91.8% of the vote with his powerful Class A shares.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Dual-class structures allow companies to access public capital without sacrificing control.</p></div></div></div> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> While they've recently become popular, dual-class structures have been around for some time in various forms. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">New York Stock Exchange</a> (NYSE) banned dual-class structures in 1940 after an outcry in 1926 over automotive company Dodge Brothers' public offering, which consisted of non-voting shares for the public. However, the exchange reinstated the practice during the 1980s in the wake of competition from other exchanges.<span class="ql-inline-citation" data-cite="2"></span> Once shares are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/listed.asp">listed</a>, companies cannot reverse any voting rights attributed to the new class, or issue any classes of shares with superior voting rights. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">7%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The approximate percentage of U.S. companies in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell_3000.asp">Russell 3000 Index</a> with a dual- or multiple-class structure, according to a Harvard Law School study.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> In recent times, the number of companies opting for a dual-class structure during listing has multiplied. This is particularly the case among technology <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/startup.asp">startups</a>, many of which use this strategy to retain control over their outfits. Alphabet Inc.'s Google is the most famous example of this trend (see below). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Alphabet Inc.'s Google is the most famous example of this trend. Many investors were frustrated at Google’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering </a>(IPO) when the internet giant, boasting a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/market-capitalization-defined/">market capitalization</a> among the top 30 firms worldwide, issued second Class B shares to founders with 10 times the amount of votes as the ordinary Class A shares sold to the public.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Several stock <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">indexes</a> have stopped including companies with dual-class structures. The S&amp;P 500 and FTSE Russell are two such indexes.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <span class="heading-toc" id="toc-dual-class-stock-controversy"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> Dual Class Stock Controversy </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Dual class stock structures are controversial. Their supporters argue that the structure enables founders to demonstrate strong leadership and the placing of long-term interests over near-term financial results. It also helps founders retain control over the company as potential <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/takeover.asp">takeovers</a> can be avoided through their supermajority voting shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> On the other hand, opponents argue that the structure allows a small group of privileged shareholders to maintain control, while other shareholders (with less voting power) provide the majority of the capital. In effect, there is an unequal distribution of risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The founder is able to access capital from public markets at minimal economic risk. Shareholders carry a major part of the risk related to strategy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Academic research has proved that powerful classes of shares for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insider.asp">insiders</a> can actually hinder long-term outperformance. A middle path has been suggested by another group of shareholders. According to them, the effects of a dual-class structure can be limited by placing a time-bound restriction on such structures and allowing shareholders to accumulate voting interest over time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <span class="heading-toc" id="toc-examples-of-dual-class-structures"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> Examples of Dual-Class Structures </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Alphabet subsidiary Google is the most famous example of a company with a dual-class structure. When it was listed in 2004, the search giant unveiled two classes of shares in its offering. Class A shares were reserved for regular investors and had one vote per share. Class B shares were reserved for founders and executives and had 10 times as many votes as those for the "ordinary" A shares.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Many investors were frustrated at this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering </a>(IPO), given that the internet giant boasted a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/market-capitalization-defined/">market capitalization</a> among the top 30 firms worldwide.<span class="ql-inline-citation" data-cite="3"></span> Later, the company added a third class of shares. These Class C shares came with zero voting rights. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Other examples of companies with dual-class structures are Meta (formerly Facebook), Zynga, Groupon, and Alibaba. </p></div>

## What Is a Dual Class Stock? A dual class stock is when a company issues two [share classes](https://www.investopedia.com/terms/s/share_class.asp). A dual class stock structure can consist of [Class A](https://www.investopedia.com/terms/c/classashares.asp) and [Class B](https://www.investopedia.com/terms/c/classbshares.asp) shares, for example. These shares can differ in terms of voting rights and [dividend](https://www.investopedia.com/terms/d/dividend.asp) payments. When multiple share classes of stock are issued, typically one class is offered to the general public, while the other is offered to company founders, executives, and family. The class offered to the general public often has limited or no [voting rights](https://www.investopedia.com/terms/v/votingright.asp), while the class available to founders and executives has more voting power and often provides for majority control of the company. ### Key Takeaways * A company or stock with a dual-class structure has two or more classes of shares with different voting rights. * Typically insiders are given access to a class of shares that provide greater control and voting rights, while the general public is offered a class of shares with little or no voting rights. * Supporters say these types of structures allow the people who founded and currently run the company to think long-term, rather than be at the mercy of shorter-term-oriented investors who want to see bigger profits right away. * Dual-class structures are controversial because they do not allow public shareholders a say in running the company and distribute risk unequally. ## Understanding a Dual Class Stock Dual class stock is designed to give specific shareholders voting control. Classes of stock with unequal [voting shares](https://www.investopedia.com/terms/v/votingshares.asp) may be created to satisfy owners who don't want to give up control, but do want the public [equity market](https://www.investopedia.com/terms/e/equitymarket.asp#axzz1iJWkopEg) to provide financing. In most cases, these so-called [super-voting](https://www.investopedia.com/ask/answers/company-multiple-share-classes-super-voting-shares/) shares are not publicly traded and company founders and their families are most commonly the controlling groups in dual-class companies. Although there is no standard nomenclature for multiple share classes, Class A shares are normally superior to Class B shares. In other cases, though, the reverse is true. That's why investors should research the details of a company's share classes if they are considering investing in a firm with more than one class of shares. Well-known companies, such as Ford and Warren Buffett's [Berkshire Hathaway](https://www.investopedia.com/terms/b/berkshire-hathaway.asp), have dual class stock structures, which provide founders, executives, and families the ability to control majority voting power with a relatively small percentage of total [equity](https://www.investopedia.com/terms/e/equity.asp). The dual-class structure at Ford, for instance, gives the Ford family control of 40% of the voting power, while owning a small percentage of the company's total equity. An extreme example is Echostar Communications CEO Charlie Ergen, who controls around 91.8% of the vote with his powerful Class A shares. ### Dual-class structures allow companies to access public capital without sacrificing control. ## Special Considerations While they've recently become popular, dual-class structures have been around for some time in various forms. The [New York Stock Exchange](https://www.investopedia.com/terms/n/nyse.asp) (NYSE) banned dual-class structures in 1940 after an outcry in 1926 over automotive company Dodge Brothers' public offering, which consisted of non-voting shares for the public. However, the exchange reinstated the practice during the 1980s in the wake of competition from other exchanges. Once shares are [listed](https://www.investopedia.com/terms/l/listed.asp), companies cannot reverse any voting rights attributed to the new class, or issue any classes of shares with superior voting rights. ### 7% The approximate percentage of U.S. companies in the [Russell 3000 Index](https://www.investopedia.com/terms/r/russell_3000.asp) with a dual- or multiple-class structure, according to a Harvard Law School study. In recent times, the number of companies opting for a dual-class structure during listing has multiplied. This is particularly the case among technology [startups](https://www.investopedia.com/terms/s/startup.asp), many of which use this strategy to retain control over their outfits. Alphabet Inc.'s Google is the most famous example of this trend (see below). Alphabet Inc.'s Google is the most famous example of this trend. Many investors were frustrated at Google’s [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO) when the internet giant, boasting a [market capitalization](https://www.investopedia.com/investing/market-capitalization-defined/) among the top 30 firms worldwide, issued second Class B shares to founders with 10 times the amount of votes as the ordinary Class A shares sold to the public. Several stock [indexes](https://www.investopedia.com/terms/i/index.asp) have stopped including companies with dual-class structures. The S&P 500 and FTSE Russell are two such indexes. ## Dual Class Stock Controversy Dual class stock structures are controversial. Their supporters argue that the structure enables founders to demonstrate strong leadership and the placing of long-term interests over near-term financial results. It also helps founders retain control over the company as potential [takeovers](https://www.investopedia.com/terms/t/takeover.asp) can be avoided through their supermajority voting shares. On the other hand, opponents argue that the structure allows a small group of privileged shareholders to maintain control, while other shareholders (with less voting power) provide the majority of the capital. In effect, there is an unequal distribution of risk. The founder is able to access capital from public markets at minimal economic risk. Shareholders carry a major part of the risk related to strategy. Academic research has proved that powerful classes of shares for [insiders](https://www.investopedia.com/terms/i/insider.asp) can actually hinder long-term outperformance. A middle path has been suggested by another group of shareholders. According to them, the effects of a dual-class structure can be limited by placing a time-bound restriction on such structures and allowing shareholders to accumulate voting interest over time. ## Examples of Dual-Class Structures Alphabet subsidiary Google is the most famous example of a company with a dual-class structure. When it was listed in 2004, the search giant unveiled two classes of shares in its offering. Class A shares were reserved for regular investors and had one vote per share. Class B shares were reserved for founders and executives and had 10 times as many votes as those for the "ordinary" A shares. Many investors were frustrated at this [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO), given that the internet giant boasted a [market capitalization](https://www.investopedia.com/investing/market-capitalization-defined/) among the top 30 firms worldwide. Later, the company added a third class of shares. These Class C shares came with zero voting rights. Other examples of companies with dual-class structures are Meta (formerly Facebook), Zynga, Groupon, and Alibaba.

What Is a Dual Class Stock? A dual class stock is when a company issues two share classes. A dual class stock structure can consist of Class A and Class B shares, for example. These shares can differ in terms of voting rights and dividend payments. When multiple share classes of stock are issued, typically one class is offered to the general public, while the other is offered to company founders, executives, and family. The class offered to the general public often has limited or no voting rights, while the class available to founders and executives has more voting power and often provides for majority control of the company. Key Takeaways A company or stock with a dual-class structure has two or more classes of shares with different voting rights.Typically insiders are given access to a class of shares that provide greater control and voting rights, while the general public is offered a class of shares with little or no voting rights.Supporters say these types of structures allow the people who founded and currently run the company to think long-term, rather than be at the mercy of shorter-term-oriented investors who want to see bigger profits right away.Dual-class structures are controversial because they do not allow public shareholders a say in running the company and distribute risk unequally. Understanding a Dual Class Stock Dual class stock is designed to give specific shareholders voting control. Classes of stock with unequal voting shares may be created to satisfy owners who don't want to give up control, but do want the public equity market to provide financing. In most cases, these so-called super-voting shares are not publicly traded and company founders and their families are most commonly the controlling groups in dual-class companies. Although there is no standard nomenclature for multiple share classes, Class A shares are normally superior to Class B shares. In other cases, though, the reverse is true. That's why investors should research the details of a company's share classes if they are considering investing in a firm with more than one class of shares. Well-known companies, such as Ford and Warren Buffett's Berkshire Hathaway, have dual class stock structures, which provide founders, executives, and families the ability to control majority voting power with a relatively small percentage of total equity. The dual-class structure at Ford, for instance, gives the Ford family control of 40% of the voting power, while owning a small percentage of the company's total equity. An extreme example is Echostar Communications CEO Charlie Ergen, who controls around 91.8% of the vote with his powerful Class A shares. Dual-class structures allow companies to access public capital without sacrificing control. Special Considerations While they've recently become popular, dual-class structures have been around for some time in various forms. The New York Stock Exchange (NYSE) banned dual-class structures in 1940 after an outcry in 1926 over automotive company Dodge Brothers' public offering, which consisted of non-voting shares for the public. However, the exchange reinstated the practice during the 1980s in the wake of competition from other exchanges. Once shares are listed, companies cannot reverse any voting rights attributed to the new class, or issue any classes of shares with superior voting rights. 7% The approximate percentage of U.S. companies in the Russell 3000 Index with a dual- or multiple-class structure, according to a Harvard Law School study. In recent times, the number of companies opting for a dual-class structure during listing has multiplied. This is particularly the case among technology startups, many of which use this strategy to retain control over their outfits. Alphabet Inc.'s Google is the most famous example of this trend (see below). Alphabet Inc.'s Google is the most famous example of this trend. Many investors were frustrated at Google’s initial public offering (IPO) when the internet giant, boasting a market capitalization among the top 30 firms worldwide, issued second Class B shares to founders with 10 times the amount of votes as the ordinary Class A shares sold to the public. Several stock indexes have stopped including companies with dual-class structures. The S&P 500 and FTSE Russell are two such indexes. Dual Class Stock Controversy Dual class stock structures are controversial. Their supporters argue that the structure enables founders to demonstrate strong leadership and the placing of long-term interests over near-term financial results. It also helps founders retain control over the company as potential takeovers can be avoided through their supermajority voting shares. On the other hand, opponents argue that the structure allows a small group of privileged shareholders to maintain control, while other shareholders (with less voting power) provide the majority of the capital. In effect, there is an unequal distribution of risk. The founder is able to access capital from public markets at minimal economic risk. Shareholders carry a major part of the risk related to strategy. Academic research has proved that powerful classes of shares for insiders can actually hinder long-term outperformance. A middle path has been suggested by another group of shareholders. According to them, the effects of a dual-class structure can be limited by placing a time-bound restriction on such structures and allowing shareholders to accumulate voting interest over time. Examples of Dual-Class Structures Alphabet subsidiary Google is the most famous example of a company with a dual-class structure. When it was listed in 2004, the search giant unveiled two classes of shares in its offering. Class A shares were reserved for regular investors and had one vote per share. Class B shares were reserved for founders and executives and had 10 times as many votes as those for the "ordinary" A shares. Many investors were frustrated at this initial public offering (IPO), given that the internet giant boasted a market capitalization among the top 30 firms worldwide. Later, the company added a third class of shares. These Class C shares came with zero voting rights. Other examples of companies with dual-class structures are Meta (formerly Facebook), Zynga, Groupon, and Alibaba.

https://www.investopedia.com/the-express-podcast-episode-170-8426884

Big Deals, Little Deals, and No Deals for Investors as the Year Begins

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block megaphone" id="mntl-sc-block_1-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://playlist.megaphone.fm/?e=MERE5056087879" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Big Deals, Little Deals and No Deals for Investors as the Year Begins"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <strong>Subscribe Now</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197" rel="nofollow">Apple Podcasts</a> / <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9" rel="nofollow">Spotify</a> / <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver">Google Podcasts</a> / <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://player.fm/series/2836180">PlayerFM</a> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Sam Ro, the author of "TKer," comes back aboard to help us discern what we should be paying attention to, and what we should be ignoring as investors to start the year. From the approval of spot Bitcoin ETFs to the Fed's pivot, the outcry for active management to the unaffordable housing market, Sam helps us filter the headlines to focus on what's really important. Plus, CEOs are still worried about inflation and a recession despite decent signs around the economy. Should we also be concerned? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <strong>Do you have a news tip for Investopedia reporters?</strong> Please email us at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="mailto:tips@investopedia.com">tips@investopedia.com</a> </p></div>

**Subscribe Now**: [Apple Podcasts](https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197) / [Spotify](https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9) / [Google Podcasts](https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver) / [PlayerFM](https://player.fm/series/2836180) Sam Ro, the author of "TKer," comes back aboard to help us discern what we should be paying attention to, and what we should be ignoring as investors to start the year. From the approval of spot Bitcoin ETFs to the Fed's pivot, the outcry for active management to the unaffordable housing market, Sam helps us filter the headlines to focus on what's really important. Plus, CEOs are still worried about inflation and a recession despite decent signs around the economy. Should we also be concerned? **Do you have a news tip for Investopedia reporters?** Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM Sam Ro, the author of "TKer," comes back aboard to help us discern what we should be paying attention to, and what we should be ignoring as investors to start the year. From the approval of spot Bitcoin ETFs to the Fed's pivot, the outcry for active management to the unaffordable housing market, Sam helps us filter the headlines to focus on what's really important. Plus, CEOs are still worried about inflation and a recession despite decent signs around the economy. Should we also be concerned? Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/articles/active-trading/090215/analyzing-5-most-liquid-commodity-futures.asp

Analyzing the 5 Most Liquid Commodity Futures

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Commodity traders thrive in highly liquid markets that provide easy access to the world's most popular futures contracts. Lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">bid/ask spreads</a> in these venues reduce <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/slippage.asp">slippage</a> during entry and exit, thereby increasing profit potential. Meanwhile, less erratic price action supports short-term intraday and swing trading, as well as long-term position trading and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/markettiming.asp">market timing</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> New participants often confuse commodity futures with index and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfutures.asp">financial futures</a> contracts including the S&amp;P 500, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eurodollar.asp">Eurodollar</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/10-yeartreasury.asp">10-Year Treasury Notes</a>. Commodities represent real physical substances that can be bought or sold on spot markets.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> They originate inside the Earth or on top of it—rather than in the minds of Wall Street mathematicians. Commodities have physical supply and demand limitations that impact pricing, while financial instruments can be created from numbers on a spreadsheet. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Chicago Mercantile Exchange (CME) Group is ranked as the top futures exchange in the world, handling an average volume of more than 7.3 million contracts per day.</li><li>Like all world markets, commodity futures volume and open interest fluctuate in response to political, economic, and natural events including the weather.</li><li>Commodities attract fundamentally-oriented players including industry hedgers who use technical analysis to predict price direction.</li><li>The top five futures include crude oil, corn, natural gas, soybeans, and gold.</li></ul></div></div></div> <span class="heading-toc" id="toc-cme-group-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> CME Group: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cme.asp">Chicago Mercantile Exchange (CME)</a> is ranked as the top futures exchange in the world, handling an average daily volume in 2022 of 7.3 million contracts.<span class="ql-inline-citation" data-cite="4"></span> The group was formed after a decade of consolidation that added the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cbot.asp">Chicago Board of Trade (CBOT)</a>, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nymex.asp">New York Mercantile Exchange (NYMEX)</a>, the Chicago Mercantile Exchange (COMEX), and the Kansas City Board of Trade (KCBT).<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The exchange was founded in 1898 as the Chicago Butter and Egg Board until the name changed in 1919. The first futures contracts were issued in the early 1960s, and later added financial futures and currency contracts followed by interest rate and bond futures.<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-identifying-top-commodity-markets"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> Identifying Top Commodity Markets </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Like all world markets, commodity futures volume and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/openinterest.asp">open interest</a> fluctuate in response to political, economic, and natural events including the weather. For example, a Midwestern drought can generate strongly-trending agricultural futures, attracting capital from other futures venues.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">Volatility</a> tends to gradually rise and fall over long time periods. That's because commodity trends develop slowly, and can last for years and decades rather than weeks or months. The combined exchange reported the top five commodity futures contracts as of the end of trading on July 25, 2022, as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_19-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th>  Commodity</th> <th>  Average Daily Volume (ADV)</th> <th>  Open Interest</th> </tr> </thead> <tbody data-check="0"> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wti.asp">Crude Oil (WTI)</a></td> <td>632,116</td> <td>1,599,207</td> </tr> <tr> <td>Corn</td> <td>304,986</td> <td>1,323,449</td> </tr> <tr> <td>Henry Hub Natural Gas</td> <td>240,183</td> <td>970,247</td> </tr> <tr> <td>Soybeans</td> <td>159,629</td> <td>592,690</td> </tr> <tr> <td>Gold</td> <td>245,115</td> <td>502,738</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <em>Source: CME Group<span class="ql-inline-citation" data-cite="17"></span></em> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <span class="heading-toc" id="toc-long-term-view-on-top-contracts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> Long-Term View on Top Contracts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Ten-year price charts provide a solid technical foundation for traders and market timers looking to play these highly liquid instruments. While commodities attract fundamentally-oriented players including industry hedgers, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> is widely used to predict price direction.<span class="ql-inline-citation" data-cite="18"></span> In fact, modern charting has historic origins in the 17th-century Dutch tulip markets and 18th-century Japanese rice markets.<span class="ql-inline-citation" data-cite="16"></span><span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_26-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_27-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Technical analysis is widely used to predict price direction for futures contracts.</p></div></div></div> <span class="heading-toc" id="toc-1-crude-oil-futures"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> 1. Crude Oil Futures </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Crude oil futures hit an all-time high at $145.31 on July 3, 2008 and sold off into the upper 30s during the economic collapse. It recovered around 70% of the steep decline into the 2011 top and eased into a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tradingrange.asp">trading range</a>, bounded by $112 on the upside and $80 on the downside. The contract broke down in 2014 and entered a steep <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downtrend.asp">downtrend</a> that tested the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearmarket.asp">bear market</a> low in the third quarter of 2015.<span class="ql-inline-citation" data-cite="19"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> A new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uptrend.asp">uptrend</a> began in mid-late 2017, hitting the high 80s in Oct. 2018 before leveling off to the high 50s at the end of November 2019. In January 2022, crude oil broke $100 a barrel for the first time since 2014 and as of July 2022 was hovering around that level.<span class="ql-inline-citation" data-cite="19"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <span class="heading-toc" id="toc-2-corn-futures"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-heading__text"> 2. Corn Futures </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Corn futures went to sleep between 1998 and 2006, carving out a long <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roundingbottom.asp">rounded bottom</a> that attracted limited trading interest. It entered a strong uptrend in the second half of 2006, rising vertically into the 2008 peak above $7.00. The contract lost more than half its value during the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-collapse.asp">economic collapse</a>, finding support near $3.00 and entering a recovery wave that topped out at $8.24 in the middle of 2012.<span class="ql-inline-citation" data-cite="20"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The subsequent downtrend relinquished four years of gains, with price settling just above the 2008 low in the second half of 2014. Basing action lasted until 2020, and the next uptrend started. Prices went from below $6 to $7.47 in July 2022.<span class="ql-inline-citation" data-cite="20"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <span class="heading-toc" id="toc-3-natural-gas"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> 3. Natural Gas </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">Natural gas futures</a> trade unlike other energy or commodity markets, with a 20-year series of vertical spikes that have been repealed as quickly as they appear. Rallies above $10 in 2000, 2001, 2003, 2005, 2008, and 2021 met with heavy resistance that triggered nearly 100% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retracement.asp">retracements</a> over the next one or two years.<span class="ql-inline-citation" data-cite="21"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> At the end of November 2019, natural gas futures contracts were trading around the $2.50-mark. Prices traded below $2 during 2020, before starting an uptrend. Natural gas prices moved above $8 in early 2022 and traded at $7.35 as of July 20, 2022.<span class="ql-inline-citation" data-cite="21"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <span class="heading-toc" id="toc-4-soybeans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> 4. Soybeans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Soybean futures bottomed out at a multi-decade low between 1999 and 2002. The contract then entered a strong uptrend that posted vertical rally peaks in 2004, 2008, and 2012. It turned lower in the second half of 2012, in an orderly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/correction.asp">correction</a> that accelerated to the downside in 2014.<span class="ql-inline-citation" data-cite="22"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The decline ended just above the 2009 low. By mid-July 2012, the prices spiked above $17, but by early May, soybean futures were trading down at about $8 a bushel. As of July 2022, soybeans were trading at around $16 after seeing a spike in prices during 2020.<span class="ql-inline-citation" data-cite="22"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <span class="heading-toc" id="toc-5-gold"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-heading__text"> 5. Gold </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Gold futures have gone through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp">boom and bust cycles</a> that greatly impact open interest. It now stands as the fifth-most-traded commodity contract. For the 20 years between 1980 and 2000, Gold traded between $400 and $500. It started a decade uptrend that took the price to over $1,800 in 2011. Prices reverted and fell to $1,000 by 2015. Gold rallied in 2019 and the recent uptrend has pushed the price to over $1,700 as of July 2022.<span class="ql-inline-citation" data-cite="23"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-can-commodity-futures-contracts-be-bought-and-sold-on-the-open-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Commodity Futures Contracts Be Bought and Sold on the Open Market?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, futures contracts are traded on futures exchanges, such as the Chicago Mercantile Exchange (CME). Market orders are filled at the best possible price and executed almost immediately.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_53-0"><span class="heading-toc" id="toc-what-is-the-commodity-futures-trading-commission-cftc"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Commodity Futures Trading Commission (CFTC)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The Commodity Futures Trading Commission (CFTC) is the regulatory body for the U.S. derivatives market, which includes futures, swaps, and certain options.<span class="ql-inline-citation" data-cite="24"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_55-0"><span class="heading-toc" id="toc-why-are-commodity-futures-contracts-transferable"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are Commodity Futures Contracts Transferable?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Buyers or sellers can transfer ownership of their futures contract by trading on an exchange. The standardization of the contract makes them easily transferable. Contract specifications are the same for all participants. Only the contract price is variable.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Crude oil leads the pack as the most liquid commodity futures market followed by corn and natural gas. Agricultural futures tend to generate the highest volume during periods of low stress in the energy pits, while gold futures have gone through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp">boom and bust cycles</a> that greatly impact open interest. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> <em>Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.</em> </p></div>

Commodity traders thrive in highly liquid markets that provide easy access to the world's most popular futures contracts. Lower [bid/ask spreads](https://www.investopedia.com/terms/b/bid-askspread.asp) in these venues reduce [slippage](https://www.investopedia.com/terms/s/slippage.asp) during entry and exit, thereby increasing profit potential. Meanwhile, less erratic price action supports short-term intraday and swing trading, as well as long-term position trading and [market timing](https://www.investopedia.com/terms/m/markettiming.asp). New participants often confuse commodity futures with index and [financial futures](https://www.investopedia.com/terms/i/indexfutures.asp) contracts including the S&P 500, [Eurodollar](https://www.investopedia.com/terms/e/eurodollar.asp), and [10-Year Treasury Notes](https://www.investopedia.com/terms/1/10-yeartreasury.asp). Commodities represent real physical substances that can be bought or sold on spot markets. They originate inside the Earth or on top of it—rather than in the minds of Wall Street mathematicians. Commodities have physical supply and demand limitations that impact pricing, while financial instruments can be created from numbers on a spreadsheet. ### Key Takeaways * The Chicago Mercantile Exchange (CME) Group is ranked as the top futures exchange in the world, handling an average volume of more than 7.3 million contracts per day. * Like all world markets, commodity futures volume and open interest fluctuate in response to political, economic, and natural events including the weather. * Commodities attract fundamentally-oriented players including industry hedgers who use technical analysis to predict price direction. * The top five futures include crude oil, corn, natural gas, soybeans, and gold. ## CME Group: An Overview The [Chicago Mercantile Exchange (CME)](https://www.investopedia.com/terms/c/cme.asp) is ranked as the top futures exchange in the world, handling an average daily volume in 2022 of 7.3 million contracts. The group was formed after a decade of consolidation that added the [Chicago Board of Trade (CBOT)](https://www.investopedia.com/terms/c/cbot.asp), the [New York Mercantile Exchange (NYMEX)](https://www.investopedia.com/terms/n/nymex.asp), the Chicago Mercantile Exchange (COMEX), and the Kansas City Board of Trade (KCBT). The exchange was founded in 1898 as the Chicago Butter and Egg Board until the name changed in 1919. The first futures contracts were issued in the early 1960s, and later added financial futures and currency contracts followed by interest rate and bond futures. ## Identifying Top Commodity Markets Like all world markets, commodity futures volume and [open interest](https://www.investopedia.com/terms/o/openinterest.asp) fluctuate in response to political, economic, and natural events including the weather. For example, a Midwestern drought can generate strongly-trending agricultural futures, attracting capital from other futures venues.  [Volatility](https://www.investopedia.com/terms/v/volatility.asp) tends to gradually rise and fall over long time periods. That's because commodity trends develop slowly, and can last for years and decades rather than weeks or months. The combined exchange reported the top five commodity futures contracts as of the end of trading on July 25, 2022, as follows: | Commodity | Average Daily Volume (ADV) | Open Interest | | --- | --- | --- | | [Crude Oil (WTI)](https://www.investopedia.com/terms/w/wti.asp) | 632,116 | 1,599,207 | | Corn | 304,986 | 1,323,449 | | Henry Hub Natural Gas | 240,183 | 970,247 | | Soybeans | 159,629 | 592,690 | | Gold | 245,115 | 502,738 | *Source: CME Group* ## Long-Term View on Top Contracts Ten-year price charts provide a solid technical foundation for traders and market timers looking to play these highly liquid instruments. While commodities attract fundamentally-oriented players including industry hedgers, [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) is widely used to predict price direction. In fact, modern charting has historic origins in the 17th-century Dutch tulip markets and 18th-century Japanese rice markets. ### Technical analysis is widely used to predict price direction for futures contracts. ## 1. Crude Oil Futures Crude oil futures hit an all-time high at $145.31 on July 3, 2008 and sold off into the upper 30s during the economic collapse. It recovered around 70% of the steep decline into the 2011 top and eased into a [trading range](https://www.investopedia.com/terms/t/tradingrange.asp), bounded by $112 on the upside and $80 on the downside. The contract broke down in 2014 and entered a steep [downtrend](https://www.investopedia.com/terms/d/downtrend.asp) that tested the [bear market](https://www.investopedia.com/terms/b/bearmarket.asp) low in the third quarter of 2015. A new [uptrend](https://www.investopedia.com/terms/u/uptrend.asp) began in mid-late 2017, hitting the high 80s in Oct. 2018 before leveling off to the high 50s at the end of November 2019. In January 2022, crude oil broke $100 a barrel for the first time since 2014 and as of July 2022 was hovering around that level. ## 2. Corn Futures Corn futures went to sleep between 1998 and 2006, carving out a long [rounded bottom](https://www.investopedia.com/terms/r/roundingbottom.asp) that attracted limited trading interest. It entered a strong uptrend in the second half of 2006, rising vertically into the 2008 peak above $7.00. The contract lost more than half its value during the [economic collapse](https://www.investopedia.com/terms/e/economic-collapse.asp), finding support near $3.00 and entering a recovery wave that topped out at $8.24 in the middle of 2012. The subsequent downtrend relinquished four years of gains, with price settling just above the 2008 low in the second half of 2014. Basing action lasted until 2020, and the next uptrend started. Prices went from below $6 to $7.47 in July 2022. ## 3. Natural Gas [Natural gas futures](https://www.investopedia.com/terms/f/futurescontract.asp) trade unlike other energy or commodity markets, with a 20-year series of vertical spikes that have been repealed as quickly as they appear. Rallies above $10 in 2000, 2001, 2003, 2005, 2008, and 2021 met with heavy resistance that triggered nearly 100% [retracements](https://www.investopedia.com/terms/r/retracement.asp) over the next one or two years. At the end of November 2019, natural gas futures contracts were trading around the $2.50-mark. Prices traded below $2 during 2020, before starting an uptrend. Natural gas prices moved above $8 in early 2022 and traded at $7.35 as of July 20, 2022. ## 4. Soybeans Soybean futures bottomed out at a multi-decade low between 1999 and 2002. The contract then entered a strong uptrend that posted vertical rally peaks in 2004, 2008, and 2012. It turned lower in the second half of 2012, in an orderly [correction](https://www.investopedia.com/terms/c/correction.asp) that accelerated to the downside in 2014. The decline ended just above the 2009 low. By mid-July 2012, the prices spiked above $17, but by early May, soybean futures were trading down at about $8 a bushel. As of July 2022, soybeans were trading at around $16 after seeing a spike in prices during 2020. ## 5. Gold Gold futures have gone through [boom and bust cycles](https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp) that greatly impact open interest. It now stands as the fifth-most-traded commodity contract. For the 20 years between 1980 and 2000, Gold traded between $400 and $500. It started a decade uptrend that took the price to over $1,800 in 2011. Prices reverted and fell to $1,000 by 2015. Gold rallied in 2019 and the recent uptrend has pushed the price to over $1,700 as of July 2022. ## Can Commodity Futures Contracts Be Bought and Sold on the Open Market? Yes, futures contracts are traded on futures exchanges, such as the Chicago Mercantile Exchange (CME). Market orders are filled at the best possible price and executed almost immediately. ## What Is the Commodity Futures Trading Commission (CFTC)? The Commodity Futures Trading Commission (CFTC) is the regulatory body for the U.S. derivatives market, which includes futures, swaps, and certain options. ## Why Are Commodity Futures Contracts Transferable? Buyers or sellers can transfer ownership of their futures contract by trading on an exchange. The standardization of the contract makes them easily transferable. Contract specifications are the same for all participants. Only the contract price is variable. ## The Bottom Line Crude oil leads the pack as the most liquid commodity futures market followed by corn and natural gas. Agricultural futures tend to generate the highest volume during periods of low stress in the energy pits, while gold futures have gone through [boom and bust cycles](https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp) that greatly impact open interest. *Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.*

Commodity traders thrive in highly liquid markets that provide easy access to the world's most popular futures contracts. Lower bid/ask spreads in these venues reduce slippage during entry and exit, thereby increasing profit potential. Meanwhile, less erratic price action supports short-term intraday and swing trading, as well as long-term position trading and market timing. New participants often confuse commodity futures with index and financial futures contracts including the S&P 500, Eurodollar, and 10-Year Treasury Notes. Commodities represent real physical substances that can be bought or sold on spot markets. They originate inside the Earth or on top of it—rather than in the minds of Wall Street mathematicians. Commodities have physical supply and demand limitations that impact pricing, while financial instruments can be created from numbers on a spreadsheet. Key Takeaways The Chicago Mercantile Exchange (CME) Group is ranked as the top futures exchange in the world, handling an average volume of more than 7.3 million contracts per day.Like all world markets, commodity futures volume and open interest fluctuate in response to political, economic, and natural events including the weather.Commodities attract fundamentally-oriented players including industry hedgers who use technical analysis to predict price direction.The top five futures include crude oil, corn, natural gas, soybeans, and gold. CME Group: An Overview The Chicago Mercantile Exchange (CME) is ranked as the top futures exchange in the world, handling an average daily volume in 2022 of 7.3 million contracts. The group was formed after a decade of consolidation that added the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (COMEX), and the Kansas City Board of Trade (KCBT). The exchange was founded in 1898 as the Chicago Butter and Egg Board until the name changed in 1919. The first futures contracts were issued in the early 1960s, and later added financial futures and currency contracts followed by interest rate and bond futures. Identifying Top Commodity Markets Like all world markets, commodity futures volume and open interest fluctuate in response to political, economic, and natural events including the weather. For example, a Midwestern drought can generate strongly-trending agricultural futures, attracting capital from other futures venues.  Volatility tends to gradually rise and fall over long time periods. That's because commodity trends develop slowly, and can last for years and decades rather than weeks or months. The combined exchange reported the top five commodity futures contracts as of the end of trading on July 25, 2022, as follows:   Commodity   Average Daily Volume (ADV)   Open Interest Crude Oil (WTI) 632,116 1,599,207 Corn 304,986 1,323,449 Henry Hub Natural Gas 240,183 970,247 Soybeans 159,629 592,690 Gold 245,115 502,738 Source: CME Group Long-Term View on Top Contracts Ten-year price charts provide a solid technical foundation for traders and market timers looking to play these highly liquid instruments. While commodities attract fundamentally-oriented players including industry hedgers, technical analysis is widely used to predict price direction. In fact, modern charting has historic origins in the 17th-century Dutch tulip markets and 18th-century Japanese rice markets. Technical analysis is widely used to predict price direction for futures contracts. 1. Crude Oil Futures Crude oil futures hit an all-time high at $145.31 on July 3, 2008 and sold off into the upper 30s during the economic collapse. It recovered around 70% of the steep decline into the 2011 top and eased into a trading range, bounded by $112 on the upside and $80 on the downside. The contract broke down in 2014 and entered a steep downtrend that tested the bear market low in the third quarter of 2015. A new uptrend began in mid-late 2017, hitting the high 80s in Oct. 2018 before leveling off to the high 50s at the end of November 2019. In January 2022, crude oil broke $100 a barrel for the first time since 2014 and as of July 2022 was hovering around that level. 2. Corn Futures Corn futures went to sleep between 1998 and 2006, carving out a long rounded bottom that attracted limited trading interest. It entered a strong uptrend in the second half of 2006, rising vertically into the 2008 peak above $7.00. The contract lost more than half its value during the economic collapse, finding support near $3.00 and entering a recovery wave that topped out at $8.24 in the middle of 2012. The subsequent downtrend relinquished four years of gains, with price settling just above the 2008 low in the second half of 2014. Basing action lasted until 2020, and the next uptrend started. Prices went from below $6 to $7.47 in July 2022. 3. Natural Gas Natural gas futures trade unlike other energy or commodity markets, with a 20-year series of vertical spikes that have been repealed as quickly as they appear. Rallies above $10 in 2000, 2001, 2003, 2005, 2008, and 2021 met with heavy resistance that triggered nearly 100% retracements over the next one or two years. At the end of November 2019, natural gas futures contracts were trading around the $2.50-mark. Prices traded below $2 during 2020, before starting an uptrend. Natural gas prices moved above $8 in early 2022 and traded at $7.35 as of July 20, 2022. 4. Soybeans Soybean futures bottomed out at a multi-decade low between 1999 and 2002. The contract then entered a strong uptrend that posted vertical rally peaks in 2004, 2008, and 2012. It turned lower in the second half of 2012, in an orderly correction that accelerated to the downside in 2014. The decline ended just above the 2009 low. By mid-July 2012, the prices spiked above $17, but by early May, soybean futures were trading down at about $8 a bushel. As of July 2022, soybeans were trading at around $16 after seeing a spike in prices during 2020. 5. Gold Gold futures have gone through boom and bust cycles that greatly impact open interest. It now stands as the fifth-most-traded commodity contract. For the 20 years between 1980 and 2000, Gold traded between $400 and $500. It started a decade uptrend that took the price to over $1,800 in 2011. Prices reverted and fell to $1,000 by 2015. Gold rallied in 2019 and the recent uptrend has pushed the price to over $1,700 as of July 2022. Can Commodity Futures Contracts Be Bought and Sold on the Open Market? Yes, futures contracts are traded on futures exchanges, such as the Chicago Mercantile Exchange (CME). Market orders are filled at the best possible price and executed almost immediately. What Is the Commodity Futures Trading Commission (CFTC)? The Commodity Futures Trading Commission (CFTC) is the regulatory body for the U.S. derivatives market, which includes futures, swaps, and certain options. Why Are Commodity Futures Contracts Transferable? Buyers or sellers can transfer ownership of their futures contract by trading on an exchange. The standardization of the contract makes them easily transferable. Contract specifications are the same for all participants. Only the contract price is variable. The Bottom Line Crude oil leads the pack as the most liquid commodity futures market followed by corn and natural gas. Agricultural futures tend to generate the highest volume during periods of low stress in the energy pits, while gold futures have gone through boom and bust cycles that greatly impact open interest. Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

https://www.investopedia.com/articles/markets/080916/capm-vs-arbitrage-pricing-theory-how-they-differ.asp

CAPM vs. Arbitrage Pricing Theory: What's the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-capm-vs-arbitrage-pricing-theory-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> CAPM vs. Arbitrage Pricing Theory: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> In the 1960s, Jack Treynor, William F. Sharpe, John Lintner, and Jan Mossin developed the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM) to determine the theoretical appropriate rate that an asset should return given the level of risk assumed.<span class="ql-inline-citation" data-cite="1"></span> Thereafter, in 1976, economist Stephen Ross developed the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apt.asp">arbitrage pricing theory</a> (APT) as an alternative to the CAPM. The APT introduced a framework that explains the expected theoretical rate of return of an asset, or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>, in equilibrium as a linear function of the risk of the asset, or portfolio, with respect to a set of factors capturing <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systematicrisk.asp">systematic risk</a>.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The CAPM lets investors quantify the expected return on investment given the risk, risk-free rate of return, expected market return, and the beta of an asset or portfolio.</li><li>The arbitrage pricing theory is an alternative to the CAPM that uses fewer assumptions and can be harder to implement than the CAPM.</li><li>While both are useful, many investors prefer to use the CAPM, a one-factor model, over the more complicated APT, which requires users to quantify multiple factors.</li></ul></div></div></div> <span class="heading-toc" id="toc-capital-asset-pricing-model"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Capital Asset Pricing Model </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The CAPM allows investors to quantify the expected return on an investment given the investment risk, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-freerate.asp">risk-free rate of return</a>, expected market return, and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">beta</a> of an asset or portfolio. The risk-free rate of return that is used is typically the federal funds rate or the 10-year government bond yield. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> An asset's or portfolio's beta <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041415/how-capital-asset-pricing-model-capm-represented-security-market-line-sml.asp">measures the theoretical volatility</a> in relation to the overall market. For example, if a portfolio has a beta of 1.25 in relation to the Standard &amp; Poor's 500 Index (S&amp;P 500), it is theoretically 25% more volatile than the S&amp;P 500 Index. Therefore, if the index rises by 10 percent, the portfolio rises by 12.5%. If the index falls by 10%, the portfolio falls by 12.5%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-subheading__text"> CAPM Formula </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The formula used in CAPM is: E(ri) = rf + βi * (E(rM) - rf), where rf is the risk-free rate of return, βi is the asset's or portfolio's beta in relation to a benchmark index, E(rM) is the expected benchmark index's returns over a specified period, and E(ri) is the theoretical appropriate rate that an asset should return given the inputs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-arbitrage-pricing-theory"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> Arbitrage Pricing Theory </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The APT serves as an alternative to the CAPM, and it uses fewer assumptions and may be harder to implement than the CAPM. Ross developed the APT on the basis that the prices of securities are driven by multiple factors, which could be grouped into macroeconomic or company-specific factors.<span class="ql-inline-citation" data-cite="2"></span> Unlike the CAPM, the APT does not indicate the identity or even the number of risk factors. Instead, for any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/multifactor-model.asp">multifactor model</a> assumed to generate returns, which follows a return-generating process, the theory gives the associated expression for the asset’s expected return. While the CAPM formula requires the input of the expected market return, the APT formula uses an asset's expected rate of return and the risk premium of multiple macroeconomic factors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-subheading__text"> Arbitrage Pricing Theory Formula </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In the APT model, an asset's or a portfolio's returns follow a factor intensity structure if the returns could be expressed using this formula: ri = ai + βi1 * F1 + βi2 * F2 + ... + βkn * Fn + εi, where ai is a constant for the asset; F is a systematic factor, such as a macroeconomic or company-specific factor; β is the sensitivity of the asset or portfolio in relation to the specified factor; and εi is the asset's idiosyncratic random shock with an expected mean of zero, also known as the error term. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/082415/arbitrage-pricing-theory-its-not-just-fancy-math.asp">APT</a> formula is E(ri) = rf + βi1 * RP1 + βi2 * RP2 + ... + βkn * RPn, where rf is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrage_free_valuation.asp">risk-free rate of return</a>, β is the sensitivity of the asset or portfolio in relation to the specified factor and RP is the risk premium of the specified factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-key-differences"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Key Differences </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> At first glance, the CAPM and APT formulas look identical, but the CAPM has only one factor and one beta. Conversely, the APT formula has multiple factors that include non-company factors, which requires the asset's beta in relation to each separate factor. However, the APT does not provide insight into what these factors could be, so users of the APT model must analytically determine relevant factors that might affect the asset's returns. On the other hand, the factor used in the CAPM is the difference between the expected market rate of return and the risk-free rate of return. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Since the CAPM is a one-factor model and simpler to use, investors may want to use it to determine the expected theoretical <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071415/what-formula-calculating-capital-asset-pricing-model-capm-excel.asp">appropriate rate of return</a> rather than using APT, which requires users to quantify multiple factors.</p></div></div></div></div>

## CAPM vs. Arbitrage Pricing Theory: An Overview In the 1960s, Jack Treynor, William F. Sharpe, John Lintner, and Jan Mossin developed the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM) to determine the theoretical appropriate rate that an asset should return given the level of risk assumed. Thereafter, in 1976, economist Stephen Ross developed the [arbitrage pricing theory](https://www.investopedia.com/terms/a/apt.asp) (APT) as an alternative to the CAPM. The APT introduced a framework that explains the expected theoretical rate of return of an asset, or [portfolio](https://www.investopedia.com/terms/p/portfolio.asp), in equilibrium as a linear function of the risk of the asset, or portfolio, with respect to a set of factors capturing [systematic risk](https://www.investopedia.com/terms/s/systematicrisk.asp). ### Key Takeaways * The CAPM lets investors quantify the expected return on investment given the risk, risk-free rate of return, expected market return, and the beta of an asset or portfolio. * The arbitrage pricing theory is an alternative to the CAPM that uses fewer assumptions and can be harder to implement than the CAPM. * While both are useful, many investors prefer to use the CAPM, a one-factor model, over the more complicated APT, which requires users to quantify multiple factors. ## Capital Asset Pricing Model The CAPM allows investors to quantify the expected return on an investment given the investment risk, [risk-free rate of return](https://www.investopedia.com/terms/r/risk-freerate.asp), expected market return, and the [beta](https://www.investopedia.com/terms/b/beta.asp) of an asset or portfolio. The risk-free rate of return that is used is typically the federal funds rate or the 10-year government bond yield. An asset's or portfolio's beta [measures the theoretical volatility](https://www.investopedia.com/ask/answers/041415/how-capital-asset-pricing-model-capm-represented-security-market-line-sml.asp) in relation to the overall market. For example, if a portfolio has a beta of 1.25 in relation to the Standard & Poor's 500 Index (S&P 500), it is theoretically 25% more volatile than the S&P 500 Index. Therefore, if the index rises by 10 percent, the portfolio rises by 12.5%. If the index falls by 10%, the portfolio falls by 12.5%. ### CAPM Formula The formula used in CAPM is: E(ri) = rf + βi \* (E(rM) - rf), where rf is the risk-free rate of return, βi is the asset's or portfolio's beta in relation to a benchmark index, E(rM) is the expected benchmark index's returns over a specified period, and E(ri) is the theoretical appropriate rate that an asset should return given the inputs. ## Arbitrage Pricing Theory The APT serves as an alternative to the CAPM, and it uses fewer assumptions and may be harder to implement than the CAPM. Ross developed the APT on the basis that the prices of securities are driven by multiple factors, which could be grouped into macroeconomic or company-specific factors. Unlike the CAPM, the APT does not indicate the identity or even the number of risk factors. Instead, for any [multifactor model](https://www.investopedia.com/terms/m/multifactor-model.asp) assumed to generate returns, which follows a return-generating process, the theory gives the associated expression for the asset’s expected return. While the CAPM formula requires the input of the expected market return, the APT formula uses an asset's expected rate of return and the risk premium of multiple macroeconomic factors. ### Arbitrage Pricing Theory Formula In the APT model, an asset's or a portfolio's returns follow a factor intensity structure if the returns could be expressed using this formula: ri = ai + βi1 \* F1 + βi2 \* F2 + ... + βkn \* Fn + εi, where ai is a constant for the asset; F is a systematic factor, such as a macroeconomic or company-specific factor; β is the sensitivity of the asset or portfolio in relation to the specified factor; and εi is the asset's idiosyncratic random shock with an expected mean of zero, also known as the error term. The [APT](https://www.investopedia.com/articles/active-trading/082415/arbitrage-pricing-theory-its-not-just-fancy-math.asp) formula is E(ri) = rf + βi1 \* RP1 + βi2 \* RP2 + ... + βkn \* RPn, where rf is the [risk-free rate of return](https://www.investopedia.com/terms/a/arbitrage_free_valuation.asp), β is the sensitivity of the asset or portfolio in relation to the specified factor and RP is the risk premium of the specified factor. ## Key Differences At first glance, the CAPM and APT formulas look identical, but the CAPM has only one factor and one beta. Conversely, the APT formula has multiple factors that include non-company factors, which requires the asset's beta in relation to each separate factor. However, the APT does not provide insight into what these factors could be, so users of the APT model must analytically determine relevant factors that might affect the asset's returns. On the other hand, the factor used in the CAPM is the difference between the expected market rate of return and the risk-free rate of return. ### Since the CAPM is a one-factor model and simpler to use, investors may want to use it to determine the expected theoretical [appropriate rate of return](https://www.investopedia.com/ask/answers/071415/what-formula-calculating-capital-asset-pricing-model-capm-excel.asp) rather than using APT, which requires users to quantify multiple factors.

CAPM vs. Arbitrage Pricing Theory: An Overview In the 1960s, Jack Treynor, William F. Sharpe, John Lintner, and Jan Mossin developed the capital asset pricing model (CAPM) to determine the theoretical appropriate rate that an asset should return given the level of risk assumed. Thereafter, in 1976, economist Stephen Ross developed the arbitrage pricing theory (APT) as an alternative to the CAPM. The APT introduced a framework that explains the expected theoretical rate of return of an asset, or portfolio, in equilibrium as a linear function of the risk of the asset, or portfolio, with respect to a set of factors capturing systematic risk. Key Takeaways The CAPM lets investors quantify the expected return on investment given the risk, risk-free rate of return, expected market return, and the beta of an asset or portfolio.The arbitrage pricing theory is an alternative to the CAPM that uses fewer assumptions and can be harder to implement than the CAPM.While both are useful, many investors prefer to use the CAPM, a one-factor model, over the more complicated APT, which requires users to quantify multiple factors. Capital Asset Pricing Model The CAPM allows investors to quantify the expected return on an investment given the investment risk, risk-free rate of return, expected market return, and the beta of an asset or portfolio. The risk-free rate of return that is used is typically the federal funds rate or the 10-year government bond yield. An asset's or portfolio's beta measures the theoretical volatility in relation to the overall market. For example, if a portfolio has a beta of 1.25 in relation to the Standard & Poor's 500 Index (S&P 500), it is theoretically 25% more volatile than the S&P 500 Index. Therefore, if the index rises by 10 percent, the portfolio rises by 12.5%. If the index falls by 10%, the portfolio falls by 12.5%. CAPM Formula The formula used in CAPM is: E(ri) = rf + βi * (E(rM) - rf), where rf is the risk-free rate of return, βi is the asset's or portfolio's beta in relation to a benchmark index, E(rM) is the expected benchmark index's returns over a specified period, and E(ri) is the theoretical appropriate rate that an asset should return given the inputs. Arbitrage Pricing Theory The APT serves as an alternative to the CAPM, and it uses fewer assumptions and may be harder to implement than the CAPM. Ross developed the APT on the basis that the prices of securities are driven by multiple factors, which could be grouped into macroeconomic or company-specific factors. Unlike the CAPM, the APT does not indicate the identity or even the number of risk factors. Instead, for any multifactor model assumed to generate returns, which follows a return-generating process, the theory gives the associated expression for the asset’s expected return. While the CAPM formula requires the input of the expected market return, the APT formula uses an asset's expected rate of return and the risk premium of multiple macroeconomic factors. Arbitrage Pricing Theory Formula In the APT model, an asset's or a portfolio's returns follow a factor intensity structure if the returns could be expressed using this formula: ri = ai + βi1 * F1 + βi2 * F2 + ... + βkn * Fn + εi, where ai is a constant for the asset; F is a systematic factor, such as a macroeconomic or company-specific factor; β is the sensitivity of the asset or portfolio in relation to the specified factor; and εi is the asset's idiosyncratic random shock with an expected mean of zero, also known as the error term. The APT formula is E(ri) = rf + βi1 * RP1 + βi2 * RP2 + ... + βkn * RPn, where rf is the risk-free rate of return, β is the sensitivity of the asset or portfolio in relation to the specified factor and RP is the risk premium of the specified factor. Key Differences At first glance, the CAPM and APT formulas look identical, but the CAPM has only one factor and one beta. Conversely, the APT formula has multiple factors that include non-company factors, which requires the asset's beta in relation to each separate factor. However, the APT does not provide insight into what these factors could be, so users of the APT model must analytically determine relevant factors that might affect the asset's returns. On the other hand, the factor used in the CAPM is the difference between the expected market rate of return and the risk-free rate of return. Since the CAPM is a one-factor model and simpler to use, investors may want to use it to determine the expected theoretical appropriate rate of return rather than using APT, which requires users to quantify multiple factors.

https://www.investopedia.com/articles/active-trading/093014/penny-stocks-options-and-trading-margin.asp

Penny Stocks, Options and Trading on Margin

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> At its best, investing in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pennystock.asp">penny stocks</a> can be an exciting, lucrative endeavor. In most cases, a good strategy is to maximize the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a> of the invested capital by buying as many shares as possible. A move of only a few pennies when multiplied by a large position can equal a substantial gain in a relatively short period of time. Additionally, penny stocks can have lower trading volume than many listed options, a lack of liquidity which might present additional trading difficulties. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> As investors become more sophisticated they turn to products such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/options-basics-tutorial-4583012">options</a> as a method for increasing the amount of leverage in a position. Given the lure of penny stocks and options it's natural for an investor to try and combine the two. Unfortunately, in the case of penny stocks, trading associated options is not possible. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Penny stocks are low-priced shares of companies that often come with a greater degree of risk and volatility.</li><li>Because they have low share prices, investors and traders can acquire a sizable position, especially if employing leverage or options contracts.</li><li>Leverage however, can magnify the risk and volatility associated with penny stocks, so beware!</li></ul></div></div></div> <span class="heading-toc" id="toc-options-on-small-cap-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Options on Small-Cap ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> While it may not be possible to trade options in specific penny stocks, it's still possible to use options to leverage the potential of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-cap.asp">small-cap</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/microcapstock.asp">micro-cap</a> universe. One popular product for trading small-cap stocks is the iShares Russell 2000 ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwm">IWM</a>). For those unfamiliar with this product, IWM seeks to track the investment results of an index composed of small-cap U.S. equities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Let's look at a historical example: Over the twelve months ending Sept. 23, 2014, IWM returned 17.62%. While it isn’t possible to trade options in many of the components, it's possible to trade options on the ETF itself. Small moves in the underlying ETF generally translate to significant movements in the options. One of the biggest benefits of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/etfs-mutual-funds/050416/4-largest-microcap-etfs-iwc-fdm.asp">trading options in small-cap ETFs</a> rather than the stocks themselves is that it removes much of the company-specific risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-margin-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> Margin Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Another method for increasing leverage to penny stocks is to set up a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaccount.asp">margin account</a>. This type of investment account gives investors access to additional capital based on leveraging capital and securities existing within the account. Essentially this is the equivalent to borrowing money from your broker, using existing cash and securities as collateral, and then paying interest on the borrowed money for the right to use capital for buying and selling shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> While trading on margin provides investors with additional leverage, it can be extremely risky. Using money that you don’t have for the purpose of buying any kind of stock is frowned upon by many, and if not used correctly, can lead to financial ruin. A good rule is to tread lightly whenever using margin or leverage of any kind to buy financial assets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Buying penny stocks with cash can be a risky maneuver. That said, there are some traders out there that would like to increase their leverage to penny stocks even more by using products such as options. Unfortunately, in the majority of cases, options are not available for trading penny stocks. However, some risk-tolerant traders can turn to options on exchange-traded funds as a workaround. Some traders may even use the benefits of their margin accounts when trading penny stocks, but this should be considered a last resort and used with extreme caution. </p></div>

At its best, investing in [penny stocks](https://www.investopedia.com/terms/p/pennystock.asp) can be an exciting, lucrative endeavor. In most cases, a good strategy is to maximize the [leverage](https://www.investopedia.com/terms/l/leverage.asp) of the invested capital by buying as many shares as possible. A move of only a few pennies when multiplied by a large position can equal a substantial gain in a relatively short period of time. Additionally, penny stocks can have lower trading volume than many listed options, a lack of liquidity which might present additional trading difficulties. As investors become more sophisticated they turn to products such as [options](https://www.investopedia.com/options-basics-tutorial-4583012) as a method for increasing the amount of leverage in a position. Given the lure of penny stocks and options it's natural for an investor to try and combine the two. Unfortunately, in the case of penny stocks, trading associated options is not possible. ### Key Takeaways * Penny stocks are low-priced shares of companies that often come with a greater degree of risk and volatility. * Because they have low share prices, investors and traders can acquire a sizable position, especially if employing leverage or options contracts. * Leverage however, can magnify the risk and volatility associated with penny stocks, so beware! ## Options on Small-Cap ETFs While it may not be possible to trade options in specific penny stocks, it's still possible to use options to leverage the potential of the [small-cap](https://www.investopedia.com/terms/s/small-cap.asp) or [micro-cap](https://www.investopedia.com/terms/m/microcapstock.asp) universe. One popular product for trading small-cap stocks is the iShares Russell 2000 ETF ([IWM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwm)). For those unfamiliar with this product, IWM seeks to track the investment results of an index composed of small-cap U.S. equities. Let's look at a historical example: Over the twelve months ending Sept. 23, 2014, IWM returned 17.62%. While it isn’t possible to trade options in many of the components, it's possible to trade options on the ETF itself. Small moves in the underlying ETF generally translate to significant movements in the options. One of the biggest benefits of [trading options in small-cap ETFs](https://www.investopedia.com/articles/etfs-mutual-funds/050416/4-largest-microcap-etfs-iwc-fdm.asp) rather than the stocks themselves is that it removes much of the company-specific risk. ## Margin Accounts Another method for increasing leverage to penny stocks is to set up a [margin account](https://www.investopedia.com/terms/m/marginaccount.asp). This type of investment account gives investors access to additional capital based on leveraging capital and securities existing within the account. Essentially this is the equivalent to borrowing money from your broker, using existing cash and securities as collateral, and then paying interest on the borrowed money for the right to use capital for buying and selling shares. While trading on margin provides investors with additional leverage, it can be extremely risky. Using money that you don’t have for the purpose of buying any kind of stock is frowned upon by many, and if not used correctly, can lead to financial ruin. A good rule is to tread lightly whenever using margin or leverage of any kind to buy financial assets. ## The Bottom Line Buying penny stocks with cash can be a risky maneuver. That said, there are some traders out there that would like to increase their leverage to penny stocks even more by using products such as options. Unfortunately, in the majority of cases, options are not available for trading penny stocks. However, some risk-tolerant traders can turn to options on exchange-traded funds as a workaround. Some traders may even use the benefits of their margin accounts when trading penny stocks, but this should be considered a last resort and used with extreme caution.

At its best, investing in penny stocks can be an exciting, lucrative endeavor. In most cases, a good strategy is to maximize the leverage of the invested capital by buying as many shares as possible. A move of only a few pennies when multiplied by a large position can equal a substantial gain in a relatively short period of time. Additionally, penny stocks can have lower trading volume than many listed options, a lack of liquidity which might present additional trading difficulties. As investors become more sophisticated they turn to products such as options as a method for increasing the amount of leverage in a position. Given the lure of penny stocks and options it's natural for an investor to try and combine the two. Unfortunately, in the case of penny stocks, trading associated options is not possible. Key Takeaways Penny stocks are low-priced shares of companies that often come with a greater degree of risk and volatility.Because they have low share prices, investors and traders can acquire a sizable position, especially if employing leverage or options contracts.Leverage however, can magnify the risk and volatility associated with penny stocks, so beware! Options on Small-Cap ETFs While it may not be possible to trade options in specific penny stocks, it's still possible to use options to leverage the potential of the small-cap or micro-cap universe. One popular product for trading small-cap stocks is the iShares Russell 2000 ETF (IWM). For those unfamiliar with this product, IWM seeks to track the investment results of an index composed of small-cap U.S. equities. Let's look at a historical example: Over the twelve months ending Sept. 23, 2014, IWM returned 17.62%. While it isn’t possible to trade options in many of the components, it's possible to trade options on the ETF itself. Small moves in the underlying ETF generally translate to significant movements in the options. One of the biggest benefits of trading options in small-cap ETFs rather than the stocks themselves is that it removes much of the company-specific risk. Margin Accounts Another method for increasing leverage to penny stocks is to set up a margin account. This type of investment account gives investors access to additional capital based on leveraging capital and securities existing within the account. Essentially this is the equivalent to borrowing money from your broker, using existing cash and securities as collateral, and then paying interest on the borrowed money for the right to use capital for buying and selling shares. While trading on margin provides investors with additional leverage, it can be extremely risky. Using money that you don’t have for the purpose of buying any kind of stock is frowned upon by many, and if not used correctly, can lead to financial ruin. A good rule is to tread lightly whenever using margin or leverage of any kind to buy financial assets. The Bottom Line Buying penny stocks with cash can be a risky maneuver. That said, there are some traders out there that would like to increase their leverage to penny stocks even more by using products such as options. Unfortunately, in the majority of cases, options are not available for trading penny stocks. However, some risk-tolerant traders can turn to options on exchange-traded funds as a workaround. Some traders may even use the benefits of their margin accounts when trading penny stocks, but this should be considered a last resort and used with extreme caution.

https://www.investopedia.com/urban-outfitters-stock-falls-after-jefferies-downgrade-as-retailer-foot-traffic-slows-8634973

Urban Outfitters Stock Falls After Jefferies Downgrade as Retailer's Foot Traffic Slows

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Urban Outfitters shares decline after Jefferies warned about slowing foot traffic at the clothing and shoe retailer.</li><li>Jefferies cut its rating on the stock to Underperform from Hold, and reduced the price target by $10 to $32.</li><li>Analyst Corey Tarlowe said along with declining foot traffic, Urban Outfitters faced promotional pressures and more competition.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Shares of clothing and shoe retailer Urban Outfitters (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=URBN">URBN</a>) dropped over 3% in intraday trading Wednesday following a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downgrade.asp">downgrade</a> from Jefferies, which warned about a slowdown in shoppers going to Urban Outfitters stores. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Jefferies lowered its rating on the stock to "underperform" from "hold," and lowered the price target to $32 from $42. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Analyst Corey Tarlowe wrote that there has been “a notable deceleration” in rolling three-month foot traffic at its Urban Outfitters, Anthropologie, and Free People locations. He noted that while the firm’s core brands have benefited from recent emerging fashion trends, “the stock could face short-term headwinds as core Urban Outfitters' turnaround is likely bumpy, and growth at Anthropologie &amp; Free People appears to be moderating.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Tarlowe added that the company also faced promotional pressures and increased competition. He pointed to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/gap-shares-gain-on-q4-earnings-beat-boosted-by-namesake-brand-old-navy-8606265">increased foot traffic at the stores of rival Gap</a> (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPS">GPS</a>) and the potential loss of market share. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Shares of Urban Outfitters were down 3.2% at $36.81 as of about 2 p.m. ET Wednesday. Despite Wednesday's losses, shares of Urban Outfitters remained higher for 2024. They've gained close to 3% since the start of the year.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_13-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:65.1%;"> <img alt="URBN" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Hn6ScDJ8zGr_ecdcaffjOildY1g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/URBN_2024-04-17_14-07-45-c82f0c0d804e43ad9e5ef852d16ba100.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Hn6ScDJ8zGr_ecdcaffjOildY1g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/URBN_2024-04-17_14-07-45-c82f0c0d804e43ad9e5ef852d16ba100.png" data-srcset="https://www.investopedia.com/thmb/otS_trCLYK7DEQ3TP9KkDwBOTco=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/URBN_2024-04-17_14-07-45-c82f0c0d804e43ad9e5ef852d16ba100.png 750w" data-tracking-container="true" height="1015" id="mntl-sc-block-image_1-0" width="1558"/> <noscript> <img alt="URBN" class="img--noscript universal-image__image" height="1015" sizes="750px" src="https://www.investopedia.com/thmb/Hn6ScDJ8zGr_ecdcaffjOildY1g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/URBN_2024-04-17_14-07-45-c82f0c0d804e43ad9e5ef852d16ba100.png" srcset="https://www.investopedia.com/thmb/otS_trCLYK7DEQ3TP9KkDwBOTco=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/URBN_2024-04-17_14-07-45-c82f0c0d804e43ad9e5ef852d16ba100.png 750w" width="1558"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span> </figcaption></figure> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * Urban Outfitters shares decline after Jefferies warned about slowing foot traffic at the clothing and shoe retailer. * Jefferies cut its rating on the stock to Underperform from Hold, and reduced the price target by $10 to $32. * Analyst Corey Tarlowe said along with declining foot traffic, Urban Outfitters faced promotional pressures and more competition. Shares of clothing and shoe retailer Urban Outfitters ([URBN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=URBN)) dropped over 3% in intraday trading Wednesday following a [downgrade](https://www.investopedia.com/terms/d/downgrade.asp) from Jefferies, which warned about a slowdown in shoppers going to Urban Outfitters stores. Jefferies lowered its rating on the stock to "underperform" from "hold," and lowered the price target to $32 from $42. Analyst Corey Tarlowe wrote that there has been “a notable deceleration” in rolling three-month foot traffic at its Urban Outfitters, Anthropologie, and Free People locations. He noted that while the firm’s core brands have benefited from recent emerging fashion trends, “the stock could face short-term headwinds as core Urban Outfitters' turnaround is likely bumpy, and growth at Anthropologie & Free People appears to be moderating.” Tarlowe added that the company also faced promotional pressures and increased competition. He pointed to [increased foot traffic at the stores of rival Gap](https://www.investopedia.com/gap-shares-gain-on-q4-earnings-beat-boosted-by-namesake-brand-old-navy-8606265) ([GPS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPS)) and the potential loss of market share. Shares of Urban Outfitters were down 3.2% at $36.81 as of about 2 p.m. ET Wednesday. Despite Wednesday's losses, shares of Urban Outfitters remained higher for 2024. They've gained close to 3% since the start of the year. ![URBN]() :max_bytes(150000):strip_icc()/URBN_2024-04-17_14-07-45-c82f0c0d804e43ad9e5ef852d16ba100.png) TradingView Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways Urban Outfitters shares decline after Jefferies warned about slowing foot traffic at the clothing and shoe retailer.Jefferies cut its rating on the stock to Underperform from Hold, and reduced the price target by $10 to $32.Analyst Corey Tarlowe said along with declining foot traffic, Urban Outfitters faced promotional pressures and more competition. Shares of clothing and shoe retailer Urban Outfitters (URBN) dropped over 3% in intraday trading Wednesday following a downgrade from Jefferies, which warned about a slowdown in shoppers going to Urban Outfitters stores. Jefferies lowered its rating on the stock to "underperform" from "hold," and lowered the price target to $32 from $42. Analyst Corey Tarlowe wrote that there has been “a notable deceleration” in rolling three-month foot traffic at its Urban Outfitters, Anthropologie, and Free People locations. He noted that while the firm’s core brands have benefited from recent emerging fashion trends, “the stock could face short-term headwinds as core Urban Outfitters' turnaround is likely bumpy, and growth at Anthropologie & Free People appears to be moderating.” Tarlowe added that the company also faced promotional pressures and increased competition. He pointed to increased foot traffic at the stores of rival Gap (GPS) and the potential loss of market share. Shares of Urban Outfitters were down 3.2% at $36.81 as of about 2 p.m. ET Wednesday. Despite Wednesday's losses, shares of Urban Outfitters remained higher for 2024. They've gained close to 3% since the start of the year. TradingView Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/lendingclub-savings-account-interest-rates-7500507

LendingClub Savings Account Interest Rates: May 2024

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-lendingclub-savings-account-interest-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> LendingClub Savings Account Interest Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Although LendingClub is primarily known for its personal loans, the company has expanded its offerings to include other banking products, including checking and savings accounts. It now has two high-yield savings account options that offer much higher-than-average annual percentage yields (APYs) with no monthly maintenance fees. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> However, the account with the highest APY is available by invitation only, and it’s not open to the general public. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_6-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th><b>Account Name</b></th> <th><b>Balance for Highest APY</b></th> <th><b>APY Range</b></th> <th><b>Monthly Fee</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>High-Yield Savings</b></td> <td>$0 ($100 opening deposit)</td> <td>5.00%</td> <td>$0<span data-cite="1"></span></td> </tr> <tr> <td><b>Founder Savings</b></td> <td>$0</td> <td>5.05%</td> <td>$0<span data-cite="2"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>See the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings account rates</a> today before choosing the savings account that is best for you.</p></div></div></div> <span class="heading-toc" id="toc-lendingclub-high-yield-savings-accounts-key-features"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> LendingClub High-Yield Savings Accounts: Key Features </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_11-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">High-Yield Savings Account Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>5.00%</td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>None</td> </tr> <tr> <th><b>Minimum Opening Deposit</b></th> <td>$100</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>Daily limits apply to ATM withdrawals and outgoing transfers</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$0<span data-cite="1"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> LendingClub’s high-yield savings accounts offer an APY that is significantly higher than the national average.<span class="ql-inline-citation" data-cite="3"></span> You can open an account with as little as $100 and, after the account is open, there is no minimum balance to maintain.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The account has no monthly fees, and you can get a free ATM card to use with no fees at in-network ATMs (SUM and MoneyPass ATMs).<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> LendingClub uses the daily balance method to calculate interest on the account. The accrued interest is credited to your account on the last business day of the monthly statement cycle.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Unlike most banks, LendingClub doesn’t have a fixed limit on the number of transfers you can make per month. Instead, it sets daily <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/faq-what-are-the-withdrawal-limits-for-savings-accounts-4589981">withdrawal limits</a> based on the age of the account and your total balance in LendingClub accounts.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_21-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th></th> <th><b>Account open for 30 days or less</b></th> <th><b>Account open for at least 90 days and total relationship balance of $10,000 or more</b></th> <th><b>Account open for at least 120 days and total relationship balance of $50,000 or more</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Outgoing external ACH transfers</b></td> <td>$10,000 daily limit</td> <td>$50,000 daily limit</td> <td>$250,000 daily limit</td> </tr> <tr> <td><b>ATM withdrawal</b></td> <td>$500 daily limit</td> <td>$1,000 daily limit</td> <td>$2,000 daily limit</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>As a LendingClub customer, you also get access to a financial dashboard. You can use the dashboard to create a budget, track your spending, develop an action plan to repay outstanding debt, and track your net worth. </p></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_25-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Founders Savings Account Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>5.05%</td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>$0</td> </tr> <tr> <th><b>Minimum Opening Deposit</b></th> <td>$0</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>Daily limits apply to outgoing external transfers</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$0<span data-cite="2"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> In LendingClub’s early days, it allowed individuals to become investors by providing funding for loans through the LendingClub Notes program. However, LendingClub Notes has ended. But as a benefit to those founding members, LendingClub introduced the Founder Savings account, an account only available through invitation. If you participated in the LendingClub Notes program, you may be eligible for the Founder Savings account.<span class="ql-inline-citation" data-cite="4"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The Founder Savings account offers a higher APY than is available through LendingClub’s public high-yield savings account, and there is no minimum balance requirement to open an account. Nor are there any monthly maintenance fees.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> LendingClub uses the daily balance method to calculate interest on the Founder Savings account, and accrued interest is credited on the last business day of the monthly statement cycle.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The Founder Savings account doesn’t limit the number of transfers you can make, but it does set a daily limit of $250,000 on outgoing external transfers.<span class="ql-inline-citation" data-cite="2"></span> <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-pros-and-cons-of-lendingclub-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Pros and Cons of LendingClub Savings Accounts </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-subheading__text"> Pros </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <li><strong>Higher-than-average APY:</strong> LendingClub’s savings account interest rates tend to be significantly higher than the national average. In Oct. 2023, its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apy.asp">annual percentage yield (APY)</a> was around ten times higher than the national average APY for all savings accounts.<span class="ql-inline-citation" data-cite="10"></span></li> <li><strong>No monthly fees:</strong> Whereas many banks charge monthly fees—or require account holders to maintain a certain balance before they'll waive the fee—LendingClub's high-yield savings account has no <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/bank_fees.asp">monthly maintenance fees</a>. </li> <li><strong>Allows cash deposits at ATMs:</strong> Many digital banks provide no option to deposit cash; all deposits must be made via electronic transfer or mobile deposit. For those in jobs that typically pay cash, that downside is significant. But with the LendingClub savings account you can deposit cash at a MoneyPass deposit-taking ATM. </li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Cons </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <li><strong>Minimum deposit requirement:</strong> Although many digital banks allow customers to open accounts with no minimum deposit, LendingClub requires a deposit of at least $100 to open a high-yield savings account, although there’s no minimum required balance after that.</li> <li><strong>Low external transfer limit:</strong> Nationally, the per-payment <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-an-external-transfer-5185528">electronic transfer</a> limit is $1 million. Most banks have lower limits, but they usually allow transfers of $25,000 to $100,000 per day.<span class="ql-inline-citation" data-cite="9"></span> But with LendingClub, those with high-yield savings accounts with the basic "Preferred" status based on their account balances are limited to just $10,000 in outgoing external transfers per day. If you're making a large transaction—such as transferring the funds for a down payment on a house—you may have to space out your deposits, which could be frustrating. </li> <li><strong>Lack of physical branches:</strong> LendingClub operates two branches nationwide, so the vast majority of customers won't have access to a brick-and-mortar location or in-person assistance. <br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_42-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-advisorinsight" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_43-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>With a LendingClub savings account, you can deposit and withdraw cash at select MoneyPass ATMs. MoneyPass is a fee-free ATM network with over 40,000 locations nationwide.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div> <span class="heading-toc" id="toc-about-lendingclub-other-savings-options"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-heading__text"> About LendingClub: Other Savings Options </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lendingclub-banking-review-5071446">LendingClub</a> was founded in 2006 as a digital installment loan platform. But in 2021, it acquired Radius Bancorp and became a bank holding company. Now, LendingClub offers a range of financial products, including <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lendingclub-personal-loans-review-4800191">personal loans</a>, auto loans, checking accounts, and savings accounts.<span class="ql-inline-citation" data-cite="5"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> As a digital bank, LendingClub allows you to open accounts entirely online. You just need to provide your Social Security number, current U.S. address, email address, and the banking details of another bank account to make your initial deposit.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Besides high-yield savings accounts, LendingClub also offers a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificate of deposit (CD)</a>. Its CD usually has a much higher-than-average APY, and you can choose from a variety of term lengths.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> LendingClub’s checking accounts, savings accounts, and CDs are backed by the Federal Deposit Insurance Corporation (FDIC), so your deposits are insured up to $250,000.<span class="ql-inline-citation" data-cite="7"></span> <br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_53-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_54-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>You can only open a LendingClub savings account online. You cannot open an account over the phone, and LendingClub doesn’t operate any branches. If you want one-on-one assistance, you may want a more traditional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/banks-pay-highest-interest-rates-savings-accounts/">brick-and-mortar bank or credit union</a>.</p></div></div></div> <span class="heading-toc" id="toc-alternatives-to-lendingclub-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> Alternatives to LendingClub Savings Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> If LendingClub isn't right for you, consider one of the following alternatives to build your savings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-subheading__text"> Other High-Yield Savings Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Although LendingClub offers a high-yield savings account with relatively good interest rates, it likely doesn’t offer the highest rate you can get. If a great APY is on the top of your wish list, check out the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings account rates</a> to see how much you could earn. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Although some banks and credit unions advertise high APYs on savings accounts, the rates are usually <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/whats-better-for-my-savings-right-now-a-fixed-or-variable-interest-rate-7511362">variable</a>, and they could decrease (or increase) over time.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_63-0"> <span class="mntl-sc-block-subheading__text"> High-Yield Checking </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> High-yield savings accounts provide higher-than-average APYs, but they often lack accessibility. They may not provide debit or check-writing privileges, and the bank may limit how many withdrawals you can make per month.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> If you need to withdraw money from your account with low friction and/or often, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-checking-accounts-5070332">high-yield checking account</a> may be a better choice. You'll earn a relatively high APY on your balance, but you can quickly and easily withdraw cash at an ATM or by writing checks without restrictions on the number of withdrawals.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-subheading__text"> Certificates of Deposit (CDs) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> If you want to lock in a specific rate, a CD may be a better choice than a savings account or cash management account. With a CD your money is committed to the account for a specific period, such as 24 or 36 months, and you earn a fixed rate of interest during that time. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">The best CD accounts</a> often pay higher APYs than savings accounts, so your money can grow more quickly.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> However, CDs aren't as liquid as savings accounts. If you need to withdraw money from the CD before its maturity date, you'll usually have to pay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">an early-withdrawal penalty</a>.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-subheading__text"> Cash Management Accounts  </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cash-management-account-vs-brokerage-account-7498122">Cash management accounts</a> are typically offered by non-bank entities, such as brokerage firms. They usually offer substantially higher APYs than the average rate for traditional savings accounts, and they may offer additional Federal Deposit Insurance Corporation (FDIC) coverage, protecting deposits over the $250,000 limit. Depending on the brokerage offering the CMA, you may also have check-writing privileges and a debit card. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-compare-savings-account-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> Compare Savings Account Rates </span> </h2> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--ma-rate-table--finance-mma" id="mntl-sc-block_77-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div class="comp ma-rate-table--finance-mma mntl-block" id="ma-rate-table--finance-mma_1-0"></div><!-- end: comp ma-rate-table--finance-mma mntl-block --> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <span class="heading-toc" id="toc-frequently-asked-questions-faqs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_79-0"> <span class="mntl-sc-block-heading__text"> Frequently Asked Questions (FAQs) </span> </h2> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_80-0"><span class="heading-toc" id="toc-are-lendingclub-savings-accounts-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are LendingClub Savings Accounts Safe?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>LendingClub is a safe option. Like traditional brick-and-mortar banks, LendingClub’s savings accounts are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">backed by the FDIC</a>, so your deposits are insured up to $250,000.<span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_82-0"><span class="heading-toc" id="toc-how-do-you-open-a-lendingclub-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Open a LendingClub Savings Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631">open a LendingClub savings account online</a>. To open an account you must be at least 18 years old and a citizen or resident of the U.S. with a valid Social Security number. You'll also need at least $100 for the opening deposit for a high-yield account. According to LendingClub, you can fill out the account application and get a response within minutes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_84-0"><span class="heading-toc" id="toc-how-much-money-do-you-need-for-a-lendingclub-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Money Do You Need for a LendingClub Savings Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>To <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631">open a high-yield savings account</a> with LendingClub, you need at least $100.<span class="ql-inline-citation" data-cite="1"></span> There is no minimum deposit requirement for LendingClub’s Founders Savings Account, but that account is invitation-only.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_86-0"><span class="heading-toc" id="toc-how-can-you-withdraw-money-from-a-lendingclub-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Withdraw Money From a LendingClub Savings Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>LendingClub doesn’t operate branches, so you can’t withdraw money from a teller. However, you can withdraw money at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atm.asp">ATMs</a> with your provided ATM card, or by transferring funds to another bank online via ACH.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_88-0"><span class="heading-toc" id="toc-is-lendingclub-good-for-savings"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is LendingClub Good for Savings?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>LendingClub is a useful option for those who want a bank account with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/bank_fees.asp">no monthly fees</a>. You can earn a much higher yield on your savings, and there’s no ongoing minimum balance requirement.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_90-0"><span class="heading-toc" id="toc-is-lendingclubs-savings-account-legit"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is LendingClub’s Savings Account Legit?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>LendingClub's savings accounts are a legitimate banking option. LendingClub acquired Radius Bancorp in 2021 and formed LendingClub Bank.<span class="ql-inline-citation" data-cite="11"></span> Today, it offers a range of banking products and its deposit accounts are backed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic-insured-account.asp">FDIC insurance</a>. Deposits to a LendingClub savings or checking account are insured up to $250,000.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div> <span class="heading-toc" id="toc-your-guide-to-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_92-0"> <span class="mntl-sc-block-heading__text"> Your Guide to Savings Accounts </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">What Is a Savings Account and How Does It Work?</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">What Is a High-Yield Savings Account?</a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631">How to Open a High-Yield Savings Account</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-close-a-savings-account-7500880">How to Close a Savings Account</a></li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp">Besides a Savings Account, Where Is the Safest Place to Keep My Money?</a></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-many-savings-accounts-should-i-have-7775519">How Many Savings Accounts Should I Have?</a></li> <li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/043015/what-economic-factors-affect-savings-account-rates.asp">How Savings Account Interest Rates Are Determined</a></li> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp">How Interest Works on Savings Accounts</a></li> <li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/052515/how-savings-account-taxed.asp">How Is a Savings Account Taxed?</a></li> <li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp">Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?</a></li> <li><a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cds-vs-savings-accounts-5270287">Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?</a></li> <li><a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp">4 Savings Accounts for Investors</a></li> <li><a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">Best High-Yield Savings Accounts</a></li> <li><a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-free-savings-accounts-5191103">Best Free Savings Accounts</a></li> <li><a data-component="link" data-ordinal="15" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-accounts-for-kids-5179494">Best Savings Accounts for Kids and Teens</a></li> </ul></div>

## LendingClub Savings Account Interest Rates Although LendingClub is primarily known for its personal loans, the company has expanded its offerings to include other banking products, including checking and savings accounts. It now has two high-yield savings account options that offer much higher-than-average annual percentage yields (APYs) with no monthly maintenance fees. However, the account with the highest APY is available by invitation only, and it’s not open to the general public. | **Account Name** | **Balance for Highest APY** | **APY Range** | **Monthly Fee** | | --- | --- | --- | --- | | **High-Yield Savings** | $0 ($100 opening deposit) | 5.00% | $0 | | **Founder Savings** | $0 | 5.05% | $0 | ### See the [best high-yield savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) today before choosing the savings account that is best for you. ## LendingClub High-Yield Savings Accounts: Key Features | High-Yield Savings Account Key Features | | | --- | --- | | **APY Range** | 5.00% | | **Minimum Balance to Earn Highest APY** | None | | **Minimum Opening Deposit** | $100 | | **Withdrawal Limit** | Daily limits apply to ATM withdrawals and outgoing transfers | | **Monthly Service Fee** | $0 | LendingClub’s high-yield savings accounts offer an APY that is significantly higher than the national average. You can open an account with as little as $100 and, after the account is open, there is no minimum balance to maintain.  The account has no monthly fees, and you can get a free ATM card to use with no fees at in-network ATMs (SUM and MoneyPass ATMs). LendingClub uses the daily balance method to calculate interest on the account. The accrued interest is credited to your account on the last business day of the monthly statement cycle.  Unlike most banks, LendingClub doesn’t have a fixed limit on the number of transfers you can make per month. Instead, it sets daily [withdrawal limits](https://www.investopedia.com/faq-what-are-the-withdrawal-limits-for-savings-accounts-4589981) based on the age of the account and your total balance in LendingClub accounts.  | | **Account open for 30 days or less** | **Account open for at least 90 days and total relationship balance of $10,000 or more** | **Account open for at least 120 days and total relationship balance of $50,000 or more** | | --- | --- | --- | --- | | **Outgoing external ACH transfers** | $10,000 daily limit | $50,000 daily limit | $250,000 daily limit | | **ATM withdrawal** | $500 daily limit | $1,000 daily limit | $2,000 daily limit | ### As a LendingClub customer, you also get access to a financial dashboard. You can use the dashboard to create a budget, track your spending, develop an action plan to repay outstanding debt, and track your net worth.  | Founders Savings Account Key Features | | | --- | --- | | **APY Range** | 5.05% | | **Minimum Balance to Earn Highest APY** | $0 | | **Minimum Opening Deposit** | $0 | | **Withdrawal Limit** | Daily limits apply to outgoing external transfers | | **Monthly Service Fee** | $0 | In LendingClub’s early days, it allowed individuals to become investors by providing funding for loans through the LendingClub Notes program. However, LendingClub Notes has ended. But as a benefit to those founding members, LendingClub introduced the Founder Savings account, an account only available through invitation. If you participated in the LendingClub Notes program, you may be eligible for the Founder Savings account.  The Founder Savings account offers a higher APY than is available through LendingClub’s public high-yield savings account, and there is no minimum balance requirement to open an account. Nor are there any monthly maintenance fees.  LendingClub uses the daily balance method to calculate interest on the Founder Savings account, and accrued interest is credited on the last business day of the monthly statement cycle.  The Founder Savings account doesn’t limit the number of transfers you can make, but it does set a daily limit of $250,000 on outgoing external transfers.  ## Pros and Cons of LendingClub Savings Accounts ### Pros * **Higher-than-average APY:** LendingClub’s savings account interest rates tend to be significantly higher than the national average. In Oct. 2023, its [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp) was around ten times higher than the national average APY for all savings accounts. * **No monthly fees:** Whereas many banks charge monthly fees—or require account holders to maintain a certain balance before they'll waive the fee—LendingClub's high-yield savings account has no [monthly maintenance fees](https://www.investopedia.com/articles/pf/07/bank_fees.asp). * **Allows cash deposits at ATMs:** Many digital banks provide no option to deposit cash; all deposits must be made via electronic transfer or mobile deposit. For those in jobs that typically pay cash, that downside is significant. But with the LendingClub savings account you can deposit cash at a MoneyPass deposit-taking ATM. ### Cons * **Minimum deposit requirement:** Although many digital banks allow customers to open accounts with no minimum deposit, LendingClub requires a deposit of at least $100 to open a high-yield savings account, although there’s no minimum required balance after that. * **Low external transfer limit:** Nationally, the per-payment [electronic transfer](https://www.investopedia.com/what-is-an-external-transfer-5185528) limit is $1 million. Most banks have lower limits, but they usually allow transfers of $25,000 to $100,000 per day. But with LendingClub, those with high-yield savings accounts with the basic "Preferred" status based on their account balances are limited to just $10,000 in outgoing external transfers per day. If you're making a large transaction—such as transferring the funds for a down payment on a house—you may have to space out your deposits, which could be frustrating. * **Lack of physical branches:** LendingClub operates two branches nationwide, so the vast majority of customers won't have access to a brick-and-mortar location or in-person assistance. ### With a LendingClub savings account, you can deposit and withdraw cash at select MoneyPass ATMs. MoneyPass is a fee-free ATM network with over 40,000 locations nationwide. ## About LendingClub: Other Savings Options [LendingClub](https://www.investopedia.com/lendingclub-banking-review-5071446) was founded in 2006 as a digital installment loan platform. But in 2021, it acquired Radius Bancorp and became a bank holding company. Now, LendingClub offers a range of financial products, including [personal loans](https://www.investopedia.com/lendingclub-personal-loans-review-4800191), auto loans, checking accounts, and savings accounts.  As a digital bank, LendingClub allows you to open accounts entirely online. You just need to provide your Social Security number, current U.S. address, email address, and the banking details of another bank account to make your initial deposit.  Besides high-yield savings accounts, LendingClub also offers a [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp). Its CD usually has a much higher-than-average APY, and you can choose from a variety of term lengths.  LendingClub’s checking accounts, savings accounts, and CDs are backed by the Federal Deposit Insurance Corporation (FDIC), so your deposits are insured up to $250,000.  ### You can only open a LendingClub savings account online. You cannot open an account over the phone, and LendingClub doesn’t operate any branches. If you want one-on-one assistance, you may want a more traditional [brick-and-mortar bank or credit union](https://www.investopedia.com/personal-finance/banks-pay-highest-interest-rates-savings-accounts/). ## Alternatives to LendingClub Savings Accounts If LendingClub isn't right for you, consider one of the following alternatives to build your savings. ### Other High-Yield Savings Accounts Although LendingClub offers a high-yield savings account with relatively good interest rates, it likely doesn’t offer the highest rate you can get. If a great APY is on the top of your wish list, check out the [best high-yield savings account rates](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) to see how much you could earn. Although some banks and credit unions advertise high APYs on savings accounts, the rates are usually [variable](https://www.investopedia.com/whats-better-for-my-savings-right-now-a-fixed-or-variable-interest-rate-7511362), and they could decrease (or increase) over time. ### High-Yield Checking High-yield savings accounts provide higher-than-average APYs, but they often lack accessibility. They may not provide debit or check-writing privileges, and the bank may limit how many withdrawals you can make per month.  If you need to withdraw money from your account with low friction and/or often, a [high-yield checking account](https://www.investopedia.com/best-high-yield-checking-accounts-5070332) may be a better choice. You'll earn a relatively high APY on your balance, but you can quickly and easily withdraw cash at an ATM or by writing checks without restrictions on the number of withdrawals.  ### Certificates of Deposit (CDs) If you want to lock in a specific rate, a CD may be a better choice than a savings account or cash management account. With a CD your money is committed to the account for a specific period, such as 24 or 36 months, and you earn a fixed rate of interest during that time. [The best CD accounts](https://www.investopedia.com/best-cd-rates-4770214) often pay higher APYs than savings accounts, so your money can grow more quickly.  However, CDs aren't as liquid as savings accounts. If you need to withdraw money from the CD before its maturity date, you'll usually have to pay [an early-withdrawal penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111).  ### Cash Management Accounts [Cash management accounts](https://www.investopedia.com/cash-management-account-vs-brokerage-account-7498122) are typically offered by non-bank entities, such as brokerage firms. They usually offer substantially higher APYs than the average rate for traditional savings accounts, and they may offer additional Federal Deposit Insurance Corporation (FDIC) coverage, protecting deposits over the $250,000 limit. Depending on the brokerage offering the CMA, you may also have check-writing privileges and a debit card. ## Compare Savings Account Rates ## Frequently Asked Questions (FAQs) ## Are LendingClub Savings Accounts Safe? LendingClub is a safe option. Like traditional brick-and-mortar banks, LendingClub’s savings accounts are [backed by the FDIC](https://www.investopedia.com/terms/f/fdic.asp), so your deposits are insured up to $250,000. ## How Do You Open a LendingClub Savings Account? You can [open a LendingClub savings account online](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631). To open an account you must be at least 18 years old and a citizen or resident of the U.S. with a valid Social Security number. You'll also need at least $100 for the opening deposit for a high-yield account. According to LendingClub, you can fill out the account application and get a response within minutes. ## How Much Money Do You Need for a LendingClub Savings Account? To [open a high-yield savings account](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631) with LendingClub, you need at least $100. There is no minimum deposit requirement for LendingClub’s Founders Savings Account, but that account is invitation-only. ## How Can You Withdraw Money From a LendingClub Savings Account? LendingClub doesn’t operate branches, so you can’t withdraw money from a teller. However, you can withdraw money at [ATMs](https://www.investopedia.com/terms/a/atm.asp) with your provided ATM card, or by transferring funds to another bank online via ACH. ## Is LendingClub Good for Savings? LendingClub is a useful option for those who want a bank account with [no monthly fees](https://www.investopedia.com/articles/pf/07/bank_fees.asp). You can earn a much higher yield on your savings, and there’s no ongoing minimum balance requirement. ## Is LendingClub’s Savings Account Legit? LendingClub's savings accounts are a legitimate banking option. LendingClub acquired Radius Bancorp in 2021 and formed LendingClub Bank. Today, it offers a range of banking products and its deposit accounts are backed by [FDIC insurance](https://www.investopedia.com/terms/f/fdic-insured-account.asp). Deposits to a LendingClub savings or checking account are insured up to $250,000. ## Your Guide to Savings Accounts * [What Is a Savings Account and How Does It Work?](https://www.investopedia.com/terms/s/savingsaccount.asp) * [What Is a High-Yield Savings Account?](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) * [How to Open a High-Yield Savings Account](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631) * [How to Close a Savings Account](https://www.investopedia.com/how-to-close-a-savings-account-7500880) * [Besides a Savings Account, Where Is the Safest Place to Keep My Money?](https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp) * [How Many Savings Accounts Should I Have?](https://www.investopedia.com/how-many-savings-accounts-should-i-have-7775519) * [How Savings Account Interest Rates Are Determined](https://www.investopedia.com/ask/answers/043015/what-economic-factors-affect-savings-account-rates.asp) * [How Interest Works on Savings Accounts](https://www.investopedia.com/articles/personal-finance/062315/how-interest-rates-work-savings-accounts.asp) * [How Is a Savings Account Taxed?](https://www.investopedia.com/ask/answers/052515/how-savings-account-taxed.asp) * [Money Market Fund vs. MMA vs. Savings Account: What’s the Difference?](https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp) * [Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You?](https://www.investopedia.com/cds-vs-savings-accounts-5270287) * [4 Savings Accounts for Investors](https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp) * [Best High-Yield Savings Accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) * [Best Free Savings Accounts](https://www.investopedia.com/best-free-savings-accounts-5191103) * [Best Savings Accounts for Kids and Teens](https://www.investopedia.com/best-savings-accounts-for-kids-5179494)

LendingClub Savings Account Interest Rates Although LendingClub is primarily known for its personal loans, the company has expanded its offerings to include other banking products, including checking and savings accounts. It now has two high-yield savings account options that offer much higher-than-average annual percentage yields (APYs) with no monthly maintenance fees. However, the account with the highest APY is available by invitation only, and it’s not open to the general public. Account Name Balance for Highest APY APY Range Monthly Fee High-Yield Savings $0 ($100 opening deposit) 5.00% $0 Founder Savings $0 5.05% $0 See the best high-yield savings account rates today before choosing the savings account that is best for you. LendingClub High-Yield Savings Accounts: Key Features High-Yield Savings Account Key Features APY Range 5.00% Minimum Balance to Earn Highest APY None Minimum Opening Deposit $100 Withdrawal Limit Daily limits apply to ATM withdrawals and outgoing transfers Monthly Service Fee $0 LendingClub’s high-yield savings accounts offer an APY that is significantly higher than the national average. You can open an account with as little as $100 and, after the account is open, there is no minimum balance to maintain.  The account has no monthly fees, and you can get a free ATM card to use with no fees at in-network ATMs (SUM and MoneyPass ATMs). LendingClub uses the daily balance method to calculate interest on the account. The accrued interest is credited to your account on the last business day of the monthly statement cycle.  Unlike most banks, LendingClub doesn’t have a fixed limit on the number of transfers you can make per month. Instead, it sets daily withdrawal limits based on the age of the account and your total balance in LendingClub accounts.  Account open for 30 days or less Account open for at least 90 days and total relationship balance of $10,000 or more Account open for at least 120 days and total relationship balance of $50,000 or more Outgoing external ACH transfers $10,000 daily limit $50,000 daily limit $250,000 daily limit ATM withdrawal $500 daily limit $1,000 daily limit $2,000 daily limit As a LendingClub customer, you also get access to a financial dashboard. You can use the dashboard to create a budget, track your spending, develop an action plan to repay outstanding debt, and track your net worth.  Founders Savings Account Key Features APY Range 5.05% Minimum Balance to Earn Highest APY $0 Minimum Opening Deposit $0 Withdrawal Limit Daily limits apply to outgoing external transfers Monthly Service Fee $0 In LendingClub’s early days, it allowed individuals to become investors by providing funding for loans through the LendingClub Notes program. However, LendingClub Notes has ended. But as a benefit to those founding members, LendingClub introduced the Founder Savings account, an account only available through invitation. If you participated in the LendingClub Notes program, you may be eligible for the Founder Savings account.  The Founder Savings account offers a higher APY than is available through LendingClub’s public high-yield savings account, and there is no minimum balance requirement to open an account. Nor are there any monthly maintenance fees.  LendingClub uses the daily balance method to calculate interest on the Founder Savings account, and accrued interest is credited on the last business day of the monthly statement cycle.  The Founder Savings account doesn’t limit the number of transfers you can make, but it does set a daily limit of $250,000 on outgoing external transfers.  Pros and Cons of LendingClub Savings Accounts Pros Higher-than-average APY: LendingClub’s savings account interest rates tend to be significantly higher than the national average. In Oct. 2023, its annual percentage yield (APY) was around ten times higher than the national average APY for all savings accounts. No monthly fees: Whereas many banks charge monthly fees—or require account holders to maintain a certain balance before they'll waive the fee—LendingClub's high-yield savings account has no monthly maintenance fees.  Allows cash deposits at ATMs: Many digital banks provide no option to deposit cash; all deposits must be made via electronic transfer or mobile deposit. For those in jobs that typically pay cash, that downside is significant. But with the LendingClub savings account you can deposit cash at a MoneyPass deposit-taking ATM.  Cons Minimum deposit requirement: Although many digital banks allow customers to open accounts with no minimum deposit, LendingClub requires a deposit of at least $100 to open a high-yield savings account, although there’s no minimum required balance after that. Low external transfer limit: Nationally, the per-payment electronic transfer limit is $1 million. Most banks have lower limits, but they usually allow transfers of $25,000 to $100,000 per day. But with LendingClub, those with high-yield savings accounts with the basic "Preferred" status based on their account balances are limited to just $10,000 in outgoing external transfers per day. If you're making a large transaction—such as transferring the funds for a down payment on a house—you may have to space out your deposits, which could be frustrating.  Lack of physical branches: LendingClub operates two branches nationwide, so the vast majority of customers won't have access to a brick-and-mortar location or in-person assistance.  With a LendingClub savings account, you can deposit and withdraw cash at select MoneyPass ATMs. MoneyPass is a fee-free ATM network with over 40,000 locations nationwide. About LendingClub: Other Savings Options LendingClub was founded in 2006 as a digital installment loan platform. But in 2021, it acquired Radius Bancorp and became a bank holding company. Now, LendingClub offers a range of financial products, including personal loans, auto loans, checking accounts, and savings accounts.  As a digital bank, LendingClub allows you to open accounts entirely online. You just need to provide your Social Security number, current U.S. address, email address, and the banking details of another bank account to make your initial deposit.  Besides high-yield savings accounts, LendingClub also offers a certificate of deposit (CD). Its CD usually has a much higher-than-average APY, and you can choose from a variety of term lengths.  LendingClub’s checking accounts, savings accounts, and CDs are backed by the Federal Deposit Insurance Corporation (FDIC), so your deposits are insured up to $250,000.  You can only open a LendingClub savings account online. You cannot open an account over the phone, and LendingClub doesn’t operate any branches. If you want one-on-one assistance, you may want a more traditional brick-and-mortar bank or credit union. Alternatives to LendingClub Savings Accounts If LendingClub isn't right for you, consider one of the following alternatives to build your savings. Other High-Yield Savings Accounts Although LendingClub offers a high-yield savings account with relatively good interest rates, it likely doesn’t offer the highest rate you can get. If a great APY is on the top of your wish list, check out the best high-yield savings account rates to see how much you could earn. Although some banks and credit unions advertise high APYs on savings accounts, the rates are usually variable, and they could decrease (or increase) over time. High-Yield Checking High-yield savings accounts provide higher-than-average APYs, but they often lack accessibility. They may not provide debit or check-writing privileges, and the bank may limit how many withdrawals you can make per month.  If you need to withdraw money from your account with low friction and/or often, a high-yield checking account may be a better choice. You'll earn a relatively high APY on your balance, but you can quickly and easily withdraw cash at an ATM or by writing checks without restrictions on the number of withdrawals.  Certificates of Deposit (CDs) If you want to lock in a specific rate, a CD may be a better choice than a savings account or cash management account. With a CD your money is committed to the account for a specific period, such as 24 or 36 months, and you earn a fixed rate of interest during that time. The best CD accounts often pay higher APYs than savings accounts, so your money can grow more quickly.  However, CDs aren't as liquid as savings accounts. If you need to withdraw money from the CD before its maturity date, you'll usually have to pay an early-withdrawal penalty.  Cash Management Accounts  Cash management accounts are typically offered by non-bank entities, such as brokerage firms. They usually offer substantially higher APYs than the average rate for traditional savings accounts, and they may offer additional Federal Deposit Insurance Corporation (FDIC) coverage, protecting deposits over the $250,000 limit. Depending on the brokerage offering the CMA, you may also have check-writing privileges and a debit card. Compare Savings Account Rates Frequently Asked Questions (FAQs) Are LendingClub Savings Accounts Safe? LendingClub is a safe option. Like traditional brick-and-mortar banks, LendingClub’s savings accounts are backed by the FDIC, so your deposits are insured up to $250,000. How Do You Open a LendingClub Savings Account? You can open a LendingClub savings account online. To open an account you must be at least 18 years old and a citizen or resident of the U.S. with a valid Social Security number. You'll also need at least $100 for the opening deposit for a high-yield account. According to LendingClub, you can fill out the account application and get a response within minutes. How Much Money Do You Need for a LendingClub Savings Account? To open a high-yield savings account with LendingClub, you need at least $100. There is no minimum deposit requirement for LendingClub’s Founders Savings Account, but that account is invitation-only. How Can You Withdraw Money From a LendingClub Savings Account? LendingClub doesn’t operate branches, so you can’t withdraw money from a teller. However, you can withdraw money at ATMs with your provided ATM card, or by transferring funds to another bank online via ACH. Is LendingClub Good for Savings? LendingClub is a useful option for those who want a bank account with no monthly fees. You can earn a much higher yield on your savings, and there’s no ongoing minimum balance requirement. Is LendingClub’s Savings Account Legit? LendingClub's savings accounts are a legitimate banking option. LendingClub acquired Radius Bancorp in 2021 and formed LendingClub Bank. Today, it offers a range of banking products and its deposit accounts are backed by FDIC insurance. Deposits to a LendingClub savings or checking account are insured up to $250,000. Your Guide to Savings Accounts What Is a Savings Account and How Does It Work? What Is a High-Yield Savings Account? How to Open a High-Yield Savings Account How to Close a Savings Account Besides a Savings Account, Where Is the Safest Place to Keep My Money? How Many Savings Accounts Should I Have? How Savings Account Interest Rates Are Determined How Interest Works on Savings Accounts How Is a Savings Account Taxed? Money Market Fund vs. MMA vs. Savings Account: What’s the Difference? Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You? 4 Savings Accounts for Investors Best High-Yield Savings Accounts Best Free Savings Accounts Best Savings Accounts for Kids and Teens

https://www.investopedia.com/terms/c/commoditypool.asp

Commodity Pool

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-commodity-pool"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Commodity Pool? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A commodity pool is a private investment structure that combines investor contributions to trade the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp" rel="noopener noreferrer">futures</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp" rel="noopener noreferrer">commodities</a> markets. The commodity pool, or fund, is used as a single entity to gain <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp" rel="noopener noreferrer">leverage</a> in trading, in the hopes of maximizing profit potential. The title "commodity pool" is a legal term as set forth by the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nfa.asp" rel="noopener noreferrer">National Futures Association (NFA)</a>. Commodity pools are also called "managed futures funds." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A commodity pool is a private investment structure that combines investor contributions to trade futures and options in commodities.</li><li>The commodity pool, or fund, is used as a single entity to gain leverage in trading, in the hopes of maximizing profit potential.</li><li>The risk of investing in commodity pools is limited to the amount of an investor's financial contribution to the fund.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-commodity-pool-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How a Commodity Pool Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Commodity pools are funds that contain a pool of capital from many investors in which the contributed money is combined and invested by the commodity pool investment management team. Commodity pool investments typically use leverage, which is borrowed money from a broker designed to magnify the returns on the investment. Commodity pools are similar to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp" rel="noopener noreferrer">mutual funds</a>, which are funds of pooled money that invest in a basket of securities, including stocks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp" rel="noopener noreferrer">hedge funds</a>–private pools of activity managed capital–are commodity pools. However, instead of investing in stocks, commodity pools invest in a basket of commodity futures contracts and options. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp" rel="noopener noreferrer">futures contract</a> is an agreement to buy or sell a commodity or security at a preset price, quantity, and time in the future. Futures contracts have standardized amounts and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlementdate.asp" rel="noopener noreferrer">settlement dates</a> and are traded on a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futuresexchange.asp" rel="noopener noreferrer">futures exchange</a>.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/option.asp" rel="noopener noreferrer">Options contracts</a> are similar to futures and give the holder the right to buy or sell the underlying asset at a preset price and date. However, options are more flexible than futures since they have more expiration dates available, and the contract sizes can be customized. Both futures and options contracts are considered <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp" rel="noopener noreferrer">derivatives</a> since the contracts derive their value from an underlying commodity or security. A commodity pool's futures and options contracts can include investments in gold, silver, corn, crude oil, and wheat. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-commodity-pool-operators"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Commodity Pool Operators </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> A principal or partner in the firm or fund would be in charge of the financial interests within the commodity pool. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cpo.asp" rel="noopener noreferrer">The commodity pool operator</a> receives the funds to use in the operation of a commodity pool, syndicate, investment trust, or another similar fund, specifically for trading commodities. The commodity pool operator would often solicit investors to bring in new funds or capital for the commodity pool. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-commodity-pool-regulators"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Commodity Pool Regulators </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Commodity pools in the United States are regulated by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cftc.asp" rel="noopener noreferrer">Commodity Futures Trading Commission (CFTC)</a> and the National Futures Association, rather than by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp" rel="noopener noreferrer">Securities and Exchange Commission (SEC)</a>, which regulates other market activity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Hedge funds that are commodity pools must be registered with the Commodity Futures Trading Commission as commodity pools and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cta.asp" rel="noopener noreferrer">Commodity Trading Advisors (CTAs)</a>. CTAs are similar to financial advisors in that they are registered advisors, but instead of providing stock advice, CTAs advise investors on commodity investing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <span class="heading-toc" id="toc-commodity-pool-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-heading__text"> Commodity Pool ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> A simplified method for retail investors to obtain market access is through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp" rel="noopener noreferrer">exchange traded funds (ETFs)</a>. These funds are similar to mutual funds but tend to have much lower costs. Commodity ETFs can be a type of commodity pool where investors pool financial resources to gain access to commodity futures markets. One reason for the explosive growth of the ETF industry is that they have dramatically expanded the way that investors can gain access to commodities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> However, not all commodity ETFs invest in commodity futures. Some commodity-based ETFs hold the stocks of commodity-producing companies such as gold mining and oil drilling companies. Other commodity ETFs buy and hold the physical commodity itself and store the investment in a vault. A gold or silver ETF, for example, might hold the physical commodity. Before investing in a commodity-based ETF, investors should research what type of holdings are in the fund. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <span class="heading-toc" id="toc-benefits-of-a-commodity-pool"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> Benefits of a Commodity Pool </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Commodity pools provide a number of benefits to investors in lieu of investing in the individual commodities that are held within the fund. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-subheading__text"> Professional Management </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Commodity pools benefit investors since they gain access to trades that would not be possible for an individual investor. Investing in futures and options contracts can be quite complex, and by deferring to an expert that's licensed to trade derivatives, investors save money from the potential costly mistakes of going it alone when investing in commodity futures. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> Leverage </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Investors gain leverage in trading, meaning they join a pool with a number of different investors, which increases their purchasing power. Investors gain more leverage and diversification, for example, by trading a $1million pooled account as opposed to a $10,000 individual account had the investor gone it alone. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-subheading__text"> Defined Risk </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> However, the risk of investing in commodity pools is limited to the amount of the investor's financial contribution to the commodity pool. Futures contracts often use borrowed funds from a broker, but no matter how big the fund's losses are due to that leverage, the investor is at risk for only the amount they contributed. The limited risk is due, in part, to the structure of commodity pools in that they're typically established as limited partnerships. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> As a result, investors can control the amount of money they want to allocate to a commodity pool, depending on their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp" rel="noopener noreferrer">risk tolerance</a>, age, financial standing, and time horizon for investing. However, investors who are unfamiliar with commodities, futures, and options should seek help from an investment advisor to determine whether a commodity pool is the right investment for them. </p></div>

## What Is a Commodity Pool? A commodity pool is a private investment structure that combines investor contributions to trade the [futures](https://www.investopedia.com/terms/f/futures.asp) and [commodities](https://www.investopedia.com/terms/c/commodity.asp) markets. The commodity pool, or fund, is used as a single entity to gain [leverage](https://www.investopedia.com/terms/l/leverage.asp) in trading, in the hopes of maximizing profit potential. The title "commodity pool" is a legal term as set forth by the [National Futures Association (NFA)](https://www.investopedia.com/terms/n/nfa.asp). Commodity pools are also called "managed futures funds." ### Key Takeaways * A commodity pool is a private investment structure that combines investor contributions to trade futures and options in commodities. * The commodity pool, or fund, is used as a single entity to gain leverage in trading, in the hopes of maximizing profit potential. * The risk of investing in commodity pools is limited to the amount of an investor's financial contribution to the fund. ## How a Commodity Pool Works Commodity pools are funds that contain a pool of capital from many investors in which the contributed money is combined and invested by the commodity pool investment management team. Commodity pool investments typically use leverage, which is borrowed money from a broker designed to magnify the returns on the investment. Commodity pools are similar to [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), which are funds of pooled money that invest in a basket of securities, including stocks. Many [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp)–private pools of activity managed capital–are commodity pools. However, instead of investing in stocks, commodity pools invest in a basket of commodity futures contracts and options. A [futures contract](https://www.investopedia.com/terms/f/futurescontract.asp) is an agreement to buy or sell a commodity or security at a preset price, quantity, and time in the future. Futures contracts have standardized amounts and [settlement dates](https://www.investopedia.com/terms/s/settlementdate.asp) and are traded on a [futures exchange](https://www.investopedia.com/terms/f/futuresexchange.asp).  [Options contracts](https://www.investopedia.com/terms/o/option.asp) are similar to futures and give the holder the right to buy or sell the underlying asset at a preset price and date. However, options are more flexible than futures since they have more expiration dates available, and the contract sizes can be customized. Both futures and options contracts are considered [derivatives](https://www.investopedia.com/terms/d/derivative.asp) since the contracts derive their value from an underlying commodity or security. A commodity pool's futures and options contracts can include investments in gold, silver, corn, crude oil, and wheat. ## Commodity Pool Operators A principal or partner in the firm or fund would be in charge of the financial interests within the commodity pool. [The commodity pool operator](https://www.investopedia.com/terms/c/cpo.asp) receives the funds to use in the operation of a commodity pool, syndicate, investment trust, or another similar fund, specifically for trading commodities. The commodity pool operator would often solicit investors to bring in new funds or capital for the commodity pool. ## Commodity Pool Regulators Commodity pools in the United States are regulated by the [Commodity Futures Trading Commission (CFTC)](https://www.investopedia.com/terms/c/cftc.asp) and the National Futures Association, rather than by the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp), which regulates other market activity. Hedge funds that are commodity pools must be registered with the Commodity Futures Trading Commission as commodity pools and [Commodity Trading Advisors (CTAs)](https://www.investopedia.com/terms/c/cta.asp). CTAs are similar to financial advisors in that they are registered advisors, but instead of providing stock advice, CTAs advise investors on commodity investing. ## Commodity Pool ETFs A simplified method for retail investors to obtain market access is through [exchange traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). These funds are similar to mutual funds but tend to have much lower costs. Commodity ETFs can be a type of commodity pool where investors pool financial resources to gain access to commodity futures markets. One reason for the explosive growth of the ETF industry is that they have dramatically expanded the way that investors can gain access to commodities. However, not all commodity ETFs invest in commodity futures. Some commodity-based ETFs hold the stocks of commodity-producing companies such as gold mining and oil drilling companies. Other commodity ETFs buy and hold the physical commodity itself and store the investment in a vault. A gold or silver ETF, for example, might hold the physical commodity. Before investing in a commodity-based ETF, investors should research what type of holdings are in the fund. ## Benefits of a Commodity Pool Commodity pools provide a number of benefits to investors in lieu of investing in the individual commodities that are held within the fund. ### Professional Management Commodity pools benefit investors since they gain access to trades that would not be possible for an individual investor. Investing in futures and options contracts can be quite complex, and by deferring to an expert that's licensed to trade derivatives, investors save money from the potential costly mistakes of going it alone when investing in commodity futures. ### Leverage Investors gain leverage in trading, meaning they join a pool with a number of different investors, which increases their purchasing power. Investors gain more leverage and diversification, for example, by trading a $1million pooled account as opposed to a $10,000 individual account had the investor gone it alone. ### Defined Risk However, the risk of investing in commodity pools is limited to the amount of the investor's financial contribution to the commodity pool. Futures contracts often use borrowed funds from a broker, but no matter how big the fund's losses are due to that leverage, the investor is at risk for only the amount they contributed. The limited risk is due, in part, to the structure of commodity pools in that they're typically established as limited partnerships. As a result, investors can control the amount of money they want to allocate to a commodity pool, depending on their [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), age, financial standing, and time horizon for investing. However, investors who are unfamiliar with commodities, futures, and options should seek help from an investment advisor to determine whether a commodity pool is the right investment for them.

What Is a Commodity Pool? A commodity pool is a private investment structure that combines investor contributions to trade the futures and commodities markets. The commodity pool, or fund, is used as a single entity to gain leverage in trading, in the hopes of maximizing profit potential. The title "commodity pool" is a legal term as set forth by the National Futures Association (NFA). Commodity pools are also called "managed futures funds." Key Takeaways A commodity pool is a private investment structure that combines investor contributions to trade futures and options in commodities.The commodity pool, or fund, is used as a single entity to gain leverage in trading, in the hopes of maximizing profit potential.The risk of investing in commodity pools is limited to the amount of an investor's financial contribution to the fund. How a Commodity Pool Works Commodity pools are funds that contain a pool of capital from many investors in which the contributed money is combined and invested by the commodity pool investment management team. Commodity pool investments typically use leverage, which is borrowed money from a broker designed to magnify the returns on the investment. Commodity pools are similar to mutual funds, which are funds of pooled money that invest in a basket of securities, including stocks. Many hedge funds–private pools of activity managed capital–are commodity pools. However, instead of investing in stocks, commodity pools invest in a basket of commodity futures contracts and options. A futures contract is an agreement to buy or sell a commodity or security at a preset price, quantity, and time in the future. Futures contracts have standardized amounts and settlement dates and are traded on a futures exchange.  Options contracts are similar to futures and give the holder the right to buy or sell the underlying asset at a preset price and date. However, options are more flexible than futures since they have more expiration dates available, and the contract sizes can be customized. Both futures and options contracts are considered derivatives since the contracts derive their value from an underlying commodity or security. A commodity pool's futures and options contracts can include investments in gold, silver, corn, crude oil, and wheat. Commodity Pool Operators A principal or partner in the firm or fund would be in charge of the financial interests within the commodity pool. The commodity pool operator receives the funds to use in the operation of a commodity pool, syndicate, investment trust, or another similar fund, specifically for trading commodities. The commodity pool operator would often solicit investors to bring in new funds or capital for the commodity pool. Commodity Pool Regulators Commodity pools in the United States are regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association, rather than by the Securities and Exchange Commission (SEC), which regulates other market activity. Hedge funds that are commodity pools must be registered with the Commodity Futures Trading Commission as commodity pools and Commodity Trading Advisors (CTAs). CTAs are similar to financial advisors in that they are registered advisors, but instead of providing stock advice, CTAs advise investors on commodity investing. Commodity Pool ETFs A simplified method for retail investors to obtain market access is through exchange traded funds (ETFs). These funds are similar to mutual funds but tend to have much lower costs. Commodity ETFs can be a type of commodity pool where investors pool financial resources to gain access to commodity futures markets. One reason for the explosive growth of the ETF industry is that they have dramatically expanded the way that investors can gain access to commodities. However, not all commodity ETFs invest in commodity futures. Some commodity-based ETFs hold the stocks of commodity-producing companies such as gold mining and oil drilling companies. Other commodity ETFs buy and hold the physical commodity itself and store the investment in a vault. A gold or silver ETF, for example, might hold the physical commodity. Before investing in a commodity-based ETF, investors should research what type of holdings are in the fund. Benefits of a Commodity Pool Commodity pools provide a number of benefits to investors in lieu of investing in the individual commodities that are held within the fund. Professional Management Commodity pools benefit investors since they gain access to trades that would not be possible for an individual investor. Investing in futures and options contracts can be quite complex, and by deferring to an expert that's licensed to trade derivatives, investors save money from the potential costly mistakes of going it alone when investing in commodity futures. Leverage Investors gain leverage in trading, meaning they join a pool with a number of different investors, which increases their purchasing power. Investors gain more leverage and diversification, for example, by trading a $1million pooled account as opposed to a $10,000 individual account had the investor gone it alone. Defined Risk However, the risk of investing in commodity pools is limited to the amount of the investor's financial contribution to the commodity pool. Futures contracts often use borrowed funds from a broker, but no matter how big the fund's losses are due to that leverage, the investor is at risk for only the amount they contributed. The limited risk is due, in part, to the structure of commodity pools in that they're typically established as limited partnerships. As a result, investors can control the amount of money they want to allocate to a commodity pool, depending on their risk tolerance, age, financial standing, and time horizon for investing. However, investors who are unfamiliar with commodities, futures, and options should seek help from an investment advisor to determine whether a commodity pool is the right investment for them.

https://www.investopedia.com/articles/personal-finance/090715/8-best-cloud-storage-solutions-small-business.asp

8 Best Cloud Storage Solutions for Small Business

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> These days, small businesses increasingly need access to their data on the go, with no overhead for storage maintenance and no hardware maintenance costs. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cloud-computing.asp">Cloud storage</a> provides an efficient solution and is rapidly gaining in popularity. This article explores the cloud-hosting concept and looks at some top cloud-hosting providers for small-business needs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Data is increasingly valuable for companies, but it can be expensive and insecure to keep it onsite.</li><li>To keep large amounts of data secure and accessible, cloud storage is an increasingly popular and cost-effective option.</li><li>Here we list some of the best cloud storage providers for business.</li></ul></div></div></div> <span class="heading-toc" id="toc-data-storage-options"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Data Storage Options </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Before <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cloud-storage.asp">cloud computing</a>, individuals stored their personal data on hard drives and memory cards. But computers and mobile phones can be easily damaged or lost, and may require physical proximity to the device in order to access the stored data. Businesses have stored their data on large-sized servers hosted in dedicated data centers. Data can only be accessed by a user who logs in to the corporate network, and it may not be accessible via the Internet or when the user is on the move. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Both the individual devices and the corporate servers need dedicated support and maintenance, and ensuring the security of the data remains a challenge. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <span class="heading-toc" id="toc-what-is-cloud-storage"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> What Is Cloud Storage? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> A cloud service provider or a cloud hosting company provides a fixed-size server space to clients, who use it to store data. While the client owns the stored data, the hosting company owns and maintains the required hardware. The cloud host offers non-stop accessibility to client data, while providing secure access as designated by the clients. The data, in turn, may be stored across one or many servers, configured by the cloud hosting company in their data centers.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Although this concept dates back to the 1960s, it has gained popularity in the last few years due to improved Internet infrastructure allowing faster access to remotely hosted data. Businesses have increasingly relied on cloud hosting, as it does away with the hassles of local server maintenance, associated costs, and certain security concerns. The growing market of cloud hosting includes big names like Amazon.com, Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn">AMZN</a>) and Microsoft Corp (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft">MSFT</a>) and giants like Intel are reportedly investing heavily in supporting technologies.<span class="ql-inline-citation" data-cite="19"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> This article lists the top eight cloud service providers. Our list is arranged in alphabetical order, with pricing details as available at the time of publication. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <li><strong>Amazon Web Services (AWS): </strong>Amazon’s AWS offers a wide range of cloud hosting services. Plans include Pay as you go, Pay less when you reserve, Pay even less per unit by using more, Pay even less as AWS grows, and Custom pricing. “Pay as you go” allows one to pay only for the resources actually used, without any long-term commitments or upfront costs. The “Pay less when you reserve” plan allows one to invest in reserved capacity, and later get discounts and savings. “Pay even less per unit by using more” allows one to get benefits of reduced costs with increased storage space and data transfer. “Pay even less as AWS grows” plan allows one to receive benefits when AWS optimizations result in reduced operational costs. Custom pricing, as you might expect, is for clients needing customized solutions.<span class="ql-inline-citation" data-cite="3"></span> AWS offers computation and dedicated application services, including website hosting, mobile data backup, business apps hosting and gaming. Pricing details vary widely across multiple product offerings, and one can start with AWS free tier to get a firsthand experience of services and expected costs.<span class="ql-inline-citation" data-cite="4"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Box</strong>: Box for business offers features such as secure file sharing, enterprise-level security, file sync, cross platforms, IT and admin controls, reporting and dedicated technical support. Their Individual plan is free, offering 10GB of storage, and the Personal Pro plan costs $10 per month for 100 GB storage.<span class="ql-inline-citation" data-cite="5"></span> Business plans include a starter plan costing $5 per user per month with 100GB of storage; for $15 per user per month, and with at least three users, businesses can get unlimited storage. Clients can request customization under the Enterprise plan. Integrations for Microsoft Office and Teams, Salesforce, Google Workspace, Slack, and many others are supported across all plans. Features such as maximum allowed file size, custom metadata, HIPAA/FedRAMP compliance, and 2FA for external users vary across business plans and users can choose what best meets their needs.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="6"></span></li> <li><strong>Dropbox</strong>: Dropbox claims to serve more than 500,000 teams through their cloud-hosting solutions as of 2024.<span class="ql-inline-citation" data-cite="21"></span> Moleskine, Tomorrow Lab, Sundance Film Festival, and Ben &amp; Jerry’s are a few of the well-known brands in Dropbox’s esteemed clients list.<span class="ql-inline-citation" data-cite="9"></span> Beyond the cross-platform sharing, storage, sync, backup, and seamless integration features, Dropbox allows file sharing even with users who don’t have a Dropbox account.<span class="ql-inline-citation" data-cite="23"></span> The basic plan for individuals is free, offers 2GB of storage, and comes with Microsoft 365 integration, allowing one to edit files directly through Dropbox.<span class="ql-inline-citation" data-cite="22"></span> The Plus plan for individuals offers 2TB of storage for $9.99 per month.<span class="ql-inline-citation" data-cite="7"></span> The Business plan offers 9TB of storage for $15 per user per month for at least three users.<span class="ql-inline-citation" data-cite="24"></span> Dropbox offers full audit records of user activities, sharing, and controls. Professional users get priority dedicated support.<span class="ql-inline-citation" data-cite="25"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>JustCloud</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.justcloud.com/business/business-features">JustCloud</a> offers more than <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="http://www.justcloud.com/business/business-allfeatures">50 features</a>, including an admin control panel, network drives, access and permission management, geo-redundant storage, file <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/versioning.asp">versioning</a>, and hourly backup.<span class="ql-inline-citation" data-cite="10"></span>The business plan costs $59.90 per month and includes 100GB of storage for five computers, while the enterprise plan costs $119.90 per month and includes 500GB of storage space for 20 computers. You can also get a custom plan if you require additional computers or storage space.<span class="ql-inline-citation" data-cite="11"></span></li> <li><strong>Microsoft OneDrive: </strong>The tech giant Microsoft offers its cloud hosting services through OneDrive. Individual users can <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://onedrive.live.com/about/en-us/plans/">opt</a> for 5 GB storage for free, while higher capacities such as 100GB, 1TB, and 6TB cost $1.99, $6.99, and $9.99 per month, respectively.<span class="ql-inline-citation" data-cite="12"></span> The <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://onedrive.live.com/about/en-us/business/">business plans</a> start at 1TB per user for $5 per month. Microsoft 365 Business Basic plans with OneDrive and additional applications start at $6 per month and come with a free trial. Beyond the storage, cross-platform syncing and powerful searching are the key features of OneDrive. It has its own downloadable software to keep remote and local data in sync, and also supports many <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://onedrive.live.com/about/en-us/apps-that-work-with-onedrive/">third-party apps</a> to seamlessly work with cloud data. It also offers hybrid options that integrate your on-premises solutions with the cloud services offered by Microsoft.<span class="ql-inline-citation" data-cite="13"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>OpenDrive: </strong>OpenDrive offers a vast suite of features under its business plan, including data management, project and <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/workflow.asp">workflow</a> management, and user management. Data management offers the standard data storage, sync and backup features, while <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/project-management.asp">project management</a> offers online Office suite which supports more than 17 different file types for direct editing.<span class="ql-inline-citation" data-cite="26"></span> Powerful desktop software and apps which work across Windows, Mac, and Android platforms are available. OpenDrive has a basic plan with 5GB of free storage with limits on file size and speed of access. The professional plans start from $29.95 per month, offering unlimited storage, unlimited file size, and unlimited access speed for one user. The personal unlimited plan allows up to four user accounts (each user costing extra), while the business unlimited plan allows unlimited user accounts (at extra cost). Custom pricing for specific needs is available.<span class="ql-inline-citation" data-cite="28"></span><span class="ql-inline-citation" data-cite="27"></span></li> <li><strong>SpiderOak</strong>: Computer analyst and <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/whistleblower.asp">whistleblower</a> Edward Snowden has praised SpiderOak in the press.<span class="ql-inline-citation" data-cite="17"></span> Full privacy, full control to the clients, no knowledge to the hosts, and flexible hosting plans are SpiderOak's selling points. Plans start at $6 per month for 150GB of data, and go up to 5TB.<span class="ql-inline-citation" data-cite="15"></span> For advanced business needs such as active directory integration, SpiderOak offers Enterprise hosted and Enterprise on Premise plans that require at least 500 users. For businesses holding sensitive data and needing advanced system configuration and services, SpiderOak is a good fit.<span class="ql-inline-citation" data-cite="16"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Syncplicity</strong>: <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="externalLink" href="https://www.syncplicity.com/features/">Syncplicity</a> is a good cloud host for businesses that hold sensitive data and want their administrators to be able to control and limit access. Stored data is accessible across devices on multiple platforms, the interface is clutter-free, and there are robust reporting features to monitor content usage. For administrators, it allows implementing policies and controls for accessing data.<span class="ql-inline-citation" data-cite="29"></span> It enables you to group users and apply different controls to those groups. It also facilitates restrictions based on the location of devices. The Professional plan, which offers 300GB of storage with a three-seat minimum, is $20 per month., and includes a 30-day free trial. A custom Enterprise plan for internal and external collaboration is available.<span class="ql-inline-citation" data-cite="18"></span></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In the technology world, “free offers” often come with lots of restrictions. For free cloud storage, this means limits on the size and type of data that can be hosted, bandwidth utilization, platforms (Windows or Linux), availability of backups, and technical support. This may be fine for individual users, but small businesses will likely need to pay for a service that will meet their needs. While there are plenty of good options, you'll certainly want to do your homework before trusting your business data to any provider.  </p></div>

These days, small businesses increasingly need access to their data on the go, with no overhead for storage maintenance and no hardware maintenance costs. [Cloud storage](https://www.investopedia.com/terms/c/cloud-computing.asp) provides an efficient solution and is rapidly gaining in popularity. This article explores the cloud-hosting concept and looks at some top cloud-hosting providers for small-business needs. ### Key Takeaways * Data is increasingly valuable for companies, but it can be expensive and insecure to keep it onsite. * To keep large amounts of data secure and accessible, cloud storage is an increasingly popular and cost-effective option. * Here we list some of the best cloud storage providers for business. ## Data Storage Options Before [cloud computing](https://www.investopedia.com/terms/c/cloud-storage.asp), individuals stored their personal data on hard drives and memory cards. But computers and mobile phones can be easily damaged or lost, and may require physical proximity to the device in order to access the stored data. Businesses have stored their data on large-sized servers hosted in dedicated data centers. Data can only be accessed by a user who logs in to the corporate network, and it may not be accessible via the Internet or when the user is on the move. Both the individual devices and the corporate servers need dedicated support and maintenance, and ensuring the security of the data remains a challenge. ## What Is Cloud Storage? A cloud service provider or a cloud hosting company provides a fixed-size server space to clients, who use it to store data. While the client owns the stored data, the hosting company owns and maintains the required hardware. The cloud host offers non-stop accessibility to client data, while providing secure access as designated by the clients. The data, in turn, may be stored across one or many servers, configured by the cloud hosting company in their data centers.  Although this concept dates back to the 1960s, it has gained popularity in the last few years due to improved Internet infrastructure allowing faster access to remotely hosted data. Businesses have increasingly relied on cloud hosting, as it does away with the hassles of local server maintenance, associated costs, and certain security concerns. The growing market of cloud hosting includes big names like Amazon.com, Inc. ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)) and Microsoft Corp ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft)) and giants like Intel are reportedly investing heavily in supporting technologies.  This article lists the top eight cloud service providers. Our list is arranged in alphabetical order, with pricing details as available at the time of publication. 1. **Amazon Web Services (AWS):** Amazon’s AWS offers a wide range of cloud hosting services. Plans include Pay as you go, Pay less when you reserve, Pay even less per unit by using more, Pay even less as AWS grows, and Custom pricing. “Pay as you go” allows one to pay only for the resources actually used, without any long-term commitments or upfront costs. The “Pay less when you reserve” plan allows one to invest in reserved capacity, and later get discounts and savings. “Pay even less per unit by using more” allows one to get benefits of reduced costs with increased storage space and data transfer. “Pay even less as AWS grows” plan allows one to receive benefits when AWS optimizations result in reduced operational costs. Custom pricing, as you might expect, is for clients needing customized solutions. AWS offers computation and dedicated application services, including website hosting, mobile data backup, business apps hosting and gaming. Pricing details vary widely across multiple product offerings, and one can start with AWS free tier to get a firsthand experience of services and expected costs. 3. **Box**: Box for business offers features such as secure file sharing, enterprise-level security, file sync, cross platforms, IT and admin controls, reporting and dedicated technical support. Their Individual plan is free, offering 10GB of storage, and the Personal Pro plan costs $10 per month for 100 GB storage. Business plans include a starter plan costing $5 per user per month with 100GB of storage; for $15 per user per month, and with at least three users, businesses can get unlimited storage. Clients can request customization under the Enterprise plan. Integrations for Microsoft Office and Teams, Salesforce, Google Workspace, Slack, and many others are supported across all plans. Features such as maximum allowed file size, custom metadata, HIPAA/FedRAMP compliance, and 2FA for external users vary across business plans and users can choose what best meets their needs. 4. **Dropbox**: Dropbox claims to serve more than 500,000 teams through their cloud-hosting solutions as of 2024. Moleskine, Tomorrow Lab, Sundance Film Festival, and Ben & Jerry’s are a few of the well-known brands in Dropbox’s esteemed clients list. Beyond the cross-platform sharing, storage, sync, backup, and seamless integration features, Dropbox allows file sharing even with users who don’t have a Dropbox account. The basic plan for individuals is free, offers 2GB of storage, and comes with Microsoft 365 integration, allowing one to edit files directly through Dropbox. The Plus plan for individuals offers 2TB of storage for $9.99 per month. The Business plan offers 9TB of storage for $15 per user per month for at least three users. Dropbox offers full audit records of user activities, sharing, and controls. Professional users get priority dedicated support. 6. **JustCloud**: [JustCloud](http://www.justcloud.com/business/business-features) offers more than [50 features](http://www.justcloud.com/business/business-allfeatures), including an admin control panel, network drives, access and permission management, geo-redundant storage, file [versioning](https://www.investopedia.com/terms/v/versioning.asp), and hourly backup.The business plan costs $59.90 per month and includes 100GB of storage for five computers, while the enterprise plan costs $119.90 per month and includes 500GB of storage space for 20 computers. You can also get a custom plan if you require additional computers or storage space. 7. **Microsoft OneDrive:** The tech giant Microsoft offers its cloud hosting services through OneDrive. Individual users can [opt](https://onedrive.live.com/about/en-us/plans/) for 5 GB storage for free, while higher capacities such as 100GB, 1TB, and 6TB cost $1.99, $6.99, and $9.99 per month, respectively. The [business plans](https://onedrive.live.com/about/en-us/business/) start at 1TB per user for $5 per month. Microsoft 365 Business Basic plans with OneDrive and additional applications start at $6 per month and come with a free trial. Beyond the storage, cross-platform syncing and powerful searching are the key features of OneDrive. It has its own downloadable software to keep remote and local data in sync, and also supports many [third-party apps](https://onedrive.live.com/about/en-us/apps-that-work-with-onedrive/) to seamlessly work with cloud data. It also offers hybrid options that integrate your on-premises solutions with the cloud services offered by Microsoft. 9. **OpenDrive:** OpenDrive offers a vast suite of features under its business plan, including data management, project and [workflow](https://www.investopedia.com/terms/w/workflow.asp) management, and user management. Data management offers the standard data storage, sync and backup features, while [project management](https://www.investopedia.com/terms/p/project-management.asp) offers online Office suite which supports more than 17 different file types for direct editing. Powerful desktop software and apps which work across Windows, Mac, and Android platforms are available. OpenDrive has a basic plan with 5GB of free storage with limits on file size and speed of access. The professional plans start from $29.95 per month, offering unlimited storage, unlimited file size, and unlimited access speed for one user. The personal unlimited plan allows up to four user accounts (each user costing extra), while the business unlimited plan allows unlimited user accounts (at extra cost). Custom pricing for specific needs is available. 10. **SpiderOak**: Computer analyst and [whistleblower](https://www.investopedia.com/terms/w/whistleblower.asp) Edward Snowden has praised SpiderOak in the press. Full privacy, full control to the clients, no knowledge to the hosts, and flexible hosting plans are SpiderOak's selling points. Plans start at $6 per month for 150GB of data, and go up to 5TB. For advanced business needs such as active directory integration, SpiderOak offers Enterprise hosted and Enterprise on Premise plans that require at least 500 users. For businesses holding sensitive data and needing advanced system configuration and services, SpiderOak is a good fit. 12. **Syncplicity**: [Syncplicity](https://www.syncplicity.com/features/) is a good cloud host for businesses that hold sensitive data and want their administrators to be able to control and limit access. Stored data is accessible across devices on multiple platforms, the interface is clutter-free, and there are robust reporting features to monitor content usage. For administrators, it allows implementing policies and controls for accessing data. It enables you to group users and apply different controls to those groups. It also facilitates restrictions based on the location of devices. The Professional plan, which offers 300GB of storage with a three-seat minimum, is $20 per month., and includes a 30-day free trial. A custom Enterprise plan for internal and external collaboration is available. ## The Bottom Line In the technology world, “free offers” often come with lots of restrictions. For free cloud storage, this means limits on the size and type of data that can be hosted, bandwidth utilization, platforms (Windows or Linux), availability of backups, and technical support. This may be fine for individual users, but small businesses will likely need to pay for a service that will meet their needs. While there are plenty of good options, you'll certainly want to do your homework before trusting your business data to any provider. 

These days, small businesses increasingly need access to their data on the go, with no overhead for storage maintenance and no hardware maintenance costs. Cloud storage provides an efficient solution and is rapidly gaining in popularity. This article explores the cloud-hosting concept and looks at some top cloud-hosting providers for small-business needs. Key Takeaways Data is increasingly valuable for companies, but it can be expensive and insecure to keep it onsite.To keep large amounts of data secure and accessible, cloud storage is an increasingly popular and cost-effective option.Here we list some of the best cloud storage providers for business. Data Storage Options Before cloud computing, individuals stored their personal data on hard drives and memory cards. But computers and mobile phones can be easily damaged or lost, and may require physical proximity to the device in order to access the stored data. Businesses have stored their data on large-sized servers hosted in dedicated data centers. Data can only be accessed by a user who logs in to the corporate network, and it may not be accessible via the Internet or when the user is on the move. Both the individual devices and the corporate servers need dedicated support and maintenance, and ensuring the security of the data remains a challenge. What Is Cloud Storage? A cloud service provider or a cloud hosting company provides a fixed-size server space to clients, who use it to store data. While the client owns the stored data, the hosting company owns and maintains the required hardware. The cloud host offers non-stop accessibility to client data, while providing secure access as designated by the clients. The data, in turn, may be stored across one or many servers, configured by the cloud hosting company in their data centers.  Although this concept dates back to the 1960s, it has gained popularity in the last few years due to improved Internet infrastructure allowing faster access to remotely hosted data. Businesses have increasingly relied on cloud hosting, as it does away with the hassles of local server maintenance, associated costs, and certain security concerns. The growing market of cloud hosting includes big names like Amazon.com, Inc. (AMZN) and Microsoft Corp (MSFT) and giants like Intel are reportedly investing heavily in supporting technologies.  This article lists the top eight cloud service providers. Our list is arranged in alphabetical order, with pricing details as available at the time of publication. Amazon Web Services (AWS): Amazon’s AWS offers a wide range of cloud hosting services. Plans include Pay as you go, Pay less when you reserve, Pay even less per unit by using more, Pay even less as AWS grows, and Custom pricing. “Pay as you go” allows one to pay only for the resources actually used, without any long-term commitments or upfront costs. The “Pay less when you reserve” plan allows one to invest in reserved capacity, and later get discounts and savings. “Pay even less per unit by using more” allows one to get benefits of reduced costs with increased storage space and data transfer. “Pay even less as AWS grows” plan allows one to receive benefits when AWS optimizations result in reduced operational costs. Custom pricing, as you might expect, is for clients needing customized solutions. AWS offers computation and dedicated application services, including website hosting, mobile data backup, business apps hosting and gaming. Pricing details vary widely across multiple product offerings, and one can start with AWS free tier to get a firsthand experience of services and expected costs. Box: Box for business offers features such as secure file sharing, enterprise-level security, file sync, cross platforms, IT and admin controls, reporting and dedicated technical support. Their Individual plan is free, offering 10GB of storage, and the Personal Pro plan costs $10 per month for 100 GB storage. Business plans include a starter plan costing $5 per user per month with 100GB of storage; for $15 per user per month, and with at least three users, businesses can get unlimited storage. Clients can request customization under the Enterprise plan. Integrations for Microsoft Office and Teams, Salesforce, Google Workspace, Slack, and many others are supported across all plans. Features such as maximum allowed file size, custom metadata, HIPAA/FedRAMP compliance, and 2FA for external users vary across business plans and users can choose what best meets their needs. Dropbox: Dropbox claims to serve more than 500,000 teams through their cloud-hosting solutions as of 2024. Moleskine, Tomorrow Lab, Sundance Film Festival, and Ben & Jerry’s are a few of the well-known brands in Dropbox’s esteemed clients list. Beyond the cross-platform sharing, storage, sync, backup, and seamless integration features, Dropbox allows file sharing even with users who don’t have a Dropbox account. The basic plan for individuals is free, offers 2GB of storage, and comes with Microsoft 365 integration, allowing one to edit files directly through Dropbox. The Plus plan for individuals offers 2TB of storage for $9.99 per month. The Business plan offers 9TB of storage for $15 per user per month for at least three users. Dropbox offers full audit records of user activities, sharing, and controls. Professional users get priority dedicated support. JustCloud: JustCloud offers more than 50 features, including an admin control panel, network drives, access and permission management, geo-redundant storage, file versioning, and hourly backup.The business plan costs $59.90 per month and includes 100GB of storage for five computers, while the enterprise plan costs $119.90 per month and includes 500GB of storage space for 20 computers. You can also get a custom plan if you require additional computers or storage space. Microsoft OneDrive: The tech giant Microsoft offers its cloud hosting services through OneDrive. Individual users can opt for 5 GB storage for free, while higher capacities such as 100GB, 1TB, and 6TB cost $1.99, $6.99, and $9.99 per month, respectively. The business plans start at 1TB per user for $5 per month. Microsoft 365 Business Basic plans with OneDrive and additional applications start at $6 per month and come with a free trial. Beyond the storage, cross-platform syncing and powerful searching are the key features of OneDrive. It has its own downloadable software to keep remote and local data in sync, and also supports many third-party apps to seamlessly work with cloud data. It also offers hybrid options that integrate your on-premises solutions with the cloud services offered by Microsoft. OpenDrive: OpenDrive offers a vast suite of features under its business plan, including data management, project and workflow management, and user management. Data management offers the standard data storage, sync and backup features, while project management offers online Office suite which supports more than 17 different file types for direct editing. Powerful desktop software and apps which work across Windows, Mac, and Android platforms are available. OpenDrive has a basic plan with 5GB of free storage with limits on file size and speed of access. The professional plans start from $29.95 per month, offering unlimited storage, unlimited file size, and unlimited access speed for one user. The personal unlimited plan allows up to four user accounts (each user costing extra), while the business unlimited plan allows unlimited user accounts (at extra cost). Custom pricing for specific needs is available. SpiderOak: Computer analyst and whistleblower Edward Snowden has praised SpiderOak in the press. Full privacy, full control to the clients, no knowledge to the hosts, and flexible hosting plans are SpiderOak's selling points. Plans start at $6 per month for 150GB of data, and go up to 5TB. For advanced business needs such as active directory integration, SpiderOak offers Enterprise hosted and Enterprise on Premise plans that require at least 500 users. For businesses holding sensitive data and needing advanced system configuration and services, SpiderOak is a good fit. Syncplicity: Syncplicity is a good cloud host for businesses that hold sensitive data and want their administrators to be able to control and limit access. Stored data is accessible across devices on multiple platforms, the interface is clutter-free, and there are robust reporting features to monitor content usage. For administrators, it allows implementing policies and controls for accessing data. It enables you to group users and apply different controls to those groups. It also facilitates restrictions based on the location of devices. The Professional plan, which offers 300GB of storage with a three-seat minimum, is $20 per month., and includes a 30-day free trial. A custom Enterprise plan for internal and external collaboration is available. The Bottom Line In the technology world, “free offers” often come with lots of restrictions. For free cloud storage, this means limits on the size and type of data that can be hosted, bandwidth utilization, platforms (Windows or Linux), availability of backups, and technical support. This may be fine for individual users, but small businesses will likely need to pay for a service that will meet their needs. While there are plenty of good options, you'll certainly want to do your homework before trusting your business data to any provider. 

https://www.investopedia.com/pce-inflation-march-2024-preview-8637247

What To Expect From Friday's Closely Watched Report On Inflation

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Economists expect the Federal Reserve's preferred measure of inflation remained stubborn in March.</li><li>The Personal Consumption Expenditures index will likely follow its counterpart inflation measures, but the details could make the Federal Reserve's job of parsing the data more difficult.</li><li>Inflation has run hotter than expected in each month so far this year, making predictions all the harder.</li><li>Fed officials have said they need more confidence that inflation is under control before the central bank will cut interest rates.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The Fed’s preferred gauge of inflation likely stayed stubbornly high in March, though the details of Friday's official report could complicate the picture.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The cost of living measured by the Bureau of Economic Analysis’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pce.asp">Personal Consumption Expenditures (PCE) </a>index is expected to have increased 2.6% over the 12 months ending in March, according to a survey of forecasters by Dow Jones Newswires and The <em>Wall Street Journal</em>.<span class="ql-inline-citation" data-cite="1"></span> That would be an acceleration from the 2.5% annual rate <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/feds-favorite-inflation-gauge-sent-mixed-signals-in-february-8622078">reported in February</a>, and still above the 2% rate officials at the Federal Reserve target when they set the nation’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/monetary-policy-4689792">monetary policy</a>.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <span class="heading-toc" id="toc-economists-got-sneak-peek-thursday"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Economists Got Sneak Peek Thursday </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> However, Thursday's report on Gross Domestic Product (GDP) gave hints that March's inflation measure may be higher than economists anticipate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Inflation in the entire first quarter rose at an annualized rate of 3.4% in the first quarter, up from 1.8% in the fourth quarter of 2023, the Bureau of Economic Analysis said in the GDP report Thursday.<span class="ql-inline-citation" data-cite="1"></span> That figure incorporates data on inflation from January and February, which have already been made public, and from March, which won't be released until tomorrow. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The high quarterly figure signals either inflation accelerated in March or the figures for previous months were revised upward, economists said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-what-core-inflation-could-mean-for-interest-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> What Core Inflation Could Mean For Interest Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Economists, however, expect core inflation, which excludes volatile prices for food and energy, to have declined to 2.7% from 2.8% in February. That’s a key measure for anyone concerned with interest rates.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Policymakers at the Fed closely watch core PCE as an indication of the trajectory of inflation because it’s not influenced by things like weather, which can move food and oil prices but are not linked to broader inflation trends.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_19-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Cbzl6/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Core PCE"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Inflation figures, however, have had a nasty habit of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">running hotter than expectations</a> in the first three months of this year. Should that trend continue, it could prompt officials at the Federal Reserve to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-housing-starts-and-permits-nosedived-in-march-8634124">keep interest rates higher for longer</a> to quash inflation by making all kinds of loans more expensive and cooling the economy.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> “Persistently disappointing dynamics in consumer prices are likely to lead Fed officials to look for a larger accumulation of evidence that points to inflation normalization before deciding to pull the trigger on rate cuts,” economists at TD Securities wrote in a commentary.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <em>Update, April 25, 2024: This article has been updated to include first-quarter inflation information from Thursday's report on Gross Domestic Product.</em><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * Economists expect the Federal Reserve's preferred measure of inflation remained stubborn in March. * The Personal Consumption Expenditures index will likely follow its counterpart inflation measures, but the details could make the Federal Reserve's job of parsing the data more difficult. * Inflation has run hotter than expected in each month so far this year, making predictions all the harder. * Fed officials have said they need more confidence that inflation is under control before the central bank will cut interest rates. The Fed’s preferred gauge of inflation likely stayed stubbornly high in March, though the details of Friday's official report could complicate the picture.  The cost of living measured by the Bureau of Economic Analysis’s [Personal Consumption Expenditures (PCE)](https://www.investopedia.com/terms/p/pce.asp) index is expected to have increased 2.6% over the 12 months ending in March, according to a survey of forecasters by Dow Jones Newswires and The *Wall Street Journal*. That would be an acceleration from the 2.5% annual rate [reported in February](https://www.investopedia.com/feds-favorite-inflation-gauge-sent-mixed-signals-in-february-8622078), and still above the 2% rate officials at the Federal Reserve target when they set the nation’s [monetary policy](https://www.investopedia.com/monetary-policy-4689792).  ## Economists Got Sneak Peek Thursday However, Thursday's report on Gross Domestic Product (GDP) gave hints that March's inflation measure may be higher than economists anticipate. Inflation in the entire first quarter rose at an annualized rate of 3.4% in the first quarter, up from 1.8% in the fourth quarter of 2023, the Bureau of Economic Analysis said in the GDP report Thursday. That figure incorporates data on inflation from January and February, which have already been made public, and from March, which won't be released until tomorrow. The high quarterly figure signals either inflation accelerated in March or the figures for previous months were revised upward, economists said. ## What Core Inflation Could Mean For Interest Rates Economists, however, expect core inflation, which excludes volatile prices for food and energy, to have declined to 2.7% from 2.8% in February. That’s a key measure for anyone concerned with interest rates.  Policymakers at the Fed closely watch core PCE as an indication of the trajectory of inflation because it’s not influenced by things like weather, which can move food and oil prices but are not linked to broader inflation trends.  Inflation figures, however, have had a nasty habit of [running hotter than expectations](https://www.investopedia.com/inflation-heated-up-in-march-8629363) in the first three months of this year. Should that trend continue, it could prompt officials at the Federal Reserve to [keep interest rates higher for longer](https://www.investopedia.com/us-economy-news-today-housing-starts-and-permits-nosedived-in-march-8634124) to quash inflation by making all kinds of loans more expensive and cooling the economy.  “Persistently disappointing dynamics in consumer prices are likely to lead Fed officials to look for a larger accumulation of evidence that points to inflation normalization before deciding to pull the trigger on rate cuts,” economists at TD Securities wrote in a commentary.  *Update, April 25, 2024: This article has been updated to include first-quarter inflation information from Thursday's report on Gross Domestic Product.* Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways Economists expect the Federal Reserve's preferred measure of inflation remained stubborn in March.The Personal Consumption Expenditures index will likely follow its counterpart inflation measures, but the details could make the Federal Reserve's job of parsing the data more difficult.Inflation has run hotter than expected in each month so far this year, making predictions all the harder.Fed officials have said they need more confidence that inflation is under control before the central bank will cut interest rates. The Fed’s preferred gauge of inflation likely stayed stubbornly high in March, though the details of Friday's official report could complicate the picture.  The cost of living measured by the Bureau of Economic Analysis’s Personal Consumption Expenditures (PCE) index is expected to have increased 2.6% over the 12 months ending in March, according to a survey of forecasters by Dow Jones Newswires and The Wall Street Journal. That would be an acceleration from the 2.5% annual rate reported in February, and still above the 2% rate officials at the Federal Reserve target when they set the nation’s monetary policy.  Economists Got Sneak Peek Thursday However, Thursday's report on Gross Domestic Product (GDP) gave hints that March's inflation measure may be higher than economists anticipate. Inflation in the entire first quarter rose at an annualized rate of 3.4% in the first quarter, up from 1.8% in the fourth quarter of 2023, the Bureau of Economic Analysis said in the GDP report Thursday. That figure incorporates data on inflation from January and February, which have already been made public, and from March, which won't be released until tomorrow. The high quarterly figure signals either inflation accelerated in March or the figures for previous months were revised upward, economists said. What Core Inflation Could Mean For Interest Rates Economists, however, expect core inflation, which excludes volatile prices for food and energy, to have declined to 2.7% from 2.8% in February. That’s a key measure for anyone concerned with interest rates.  Policymakers at the Fed closely watch core PCE as an indication of the trajectory of inflation because it’s not influenced by things like weather, which can move food and oil prices but are not linked to broader inflation trends.  Inflation figures, however, have had a nasty habit of running hotter than expectations in the first three months of this year. Should that trend continue, it could prompt officials at the Federal Reserve to keep interest rates higher for longer to quash inflation by making all kinds of loans more expensive and cooling the economy.  “Persistently disappointing dynamics in consumer prices are likely to lead Fed officials to look for a larger accumulation of evidence that points to inflation normalization before deciding to pull the trigger on rate cuts,” economists at TD Securities wrote in a commentary.  Update, April 25, 2024: This article has been updated to include first-quarter inflation information from Thursday's report on Gross Domestic Product. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/covered-call-etfs-7975323

Covered Call ETFs: How They Can Help Enhance Investment Returns

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Selling covered calls is a classic options strategy for investors who want steady income from their investments with some protection against risk. One drawback of this strategy is the effort and capital required to buy enough shares to cover the options you sell and then sell the options. Covered call <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> allow investors to buy shares in a fund that conducts this strategy on their behalf, offering its benefits with less effort. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Covered call exchange-traded funds (ETFs) could earn investors additional income through call options, serving as a buffer against market volatility.</li><li>While covered call ETFs can provide steady income, the strategy limits the potential upside that other ETFs might have.</li><li>This reduced upside potential makes it less appropriate for those who foresee significant appreciation in the underlying assets.</li><li>Covered call ETFs can be equity-based, index-based, or sector-specific, giving a range of choices for diversifying an investment portfolio.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-a-covered-call-etf"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Is a Covered Call ETF? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> A covered call ETF is an exchange-traded fund that uses <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp">covered calls</a> to generate income. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> For covered calls, the ETF purchases <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shares.asp">shares</a> in a business and sells <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/calloption.asp">call options</a> for those shares. The ETF earns a premium when selling the option and owns the underlying shares unless the option is exercised and they are sold. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> A covered call strategy can generate more income through the premiums received while offering some protection against drops in the underlying asset price.<span class="ql-inline-citation" data-cite="14"></span> The tradeoff is the limit to the ETF’s potential upside on particular stocks. If the stock rises enough, the ETF has to sell it at the option’s strike price, if exercised. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> By investing in a covered call ETF, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a> can avoid the manual process of buying shares, choosing a strike price, and selling options. Instead, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundmanager.asp">fund managers</a> handle that process for you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-how-covered-call-etfs-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> How Covered Call ETFs Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Like other ETFs, covered call ETFs let investors buy shares in a single security. In exchange for a fee, called an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratio</a>, investors can use ETF to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversify their portfolios</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The managers of covered call ETFs execute a covered call strategy on behalf of the fund’s investors. They buy shares in various companies and then sell call options to collect a premium. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> That regular source of income helps the fund offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashdividend.asp">dividend income</a> to investors. It can also reduce volatility in the fund’s price because decreases in the value of the fund’s holdings can be offset by the premiums that the fund earns from selling options. However, it also limits the upside. If a share rises above the call option’s strike price, it will likely be exercised and sold at the lower-than-market strike price, setting a cap on how much the fund can benefit from price <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciation</a> in its holdings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <span class="heading-toc" id="toc-advantages-and-disadvantages-of-covered-call-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-heading__text"> Advantages and Disadvantages of Covered Call ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Covered call ETFs help investors use this strategy more easily, but it’s important to consider the drawbacks before investing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-subheading__text"> Advantages </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Covered call ETFs have grown more popular because they offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/benefits-covered-call-etf/">benefits</a> to investors: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li>Selling covered calls can help a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> produce income. This income can be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/042715/writing-covered-calls-dividend-stocks.asp">distributed as dividends</a>, offering a potentially higher yield than a traditional ETF.</li> <li>This premium income can help limit <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> by offsetting price drops.</li> <li>Investing in a covered call ETF could involve fewer fees and lower costs than selling options on your own.</li> <li>The cash flow from an ETF may be taxed as capital gains, offering preferential tax treatment to using this strategy on your own.<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-subheading__text"> Disadvantages </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Though there are many reasons to consider investing in covered call ETFs, it’s important to understand the drawbacks and risks before you do. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <li>Selling calls limits the upside potential if a stock price increases. If the underlying securities experience significant growth, then a regular ETF would, at that point, have higher returns.</li> <li>Like all investments, the value of the ETF could decrease, even if the premium income helps limit those losses.</li> <li>Other investments, like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>, may offer more income than covered call ETFs.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-examples-of-covered-call-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Examples of Covered Call ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Many ETFs use a covered call strategy. The largest, based on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management (AUM)</a>, is the Global X Nasdaq 100 Covered Call ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=QYLD">QYLD</a>).<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> As of the first quarter of 2024, the fund had $7.65 billion in net assets and had offered monthly distributions to its investors for the past nine years. Since beginning in December 2013, it has had an annualized return of 7.00%.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Some ETFs focus on selling covered calls on stocks in other indexes, such as the Global X S&amp;P 500 Covered Call ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XYLD">XYLD</a>) and the Global X Russell 2000 Covered Call ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=RYLD">RYLD</a>).<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Other asset managers, including J.P. Morgan and BlackRock, offer covered call ETFs, each with a particular covered call strategy. For example, the iShares 20+ Year Treasury Bond Strategy ETF <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TLT">(TLT.O)</a> invests in long-term bonds.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Given the variety of funds, investors should be able to find one that matches their preferred strategy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-do-covered-calls-outperform-the-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Covered Calls Outperform the Market?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>As with any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentstrategy.asp">investing strategy</a>, a covered call strategy may outperform, underperform, or match the market. Generally, covered calls do best in sideways or down markets. Because selling covered calls limits the upside potential, they may underperform during times when the market is rising.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-what-impacts-call-premiums"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Impacts Call Premiums?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/option-premium.asp">premium</a> you receive from selling a call depends on a few factors. Generally, the closer the strike price of the option is to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042715/what-difference-between-money-and-out-money.asp">in the money</a> or profitable and the more time left until the expiration date, the higher the premium will be.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-are-covered-call-etfs-active-or-passive-funds"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Covered Call ETFs Active or Passive Funds?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Fund managers have to regularly adapt the fund’s portfolio and sell options, which means that these ETFs are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activemanagement.asp">actively managed</a>. Thus, they typically have a higher expense ratio than <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passivemanagement.asp">passively managed</a> funds.<span class="ql-inline-citation" data-cite="11"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-how-does-a-covered-call-etf-differ-from-a-regular-etf-for-returns"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a Covered Call ETF Differ from a Regular ETF for Returns?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Covered call ETFs generally aim to have income through the premiums from selling call options. Still, this strategy caps the upside potential if the underlying assets significantly appreciate. Alternatively, the revenue from premiums offers a cushion against minor declines, making it potentially less risky in certain market conditions.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_53-0"><span class="heading-toc" id="toc-can-i-use-a-covered-call-etf-in-my-retirement-portfolio"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Use a Covered Call ETF in My Retirement Portfolio?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, a covered call ETF might be suitable as part of a diversified <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisors/072915/what-does-ideal-retirement-portfolio-look.asp">retirement portfolio</a>, especially if your focus is on strategies generating more income. The risk-mitigating features of these ETFs could complement more conservative investments common in retirement accounts. As with any investment, though, it’s important to consider your overall <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/figure-out-your-investment-goals/">investment goals</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Covered call ETFs let investors benefit from this options strategy without needing the requisite capital to either buy a large number of shares or handle selling options on their own. These funds can be a strong source of income for investors, but it’s important to understand the drawbacks, such as the limits they place on how much investors can benefit from price appreciation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Before investing in a covered call ETF, make sure the strategy is right for you, then find a fund that matches the specific strategy you desire. </p></div>

Selling covered calls is a classic options strategy for investors who want steady income from their investments with some protection against risk. One drawback of this strategy is the effort and capital required to buy enough shares to cover the options you sell and then sell the options. Covered call [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) allow investors to buy shares in a fund that conducts this strategy on their behalf, offering its benefits with less effort. ### Key Takeaways * Covered call exchange-traded funds (ETFs) could earn investors additional income through call options, serving as a buffer against market volatility. * While covered call ETFs can provide steady income, the strategy limits the potential upside that other ETFs might have. * This reduced upside potential makes it less appropriate for those who foresee significant appreciation in the underlying assets. * Covered call ETFs can be equity-based, index-based, or sector-specific, giving a range of choices for diversifying an investment portfolio. ## What Is a Covered Call ETF? A covered call ETF is an exchange-traded fund that uses [covered calls](https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp) to generate income. For covered calls, the ETF purchases [shares](https://www.investopedia.com/terms/s/shares.asp) in a business and sells [call options](https://www.investopedia.com/terms/c/calloption.asp) for those shares. The ETF earns a premium when selling the option and owns the underlying shares unless the option is exercised and they are sold. A covered call strategy can generate more income through the premiums received while offering some protection against drops in the underlying asset price. The tradeoff is the limit to the ETF’s potential upside on particular stocks. If the stock rises enough, the ETF has to sell it at the option’s strike price, if exercised. By investing in a covered call ETF, [investors](https://www.investopedia.com/terms/i/investor.asp) can avoid the manual process of buying shares, choosing a strike price, and selling options. Instead, the [fund managers](https://www.investopedia.com/terms/f/fundmanager.asp) handle that process for you. ## How Covered Call ETFs Work Like other ETFs, covered call ETFs let investors buy shares in a single security. In exchange for a fee, called an [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp), investors can use ETF to [diversify their portfolios](https://www.investopedia.com/terms/d/diversification.asp). The managers of covered call ETFs execute a covered call strategy on behalf of the fund’s investors. They buy shares in various companies and then sell call options to collect a premium. That regular source of income helps the fund offer [dividend income](https://www.investopedia.com/terms/c/cashdividend.asp) to investors. It can also reduce volatility in the fund’s price because decreases in the value of the fund’s holdings can be offset by the premiums that the fund earns from selling options. However, it also limits the upside. If a share rises above the call option’s strike price, it will likely be exercised and sold at the lower-than-market strike price, setting a cap on how much the fund can benefit from price [appreciation](https://www.investopedia.com/terms/a/appreciation.asp) in its holdings. ## Advantages and Disadvantages of Covered Call ETFs Covered call ETFs help investors use this strategy more easily, but it’s important to consider the drawbacks before investing. ### Advantages Covered call ETFs have grown more popular because they offer [benefits](https://www.investopedia.com/investing/benefits-covered-call-etf/) to investors: * Selling covered calls can help a [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) produce income. This income can be [distributed as dividends](https://www.investopedia.com/articles/active-trading/042715/writing-covered-calls-dividend-stocks.asp), offering a potentially higher yield than a traditional ETF. * This premium income can help limit [volatility](https://www.investopedia.com/terms/v/volatility.asp) by offsetting price drops. * Investing in a covered call ETF could involve fewer fees and lower costs than selling options on your own. * The cash flow from an ETF may be taxed as capital gains, offering preferential tax treatment to using this strategy on your own. ### Disadvantages Though there are many reasons to consider investing in covered call ETFs, it’s important to understand the drawbacks and risks before you do. * Selling calls limits the upside potential if a stock price increases. If the underlying securities experience significant growth, then a regular ETF would, at that point, have higher returns. * Like all investments, the value of the ETF could decrease, even if the premium income helps limit those losses. * Other investments, like [bonds](https://www.investopedia.com/terms/b/bond.asp), may offer more income than covered call ETFs. ## Examples of Covered Call ETFs Many ETFs use a covered call strategy. The largest, based on [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp), is the Global X Nasdaq 100 Covered Call ETF ([QYLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=QYLD)). As of the first quarter of 2024, the fund had $7.65 billion in net assets and had offered monthly distributions to its investors for the past nine years. Since beginning in December 2013, it has had an annualized return of 7.00%. Some ETFs focus on selling covered calls on stocks in other indexes, such as the Global X S&P 500 Covered Call ETF ([XYLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XYLD)) and the Global X Russell 2000 Covered Call ETF ([RYLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=RYLD)). Other asset managers, including J.P. Morgan and BlackRock, offer covered call ETFs, each with a particular covered call strategy. For example, the iShares 20+ Year Treasury Bond Strategy ETF [(TLT.O)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TLT) invests in long-term bonds. Given the variety of funds, investors should be able to find one that matches their preferred strategy. ## Do Covered Calls Outperform the Market? As with any [investing strategy](https://www.investopedia.com/terms/i/investmentstrategy.asp), a covered call strategy may outperform, underperform, or match the market. Generally, covered calls do best in sideways or down markets. Because selling covered calls limits the upside potential, they may underperform during times when the market is rising. ## What Impacts Call Premiums? The [premium](https://www.investopedia.com/terms/o/option-premium.asp) you receive from selling a call depends on a few factors. Generally, the closer the strike price of the option is to [in the money](https://www.investopedia.com/ask/answers/042715/what-difference-between-money-and-out-money.asp) or profitable and the more time left until the expiration date, the higher the premium will be. ## Are Covered Call ETFs Active or Passive Funds? Fund managers have to regularly adapt the fund’s portfolio and sell options, which means that these ETFs are [actively managed](https://www.investopedia.com/terms/a/activemanagement.asp). Thus, they typically have a higher expense ratio than [passively managed](https://www.investopedia.com/terms/p/passivemanagement.asp) funds. ## How Does a Covered Call ETF Differ from a Regular ETF for Returns? Covered call ETFs generally aim to have income through the premiums from selling call options. Still, this strategy caps the upside potential if the underlying assets significantly appreciate. Alternatively, the revenue from premiums offers a cushion against minor declines, making it potentially less risky in certain market conditions. ## Can I Use a Covered Call ETF in My Retirement Portfolio? Yes, a covered call ETF might be suitable as part of a diversified [retirement portfolio](https://www.investopedia.com/articles/financial-advisors/072915/what-does-ideal-retirement-portfolio-look.asp), especially if your focus is on strategies generating more income. The risk-mitigating features of these ETFs could complement more conservative investments common in retirement accounts. As with any investment, though, it’s important to consider your overall [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) and [investment goals](https://www.investopedia.com/investing/figure-out-your-investment-goals/). ## The Bottom Line Covered call ETFs let investors benefit from this options strategy without needing the requisite capital to either buy a large number of shares or handle selling options on their own. These funds can be a strong source of income for investors, but it’s important to understand the drawbacks, such as the limits they place on how much investors can benefit from price appreciation. Before investing in a covered call ETF, make sure the strategy is right for you, then find a fund that matches the specific strategy you desire.

Selling covered calls is a classic options strategy for investors who want steady income from their investments with some protection against risk. One drawback of this strategy is the effort and capital required to buy enough shares to cover the options you sell and then sell the options. Covered call exchange-traded funds (ETFs) allow investors to buy shares in a fund that conducts this strategy on their behalf, offering its benefits with less effort. Key Takeaways Covered call exchange-traded funds (ETFs) could earn investors additional income through call options, serving as a buffer against market volatility.While covered call ETFs can provide steady income, the strategy limits the potential upside that other ETFs might have.This reduced upside potential makes it less appropriate for those who foresee significant appreciation in the underlying assets.Covered call ETFs can be equity-based, index-based, or sector-specific, giving a range of choices for diversifying an investment portfolio. What Is a Covered Call ETF? A covered call ETF is an exchange-traded fund that uses covered calls to generate income. For covered calls, the ETF purchases shares in a business and sells call options for those shares. The ETF earns a premium when selling the option and owns the underlying shares unless the option is exercised and they are sold. A covered call strategy can generate more income through the premiums received while offering some protection against drops in the underlying asset price. The tradeoff is the limit to the ETF’s potential upside on particular stocks. If the stock rises enough, the ETF has to sell it at the option’s strike price, if exercised. By investing in a covered call ETF, investors can avoid the manual process of buying shares, choosing a strike price, and selling options. Instead, the fund managers handle that process for you. How Covered Call ETFs Work Like other ETFs, covered call ETFs let investors buy shares in a single security. In exchange for a fee, called an expense ratio, investors can use ETF to diversify their portfolios. The managers of covered call ETFs execute a covered call strategy on behalf of the fund’s investors. They buy shares in various companies and then sell call options to collect a premium. That regular source of income helps the fund offer dividend income to investors. It can also reduce volatility in the fund’s price because decreases in the value of the fund’s holdings can be offset by the premiums that the fund earns from selling options. However, it also limits the upside. If a share rises above the call option’s strike price, it will likely be exercised and sold at the lower-than-market strike price, setting a cap on how much the fund can benefit from price appreciation in its holdings. Advantages and Disadvantages of Covered Call ETFs Covered call ETFs help investors use this strategy more easily, but it’s important to consider the drawbacks before investing. Advantages Covered call ETFs have grown more popular because they offer benefits to investors: Selling covered calls can help a portfolio produce income. This income can be distributed as dividends, offering a potentially higher yield than a traditional ETF. This premium income can help limit volatility by offsetting price drops. Investing in a covered call ETF could involve fewer fees and lower costs than selling options on your own. The cash flow from an ETF may be taxed as capital gains, offering preferential tax treatment to using this strategy on your own. Disadvantages Though there are many reasons to consider investing in covered call ETFs, it’s important to understand the drawbacks and risks before you do. Selling calls limits the upside potential if a stock price increases. If the underlying securities experience significant growth, then a regular ETF would, at that point, have higher returns. Like all investments, the value of the ETF could decrease, even if the premium income helps limit those losses. Other investments, like bonds, may offer more income than covered call ETFs. Examples of Covered Call ETFs Many ETFs use a covered call strategy. The largest, based on assets under management (AUM), is the Global X Nasdaq 100 Covered Call ETF (QYLD). As of the first quarter of 2024, the fund had $7.65 billion in net assets and had offered monthly distributions to its investors for the past nine years. Since beginning in December 2013, it has had an annualized return of 7.00%. Some ETFs focus on selling covered calls on stocks in other indexes, such as the Global X S&P 500 Covered Call ETF (XYLD) and the Global X Russell 2000 Covered Call ETF (RYLD). Other asset managers, including J.P. Morgan and BlackRock, offer covered call ETFs, each with a particular covered call strategy. For example, the iShares 20+ Year Treasury Bond Strategy ETF (TLT.O) invests in long-term bonds. Given the variety of funds, investors should be able to find one that matches their preferred strategy. Do Covered Calls Outperform the Market? As with any investing strategy, a covered call strategy may outperform, underperform, or match the market. Generally, covered calls do best in sideways or down markets. Because selling covered calls limits the upside potential, they may underperform during times when the market is rising. What Impacts Call Premiums? The premium you receive from selling a call depends on a few factors. Generally, the closer the strike price of the option is to in the money or profitable and the more time left until the expiration date, the higher the premium will be. Are Covered Call ETFs Active or Passive Funds? Fund managers have to regularly adapt the fund’s portfolio and sell options, which means that these ETFs are actively managed. Thus, they typically have a higher expense ratio than passively managed funds. How Does a Covered Call ETF Differ from a Regular ETF for Returns? Covered call ETFs generally aim to have income through the premiums from selling call options. Still, this strategy caps the upside potential if the underlying assets significantly appreciate. Alternatively, the revenue from premiums offers a cushion against minor declines, making it potentially less risky in certain market conditions. Can I Use a Covered Call ETF in My Retirement Portfolio? Yes, a covered call ETF might be suitable as part of a diversified retirement portfolio, especially if your focus is on strategies generating more income. The risk-mitigating features of these ETFs could complement more conservative investments common in retirement accounts. As with any investment, though, it’s important to consider your overall risk tolerance and investment goals. The Bottom Line Covered call ETFs let investors benefit from this options strategy without needing the requisite capital to either buy a large number of shares or handle selling options on their own. These funds can be a strong source of income for investors, but it’s important to understand the drawbacks, such as the limits they place on how much investors can benefit from price appreciation. Before investing in a covered call ETF, make sure the strategy is right for you, then find a fund that matches the specific strategy you desire.

https://www.investopedia.com/learn-how-to-trade-the-market-in-5-steps-4692230

How To Trade Stocks: Six Steps To Get Started

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Trading stocks can be a fascinating and lucrative way to grow your wealth. However, the stock market can be daunting for beginners, especially with the complex strategies, platforms, and tools available. New traders enter the market daily, but many fail to achieve their full potential because of a lack of knowledge, preparation, and proper risk management. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> If you're interested in learning how to trade stocks but don't know where to start, you're not alone. The good news is that anyone can become a successful trader with the right amount of knowledge, mindset, and approach. In this guide, we'll walk you through six essential steps to get started in stock trading, including determining your trading style, choosing a brokerage, conducting research, placing orders, and managing risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Whether you're a complete novice or already have some experience with investing, this article will provide you with the foundation you need to enter the world of stock trading confidently. By following these steps and continually expanding your knowledge, you'll develop the skills and strategies necessary to thrive in the ever-changing stock market. Let's dive in and explore how you can start trading stocks today. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Newer investors need to determine their trading style before diving into the stock market. This comes from one's personality, risk tolerance, time commitment, and financial goals.</li><li>You'll need to decide on a brokerage platform that aligns with your trading style and offers the tools, resources, and support you need.</li><li>Examine the stocks you might want to trade, using fundamental and technical analysis to make informed decisions.</li><li>Learn about different order types. Understanding how each works, along with their risks and advantages, will help you make better decisions when placing trades.</li><li>Create and stick to a strong risk management plan. This should include proper position sizing, stop-loss orders, and diversification.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_9-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="How to Trade Stocks" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/nBjXxYV5LxgUevvn5GYRBDj188Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HowtoTradeStocks-v3-0bc090b604fd4c6e8aec3780a7f6b5ef.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/nBjXxYV5LxgUevvn5GYRBDj188Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HowtoTradeStocks-v3-0bc090b604fd4c6e8aec3780a7f6b5ef.png" data-srcset="https://www.investopedia.com/thmb/XXHFZu-bYtF9YKAkV7uuRWQbS7Y=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/HowtoTradeStocks-v3-0bc090b604fd4c6e8aec3780a7f6b5ef.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="How to Trade Stocks" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/nBjXxYV5LxgUevvn5GYRBDj188Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HowtoTradeStocks-v3-0bc090b604fd4c6e8aec3780a7f6b5ef.png" srcset="https://www.investopedia.com/thmb/XXHFZu-bYtF9YKAkV7uuRWQbS7Y=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/HowtoTradeStocks-v3-0bc090b604fd4c6e8aec3780a7f6b5ef.png 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Zoe Hansen</p></span> </figcaption></figure> <span class="heading-toc" id="toc-1-decide-what-type-of-trader-you-want-to-be"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> 1) Decide What Type of Trader You Want To Be </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Before you start trading, it's important to choose your trading style. Are you interested in short-term trading, or are you looking at the long-term? Do you have the time and dedication to be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/daytrader.asp">day trader</a>, or would swing or position trading be more suitable? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Consider your personality, risk tolerance, and the time you can realistically dedicate to trading. Reflecting on this will help you find a trading style that aligns with your goals and abilities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> For instance, if you are generally risk-averse and don't have much time for stock market analysis, day trading is not the best fit for you. It requires constant attention to the markets during trading hours and making rapid decisions under stress; it's not for the faint of heart. Swing or position trading is likely more suitable, as these allow for longer holding periods and require less time commitment. The table below can help you decide: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_17-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="4">Three Main Trading Styles</th> </tr> <tr> <th>Trading Style</th> <th>Holding Period</th> <th>Time Commitment</th> <th>Relative Risk and Volatility</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Swing Trading</td> <td>Days to a few weeks or months</td> <td>Moderate</td> <td>Moderate</td> </tr> <tr> <td>Position Trading (Long-Term Trading)</td> <td>Several months, years, or decades</td> <td>Low</td> <td>Low to moderate</td> </tr> <tr> <td>Day Trading</td> <td>Intraday (positions closed by the end of the trading day)</td> <td>High</td> <td>High</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> We sort the trading styles above based on how long an investor or trade holds onto the stocks. Day traders aim to profit from short-term price moves and typically close out all positions by the end of the trading day, so their trades are the fastest. Next up are swing traders, who hold positions for periods ranging from days to a few weeks or months and aim to capture short- to medium-term trends. This style requires less time commitment than day trading but still involves being pretty engaged in the market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The third style is position or long-term trading, which is for those who hold onto stocks for several months, years, or even decades. These investors focus on long-term trends and may base their decisions on fundamental and technical analyses. This style requires patience and a long-term outlook, with less frequent trading than the other two. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> There's no one-size-fits-all approach to trading. It's essential to choose a trading style that aligns with your personality, risk tolerance, and lifestyle. As you gain experience and knowledge or as your life circumstances change, you may find that your preferred trading style also evolves. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-2-research-brokerages-and-choose-one-suitable-for-your-style-of-trading"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> 2) Research Brokerages and Choose One Suitable for Your Style of Trading </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Once you've decided on your style, you'll need to find a good online broker and open an account. When selecting a brokerage, you'll want a platform that caters to your needs. Brokerages have different features and tools, and some are more suitable for your type of trading than others. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Brokerages For Day Traders </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> A platform with quick speeds (low latency), real-time data, and advanced charting abilities is a must for day traders. Day traders often require tools like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/level2.asp">Level 2 quotes</a>, which provide detailed liquidity information about the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/order-book.asp">order book</a> and hot keys for rapid ordering. They may also offer automated or algorithmic trading options, triggers, and technical indicators. Customizable platforms like Interactive Brokers, TradeStation, and TD Ameritrade's thinkorswim are popular among day traders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> Brokerages For Swing Traders </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Swing and position traders should look for a platform with a wide range of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/11/indicators-and-strategies-explained.asp">indicators</a>, research resources, fundamental analysis tools, and risk management features. These traders may also benefit from a platform that offers mobile trading apps, allowing them to monitor their positions and trade on the go. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Brokers like Charles Schwab, Fidelity, Robinhood, and E*TRADE are well-suited for swing and position traders since they provide a balance of research tools, user-friendly platforms, and competitive prices (typically with commission-free trading in most stocks and exchange-traded funds). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-subheading__text"> Brokerages For Long-Term Investors </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> For long-term investors or those new to trading, a brokerage with a strong educational component and user-friendly interface is likely the best choice. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp">Robo-advisors</a>, such as Betterment and Wealthfront, can be a good option for those who prefer a more automated approach to their portfolio. These platforms use algorithms to create and manage diversified portfolios based on the investor's risk tolerance and goals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> For a more comprehensive discussion of the best brokerage platforms for different kinds of trading, see our list of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">best online brokerages and platforms</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_41-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_42-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Many brokerages provide free demo accounts, allowing you to practice trading with virtual money before risking your own capital.</p></div></div></div> <span class="heading-toc" id="toc-3-open-a-brokerage-account-and-fund-it"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> 3) Open a Brokerage Account and Fund it </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Once you've chosen a platform that suits your trading style and needs, it's time to open and fund an account. The process is straightforward and can be done in minutes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> <li><strong>Provide your personal information</strong>: You must supply your name, address, date of birth, Social Security number, and other basic personal information. This information is required by law to verify your identity and prevent fraud, so you can't avoid doing so by going elsewhere.</li> <li><strong>Choose your account type</strong>: Brokerages offer several account types, such as individual taxable accounts, joint accounts, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement accounts</a> (IRAs), such as traditional and Roth IRAs. Select the account type that best fits your trading goals and tax situation.</li> <li><strong>Complete the application</strong>: Fill out the online application, which may include additional questions about your employment status, income, net worth, and trading experience. This helps brokerages follow regulations and assess your risk tolerance. This information may also be used when applying for account features such as margin (borrowing to trade) and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/options-basics-tutorial-4583012">options</a>. Be sure to read and agree to the brokerage's terms and conditions, which outline the services provided, fees, and your rights and responsibilities as a client.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Fund your account</strong>: Once approved, you'll need to deposit money before you can start trading. After you've funded your account, it may take a few days for the funds to become available for trading. The delay depends on the funding method and your brokerage's policies. Most brokerages offer several ways to fund your account:</li> <li class="ql-indent-1">Bank transfer: Link your checking or savings account to your account and initiate an ACH transfer. The funds will generally appear in your account within a few days.</li> <li class="ql-indent-1">Wire transfer: To get trading faster, you can send a wire transfer from your bank to your brokerage account. Wire transfers are usually cleared the same or the next business day, but there's usually an extra fee.</li> <li class="ql-indent-1">Check deposit: Some brokerages allow you to mail a physical check to fund your account, though this is the slowest funding method.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Ensure you understand the minimum balance requirements and any maintenance fees associated with your account. Some brokerages require a minimum initial deposit or charge fees if your balance falls below a certain amount. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_50-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_51-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>When reviewing brokers, compare their commissions, research and analysis tools, ease of use, and reputation. Some sites, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/2023-best-online-brokers-awards-7152001">including <em>Investopedia</em></a>, offer online broker reviews to help you find the right broker.</p></div></div></div> <span class="heading-toc" id="toc-4-research-the-stocks-you-want-to-own"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> 4) Research the Stocks You Want to Own </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Before investing, you should research the stocks you're interested in. This involves analyzing the company's fundamentals and the stock's price moves over time. Combining <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/difference-between-fundamental-and-technical-analysis/">fundamental and technical analysis</a> will give you far more confidence when finally diving in. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <li><strong>Fundamental analysis</strong>: This approach best suits position traders and long-term investors. Fundamental analysis involves evaluating a company's financial health, competitive position, and growth prospects. Review each company's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-statements.asp">financial statements</a> to assess its profitability, debt levels, and liquidity. Also, companies should be looked for with consistent and growing earnings over time since this can indicate a robust business model and effective management. As you narrow your list of potential investments, learn a bit about the company's industry and its position. What is its market share? Is this a sector set for growth? Don't forget to research the company's management team and track record.</li> <li><strong>Technical analysis</strong>: Day traders and swing traders often use technical analysis. Technical analysis involves studying past prices and volume data to identify trends and patterns indicating future price moves. You might look for recognizable <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/112601.asp">chart patterns</a>, with names such as head and shoulders, triangles, and wedges. These price patterns reflect the behavior of market participants and can help signal potential trend reversals or continuations. Moving averages can help identify trends and potential support and resistance levels. For momentum, you would employ oscillators, such as the relative strength index and stochastic oscillator, to gauge momentum and identify when a stock is set to rise or fall. Many platforms provide these technical analysis tools.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>News and sentiment analysis:</strong> Monitor news and investor sentiment for the stocks that interest you. Review earnings reports (earnings call transcripts will typically reveal specific areas of concern to investors), management guidance, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0512/understanding-analyst-ratings.aspx">analyst ratings</a>, and any geopolitical or macroeconomic events that could impact the company or its industry.</li> <li><strong>Diversification</strong>: To manage risk, it is important to invest across different sectors, market capitalizations, and geographic regions as you build your stock portfolio. Diversification helps mitigate the influence of any single stock or sector underperforming.</li> <li><strong>Continuous learning:</strong> Expand your knowledge by reading financial articles, stock market books, and website tutorials. Tune into Bloomberg TV and stay informed about market trends and economic indicators that could affect your holdings. Adapting to new information is essential for long-term success as a trader.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Remember, research and analysis is an ongoing endeavor. As you gain experience and knowledge, you may refine your research methods and develop a more personalized approach to stock selection. It's also important to regularly review and assess your portfolio to ensure it aligns with your trading goals and risk tolerance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_59-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_60-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Many brokerages offer extensive research resources and tools to help you analyze stocks and make informed trading decisions, including stock screeners, fundamental and technical data, market news, and educational content.</p></div></div></div> <span class="heading-toc" id="toc-5-place-your-order-to-buy-or-sell-stocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-heading__text"> 5) Place Your Order To Buy or Sell Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Once you've developed a trading plan and researched a range of stocks, it's time to place orders with your brokerage. When placing an order, you'll need to specify the stock ticker symbol, the number of shares you want to trade, and the type of order you want to use. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> <li><strong>Market orders</strong>: These are the simplest type, where you ask your brokerage to buy or sell a stock at the best available price. Market orders are executed quickly, so you can be sure your trade will go through. However, you can get an unfavorable price, especially when there's lots of market activity or when dealing with stocks that don't trade frequently. Market orders are best used when you need to make a trade quickly and are willing to accept the present market price.</li> <li><strong>Limit orders</strong>: For these orders, you set the maximum price you're willing to pay for a stock (if you're buying) or the minimum price you're willing to accept (if you're selling). <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitorder.asp">Limit orders</a> give you more control over the execution price, but don't guarantee that your order will be filled. If the stock never reaches your limit price, your order won't go through. Limit orders are useful when you have a specific price in mind and are willing to wait for the market to reach that level.</li> <li><strong>Stop orders</strong>: These are triggered when a stock reaches a specific price, known as the stop price. Once that price is reached, the order becomes a market order and is filled at the next available price. Stop orders can limit losses on a trade or protect profits should your stock start to fall. However, in fast-moving markets, your order could be filled at a price significantly different from your stop price.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Order modifications and cancellations</strong>: After placing an order, you may be able to modify (e.g., change the limit price or number of shares) or cancel it before it's executed. However, keep in mind that your order may be filled in fast-moving markets before you can do so.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> When placing your order, you'll also need to specify the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timeinforce.asp">time in force</a>, which is how long it's active. This table provides the most common options, along with their abbreviations in case they aren't spelled out on a platform: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_68-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th>Time-in-Force</th> <th>Expiration</th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Day Order</b></td> <td>Expires at the end of the trading day if not executed</td> </tr> <tr> <td><b>Good-'til-Canceled (GTC)</b></td> <td>Remains active until it is either executed or canceled by you</td> </tr> <tr> <td><b>Immediate-or-Cancel (IOC)</b></td> <td>Must be filled immediately, and any unfilled portion will be canceled.</td> </tr> <tr> <td><b>All-or-None (AON)</b></td> <td>Must be filled in its entirety or not at all.</td> </tr> <tr> <td><b>Fill-or-Kill (FOK)</b></td> <td>Must be filled immediately and in its entirety, or it will be canceled. (Combines IOC and AON)</td> </tr> <tr> <td><b>Market on Open (MOO)</b></td> <td>A market order filled as close as possible to the stock's opening price; filled at the opening of the trading day</td> </tr> <tr> <td><b>Market on Close (MOC)</b></td> <td>A market order filled as close as possible to the stock's closing price; filled at the day's close</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_70-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_71-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>When trading, it's essential to double-check the details to avoid costly mistakes. Ensure you've entered the correct stock ticker, order type, quantity, and price (if applicable). Double-check that you have the correct number of zeros in the quantity, as buying 1,000 shares is 10 times more costly than 100 (it happens). Also, be aware of any fees or commissions associated with your trades, as these can affect your profits.</p></div></div></div> <span class="heading-toc" id="toc-6-managing-risk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_72-0"> <span class="mntl-sc-block-heading__text"> 6) Managing Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> When you're finally up and running and real money is at stake, you'll need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskmanagement.asp">manage your risk</a>. This involves identifying, assessing, and ranking potential risks to minimize their impact on your portfolio. By implementing effective risk management strategies, you can protect your hard-earned capital, limit losses, and improve your trading performance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> <li><strong>Diversification</strong>:<strong> </strong>This involves spreading your investments across different stocks, sectors, and asset classes. By diversifying, you can reduce the impact of an investment's performance on your overall portfolio. This is especially important for long-term investors. However, keep in mind that diversification does not guarantee profits or eliminate the risk of loss.</li> <li><strong>Emotional discipline</strong>: Don't underestimate the importance of emotional control for managing risk. Emotions such as fear and greed can significantly affect your trading decisions. Fear can have you exiting a position too early, and greed can cause you to hold onto a losing stock long after hope for a recovery is gone. By managing your emotions and sticking to your trading plan, you can make more rational decisions and avoid impulsive trades.</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/hedging-beginners-guide/"><strong>Hedging</strong></a>: For more advanced traders, this involves investing in a position to offset the risks they're taking with another trade should the price not move as they expect. (Like when you put money into an insurance policy to offset the chance your home is flooded.) For example, if you own a stock, you could buy a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put option</a> to protect against a potential decline in the stock's price. While hedging can be complex and involves certain costs, it can be quite effective in managing risk.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Position sizing</strong>: This refers to the number of shares or contracts you trade in relation to your account size. Proper <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/positionsizing.asp">position sizing</a> helps you control your risk exposure and avoid putting too many eggs in one basket. A general rule of thumb is to risk no more than 1% to 2% of your account on any single trade.</li> <li><strong>Risk-reward ratio</strong>: This compares the potential profit from a trade to the potential loss. A common risk-reward ratio is 1:2, meaning you risk $1 to earn $2 potentially. Maintaining a favorable risk-reward ratio ensures that your winning trades are larger than your losing ones, helping you achieve overall profits.</li> <li><strong>Stop-loss orders</strong>: A critical risk management tool, these orders automatically close your position if the stock price reaches a preset level. By setting a stop-loss, you can limit your potential losses and protect your capital. When placing a stop-loss, consider the stock's volatility, support and resistance levels, and your risk tolerance. A <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trailingstop.asp">trailing stop</a> is a type of stop-loss that adjusts automatically as the stock price moves in your favor. This allows you to lock in profits while still limiting potential losses. As the stock price rises, the trailing stop-loss moves up with it, maintaining a fixed distance from the current price. If the stock price reverses and hits the trailing stop-loss, your position will be closed, securing your gains.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Risk management is an ongoing process that should be regularly reviewed and adjusted. As your trading skills, life circumstances, and economic conditions change, you can adapt your risk management strategies. Whatever your circumstances, though, prioritizing risk management is a must to protect your capital, minimize losses, and increase your chances of long-term success. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_79-0"><span class="heading-toc" id="toc-are-there-main-differences-between-trading-and-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Main Differences Between Trading and Investing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In general, investors are long-term buy-and-hold market participants, while traders buy and sell shares more frequently, hoping to make shorter-term profits.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-what-are-some-common-trading-strategies"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Common Trading Strategies?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>These would include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trendanalysis.asp">following the trend</a>, that is, buying when the market is rising and short selling when it is declining; contrarian trading, or going against the herd; <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/05/scalping.asp#">scalping</a>, and trading the news.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_83-0"><span class="heading-toc" id="toc-is-technical-analysis-or-fundamental-analysis-more-important-for-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Technical Analysis or Fundamental Analysis More Important for Trading?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Because technical analysis looks at the short-term picture and can help you to identify short-term trading patterns and trends, it is ordinarily better suited to trading than fundamental analysis, which takes a longer-term view.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_85-0"><span class="heading-toc" id="toc-what-are-the-traits-of-a-successful-trader"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Traits of a Successful Trader?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In addition to knowledge and experience, discipline and mental fortitude are key. You need discipline since you're most often better off sticking to your trading strategy should you face challenges. Without this, small losses can turn into huge ones. Mental fortitude is required to bounce back from the inevitable setbacks and lousy trading days in every trader's career. Trading acumen is another trait necessary for success, but this can be developed over the years as you gain knowledge and experience.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_87-0"> <span class="mntl-sc-block-subheading__text"> The Bottom Line </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> Start your trading journey by getting up to speed on the financial markets. Then, dive into company fundamentals, read charts, and watch the prices to see if they meet your expectations. Test these strategies with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/demo-account.asp">demo accounts</a> to practice trading, analyze the results, and make adjustments. After that, you can research stocks, pick a brokerage, and begin your first trades. That brings you to the beginning, not the end, of your investing journey. </p></div>

Trading stocks can be a fascinating and lucrative way to grow your wealth. However, the stock market can be daunting for beginners, especially with the complex strategies, platforms, and tools available. New traders enter the market daily, but many fail to achieve their full potential because of a lack of knowledge, preparation, and proper risk management. If you're interested in learning how to trade stocks but don't know where to start, you're not alone. The good news is that anyone can become a successful trader with the right amount of knowledge, mindset, and approach. In this guide, we'll walk you through six essential steps to get started in stock trading, including determining your trading style, choosing a brokerage, conducting research, placing orders, and managing risk. Whether you're a complete novice or already have some experience with investing, this article will provide you with the foundation you need to enter the world of stock trading confidently. By following these steps and continually expanding your knowledge, you'll develop the skills and strategies necessary to thrive in the ever-changing stock market. Let's dive in and explore how you can start trading stocks today. ### Key Takeaways * Newer investors need to determine their trading style before diving into the stock market. This comes from one's personality, risk tolerance, time commitment, and financial goals. * You'll need to decide on a brokerage platform that aligns with your trading style and offers the tools, resources, and support you need. * Examine the stocks you might want to trade, using fundamental and technical analysis to make informed decisions. * Learn about different order types. Understanding how each works, along with their risks and advantages, will help you make better decisions when placing trades. * Create and stick to a strong risk management plan. This should include proper position sizing, stop-loss orders, and diversification. ![How to Trade Stocks]() :max_bytes(150000):strip_icc()/HowtoTradeStocks-v3-0bc090b604fd4c6e8aec3780a7f6b5ef.png) Investopedia / Zoe Hansen ## 1) Decide What Type of Trader You Want To Be Before you start trading, it's important to choose your trading style. Are you interested in short-term trading, or are you looking at the long-term? Do you have the time and dedication to be a [day trader](https://www.investopedia.com/terms/d/daytrader.asp), or would swing or position trading be more suitable? Consider your personality, risk tolerance, and the time you can realistically dedicate to trading. Reflecting on this will help you find a trading style that aligns with your goals and abilities. For instance, if you are generally risk-averse and don't have much time for stock market analysis, day trading is not the best fit for you. It requires constant attention to the markets during trading hours and making rapid decisions under stress; it's not for the faint of heart. Swing or position trading is likely more suitable, as these allow for longer holding periods and require less time commitment. The table below can help you decide: | Three Main Trading Styles | | | | | --- | --- | --- | --- | | Trading Style | Holding Period | Time Commitment | Relative Risk and Volatility | | Swing Trading | Days to a few weeks or months | Moderate | Moderate | | Position Trading (Long-Term Trading) | Several months, years, or decades | Low | Low to moderate | | Day Trading | Intraday (positions closed by the end of the trading day) | High | High | We sort the trading styles above based on how long an investor or trade holds onto the stocks. Day traders aim to profit from short-term price moves and typically close out all positions by the end of the trading day, so their trades are the fastest. Next up are swing traders, who hold positions for periods ranging from days to a few weeks or months and aim to capture short- to medium-term trends. This style requires less time commitment than day trading but still involves being pretty engaged in the market. The third style is position or long-term trading, which is for those who hold onto stocks for several months, years, or even decades. These investors focus on long-term trends and may base their decisions on fundamental and technical analyses. This style requires patience and a long-term outlook, with less frequent trading than the other two. There's no one-size-fits-all approach to trading. It's essential to choose a trading style that aligns with your personality, risk tolerance, and lifestyle. As you gain experience and knowledge or as your life circumstances change, you may find that your preferred trading style also evolves. ## 2) Research Brokerages and Choose One Suitable for Your Style of Trading Once you've decided on your style, you'll need to find a good online broker and open an account. When selecting a brokerage, you'll want a platform that caters to your needs. Brokerages have different features and tools, and some are more suitable for your type of trading than others. ### Brokerages For Day Traders A platform with quick speeds (low latency), real-time data, and advanced charting abilities is a must for day traders. Day traders often require tools like [Level 2 quotes](https://www.investopedia.com/terms/l/level2.asp), which provide detailed liquidity information about the [order book](https://www.investopedia.com/terms/o/order-book.asp) and hot keys for rapid ordering. They may also offer automated or algorithmic trading options, triggers, and technical indicators. Customizable platforms like Interactive Brokers, TradeStation, and TD Ameritrade's thinkorswim are popular among day traders. ### Brokerages For Swing Traders Swing and position traders should look for a platform with a wide range of [indicators](https://www.investopedia.com/articles/trading/11/indicators-and-strategies-explained.asp), research resources, fundamental analysis tools, and risk management features. These traders may also benefit from a platform that offers mobile trading apps, allowing them to monitor their positions and trade on the go. Brokers like Charles Schwab, Fidelity, Robinhood, and E\*TRADE are well-suited for swing and position traders since they provide a balance of research tools, user-friendly platforms, and competitive prices (typically with commission-free trading in most stocks and exchange-traded funds). ### Brokerages For Long-Term Investors For long-term investors or those new to trading, a brokerage with a strong educational component and user-friendly interface is likely the best choice. [Robo-advisors](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp), such as Betterment and Wealthfront, can be a good option for those who prefer a more automated approach to their portfolio. These platforms use algorithms to create and manage diversified portfolios based on the investor's risk tolerance and goals. For a more comprehensive discussion of the best brokerage platforms for different kinds of trading, see our list of the [best online brokerages and platforms](https://www.investopedia.com/best-online-brokers-4587872). ### Many brokerages provide free demo accounts, allowing you to practice trading with virtual money before risking your own capital. ## 3) Open a Brokerage Account and Fund it Once you've chosen a platform that suits your trading style and needs, it's time to open and fund an account. The process is straightforward and can be done in minutes. 1. **Provide your personal information**: You must supply your name, address, date of birth, Social Security number, and other basic personal information. This information is required by law to verify your identity and prevent fraud, so you can't avoid doing so by going elsewhere. 2. **Choose your account type**: Brokerages offer several account types, such as individual taxable accounts, joint accounts, and [individual retirement accounts](https://www.investopedia.com/terms/i/ira.asp) (IRAs), such as traditional and Roth IRAs. Select the account type that best fits your trading goals and tax situation. 3. **Complete the application**: Fill out the online application, which may include additional questions about your employment status, income, net worth, and trading experience. This helps brokerages follow regulations and assess your risk tolerance. This information may also be used when applying for account features such as margin (borrowing to trade) and [options](https://www.investopedia.com/options-basics-tutorial-4583012). Be sure to read and agree to the brokerage's terms and conditions, which outline the services provided, fees, and your rights and responsibilities as a client. 5. **Fund your account**: Once approved, you'll need to deposit money before you can start trading. After you've funded your account, it may take a few days for the funds to become available for trading. The delay depends on the funding method and your brokerage's policies. Most brokerages offer several ways to fund your account: 6. Bank transfer: Link your checking or savings account to your account and initiate an ACH transfer. The funds will generally appear in your account within a few days. 7. Wire transfer: To get trading faster, you can send a wire transfer from your bank to your brokerage account. Wire transfers are usually cleared the same or the next business day, but there's usually an extra fee. 8. Check deposit: Some brokerages allow you to mail a physical check to fund your account, though this is the slowest funding method. Ensure you understand the minimum balance requirements and any maintenance fees associated with your account. Some brokerages require a minimum initial deposit or charge fees if your balance falls below a certain amount. ### When reviewing brokers, compare their commissions, research and analysis tools, ease of use, and reputation. Some sites, [including *Investopedia*](https://www.investopedia.com/2023-best-online-brokers-awards-7152001), offer online broker reviews to help you find the right broker. ## 4) Research the Stocks You Want to Own Before investing, you should research the stocks you're interested in. This involves analyzing the company's fundamentals and the stock's price moves over time. Combining [fundamental and technical analysis](https://www.investopedia.com/ask/answers/difference-between-fundamental-and-technical-analysis/) will give you far more confidence when finally diving in. * **Fundamental analysis**: This approach best suits position traders and long-term investors. Fundamental analysis involves evaluating a company's financial health, competitive position, and growth prospects. Review each company's [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp) to assess its profitability, debt levels, and liquidity. Also, companies should be looked for with consistent and growing earnings over time since this can indicate a robust business model and effective management. As you narrow your list of potential investments, learn a bit about the company's industry and its position. What is its market share? Is this a sector set for growth? Don't forget to research the company's management team and track record. * **Technical analysis**: Day traders and swing traders often use technical analysis. Technical analysis involves studying past prices and volume data to identify trends and patterns indicating future price moves. You might look for recognizable [chart patterns](https://www.investopedia.com/articles/technical/112601.asp), with names such as head and shoulders, triangles, and wedges. These price patterns reflect the behavior of market participants and can help signal potential trend reversals or continuations. Moving averages can help identify trends and potential support and resistance levels. For momentum, you would employ oscillators, such as the relative strength index and stochastic oscillator, to gauge momentum and identify when a stock is set to rise or fall. Many platforms provide these technical analysis tools. * **News and sentiment analysis:** Monitor news and investor sentiment for the stocks that interest you. Review earnings reports (earnings call transcripts will typically reveal specific areas of concern to investors), management guidance, [analyst ratings](https://www.investopedia.com/financial-edge/0512/understanding-analyst-ratings.aspx), and any geopolitical or macroeconomic events that could impact the company or its industry. * **Diversification**: To manage risk, it is important to invest across different sectors, market capitalizations, and geographic regions as you build your stock portfolio. Diversification helps mitigate the influence of any single stock or sector underperforming. * **Continuous learning:** Expand your knowledge by reading financial articles, stock market books, and website tutorials. Tune into Bloomberg TV and stay informed about market trends and economic indicators that could affect your holdings. Adapting to new information is essential for long-term success as a trader. Remember, research and analysis is an ongoing endeavor. As you gain experience and knowledge, you may refine your research methods and develop a more personalized approach to stock selection. It's also important to regularly review and assess your portfolio to ensure it aligns with your trading goals and risk tolerance. ### Many brokerages offer extensive research resources and tools to help you analyze stocks and make informed trading decisions, including stock screeners, fundamental and technical data, market news, and educational content. ## 5) Place Your Order To Buy or Sell Stocks Once you've developed a trading plan and researched a range of stocks, it's time to place orders with your brokerage. When placing an order, you'll need to specify the stock ticker symbol, the number of shares you want to trade, and the type of order you want to use. * **Market orders**: These are the simplest type, where you ask your brokerage to buy or sell a stock at the best available price. Market orders are executed quickly, so you can be sure your trade will go through. However, you can get an unfavorable price, especially when there's lots of market activity or when dealing with stocks that don't trade frequently. Market orders are best used when you need to make a trade quickly and are willing to accept the present market price. * **Limit orders**: For these orders, you set the maximum price you're willing to pay for a stock (if you're buying) or the minimum price you're willing to accept (if you're selling). [Limit orders](https://www.investopedia.com/terms/l/limitorder.asp) give you more control over the execution price, but don't guarantee that your order will be filled. If the stock never reaches your limit price, your order won't go through. Limit orders are useful when you have a specific price in mind and are willing to wait for the market to reach that level. * **Stop orders**: These are triggered when a stock reaches a specific price, known as the stop price. Once that price is reached, the order becomes a market order and is filled at the next available price. Stop orders can limit losses on a trade or protect profits should your stock start to fall. However, in fast-moving markets, your order could be filled at a price significantly different from your stop price. * **Order modifications and cancellations**: After placing an order, you may be able to modify (e.g., change the limit price or number of shares) or cancel it before it's executed. However, keep in mind that your order may be filled in fast-moving markets before you can do so. When placing your order, you'll also need to specify the [time in force](https://www.investopedia.com/terms/t/timeinforce.asp), which is how long it's active. This table provides the most common options, along with their abbreviations in case they aren't spelled out on a platform: | Time-in-Force | Expiration | | --- | --- | | **Day Order** | Expires at the end of the trading day if not executed | | **Good-'til-Canceled (GTC)** | Remains active until it is either executed or canceled by you | | **Immediate-or-Cancel (IOC)** | Must be filled immediately, and any unfilled portion will be canceled. | | **All-or-None (AON)** | Must be filled in its entirety or not at all. | | **Fill-or-Kill (FOK)** | Must be filled immediately and in its entirety, or it will be canceled. (Combines IOC and AON) | | **Market on Open (MOO)** | A market order filled as close as possible to the stock's opening price; filled at the opening of the trading day | | **Market on Close (MOC)** | A market order filled as close as possible to the stock's closing price; filled at the day's close | ### When trading, it's essential to double-check the details to avoid costly mistakes. Ensure you've entered the correct stock ticker, order type, quantity, and price (if applicable). Double-check that you have the correct number of zeros in the quantity, as buying 1,000 shares is 10 times more costly than 100 (it happens). Also, be aware of any fees or commissions associated with your trades, as these can affect your profits. ## 6) Managing Risk When you're finally up and running and real money is at stake, you'll need to [manage your risk](https://www.investopedia.com/terms/r/riskmanagement.asp). This involves identifying, assessing, and ranking potential risks to minimize their impact on your portfolio. By implementing effective risk management strategies, you can protect your hard-earned capital, limit losses, and improve your trading performance. * **Diversification**:This involves spreading your investments across different stocks, sectors, and asset classes. By diversifying, you can reduce the impact of an investment's performance on your overall portfolio. This is especially important for long-term investors. However, keep in mind that diversification does not guarantee profits or eliminate the risk of loss. * **Emotional discipline**: Don't underestimate the importance of emotional control for managing risk. Emotions such as fear and greed can significantly affect your trading decisions. Fear can have you exiting a position too early, and greed can cause you to hold onto a losing stock long after hope for a recovery is gone. By managing your emotions and sticking to your trading plan, you can make more rational decisions and avoid impulsive trades. * [**Hedging**](https://www.investopedia.com/trading/hedging-beginners-guide/): For more advanced traders, this involves investing in a position to offset the risks they're taking with another trade should the price not move as they expect. (Like when you put money into an insurance policy to offset the chance your home is flooded.) For example, if you own a stock, you could buy a [put option](https://www.investopedia.com/terms/p/putoption.asp) to protect against a potential decline in the stock's price. While hedging can be complex and involves certain costs, it can be quite effective in managing risk. * **Position sizing**: This refers to the number of shares or contracts you trade in relation to your account size. Proper [position sizing](https://www.investopedia.com/terms/p/positionsizing.asp) helps you control your risk exposure and avoid putting too many eggs in one basket. A general rule of thumb is to risk no more than 1% to 2% of your account on any single trade. * **Risk-reward ratio**: This compares the potential profit from a trade to the potential loss. A common risk-reward ratio is 1:2, meaning you risk $1 to earn $2 potentially. Maintaining a favorable risk-reward ratio ensures that your winning trades are larger than your losing ones, helping you achieve overall profits. * **Stop-loss orders**: A critical risk management tool, these orders automatically close your position if the stock price reaches a preset level. By setting a stop-loss, you can limit your potential losses and protect your capital. When placing a stop-loss, consider the stock's volatility, support and resistance levels, and your risk tolerance. A [trailing stop](https://www.investopedia.com/terms/t/trailingstop.asp) is a type of stop-loss that adjusts automatically as the stock price moves in your favor. This allows you to lock in profits while still limiting potential losses. As the stock price rises, the trailing stop-loss moves up with it, maintaining a fixed distance from the current price. If the stock price reverses and hits the trailing stop-loss, your position will be closed, securing your gains. Risk management is an ongoing process that should be regularly reviewed and adjusted. As your trading skills, life circumstances, and economic conditions change, you can adapt your risk management strategies. Whatever your circumstances, though, prioritizing risk management is a must to protect your capital, minimize losses, and increase your chances of long-term success. ## Are There Main Differences Between Trading and Investing? In general, investors are long-term buy-and-hold market participants, while traders buy and sell shares more frequently, hoping to make shorter-term profits. ## What Are Some Common Trading Strategies? These would include [following the trend](https://www.investopedia.com/terms/t/trendanalysis.asp), that is, buying when the market is rising and short selling when it is declining; contrarian trading, or going against the herd; [scalping](https://www.investopedia.com/articles/trading/05/scalping.asp#), and trading the news. ## Is Technical Analysis or Fundamental Analysis More Important for Trading? Because technical analysis looks at the short-term picture and can help you to identify short-term trading patterns and trends, it is ordinarily better suited to trading than fundamental analysis, which takes a longer-term view. ## What Are the Traits of a Successful Trader? In addition to knowledge and experience, discipline and mental fortitude are key. You need discipline since you're most often better off sticking to your trading strategy should you face challenges. Without this, small losses can turn into huge ones. Mental fortitude is required to bounce back from the inevitable setbacks and lousy trading days in every trader's career. Trading acumen is another trait necessary for success, but this can be developed over the years as you gain knowledge and experience. ### The Bottom Line Start your trading journey by getting up to speed on the financial markets. Then, dive into company fundamentals, read charts, and watch the prices to see if they meet your expectations. Test these strategies with [demo accounts](https://www.investopedia.com/terms/d/demo-account.asp) to practice trading, analyze the results, and make adjustments. After that, you can research stocks, pick a brokerage, and begin your first trades. That brings you to the beginning, not the end, of your investing journey.

Trading stocks can be a fascinating and lucrative way to grow your wealth. However, the stock market can be daunting for beginners, especially with the complex strategies, platforms, and tools available. New traders enter the market daily, but many fail to achieve their full potential because of a lack of knowledge, preparation, and proper risk management. If you're interested in learning how to trade stocks but don't know where to start, you're not alone. The good news is that anyone can become a successful trader with the right amount of knowledge, mindset, and approach. In this guide, we'll walk you through six essential steps to get started in stock trading, including determining your trading style, choosing a brokerage, conducting research, placing orders, and managing risk. Whether you're a complete novice or already have some experience with investing, this article will provide you with the foundation you need to enter the world of stock trading confidently. By following these steps and continually expanding your knowledge, you'll develop the skills and strategies necessary to thrive in the ever-changing stock market. Let's dive in and explore how you can start trading stocks today. Key Takeaways Newer investors need to determine their trading style before diving into the stock market. This comes from one's personality, risk tolerance, time commitment, and financial goals.You'll need to decide on a brokerage platform that aligns with your trading style and offers the tools, resources, and support you need.Examine the stocks you might want to trade, using fundamental and technical analysis to make informed decisions.Learn about different order types. Understanding how each works, along with their risks and advantages, will help you make better decisions when placing trades.Create and stick to a strong risk management plan. This should include proper position sizing, stop-loss orders, and diversification. Investopedia / Zoe Hansen 1) Decide What Type of Trader You Want To Be Before you start trading, it's important to choose your trading style. Are you interested in short-term trading, or are you looking at the long-term? Do you have the time and dedication to be a day trader, or would swing or position trading be more suitable? Consider your personality, risk tolerance, and the time you can realistically dedicate to trading. Reflecting on this will help you find a trading style that aligns with your goals and abilities. For instance, if you are generally risk-averse and don't have much time for stock market analysis, day trading is not the best fit for you. It requires constant attention to the markets during trading hours and making rapid decisions under stress; it's not for the faint of heart. Swing or position trading is likely more suitable, as these allow for longer holding periods and require less time commitment. The table below can help you decide: Three Main Trading Styles Trading Style Holding Period Time Commitment Relative Risk and Volatility Swing Trading Days to a few weeks or months Moderate Moderate Position Trading (Long-Term Trading) Several months, years, or decades Low Low to moderate Day Trading Intraday (positions closed by the end of the trading day) High High We sort the trading styles above based on how long an investor or trade holds onto the stocks. Day traders aim to profit from short-term price moves and typically close out all positions by the end of the trading day, so their trades are the fastest. Next up are swing traders, who hold positions for periods ranging from days to a few weeks or months and aim to capture short- to medium-term trends. This style requires less time commitment than day trading but still involves being pretty engaged in the market. The third style is position or long-term trading, which is for those who hold onto stocks for several months, years, or even decades. These investors focus on long-term trends and may base their decisions on fundamental and technical analyses. This style requires patience and a long-term outlook, with less frequent trading than the other two. There's no one-size-fits-all approach to trading. It's essential to choose a trading style that aligns with your personality, risk tolerance, and lifestyle. As you gain experience and knowledge or as your life circumstances change, you may find that your preferred trading style also evolves. 2) Research Brokerages and Choose One Suitable for Your Style of Trading Once you've decided on your style, you'll need to find a good online broker and open an account. When selecting a brokerage, you'll want a platform that caters to your needs. Brokerages have different features and tools, and some are more suitable for your type of trading than others. Brokerages For Day Traders A platform with quick speeds (low latency), real-time data, and advanced charting abilities is a must for day traders. Day traders often require tools like Level 2 quotes, which provide detailed liquidity information about the order book and hot keys for rapid ordering. They may also offer automated or algorithmic trading options, triggers, and technical indicators. Customizable platforms like Interactive Brokers, TradeStation, and TD Ameritrade's thinkorswim are popular among day traders. Brokerages For Swing Traders Swing and position traders should look for a platform with a wide range of indicators, research resources, fundamental analysis tools, and risk management features. These traders may also benefit from a platform that offers mobile trading apps, allowing them to monitor their positions and trade on the go. Brokers like Charles Schwab, Fidelity, Robinhood, and E*TRADE are well-suited for swing and position traders since they provide a balance of research tools, user-friendly platforms, and competitive prices (typically with commission-free trading in most stocks and exchange-traded funds). Brokerages For Long-Term Investors For long-term investors or those new to trading, a brokerage with a strong educational component and user-friendly interface is likely the best choice. Robo-advisors, such as Betterment and Wealthfront, can be a good option for those who prefer a more automated approach to their portfolio. These platforms use algorithms to create and manage diversified portfolios based on the investor's risk tolerance and goals. For a more comprehensive discussion of the best brokerage platforms for different kinds of trading, see our list of the best online brokerages and platforms. Many brokerages provide free demo accounts, allowing you to practice trading with virtual money before risking your own capital. 3) Open a Brokerage Account and Fund it Once you've chosen a platform that suits your trading style and needs, it's time to open and fund an account. The process is straightforward and can be done in minutes. Provide your personal information: You must supply your name, address, date of birth, Social Security number, and other basic personal information. This information is required by law to verify your identity and prevent fraud, so you can't avoid doing so by going elsewhere. Choose your account type: Brokerages offer several account types, such as individual taxable accounts, joint accounts, and individual retirement accounts (IRAs), such as traditional and Roth IRAs. Select the account type that best fits your trading goals and tax situation. Complete the application: Fill out the online application, which may include additional questions about your employment status, income, net worth, and trading experience. This helps brokerages follow regulations and assess your risk tolerance. This information may also be used when applying for account features such as margin (borrowing to trade) and options. Be sure to read and agree to the brokerage's terms and conditions, which outline the services provided, fees, and your rights and responsibilities as a client. Fund your account: Once approved, you'll need to deposit money before you can start trading. After you've funded your account, it may take a few days for the funds to become available for trading. The delay depends on the funding method and your brokerage's policies. Most brokerages offer several ways to fund your account: Bank transfer: Link your checking or savings account to your account and initiate an ACH transfer. The funds will generally appear in your account within a few days. Wire transfer: To get trading faster, you can send a wire transfer from your bank to your brokerage account. Wire transfers are usually cleared the same or the next business day, but there's usually an extra fee. Check deposit: Some brokerages allow you to mail a physical check to fund your account, though this is the slowest funding method. Ensure you understand the minimum balance requirements and any maintenance fees associated with your account. Some brokerages require a minimum initial deposit or charge fees if your balance falls below a certain amount. When reviewing brokers, compare their commissions, research and analysis tools, ease of use, and reputation. Some sites, including Investopedia, offer online broker reviews to help you find the right broker. 4) Research the Stocks You Want to Own Before investing, you should research the stocks you're interested in. This involves analyzing the company's fundamentals and the stock's price moves over time. Combining fundamental and technical analysis will give you far more confidence when finally diving in. Fundamental analysis: This approach best suits position traders and long-term investors. Fundamental analysis involves evaluating a company's financial health, competitive position, and growth prospects. Review each company's financial statements to assess its profitability, debt levels, and liquidity. Also, companies should be looked for with consistent and growing earnings over time since this can indicate a robust business model and effective management. As you narrow your list of potential investments, learn a bit about the company's industry and its position. What is its market share? Is this a sector set for growth? Don't forget to research the company's management team and track record. Technical analysis: Day traders and swing traders often use technical analysis. Technical analysis involves studying past prices and volume data to identify trends and patterns indicating future price moves. You might look for recognizable chart patterns, with names such as head and shoulders, triangles, and wedges. These price patterns reflect the behavior of market participants and can help signal potential trend reversals or continuations. Moving averages can help identify trends and potential support and resistance levels. For momentum, you would employ oscillators, such as the relative strength index and stochastic oscillator, to gauge momentum and identify when a stock is set to rise or fall. Many platforms provide these technical analysis tools. News and sentiment analysis: Monitor news and investor sentiment for the stocks that interest you. Review earnings reports (earnings call transcripts will typically reveal specific areas of concern to investors), management guidance, analyst ratings, and any geopolitical or macroeconomic events that could impact the company or its industry. Diversification: To manage risk, it is important to invest across different sectors, market capitalizations, and geographic regions as you build your stock portfolio. Diversification helps mitigate the influence of any single stock or sector underperforming. Continuous learning: Expand your knowledge by reading financial articles, stock market books, and website tutorials. Tune into Bloomberg TV and stay informed about market trends and economic indicators that could affect your holdings. Adapting to new information is essential for long-term success as a trader. Remember, research and analysis is an ongoing endeavor. As you gain experience and knowledge, you may refine your research methods and develop a more personalized approach to stock selection. It's also important to regularly review and assess your portfolio to ensure it aligns with your trading goals and risk tolerance. Many brokerages offer extensive research resources and tools to help you analyze stocks and make informed trading decisions, including stock screeners, fundamental and technical data, market news, and educational content. 5) Place Your Order To Buy or Sell Stocks Once you've developed a trading plan and researched a range of stocks, it's time to place orders with your brokerage. When placing an order, you'll need to specify the stock ticker symbol, the number of shares you want to trade, and the type of order you want to use. Market orders: These are the simplest type, where you ask your brokerage to buy or sell a stock at the best available price. Market orders are executed quickly, so you can be sure your trade will go through. However, you can get an unfavorable price, especially when there's lots of market activity or when dealing with stocks that don't trade frequently. Market orders are best used when you need to make a trade quickly and are willing to accept the present market price. Limit orders: For these orders, you set the maximum price you're willing to pay for a stock (if you're buying) or the minimum price you're willing to accept (if you're selling). Limit orders give you more control over the execution price, but don't guarantee that your order will be filled. If the stock never reaches your limit price, your order won't go through. Limit orders are useful when you have a specific price in mind and are willing to wait for the market to reach that level. Stop orders: These are triggered when a stock reaches a specific price, known as the stop price. Once that price is reached, the order becomes a market order and is filled at the next available price. Stop orders can limit losses on a trade or protect profits should your stock start to fall. However, in fast-moving markets, your order could be filled at a price significantly different from your stop price. Order modifications and cancellations: After placing an order, you may be able to modify (e.g., change the limit price or number of shares) or cancel it before it's executed. However, keep in mind that your order may be filled in fast-moving markets before you can do so. When placing your order, you'll also need to specify the time in force, which is how long it's active. This table provides the most common options, along with their abbreviations in case they aren't spelled out on a platform: Time-in-Force Expiration Day Order Expires at the end of the trading day if not executed Good-'til-Canceled (GTC) Remains active until it is either executed or canceled by you Immediate-or-Cancel (IOC) Must be filled immediately, and any unfilled portion will be canceled. All-or-None (AON) Must be filled in its entirety or not at all. Fill-or-Kill (FOK) Must be filled immediately and in its entirety, or it will be canceled. (Combines IOC and AON) Market on Open (MOO) A market order filled as close as possible to the stock's opening price; filled at the opening of the trading day Market on Close (MOC) A market order filled as close as possible to the stock's closing price; filled at the day's close When trading, it's essential to double-check the details to avoid costly mistakes. Ensure you've entered the correct stock ticker, order type, quantity, and price (if applicable). Double-check that you have the correct number of zeros in the quantity, as buying 1,000 shares is 10 times more costly than 100 (it happens). Also, be aware of any fees or commissions associated with your trades, as these can affect your profits. 6) Managing Risk When you're finally up and running and real money is at stake, you'll need to manage your risk. This involves identifying, assessing, and ranking potential risks to minimize their impact on your portfolio. By implementing effective risk management strategies, you can protect your hard-earned capital, limit losses, and improve your trading performance. Diversification: This involves spreading your investments across different stocks, sectors, and asset classes. By diversifying, you can reduce the impact of an investment's performance on your overall portfolio. This is especially important for long-term investors. However, keep in mind that diversification does not guarantee profits or eliminate the risk of loss. Emotional discipline: Don't underestimate the importance of emotional control for managing risk. Emotions such as fear and greed can significantly affect your trading decisions. Fear can have you exiting a position too early, and greed can cause you to hold onto a losing stock long after hope for a recovery is gone. By managing your emotions and sticking to your trading plan, you can make more rational decisions and avoid impulsive trades. Hedging: For more advanced traders, this involves investing in a position to offset the risks they're taking with another trade should the price not move as they expect. (Like when you put money into an insurance policy to offset the chance your home is flooded.) For example, if you own a stock, you could buy a put option to protect against a potential decline in the stock's price. While hedging can be complex and involves certain costs, it can be quite effective in managing risk. Position sizing: This refers to the number of shares or contracts you trade in relation to your account size. Proper position sizing helps you control your risk exposure and avoid putting too many eggs in one basket. A general rule of thumb is to risk no more than 1% to 2% of your account on any single trade. Risk-reward ratio: This compares the potential profit from a trade to the potential loss. A common risk-reward ratio is 1:2, meaning you risk $1 to earn $2 potentially. Maintaining a favorable risk-reward ratio ensures that your winning trades are larger than your losing ones, helping you achieve overall profits. Stop-loss orders: A critical risk management tool, these orders automatically close your position if the stock price reaches a preset level. By setting a stop-loss, you can limit your potential losses and protect your capital. When placing a stop-loss, consider the stock's volatility, support and resistance levels, and your risk tolerance. A trailing stop is a type of stop-loss that adjusts automatically as the stock price moves in your favor. This allows you to lock in profits while still limiting potential losses. As the stock price rises, the trailing stop-loss moves up with it, maintaining a fixed distance from the current price. If the stock price reverses and hits the trailing stop-loss, your position will be closed, securing your gains. Risk management is an ongoing process that should be regularly reviewed and adjusted. As your trading skills, life circumstances, and economic conditions change, you can adapt your risk management strategies. Whatever your circumstances, though, prioritizing risk management is a must to protect your capital, minimize losses, and increase your chances of long-term success. Are There Main Differences Between Trading and Investing? In general, investors are long-term buy-and-hold market participants, while traders buy and sell shares more frequently, hoping to make shorter-term profits. What Are Some Common Trading Strategies? These would include following the trend, that is, buying when the market is rising and short selling when it is declining; contrarian trading, or going against the herd; scalping, and trading the news. Is Technical Analysis or Fundamental Analysis More Important for Trading? Because technical analysis looks at the short-term picture and can help you to identify short-term trading patterns and trends, it is ordinarily better suited to trading than fundamental analysis, which takes a longer-term view. What Are the Traits of a Successful Trader? In addition to knowledge and experience, discipline and mental fortitude are key. You need discipline since you're most often better off sticking to your trading strategy should you face challenges. Without this, small losses can turn into huge ones. Mental fortitude is required to bounce back from the inevitable setbacks and lousy trading days in every trader's career. Trading acumen is another trait necessary for success, but this can be developed over the years as you gain knowledge and experience. The Bottom Line Start your trading journey by getting up to speed on the financial markets. Then, dive into company fundamentals, read charts, and watch the prices to see if they meet your expectations. Test these strategies with demo accounts to practice trading, analyze the results, and make adjustments. After that, you can research stocks, pick a brokerage, and begin your first trades. That brings you to the beginning, not the end, of your investing journey.

https://www.investopedia.com/terms/c/commodity.asp

What Are Commodities and Understanding Their Role in the Stock Market

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-commodities"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are Commodities? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> In commerce, commodities are basic resources that are interchangeable with other goods of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When traded on an exchange, commodities must also meet specified minimum standards, also known as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basisgrade.asp">basis grade</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.</li><li>Commodities are most often used as inputs in the production of other goods or services.</li><li>Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.</li><li>Hard commodities refer to energy and metals products, while soft commodities are often agricultural goods.</li><li>Many investors view allocating commodities in a portfolio as a hedge against inflation.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Commodity" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/xcmsSid3vdtt1zSCrRXsDW7kUb0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/commodity-4199120-1-911855241479465fb4e4f2f9d9d25c8a.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/xcmsSid3vdtt1zSCrRXsDW7kUb0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/commodity-4199120-1-911855241479465fb4e4f2f9d9d25c8a.jpg" data-srcset="https://www.investopedia.com/thmb/CBL-Of6HMpYtv7kf7T7AS5B9L-w=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/commodity-4199120-1-911855241479465fb4e4f2f9d9d25c8a.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Commodity" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/xcmsSid3vdtt1zSCrRXsDW7kUb0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/commodity-4199120-1-911855241479465fb4e4f2f9d9d25c8a.jpg" srcset="https://www.investopedia.com/thmb/CBL-Of6HMpYtv7kf7T7AS5B9L-w=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/commodity-4199120-1-911855241479465fb4e4f2f9d9d25c8a.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Joules Garcia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-commodities"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding Commodities </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Commodities are the raw inputs used in the production of goods. They may also be basic staples such as certain agricultural products. The important feature of a commodity is that there is very little differentiation in that good, regardless of who produces it. A barrel of oil is basically the same product, regardless of the producer. The same goes for a bushel of wheat or a ton of ore. By contrast, the quality and features of a given consumer product will often be quite different depending on the producer (e.g., Coke vs. Pepsi).<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Some traditional examples of commodities include grains, gold, beef, oil, and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/commodities-4427780">Commodities can be bought and sold</a> on specialized exchanges as financial assets. There are also well-developed derivatives markets whereby you can buy contracts on such commodities (e.g., oil forwards, wheat or gold futures, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/010715/trading-natural-gas-options.asp">natural gas options</a>). Some experts believe that investors should hold at least some portion of a well-diversified portfolio in commodities since they are not highly correlated with other financial assets and may serve as an inflation hedge.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>You might consider allocating up to 10% of your portfolio to a mix of commodities. Ordinary investors can look to one of several <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity-etf.asp">commodities ETFs</a> or mutual funds to gain exposure.</p></div></div></div> <span class="heading-toc" id="toc-buyers-and-producers-of-commodities"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Buyers and Producers of Commodities </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The sale and purchase of commodities are usually carried out through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a> contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cbot.asp">Chicago Board of Trade (CBOT)</a> stipulates that one wheat contract is for 5,000 bushels and states what grades of wheat can be used to satisfy the contract.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Two types of traders trade commodity futures. The first are buyers and producers of commodities that use commodity futures contracts for the hedging purposes for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> For example, the wheat farmer who plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested. The farmer can sell wheat futures contracts when the crop is planted and have a guaranteed, predetermined price for the wheat when it is harvested. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-commodities-speculators"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> Commodities Speculators </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The second type of commodities trader is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculator.asp">speculator</a>. These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. These traders never intend to make or take delivery of the actual commodity when the futures contract expires. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Many futures markets are very liquid and have a high degree of daily range and volatility, making them very tempting markets for intraday traders. Many index futures are used by brokerages and portfolio managers to offset risk. Also, since commodities do not typically trade in tandem with equity and bond markets, some commodities can be used effectively to diversify an investment portfolio. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Commodity prices typically rise when <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> accelerates, which is why investors often flock to them for their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp">protection</a> during times of increasing inflation—particularly when it is unexpected. So, commodity demand increases because investors flock to them, raising their prices. The prices of goods and services then go up to match the increase. This causes commodities to often serve as a hedge against a currency's decreased buying power when the inflation rate increases.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-what-is-the-relationship-between-commodities-and-derivatives"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Relationship Between Commodities and Derivatives?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The modern commodities market relies heavily on derivative securities, such as futures and forward contracts. Buyers and sellers can transact with one another easily and in large volumes without needing to exchange the physical commodities themselves. Many buyers and sellers of commodity derivatives do so to speculate on the price movements of the underlying commodities for purposes such as risk hedging and inflation protection.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-what-determines-commodity-prices"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Determines Commodity Prices?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Like all assets, commodity prices are ultimately determined by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/law-of-supply-demand.asp">supply and demand</a>. For example, a booming economy might lead to increased demand for oil and other energy commodities. Supply and demand for commodities can be impacted in many ways, such as economic shocks, natural disasters, and investor appetite (investors may purchase commodities as an inflation hedge if they expect inflation to rise).</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-what-is-the-difference-between-a-commodity-and-a-security-or-asset"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between a Commodity and a Security or Asset?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Commodities are physical products that are meant to be consumed or used in the production process. Assets, on the other hand, are goods that are not consumed through their use. For instance, money or a piece of machinery are used for productive purposes, but persist as they are used. A security is a financial instrument that is not a physical product. It is a legal representation (e.g., a contract or claim) that represents certain cash flows generated from various activities (such as a stock representing the future cash flows of a business).</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-what-are-the-types-of-commodities"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Types of Commodities?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Hard commodities are usually classified as those that are mined or extracted from the earth. These can include metals, ore, and petroleum (energy) products. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/softcommodity.asp">Soft commodities</a> instead refer to those that are grown, such as agricultural products. These include wheat, cotton, coffee, sugar, soybeans, and other harvested items.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-where-are-commodities-traded"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Are Commodities Traded?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The major U.S. commodity exchanges are ICE Futures U.S. and the CME Group, which operate four major exchanges: the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Commodity Exchange, Inc. (COMEX). There are also major <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commoditiesexchange.asp">commodities exchanges</a> located around the world.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity. Commodities have long been an important part of commerce, but in recent decades, commodities trading has become increasingly standardized. </p></div>

## What Are Commodities? Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers. In commerce, commodities are basic resources that are interchangeable with other goods of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When traded on an exchange, commodities must also meet specified minimum standards, also known as a [basis grade](https://www.investopedia.com/terms/b/basisgrade.asp). ### Key Takeaways * A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. * Commodities are most often used as inputs in the production of other goods or services. * Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options. * Hard commodities refer to energy and metals products, while soft commodities are often agricultural goods. * Many investors view allocating commodities in a portfolio as a hedge against inflation. ![Commodity]() :max_bytes(150000):strip_icc()/commodity-4199120-1-911855241479465fb4e4f2f9d9d25c8a.jpg) Investopedia / Joules Garcia ## Understanding Commodities Commodities are the raw inputs used in the production of goods. They may also be basic staples such as certain agricultural products. The important feature of a commodity is that there is very little differentiation in that good, regardless of who produces it. A barrel of oil is basically the same product, regardless of the producer. The same goes for a bushel of wheat or a ton of ore. By contrast, the quality and features of a given consumer product will often be quite different depending on the producer (e.g., Coke vs. Pepsi). Some traditional examples of commodities include grains, gold, beef, oil, and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. [Commodities can be bought and sold](https://www.investopedia.com/commodities-4427780) on specialized exchanges as financial assets. There are also well-developed derivatives markets whereby you can buy contracts on such commodities (e.g., oil forwards, wheat or gold futures, and [natural gas options](https://www.investopedia.com/articles/active-trading/010715/trading-natural-gas-options.asp)). Some experts believe that investors should hold at least some portion of a well-diversified portfolio in commodities since they are not highly correlated with other financial assets and may serve as an inflation hedge. ### You might consider allocating up to 10% of your portfolio to a mix of commodities. Ordinary investors can look to one of several [commodities ETFs](https://www.investopedia.com/terms/c/commodity-etf.asp) or mutual funds to gain exposure. ## Buyers and Producers of Commodities The sale and purchase of commodities are usually carried out through [futures](https://www.investopedia.com/terms/f/futures.asp) contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the [Chicago Board of Trade (CBOT)](https://www.investopedia.com/terms/c/cbot.asp) stipulates that one wheat contract is for 5,000 bushels and states what grades of wheat can be used to satisfy the contract. Two types of traders trade commodity futures. The first are buyers and producers of commodities that use commodity futures contracts for the hedging purposes for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires. For example, the wheat farmer who plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested. The farmer can sell wheat futures contracts when the crop is planted and have a guaranteed, predetermined price for the wheat when it is harvested. ## Commodities Speculators The second type of commodities trader is the [speculator](https://www.investopedia.com/terms/s/speculator.asp). These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. These traders never intend to make or take delivery of the actual commodity when the futures contract expires. Many futures markets are very liquid and have a high degree of daily range and volatility, making them very tempting markets for intraday traders. Many index futures are used by brokerages and portfolio managers to offset risk. Also, since commodities do not typically trade in tandem with equity and bond markets, some commodities can be used effectively to diversify an investment portfolio. ## Special Considerations Commodity prices typically rise when [inflation](https://www.investopedia.com/terms/i/inflation.asp) accelerates, which is why investors often flock to them for their [protection](https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp) during times of increasing inflation—particularly when it is unexpected. So, commodity demand increases because investors flock to them, raising their prices. The prices of goods and services then go up to match the increase. This causes commodities to often serve as a hedge against a currency's decreased buying power when the inflation rate increases. ## What Is the Relationship Between Commodities and Derivatives? The modern commodities market relies heavily on derivative securities, such as futures and forward contracts. Buyers and sellers can transact with one another easily and in large volumes without needing to exchange the physical commodities themselves. Many buyers and sellers of commodity derivatives do so to speculate on the price movements of the underlying commodities for purposes such as risk hedging and inflation protection. ## What Determines Commodity Prices? Like all assets, commodity prices are ultimately determined by [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp). For example, a booming economy might lead to increased demand for oil and other energy commodities. Supply and demand for commodities can be impacted in many ways, such as economic shocks, natural disasters, and investor appetite (investors may purchase commodities as an inflation hedge if they expect inflation to rise). ## What Is the Difference Between a Commodity and a Security or Asset? Commodities are physical products that are meant to be consumed or used in the production process. Assets, on the other hand, are goods that are not consumed through their use. For instance, money or a piece of machinery are used for productive purposes, but persist as they are used. A security is a financial instrument that is not a physical product. It is a legal representation (e.g., a contract or claim) that represents certain cash flows generated from various activities (such as a stock representing the future cash flows of a business). ## What Are the Types of Commodities? Hard commodities are usually classified as those that are mined or extracted from the earth. These can include metals, ore, and petroleum (energy) products. [Soft commodities](https://www.investopedia.com/terms/s/softcommodity.asp) instead refer to those that are grown, such as agricultural products. These include wheat, cotton, coffee, sugar, soybeans, and other harvested items. ## Where Are Commodities Traded? The major U.S. commodity exchanges are ICE Futures U.S. and the CME Group, which operate four major exchanges: the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Commodity Exchange, Inc. (COMEX). There are also major [commodities exchanges](https://www.investopedia.com/terms/c/commoditiesexchange.asp) located around the world. ## The Bottom Line Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity. Commodities have long been an important part of commerce, but in recent decades, commodities trading has become increasingly standardized.

What Are Commodities? Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers. In commerce, commodities are basic resources that are interchangeable with other goods of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. Key Takeaways A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.Commodities are most often used as inputs in the production of other goods or services.Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.Hard commodities refer to energy and metals products, while soft commodities are often agricultural goods.Many investors view allocating commodities in a portfolio as a hedge against inflation. Investopedia / Joules Garcia Understanding Commodities Commodities are the raw inputs used in the production of goods. They may also be basic staples such as certain agricultural products. The important feature of a commodity is that there is very little differentiation in that good, regardless of who produces it. A barrel of oil is basically the same product, regardless of the producer. The same goes for a bushel of wheat or a ton of ore. By contrast, the quality and features of a given consumer product will often be quite different depending on the producer (e.g., Coke vs. Pepsi). Some traditional examples of commodities include grains, gold, beef, oil, and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. Commodities can be bought and sold on specialized exchanges as financial assets. There are also well-developed derivatives markets whereby you can buy contracts on such commodities (e.g., oil forwards, wheat or gold futures, and natural gas options). Some experts believe that investors should hold at least some portion of a well-diversified portfolio in commodities since they are not highly correlated with other financial assets and may serve as an inflation hedge. You might consider allocating up to 10% of your portfolio to a mix of commodities. Ordinary investors can look to one of several commodities ETFs or mutual funds to gain exposure. Buyers and Producers of Commodities The sale and purchase of commodities are usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade (CBOT) stipulates that one wheat contract is for 5,000 bushels and states what grades of wheat can be used to satisfy the contract. Two types of traders trade commodity futures. The first are buyers and producers of commodities that use commodity futures contracts for the hedging purposes for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires. For example, the wheat farmer who plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested. The farmer can sell wheat futures contracts when the crop is planted and have a guaranteed, predetermined price for the wheat when it is harvested. Commodities Speculators The second type of commodities trader is the speculator. These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. These traders never intend to make or take delivery of the actual commodity when the futures contract expires. Many futures markets are very liquid and have a high degree of daily range and volatility, making them very tempting markets for intraday traders. Many index futures are used by brokerages and portfolio managers to offset risk. Also, since commodities do not typically trade in tandem with equity and bond markets, some commodities can be used effectively to diversify an investment portfolio. Special Considerations Commodity prices typically rise when inflation accelerates, which is why investors often flock to them for their protection during times of increasing inflation—particularly when it is unexpected. So, commodity demand increases because investors flock to them, raising their prices. The prices of goods and services then go up to match the increase. This causes commodities to often serve as a hedge against a currency's decreased buying power when the inflation rate increases. What Is the Relationship Between Commodities and Derivatives? The modern commodities market relies heavily on derivative securities, such as futures and forward contracts. Buyers and sellers can transact with one another easily and in large volumes without needing to exchange the physical commodities themselves. Many buyers and sellers of commodity derivatives do so to speculate on the price movements of the underlying commodities for purposes such as risk hedging and inflation protection. What Determines Commodity Prices? Like all assets, commodity prices are ultimately determined by supply and demand. For example, a booming economy might lead to increased demand for oil and other energy commodities. Supply and demand for commodities can be impacted in many ways, such as economic shocks, natural disasters, and investor appetite (investors may purchase commodities as an inflation hedge if they expect inflation to rise). What Is the Difference Between a Commodity and a Security or Asset? Commodities are physical products that are meant to be consumed or used in the production process. Assets, on the other hand, are goods that are not consumed through their use. For instance, money or a piece of machinery are used for productive purposes, but persist as they are used. A security is a financial instrument that is not a physical product. It is a legal representation (e.g., a contract or claim) that represents certain cash flows generated from various activities (such as a stock representing the future cash flows of a business). What Are the Types of Commodities? Hard commodities are usually classified as those that are mined or extracted from the earth. These can include metals, ore, and petroleum (energy) products. Soft commodities instead refer to those that are grown, such as agricultural products. These include wheat, cotton, coffee, sugar, soybeans, and other harvested items. Where Are Commodities Traded? The major U.S. commodity exchanges are ICE Futures U.S. and the CME Group, which operate four major exchanges: the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Commodity Exchange, Inc. (COMEX). There are also major commodities exchanges located around the world. The Bottom Line Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity. Commodities have long been an important part of commerce, but in recent decades, commodities trading has become increasingly standardized.

https://www.investopedia.com/terms/s/statutory-reserves.asp

Statutory Reserves: Definition and Examples

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-statutory-reserves"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are Statutory Reserves? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Statutory reserves are the funds that state insurance <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp" rel="noopener noreferrer">regulators</a> require the insurance companies operating in their state to maintain at any given time. The purpose of statutory reserves is to help ensure that insurance companies have adequate liquidity available to honor all of the legitimate <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance_claim.asp" rel="noopener noreferrer">claims</a> made by their policyholders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Statutory reserves are the minimum amounts of cash and readily marketable securities that insurance companies must hold.</li><li>They are mandated under state insurance regulations.</li><li>Insurance companies are free to set their statutory reserves above the minimum level, using a principles-based approach.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-statutory-reserves"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Statutory Reserves </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The McCarran-Ferguson Act, passed by Congress in 1945, gave states the authority to regulate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance.asp" rel="noopener noreferrer">insurance</a> companies. To do business in a state, each insurer must be licensed by the state's insurance department and abide by its rules. Among those rules is how much money an insurer must keep in reserve to make sure that it will be able to pay its future claims. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Insurance companies collect <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance-premium.asp" rel="noopener noreferrer">insurance premiums</a> from their customers and then invest those premiums in their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/general-account.asp" rel="noopener noreferrer">general account</a> to generate a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp" rel="noopener noreferrer">return on investment</a> (ROI). In theory, insurers might be tempted to invest a very large fraction of the premiums they collect in order to maximize their return. However, doing so could leave them with insufficient cash on hand to satisfy the claims made by their customers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> To prevent this from happening, state insurance regulators enforce minimum levels of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp" rel="noopener noreferrer">liquidity</a> that insurance companies must maintain. These statutory reserves can either be held in cash, or in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketablesecurities.asp" rel="noopener noreferrer">readily marketable securities</a> that can be converted into cash reliably and on short notice. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Statutory reserves apply to a range of insurance products, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeinsurance.asp" rel="noopener noreferrer">life insurance</a>, health insurance, property and casualty insurance, long-term care insurance, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/annuitycontract.asp" rel="noopener noreferrer">annuity contracts</a>. The requirements can vary from one state to another and according to the type of insurance product. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-statutory-reserves-methods"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Statutory Reserves Methods </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In setting the level of statutory reserves, state insurance regulators use two basic approaches. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-subheading__text"> Rules-Based Approach </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The first of these is a rules-based approach, in which insurers are told how much of their premiums they must keep in reserve based on standardized formulas and assumptions.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-subheading__text"> Principles-Based Approach </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The second approach, known as the principles-based approach, gives insurers greater leeway in setting their reserves. Specifically, it allows them to set reserves based on their own experience, such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/actuarial-science.asp" rel="noopener noreferrer">actuarial statistics</a> and past claims behavior of their own customers, provided that they are as large or larger than the reserves stipulated under the rules-based approach.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When an insurance company chooses to keep reserves that are in excess of the minimum amount required under the rules-based approach, these are referred to as non-statutory or voluntary reserves.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Regardless of the approach used to calculate them, statutory reserves will generally cause insurance companies to lose out on some potential profits. However, they benefit the insurance markets as a whole by making insurance customers more confident that their insurers will be able to withstand difficult economic circumstances and stand behind their policies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-example-of-statutory-reserves"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> Example of Statutory Reserves </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Consider the case of XYZ Insurance. According to the statutory reserve requirements of its state insurance regulator, XYZ would be required to keep $50 million in reserve based on the rules-based approach. However, after considering the competitive landscape in its state and reviewing the past performance of its insurance portfolio, XYZ decided to use the principles-based approach and set its statutory reserves above the minimum required level. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Although the additional reserves would likely cost it in terms of lost <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentincome.asp" rel="noopener noreferrer">investment income</a>, XYZ reasoned that this more conservative approach would strengthen its image as a responsible insurer and make it well-positioned to navigate any potential <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recession.asp" rel="noopener noreferrer">recession</a> or other economic headwinds. </p></div>

## What Are Statutory Reserves? Statutory reserves are the funds that state insurance [regulators](https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp) require the insurance companies operating in their state to maintain at any given time. The purpose of statutory reserves is to help ensure that insurance companies have adequate liquidity available to honor all of the legitimate [claims](https://www.investopedia.com/terms/i/insurance_claim.asp) made by their policyholders. ### Key Takeaways * Statutory reserves are the minimum amounts of cash and readily marketable securities that insurance companies must hold. * They are mandated under state insurance regulations. * Insurance companies are free to set their statutory reserves above the minimum level, using a principles-based approach. ## Understanding Statutory Reserves The McCarran-Ferguson Act, passed by Congress in 1945, gave states the authority to regulate [insurance](https://www.investopedia.com/terms/i/insurance.asp) companies. To do business in a state, each insurer must be licensed by the state's insurance department and abide by its rules. Among those rules is how much money an insurer must keep in reserve to make sure that it will be able to pay its future claims. Insurance companies collect [insurance premiums](https://www.investopedia.com/terms/i/insurance-premium.asp) from their customers and then invest those premiums in their [general account](https://www.investopedia.com/terms/g/general-account.asp) to generate a [return on investment](https://www.investopedia.com/terms/r/returnoninvestment.asp) (ROI). In theory, insurers might be tempted to invest a very large fraction of the premiums they collect in order to maximize their return. However, doing so could leave them with insufficient cash on hand to satisfy the claims made by their customers. To prevent this from happening, state insurance regulators enforce minimum levels of [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) that insurance companies must maintain. These statutory reserves can either be held in cash, or in [readily marketable securities](https://www.investopedia.com/terms/m/marketablesecurities.asp) that can be converted into cash reliably and on short notice. Statutory reserves apply to a range of insurance products, including [life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp), health insurance, property and casualty insurance, long-term care insurance, and [annuity contracts](https://www.investopedia.com/terms/a/annuitycontract.asp). The requirements can vary from one state to another and according to the type of insurance product. ## Statutory Reserves Methods In setting the level of statutory reserves, state insurance regulators use two basic approaches. ### Rules-Based Approach The first of these is a rules-based approach, in which insurers are told how much of their premiums they must keep in reserve based on standardized formulas and assumptions.  ### Principles-Based Approach The second approach, known as the principles-based approach, gives insurers greater leeway in setting their reserves. Specifically, it allows them to set reserves based on their own experience, such as the [actuarial statistics](https://www.investopedia.com/terms/a/actuarial-science.asp) and past claims behavior of their own customers, provided that they are as large or larger than the reserves stipulated under the rules-based approach.  ### Important When an insurance company chooses to keep reserves that are in excess of the minimum amount required under the rules-based approach, these are referred to as non-statutory or voluntary reserves. Regardless of the approach used to calculate them, statutory reserves will generally cause insurance companies to lose out on some potential profits. However, they benefit the insurance markets as a whole by making insurance customers more confident that their insurers will be able to withstand difficult economic circumstances and stand behind their policies. ## Example of Statutory Reserves Consider the case of XYZ Insurance. According to the statutory reserve requirements of its state insurance regulator, XYZ would be required to keep $50 million in reserve based on the rules-based approach. However, after considering the competitive landscape in its state and reviewing the past performance of its insurance portfolio, XYZ decided to use the principles-based approach and set its statutory reserves above the minimum required level. Although the additional reserves would likely cost it in terms of lost [investment income](https://www.investopedia.com/terms/i/investmentincome.asp), XYZ reasoned that this more conservative approach would strengthen its image as a responsible insurer and make it well-positioned to navigate any potential [recession](https://www.investopedia.com/terms/r/recession.asp) or other economic headwinds.

What Are Statutory Reserves? Statutory reserves are the funds that state insurance regulators require the insurance companies operating in their state to maintain at any given time. The purpose of statutory reserves is to help ensure that insurance companies have adequate liquidity available to honor all of the legitimate claims made by their policyholders. Key Takeaways Statutory reserves are the minimum amounts of cash and readily marketable securities that insurance companies must hold.They are mandated under state insurance regulations.Insurance companies are free to set their statutory reserves above the minimum level, using a principles-based approach. Understanding Statutory Reserves The McCarran-Ferguson Act, passed by Congress in 1945, gave states the authority to regulate insurance companies. To do business in a state, each insurer must be licensed by the state's insurance department and abide by its rules. Among those rules is how much money an insurer must keep in reserve to make sure that it will be able to pay its future claims. Insurance companies collect insurance premiums from their customers and then invest those premiums in their general account to generate a return on investment (ROI). In theory, insurers might be tempted to invest a very large fraction of the premiums they collect in order to maximize their return. However, doing so could leave them with insufficient cash on hand to satisfy the claims made by their customers. To prevent this from happening, state insurance regulators enforce minimum levels of liquidity that insurance companies must maintain. These statutory reserves can either be held in cash, or in readily marketable securities that can be converted into cash reliably and on short notice. Statutory reserves apply to a range of insurance products, including life insurance, health insurance, property and casualty insurance, long-term care insurance, and annuity contracts. The requirements can vary from one state to another and according to the type of insurance product. Statutory Reserves Methods In setting the level of statutory reserves, state insurance regulators use two basic approaches. Rules-Based Approach The first of these is a rules-based approach, in which insurers are told how much of their premiums they must keep in reserve based on standardized formulas and assumptions.  Principles-Based Approach The second approach, known as the principles-based approach, gives insurers greater leeway in setting their reserves. Specifically, it allows them to set reserves based on their own experience, such as the actuarial statistics and past claims behavior of their own customers, provided that they are as large or larger than the reserves stipulated under the rules-based approach.  Important When an insurance company chooses to keep reserves that are in excess of the minimum amount required under the rules-based approach, these are referred to as non-statutory or voluntary reserves. Regardless of the approach used to calculate them, statutory reserves will generally cause insurance companies to lose out on some potential profits. However, they benefit the insurance markets as a whole by making insurance customers more confident that their insurers will be able to withstand difficult economic circumstances and stand behind their policies. Example of Statutory Reserves Consider the case of XYZ Insurance. According to the statutory reserve requirements of its state insurance regulator, XYZ would be required to keep $50 million in reserve based on the rules-based approach. However, after considering the competitive landscape in its state and reviewing the past performance of its insurance portfolio, XYZ decided to use the principles-based approach and set its statutory reserves above the minimum required level. Although the additional reserves would likely cost it in terms of lost investment income, XYZ reasoned that this more conservative approach would strengthen its image as a responsible insurer and make it well-positioned to navigate any potential recession or other economic headwinds.

https://www.investopedia.com/ask/answers/051915/what-trade-volume-index-tvi-formula-and-how-it-calculated.asp

Trade Volume Index: Meaning, Formula, Calculation

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-trade-volume-index-tvi"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is the Trade Volume Index (TVI)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tradevolumeindex.asp">trade volume index (TVI)</a> measures the amount of money flowing in and out of a security or the market. The TVI depends on the direction of the security and whether securities are accumulated or distributed. The TVI generally uses a security's intraday price data. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <span class="heading-toc" id="toc-how-is-the-trade-volume-index-tvi-calculated"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0"> <span class="mntl-sc-block-heading__text"> How Is the Trade Volume Index (TVI) Calculated? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> To calculate the TVI, the minimum tick value of the security must be known. Next, the change in price must be calculated by subtracting the last price from the most current price. Then, the direction must be determined. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> If the change in the security's price is greater than the minimum tick value, the security is in an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accumulation.asp">accumulation</a> period. If the change in the security's price is less than the minimum tick value, the security is in a distribution period. If the change is less than or equal to, or greater than or equal to, the minimum tick value, the security's direction is the same as the last direction. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> When the direction is determined, the TVI can be calculated. If the security is in accumulation, the current TVI is the previous trade volume index plus the current day's volume. Conversely, if the security is in distribution, the TVI is the previous trade volume index less the current day's volume. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The TVI can be used to indicate buying or selling pressure within a security. Say, for example, the changes in the prices of the security are greater than the minimum tick value and have been rising over a six-hour period. This signals traders and investors are accumulating the security and buying at the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ask.asp">ask</a>. This can be interpreted as bullish activity and may signal the security could increase in price due to the buying pressure. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <em>Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.</em> </p></div>

## What Is the Trade Volume Index (TVI)? The [trade volume index (TVI)](https://www.investopedia.com/terms/t/tradevolumeindex.asp) measures the amount of money flowing in and out of a security or the market. The TVI depends on the direction of the security and whether securities are accumulated or distributed. The TVI generally uses a security's intraday price data. ## How Is the Trade Volume Index (TVI) Calculated? To calculate the TVI, the minimum tick value of the security must be known. Next, the change in price must be calculated by subtracting the last price from the most current price. Then, the direction must be determined. If the change in the security's price is greater than the minimum tick value, the security is in an [accumulation](https://www.investopedia.com/terms/a/accumulation.asp) period. If the change in the security's price is less than the minimum tick value, the security is in a distribution period. If the change is less than or equal to, or greater than or equal to, the minimum tick value, the security's direction is the same as the last direction. When the direction is determined, the TVI can be calculated. If the security is in accumulation, the current TVI is the previous trade volume index plus the current day's volume. Conversely, if the security is in distribution, the TVI is the previous trade volume index less the current day's volume. The TVI can be used to indicate buying or selling pressure within a security. Say, for example, the changes in the prices of the security are greater than the minimum tick value and have been rising over a six-hour period. This signals traders and investors are accumulating the security and buying at the [ask](https://www.investopedia.com/terms/a/ask.asp). This can be interpreted as bullish activity and may signal the security could increase in price due to the buying pressure. *Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.*

What Is the Trade Volume Index (TVI)? The trade volume index (TVI) measures the amount of money flowing in and out of a security or the market. The TVI depends on the direction of the security and whether securities are accumulated or distributed. The TVI generally uses a security's intraday price data. How Is the Trade Volume Index (TVI) Calculated? To calculate the TVI, the minimum tick value of the security must be known. Next, the change in price must be calculated by subtracting the last price from the most current price. Then, the direction must be determined. If the change in the security's price is greater than the minimum tick value, the security is in an accumulation period. If the change in the security's price is less than the minimum tick value, the security is in a distribution period. If the change is less than or equal to, or greater than or equal to, the minimum tick value, the security's direction is the same as the last direction. When the direction is determined, the TVI can be calculated. If the security is in accumulation, the current TVI is the previous trade volume index plus the current day's volume. Conversely, if the security is in distribution, the TVI is the previous trade volume index less the current day's volume. The TVI can be used to indicate buying or selling pressure within a security. Say, for example, the changes in the prices of the security are greater than the minimum tick value and have been rising over a six-hour period. This signals traders and investors are accumulating the security and buying at the ask. This can be interpreted as bullish activity and may signal the security could increase in price due to the buying pressure. Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

https://www.investopedia.com/articles/investing/060215/how-mutual-funds-are-taxed-us.asp

How Capital Gains from Mutual Funds Are Taxed in the U.S.

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual funds</a> that are not in a tax-free account, filling out <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/1040.asp">1040</a> can seem daunting. Sometimes there is an intimidating array of rules and calculations on the forms. As it happens, though, there’s a number of ways to make your mutual funds investing tax-efficient. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Stock funds are taxed at the capital gains tax rate.</li><li>Bond funds are taxed differently, and some are even tax-exempt, such as those that invest in municipal bonds.</li><li>International funds are often taxed (once) at the issuing country's tax rate. However, you may have to pay taxes twice if the issuing country has no tax treaty with the U.S.</li><li>Putting investments into investment accounts like 401(k)s or IRAs ensures you are maximizing your tax-savings potential.</li></ul></div></div></div> <span class="heading-toc" id="toc-stock-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Stock Funds<strong> </strong> </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> There is a difference between the tax liability for a stock and a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bondfund.asp">bond fund</a>. Stock funds, if they trade the component stocks, get taxed on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital_gains_tax.asp">capital gains</a>. They also issue <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/distribution.asp">distributions</a>, which are also taxable. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> For capital gains, there are two rates: short-term (less than one year) and long-term (for assets held longer than one year). Long-term capital gains are smaller with a maximum of 20%. Most people pay the 15% rate or 0%. Short-term gains are taxed as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/ordinaryincome.asp">ordinary income</a>.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Stock funds sometimes make distributions, and that could be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> or simply gains from sales of stock; in the former case, they can be taxed at the long-term capital gains rate. The tax rate on dividends depends on whether they are “qualified” or “ordinary” dividends. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> “Qualified” dividends are taxed at the same rate as long-term capital gains, while “ordinary” dividends are taxed at regular income tax rates, up to 37%. Fund distributions are taxed whether or not the money is put back into more shares of the fund.<span class="ql-inline-citation" data-cite="2"></span> And of course, there are taxes if the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071316/how-are-you-taxed-after-selling-mutual-fund-ira.asp">fund shares are sold at a gain</a> (or deductions if there is a loss). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-bond-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> Bond Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Bond funds are a bit different. The interest earned is taxed as ordinary income. But there are some added wrinkles depending on the kind of bond fund you buy. For example, there are tax-free <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/municipalbondfund.asp">municipal bond funds</a>, but generally, the tax break only applies if you live in the same state those bonds were issued in.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In most cases, municipal bond funds are not taxable at the federal level, while federal debt (e.g., <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">Treasury Bill</a> fund) will be exempt from state income tax but still taxable at the federal level.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-international-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> International Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> This gets us to the third category of funds—international. Sometimes international funds aren't taxed, because of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-tax-credit.asp">foreign tax credit</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> In order to avoid taxing people twice the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp">Internal Revenue Service</a> (IRS) allows credits for foreign taxes paid already.<span class="ql-inline-citation" data-cite="5"></span> That can make them a good diversifier and a tax hedge. However, it's important to look carefully at what countries the funds cover. Countries with a tax treaty with the U.S., you may get taxed twice.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-tax-efficiency"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Tax Efficiency </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Even though the tax rules are complicated for funds, tax efficiency can still be maximized. First, minimize trading. A fund that trades a lot will incur more taxes, period. A useful strategy is to put bond funds in a 401(k) or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account</a> (IRA), for example, while keeping the stock funds in a taxable account. The reason is that bond fund distributions are taxed at whatever rate applies to your income, which means that every year there will be a tax hit. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> There's also no guarantee that stock funds will outperform bond funds (or vice versa) or that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a> will remain as low as they are, so the simplest thing is to defer the taxes until you withdraw the money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Stock funds, meanwhile, get taxed at the capital gains rate, which much of the time is lower than the rate on ordinary income. That means it's actually better to pay the smaller rate every year rather than the larger rate on the income from selling off the fund shares down the road. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> One type of index fund is an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange traded fund</a> (ETF). ETFs can prove to be more tax-efficient because an ETF that is rebalancing will <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/etf-open-secret-theyre-tax-loophole/">not have to pay the same taxes</a> as a mutual fund. In practice, fund managers will almost always sell the highest <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/costbasis.asp">cost basis</a> stocks first, which means they'll unload the stuff that's losing money or making less money, and pay less in capital gain. </p></div>

If you own [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) that are not in a tax-free account, filling out [1040](https://www.investopedia.com/terms/1/1040.asp) can seem daunting. Sometimes there is an intimidating array of rules and calculations on the forms. As it happens, though, there’s a number of ways to make your mutual funds investing tax-efficient. ### Key Takeaways * Stock funds are taxed at the capital gains tax rate. * Bond funds are taxed differently, and some are even tax-exempt, such as those that invest in municipal bonds. * International funds are often taxed (once) at the issuing country's tax rate. However, you may have to pay taxes twice if the issuing country has no tax treaty with the U.S. * Putting investments into investment accounts like 401(k)s or IRAs ensures you are maximizing your tax-savings potential. ## Stock Funds There is a difference between the tax liability for a stock and a [bond fund](https://www.investopedia.com/terms/b/bondfund.asp). Stock funds, if they trade the component stocks, get taxed on the [capital gains](https://www.investopedia.com/terms/c/capital_gains_tax.asp). They also issue [distributions](https://www.investopedia.com/terms/d/distribution.asp), which are also taxable. For capital gains, there are two rates: short-term (less than one year) and long-term (for assets held longer than one year). Long-term capital gains are smaller with a maximum of 20%. Most people pay the 15% rate or 0%. Short-term gains are taxed as [ordinary income](https://www.investopedia.com/terms/o/ordinaryincome.asp). Stock funds sometimes make distributions, and that could be [dividends](https://www.investopedia.com/terms/d/dividend.asp) or simply gains from sales of stock; in the former case, they can be taxed at the long-term capital gains rate. The tax rate on dividends depends on whether they are “qualified” or “ordinary” dividends. “Qualified” dividends are taxed at the same rate as long-term capital gains, while “ordinary” dividends are taxed at regular income tax rates, up to 37%. Fund distributions are taxed whether or not the money is put back into more shares of the fund. And of course, there are taxes if the [fund shares are sold at a gain](https://www.investopedia.com/ask/answers/071316/how-are-you-taxed-after-selling-mutual-fund-ira.asp) (or deductions if there is a loss). ## Bond Funds Bond funds are a bit different. The interest earned is taxed as ordinary income. But there are some added wrinkles depending on the kind of bond fund you buy. For example, there are tax-free [municipal bond funds](https://www.investopedia.com/terms/m/municipalbondfund.asp), but generally, the tax break only applies if you live in the same state those bonds were issued in. In most cases, municipal bond funds are not taxable at the federal level, while federal debt (e.g., [Treasury Bill](https://www.investopedia.com/terms/t/treasurybill.asp) fund) will be exempt from state income tax but still taxable at the federal level. ## International Funds This gets us to the third category of funds—international. Sometimes international funds aren't taxed, because of the [foreign tax credit](https://www.investopedia.com/terms/f/foreign-tax-credit.asp). In order to avoid taxing people twice the [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) allows credits for foreign taxes paid already. That can make them a good diversifier and a tax hedge. However, it's important to look carefully at what countries the funds cover. Countries with a tax treaty with the U.S., you may get taxed twice. ## Tax Efficiency Even though the tax rules are complicated for funds, tax efficiency can still be maximized. First, minimize trading. A fund that trades a lot will incur more taxes, period. A useful strategy is to put bond funds in a 401(k) or [individual retirement account](https://www.investopedia.com/terms/i/ira.asp) (IRA), for example, while keeping the stock funds in a taxable account. The reason is that bond fund distributions are taxed at whatever rate applies to your income, which means that every year there will be a tax hit. There's also no guarantee that stock funds will outperform bond funds (or vice versa) or that [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) will remain as low as they are, so the simplest thing is to defer the taxes until you withdraw the money. Stock funds, meanwhile, get taxed at the capital gains rate, which much of the time is lower than the rate on ordinary income. That means it's actually better to pay the smaller rate every year rather than the larger rate on the income from selling off the fund shares down the road. One type of index fund is an [exchange traded fund](https://www.investopedia.com/terms/e/etf.asp) (ETF). ETFs can prove to be more tax-efficient because an ETF that is rebalancing will [not have to pay the same taxes](https://www.investopedia.com/news/etf-open-secret-theyre-tax-loophole/) as a mutual fund. In practice, fund managers will almost always sell the highest [cost basis](https://www.investopedia.com/terms/c/costbasis.asp) stocks first, which means they'll unload the stuff that's losing money or making less money, and pay less in capital gain.

If you own mutual funds that are not in a tax-free account, filling out 1040 can seem daunting. Sometimes there is an intimidating array of rules and calculations on the forms. As it happens, though, there’s a number of ways to make your mutual funds investing tax-efficient. Key Takeaways Stock funds are taxed at the capital gains tax rate.Bond funds are taxed differently, and some are even tax-exempt, such as those that invest in municipal bonds.International funds are often taxed (once) at the issuing country's tax rate. However, you may have to pay taxes twice if the issuing country has no tax treaty with the U.S.Putting investments into investment accounts like 401(k)s or IRAs ensures you are maximizing your tax-savings potential. Stock Funds There is a difference between the tax liability for a stock and a bond fund. Stock funds, if they trade the component stocks, get taxed on the capital gains. They also issue distributions, which are also taxable. For capital gains, there are two rates: short-term (less than one year) and long-term (for assets held longer than one year). Long-term capital gains are smaller with a maximum of 20%. Most people pay the 15% rate or 0%. Short-term gains are taxed as ordinary income. Stock funds sometimes make distributions, and that could be dividends or simply gains from sales of stock; in the former case, they can be taxed at the long-term capital gains rate. The tax rate on dividends depends on whether they are “qualified” or “ordinary” dividends. “Qualified” dividends are taxed at the same rate as long-term capital gains, while “ordinary” dividends are taxed at regular income tax rates, up to 37%. Fund distributions are taxed whether or not the money is put back into more shares of the fund. And of course, there are taxes if the fund shares are sold at a gain (or deductions if there is a loss). Bond Funds Bond funds are a bit different. The interest earned is taxed as ordinary income. But there are some added wrinkles depending on the kind of bond fund you buy. For example, there are tax-free municipal bond funds, but generally, the tax break only applies if you live in the same state those bonds were issued in. In most cases, municipal bond funds are not taxable at the federal level, while federal debt (e.g., Treasury Bill fund) will be exempt from state income tax but still taxable at the federal level. International Funds This gets us to the third category of funds—international. Sometimes international funds aren't taxed, because of the foreign tax credit. In order to avoid taxing people twice the Internal Revenue Service (IRS) allows credits for foreign taxes paid already. That can make them a good diversifier and a tax hedge. However, it's important to look carefully at what countries the funds cover. Countries with a tax treaty with the U.S., you may get taxed twice. Tax Efficiency Even though the tax rules are complicated for funds, tax efficiency can still be maximized. First, minimize trading. A fund that trades a lot will incur more taxes, period. A useful strategy is to put bond funds in a 401(k) or individual retirement account (IRA), for example, while keeping the stock funds in a taxable account. The reason is that bond fund distributions are taxed at whatever rate applies to your income, which means that every year there will be a tax hit. There's also no guarantee that stock funds will outperform bond funds (or vice versa) or that interest rates will remain as low as they are, so the simplest thing is to defer the taxes until you withdraw the money. Stock funds, meanwhile, get taxed at the capital gains rate, which much of the time is lower than the rate on ordinary income. That means it's actually better to pay the smaller rate every year rather than the larger rate on the income from selling off the fund shares down the road. One type of index fund is an exchange traded fund (ETF). ETFs can prove to be more tax-efficient because an ETF that is rebalancing will not have to pay the same taxes as a mutual fund. In practice, fund managers will almost always sell the highest cost basis stocks first, which means they'll unload the stuff that's losing money or making less money, and pay less in capital gain.

https://www.investopedia.com/401k-is-not-performing-5323832

What if My 401(k) Isn't Performing?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A 401(k) can be an important tool for creating retirement wealth. These defined contribution plans can be funded by elective salary deferrals and employer matching contributions, both of which enjoy tax-deferred growth.<span class="ql-inline-citation" data-cite="4"></span> When you're ready to retire, those savings may be one of your main streams of income. But what do you do when a 401(k) plan isn't posting the kind of returns you'd like to see? There are different reasons why a 401(k) may underperform—and several ways to counteract them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A 401(k) is a tax-advantaged defined contribution plan that's funded through elective salary deferrals and employer matching contributions if offered.<span class="ql-inline-citation" data-cite="4"></span></li><li>Investing too conservatively is one reason why your 401(k)'s performance may not match up to your expectations.</li><li>Stock market volatility is another common culprit when 401(k) returns fall short of an investor's goals.</li><li>Diversifying investments, minimizing fees, and maintaining contributions can help to counteract flagging 401(k) returns.</li></ul></div></div></div> <span class="heading-toc" id="toc-why-a-401k-might-underperform"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Why a 401(k) Might Underperform </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k) plan</a> is an investment vehicle. As with any investment, high returns are not guaranteed. In fact, returns aren't guaranteed at all the way they might be with something like a certificate of deposit (CD) account or low-risk bond. That said, there are a few reasons why your plan may deliver a lackluster performance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-subheading__text"> Reason No.1: You're playing it too safe </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Investing too conservatively for your age, time horizon, and goals could result in underperformance in your 401(k). Generally, the younger you are, the more risk you can afford to take as you have a longer window in which to recover from market downturns or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/021015/what-best-measure-given-stocks-volatility.asp">periods of increased volatility</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Historically, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockmarket.asp">stock market</a> has delivered annual returns of roughly 10%, which dips to 7% when adjusted for inflation.<span class="ql-inline-citation" data-cite="1"></span> If your 401(k) investments are delivering 5% or 6% instead because most of your money is tied up in bonds or lower-risk stocks, then your savings may fall far short of your end goals.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Though <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/target-date_fund.asp">target-date funds (TDFs)</a> can offer a simplified investment option for 401(k) savers, it's important to understand the fund's glide path and projected returns over your working career.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> Reason No.2: You're paying high fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Fees, including administrative fees and fund expense ratios, can take a sizable bite out of your 401(k) returns. For example, the average fee for large 401(k) plans with $50 million in assets was 0.88%, as of 2021. The average fee for smaller 401(k) plans with $5 million in assets was 1.19%.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Most 401(k) plan fees have actually been on a steady downward trend in recent years, but it's important to remember that not all plans are the same.<span class="ql-inline-citation" data-cite="2"></span> It's possible that less-than-stellar returns may be the result not of your investment choices but the fees you're paying.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_20-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_21-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">Note</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">Expense ratios</a> for individual mutual funds can vary widely depending on whether the fund is actively or passively managed and its overall investment strategy.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-subheading__text"> Reason No.3: Stock market volatility is up </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The stock market can be volatile and unpredictable even on its best day. When volatility picks up, the value of your 401(k) can drop if stock prices are nosediving. There are different factors that can cause price fluctuations, which you have little control over as an investor. Speculation about interest rate hikes, inflation, and a global health crisis are just some of the factors that have triggered a spike in volatility in recent years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-what-to-do-if-your-401k-is-underperforming"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> What to Do if Your 401(k) Is Underperforming </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> If your 401(k) is losing money or just isn't delivering the kind of returns that you want, it helps to have a strategy for coping. There are a few things you can do that could help to boost your returns and get closer to your investment goals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-diversify-401k-investments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> Diversify 401(k) Investments </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">Diversification</a>, in simple terms, means not putting all of your investment eggs in one basket. When you diversify investments, you spread out risk while keeping rewards in sight. If your 401(k) is underperforming or even losing money, making sure you're properly diversified can help. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Most 401(k) plans allow you to invest in mutual funds, index funds, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a>. Each one represents a basket of securities, which are curated based on the overall objective of the fund. If you have multiple mutual funds or ETFs in your plan, taking a look under the hood can give you an idea of how diversified you really are and what adjustments you might need to make to improve diversification. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_33-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_34-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Opening an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account (IRA)</a> and/or a taxable brokerage account can provide additional opportunities to diversify investments beyond mutual funds or ETFs.</p></div></div></div> <span class="heading-toc" id="toc-review-plan-fees"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Review Plan Fees </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Minimizing 401(k) fees is a strategic move that won't necessarily boost your investments' performance but can help you to keep more of the returns you're earning. If you're not sure where to start looking for a fee audit of your 401(k), look to your fund expense ratios first. There may be little you can do about your plan's administrative fees, but you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/032715/when-expense-ratio-considered-high-and-when-it-considered-low.asp">opt out of paying high expense ratios</a> simply by choosing a different fund. If you need a guideline for evaluating fees, the average expense ratio for equity funds is 0.47%, while the average expense ratio for bond funds is 0.39%.<span class="ql-inline-citation" data-cite="3"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <span class="heading-toc" id="toc-wait-it-out"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> Wait It Out </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> When volatility is driving poor performance in your 401(k), there may be little you can do other than try to ride it out. Whether this is feasible for you or not can depend on how close you are to retirement and how soon you'll need to draw income from your savings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> If volatility appears to be a short-term blip and you're still relatively young, then your best bet may be to simply continue making contributions to your 401(k) at your current rate or even increase them. This allows you to benefit from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dollarcostaveraging.asp">dollar-cost averaging</a>—and if volatility sends stock prices lower, you can purchase investments at a discount. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_43-0"><span class="heading-toc" id="toc-what-should-i-do-if-my-401k-is-losing-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Should I Do if My 401(k) Is Losing Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If your 401(k) is losing money, the first thing to do is consider why this is happening. Stock market volatility and/or poor investment choices are two of the most common causes of 401(k) losses. Diversifying your portfolio, minimizing investment fees, and not panicking when the market is down can help you to regain lost ground over time.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-why-is-my-401k-not-growing"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is My 401(k) Not Growing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you're contributing money steadily to your 401(k) but you're not seeing any growth, the problem may be that you're investing too conservatively or that you're handing back a chunk of your returns in the form of high fees. Reviewing the performance—and costs—for each of your investments in the plan can help you to decide whether they're worth keeping or whether you should move your money into a different fund.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-can-i-lose-all-my-money-in-a-401k"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Lose All My Money in a 401(k)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It's definitely possible to lose money—albeit temporarily—in a 401(k) if the market experiences significant volatility that causes the value of your investments to drop. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/09/cash-is-king.asp">Remember that most losses are temporary</a>. Diversifying can help with managing risk so that if the market does take a dip, your investments aren't all affected across the board.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Feeling like your 401(k)'s performance is stuck in place can be discouraging, but it doesn't mean that you can't attempt to do something about it. Understanding what you own in your plan and what you're paying for those investments can help you fine-tune your overall strategy. You can also bolster your 401(k) savings with other investments in an IRA or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/2022-broker-awards-5214877">online brokerage account</a> if you're interested in buying individual stocks, real estate, or other securities.<br/> </p></div>

A 401(k) can be an important tool for creating retirement wealth. These defined contribution plans can be funded by elective salary deferrals and employer matching contributions, both of which enjoy tax-deferred growth. When you're ready to retire, those savings may be one of your main streams of income. But what do you do when a 401(k) plan isn't posting the kind of returns you'd like to see? There are different reasons why a 401(k) may underperform—and several ways to counteract them. ### Key Takeaways * A 401(k) is a tax-advantaged defined contribution plan that's funded through elective salary deferrals and employer matching contributions if offered. * Investing too conservatively is one reason why your 401(k)'s performance may not match up to your expectations. * Stock market volatility is another common culprit when 401(k) returns fall short of an investor's goals. * Diversifying investments, minimizing fees, and maintaining contributions can help to counteract flagging 401(k) returns. ## Why a 401(k) Might Underperform A [401(k) plan](https://www.investopedia.com/terms/1/401kplan.asp) is an investment vehicle. As with any investment, high returns are not guaranteed. In fact, returns aren't guaranteed at all the way they might be with something like a certificate of deposit (CD) account or low-risk bond. That said, there are a few reasons why your plan may deliver a lackluster performance. ### Reason No.1: You're playing it too safe Investing too conservatively for your age, time horizon, and goals could result in underperformance in your 401(k). Generally, the younger you are, the more risk you can afford to take as you have a longer window in which to recover from market downturns or [periods of increased volatility](https://www.investopedia.com/ask/answers/021015/what-best-measure-given-stocks-volatility.asp). Historically, the [stock market](https://www.investopedia.com/terms/s/stockmarket.asp) has delivered annual returns of roughly 10%, which dips to 7% when adjusted for inflation. If your 401(k) investments are delivering 5% or 6% instead because most of your money is tied up in bonds or lower-risk stocks, then your savings may fall far short of your end goals. ### Important Though [target-date funds (TDFs)](https://www.investopedia.com/terms/t/target-date_fund.asp) can offer a simplified investment option for 401(k) savers, it's important to understand the fund's glide path and projected returns over your working career. ### Reason No.2: You're paying high fees Fees, including administrative fees and fund expense ratios, can take a sizable bite out of your 401(k) returns. For example, the average fee for large 401(k) plans with $50 million in assets was 0.88%, as of 2021. The average fee for smaller 401(k) plans with $5 million in assets was 1.19%. Most 401(k) plan fees have actually been on a steady downward trend in recent years, but it's important to remember that not all plans are the same. It's possible that less-than-stellar returns may be the result not of your investment choices but the fees you're paying. ### Note [Expense ratios](https://www.investopedia.com/terms/e/expenseratio.asp) for individual mutual funds can vary widely depending on whether the fund is actively or passively managed and its overall investment strategy. ### Reason No.3: Stock market volatility is up The stock market can be volatile and unpredictable even on its best day. When volatility picks up, the value of your 401(k) can drop if stock prices are nosediving. There are different factors that can cause price fluctuations, which you have little control over as an investor. Speculation about interest rate hikes, inflation, and a global health crisis are just some of the factors that have triggered a spike in volatility in recent years. ## What to Do if Your 401(k) Is Underperforming If your 401(k) is losing money or just isn't delivering the kind of returns that you want, it helps to have a strategy for coping. There are a few things you can do that could help to boost your returns and get closer to your investment goals. ## Diversify 401(k) Investments [Diversification](https://www.investopedia.com/terms/d/diversification.asp), in simple terms, means not putting all of your investment eggs in one basket. When you diversify investments, you spread out risk while keeping rewards in sight. If your 401(k) is underperforming or even losing money, making sure you're properly diversified can help. Most 401(k) plans allow you to invest in mutual funds, index funds, and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). Each one represents a basket of securities, which are curated based on the overall objective of the fund. If you have multiple mutual funds or ETFs in your plan, taking a look under the hood can give you an idea of how diversified you really are and what adjustments you might need to make to improve diversification. ### Tip Opening an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp) and/or a taxable brokerage account can provide additional opportunities to diversify investments beyond mutual funds or ETFs. ## Review Plan Fees Minimizing 401(k) fees is a strategic move that won't necessarily boost your investments' performance but can help you to keep more of the returns you're earning. If you're not sure where to start looking for a fee audit of your 401(k), look to your fund expense ratios first. There may be little you can do about your plan's administrative fees, but you can [opt out of paying high expense ratios](https://www.investopedia.com/ask/answers/032715/when-expense-ratio-considered-high-and-when-it-considered-low.asp) simply by choosing a different fund. If you need a guideline for evaluating fees, the average expense ratio for equity funds is 0.47%, while the average expense ratio for bond funds is 0.39%. ## Wait It Out When volatility is driving poor performance in your 401(k), there may be little you can do other than try to ride it out. Whether this is feasible for you or not can depend on how close you are to retirement and how soon you'll need to draw income from your savings. If volatility appears to be a short-term blip and you're still relatively young, then your best bet may be to simply continue making contributions to your 401(k) at your current rate or even increase them. This allows you to benefit from [dollar-cost averaging](https://www.investopedia.com/terms/d/dollarcostaveraging.asp)—and if volatility sends stock prices lower, you can purchase investments at a discount. ## What Should I Do if My 401(k) Is Losing Money? If your 401(k) is losing money, the first thing to do is consider why this is happening. Stock market volatility and/or poor investment choices are two of the most common causes of 401(k) losses. Diversifying your portfolio, minimizing investment fees, and not panicking when the market is down can help you to regain lost ground over time. ## Why Is My 401(k) Not Growing? If you're contributing money steadily to your 401(k) but you're not seeing any growth, the problem may be that you're investing too conservatively or that you're handing back a chunk of your returns in the form of high fees. Reviewing the performance—and costs—for each of your investments in the plan can help you to decide whether they're worth keeping or whether you should move your money into a different fund. ## Can I Lose All My Money in a 401(k)? It's definitely possible to lose money—albeit temporarily—in a 401(k) if the market experiences significant volatility that causes the value of your investments to drop. [Remember that most losses are temporary](https://www.investopedia.com/articles/basics/09/cash-is-king.asp). Diversifying can help with managing risk so that if the market does take a dip, your investments aren't all affected across the board. ## The Bottom Line Feeling like your 401(k)'s performance is stuck in place can be discouraging, but it doesn't mean that you can't attempt to do something about it. Understanding what you own in your plan and what you're paying for those investments can help you fine-tune your overall strategy. You can also bolster your 401(k) savings with other investments in an IRA or [online brokerage account](https://www.investopedia.com/2022-broker-awards-5214877) if you're interested in buying individual stocks, real estate, or other securities.

A 401(k) can be an important tool for creating retirement wealth. These defined contribution plans can be funded by elective salary deferrals and employer matching contributions, both of which enjoy tax-deferred growth. When you're ready to retire, those savings may be one of your main streams of income. But what do you do when a 401(k) plan isn't posting the kind of returns you'd like to see? There are different reasons why a 401(k) may underperform—and several ways to counteract them. Key Takeaways A 401(k) is a tax-advantaged defined contribution plan that's funded through elective salary deferrals and employer matching contributions if offered.Investing too conservatively is one reason why your 401(k)'s performance may not match up to your expectations.Stock market volatility is another common culprit when 401(k) returns fall short of an investor's goals.Diversifying investments, minimizing fees, and maintaining contributions can help to counteract flagging 401(k) returns. Why a 401(k) Might Underperform A 401(k) plan is an investment vehicle. As with any investment, high returns are not guaranteed. In fact, returns aren't guaranteed at all the way they might be with something like a certificate of deposit (CD) account or low-risk bond. That said, there are a few reasons why your plan may deliver a lackluster performance. Reason No.1: You're playing it too safe Investing too conservatively for your age, time horizon, and goals could result in underperformance in your 401(k). Generally, the younger you are, the more risk you can afford to take as you have a longer window in which to recover from market downturns or periods of increased volatility. Historically, the stock market has delivered annual returns of roughly 10%, which dips to 7% when adjusted for inflation. If your 401(k) investments are delivering 5% or 6% instead because most of your money is tied up in bonds or lower-risk stocks, then your savings may fall far short of your end goals. Important Though target-date funds (TDFs) can offer a simplified investment option for 401(k) savers, it's important to understand the fund's glide path and projected returns over your working career. Reason No.2: You're paying high fees Fees, including administrative fees and fund expense ratios, can take a sizable bite out of your 401(k) returns. For example, the average fee for large 401(k) plans with $50 million in assets was 0.88%, as of 2021. The average fee for smaller 401(k) plans with $5 million in assets was 1.19%. Most 401(k) plan fees have actually been on a steady downward trend in recent years, but it's important to remember that not all plans are the same. It's possible that less-than-stellar returns may be the result not of your investment choices but the fees you're paying. Note Expense ratios for individual mutual funds can vary widely depending on whether the fund is actively or passively managed and its overall investment strategy. Reason No.3: Stock market volatility is up The stock market can be volatile and unpredictable even on its best day. When volatility picks up, the value of your 401(k) can drop if stock prices are nosediving. There are different factors that can cause price fluctuations, which you have little control over as an investor. Speculation about interest rate hikes, inflation, and a global health crisis are just some of the factors that have triggered a spike in volatility in recent years. What to Do if Your 401(k) Is Underperforming If your 401(k) is losing money or just isn't delivering the kind of returns that you want, it helps to have a strategy for coping. There are a few things you can do that could help to boost your returns and get closer to your investment goals. Diversify 401(k) Investments Diversification, in simple terms, means not putting all of your investment eggs in one basket. When you diversify investments, you spread out risk while keeping rewards in sight. If your 401(k) is underperforming or even losing money, making sure you're properly diversified can help. Most 401(k) plans allow you to invest in mutual funds, index funds, and exchange-traded funds (ETFs). Each one represents a basket of securities, which are curated based on the overall objective of the fund. If you have multiple mutual funds or ETFs in your plan, taking a look under the hood can give you an idea of how diversified you really are and what adjustments you might need to make to improve diversification. Tip Opening an individual retirement account (IRA) and/or a taxable brokerage account can provide additional opportunities to diversify investments beyond mutual funds or ETFs. Review Plan Fees Minimizing 401(k) fees is a strategic move that won't necessarily boost your investments' performance but can help you to keep more of the returns you're earning. If you're not sure where to start looking for a fee audit of your 401(k), look to your fund expense ratios first. There may be little you can do about your plan's administrative fees, but you can opt out of paying high expense ratios simply by choosing a different fund. If you need a guideline for evaluating fees, the average expense ratio for equity funds is 0.47%, while the average expense ratio for bond funds is 0.39%. Wait It Out When volatility is driving poor performance in your 401(k), there may be little you can do other than try to ride it out. Whether this is feasible for you or not can depend on how close you are to retirement and how soon you'll need to draw income from your savings. If volatility appears to be a short-term blip and you're still relatively young, then your best bet may be to simply continue making contributions to your 401(k) at your current rate or even increase them. This allows you to benefit from dollar-cost averaging—and if volatility sends stock prices lower, you can purchase investments at a discount. What Should I Do if My 401(k) Is Losing Money? If your 401(k) is losing money, the first thing to do is consider why this is happening. Stock market volatility and/or poor investment choices are two of the most common causes of 401(k) losses. Diversifying your portfolio, minimizing investment fees, and not panicking when the market is down can help you to regain lost ground over time. Why Is My 401(k) Not Growing? If you're contributing money steadily to your 401(k) but you're not seeing any growth, the problem may be that you're investing too conservatively or that you're handing back a chunk of your returns in the form of high fees. Reviewing the performance—and costs—for each of your investments in the plan can help you to decide whether they're worth keeping or whether you should move your money into a different fund. Can I Lose All My Money in a 401(k)? It's definitely possible to lose money—albeit temporarily—in a 401(k) if the market experiences significant volatility that causes the value of your investments to drop. Remember that most losses are temporary. Diversifying can help with managing risk so that if the market does take a dip, your investments aren't all affected across the board. The Bottom Line Feeling like your 401(k)'s performance is stuck in place can be discouraging, but it doesn't mean that you can't attempt to do something about it. Understanding what you own in your plan and what you're paying for those investments can help you fine-tune your overall strategy. You can also bolster your 401(k) savings with other investments in an IRA or online brokerage account if you're interested in buying individual stocks, real estate, or other securities.

https://www.investopedia.com/mortgage-rates-drop-for-almost-every-loan-type-8625187

Mortgage Rates April 5, 2024: Almost Every Loan Type Saw a Decline

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The 30-year new purchase mortgage average dipped for a second day Thursday, falling to 7.23%. It was a day of declines across virtually all new purchase and refi <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">mortgage rates</a>, minus a few averages that held steady. Among the declines, jumbo 30-year rates fell back under 7%.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_3-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:76.1%;"> <img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 5, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/stBIH_aoHjHJpxgkngjXrGiaiqs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-5-4e0e644a6c10453c9221f5d0b1a9f568.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/stBIH_aoHjHJpxgkngjXrGiaiqs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-5-4e0e644a6c10453c9221f5d0b1a9f568.png" data-srcset="https://www.investopedia.com/thmb/jUkfcCAzxtta1B42nhsWV83PFqQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-5-4e0e644a6c10453c9221f5d0b1a9f568.png 750w" data-tracking-container="true" height="1888" id="mntl-sc-block-image_1-0" width="2480"/> <noscript> <img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 5, 2024" class="img--noscript universal-image__image" height="1888" sizes="750px" src="https://www.investopedia.com/thmb/stBIH_aoHjHJpxgkngjXrGiaiqs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-5-4e0e644a6c10453c9221f5d0b1a9f568.png" srcset="https://www.investopedia.com/thmb/jUkfcCAzxtta1B42nhsWV83PFqQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-5-4e0e644a6c10453c9221f5d0b1a9f568.png 750w" width="2480"/> </noscript> </div> </div> </figure> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_4-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Mortgage Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.23%</td> <td>7.47%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.03%</td> <td>7.50%</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>6.95%</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.47%</td> <td>6.76%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.80%</td> <td>7.85%</td> </tr> </tbody> </table> <figcaption>National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Rates vary widely across lenders, so it's always smart to shop around for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">your best mortgage option</a> and compare rates regularly no matter the type of home loan you seek. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_8-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_11-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Rates on 30-year new purchase mortgages subtracted another 6 basis points Thursday, after inching down 2 points the previous day. Now at 7.23%, the average is just an eighth of a percentage point above its March low of 7.11%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Rates on 30-year loans remain elevated compared to the start of February, when the 30-year average dipped down into 6% territory. But the average is still considerably below October's historic 23-year peak of 8.45%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_18-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/xntCL/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="30-Year Mortgage Rates Since June 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Rates on 15-year new purchase loans saw a much bigger fall Thursday, sinking 16 basis points. The drop comes, however, after a combined 32-point climb over the prior three days. Now averaging 6.47%, 15-year rates are about a third of a percentage point pricier than the seven-month low of 6.10% seen just before the new year. But they're still much more affordable than last fall's 7.59% average—a peak since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Jumbo 30-year rates meanwhile fell back under 7%, after jumping to 7.07% Wednesday—their first time above 7% since Nov. 13. Although daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached last October was the most expensive jumbo 30-year average in more than 20 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Rates for every other new purchase loan type also dropped Thursday except for the flat jumbo 5/6 adjustable-rate average. The biggest decline was seen in FHA 30-year rates, which plunged 18 basis points on average. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_26-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.23%</td> <td>-0.06</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.03%</td> <td>-0.18</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>6.78%</td> <td>-0.08</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>-0.12</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.00%</td> <td>-0.06</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.47%</td> <td>-0.16</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.80%</td> <td>-0.01</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>-0.13</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.40%</td> <td>-0.08</td> </tr> <tr> <td>10/6 ARM</td> <td>7.65%</td> <td>-0.06</td> </tr> <tr> <td>7/6 ARM</td> <td>7.67%</td> <td>-0.03</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.58%</td> <td>-0.12</td> </tr> <tr> <td>5/6 ARM</td> <td>7.80%</td> <td>-0.04</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.68%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_28-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/n1VDK/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates. This week's reading inched up 3 basis points to 6.82%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its highest level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Refinancing rates also moved lower Thursday, but a little less substantially. The 30-year refi average dipped just 4 basis points, leaving the spread between 30-year new purchase and refi rates at a narrow 24 basis points. The 15-year refi average meanwhile dropped 6 basis points, while jumbo 30-year refi rates erased their eighth of a percentage point gain from the previous day. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Aside from a few averages that essentially marched in place, the rest of the refi averages also dropped Thursday. Among the largest declines were jumbo 30-year and 15-year refi rates, which both fell 13 basis points, and jumbo 7/6 ARM rates, which gave up 12 points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_40-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 157px;"></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - Refinance</th> </tr> <tr> <th>Loan Type</th> <th><b>Refinance Rates</b></th> <th>Daily Change</th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.47%</td> <td>-0.04</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.50%</td> <td>-0.04</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.38%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>-0.13</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.35%</td> <td>-0.04</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.76%</td> <td>-0.06</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.97%</td> <td>No Change</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>-0.13</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.66%</td> <td>-0.08</td> </tr> <tr> <td>10/6 ARM</td> <td>7.80%</td> <td>-0.03</td> </tr> <tr> <td>7/6 ARM</td> <td>7.83%</td> <td>-0.04</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.68%</td> <td>-0.12</td> </tr> <tr> <td>5/6 ARM</td> <td>7.85%</td> <td>-0.02</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.68%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or may be based on a hypothetical borrower with an ultra-high credit score or for a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it can vary from the averages you see here.</p></div></div></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_46-0"><div class="comp mortgage-loan-calculator mntl-block" data-defer="load" id="mortgage-loan-calculator_1-0"></div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <span class="heading-toc" id="toc-mortgage-rates-by-state"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-heading__text"> Mortgage Rates by State </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The states with the cheapest 30-year new purchase rates Tuesday were Mississippi, Vermont, Louisiana, Rhode Island, Hawaii, and Iowa, while the states with the highest average rates were Minnesota, Arizona, Idaho, Oregon, Washington, Maryland, and Nevada. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_53-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/yx225/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Mortgage Rates by State"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li>The level and direction of the bond market, especially 10-year Treasury yields</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li> <li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> The Fed has been maintaining the federal funds rate at its current level since July, with a fifth consecutive rate hold announced on March 20.<span class="ql-inline-citation" data-cite="5"></span> Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and reliably, it has said it is hesitant to start cutting rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Still, Fed committee members do collectively expect to reduce rates in 2024. The March 20 meeting included the latest installment of the Fed's "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/dot-plot-4581755">dot plot</a>" forecast, which showed that the median expectation among the 19 Fed members is for three rate decreases—totaling 0.75 percentage points—by year's end. The dot plot also shows similar expected rate cuts in 2025 and 2026.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The Fed will hold six more meetings this year, with the next scheduled for April 30 to May 1.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value ratio (LTV)</a> of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>

The 30-year new purchase mortgage average dipped for a second day Thursday, falling to 7.23%. It was a day of declines across virtually all new purchase and refi [mortgage rates](https://www.investopedia.com/mortgage-rates-5094943), minus a few averages that held steady. Among the declines, jumbo 30-year rates fell back under 7%. ![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 5, 2024]() :max_bytes(150000):strip_icc()/4-5-4e0e644a6c10453c9221f5d0b1a9f568.png) | National Averages of Lenders' Best Mortgage Rates | | | | --- | --- | --- | | **Loan Type** | **New Purchase** | **Refinance** | | 30-Year Fixed | 7.23% | 7.47% | | FHA 30-Year Fixed | 7.03% | 7.50% | | Jumbo 30-Year Fixed | 6.95% | 6.95% | | 15-Year Fixed | 6.47% | 6.76% | | 5/6 ARM | 7.80% | 7.85% | National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. Rates vary widely across lenders, so it's always smart to shop around for [your best mortgage option](https://www.investopedia.com/mortgage-rates-5094943) and compare rates regularly no matter the type of home loan you seek. [Compare the Best Mortgage Rates Today - May 21, 2024](https://www.investopedia.com/mortgage-rates-5094943) ## Today's Mortgage Rate Averages: New Purchase Rates on 30-year new purchase mortgages subtracted another 6 basis points Thursday, after inching down 2 points the previous day. Now at 7.23%, the average is just an eighth of a percentage point above its March low of 7.11%. Rates on 30-year loans remain elevated compared to the start of February, when the 30-year average dipped down into 6% territory. But the average is still considerably below October's historic 23-year peak of 8.45%. Rates on 15-year new purchase loans saw a much bigger fall Thursday, sinking 16 basis points. The drop comes, however, after a combined 32-point climb over the prior three days. Now averaging 6.47%, 15-year rates are about a third of a percentage point pricier than the seven-month low of 6.10% seen just before the new year. But they're still much more affordable than last fall's 7.59% average—a peak since 2000. Jumbo 30-year rates meanwhile fell back under 7%, after jumping to 7.07% Wednesday—their first time above 7% since Nov. 13. Although daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached last October was the most expensive jumbo 30-year average in more than 20 years. Rates for every other new purchase loan type also dropped Thursday except for the flat jumbo 5/6 adjustable-rate average. The biggest decline was seen in FHA 30-year rates, which plunged 18 basis points on average. | National Averages of Lenders' Best Rates - New Purchase | | | | --- | --- | --- | | Loan Type | **New Purchase Rates** | **Daily Change** | | 30-Year Fixed | 7.23% | -0.06 | | FHA 30-Year Fixed | 7.03% | -0.18 | | VA 30-Year Fixed | 6.78% | -0.08 | | Jumbo 30-Year Fixed | 6.95% | -0.12 | | 20-Year Fixed | 7.00% | -0.06 | | 15-Year Fixed | 6.47% | -0.16 | | FHA 15-Year Fixed | 6.80% | -0.01 | | Jumbo 15-Year Fixed | 6.78% | -0.13 | | 10-Year Fixed | 6.40% | -0.08 | | 10/6 ARM | 7.65% | -0.06 | | 7/6 ARM | 7.67% | -0.03 | | Jumbo 7/6 ARM | 6.58% | -0.12 | | 5/6 ARM | 7.80% | -0.04 | | Jumbo 5/6 ARM | 6.68% | No Change | ## The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates. This week's reading inched up 3 basis points to 6.82%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its highest level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a *weekly* average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with [discount points](https://www.investopedia.com/terms/d/discountpoints.asp), while Investopedia’s averages only include zero-point loans. ## Today's Mortgage Rate Averages: Refinancing Refinancing rates also moved lower Thursday, but a little less substantially. The 30-year refi average dipped just 4 basis points, leaving the spread between 30-year new purchase and refi rates at a narrow 24 basis points. The 15-year refi average meanwhile dropped 6 basis points, while jumbo 30-year refi rates erased their eighth of a percentage point gain from the previous day. Aside from a few averages that essentially marched in place, the rest of the refi averages also dropped Thursday. Among the largest declines were jumbo 30-year and 15-year refi rates, which both fell 13 basis points, and jumbo 7/6 ARM rates, which gave up 12 points. | National Averages of Lenders' Best Rates - Refinance | | | | --- | --- | --- | | Loan Type | **Refinance Rates** | Daily Change | | 30-Year Fixed | 7.47% | -0.04 | | FHA 30-Year Fixed | 7.50% | -0.04 | | VA 30-Year Fixed | 7.38% | +0.01 | | Jumbo 30-Year Fixed | 6.95% | -0.13 | | 20-Year Fixed | 7.35% | -0.04 | | 15-Year Fixed | 6.76% | -0.06 | | FHA 15-Year Fixed | 6.97% | No Change | | Jumbo 15-Year Fixed | 6.78% | -0.13 | | 10-Year Fixed | 6.66% | -0.08 | | 10/6 ARM | 7.80% | -0.03 | | 7/6 ARM | 7.83% | -0.04 | | Jumbo 7/6 ARM | 6.68% | -0.12 | | 5/6 ARM | 7.85% | -0.02 | | Jumbo 5/6 ARM | 6.68% | No Change | Calculate monthly payments for different loan scenarios with our [Mortgage Calculator](https://www.investopedia.com/mortgage-calculator-5084794). ### The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or may be based on a hypothetical borrower with an ultra-high credit score or for a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it can vary from the averages you see here. ## Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates Tuesday were Mississippi, Vermont, Louisiana, Rhode Island, Hawaii, and Iowa, while the states with the highest average rates were Minnesota, Arizona, Idaho, Oregon, Washington, Maryland, and Nevada. ## What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: * The level and direction of the bond market, especially 10-year Treasury yields * The [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservebank.asp) current monetary policy, especially as it relates to bond buying and funding government-backed mortgages * Competition between [mortgage lenders and across loan types](https://www.investopedia.com/best-mortgage-lenders-5076852) Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This [bond-buying policy](https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp) is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has been maintaining the federal funds rate at its current level since July, with a fifth consecutive rate hold announced on March 20. Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and reliably, it has said it is hesitant to start cutting rates. Still, Fed committee members do collectively expect to reduce rates in 2024. The March 20 meeting included the latest installment of the Fed's "[dot plot](https://www.investopedia.com/dot-plot-4581755)" forecast, which showed that the median expectation among the 19 Fed members is for three rate decreases—totaling 0.75 percentage points—by year's end. The dot plot also shows similar expected rate cuts in 2025 and 2026. The Fed will hold six more meetings this year, with the next scheduled for April 30 to May 1. ## How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a [loan-to-value ratio (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

The 30-year new purchase mortgage average dipped for a second day Thursday, falling to 7.23%. It was a day of declines across virtually all new purchase and refi mortgage rates, minus a few averages that held steady. Among the declines, jumbo 30-year rates fell back under 7%. National Averages of Lenders' Best Mortgage Rates Loan Type New Purchase Refinance 30-Year Fixed 7.23% 7.47% FHA 30-Year Fixed 7.03% 7.50% Jumbo 30-Year Fixed 6.95% 6.95% 15-Year Fixed 6.47% 6.76% 5/6 ARM 7.80% 7.85% National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. Rates vary widely across lenders, so it's always smart to shop around for your best mortgage option and compare rates regularly no matter the type of home loan you seek. Compare the Best Mortgage Rates Today - May 21, 2024 Today's Mortgage Rate Averages: New Purchase Rates on 30-year new purchase mortgages subtracted another 6 basis points Thursday, after inching down 2 points the previous day. Now at 7.23%, the average is just an eighth of a percentage point above its March low of 7.11%. Rates on 30-year loans remain elevated compared to the start of February, when the 30-year average dipped down into 6% territory. But the average is still considerably below October's historic 23-year peak of 8.45%. Rates on 15-year new purchase loans saw a much bigger fall Thursday, sinking 16 basis points. The drop comes, however, after a combined 32-point climb over the prior three days. Now averaging 6.47%, 15-year rates are about a third of a percentage point pricier than the seven-month low of 6.10% seen just before the new year. But they're still much more affordable than last fall's 7.59% average—a peak since 2000. Jumbo 30-year rates meanwhile fell back under 7%, after jumping to 7.07% Wednesday—their first time above 7% since Nov. 13. Although daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached last October was the most expensive jumbo 30-year average in more than 20 years. Rates for every other new purchase loan type also dropped Thursday except for the flat jumbo 5/6 adjustable-rate average. The biggest decline was seen in FHA 30-year rates, which plunged 18 basis points on average. National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.23% -0.06 FHA 30-Year Fixed 7.03% -0.18 VA 30-Year Fixed 6.78% -0.08 Jumbo 30-Year Fixed 6.95% -0.12 20-Year Fixed 7.00% -0.06 15-Year Fixed 6.47% -0.16 FHA 15-Year Fixed 6.80% -0.01 Jumbo 15-Year Fixed 6.78% -0.13 10-Year Fixed 6.40% -0.08 10/6 ARM 7.65% -0.06 7/6 ARM 7.67% -0.03 Jumbo 7/6 ARM 6.58% -0.12 5/6 ARM 7.80% -0.04 Jumbo 5/6 ARM 6.68% No Change The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates. This week's reading inched up 3 basis points to 6.82%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its highest level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a weekly average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with discount points, while Investopedia’s averages only include zero-point loans. Today's Mortgage Rate Averages: Refinancing Refinancing rates also moved lower Thursday, but a little less substantially. The 30-year refi average dipped just 4 basis points, leaving the spread between 30-year new purchase and refi rates at a narrow 24 basis points. The 15-year refi average meanwhile dropped 6 basis points, while jumbo 30-year refi rates erased their eighth of a percentage point gain from the previous day. Aside from a few averages that essentially marched in place, the rest of the refi averages also dropped Thursday. Among the largest declines were jumbo 30-year and 15-year refi rates, which both fell 13 basis points, and jumbo 7/6 ARM rates, which gave up 12 points. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 7.47% -0.04 FHA 30-Year Fixed 7.50% -0.04 VA 30-Year Fixed 7.38% +0.01 Jumbo 30-Year Fixed 6.95% -0.13 20-Year Fixed 7.35% -0.04 15-Year Fixed 6.76% -0.06 FHA 15-Year Fixed 6.97% No Change Jumbo 15-Year Fixed 6.78% -0.13 10-Year Fixed 6.66% -0.08 10/6 ARM 7.80% -0.03 7/6 ARM 7.83% -0.04 Jumbo 7/6 ARM 6.68% -0.12 5/6 ARM 7.85% -0.02 Jumbo 5/6 ARM 6.68% No Change Calculate monthly payments for different loan scenarios with our Mortgage Calculator. The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or may be based on a hypothetical borrower with an ultra-high credit score or for a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it can vary from the averages you see here. Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates Tuesday were Mississippi, Vermont, Louisiana, Rhode Island, Hawaii, and Iowa, while the states with the highest average rates were Minnesota, Arizona, Idaho, Oregon, Washington, Maryland, and Nevada. What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: The level and direction of the bond market, especially 10-year Treasury yields The Federal Reserve's current monetary policy, especially as it relates to bond buying and funding government-backed mortgages Competition between mortgage lenders and across loan types Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This bond-buying policy is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the federal funds rate to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has been maintaining the federal funds rate at its current level since July, with a fifth consecutive rate hold announced on March 20. Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and reliably, it has said it is hesitant to start cutting rates. Still, Fed committee members do collectively expect to reduce rates in 2024. The March 20 meeting included the latest installment of the Fed's "dot plot" forecast, which showed that the median expectation among the 19 Fed members is for three rate decreases—totaling 0.75 percentage points—by year's end. The dot plot also shows similar expected rate cuts in 2025 and 2026. The Fed will hold six more meetings this year, with the next scheduled for April 30 to May 1. How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a loan-to-value ratio (LTV) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

https://www.investopedia.com/terms/d/debtequityswap.asp

What Is a Debt/Equity Swap? How It Works and Who Benefits

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-debtequity-swap"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Debt/Equity Swap? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A debt/equity swap is a transaction in which the obligations or debts of a company or individual are exchanged for something of value, namely, equity. In the case of a publicly-traded company, this generally entails an exchange of bonds for stock. The value of the stocks and bonds being exchanged is typically determined by the market at the time of the swap. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Debt/equity swaps involve the exchange of equity for debt in order to write off money owed to creditors.</li><li>They are usually conducted during bankruptcies, and the swap ratio between debt and equity can vary based on individual cases.</li><li>In a bankruptcy case, the debt holder is required to make the debt/equity swap, but in other cases, the debt holder may opt to make the swap, provided the offering is a financially favorable one.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-debtequity-swaps"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Debt/Equity Swaps </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A debt/equity <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swap.asp" rel="noopener noreferrer">swap</a> is a refinancing deal in which a debt holder gets an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equity.asp" rel="noopener noreferrer">equity</a> position in exchange for the cancellation of the debt. The swap is generally done to help a struggling company continue to operate. The logic behind this is an insolvent company cannot pay its debts or improve its equity standing. However, sometimes a company may simply wish to take advantage of favorable market conditions. Covenants in the bond indenture may prevent a swap from happening without consent. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> In cases of bankruptcy, the debt holder does not have a choice about whether he wants to make the debt/equity swap. However, in other cases, he may have a choice in the matter. To entice people into debt/equity swaps, businesses often offer advantageous trade ratios. For example, if the business offers a 1:1 swap ratio, the bondholder receives stocks worth exactly the same amount as his bonds, not a particularly advantageous trade. However, if the company offers a 1:2 ratio, the bondholder receives stocks valued at twice as much as his bonds, making the trade more enticing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-why-use-debtequity-swaps"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Why Use Debt/Equity Swaps? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Debt/equity swaps can offer debt holders equity because the business does not want to or cannot pay the face value of the bonds it has issued. To delay repayment, it offers stock instead. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> In other cases, businesses have to maintain certain debt/equity ratios and invite debt holders to swap their debts for equity if the company helps to adjust that balance. These debt/equity ratios are often part of financing requirements imposed by lenders. In other cases, businesses use debt/equity swaps as part of their bankruptcy restructuring. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-debtequity-and-bankruptcy"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Debt/Equity and Bankruptcy </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> If a company decides to declare bankruptcy, it has a choice between Chapter 7 and Chapter 11. Under Chapter 7, all of the business's debts are eliminated, and the business no longer operates. Under Chapter 11, the business continues its operations while restructuring its finances. In many cases, Chapter 11 reorganization cancels the company's existing equity shares. It then reissues new shares to the debt holders, and the bondholders and creditors become the new shareholders in the company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-debtequity-swaps-vs-equitydebt-swaps"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Debt/Equity Swaps vs. Equity/Debt Swaps </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> An equity/debt swap is the opposite of a debt/equity swap. Instead of trading debt for equity, shareholders swap equity for debt. Essentially, they exchange stocks for bonds. Generally, Equity/Debt swaps are conducted in order to facilitate smooth mergers or restructuring in a company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-example-of-a-debtequity-swap"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Example of a Debt/Equity Swap </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Suppose company ABC has a $100 million debt that it is unable to service. The company offers 25% percent ownership to its two debtors in exchange for writing off the entire debt amount. This is a debt-for-equity swap in which the company has exchanged its debt holdings for equity ownership by two lenders. </p></div>

## What Is a Debt/Equity Swap? A debt/equity swap is a transaction in which the obligations or debts of a company or individual are exchanged for something of value, namely, equity. In the case of a publicly-traded company, this generally entails an exchange of bonds for stock. The value of the stocks and bonds being exchanged is typically determined by the market at the time of the swap. ### Key Takeaways * Debt/equity swaps involve the exchange of equity for debt in order to write off money owed to creditors. * They are usually conducted during bankruptcies, and the swap ratio between debt and equity can vary based on individual cases. * In a bankruptcy case, the debt holder is required to make the debt/equity swap, but in other cases, the debt holder may opt to make the swap, provided the offering is a financially favorable one. ## Understanding Debt/Equity Swaps A debt/equity [swap](https://www.investopedia.com/terms/s/swap.asp) is a refinancing deal in which a debt holder gets an [equity](https://www.investopedia.com/terms/e/equity.asp) position in exchange for the cancellation of the debt. The swap is generally done to help a struggling company continue to operate. The logic behind this is an insolvent company cannot pay its debts or improve its equity standing. However, sometimes a company may simply wish to take advantage of favorable market conditions. Covenants in the bond indenture may prevent a swap from happening without consent. In cases of bankruptcy, the debt holder does not have a choice about whether he wants to make the debt/equity swap. However, in other cases, he may have a choice in the matter. To entice people into debt/equity swaps, businesses often offer advantageous trade ratios. For example, if the business offers a 1:1 swap ratio, the bondholder receives stocks worth exactly the same amount as his bonds, not a particularly advantageous trade. However, if the company offers a 1:2 ratio, the bondholder receives stocks valued at twice as much as his bonds, making the trade more enticing. ## Why Use Debt/Equity Swaps? Debt/equity swaps can offer debt holders equity because the business does not want to or cannot pay the face value of the bonds it has issued. To delay repayment, it offers stock instead. In other cases, businesses have to maintain certain debt/equity ratios and invite debt holders to swap their debts for equity if the company helps to adjust that balance. These debt/equity ratios are often part of financing requirements imposed by lenders. In other cases, businesses use debt/equity swaps as part of their bankruptcy restructuring. ## Debt/Equity and Bankruptcy If a company decides to declare bankruptcy, it has a choice between Chapter 7 and Chapter 11. Under Chapter 7, all of the business's debts are eliminated, and the business no longer operates. Under Chapter 11, the business continues its operations while restructuring its finances. In many cases, Chapter 11 reorganization cancels the company's existing equity shares. It then reissues new shares to the debt holders, and the bondholders and creditors become the new shareholders in the company. ## Debt/Equity Swaps vs. Equity/Debt Swaps An equity/debt swap is the opposite of a debt/equity swap. Instead of trading debt for equity, shareholders swap equity for debt. Essentially, they exchange stocks for bonds. Generally, Equity/Debt swaps are conducted in order to facilitate smooth mergers or restructuring in a company. ## Example of a Debt/Equity Swap Suppose company ABC has a $100 million debt that it is unable to service. The company offers 25% percent ownership to its two debtors in exchange for writing off the entire debt amount. This is a debt-for-equity swap in which the company has exchanged its debt holdings for equity ownership by two lenders.

What Is a Debt/Equity Swap? A debt/equity swap is a transaction in which the obligations or debts of a company or individual are exchanged for something of value, namely, equity. In the case of a publicly-traded company, this generally entails an exchange of bonds for stock. The value of the stocks and bonds being exchanged is typically determined by the market at the time of the swap. Key Takeaways Debt/equity swaps involve the exchange of equity for debt in order to write off money owed to creditors.They are usually conducted during bankruptcies, and the swap ratio between debt and equity can vary based on individual cases.In a bankruptcy case, the debt holder is required to make the debt/equity swap, but in other cases, the debt holder may opt to make the swap, provided the offering is a financially favorable one. Understanding Debt/Equity Swaps A debt/equity swap is a refinancing deal in which a debt holder gets an equity position in exchange for the cancellation of the debt. The swap is generally done to help a struggling company continue to operate. The logic behind this is an insolvent company cannot pay its debts or improve its equity standing. However, sometimes a company may simply wish to take advantage of favorable market conditions. Covenants in the bond indenture may prevent a swap from happening without consent. In cases of bankruptcy, the debt holder does not have a choice about whether he wants to make the debt/equity swap. However, in other cases, he may have a choice in the matter. To entice people into debt/equity swaps, businesses often offer advantageous trade ratios. For example, if the business offers a 1:1 swap ratio, the bondholder receives stocks worth exactly the same amount as his bonds, not a particularly advantageous trade. However, if the company offers a 1:2 ratio, the bondholder receives stocks valued at twice as much as his bonds, making the trade more enticing. Why Use Debt/Equity Swaps? Debt/equity swaps can offer debt holders equity because the business does not want to or cannot pay the face value of the bonds it has issued. To delay repayment, it offers stock instead. In other cases, businesses have to maintain certain debt/equity ratios and invite debt holders to swap their debts for equity if the company helps to adjust that balance. These debt/equity ratios are often part of financing requirements imposed by lenders. In other cases, businesses use debt/equity swaps as part of their bankruptcy restructuring. Debt/Equity and Bankruptcy If a company decides to declare bankruptcy, it has a choice between Chapter 7 and Chapter 11. Under Chapter 7, all of the business's debts are eliminated, and the business no longer operates. Under Chapter 11, the business continues its operations while restructuring its finances. In many cases, Chapter 11 reorganization cancels the company's existing equity shares. It then reissues new shares to the debt holders, and the bondholders and creditors become the new shareholders in the company. Debt/Equity Swaps vs. Equity/Debt Swaps An equity/debt swap is the opposite of a debt/equity swap. Instead of trading debt for equity, shareholders swap equity for debt. Essentially, they exchange stocks for bonds. Generally, Equity/Debt swaps are conducted in order to facilitate smooth mergers or restructuring in a company. Example of a Debt/Equity Swap Suppose company ABC has a $100 million debt that it is unable to service. The company offers 25% percent ownership to its two debtors in exchange for writing off the entire debt amount. This is a debt-for-equity swap in which the company has exchanged its debt holdings for equity ownership by two lenders.

https://www.investopedia.com/terms/j/john_bogle.asp

Who Was John Bogle? Vanguard Founder, Father of Indexing

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> John Bogle was the founder of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/111715/how-vanguard-index-funds-work.asp">Vanguard Group</a> and a major proponent of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index-investing.asp">index investing</a>. Commonly referred to as "Jack," Bogle revolutionized the mutual fund world by creating index investing, which allows investors to buy mutual funds that track the broader market. He did this with the overall intent to make investing easier and at a low cost for the average investor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> He died on Jan. 16, 2019, at the age of 89.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>John Bogle was an investor and founder of the Vanguard Group, one of the largest investment firms in the world.</li><li>Bogle created index investing, which allows investors to buy mutual funds that track the broader market.</li><li>Bogle introduced the Vanguard 500 fund, which tracks the returns of the S&amp;P 500 and marked the first index fund marketed to retail investors.</li><li>One of Bogle's pioneering achievements was low-cost investing in mutual funds by creating no-load funds.</li><li>Index investing utilizes a passive investment strategy that requires a manager to only ensure that the fund's holdings match those of the benchmark index.</li><li><em>Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor</em> is a book Bogle wrote on investing that has since become a classic for investors worldwide.<span class="ql-inline-citation" data-cite="1"></span></li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_7-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="John Bogle" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/ULIMSo4QURB59d31YWCKlxcVmqo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/John_bogle.asp_v2-db538a5a053f4a138779fd77f57b3aaf.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ULIMSo4QURB59d31YWCKlxcVmqo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/John_bogle.asp_v2-db538a5a053f4a138779fd77f57b3aaf.png" data-srcset="https://www.investopedia.com/thmb/NsdbfLn4yOr62qjDcP1VUHxG5i0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/John_bogle.asp_v2-db538a5a053f4a138779fd77f57b3aaf.png 750w" data-tracking-container="true" height="2000" id="mntl-sc-block-image_1-0" width="3000"/> <noscript> <img alt="John Bogle" class="img--noscript universal-image__image" height="2000" sizes="750px" src="https://www.investopedia.com/thmb/ULIMSo4QURB59d31YWCKlxcVmqo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/John_bogle.asp_v2-db538a5a053f4a138779fd77f57b3aaf.png" srcset="https://www.investopedia.com/thmb/NsdbfLn4yOr62qjDcP1VUHxG5i0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/John_bogle.asp_v2-db538a5a053f4a138779fd77f57b3aaf.png 750w" width="3000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Hugo Lin</p></span> </figcaption></figure> <span class="heading-toc" id="toc-early-life-and-education"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Early Life and Education </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> John Bogle was born on May 8, 1929, in Montclair, New Jersey. He attended Blair Academy which was paid for by his uncle, as his family had lost most of their wealth in the 1929 stock market crash. John Bogle attended Princeton University where he studied economics.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In his early career, he joined Wellington Management in 1951 and attempted to persuade them to change their strategy of focusing on one investment fund to many. He eventually became chairman of Wellington but was fired after a poorly made merger decision. He then founded his own mutual fund company, Vanguard Group, in 1974.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-notable-accomplishments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Notable Accomplishments </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-subheading__text"> Vanguard </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> With Vanguard, Bogle employed a novel ownership structure in which the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp">shareholders</a> of mutual funds became part owners of the funds in which they invested. The funds themselves own the investment firm, making the fund investors indirect owners of the firm itself. This structure allows the firm to incorporate any profits into its operating structure, reducing investment costs for fund investors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In 1976, Bogle introduced the Vanguard 500 fund, which tracks the returns of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&amp;P 500</a> and marked the first <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index fund</a> marketed to retail investors. Bogle’s unique structure for Vanguard also made it a natural fit for the provision of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/no-loadfund.asp">no-load mutual funds</a>, which do not charge a commission on investment purchases.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>An index fund is an investment fund, such as an ETF or mutual fund with a portfolio that is constructed to match that of a specific market index.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> When the Vanguard 500 fund was launched in its initial iteration, it raised only $11 million in its first underwriting in 1976. As of July 28, 2022, the fund manages more than $709 billion in assets.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Bogle retired as CEO and chair of Vanguard in 1999 and wrote <em>Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor</em> the same year, which has since become a classic for investors worldwide.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Legacy </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> John Bogle contributed significantly to the popularity of index investing, in which a fund maintains a mix of investments that track a major market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">index</a>. Bogle’s philosophy that average investors would find it difficult or impossible to beat the market over time led him to prioritize ways to reduce expenses associated with investing in mutual funds. For example, Bogle focused on no-load funds featuring low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolioturnover.asp">turnover</a> and simple investment strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The philosophy behind passive investing generally rests upon the idea that the expenses associated with chasing high market returns cancel out most or all of the gains an investor would otherwise achieve with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive strategy</a> that relies upon funds with lower turnover, management fees, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratios</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Passive investing stands in contrast to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activemanagement.asp">active investing</a>, which requires managers to take a more hands-on role with the intent of outperforming the market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Index funds fit this model nicely because they base their holdings on the securities listed on any given index. Investors who purchase shares in index funds gain the benefit of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversity</a> represented by all the securities on an index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> This protects against the risk that a given company will lower the performance of the overall fund. Index funds also more or less run themselves, as managers only need to ensure their holdings match those of the index they follow. This keeps fees lower for index funds than for funds with more active trading. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Finally, because index funds require fewer trades to maintain their portfolios than funds with more active management schemes, index funds tend to produce more tax-efficient returns than other types of funds. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-was-john-bogles-net-worth"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Was John Bogle's Net Worth?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>At the time of his death in 2019, John Bogle's net worth was approximately $80 million. He earned the bulk of that money as the founder of the investment management company, Vanguard.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-who-invented-passive-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Invented Passive Investing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>John Bogle, the founder of the investment management firm, Vanguard, invented passive investing. By doing so, he created a new industry focused on this type of investing as opposed to the traditional method of investing, active investing. He is known as the "Father of Passive Investing."<span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-is-the-difference-between-an-etf-and-an-index-fund"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between an ETF and an Index Fund?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An ETF can be bought and sold on an exchange like a stock at any point whereas an index fund can only be traded at the end of the day at the set price point. ETFs provide greater flexibility than index funds.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> John Bogle is a titan in the history of investment management by starting the Vanguard Group, one of the largest investment management firms in the world. Through Vanguard he popularized passive investing, making it easier for average investors to invest their capital and generate returns with low risks. </p></div>

John Bogle was the founder of the [Vanguard Group](https://www.investopedia.com/articles/investing/111715/how-vanguard-index-funds-work.asp) and a major proponent of [index investing](https://www.investopedia.com/terms/i/index-investing.asp). Commonly referred to as "Jack," Bogle revolutionized the mutual fund world by creating index investing, which allows investors to buy mutual funds that track the broader market. He did this with the overall intent to make investing easier and at a low cost for the average investor. He died on Jan. 16, 2019, at the age of 89. ### Key Takeaways * John Bogle was an investor and founder of the Vanguard Group, one of the largest investment firms in the world. * Bogle created index investing, which allows investors to buy mutual funds that track the broader market. * Bogle introduced the Vanguard 500 fund, which tracks the returns of the S&P 500 and marked the first index fund marketed to retail investors. * One of Bogle's pioneering achievements was low-cost investing in mutual funds by creating no-load funds. * Index investing utilizes a passive investment strategy that requires a manager to only ensure that the fund's holdings match those of the benchmark index. * *Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor* is a book Bogle wrote on investing that has since become a classic for investors worldwide. ![John Bogle]() :max_bytes(150000):strip_icc()/John_bogle.asp_v2-db538a5a053f4a138779fd77f57b3aaf.png) Investopedia / Hugo Lin ## Early Life and Education John Bogle was born on May 8, 1929, in Montclair, New Jersey. He attended Blair Academy which was paid for by his uncle, as his family had lost most of their wealth in the 1929 stock market crash. John Bogle attended Princeton University where he studied economics. In his early career, he joined Wellington Management in 1951 and attempted to persuade them to change their strategy of focusing on one investment fund to many. He eventually became chairman of Wellington but was fired after a poorly made merger decision. He then founded his own mutual fund company, Vanguard Group, in 1974. ## Notable Accomplishments ### Vanguard With Vanguard, Bogle employed a novel ownership structure in which the [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) of mutual funds became part owners of the funds in which they invested. The funds themselves own the investment firm, making the fund investors indirect owners of the firm itself. This structure allows the firm to incorporate any profits into its operating structure, reducing investment costs for fund investors. In 1976, Bogle introduced the Vanguard 500 fund, which tracks the returns of the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) and marked the first [index fund](https://www.investopedia.com/terms/i/indexfund.asp) marketed to retail investors. Bogle’s unique structure for Vanguard also made it a natural fit for the provision of [no-load mutual funds](https://www.investopedia.com/terms/n/no-loadfund.asp), which do not charge a commission on investment purchases. ### An index fund is an investment fund, such as an ETF or mutual fund with a portfolio that is constructed to match that of a specific market index. When the Vanguard 500 fund was launched in its initial iteration, it raised only $11 million in its first underwriting in 1976. As of July 28, 2022, the fund manages more than $709 billion in assets. Bogle retired as CEO and chair of Vanguard in 1999 and wrote *Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor* the same year, which has since become a classic for investors worldwide. ### Legacy John Bogle contributed significantly to the popularity of index investing, in which a fund maintains a mix of investments that track a major market [index](https://www.investopedia.com/terms/i/index.asp). Bogle’s philosophy that average investors would find it difficult or impossible to beat the market over time led him to prioritize ways to reduce expenses associated with investing in mutual funds. For example, Bogle focused on no-load funds featuring low [turnover](https://www.investopedia.com/terms/p/portfolioturnover.asp) and simple investment strategies. The philosophy behind passive investing generally rests upon the idea that the expenses associated with chasing high market returns cancel out most or all of the gains an investor would otherwise achieve with a [passive strategy](https://www.investopedia.com/terms/p/passiveinvesting.asp) that relies upon funds with lower turnover, management fees, and [expense ratios](https://www.investopedia.com/terms/e/expenseratio.asp). Passive investing stands in contrast to [active investing](https://www.investopedia.com/terms/a/activemanagement.asp), which requires managers to take a more hands-on role with the intent of outperforming the market. Index funds fit this model nicely because they base their holdings on the securities listed on any given index. Investors who purchase shares in index funds gain the benefit of the [diversity](https://www.investopedia.com/terms/d/diversification.asp) represented by all the securities on an index. This protects against the risk that a given company will lower the performance of the overall fund. Index funds also more or less run themselves, as managers only need to ensure their holdings match those of the index they follow. This keeps fees lower for index funds than for funds with more active trading. Finally, because index funds require fewer trades to maintain their portfolios than funds with more active management schemes, index funds tend to produce more tax-efficient returns than other types of funds. ## What Was John Bogle's Net Worth? At the time of his death in 2019, John Bogle's net worth was approximately $80 million. He earned the bulk of that money as the founder of the investment management company, Vanguard. ## Who Invented Passive Investing? John Bogle, the founder of the investment management firm, Vanguard, invented passive investing. By doing so, he created a new industry focused on this type of investing as opposed to the traditional method of investing, active investing. He is known as the "Father of Passive Investing." ## What Is the Difference Between an ETF and an Index Fund? An ETF can be bought and sold on an exchange like a stock at any point whereas an index fund can only be traded at the end of the day at the set price point. ETFs provide greater flexibility than index funds. ## The Bottom Line John Bogle is a titan in the history of investment management by starting the Vanguard Group, one of the largest investment management firms in the world. Through Vanguard he popularized passive investing, making it easier for average investors to invest their capital and generate returns with low risks.

John Bogle was the founder of the Vanguard Group and a major proponent of index investing. Commonly referred to as "Jack," Bogle revolutionized the mutual fund world by creating index investing, which allows investors to buy mutual funds that track the broader market. He did this with the overall intent to make investing easier and at a low cost for the average investor. He died on Jan. 16, 2019, at the age of 89. Key Takeaways John Bogle was an investor and founder of the Vanguard Group, one of the largest investment firms in the world.Bogle created index investing, which allows investors to buy mutual funds that track the broader market.Bogle introduced the Vanguard 500 fund, which tracks the returns of the S&P 500 and marked the first index fund marketed to retail investors.One of Bogle's pioneering achievements was low-cost investing in mutual funds by creating no-load funds.Index investing utilizes a passive investment strategy that requires a manager to only ensure that the fund's holdings match those of the benchmark index.Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor is a book Bogle wrote on investing that has since become a classic for investors worldwide. Investopedia / Hugo Lin Early Life and Education John Bogle was born on May 8, 1929, in Montclair, New Jersey. He attended Blair Academy which was paid for by his uncle, as his family had lost most of their wealth in the 1929 stock market crash. John Bogle attended Princeton University where he studied economics. In his early career, he joined Wellington Management in 1951 and attempted to persuade them to change their strategy of focusing on one investment fund to many. He eventually became chairman of Wellington but was fired after a poorly made merger decision. He then founded his own mutual fund company, Vanguard Group, in 1974. Notable Accomplishments Vanguard With Vanguard, Bogle employed a novel ownership structure in which the shareholders of mutual funds became part owners of the funds in which they invested. The funds themselves own the investment firm, making the fund investors indirect owners of the firm itself. This structure allows the firm to incorporate any profits into its operating structure, reducing investment costs for fund investors. In 1976, Bogle introduced the Vanguard 500 fund, which tracks the returns of the S&P 500 and marked the first index fund marketed to retail investors. Bogle’s unique structure for Vanguard also made it a natural fit for the provision of no-load mutual funds, which do not charge a commission on investment purchases. An index fund is an investment fund, such as an ETF or mutual fund with a portfolio that is constructed to match that of a specific market index. When the Vanguard 500 fund was launched in its initial iteration, it raised only $11 million in its first underwriting in 1976. As of July 28, 2022, the fund manages more than $709 billion in assets. Bogle retired as CEO and chair of Vanguard in 1999 and wrote Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor the same year, which has since become a classic for investors worldwide. Legacy John Bogle contributed significantly to the popularity of index investing, in which a fund maintains a mix of investments that track a major market index. Bogle’s philosophy that average investors would find it difficult or impossible to beat the market over time led him to prioritize ways to reduce expenses associated with investing in mutual funds. For example, Bogle focused on no-load funds featuring low turnover and simple investment strategies. The philosophy behind passive investing generally rests upon the idea that the expenses associated with chasing high market returns cancel out most or all of the gains an investor would otherwise achieve with a passive strategy that relies upon funds with lower turnover, management fees, and expense ratios. Passive investing stands in contrast to active investing, which requires managers to take a more hands-on role with the intent of outperforming the market. Index funds fit this model nicely because they base their holdings on the securities listed on any given index. Investors who purchase shares in index funds gain the benefit of the diversity represented by all the securities on an index. This protects against the risk that a given company will lower the performance of the overall fund. Index funds also more or less run themselves, as managers only need to ensure their holdings match those of the index they follow. This keeps fees lower for index funds than for funds with more active trading. Finally, because index funds require fewer trades to maintain their portfolios than funds with more active management schemes, index funds tend to produce more tax-efficient returns than other types of funds. What Was John Bogle's Net Worth? At the time of his death in 2019, John Bogle's net worth was approximately $80 million. He earned the bulk of that money as the founder of the investment management company, Vanguard. Who Invented Passive Investing? John Bogle, the founder of the investment management firm, Vanguard, invented passive investing. By doing so, he created a new industry focused on this type of investing as opposed to the traditional method of investing, active investing. He is known as the "Father of Passive Investing." What Is the Difference Between an ETF and an Index Fund? An ETF can be bought and sold on an exchange like a stock at any point whereas an index fund can only be traded at the end of the day at the set price point. ETFs provide greater flexibility than index funds. The Bottom Line John Bogle is a titan in the history of investment management by starting the Vanguard Group, one of the largest investment management firms in the world. Through Vanguard he popularized passive investing, making it easier for average investors to invest their capital and generate returns with low risks.

https://www.investopedia.com/is-my-401-k-safe-from-hackers-5323891

Is My 401(k) Safe from Hackers?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Imagine somebody accessing your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k)</a><strong> </strong>account, editing your details, and then calling your retirement plan’s call center pretending to be you in order to transfer hundreds of thousands of dollars of your pension funds into their own bank account. This chain of events, as improbable as it might sound, isn’t fiction. It is the story of Heide Bartnett, a woman from Darien, Ill., and should serve as a reminder that no money is out of reach of hackers.<span class="ql-inline-citation" data-cite="1"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>401(k)s store a lot of money and are rarely monitored, making them ideal targets for hackers.</li> <li>In most cases, it is personal information that is stolen, although it has become increasingly common for money to be swiped, too.</li> <li>Retirement plan providers are not always willing to reimburse victims of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/could-company-steal-401k-funds-5409265">fraud</a> and may refuse requests on the grounds that the client used sloppy security measures.</li> <li>Following a few simple steps can greatly reduce the likelihood of someone becoming the next victim of a bumper 401(k) heist.</li> <li>Good practices include regularly monitoring your account; using long, hard-to-guess passwords; accepting any extra security measures on offer; and generally being cautious.</li> </ul></div></div></div> <span class="heading-toc" id="toc-401ks-are-hotspots-for-hackers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> 401(k)s Are Hotspots for Hackers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Most of us never give hackers much thought. It seldom crosses our minds that an experienced online thief could quite <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-blockchain-can-change-401-k-5324830">easily get into our financial accounts</a> and empty them without breaking much of a sweat. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> But if we were to be targeted, a 401(k) would be attractive prey. These investment accounts usually hold a lot more money than checking or savings accounts and aren’t generally checked very often. By the time we discover that a 401(k) has been fully or partially raided, the thief will likely be long gone. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Logging into somebody’s 401(k), then somehow getting a distribution to a new bank account signed off by the administrator without ever alerting the plan holder, sounds like a highly challenging and improbable task. It apparently isn’t, though. Judging by the numerous horror stories out there, online criminals are constantly coming up with ways to circumvent the latest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cybersecurity.asp">cybersecurity</a> safeguards put in place to stop them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> And those who don’t go all the way might still get hold of personal information, which in some cases can be just as damaging. Hackers steal personal information so that they, or somebody to whom they sell it, can pose as the victim and apply for credit cards, government benefits, loans, and other things in their name. That’s a lucrative market and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/401-k-scams-to-avoid-5425468">another big risk</a> to watch out for. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_14-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_15-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Hackers break into 401(k)s to steal money or your personal information, which can sometimes be just as costly.</p></div></div></div> <span class="heading-toc" id="toc-if-my-401k-is-hacked-can-i-get-my-money-back"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> If My 401(k) Is Hacked, Can I Get My Money Back? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When money is stolen from a bank account or credit card, it’s usually fairly straightforward to get it back.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="7"></span> With 401(k)s, reimbursement can be a little more complicated.<br/><br/>The federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/erisa.asp">Employee Retirement Income Security Act (ERISA)</a>, the law that governs 401(k) plans, has yet to fully address measures for preventing and dealing with private retirement account hacks—much to the dismay of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/government-accountability-office-gao.asp">Government Accountability Office (GAO)</a>.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> That ambiguity can leave 401(k) account holders in a tricky position. Yes, custodians do generally pledge to return any funds that went missing because of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fraud.asp">fraud</a>. However, the language they sometimes use suggests that they could easily come up with ways to wriggle out of that commitment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> A handful of plan providers provide assurances that they will cover clients unconditionally. Others say they will pick up the bill only if account holders abide by certain security practices.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Plan providers typically have cyber-fraud insurance, but it may be extended to victims only if they can prove that they took certain steps to protect their accounts.</p></div></div></div> <span class="heading-toc" id="toc-tips-to-thwart-hackers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> Tips to Thwart Hackers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Don’t bank on your plan provider to stop you from getting hacked. Billions are spent on cybersecurity, but sloppy behavior by 401(k) participants can render all of that extra protection useless. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Here are some basic steps you can take to reduce the risk of your retirement account being compromised: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-subheading__text"> Routinely monitor your account </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> We are often advised not to monitor investments too closely, as doing so can tempt us into knee-jerk reactions. That doesn’t mean you should never log in to your 401(k) online account, though. As with your bank account, it’s wise to comb through your statements fairly frequently to make sure there is no suspicious activity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Make sure you also turn on account alerts. Do that and you should be informed whenever there is any kind of activity on your account, including login attempts and editing of your personal information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-subheading__text"> Create a long, unique password </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Cybersecurity experts recommend using a password with at least 16 characters. According to LMG Security, an eight-character password hash can be cracked in approximately seven days, whereas a 16-character one would take 147 trillion years to unlock.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The problem with utilizing unique, long, and complicated passwords for every online account is remembering them, particularly as we are not supposed to save passwords somewhere where somebody with evil intentions could find them. A helpful way around this can be to use a phrase. Combine several words together that are familiar to you but gibberish to anybody else and spell them creatively, with numbers and the odd caps lock thrown in. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-subheading__text"> Accept all the extra security offered </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Nowadays, many plan providers offer a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp">two-factor authentication</a> process for access to your account. If this option is presented to you, use it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Getting a code sent to your phone or an authenticator app isn’t completely flawless; hackers have been known to hack them, too. However, it does represent extra security, which is always a good thing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Biometric safeguards are even better. Some websites now require fingerprints or voice or facial recognition to get past the login phase, making it even more difficult for hackers to gain access. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>A long and tricky password, an authentication code sent to an app, and fingerprint confirmation can increase your chances of keeping hackers away.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-subheading__text"> Be careful when using free Wi-Fi </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Free Wi-Fi at airports, hotels, and coffee shops is a great way to save mobile data. It can also be dangerous. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> If you happen to be connected to the public network at the same time as a crafty hacker, you could be in trouble. According to Kaspersky, it’s possible for the cybercriminal to position themselves between you and the connection point, giving them unfettered access to every piece of information you’re sending out on the internet.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Other than being careful what you access, you should also consider using a VPN, enabling the “Always Use HTTPS” option on websites, and turning off the sharing option on your computer.<span class="ql-inline-citation" data-cite="6"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-subheading__text"> Treat communication with caution </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Whenever somebody calls, texts, or emails you asking for personal information, be skeptical. It is very unlikely that your 401(k) provider would contact you to request that kind of information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> You should also be careful about clicking on links, as this could plant malicious software on your device or lead you to a website designed to steal sensitive information. If in doubt, contact the plan provider or administrator using the numbers/addresses provided in the official documents. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-can-a-401k-account-be-hacked"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a 401(k) account be hacked?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, sadly, 401(k)s do get hacked. This often leads to personal information getting stolen. However, there have also been cases where people have had hundreds of thousands of dollars stolen from their accounts.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_63-0"><span class="heading-toc" id="toc-how-can-i-protect-my-401k-from-identity-theft"></span> <h2 class="mntl-sc-block-questionandanswer__question">How can I protect my 401(k) from identity theft?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Your 401(k) can be better protected by using unique, hard-to-guess passwords, implementing as many additional security barriers as possible, watching over your shoulder, and being very careful to whom you give personal information.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_65-0"><span class="heading-toc" id="toc-are-retirement-accounts-protected-from-theft"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are retirement accounts protected from theft?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, not always in the same way that credit cards and bank accounts are. Custodians usually pledge to return any funds that went missing. However, that assurance can come with conditions that aren’t always easy to prove and meet.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> The relative ease with which hackers swipe funds or personal information—coupled with generally little clarity about who is to blame and should foot the bill—has put the onus on 401(k) account holders to do all they can to beef up their own security. Some companies spend billions of dollars protecting their websites. However, at the end of the day, it is the simple steps taken by you, the account holder, that often function as the best form of defense. </p></div>

Imagine somebody accessing your [401(k)](https://www.investopedia.com/terms/1/401kplan.asp)account, editing your details, and then calling your retirement plan’s call center pretending to be you in order to transfer hundreds of thousands of dollars of your pension funds into their own bank account. This chain of events, as improbable as it might sound, isn’t fiction. It is the story of Heide Bartnett, a woman from Darien, Ill., and should serve as a reminder that no money is out of reach of hackers. ### Key Takeaways * 401(k)s store a lot of money and are rarely monitored, making them ideal targets for hackers. * In most cases, it is personal information that is stolen, although it has become increasingly common for money to be swiped, too. * Retirement plan providers are not always willing to reimburse victims of [fraud](https://www.investopedia.com/could-company-steal-401k-funds-5409265) and may refuse requests on the grounds that the client used sloppy security measures. * Following a few simple steps can greatly reduce the likelihood of someone becoming the next victim of a bumper 401(k) heist. * Good practices include regularly monitoring your account; using long, hard-to-guess passwords; accepting any extra security measures on offer; and generally being cautious. ## 401(k)s Are Hotspots for Hackers Most of us never give hackers much thought. It seldom crosses our minds that an experienced online thief could quite [easily get into our financial accounts](https://www.investopedia.com/how-blockchain-can-change-401-k-5324830) and empty them without breaking much of a sweat. But if we were to be targeted, a 401(k) would be attractive prey. These investment accounts usually hold a lot more money than checking or savings accounts and aren’t generally checked very often. By the time we discover that a 401(k) has been fully or partially raided, the thief will likely be long gone. Logging into somebody’s 401(k), then somehow getting a distribution to a new bank account signed off by the administrator without ever alerting the plan holder, sounds like a highly challenging and improbable task. It apparently isn’t, though. Judging by the numerous horror stories out there, online criminals are constantly coming up with ways to circumvent the latest [cybersecurity](https://www.investopedia.com/terms/c/cybersecurity.asp) safeguards put in place to stop them. And those who don’t go all the way might still get hold of personal information, which in some cases can be just as damaging. Hackers steal personal information so that they, or somebody to whom they sell it, can pose as the victim and apply for credit cards, government benefits, loans, and other things in their name. That’s a lucrative market and [another big risk](https://www.investopedia.com/401-k-scams-to-avoid-5425468) to watch out for. ### Hackers break into 401(k)s to steal money or your personal information, which can sometimes be just as costly. ## If My 401(k) Is Hacked, Can I Get My Money Back? When money is stolen from a bank account or credit card, it’s usually fairly straightforward to get it back. With 401(k)s, reimbursement can be a little more complicated. The federal [Employee Retirement Income Security Act (ERISA)](https://www.investopedia.com/terms/e/erisa.asp), the law that governs 401(k) plans, has yet to fully address measures for preventing and dealing with private retirement account hacks—much to the dismay of the [Government Accountability Office (GAO)](https://www.investopedia.com/terms/g/government-accountability-office-gao.asp). That ambiguity can leave 401(k) account holders in a tricky position. Yes, custodians do generally pledge to return any funds that went missing because of [fraud](https://www.investopedia.com/terms/f/fraud.asp). However, the language they sometimes use suggests that they could easily come up with ways to wriggle out of that commitment. A handful of plan providers provide assurances that they will cover clients unconditionally. Others say they will pick up the bill only if account holders abide by certain security practices. ### Plan providers typically have cyber-fraud insurance, but it may be extended to victims only if they can prove that they took certain steps to protect their accounts. ## Tips to Thwart Hackers Don’t bank on your plan provider to stop you from getting hacked. Billions are spent on cybersecurity, but sloppy behavior by 401(k) participants can render all of that extra protection useless. Here are some basic steps you can take to reduce the risk of your retirement account being compromised: ### Routinely monitor your account We are often advised not to monitor investments too closely, as doing so can tempt us into knee-jerk reactions. That doesn’t mean you should never log in to your 401(k) online account, though. As with your bank account, it’s wise to comb through your statements fairly frequently to make sure there is no suspicious activity. Make sure you also turn on account alerts. Do that and you should be informed whenever there is any kind of activity on your account, including login attempts and editing of your personal information. ### Create a long, unique password Cybersecurity experts recommend using a password with at least 16 characters. According to LMG Security, an eight-character password hash can be cracked in approximately seven days, whereas a 16-character one would take 147 trillion years to unlock. The problem with utilizing unique, long, and complicated passwords for every online account is remembering them, particularly as we are not supposed to save passwords somewhere where somebody with evil intentions could find them. A helpful way around this can be to use a phrase. Combine several words together that are familiar to you but gibberish to anybody else and spell them creatively, with numbers and the odd caps lock thrown in. ### Accept all the extra security offered Nowadays, many plan providers offer a [two-factor authentication](https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp) process for access to your account. If this option is presented to you, use it. Getting a code sent to your phone or an authenticator app isn’t completely flawless; hackers have been known to hack them, too. However, it does represent extra security, which is always a good thing. Biometric safeguards are even better. Some websites now require fingerprints or voice or facial recognition to get past the login phase, making it even more difficult for hackers to gain access. ### A long and tricky password, an authentication code sent to an app, and fingerprint confirmation can increase your chances of keeping hackers away. ### Be careful when using free Wi-Fi Free Wi-Fi at airports, hotels, and coffee shops is a great way to save mobile data. It can also be dangerous. If you happen to be connected to the public network at the same time as a crafty hacker, you could be in trouble. According to Kaspersky, it’s possible for the cybercriminal to position themselves between you and the connection point, giving them unfettered access to every piece of information you’re sending out on the internet. Other than being careful what you access, you should also consider using a VPN, enabling the “Always Use HTTPS” option on websites, and turning off the sharing option on your computer. ### Treat communication with caution Whenever somebody calls, texts, or emails you asking for personal information, be skeptical. It is very unlikely that your 401(k) provider would contact you to request that kind of information. You should also be careful about clicking on links, as this could plant malicious software on your device or lead you to a website designed to steal sensitive information. If in doubt, contact the plan provider or administrator using the numbers/addresses provided in the official documents. ## Can a 401(k) account be hacked? Yes, sadly, 401(k)s do get hacked. This often leads to personal information getting stolen. However, there have also been cases where people have had hundreds of thousands of dollars stolen from their accounts. ## How can I protect my 401(k) from identity theft? Your 401(k) can be better protected by using unique, hard-to-guess passwords, implementing as many additional security barriers as possible, watching over your shoulder, and being very careful to whom you give personal information. ## Are retirement accounts protected from theft? No, not always in the same way that credit cards and bank accounts are. Custodians usually pledge to return any funds that went missing. However, that assurance can come with conditions that aren’t always easy to prove and meet. ## The Bottom Line The relative ease with which hackers swipe funds or personal information—coupled with generally little clarity about who is to blame and should foot the bill—has put the onus on 401(k) account holders to do all they can to beef up their own security. Some companies spend billions of dollars protecting their websites. However, at the end of the day, it is the simple steps taken by you, the account holder, that often function as the best form of defense.

Imagine somebody accessing your 401(k) account, editing your details, and then calling your retirement plan’s call center pretending to be you in order to transfer hundreds of thousands of dollars of your pension funds into their own bank account. This chain of events, as improbable as it might sound, isn’t fiction. It is the story of Heide Bartnett, a woman from Darien, Ill., and should serve as a reminder that no money is out of reach of hackers. Key Takeaways 401(k)s store a lot of money and are rarely monitored, making them ideal targets for hackers. In most cases, it is personal information that is stolen, although it has become increasingly common for money to be swiped, too. Retirement plan providers are not always willing to reimburse victims of fraud and may refuse requests on the grounds that the client used sloppy security measures. Following a few simple steps can greatly reduce the likelihood of someone becoming the next victim of a bumper 401(k) heist. Good practices include regularly monitoring your account; using long, hard-to-guess passwords; accepting any extra security measures on offer; and generally being cautious. 401(k)s Are Hotspots for Hackers Most of us never give hackers much thought. It seldom crosses our minds that an experienced online thief could quite easily get into our financial accounts and empty them without breaking much of a sweat. But if we were to be targeted, a 401(k) would be attractive prey. These investment accounts usually hold a lot more money than checking or savings accounts and aren’t generally checked very often. By the time we discover that a 401(k) has been fully or partially raided, the thief will likely be long gone. Logging into somebody’s 401(k), then somehow getting a distribution to a new bank account signed off by the administrator without ever alerting the plan holder, sounds like a highly challenging and improbable task. It apparently isn’t, though. Judging by the numerous horror stories out there, online criminals are constantly coming up with ways to circumvent the latest cybersecurity safeguards put in place to stop them. And those who don’t go all the way might still get hold of personal information, which in some cases can be just as damaging. Hackers steal personal information so that they, or somebody to whom they sell it, can pose as the victim and apply for credit cards, government benefits, loans, and other things in their name. That’s a lucrative market and another big risk to watch out for. Hackers break into 401(k)s to steal money or your personal information, which can sometimes be just as costly. If My 401(k) Is Hacked, Can I Get My Money Back? When money is stolen from a bank account or credit card, it’s usually fairly straightforward to get it back. With 401(k)s, reimbursement can be a little more complicated.The federal Employee Retirement Income Security Act (ERISA), the law that governs 401(k) plans, has yet to fully address measures for preventing and dealing with private retirement account hacks—much to the dismay of the Government Accountability Office (GAO). That ambiguity can leave 401(k) account holders in a tricky position. Yes, custodians do generally pledge to return any funds that went missing because of fraud. However, the language they sometimes use suggests that they could easily come up with ways to wriggle out of that commitment. A handful of plan providers provide assurances that they will cover clients unconditionally. Others say they will pick up the bill only if account holders abide by certain security practices. Plan providers typically have cyber-fraud insurance, but it may be extended to victims only if they can prove that they took certain steps to protect their accounts. Tips to Thwart Hackers Don’t bank on your plan provider to stop you from getting hacked. Billions are spent on cybersecurity, but sloppy behavior by 401(k) participants can render all of that extra protection useless. Here are some basic steps you can take to reduce the risk of your retirement account being compromised: Routinely monitor your account We are often advised not to monitor investments too closely, as doing so can tempt us into knee-jerk reactions. That doesn’t mean you should never log in to your 401(k) online account, though. As with your bank account, it’s wise to comb through your statements fairly frequently to make sure there is no suspicious activity. Make sure you also turn on account alerts. Do that and you should be informed whenever there is any kind of activity on your account, including login attempts and editing of your personal information. Create a long, unique password Cybersecurity experts recommend using a password with at least 16 characters. According to LMG Security, an eight-character password hash can be cracked in approximately seven days, whereas a 16-character one would take 147 trillion years to unlock. The problem with utilizing unique, long, and complicated passwords for every online account is remembering them, particularly as we are not supposed to save passwords somewhere where somebody with evil intentions could find them. A helpful way around this can be to use a phrase. Combine several words together that are familiar to you but gibberish to anybody else and spell them creatively, with numbers and the odd caps lock thrown in. Accept all the extra security offered Nowadays, many plan providers offer a two-factor authentication process for access to your account. If this option is presented to you, use it. Getting a code sent to your phone or an authenticator app isn’t completely flawless; hackers have been known to hack them, too. However, it does represent extra security, which is always a good thing. Biometric safeguards are even better. Some websites now require fingerprints or voice or facial recognition to get past the login phase, making it even more difficult for hackers to gain access. A long and tricky password, an authentication code sent to an app, and fingerprint confirmation can increase your chances of keeping hackers away. Be careful when using free Wi-Fi Free Wi-Fi at airports, hotels, and coffee shops is a great way to save mobile data. It can also be dangerous. If you happen to be connected to the public network at the same time as a crafty hacker, you could be in trouble. According to Kaspersky, it’s possible for the cybercriminal to position themselves between you and the connection point, giving them unfettered access to every piece of information you’re sending out on the internet. Other than being careful what you access, you should also consider using a VPN, enabling the “Always Use HTTPS” option on websites, and turning off the sharing option on your computer. Treat communication with caution Whenever somebody calls, texts, or emails you asking for personal information, be skeptical. It is very unlikely that your 401(k) provider would contact you to request that kind of information. You should also be careful about clicking on links, as this could plant malicious software on your device or lead you to a website designed to steal sensitive information. If in doubt, contact the plan provider or administrator using the numbers/addresses provided in the official documents. Can a 401(k) account be hacked? Yes, sadly, 401(k)s do get hacked. This often leads to personal information getting stolen. However, there have also been cases where people have had hundreds of thousands of dollars stolen from their accounts. How can I protect my 401(k) from identity theft? Your 401(k) can be better protected by using unique, hard-to-guess passwords, implementing as many additional security barriers as possible, watching over your shoulder, and being very careful to whom you give personal information. Are retirement accounts protected from theft? No, not always in the same way that credit cards and bank accounts are. Custodians usually pledge to return any funds that went missing. However, that assurance can come with conditions that aren’t always easy to prove and meet. The Bottom Line The relative ease with which hackers swipe funds or personal information—coupled with generally little clarity about who is to blame and should foot the bill—has put the onus on 401(k) account holders to do all they can to beef up their own security. Some companies spend billions of dollars protecting their websites. However, at the end of the day, it is the simple steps taken by you, the account holder, that often function as the best form of defense.

https://www.investopedia.com/terms/t/trust.asp

What Is a Legal Trust? Common Purposes, Types, and Structures

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-trust"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Trust? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Trusts can be established to provide legal protection for the trustor’s assets to ensure they are distributed according to their wishes. Additionally, trusts can save time, reduce paperwork, and sometimes reduce inheritance or estate taxes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Trusts can also be used as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/closed-endinvestment.asp">closed-end fund</a> built as a public limited company. Read on for more about trusts and how they are used to protect assets for beneficiaries. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A trust is a fiduciary relationship in which a trustor gives another party, known as the trustee, the right to hold title to property or assets for the benefit of a third party.</li><li>While they are generally associated with the idle rich, trusts are highly versatile instruments that can be used for various purposes to achieve specific goals.</li><li>Each trust falls into six broad categories—living or testamentary, funded or unfunded, revocable or irrevocable.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_10-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Trust" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/vDYKorbsERkaq9Src3ND7r_TxqU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Trust_Final_4187588-1f106d576ccb468abf04872f4a866e86.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/vDYKorbsERkaq9Src3ND7r_TxqU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Trust_Final_4187588-1f106d576ccb468abf04872f4a866e86.jpg" data-srcset="https://www.investopedia.com/thmb/297ctY_YdpKpUbu7Xjo6W6nu-gU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Trust_Final_4187588-1f106d576ccb468abf04872f4a866e86.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Trust" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/vDYKorbsERkaq9Src3ND7r_TxqU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Trust_Final_4187588-1f106d576ccb468abf04872f4a866e86.jpg" srcset="https://www.investopedia.com/thmb/297ctY_YdpKpUbu7Xjo6W6nu-gU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Trust_Final_4187588-1f106d576ccb468abf04872f4a866e86.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Paige McLaughlin</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-trusts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Understanding Trusts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Trusts are created by settlors (an individual along with a lawyer) who decide how to transfer parts or all of the individual's assets to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trustee.asp">trustees</a>. These trustees hold on to the assets for the beneficiaries of the trust. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The rules of a trust depend on the terms on which it was built. In some areas, it is possible for beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiary</a> and a trustee at the same time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> A trust can be used to determine how a person’s money should be managed and distributed while that person is alive or after death. A trust helps an estate avoid taxes and probate. It can protect assets from creditors and dictate the terms of inheritance for beneficiaries.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> A trust is one way to provide for an underage beneficiary or someone who cannot manage their finances due to medical or other conditions. Once the beneficiary is deemed capable of managing their assets, they will receive possession of the assets held in trust. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-categories-of-trusts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Categories of Trusts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Although there are many different types of trusts, each fits into one or more of the following categories:<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <li>Living or testamentary</li><li>Revocable or irrevocable</li><li>Funded or unfunded</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-subheading__text"> Living or Testamentary </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/living-trust.asp">living trust</a>, also called an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intervivostrust.asp">inter-vivos trust</a>, is a written document in which an individual's assets are provided as a trust for the individual's use and benefit during their lifetime. A trustee is named when the trust is established; this person is in charge of handling the affairs of the trust and transferring the assets to the beneficiaries at the time of the grantor's death. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/testamentarytrust.asp">testamentary trust</a>, also called a will trust, specifies how an individual's assets are designated after the grantor's death. It is not established until after the grantor passes away. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> Revocable or Irrevocable </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revocabletrust.asp">revocable trust</a> can be changed or terminated by the trustor during that person's lifetime.<span class="ql-inline-citation" data-cite="5"></span> An irrevocable trust, as the name implies, cannot be changed once it's established.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Living trusts can be revocable or irrevocable. Testamentary trusts are generally irrevocable once established but can be revocable via a will if the grantor is still alive. The fact that it is unalterable, containing assets that have been permanently moved out of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trustor.asp">trustor's</a> possession, is what allows estate taxes to be minimized or avoided altogether. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_37-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:59.3%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/urSAIoLyBerKkv9JYOsnKUpQHC0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Trust_Aug_2020-01-69496e4b9f944b58b03b468ad356178f.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/urSAIoLyBerKkv9JYOsnKUpQHC0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Trust_Aug_2020-01-69496e4b9f944b58b03b468ad356178f.jpg" data-srcset="https://www.investopedia.com/thmb/xd1fAy-hP3hwM8JEmMlqXyBUE4s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Trust_Aug_2020-01-69496e4b9f944b58b03b468ad356178f.jpg 750w" data-tracking-container="true" height="3710" id="mntl-sc-block-image_2-0" width="6250"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="3710" sizes="750px" src="https://www.investopedia.com/thmb/urSAIoLyBerKkv9JYOsnKUpQHC0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Trust_Aug_2020-01-69496e4b9f944b58b03b468ad356178f.jpg" srcset="https://www.investopedia.com/thmb/xd1fAy-hP3hwM8JEmMlqXyBUE4s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Trust_Aug_2020-01-69496e4b9f944b58b03b468ad356178f.jpg 750w" width="6250"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>Image by Sabrina Jiang © Investopedia 2020</p></span> </figcaption></figure> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-subheading__text"> Funded or Unfunded </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> A funded trust has assets put into it by the trustor during their lifetime. An unfunded trust consists only of the trust agreement with no funding. Unfunded trusts can become funded upon the trustor’s death or remain unfunded. Since an unfunded trust exposes assets to many of the perils a trust is designed to avoid, ensuring proper funding is important. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <span class="heading-toc" id="toc-common-purposes-for-trusts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> Common Purposes for Trusts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> The trust fund is an ancient instrument (dating back to feudal times, in fact) that is sometimes greeted with scorn due to its association with the idle rich (as in the pejorative "trust fund baby"). But trusts are highly versatile vehicles that can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/strategies-for-wealth-preservation-8604652">protect assets and direct them into the right hands</a> long after the original asset owner's death. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> A trust is generally <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/08/trust-company.asp">employed to hold assets</a> so that they are safe from creditors or others that might have a claim on them after the grantor's death. In addition, trusts are often used to keep assets safe from family members who might otherwise sell or spend them. Assets may be placed in trust for trustworthy family members—even a relative with the best intentions could face a lawsuit, divorce, or other misfortune, putting those assets at risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Trusts can also be used to secure assets for specific purposes, such as a beneficiary's education or to help them start a business. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-subheading__text"> Beneficiary Care </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Trusts may seem geared primarily toward high-net-worth individuals and families, since they can be expensive to establish and maintain. However, those of more average means may find them useful. For example, trusts can be established to ensure a dependent with a physical disability or mental health condition receives care. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_51-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_52-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You might also find instances of someone who has created a trust to qualify for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medicare.asp">Medicaid</a> and still preserve at least a portion of their wealth.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-subheading__text"> Privacy </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. A will's conditions can be applied through a trust, so many individuals who don't want their intentions publicly posted choose to use them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-subheading__text"> Estate Planning </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Trusts can also be used for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a>. Typically, a deceased individual's assets are passed to the spouse and then equally divided among the surviving children. However, children who are under the legal age of 18 need to have trustees. The trustees only have control over the assets until the children reach adulthood. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Trusts can also be used for tax planning. In some cases, the tax consequences of using trusts are lower than other alternatives. Because of this, trusts have become a staple in tax planning for individuals and corporations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-subheading__text"> Tax Saving Basis </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Assets in a revocable trust benefit from a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stepupinbasis.asp">step-up in basis</a>, which can mean <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-savings-strategies-for-wealth-transfer-8417034">substantial tax savings for the heirs</a> who eventually inherit from the trust. However, if the assets are placed in an irrevocable trust, they are subject to carryover basis, or their original <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/costbasis.asp">cost basis</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Here's an example of how the stepped-up basis calculation works, using stocks: The original cost of shares was $5,000. The shares were placed into a revocable trust and passed on to a beneficiary. At the time the stocks were passed on, they were worth $10,000, so they have a step-up in basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. The difference is key when calculating taxes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> So, if the trust beneficiary sold the shares for $12,000, they would owe tax on a $2,000 gain. A beneficiary given the shares, or one who had a carryover basis, would owe taxes on a gain of $7,000 ($5,000 plus $2,000). Note that the step-up basis applies to inherited assets in general, not just those that involve a trust. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <span class="heading-toc" id="toc-types-of-trust-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-heading__text"> Types of Trust Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Below is a list of some of the more common types of trust funds: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditsheltertrust.asp"><strong>Credit shelter trust</strong></a>: Sometimes called a bypass trust or family trust, this trust allows a person to bequeath an amount up to (but not over) the estate-tax exemption. The rest of the estate passes to a spouse tax-free. Funds placed in a credit shelter trust are forever free of estate taxes, even if they grow.</li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/generation-skippingtrust.asp"><strong>Generation-skipping trust</strong></a>: This trust allows a person to transfer assets tax-free to beneficiaries at least two generations their junior, typically their grandchildren.</li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualified-personal-residence-trust.asp"><strong>Qualified personal residence trust</strong></a>: This trust removes a person's home (or vacation home) from their estate. This could be helpful if the properties are likely to appreciate significantly.</li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance_trust.asp"><strong>Insurance trust</strong></a>: This irrevocable trust shelters a life insurance policy within a trust, thus removing it from a taxable estate.<span class="ql-inline-citation" data-cite="3"></span> While a person may no longer borrow against the policy or change beneficiaries, proceeds can be used to pay estate costs after a person dies.</li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qtip.asp"><strong>Qualified terminable interest property trust</strong></a>: This trust allows a person to direct assets to specific beneficiaries (their survivors) at different times. In the typical scenario, a spouse will receive lifelong income from the trust, and children will get what’s left after the spouse dies.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Separate share trust</strong>: This trust lets a parent establish a trust with different features for each beneficiary (i.e., child).</li> <li><strong>A spendthrift trust</strong>: This trust protects the assets a person places in the trust from being claimed by creditors. It also allows for the management of the assets by an independent trustee and forbids the beneficiary from selling their interest in the trust.</li> <li><strong>Charitable trust</strong>:<strong> </strong>This trust benefits a particular charity or nonprofit organization. Normally, a charitable trust is established as part of an estate plan and helps lower or avoid estate and gift taxes. A <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/charitableremaindertrust.asp">charitable remainder trust</a>, funded during a person's lifetime, disperses income to the designated beneficiaries (like children or a spouse) for a specified period and then donates the remaining assets to a charity.<span class="ql-inline-citation" data-cite="2"></span></li> <li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/special-needs-trust.asp"><strong>Special needs trust</strong></a>: This trust is meant for a dependent who receives government benefits, such as Social Security disability benefits. Setting up the trust enables the person with a disability to receive income without affecting or forfeiting the government payments.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blindtrust.asp"><strong>Blind trust</strong></a>: This trust allows the trustees to handle the assets in the trust without the beneficiaries' knowledge. This could be useful if a beneficiary needs to avoid conflicts of interest.</li> <li><strong>Totten trust</strong>:<strong> </strong>Also known as a <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payableondeath.asp">payable-on-death</a> account, this trust is created during the lifetime of the trustor, who also acts as the trustee. It's generally used for bank accounts (physical property cannot be put into it). The big advantage is that assets in the trust avoid probate upon the trustor’s death. Often called a “poor man’s trust," this variety does not require a written document and often costs nothing to set up. It can be established simply by having the title on the account include <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-to-your-bank-account-after-death-5217555">identifying language</a> such as "In Trust For," "Payable on Death To," or "As Trustee For."</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_73-0"><span class="heading-toc" id="toc-what-is-the-benefit-of-an-irrevocable-trust"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Benefit of an Irrevocable Trust?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>By placing assets into an irrevocable trust, you give up control and ownership of them. This means they will not be considered part of your estate, which helps to minimize <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estatetax.asp">estate tax</a> after you die and avoid the probate process.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_75-0"><span class="heading-toc" id="toc-how-much-does-a-trust-cost-to-set-up"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does a Trust Cost to Set Up?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A trust is a complex legal and financial entity that should be established with the help of a qualified attorney. Costs increase depending on the complexity of the trust. The price to establish a revocable trust can range from less than $1,000 to $3,000; irrevocable trusts are more expensive—how much you'll pay depends on how complex it is and how much attorneys charge in your area.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_77-0"><span class="heading-toc" id="toc-who-controls-a-trust"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Controls a Trust?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The one establishing a trust is called the trustor or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grantor.asp">grantor</a>. The one who oversees and manages the trust is called the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trustee.asp">trustee</a>. In a revocable trust, the trustor may control the trust as well, but in an irrevocable trust, the trustee must be somebody else. The trust's beneficiaries are those who benefit from the trust, and the trustee ensures that the beneficiaries are paid.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_79-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Trusts are complex vehicles, except perhaps for the Totten trust. Creating a trust typically requires expert advice from a trust attorney or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trustcompany.asp">trust company</a>, which sets up trust funds as part of a wide range of estate- and asset-management services.<em><br/></em> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> <em>Correction—Dec. 17, 2022:</em> A previous version of this article did not correctly distinguish between the costs of revocable and irrevocable trusts. </p></div>

## What Is a Trust? A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary. Trusts can be established to provide legal protection for the trustor’s assets to ensure they are distributed according to their wishes. Additionally, trusts can save time, reduce paperwork, and sometimes reduce inheritance or estate taxes. Trusts can also be used as a [closed-end fund](https://www.investopedia.com/terms/c/closed-endinvestment.asp) built as a public limited company. Read on for more about trusts and how they are used to protect assets for beneficiaries. ### Key Takeaways * A trust is a fiduciary relationship in which a trustor gives another party, known as the trustee, the right to hold title to property or assets for the benefit of a third party. * While they are generally associated with the idle rich, trusts are highly versatile instruments that can be used for various purposes to achieve specific goals. * Each trust falls into six broad categories—living or testamentary, funded or unfunded, revocable or irrevocable. ![Trust]() :max_bytes(150000):strip_icc()/Trust_Final_4187588-1f106d576ccb468abf04872f4a866e86.jpg) Investopedia / Paige McLaughlin ## Understanding Trusts Trusts are created by settlors (an individual along with a lawyer) who decide how to transfer parts or all of the individual's assets to [trustees](https://www.investopedia.com/terms/t/trustee.asp). These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depend on the terms on which it was built. In some areas, it is possible for beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) and a trustee at the same time. A trust can be used to determine how a person’s money should be managed and distributed while that person is alive or after death. A trust helps an estate avoid taxes and probate. It can protect assets from creditors and dictate the terms of inheritance for beneficiaries. ### The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked. A trust is one way to provide for an underage beneficiary or someone who cannot manage their finances due to medical or other conditions. Once the beneficiary is deemed capable of managing their assets, they will receive possession of the assets held in trust. ## Categories of Trusts Although there are many different types of trusts, each fits into one or more of the following categories: * Living or testamentary * Revocable or irrevocable * Funded or unfunded ### Living or Testamentary A [living trust](https://www.investopedia.com/terms/l/living-trust.asp), also called an [inter-vivos trust](https://www.investopedia.com/terms/i/intervivostrust.asp), is a written document in which an individual's assets are provided as a trust for the individual's use and benefit during their lifetime. A trustee is named when the trust is established; this person is in charge of handling the affairs of the trust and transferring the assets to the beneficiaries at the time of the grantor's death. A [testamentary trust](https://www.investopedia.com/terms/t/testamentarytrust.asp), also called a will trust, specifies how an individual's assets are designated after the grantor's death. It is not established until after the grantor passes away. ### Revocable or Irrevocable A [revocable trust](https://www.investopedia.com/terms/r/revocabletrust.asp) can be changed or terminated by the trustor during that person's lifetime. An irrevocable trust, as the name implies, cannot be changed once it's established. Living trusts can be revocable or irrevocable. Testamentary trusts are generally irrevocable once established but can be revocable via a will if the grantor is still alive. The fact that it is unalterable, containing assets that have been permanently moved out of the [trustor's](https://www.investopedia.com/terms/t/trustor.asp) possession, is what allows estate taxes to be minimized or avoided altogether. ![Image]() :max_bytes(150000):strip_icc()/dotdash_Final_Trust_Aug_2020-01-69496e4b9f944b58b03b468ad356178f.jpg) Image by Sabrina Jiang © Investopedia 2020 ### Funded or Unfunded A funded trust has assets put into it by the trustor during their lifetime. An unfunded trust consists only of the trust agreement with no funding. Unfunded trusts can become funded upon the trustor’s death or remain unfunded. Since an unfunded trust exposes assets to many of the perils a trust is designed to avoid, ensuring proper funding is important. ## Common Purposes for Trusts The trust fund is an ancient instrument (dating back to feudal times, in fact) that is sometimes greeted with scorn due to its association with the idle rich (as in the pejorative "trust fund baby"). But trusts are highly versatile vehicles that can [protect assets and direct them into the right hands](https://www.investopedia.com/strategies-for-wealth-preservation-8604652) long after the original asset owner's death. A trust is generally [employed to hold assets](https://www.investopedia.com/articles/retirement/08/trust-company.asp) so that they are safe from creditors or others that might have a claim on them after the grantor's death. In addition, trusts are often used to keep assets safe from family members who might otherwise sell or spend them. Assets may be placed in trust for trustworthy family members—even a relative with the best intentions could face a lawsuit, divorce, or other misfortune, putting those assets at risk. Trusts can also be used to secure assets for specific purposes, such as a beneficiary's education or to help them start a business. ### Beneficiary Care Trusts may seem geared primarily toward high-net-worth individuals and families, since they can be expensive to establish and maintain. However, those of more average means may find them useful. For example, trusts can be established to ensure a dependent with a physical disability or mental health condition receives care. ### You might also find instances of someone who has created a trust to qualify for [Medicaid](https://www.investopedia.com/terms/m/medicare.asp) and still preserve at least a portion of their wealth. ### Privacy Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. A will's conditions can be applied through a trust, so many individuals who don't want their intentions publicly posted choose to use them. ### Estate Planning Trusts can also be used for [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp). Typically, a deceased individual's assets are passed to the spouse and then equally divided among the surviving children. However, children who are under the legal age of 18 need to have trustees. The trustees only have control over the assets until the children reach adulthood. Trusts can also be used for tax planning. In some cases, the tax consequences of using trusts are lower than other alternatives. Because of this, trusts have become a staple in tax planning for individuals and corporations. ### Tax Saving Basis Assets in a revocable trust benefit from a [step-up in basis](https://www.investopedia.com/terms/s/stepupinbasis.asp), which can mean [substantial tax savings for the heirs](https://www.investopedia.com/tax-savings-strategies-for-wealth-transfer-8417034) who eventually inherit from the trust. However, if the assets are placed in an irrevocable trust, they are subject to carryover basis, or their original [cost basis](https://www.investopedia.com/terms/c/costbasis.asp). Here's an example of how the stepped-up basis calculation works, using stocks: The original cost of shares was $5,000. The shares were placed into a revocable trust and passed on to a beneficiary. At the time the stocks were passed on, they were worth $10,000, so they have a step-up in basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. The difference is key when calculating taxes. So, if the trust beneficiary sold the shares for $12,000, they would owe tax on a $2,000 gain. A beneficiary given the shares, or one who had a carryover basis, would owe taxes on a gain of $7,000 ($5,000 plus $2,000). Note that the step-up basis applies to inherited assets in general, not just those that involve a trust. ## Types of Trust Funds Below is a list of some of the more common types of trust funds: * [**Credit shelter trust**](https://www.investopedia.com/terms/c/creditsheltertrust.asp): Sometimes called a bypass trust or family trust, this trust allows a person to bequeath an amount up to (but not over) the estate-tax exemption. The rest of the estate passes to a spouse tax-free. Funds placed in a credit shelter trust are forever free of estate taxes, even if they grow. * [**Generation-skipping trust**](https://www.investopedia.com/terms/g/generation-skippingtrust.asp): This trust allows a person to transfer assets tax-free to beneficiaries at least two generations their junior, typically their grandchildren. * [**Qualified personal residence trust**](https://www.investopedia.com/terms/q/qualified-personal-residence-trust.asp): This trust removes a person's home (or vacation home) from their estate. This could be helpful if the properties are likely to appreciate significantly. * [**Insurance trust**](https://www.investopedia.com/terms/i/insurance_trust.asp): This irrevocable trust shelters a life insurance policy within a trust, thus removing it from a taxable estate. While a person may no longer borrow against the policy or change beneficiaries, proceeds can be used to pay estate costs after a person dies. * [**Qualified terminable interest property trust**](https://www.investopedia.com/terms/q/qtip.asp): This trust allows a person to direct assets to specific beneficiaries (their survivors) at different times. In the typical scenario, a spouse will receive lifelong income from the trust, and children will get what’s left after the spouse dies. * **Separate share trust**: This trust lets a parent establish a trust with different features for each beneficiary (i.e., child). * **A spendthrift trust**: This trust protects the assets a person places in the trust from being claimed by creditors. It also allows for the management of the assets by an independent trustee and forbids the beneficiary from selling their interest in the trust. * **Charitable trust**:This trust benefits a particular charity or nonprofit organization. Normally, a charitable trust is established as part of an estate plan and helps lower or avoid estate and gift taxes. A [charitable remainder trust](https://www.investopedia.com/terms/c/charitableremaindertrust.asp), funded during a person's lifetime, disperses income to the designated beneficiaries (like children or a spouse) for a specified period and then donates the remaining assets to a charity. * [**Special needs trust**](https://www.investopedia.com/terms/s/special-needs-trust.asp): This trust is meant for a dependent who receives government benefits, such as Social Security disability benefits. Setting up the trust enables the person with a disability to receive income without affecting or forfeiting the government payments. * [**Blind trust**](https://www.investopedia.com/terms/b/blindtrust.asp): This trust allows the trustees to handle the assets in the trust without the beneficiaries' knowledge. This could be useful if a beneficiary needs to avoid conflicts of interest. * **Totten trust**:Also known as a [payable-on-death](https://www.investopedia.com/terms/p/payableondeath.asp) account, this trust is created during the lifetime of the trustor, who also acts as the trustee. It's generally used for bank accounts (physical property cannot be put into it). The big advantage is that assets in the trust avoid probate upon the trustor’s death. Often called a “poor man’s trust," this variety does not require a written document and often costs nothing to set up. It can be established simply by having the title on the account include [identifying language](https://www.investopedia.com/what-happens-to-your-bank-account-after-death-5217555) such as "In Trust For," "Payable on Death To," or "As Trustee For." ## What Is the Benefit of an Irrevocable Trust? By placing assets into an irrevocable trust, you give up control and ownership of them. This means they will not be considered part of your estate, which helps to minimize [estate tax](https://www.investopedia.com/terms/e/estatetax.asp) after you die and avoid the probate process. ## How Much Does a Trust Cost to Set Up? A trust is a complex legal and financial entity that should be established with the help of a qualified attorney. Costs increase depending on the complexity of the trust. The price to establish a revocable trust can range from less than $1,000 to $3,000; irrevocable trusts are more expensive—how much you'll pay depends on how complex it is and how much attorneys charge in your area. ## Who Controls a Trust? The one establishing a trust is called the trustor or [grantor](https://www.investopedia.com/terms/g/grantor.asp). The one who oversees and manages the trust is called the [trustee](https://www.investopedia.com/terms/t/trustee.asp). In a revocable trust, the trustor may control the trust as well, but in an irrevocable trust, the trustee must be somebody else. The trust's beneficiaries are those who benefit from the trust, and the trustee ensures that the beneficiaries are paid. ## The Bottom Line Trusts are complex vehicles, except perhaps for the Totten trust. Creating a trust typically requires expert advice from a trust attorney or a [trust company](https://www.investopedia.com/terms/t/trustcompany.asp), which sets up trust funds as part of a wide range of estate- and asset-management services. *Correction—Dec. 17, 2022:* A previous version of this article did not correctly distinguish between the costs of revocable and irrevocable trusts.

What Is a Trust? A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary. Trusts can be established to provide legal protection for the trustor’s assets to ensure they are distributed according to their wishes. Additionally, trusts can save time, reduce paperwork, and sometimes reduce inheritance or estate taxes. Trusts can also be used as a closed-end fund built as a public limited company. Read on for more about trusts and how they are used to protect assets for beneficiaries. Key Takeaways A trust is a fiduciary relationship in which a trustor gives another party, known as the trustee, the right to hold title to property or assets for the benefit of a third party.While they are generally associated with the idle rich, trusts are highly versatile instruments that can be used for various purposes to achieve specific goals.Each trust falls into six broad categories—living or testamentary, funded or unfunded, revocable or irrevocable. Investopedia / Paige McLaughlin Understanding Trusts Trusts are created by settlors (an individual along with a lawyer) who decide how to transfer parts or all of the individual's assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depend on the terms on which it was built. In some areas, it is possible for beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime beneficiary and a trustee at the same time. A trust can be used to determine how a person’s money should be managed and distributed while that person is alive or after death. A trust helps an estate avoid taxes and probate. It can protect assets from creditors and dictate the terms of inheritance for beneficiaries. The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked. A trust is one way to provide for an underage beneficiary or someone who cannot manage their finances due to medical or other conditions. Once the beneficiary is deemed capable of managing their assets, they will receive possession of the assets held in trust. Categories of Trusts Although there are many different types of trusts, each fits into one or more of the following categories: Living or testamentaryRevocable or irrevocableFunded or unfunded Living or Testamentary A living trust, also called an inter-vivos trust, is a written document in which an individual's assets are provided as a trust for the individual's use and benefit during their lifetime. A trustee is named when the trust is established; this person is in charge of handling the affairs of the trust and transferring the assets to the beneficiaries at the time of the grantor's death. A testamentary trust, also called a will trust, specifies how an individual's assets are designated after the grantor's death. It is not established until after the grantor passes away. Revocable or Irrevocable A revocable trust can be changed or terminated by the trustor during that person's lifetime. An irrevocable trust, as the name implies, cannot be changed once it's established. Living trusts can be revocable or irrevocable. Testamentary trusts are generally irrevocable once established but can be revocable via a will if the grantor is still alive. The fact that it is unalterable, containing assets that have been permanently moved out of the trustor's possession, is what allows estate taxes to be minimized or avoided altogether. Image by Sabrina Jiang © Investopedia 2020 Funded or Unfunded A funded trust has assets put into it by the trustor during their lifetime. An unfunded trust consists only of the trust agreement with no funding. Unfunded trusts can become funded upon the trustor’s death or remain unfunded. Since an unfunded trust exposes assets to many of the perils a trust is designed to avoid, ensuring proper funding is important. Common Purposes for Trusts The trust fund is an ancient instrument (dating back to feudal times, in fact) that is sometimes greeted with scorn due to its association with the idle rich (as in the pejorative "trust fund baby"). But trusts are highly versatile vehicles that can protect assets and direct them into the right hands long after the original asset owner's death. A trust is generally employed to hold assets so that they are safe from creditors or others that might have a claim on them after the grantor's death. In addition, trusts are often used to keep assets safe from family members who might otherwise sell or spend them. Assets may be placed in trust for trustworthy family members—even a relative with the best intentions could face a lawsuit, divorce, or other misfortune, putting those assets at risk. Trusts can also be used to secure assets for specific purposes, such as a beneficiary's education or to help them start a business. Beneficiary Care Trusts may seem geared primarily toward high-net-worth individuals and families, since they can be expensive to establish and maintain. However, those of more average means may find them useful. For example, trusts can be established to ensure a dependent with a physical disability or mental health condition receives care. You might also find instances of someone who has created a trust to qualify for Medicaid and still preserve at least a portion of their wealth. Privacy Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. A will's conditions can be applied through a trust, so many individuals who don't want their intentions publicly posted choose to use them. Estate Planning Trusts can also be used for estate planning. Typically, a deceased individual's assets are passed to the spouse and then equally divided among the surviving children. However, children who are under the legal age of 18 need to have trustees. The trustees only have control over the assets until the children reach adulthood. Trusts can also be used for tax planning. In some cases, the tax consequences of using trusts are lower than other alternatives. Because of this, trusts have become a staple in tax planning for individuals and corporations. Tax Saving Basis Assets in a revocable trust benefit from a step-up in basis, which can mean substantial tax savings for the heirs who eventually inherit from the trust. However, if the assets are placed in an irrevocable trust, they are subject to carryover basis, or their original cost basis. Here's an example of how the stepped-up basis calculation works, using stocks: The original cost of shares was $5,000. The shares were placed into a revocable trust and passed on to a beneficiary. At the time the stocks were passed on, they were worth $10,000, so they have a step-up in basis of $10,000. Had the same beneficiary received them as a gift when the original owner was still alive, their basis would be $5,000. The difference is key when calculating taxes. So, if the trust beneficiary sold the shares for $12,000, they would owe tax on a $2,000 gain. A beneficiary given the shares, or one who had a carryover basis, would owe taxes on a gain of $7,000 ($5,000 plus $2,000). Note that the step-up basis applies to inherited assets in general, not just those that involve a trust. Types of Trust Funds Below is a list of some of the more common types of trust funds: Credit shelter trust: Sometimes called a bypass trust or family trust, this trust allows a person to bequeath an amount up to (but not over) the estate-tax exemption. The rest of the estate passes to a spouse tax-free. Funds placed in a credit shelter trust are forever free of estate taxes, even if they grow. Generation-skipping trust: This trust allows a person to transfer assets tax-free to beneficiaries at least two generations their junior, typically their grandchildren. Qualified personal residence trust: This trust removes a person's home (or vacation home) from their estate. This could be helpful if the properties are likely to appreciate significantly. Insurance trust: This irrevocable trust shelters a life insurance policy within a trust, thus removing it from a taxable estate. While a person may no longer borrow against the policy or change beneficiaries, proceeds can be used to pay estate costs after a person dies. Qualified terminable interest property trust: This trust allows a person to direct assets to specific beneficiaries (their survivors) at different times. In the typical scenario, a spouse will receive lifelong income from the trust, and children will get what’s left after the spouse dies. Separate share trust: This trust lets a parent establish a trust with different features for each beneficiary (i.e., child). A spendthrift trust: This trust protects the assets a person places in the trust from being claimed by creditors. It also allows for the management of the assets by an independent trustee and forbids the beneficiary from selling their interest in the trust. Charitable trust: This trust benefits a particular charity or nonprofit organization. Normally, a charitable trust is established as part of an estate plan and helps lower or avoid estate and gift taxes. A charitable remainder trust, funded during a person's lifetime, disperses income to the designated beneficiaries (like children or a spouse) for a specified period and then donates the remaining assets to a charity. Special needs trust: This trust is meant for a dependent who receives government benefits, such as Social Security disability benefits. Setting up the trust enables the person with a disability to receive income without affecting or forfeiting the government payments. Blind trust: This trust allows the trustees to handle the assets in the trust without the beneficiaries' knowledge. This could be useful if a beneficiary needs to avoid conflicts of interest. Totten trust: Also known as a payable-on-death account, this trust is created during the lifetime of the trustor, who also acts as the trustee. It's generally used for bank accounts (physical property cannot be put into it). The big advantage is that assets in the trust avoid probate upon the trustor’s death. Often called a “poor man’s trust," this variety does not require a written document and often costs nothing to set up. It can be established simply by having the title on the account include identifying language such as "In Trust For," "Payable on Death To," or "As Trustee For." What Is the Benefit of an Irrevocable Trust? By placing assets into an irrevocable trust, you give up control and ownership of them. This means they will not be considered part of your estate, which helps to minimize estate tax after you die and avoid the probate process. How Much Does a Trust Cost to Set Up? A trust is a complex legal and financial entity that should be established with the help of a qualified attorney. Costs increase depending on the complexity of the trust. The price to establish a revocable trust can range from less than $1,000 to $3,000; irrevocable trusts are more expensive—how much you'll pay depends on how complex it is and how much attorneys charge in your area. Who Controls a Trust? The one establishing a trust is called the trustor or grantor. The one who oversees and manages the trust is called the trustee. In a revocable trust, the trustor may control the trust as well, but in an irrevocable trust, the trustee must be somebody else. The trust's beneficiaries are those who benefit from the trust, and the trustee ensures that the beneficiaries are paid. The Bottom Line Trusts are complex vehicles, except perhaps for the Totten trust. Creating a trust typically requires expert advice from a trust attorney or a trust company, which sets up trust funds as part of a wide range of estate- and asset-management services. Correction—Dec. 17, 2022: A previous version of this article did not correctly distinguish between the costs of revocable and irrevocable trusts.

https://www.investopedia.com/ask/answers/012815/how-does-short-selling-help-market-and-investors.asp

How Does Short Selling Help the Market and Investors?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Short selling has long been a controversial practice. It involves selling borrowed shares in the hopes of repurchasing them later at a lower price and profiting from the decline. Critics argue short selling destabilizes markets, enables manipulative bear raids, and should be strictly limited. However, proponents argue that short selling improves market efficiency and price discovery by factoring negative information or sentiment into asset values. They contend that short selling ultimately creates more stable markets through increased liquidity and healthy skepticism.<br/><br/>So what are the merits of these two opposing perspectives on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">short selling</a>? Does shorting stocks really create an unproductive downward bias, or is it a valuable mechanism for discovering fair asset prices? The debate has significant implications since restrictions on short selling affect market quality and returns for all investors. This article will examine arguments on both sides, look at real-world examples, and review what the research says about the impacts of short selling. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Short selling, an oft-misunderstood practice, often plays a vital role in market strengthening.</li><li>Unlike the traditional investing strategy of buying low and selling high, short selling allows investors to sell securities they do not own, with the intention of buying them back later at a lower price.</li><li>Critics of short selling often argue that it can exacerbate market downturns, create undue pressure on companies, and allow some traders to profit at the expense of others' losses.</li><li>Proponents argue that short sellers can add liquidity, reveal stocks that are priced higher than their actual worth, and help bring their prices closer to their true value.</li></ul></div></div></div> <span class="heading-toc" id="toc-the-positive-impact-of-short-selling"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> The Positive Impact of Short Selling </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> While short selling is sometimes portrayed as a negative force in markets, it can strengthen markets and benefit investors in several key ways.<span class="ql-inline-citation" data-cite="2"></span> Specifically, short selling facilitates efficient <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pricediscovery.asp">price discovery</a>, improves liquidity, and promotes healthy skepticism among investors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-subheading__text"> Facilitates price discovery </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> One of the main benefits of short selling is more efficient price discovery—the process by which the market determines the price of an asset based on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/033115/how-does-law-supply-and-demand-affect-prices.asp">supply and demand</a> dynamics. When short sellers identify securities they view as overvalued, they sell those assets and put downward pressure on prices. This incorporates negative information and more realistic valuations into asset prices. By betting against irrational hype or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0911/what-causes-bubbles.aspx">bubbles</a>, short sellers can prevent unjustified price spikes and bring the market back to reasonable value levels. In this way, their trading activity acts as a counterweight to overly optimistic investors and overpricing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-subheading__text"> Improves liquidity </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Short selling also enhances <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> in the markets. When short sellers sell borrowed shares, the supply of shares available for trading increases. This added volume makes it easier for buyers and sellers to execute trades in the market. Stocks and other assets with high <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortinterest.asp">short interest</a> tend to have tighter <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">bid-ask spreads</a> and lower transaction costs.<span class="ql-inline-citation" data-cite="3"></span> The increased trading activity makes markets more efficient and integrated. Short selling also helps create unified pricing for related assets by facilitating arbitrage across markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-subheading__text"> Promotes investor skepticism </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Short selling also promotes investor skepticism and critical thinking. Short sellers have a vested interest in rooting out negative information and exposing corporate malfeasance. This motivates more thorough investment analysis over the practice of passively buying hyped stocks. When investors can directly profit from identifying overvalued assets, it incentivizes healthy scrutiny of companies and avoidance of irrational exuberance. The scrutiny that comes with short selling can expose <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redflag.asp">red flags</a> like accounting irregularities and fraudulent activities within companies, acting as an additional layer of market oversight. Acting as watchdogs, short sellers check corporate misconduct and poor management. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Short selling as a common practice has been around since at least the time when stock markets emerged in the Netherlands during the 1600s.<span class="ql-inline-citation" data-cite="17"></span></p></div></div></div> <span class="heading-toc" id="toc-the-negative-impact-of-short-selling"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> The Negative Impact of Short Selling </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Although short selling can improve <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketefficiency.asp">market efficiency</a>, critics point to several ways it may negatively impact markets and companies. Specifically, short selling may exacerbate stock declines, enable manipulative <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bearraid.asp">bear raids</a>, and cause temporary artificial inflation in shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-subheading__text"> Can accelerate declines and increase volatility </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Excessive short selling activity can potentially accelerate market declines and downturns. When stocks are already falling, a surge in short selling can create selling pressure that drives prices even lower. This extra downward momentum can turn otherwise ordinary declines into full-fledged crashes. Heavy short interest increases volatility as short sellers must cover their positions by buying back shares.<span class="ql-inline-citation" data-cite="4"></span> Critics argue this added volatility undermines investor confidence and stability in the markets.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Can lead to "short attacks" </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Short sellers are sometimes accused of coordinating bear raids to deliberately sabotage stocks.<span class="ql-inline-citation" data-cite="6"></span> This involves spreading negative information and ganging up to short the stock with the goal of spooking other investors to sell. The fear is short sellers can essentially engineer a self-fulfilling prophecy and profit from the artificial decline they created. When short attacks cause viable companies to fail, it harms employees, shareholders, and the economy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Can lead to "failures to deliver" </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Another issue arises when short sellers fail to actually borrow shares before selling them—an illegal practice called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nakedshorting.asp">naked short selling</a>. This can result in a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/failuretodeliver.asp">failure to deliver</a> (FTD), where short sellers cannot locate enough borrowable shares. The resulting "failures to deliver" lead to temporary artificial inflation in shares that should not exist. Critics argue this distortion enables market manipulation and improperly distorts true supply and demand. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> Profits from others' losses </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> A philosophical objection to short selling is that it allows investors to profit directly from other investors' losses. When short sellers bet against a company's success, they profit if the stock declines, even if fundamentals do not justify it. This ability to gain from price declines often bothers critics who view markets as meant to allocate capital efficiently rather than facilitate speculative attacks for private gain at the expense of businesses. They argue short selling incentivizes predatory practices that hurt companies, employees, and investors for self-interest. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-example-of-short-selling-in-the-market"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Example of Short Selling in the Market </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> A prominent example of short selling that improved market efficiency occurred during the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">dot-com bubble</a> in the late 1990s. As technology and internet stocks became wildly overvalued amid hype about a new economy, short sellers identified the bubble. They bet against dot-com companies they saw as having poor fundamentals. Short sellers focused on dot-com stocks with shaky business models and minimal revenues that could not justify their sky-high valuations. For example, technology stocks like Pets.com, GeoCities, and eToys.com had low revenues but market caps in the billions of dollars.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> When the bubble inevitably popped, the short sellers' skepticism was validated. Many internet companies collapsed as the mania ended, vindicating the short positions. By profiting from identifying overvalued stocks, short sellers helped prevent the misallocation of even more capital to fundamentally worthless businesses. Their contrarian position to the dot-com frenzy brought prices back in line with reality. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-research-on-the-effects-of-short-selling"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-heading__text"> Research on the Effects of Short Selling </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Several academic studies and real-world experiments have shown that short sales tend to improve market efficiency overall. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> A 2012 study by Charles Jones, a former Columbia Business School professor, analyzed short-sale restrictions imposed on stock markets following the 1929 crash.<span class="ql-inline-citation" data-cite="9"></span> He found that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/09/short-selling-ban.asp">shorting bans</a> introduced in the 1930s actually reduced market liquidity and increased volatility. This finding was repeated more recently. In 2008, the SEC banned short sales on certain financial stocks to prevent manipulation and avoid worsening the market crash. However, a 2013 article published in the Review of Financial Studies found this actually increased volatility and worsened market quality for those stocks.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Another recent paper provides a systematic review of several studies on the determinants of short selling and the implications for information distribution, real economic decisions, financial reporting, and external auditing. The paper highlights that short sellers act as important information intermediaries and influence various corporate decisions as a result.<span class="ql-inline-citation" data-cite="11"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> While some studies dispute these findings or suggest that further context is important, the predominant research indicates that short selling improves price discovery and market quality on average. This empirical evidence helps support the value of allowing short selling to take place with appropriate safeguards against manipulation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-is-short-selling-legal"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Short Selling Legal?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, short selling is legal in the U.S., and anyone with a margin account can engage in shorting stocks. The practice of short selling was one of the central issues studied by Congress before enacting the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seact1934.asp">Securities and Exchange Act in 1934</a>, but Congress made no judgments about its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/110614/why-short-selling-legal-brief-history.asp">permissibility at the time</a>. Instead, Congress gave the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission</a> (SEC) broad authority to regulate short sales to prevent abusive practices.<span class="ql-inline-citation" data-cite="12"></span> During times of market crisis, when stock prices are falling rapidly, regulators have stepped in to either limit or prohibit the use of short selling temporarily until order is restored.<span class="ql-inline-citation" data-cite="16"></span> However, naked short selling remains illegal and constitutes a form of securities fraud. When short selling, a trader needs to first locate and borrow a stock that has been determined to exist and can be borrowed.<span class="ql-inline-citation" data-cite="15"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-how-does-short-selling-work-in-practice"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Short Selling Work in Practice?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In a short-sale transaction, traders borrow shares from a brokerage firm in their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaccount.asp">margin account</a> and agree to return equivalent shares in the future. The short seller immediately sells the borrowed shares at the current market price. If the price drops, they buy back shares at the lower price to return to the lender, keeping the price difference as profit.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_52-0"><span class="heading-toc" id="toc-what-are-the-risks-of-short-selling"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Risks of Short Selling?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The main risk is that instead of declining, the stock price rises significantly, forcing the short seller to buy the stock back at a higher price and take a loss. Losses can be unlimited if the stock keeps rising before the short position is closed.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-what-is-a-short-squeeze"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Short Squeeze?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A short squeeze occurs when the price of a heavily shorted stock rises, causing short sellers to scramble to buy back shares in an effort to cover their losses. That scramble to buy back the stock causes the price to quickly rise even higher, increasing losses for short sellers.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> When exercised responsibly, short selling can actually enhance pricing and improve market efficiency by incorporating negative and contrarian views. Empirical research demonstrates this and also shows how short selling bans have backfired. However, when taken to an extreme, shorting can potentially be abused to unfairly target and sabotage companies. Appropriate restrictions that allow short selling while curbing manipulation appear optimal for maintaining functional markets.<br> </br></p></div>

Short selling has long been a controversial practice. It involves selling borrowed shares in the hopes of repurchasing them later at a lower price and profiting from the decline. Critics argue short selling destabilizes markets, enables manipulative bear raids, and should be strictly limited. However, proponents argue that short selling improves market efficiency and price discovery by factoring negative information or sentiment into asset values. They contend that short selling ultimately creates more stable markets through increased liquidity and healthy skepticism. So what are the merits of these two opposing perspectives on [short selling](https://www.investopedia.com/terms/s/shortselling.asp)? Does shorting stocks really create an unproductive downward bias, or is it a valuable mechanism for discovering fair asset prices? The debate has significant implications since restrictions on short selling affect market quality and returns for all investors. This article will examine arguments on both sides, look at real-world examples, and review what the research says about the impacts of short selling. ### Key Takeaways * Short selling, an oft-misunderstood practice, often plays a vital role in market strengthening. * Unlike the traditional investing strategy of buying low and selling high, short selling allows investors to sell securities they do not own, with the intention of buying them back later at a lower price. * Critics of short selling often argue that it can exacerbate market downturns, create undue pressure on companies, and allow some traders to profit at the expense of others' losses. * Proponents argue that short sellers can add liquidity, reveal stocks that are priced higher than their actual worth, and help bring their prices closer to their true value. ## The Positive Impact of Short Selling While short selling is sometimes portrayed as a negative force in markets, it can strengthen markets and benefit investors in several key ways. Specifically, short selling facilitates efficient [price discovery](https://www.investopedia.com/terms/p/pricediscovery.asp), improves liquidity, and promotes healthy skepticism among investors. ### Facilitates price discovery One of the main benefits of short selling is more efficient price discovery—the process by which the market determines the price of an asset based on [supply and demand](https://www.investopedia.com/ask/answers/033115/how-does-law-supply-and-demand-affect-prices.asp) dynamics. When short sellers identify securities they view as overvalued, they sell those assets and put downward pressure on prices. This incorporates negative information and more realistic valuations into asset prices. By betting against irrational hype or [bubbles](https://www.investopedia.com/financial-edge/0911/what-causes-bubbles.aspx), short sellers can prevent unjustified price spikes and bring the market back to reasonable value levels. In this way, their trading activity acts as a counterweight to overly optimistic investors and overpricing. ### Improves liquidity Short selling also enhances [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) in the markets. When short sellers sell borrowed shares, the supply of shares available for trading increases. This added volume makes it easier for buyers and sellers to execute trades in the market. Stocks and other assets with high [short interest](https://www.investopedia.com/terms/s/shortinterest.asp) tend to have tighter [bid-ask spreads](https://www.investopedia.com/terms/b/bid-askspread.asp) and lower transaction costs. The increased trading activity makes markets more efficient and integrated. Short selling also helps create unified pricing for related assets by facilitating arbitrage across markets. ### Promotes investor skepticism Short selling also promotes investor skepticism and critical thinking. Short sellers have a vested interest in rooting out negative information and exposing corporate malfeasance. This motivates more thorough investment analysis over the practice of passively buying hyped stocks. When investors can directly profit from identifying overvalued assets, it incentivizes healthy scrutiny of companies and avoidance of irrational exuberance. The scrutiny that comes with short selling can expose [red flags](https://www.investopedia.com/terms/r/redflag.asp) like accounting irregularities and fraudulent activities within companies, acting as an additional layer of market oversight. Acting as watchdogs, short sellers check corporate misconduct and poor management. ### Short selling as a common practice has been around since at least the time when stock markets emerged in the Netherlands during the 1600s. ## The Negative Impact of Short Selling Although short selling can improve [market efficiency](https://www.investopedia.com/terms/m/marketefficiency.asp), critics point to several ways it may negatively impact markets and companies. Specifically, short selling may exacerbate stock declines, enable manipulative [bear raids](https://www.investopedia.com/terms/b/bearraid.asp), and cause temporary artificial inflation in shares. ### Can accelerate declines and increase volatility Excessive short selling activity can potentially accelerate market declines and downturns. When stocks are already falling, a surge in short selling can create selling pressure that drives prices even lower. This extra downward momentum can turn otherwise ordinary declines into full-fledged crashes. Heavy short interest increases volatility as short sellers must cover their positions by buying back shares. Critics argue this added volatility undermines investor confidence and stability in the markets. ### Can lead to "short attacks" Short sellers are sometimes accused of coordinating bear raids to deliberately sabotage stocks. This involves spreading negative information and ganging up to short the stock with the goal of spooking other investors to sell. The fear is short sellers can essentially engineer a self-fulfilling prophecy and profit from the artificial decline they created. When short attacks cause viable companies to fail, it harms employees, shareholders, and the economy. ### Can lead to "failures to deliver" Another issue arises when short sellers fail to actually borrow shares before selling them—an illegal practice called [naked short selling](https://www.investopedia.com/terms/n/nakedshorting.asp). This can result in a [failure to deliver](https://www.investopedia.com/terms/f/failuretodeliver.asp) (FTD), where short sellers cannot locate enough borrowable shares. The resulting "failures to deliver" lead to temporary artificial inflation in shares that should not exist. Critics argue this distortion enables market manipulation and improperly distorts true supply and demand. ### Profits from others' losses A philosophical objection to short selling is that it allows investors to profit directly from other investors' losses. When short sellers bet against a company's success, they profit if the stock declines, even if fundamentals do not justify it. This ability to gain from price declines often bothers critics who view markets as meant to allocate capital efficiently rather than facilitate speculative attacks for private gain at the expense of businesses. They argue short selling incentivizes predatory practices that hurt companies, employees, and investors for self-interest. ## Example of Short Selling in the Market A prominent example of short selling that improved market efficiency occurred during the [dot-com bubble](https://www.investopedia.com/terms/d/dotcom-bubble.asp) in the late 1990s. As technology and internet stocks became wildly overvalued amid hype about a new economy, short sellers identified the bubble. They bet against dot-com companies they saw as having poor fundamentals. Short sellers focused on dot-com stocks with shaky business models and minimal revenues that could not justify their sky-high valuations. For example, technology stocks like Pets.com, GeoCities, and eToys.com had low revenues but market caps in the billions of dollars. When the bubble inevitably popped, the short sellers' skepticism was validated. Many internet companies collapsed as the mania ended, vindicating the short positions. By profiting from identifying overvalued stocks, short sellers helped prevent the misallocation of even more capital to fundamentally worthless businesses. Their contrarian position to the dot-com frenzy brought prices back in line with reality. ## Research on the Effects of Short Selling Several academic studies and real-world experiments have shown that short sales tend to improve market efficiency overall. A 2012 study by Charles Jones, a former Columbia Business School professor, analyzed short-sale restrictions imposed on stock markets following the 1929 crash. He found that [shorting bans](https://www.investopedia.com/articles/stocks/09/short-selling-ban.asp) introduced in the 1930s actually reduced market liquidity and increased volatility. This finding was repeated more recently. In 2008, the SEC banned short sales on certain financial stocks to prevent manipulation and avoid worsening the market crash. However, a 2013 article published in the Review of Financial Studies found this actually increased volatility and worsened market quality for those stocks. Another recent paper provides a systematic review of several studies on the determinants of short selling and the implications for information distribution, real economic decisions, financial reporting, and external auditing. The paper highlights that short sellers act as important information intermediaries and influence various corporate decisions as a result. While some studies dispute these findings or suggest that further context is important, the predominant research indicates that short selling improves price discovery and market quality on average. This empirical evidence helps support the value of allowing short selling to take place with appropriate safeguards against manipulation. ## Is Short Selling Legal? Yes, short selling is legal in the U.S., and anyone with a margin account can engage in shorting stocks. The practice of short selling was one of the central issues studied by Congress before enacting the [Securities and Exchange Act in 1934](https://www.investopedia.com/terms/s/seact1934.asp), but Congress made no judgments about its [permissibility at the time](https://www.investopedia.com/articles/investing/110614/why-short-selling-legal-brief-history.asp). Instead, Congress gave the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) broad authority to regulate short sales to prevent abusive practices. During times of market crisis, when stock prices are falling rapidly, regulators have stepped in to either limit or prohibit the use of short selling temporarily until order is restored. However, naked short selling remains illegal and constitutes a form of securities fraud. When short selling, a trader needs to first locate and borrow a stock that has been determined to exist and can be borrowed. ## How Does Short Selling Work in Practice? In a short-sale transaction, traders borrow shares from a brokerage firm in their [margin account](https://www.investopedia.com/terms/m/marginaccount.asp) and agree to return equivalent shares in the future. The short seller immediately sells the borrowed shares at the current market price. If the price drops, they buy back shares at the lower price to return to the lender, keeping the price difference as profit. ## What Are the Risks of Short Selling? The main risk is that instead of declining, the stock price rises significantly, forcing the short seller to buy the stock back at a higher price and take a loss. Losses can be unlimited if the stock keeps rising before the short position is closed. ## What Is a Short Squeeze? A short squeeze occurs when the price of a heavily shorted stock rises, causing short sellers to scramble to buy back shares in an effort to cover their losses. That scramble to buy back the stock causes the price to quickly rise even higher, increasing losses for short sellers. ## The Bottom Line When exercised responsibly, short selling can actually enhance pricing and improve market efficiency by incorporating negative and contrarian views. Empirical research demonstrates this and also shows how short selling bans have backfired. However, when taken to an extreme, shorting can potentially be abused to unfairly target and sabotage companies. Appropriate restrictions that allow short selling while curbing manipulation appear optimal for maintaining functional markets.

Short selling has long been a controversial practice. It involves selling borrowed shares in the hopes of repurchasing them later at a lower price and profiting from the decline. Critics argue short selling destabilizes markets, enables manipulative bear raids, and should be strictly limited. However, proponents argue that short selling improves market efficiency and price discovery by factoring negative information or sentiment into asset values. They contend that short selling ultimately creates more stable markets through increased liquidity and healthy skepticism.So what are the merits of these two opposing perspectives on short selling? Does shorting stocks really create an unproductive downward bias, or is it a valuable mechanism for discovering fair asset prices? The debate has significant implications since restrictions on short selling affect market quality and returns for all investors. This article will examine arguments on both sides, look at real-world examples, and review what the research says about the impacts of short selling. Key Takeaways Short selling, an oft-misunderstood practice, often plays a vital role in market strengthening.Unlike the traditional investing strategy of buying low and selling high, short selling allows investors to sell securities they do not own, with the intention of buying them back later at a lower price.Critics of short selling often argue that it can exacerbate market downturns, create undue pressure on companies, and allow some traders to profit at the expense of others' losses.Proponents argue that short sellers can add liquidity, reveal stocks that are priced higher than their actual worth, and help bring their prices closer to their true value. The Positive Impact of Short Selling While short selling is sometimes portrayed as a negative force in markets, it can strengthen markets and benefit investors in several key ways. Specifically, short selling facilitates efficient price discovery, improves liquidity, and promotes healthy skepticism among investors. Facilitates price discovery One of the main benefits of short selling is more efficient price discovery—the process by which the market determines the price of an asset based on supply and demand dynamics. When short sellers identify securities they view as overvalued, they sell those assets and put downward pressure on prices. This incorporates negative information and more realistic valuations into asset prices. By betting against irrational hype or bubbles, short sellers can prevent unjustified price spikes and bring the market back to reasonable value levels. In this way, their trading activity acts as a counterweight to overly optimistic investors and overpricing. Improves liquidity Short selling also enhances liquidity in the markets. When short sellers sell borrowed shares, the supply of shares available for trading increases. This added volume makes it easier for buyers and sellers to execute trades in the market. Stocks and other assets with high short interest tend to have tighter bid-ask spreads and lower transaction costs. The increased trading activity makes markets more efficient and integrated. Short selling also helps create unified pricing for related assets by facilitating arbitrage across markets. Promotes investor skepticism Short selling also promotes investor skepticism and critical thinking. Short sellers have a vested interest in rooting out negative information and exposing corporate malfeasance. This motivates more thorough investment analysis over the practice of passively buying hyped stocks. When investors can directly profit from identifying overvalued assets, it incentivizes healthy scrutiny of companies and avoidance of irrational exuberance. The scrutiny that comes with short selling can expose red flags like accounting irregularities and fraudulent activities within companies, acting as an additional layer of market oversight. Acting as watchdogs, short sellers check corporate misconduct and poor management. Short selling as a common practice has been around since at least the time when stock markets emerged in the Netherlands during the 1600s. The Negative Impact of Short Selling Although short selling can improve market efficiency, critics point to several ways it may negatively impact markets and companies. Specifically, short selling may exacerbate stock declines, enable manipulative bear raids, and cause temporary artificial inflation in shares. Can accelerate declines and increase volatility Excessive short selling activity can potentially accelerate market declines and downturns. When stocks are already falling, a surge in short selling can create selling pressure that drives prices even lower. This extra downward momentum can turn otherwise ordinary declines into full-fledged crashes. Heavy short interest increases volatility as short sellers must cover their positions by buying back shares. Critics argue this added volatility undermines investor confidence and stability in the markets. Can lead to "short attacks" Short sellers are sometimes accused of coordinating bear raids to deliberately sabotage stocks. This involves spreading negative information and ganging up to short the stock with the goal of spooking other investors to sell. The fear is short sellers can essentially engineer a self-fulfilling prophecy and profit from the artificial decline they created. When short attacks cause viable companies to fail, it harms employees, shareholders, and the economy. Can lead to "failures to deliver" Another issue arises when short sellers fail to actually borrow shares before selling them—an illegal practice called naked short selling. This can result in a failure to deliver (FTD), where short sellers cannot locate enough borrowable shares. The resulting "failures to deliver" lead to temporary artificial inflation in shares that should not exist. Critics argue this distortion enables market manipulation and improperly distorts true supply and demand. Profits from others' losses A philosophical objection to short selling is that it allows investors to profit directly from other investors' losses. When short sellers bet against a company's success, they profit if the stock declines, even if fundamentals do not justify it. This ability to gain from price declines often bothers critics who view markets as meant to allocate capital efficiently rather than facilitate speculative attacks for private gain at the expense of businesses. They argue short selling incentivizes predatory practices that hurt companies, employees, and investors for self-interest. Example of Short Selling in the Market A prominent example of short selling that improved market efficiency occurred during the dot-com bubble in the late 1990s. As technology and internet stocks became wildly overvalued amid hype about a new economy, short sellers identified the bubble. They bet against dot-com companies they saw as having poor fundamentals. Short sellers focused on dot-com stocks with shaky business models and minimal revenues that could not justify their sky-high valuations. For example, technology stocks like Pets.com, GeoCities, and eToys.com had low revenues but market caps in the billions of dollars. When the bubble inevitably popped, the short sellers' skepticism was validated. Many internet companies collapsed as the mania ended, vindicating the short positions. By profiting from identifying overvalued stocks, short sellers helped prevent the misallocation of even more capital to fundamentally worthless businesses. Their contrarian position to the dot-com frenzy brought prices back in line with reality. Research on the Effects of Short Selling Several academic studies and real-world experiments have shown that short sales tend to improve market efficiency overall. A 2012 study by Charles Jones, a former Columbia Business School professor, analyzed short-sale restrictions imposed on stock markets following the 1929 crash. He found that shorting bans introduced in the 1930s actually reduced market liquidity and increased volatility. This finding was repeated more recently. In 2008, the SEC banned short sales on certain financial stocks to prevent manipulation and avoid worsening the market crash. However, a 2013 article published in the Review of Financial Studies found this actually increased volatility and worsened market quality for those stocks. Another recent paper provides a systematic review of several studies on the determinants of short selling and the implications for information distribution, real economic decisions, financial reporting, and external auditing. The paper highlights that short sellers act as important information intermediaries and influence various corporate decisions as a result. While some studies dispute these findings or suggest that further context is important, the predominant research indicates that short selling improves price discovery and market quality on average. This empirical evidence helps support the value of allowing short selling to take place with appropriate safeguards against manipulation. Is Short Selling Legal? Yes, short selling is legal in the U.S., and anyone with a margin account can engage in shorting stocks. The practice of short selling was one of the central issues studied by Congress before enacting the Securities and Exchange Act in 1934, but Congress made no judgments about its permissibility at the time. Instead, Congress gave the Securities and Exchange Commission (SEC) broad authority to regulate short sales to prevent abusive practices. During times of market crisis, when stock prices are falling rapidly, regulators have stepped in to either limit or prohibit the use of short selling temporarily until order is restored. However, naked short selling remains illegal and constitutes a form of securities fraud. When short selling, a trader needs to first locate and borrow a stock that has been determined to exist and can be borrowed. How Does Short Selling Work in Practice? In a short-sale transaction, traders borrow shares from a brokerage firm in their margin account and agree to return equivalent shares in the future. The short seller immediately sells the borrowed shares at the current market price. If the price drops, they buy back shares at the lower price to return to the lender, keeping the price difference as profit. What Are the Risks of Short Selling? The main risk is that instead of declining, the stock price rises significantly, forcing the short seller to buy the stock back at a higher price and take a loss. Losses can be unlimited if the stock keeps rising before the short position is closed. What Is a Short Squeeze? A short squeeze occurs when the price of a heavily shorted stock rises, causing short sellers to scramble to buy back shares in an effort to cover their losses. That scramble to buy back the stock causes the price to quickly rise even higher, increasing losses for short sellers. The Bottom Line When exercised responsibly, short selling can actually enhance pricing and improve market efficiency by incorporating negative and contrarian views. Empirical research demonstrates this and also shows how short selling bans have backfired. However, when taken to an extreme, shorting can potentially be abused to unfairly target and sabotage companies. Appropriate restrictions that allow short selling while curbing manipulation appear optimal for maintaining functional markets.

https://www.investopedia.com/gold-price-may-14-rate-climbs-as-fed-chair-powell-calls-for-patience-on-rate-cuts-8648316

Gold Price on May 14: Rate Climbs as Fed Chair Powell Calls for ‘Patience’ on Rate Cuts

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The spot price of gold rose Tuesday as a report showed wholesale inflation rose more than expected in April and Federal Reserve Chair Jerome Powell called for "patience" on interest rate cuts. </li><li>While the April Producer Price Index (PPI) was up more than economists had anticipated, the Labor Department revised its March PPI data to a decline from a gain.</li><li>Powell suggested at an event in Amsterdam that the Fed may have to keep interest rates higher for longer, but that more rate hikes likely won't be needed.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The price of spot gold was up 0.9% at $2,357.98 per ounce as of 5 p.m. ET Tuesday after a report showed wholesale inflation rose more than expected in April and Federal Reserve Chair Jerome Powell called for "patience" on interest rate cuts.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <span class="heading-toc" id="toc-wholesale-inflation-hotter-than-expected-in-april"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Wholesale Inflation Hotter Than Expected in April </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The Labor Department reported the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/ppi.asp">Producer Price Index (PPI)</a> measuring wholesale prices was up 0.5% in April, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wholesale-inflation-jump-raises-worries-over-upcoming-cpi-reading-8648227">more than economists had forecast</a>. The year-over-year PPI of 2.2% was in line with estimates.<span class="ql-inline-citation" data-cite="1"></span> Wholesale inflation is considered a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leadingindicator.asp">leading indicator</a> for consumer inflation, as increased costs for producers are often passed on to consumers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The Labor Department also revised downward March's data, which initially showed wholesale inflation gained 0.2% that month. Tuesday's report adjusted the figure to a 0.1% decline. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Wednesday, officials will be releasing the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumerpriceindex.asp">Consumer Price Index (CPI)</a>, which is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157">expected to be 3.4% higher</a> than in April 2023, compared to a 3.5% annual increase in March, according to forecasts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-fed-chair-powell-signals-against-more-rate-hikes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> Fed Chair Powell Signals Against More Rate Hikes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Federal Chair Powell Tuesday joined other Fed officials in saying that recent inflation figures have been <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">more elevated than anticipated</a>, pushing policymakers to keep interest rates higher for longer to tamp it down. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> However, in comments during a panel discussion at the Foreign Bankers' Association in Amsterdam, he suggested that more rate hikes likely won't be needed. Powell added that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-may-14-8648056#toc-2024-05-14t143527497z">time is needed</a> to let the Fed's previous monetary tightening to take full effect. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> “We'll need to be patient and let restrictive policy do its work,” Powell said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_19-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:75.8%;"> <img alt="XAUUSD" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/vykhdBaQFNmsg2c9ASil_IXZlKk=/1372x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-14_17-38-17-0876c8b540b8463db28d05679e39c682.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/-KMRz8RxGua2zUtbbzlmJo8IH4g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-14_17-38-17-0876c8b540b8463db28d05679e39c682.png" data-srcset="https://www.investopedia.com/thmb/LJTt_EHiB_G-_5Kxvq-XLPCQAUk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-14_17-38-17-0876c8b540b8463db28d05679e39c682.png 750w" data-tracking-container="true" height="1040" id="mntl-sc-block-image_1-0" width="1372"/> <noscript> <img alt="XAUUSD" class="img--noscript universal-image__image" height="1040" sizes="750px" src="https://www.investopedia.com/thmb/-KMRz8RxGua2zUtbbzlmJo8IH4g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-14_17-38-17-0876c8b540b8463db28d05679e39c682.png" srcset="https://www.investopedia.com/thmb/LJTt_EHiB_G-_5Kxvq-XLPCQAUk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-14_17-38-17-0876c8b540b8463db28d05679e39c682.png 750w" width="1372"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span> </figcaption></figure> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * The spot price of gold rose Tuesday as a report showed wholesale inflation rose more than expected in April and Federal Reserve Chair Jerome Powell called for "patience" on interest rate cuts. * While the April Producer Price Index (PPI) was up more than economists had anticipated, the Labor Department revised its March PPI data to a decline from a gain. * Powell suggested at an event in Amsterdam that the Fed may have to keep interest rates higher for longer, but that more rate hikes likely won't be needed. The price of spot gold was up 0.9% at $2,357.98 per ounce as of 5 p.m. ET Tuesday after a report showed wholesale inflation rose more than expected in April and Federal Reserve Chair Jerome Powell called for "patience" on interest rate cuts.  ## Wholesale Inflation Hotter Than Expected in April The Labor Department reported the [Producer Price Index (PPI)](https://www.investopedia.com/terms/p/ppi.asp) measuring wholesale prices was up 0.5% in April, [more than economists had forecast](https://www.investopedia.com/wholesale-inflation-jump-raises-worries-over-upcoming-cpi-reading-8648227). The year-over-year PPI of 2.2% was in line with estimates. Wholesale inflation is considered a [leading indicator](https://www.investopedia.com/terms/l/leadingindicator.asp) for consumer inflation, as increased costs for producers are often passed on to consumers. The Labor Department also revised downward March's data, which initially showed wholesale inflation gained 0.2% that month. Tuesday's report adjusted the figure to a 0.1% decline. Wednesday, officials will be releasing the [Consumer Price Index (CPI)](https://www.investopedia.com/terms/c/consumerpriceindex.asp), which is [expected to be 3.4% higher](https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157) than in April 2023, compared to a 3.5% annual increase in March, according to forecasts. ## Fed Chair Powell Signals Against More Rate Hikes Federal Chair Powell Tuesday joined other Fed officials in saying that recent inflation figures have been [more elevated than anticipated](https://www.investopedia.com/inflation-heated-up-in-march-8629363), pushing policymakers to keep interest rates higher for longer to tamp it down. However, in comments during a panel discussion at the Foreign Bankers' Association in Amsterdam, he suggested that more rate hikes likely won't be needed. Powell added that [time is needed](https://www.investopedia.com/us-economy-news-today-may-14-8648056#toc-2024-05-14t143527497z) to let the Fed's previous monetary tightening to take full effect. “We'll need to be patient and let restrictive policy do its work,” Powell said. ![XAUUSD]() :max_bytes(150000):strip_icc()/XAUUSD_2024-05-14_17-38-17-0876c8b540b8463db28d05679e39c682.png) TradingView Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways The spot price of gold rose Tuesday as a report showed wholesale inflation rose more than expected in April and Federal Reserve Chair Jerome Powell called for "patience" on interest rate cuts. While the April Producer Price Index (PPI) was up more than economists had anticipated, the Labor Department revised its March PPI data to a decline from a gain.Powell suggested at an event in Amsterdam that the Fed may have to keep interest rates higher for longer, but that more rate hikes likely won't be needed. The price of spot gold was up 0.9% at $2,357.98 per ounce as of 5 p.m. ET Tuesday after a report showed wholesale inflation rose more than expected in April and Federal Reserve Chair Jerome Powell called for "patience" on interest rate cuts.  Wholesale Inflation Hotter Than Expected in April The Labor Department reported the Producer Price Index (PPI) measuring wholesale prices was up 0.5% in April, more than economists had forecast. The year-over-year PPI of 2.2% was in line with estimates. Wholesale inflation is considered a leading indicator for consumer inflation, as increased costs for producers are often passed on to consumers. The Labor Department also revised downward March's data, which initially showed wholesale inflation gained 0.2% that month. Tuesday's report adjusted the figure to a 0.1% decline. Wednesday, officials will be releasing the Consumer Price Index (CPI), which is expected to be 3.4% higher than in April 2023, compared to a 3.5% annual increase in March, according to forecasts. Fed Chair Powell Signals Against More Rate Hikes Federal Chair Powell Tuesday joined other Fed officials in saying that recent inflation figures have been more elevated than anticipated, pushing policymakers to keep interest rates higher for longer to tamp it down. However, in comments during a panel discussion at the Foreign Bankers' Association in Amsterdam, he suggested that more rate hikes likely won't be needed. Powell added that time is needed to let the Fed's previous monetary tightening to take full effect. “We'll need to be patient and let restrictive policy do its work,” Powell said. TradingView Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/terms/q/quid.asp

What Is a Quid? History of the British Pound Sterling (GBP)

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-quid"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Quid? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> "Quid" is a slang expression for the British pound sterling, or the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gbp.asp">British pound (GBP)</a>, the currency of the United Kingdom (U.K.). A quid equals 100 pence, and the nickname may stem from the Latin phrase “quid pro quo,” which translates as "something for something." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>"Quid" is a slang expression for the British pound sterling, or the British pound (GBP), the currency of the United Kingdom (U.K.).</li><li>A quid equals 100 pence.</li><li>The use of the quid began in the late 17^th century.<span class="ql-inline-citation" data-cite="3"></span></li><li>The modern-day pound sterling is no longer comprised of silver.</li></ul></div></div></div> <span class="heading-toc" id="toc-origins-of-the-term-quid"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Origins of the Term Quid </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The term "quid" began sometime in the late 17^th century, but the link with the British currency is unclear.<span class="ql-inline-citation" data-cite="3"></span> Some scholars believe that Italian immigrants extracted the term from "scudo," the name for gold and silver coins of various denominations used in Italy from the 16^th century through the 19^th century. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The word origin may trace back to Quidhampton, a village in Wiltshire, England, once home to a Royal Mint paper mill. Any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/paper_money.asp">paper money</a> made in this mill might have been called a quid. The pound sterling has a rich history of more than 12 centuries as the world's oldest currency still in use. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_11-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_12-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The modern pound sterling, whether in coins or bills, contains no silver but retains the word often associated with silver, "sterling."</p></div></div></div> <span class="heading-toc" id="toc-history-of-the-british-pound-sterling"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> History of the British Pound Sterling </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Historians trace the pound sterling back to 775 A.D., when Anglo-Saxon kings used silver pennies, called sterlings, as currency. A collection of 240 equaled 1 pound of sterlings, hence the name "pound sterling.” In Latin, Libra means " weight," and Libra Pondo translates to pound weight, which is why the British pound bears a fancy "L" or £ symbol.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The use of a single-pound coin, or sovereign, began in 1489 under King Henry VII.<span class="ql-inline-citation" data-cite="7"></span> In addition to the United Kingdom, the British pound has served as currency in many colonies of the British Empire, including Australia, New Zealand, and Canada. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The U.K. is made up of England, Northern Ireland, Scotland, and Wales.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Two hundred forty pence in one pound sterling remained the standard for nearly 1,200 years until 1971 when the British Parliament instituted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/decimalization.asp">decimalization</a> to make 100 pence equal to one pound sterling.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-timeline-of-uk-banknotes-and-coins"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Timeline of U.K. Banknotes and Coins </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <li>In 1504: Shillings were minted with 12 pence in 1 shilling and 20 shillings in one pound</li> <li>In 1560: Gold coin minting began</li> <li>In 1694: English banknotes were created during the rule of King William III after he started the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boe.asp">Bank of England</a>. The main bill in use during that time was a 10-pound note. However, a lengthy period of severe <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> or rising prices forced the monarchy to issue five-pound notes.</li> <li>In 1717: the term "pound sterling" became obsolete when Europe moved from a silver standard to a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goldstandard.asp">gold standard</a>.<span class="ql-inline-citation" data-cite="11"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> From 775 to 1971, British coins were made into many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/denomination.asp">denominations</a> no longer circulating, including pennies, halfpennies, farthings, half-crowns, and double-florins. In 2023, the U.K.. has eight coins and four notes circulating:<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li>Penny in denominations of 1</li><li>Pence in denominations of 2, 5, 10, 20, and 50</li><li>£ coin in denominations of 1 and 2</li><li>£ note in denominations of 5, 10, 20, and 50</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-are-common-slang-terms-for-the-british-pound"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Common Slang Terms for the British Pound?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quid is the common slang term for the British pound, and the word is almost never pluralized. Other terms that refer to a pound include Smacker, Fiver for the £5 note, Tenner for the £10 note, and Dosh.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-how-many-pounds-is-a-quid"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Pounds Is a Quid?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A quid equals £1, or one pound sterling.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-what-is-a-quid-vs-a-pound"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Quid vs. a Pound?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quid is a slang term for the pound sterling issued by the United Kingdom. The pound is the name of the currency issued by the U.K., like the "dollar" is for the currency issued by the United States.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The British pound sterling (GBP) is the oldest currency used today. It is often referred to by its nickname, quid. A quid equals £1, or one pound sterling. </p></div>

## What Is a Quid? "Quid" is a slang expression for the British pound sterling, or the [British pound (GBP)](https://www.investopedia.com/terms/g/gbp.asp), the currency of the United Kingdom (U.K.). A quid equals 100 pence, and the nickname may stem from the Latin phrase “quid pro quo,” which translates as "something for something." ### Key Takeaways * "Quid" is a slang expression for the British pound sterling, or the British pound (GBP), the currency of the United Kingdom (U.K.). * A quid equals 100 pence. * The use of the quid began in the late 17th century. * The modern-day pound sterling is no longer comprised of silver. ## Origins of the Term Quid The term "quid" began sometime in the late 17th century, but the link with the British currency is unclear. Some scholars believe that Italian immigrants extracted the term from "scudo," the name for gold and silver coins of various denominations used in Italy from the 16th century through the 19th century. The word origin may trace back to Quidhampton, a village in Wiltshire, England, once home to a Royal Mint paper mill. Any [paper money](https://www.investopedia.com/terms/p/paper_money.asp) made in this mill might have been called a quid. The pound sterling has a rich history of more than 12 centuries as the world's oldest currency still in use. ### The modern pound sterling, whether in coins or bills, contains no silver but retains the word often associated with silver, "sterling." ## History of the British Pound Sterling Historians trace the pound sterling back to 775 A.D., when Anglo-Saxon kings used silver pennies, called sterlings, as currency. A collection of 240 equaled 1 pound of sterlings, hence the name "pound sterling.” In Latin, Libra means " weight," and Libra Pondo translates to pound weight, which is why the British pound bears a fancy "L" or £ symbol. The use of a single-pound coin, or sovereign, began in 1489 under King Henry VII. In addition to the United Kingdom, the British pound has served as currency in many colonies of the British Empire, including Australia, New Zealand, and Canada. ### The U.K. is made up of England, Northern Ireland, Scotland, and Wales. Two hundred forty pence in one pound sterling remained the standard for nearly 1,200 years until 1971 when the British Parliament instituted [decimalization](https://www.investopedia.com/terms/d/decimalization.asp) to make 100 pence equal to one pound sterling. ## Timeline of U.K. Banknotes and Coins * In 1504: Shillings were minted with 12 pence in 1 shilling and 20 shillings in one pound * In 1560: Gold coin minting began * In 1694: English banknotes were created during the rule of King William III after he started the [Bank of England](https://www.investopedia.com/terms/b/boe.asp). The main bill in use during that time was a 10-pound note. However, a lengthy period of severe [inflation](https://www.investopedia.com/terms/i/inflation.asp) or rising prices forced the monarchy to issue five-pound notes. * In 1717: the term "pound sterling" became obsolete when Europe moved from a silver standard to a [gold standard](https://www.investopedia.com/terms/g/goldstandard.asp). From 775 to 1971, British coins were made into many [denominations](https://www.investopedia.com/terms/d/denomination.asp) no longer circulating, including pennies, halfpennies, farthings, half-crowns, and double-florins. In 2023, the U.K.. has eight coins and four notes circulating: * Penny in denominations of 1 * Pence in denominations of 2, 5, 10, 20, and 50 * £ coin in denominations of 1 and 2 * £ note in denominations of 5, 10, 20, and 50 ## What Are Common Slang Terms for the British Pound? Quid is the common slang term for the British pound, and the word is almost never pluralized. Other terms that refer to a pound include Smacker, Fiver for the £5 note, Tenner for the £10 note, and Dosh. ## How Many Pounds Is a Quid? A quid equals £1, or one pound sterling. ## What Is a Quid vs. a Pound? Quid is a slang term for the pound sterling issued by the United Kingdom. The pound is the name of the currency issued by the U.K., like the "dollar" is for the currency issued by the United States. ## The Bottom Line The British pound sterling (GBP) is the oldest currency used today. It is often referred to by its nickname, quid. A quid equals £1, or one pound sterling.

What Is a Quid? "Quid" is a slang expression for the British pound sterling, or the British pound (GBP), the currency of the United Kingdom (U.K.). A quid equals 100 pence, and the nickname may stem from the Latin phrase “quid pro quo,” which translates as "something for something." Key Takeaways "Quid" is a slang expression for the British pound sterling, or the British pound (GBP), the currency of the United Kingdom (U.K.).A quid equals 100 pence.The use of the quid began in the late 17th century.The modern-day pound sterling is no longer comprised of silver. Origins of the Term Quid The term "quid" began sometime in the late 17th century, but the link with the British currency is unclear. Some scholars believe that Italian immigrants extracted the term from "scudo," the name for gold and silver coins of various denominations used in Italy from the 16th century through the 19th century. The word origin may trace back to Quidhampton, a village in Wiltshire, England, once home to a Royal Mint paper mill. Any paper money made in this mill might have been called a quid. The pound sterling has a rich history of more than 12 centuries as the world's oldest currency still in use. The modern pound sterling, whether in coins or bills, contains no silver but retains the word often associated with silver, "sterling." History of the British Pound Sterling Historians trace the pound sterling back to 775 A.D., when Anglo-Saxon kings used silver pennies, called sterlings, as currency. A collection of 240 equaled 1 pound of sterlings, hence the name "pound sterling.” In Latin, Libra means " weight," and Libra Pondo translates to pound weight, which is why the British pound bears a fancy "L" or £ symbol. The use of a single-pound coin, or sovereign, began in 1489 under King Henry VII. In addition to the United Kingdom, the British pound has served as currency in many colonies of the British Empire, including Australia, New Zealand, and Canada. The U.K. is made up of England, Northern Ireland, Scotland, and Wales. Two hundred forty pence in one pound sterling remained the standard for nearly 1,200 years until 1971 when the British Parliament instituted decimalization to make 100 pence equal to one pound sterling. Timeline of U.K. Banknotes and Coins In 1504: Shillings were minted with 12 pence in 1 shilling and 20 shillings in one pound In 1560: Gold coin minting began In 1694: English banknotes were created during the rule of King William III after he started the Bank of England. The main bill in use during that time was a 10-pound note. However, a lengthy period of severe inflation or rising prices forced the monarchy to issue five-pound notes. In 1717: the term "pound sterling" became obsolete when Europe moved from a silver standard to a gold standard. From 775 to 1971, British coins were made into many denominations no longer circulating, including pennies, halfpennies, farthings, half-crowns, and double-florins. In 2023, the U.K.. has eight coins and four notes circulating: Penny in denominations of 1Pence in denominations of 2, 5, 10, 20, and 50£ coin in denominations of 1 and 2£ note in denominations of 5, 10, 20, and 50 What Are Common Slang Terms for the British Pound? Quid is the common slang term for the British pound, and the word is almost never pluralized. Other terms that refer to a pound include Smacker, Fiver for the £5 note, Tenner for the £10 note, and Dosh. How Many Pounds Is a Quid? A quid equals £1, or one pound sterling. What Is a Quid vs. a Pound? Quid is a slang term for the pound sterling issued by the United Kingdom. The pound is the name of the currency issued by the U.K., like the "dollar" is for the currency issued by the United States. The Bottom Line The British pound sterling (GBP) is the oldest currency used today. It is often referred to by its nickname, quid. A quid equals £1, or one pound sterling.

https://www.investopedia.com/terms/o/origination.asp

Origination: Definition in Finance, Loan Process, and Requirements

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-origination"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Origination? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Origination is the multi-step process that every individual must go through to obtain a mortgage or home loan. The term also applies to other types of amortized personal loans. Origination is often a lengthy process that is overseen by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a> for compliance with Title XIV of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span> A loan origination fee, usually about 1% of the loan, is intended to compensate the lender for the work involved in the process. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways </h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The origination process often involves a number of steps and is overseen by the FDIC.<span class="ql-inline-citation" data-cite="2"></span></li><li>Pre-qualification is the first step of the origination process and is when a loan officer obtains all basic data and information relating to income and the property in question.</li><li>All paperwork and documentation are then run through an automatic underwriting program for loan approval.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-origination-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How Origination Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Loans help consumers and businesses meet their financial goals and obligations. They can be used to make large purchases, pay off debt, make investments, or buy properties like homes. In order to be approved, the borrower must apply for financing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Borrowers must submit various types of financial information and documentation to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstitution.asp">financial institution</a> or other lender during the origination process. Some of the most common types of information and documents required include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <li>Tax returns</li> <li>Payment history</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">Credit card</a> information</li> <li>Bank statements and balances</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Lenders then use this information to determine the type of loan and the interest rate for which the borrower is eligible. Lenders also rely on other information, especially the borrower’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a>, to determine loan eligibility. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> It isn't uncommon for lenders in the U.S. to charge <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination-fee.asp">origination fees</a>. These are upfront charges that borrowers are required to pay the lender as compensation for the application, underwriting, and approval process. Normally ranging between 0.5% to 1% of the loan value, the origination fee can be deducted from or added to the loan balance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Origination includes pre-qualification of the borrower, as well as underwriting, and lenders typically charge an origination fee to cover the associated costs.</p></div></div></div> <span class="heading-toc" id="toc-origination-steps-and-requirements"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Origination Steps and Requirements </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prequalification.asp">Pre-qualification</a> is the first step of the process. The loan officer meets with the borrower and obtains all basic data and information relating to income and the property that the loan is intended to cover. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> At this point, the lender determines the type of loan for which the individual qualifies, such as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">personal loan</a>. Fixed-rate loans have a continuous interest rate for the entire life of the loan, while <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arm.asp">adjustable-rate mortgages (ARMs)</a> have an interest rate that fluctuates in relation to an index or a bond price, such as Treasury securities. Hybrid loans feature interest-rate aspects of both fixed and adjustable loans. They most often begin with a fixed rate and eventually convert to an ARM. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The borrower receives a list of information needed to complete the loan application during this stage. This extensive required documentation typically includes the purchase and sale contract, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/w2form.asp">W-2 forms</a>, profit-and-loss statements from those who are self-employed, and bank statements. It will also include mortgage statements if the loan is to refinance an existing mortgage. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The borrower fills out an application for the loan and submits all necessary documentation. The loan officer then completes the legally required paperwork to process the loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_29-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Borrowers only pay origination fees if the loan is approved.</p></div></div></div> <span class="heading-toc" id="toc-origination-to-approval"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> Origination to Approval </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Once the application is complete and the documentation submitted, the process is now out of the borrower’s hands. All paperwork submitted and signed until this point is filed and run through an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/automated_underwriting.asp">automatic underwriting</a> program to be approved. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Some files might be sent to an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriter.asp">underwriter</a> for manual approval. The loan officer then gets the appraisal, requests insurance information, schedules a closing, and sends the loan file to the processor. The processor may request additional information, if necessary, for reviewing the loan approval. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Some mortgage borrowers might be eligible for government-backed loans, such as those insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal-housing-administration.asp">Federal Housing Administration (FHA)</a> or the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/us-department-veterans-affairs.asp">U.S. Department of Veteran Affairs (VA)</a>. These loans are considered non-conventional and are structured in a way that makes it easier for eligible individuals to purchase homes. They often feature lower qualifying ratios and a smaller or no down payment, and the origination process can be somewhat easier as a result.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <span class="heading-toc" id="toc-example-of-origination"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-heading__text"> Example of Origination </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Let's say a consumer wants to purchase their first home. They put in an offer on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/property.asp">property</a> and the seller accepts. The two parties sign a contract and agree to a purchase price of $200,000. The buyer has a total of $50,000 saved up, which means they need to borrow $150,000 to cover the remaining balance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The buyer goes to their bank, ABC Bank, to see if they <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prequalification.asp">pre-qualify</a>. When they do, ABC Bank asks them to submit a formal application and furnish supporting documents, including their proof of income, tax returns, bank statements, and approval for a credit check. The application and documents are sent to the underwriting department of ABC Bank to assess whether the borrower is a suitable candidate for the mortgage. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> After four weeks, the bank approves the loan, contacts the borrower, and arranges a time to sign the paperwork. The borrower is notified of the interest rate and loan terms and also agrees to pay the loan origination fee of 1% or $1,500. This can either be deducted from the loan balance (resulting in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/disbursement.asp">disbursement</a> of $148,500), pay it upfront, or have the seller pay it for them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-how-does-a-loan-origination-work"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a Loan Origination Work?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Loan origination is the process lenders use to assess and approve borrower applications for various forms of debt. These include loans and mortgages. Originations go from the initial application for credit through underwriting and the approval process. In order for the process to work, borrowers need to submit an application and additional documentation, such as tax returns and pay stubs. Lenders normally charge a fee, which is a small percentage of the balance, to compensate them for the work involved in reviewing and approving the application.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-do-i-have-to-pay-an-origination-fee"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Have to Pay an Origination Fee?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Most banks, financial institutions, and lenders charge an origination fee for any type of loan as a form of compensation for the loan process. This includes personal loans, debt consolidation loans, mortgages, home equity loans, and others. Fees generally range from 0.5% to 1% of the loan balance, so if you're asking for a $100,000 loan, a 1% fee will be $1,000. Some lenders may be willing to negotiate the fee, which can be deducted from the loan disbursement or paid upfront. Keep in mind that you only pay the fee if you're approved.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-do-you-need-to-go-through-the-origination-process-for-a-credit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do You Need to Go Through the Origination Process for a Credit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The application and approval process for a credit card isn't as thorough as it is for a loan. In most cases, the origination of a credit card involves filling out an application and getting a credit check done, and you may be approved in a matter of a few days to a few weeks. Lenders don't charge an origination fee for credit cards but they may require a security deposit for anyone who is just establishing their credit or who has a bad credit rating.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> It's a good idea to understand how the loan process works before you apply, whether it's for a personal loan or a mortgage. In the U.S., it's generally called origination. This process sees borrowers go through pre-qualification, application, underwriting, and approval before any loan funds are disbursed. Keep in mind that many lenders charge an origination fee, which is usually a small percentage of the loan value. </p></div>

## What Is Origination? Origination is the multi-step process that every individual must go through to obtain a mortgage or home loan. The term also applies to other types of amortized personal loans. Origination is often a lengthy process that is overseen by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) for compliance with Title XIV of the [Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp). A loan origination fee, usually about 1% of the loan, is intended to compensate the lender for the work involved in the process. ### Key Takeaways * The origination process often involves a number of steps and is overseen by the FDIC. * Pre-qualification is the first step of the origination process and is when a loan officer obtains all basic data and information relating to income and the property in question. * All paperwork and documentation are then run through an automatic underwriting program for loan approval. ## How Origination Works Loans help consumers and businesses meet their financial goals and obligations. They can be used to make large purchases, pay off debt, make investments, or buy properties like homes. In order to be approved, the borrower must apply for financing. Borrowers must submit various types of financial information and documentation to the [financial institution](https://www.investopedia.com/terms/f/financialinstitution.asp) or other lender during the origination process. Some of the most common types of information and documents required include: * Tax returns * Payment history * [Credit card](https://www.investopedia.com/terms/c/creditcard.asp) information * Bank statements and balances Lenders then use this information to determine the type of loan and the interest rate for which the borrower is eligible. Lenders also rely on other information, especially the borrower’s [credit report](https://www.investopedia.com/terms/c/creditreport.asp), to determine loan eligibility. It isn't uncommon for lenders in the U.S. to charge [origination fees](https://www.investopedia.com/terms/o/origination-fee.asp). These are upfront charges that borrowers are required to pay the lender as compensation for the application, underwriting, and approval process. Normally ranging between 0.5% to 1% of the loan value, the origination fee can be deducted from or added to the loan balance. ### Origination includes pre-qualification of the borrower, as well as underwriting, and lenders typically charge an origination fee to cover the associated costs. ## Origination Steps and Requirements [Pre-qualification](https://www.investopedia.com/terms/p/prequalification.asp) is the first step of the process. The loan officer meets with the borrower and obtains all basic data and information relating to income and the property that the loan is intended to cover. At this point, the lender determines the type of loan for which the individual qualifies, such as a [personal loan](https://www.investopedia.com/best-personal-loans-4773300). Fixed-rate loans have a continuous interest rate for the entire life of the loan, while [adjustable-rate mortgages (ARMs)](https://www.investopedia.com/terms/a/arm.asp) have an interest rate that fluctuates in relation to an index or a bond price, such as Treasury securities. Hybrid loans feature interest-rate aspects of both fixed and adjustable loans. They most often begin with a fixed rate and eventually convert to an ARM. The borrower receives a list of information needed to complete the loan application during this stage. This extensive required documentation typically includes the purchase and sale contract, [W-2 forms](https://www.investopedia.com/terms/w/w2form.asp), profit-and-loss statements from those who are self-employed, and bank statements. It will also include mortgage statements if the loan is to refinance an existing mortgage. The borrower fills out an application for the loan and submits all necessary documentation. The loan officer then completes the legally required paperwork to process the loan. ### Borrowers only pay origination fees if the loan is approved. ## Origination to Approval Once the application is complete and the documentation submitted, the process is now out of the borrower’s hands. All paperwork submitted and signed until this point is filed and run through an [automatic underwriting](https://www.investopedia.com/terms/a/automated_underwriting.asp) program to be approved. Some files might be sent to an [underwriter](https://www.investopedia.com/terms/u/underwriter.asp) for manual approval. The loan officer then gets the appraisal, requests insurance information, schedules a closing, and sends the loan file to the processor. The processor may request additional information, if necessary, for reviewing the loan approval. Some mortgage borrowers might be eligible for government-backed loans, such as those insured by the [Federal Housing Administration (FHA)](https://www.investopedia.com/terms/f/federal-housing-administration.asp) or the [U.S. Department of Veteran Affairs (VA)](https://www.investopedia.com/terms/u/us-department-veterans-affairs.asp). These loans are considered non-conventional and are structured in a way that makes it easier for eligible individuals to purchase homes. They often feature lower qualifying ratios and a smaller or no down payment, and the origination process can be somewhat easier as a result. ## Example of Origination Let's say a consumer wants to purchase their first home. They put in an offer on a [property](https://www.investopedia.com/terms/p/property.asp) and the seller accepts. The two parties sign a contract and agree to a purchase price of $200,000. The buyer has a total of $50,000 saved up, which means they need to borrow $150,000 to cover the remaining balance. The buyer goes to their bank, ABC Bank, to see if they [pre-qualify](https://www.investopedia.com/terms/p/prequalification.asp). When they do, ABC Bank asks them to submit a formal application and furnish supporting documents, including their proof of income, tax returns, bank statements, and approval for a credit check. The application and documents are sent to the underwriting department of ABC Bank to assess whether the borrower is a suitable candidate for the mortgage. After four weeks, the bank approves the loan, contacts the borrower, and arranges a time to sign the paperwork. The borrower is notified of the interest rate and loan terms and also agrees to pay the loan origination fee of 1% or $1,500. This can either be deducted from the loan balance (resulting in the [disbursement](https://www.investopedia.com/terms/d/disbursement.asp) of $148,500), pay it upfront, or have the seller pay it for them. ## How Does a Loan Origination Work? Loan origination is the process lenders use to assess and approve borrower applications for various forms of debt. These include loans and mortgages. Originations go from the initial application for credit through underwriting and the approval process. In order for the process to work, borrowers need to submit an application and additional documentation, such as tax returns and pay stubs. Lenders normally charge a fee, which is a small percentage of the balance, to compensate them for the work involved in reviewing and approving the application. ## Do I Have to Pay an Origination Fee? Most banks, financial institutions, and lenders charge an origination fee for any type of loan as a form of compensation for the loan process. This includes personal loans, debt consolidation loans, mortgages, home equity loans, and others. Fees generally range from 0.5% to 1% of the loan balance, so if you're asking for a $100,000 loan, a 1% fee will be $1,000. Some lenders may be willing to negotiate the fee, which can be deducted from the loan disbursement or paid upfront. Keep in mind that you only pay the fee if you're approved. ## Do You Need to Go Through the Origination Process for a Credit Card? The application and approval process for a credit card isn't as thorough as it is for a loan. In most cases, the origination of a credit card involves filling out an application and getting a credit check done, and you may be approved in a matter of a few days to a few weeks. Lenders don't charge an origination fee for credit cards but they may require a security deposit for anyone who is just establishing their credit or who has a bad credit rating. ## The Bottom Line It's a good idea to understand how the loan process works before you apply, whether it's for a personal loan or a mortgage. In the U.S., it's generally called origination. This process sees borrowers go through pre-qualification, application, underwriting, and approval before any loan funds are disbursed. Keep in mind that many lenders charge an origination fee, which is usually a small percentage of the loan value.

What Is Origination? Origination is the multi-step process that every individual must go through to obtain a mortgage or home loan. The term also applies to other types of amortized personal loans. Origination is often a lengthy process that is overseen by the Federal Deposit Insurance Corporation (FDIC) for compliance with Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A loan origination fee, usually about 1% of the loan, is intended to compensate the lender for the work involved in the process. Key Takeaways The origination process often involves a number of steps and is overseen by the FDIC.Pre-qualification is the first step of the origination process and is when a loan officer obtains all basic data and information relating to income and the property in question.All paperwork and documentation are then run through an automatic underwriting program for loan approval. How Origination Works Loans help consumers and businesses meet their financial goals and obligations. They can be used to make large purchases, pay off debt, make investments, or buy properties like homes. In order to be approved, the borrower must apply for financing. Borrowers must submit various types of financial information and documentation to the financial institution or other lender during the origination process. Some of the most common types of information and documents required include: Tax returns Payment history Credit card information Bank statements and balances Lenders then use this information to determine the type of loan and the interest rate for which the borrower is eligible. Lenders also rely on other information, especially the borrower’s credit report, to determine loan eligibility. It isn't uncommon for lenders in the U.S. to charge origination fees. These are upfront charges that borrowers are required to pay the lender as compensation for the application, underwriting, and approval process. Normally ranging between 0.5% to 1% of the loan value, the origination fee can be deducted from or added to the loan balance. Origination includes pre-qualification of the borrower, as well as underwriting, and lenders typically charge an origination fee to cover the associated costs. Origination Steps and Requirements Pre-qualification is the first step of the process. The loan officer meets with the borrower and obtains all basic data and information relating to income and the property that the loan is intended to cover. At this point, the lender determines the type of loan for which the individual qualifies, such as a personal loan. Fixed-rate loans have a continuous interest rate for the entire life of the loan, while adjustable-rate mortgages (ARMs) have an interest rate that fluctuates in relation to an index or a bond price, such as Treasury securities. Hybrid loans feature interest-rate aspects of both fixed and adjustable loans. They most often begin with a fixed rate and eventually convert to an ARM. The borrower receives a list of information needed to complete the loan application during this stage. This extensive required documentation typically includes the purchase and sale contract, W-2 forms, profit-and-loss statements from those who are self-employed, and bank statements. It will also include mortgage statements if the loan is to refinance an existing mortgage. The borrower fills out an application for the loan and submits all necessary documentation. The loan officer then completes the legally required paperwork to process the loan. Borrowers only pay origination fees if the loan is approved. Origination to Approval Once the application is complete and the documentation submitted, the process is now out of the borrower’s hands. All paperwork submitted and signed until this point is filed and run through an automatic underwriting program to be approved. Some files might be sent to an underwriter for manual approval. The loan officer then gets the appraisal, requests insurance information, schedules a closing, and sends the loan file to the processor. The processor may request additional information, if necessary, for reviewing the loan approval. Some mortgage borrowers might be eligible for government-backed loans, such as those insured by the Federal Housing Administration (FHA) or the U.S. Department of Veteran Affairs (VA). These loans are considered non-conventional and are structured in a way that makes it easier for eligible individuals to purchase homes. They often feature lower qualifying ratios and a smaller or no down payment, and the origination process can be somewhat easier as a result. Example of Origination Let's say a consumer wants to purchase their first home. They put in an offer on a property and the seller accepts. The two parties sign a contract and agree to a purchase price of $200,000. The buyer has a total of $50,000 saved up, which means they need to borrow $150,000 to cover the remaining balance. The buyer goes to their bank, ABC Bank, to see if they pre-qualify. When they do, ABC Bank asks them to submit a formal application and furnish supporting documents, including their proof of income, tax returns, bank statements, and approval for a credit check. The application and documents are sent to the underwriting department of ABC Bank to assess whether the borrower is a suitable candidate for the mortgage. After four weeks, the bank approves the loan, contacts the borrower, and arranges a time to sign the paperwork. The borrower is notified of the interest rate and loan terms and also agrees to pay the loan origination fee of 1% or $1,500. This can either be deducted from the loan balance (resulting in the disbursement of $148,500), pay it upfront, or have the seller pay it for them. How Does a Loan Origination Work? Loan origination is the process lenders use to assess and approve borrower applications for various forms of debt. These include loans and mortgages. Originations go from the initial application for credit through underwriting and the approval process. In order for the process to work, borrowers need to submit an application and additional documentation, such as tax returns and pay stubs. Lenders normally charge a fee, which is a small percentage of the balance, to compensate them for the work involved in reviewing and approving the application. Do I Have to Pay an Origination Fee? Most banks, financial institutions, and lenders charge an origination fee for any type of loan as a form of compensation for the loan process. This includes personal loans, debt consolidation loans, mortgages, home equity loans, and others. Fees generally range from 0.5% to 1% of the loan balance, so if you're asking for a $100,000 loan, a 1% fee will be $1,000. Some lenders may be willing to negotiate the fee, which can be deducted from the loan disbursement or paid upfront. Keep in mind that you only pay the fee if you're approved. Do You Need to Go Through the Origination Process for a Credit Card? The application and approval process for a credit card isn't as thorough as it is for a loan. In most cases, the origination of a credit card involves filling out an application and getting a credit check done, and you may be approved in a matter of a few days to a few weeks. Lenders don't charge an origination fee for credit cards but they may require a security deposit for anyone who is just establishing their credit or who has a bad credit rating. The Bottom Line It's a good idea to understand how the loan process works before you apply, whether it's for a personal loan or a mortgage. In the U.S., it's generally called origination. This process sees borrowers go through pre-qualification, application, underwriting, and approval before any loan funds are disbursed. Keep in mind that many lenders charge an origination fee, which is usually a small percentage of the loan value.

https://www.investopedia.com/articles/active-trading/102313/why-forward-contracts-are-foundation-all-derivatives.asp

Forward Contracts: The Foundation of All Derivatives

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The most complex types of investment products often fall under the broad category of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivative</a> securities. For most investors, the derivative instrument concept is hard to understand. However, since derivatives are typically used by governmental agencies, banking institutions, asset management firms, and other types of corporations to manage their investment risks, it is important for investors to have a general knowledge of what these products represent and how they are used by investment professionals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Indeed, one of the oldest and most commonly used derivatives is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forwardcontract.asp">forward contract</a>, which serves as the conceptual basis for many other types of derivatives that we see today. Here, we take a closer look at forwards and understand how they work and where they are used. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A forward contract is a customized derivative contract obligating counterparties to buy (receive) or sell (deliver) an asset at a specified price on a future date.</li><li>A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly useful for hedging.</li><li>In forex markets, forwards are used to exploit arbitrage opportunities at the cost of carrying different currencies.</li><li>Understanding how forwards work can unlock a greater understanding of more complex and nuanced derivatives products like options and swaps.</li></ul></div></div></div> <span class="heading-toc" id="toc-trading-and-settlement-procedures"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Trading and Settlement Procedures </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Forward contracts trade in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/otc.asp">over-the-counter (OTC)</a> market, meaning they do not trade on an exchange.<span class="ql-inline-citation" data-cite="2"></span> When a forward contract expires, the transaction is settled in one of two ways. The first way is through a process known as “<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/physicaldelivery.asp">physical delivery</a>.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Under this type of settlement, the party that is long the forward contract position will pay the party that is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">short the position</a> when the asset is actually delivered and the transaction is finalized. While the transactional concept of “delivery” is simple to understand, the implementation of delivering the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underlying-asset.asp">underlying asset</a> may be very difficult for the party holding the short position. As a result, a forward contract can also be completed through a process known as “cash settlement.”<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashsettlement.asp">cash settlement</a> is more complex than a delivery settlement, but it is still relatively straightforward to understand. For example, suppose that at the beginning of the year a cereal company agrees through a forward contract to buy 1 million bushels of corn at $5 per bushel from a farmer on Nov. 30 of the same year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> At the end of November, suppose that corn is selling for $4 per bushel on the open market. In this example, the cereal company, which is long the forward contract position, is due to receive from the farmer an asset that is now worth $4 per bushel. However, since it was agreed at the beginning of the year that the cereal company would pay $5 per bushel, the cereal company could simply request that the farmer sell the corn in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/open-market.asp">open market</a> at $4 per bushel, and the cereal company would make a cash payment of $1 per bushel to the farmer. Under this proposal, the farmer would still receive $5 per bushel of corn. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In terms of the other side of the transaction, the cereal company would then simply purchase the necessary bushels of corn in the open market at $4 per bushel. The net effect of this process would be a $1 payment per bushel of corn from the cereal company to the farmer. In this case, a cash settlement was used for the sole purpose of simplifying the delivery process. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-currency-forward-contracts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Currency Forward Contracts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Forward contracts can be tailored in a manner that makes them complex <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstrument.asp" rel="noopener noreferrer">financial instruments</a>. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currencyforward.asp" rel="noopener noreferrer">currency forward</a> contract can be used to help illustrate this point. Before a currency forward contract transaction can be explained, it is first important to understand how currencies are quoted to the public, versus how they are used by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp" rel="noopener noreferrer">institutional investors</a> to conduct <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-analysis.asp" rel="noopener noreferrer">financial analysis</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> If a tourist visits Times Square in New York City, he will likely find a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currency-exchange.asp" rel="noopener noreferrer">currency exchange</a> that posts <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchangerate.asp" rel="noopener noreferrer">exchange rates</a> of foreign currency per U.S. dollar. This type of convention is used frequently. It is known as an indirect quote and is probably the manner in which most <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailinvestor.asp" rel="noopener noreferrer">retail investors</a> think in terms of exchanging money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> However, when conducting financial analysis, institutional investors use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directquote.asp" rel="noopener noreferrer">direct quotation</a> method, which specifies the number of units of domestic currency per unit of foreign currency. This process was established by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/analyst.asp" rel="noopener noreferrer">analysts</a> in the securities industry, because institutional investors tend to think in terms of the amount of domestic currency required to buy one unit of a given stock, rather than how many shares of stock can be bought with one unit of the domestic currency. Given this convention standard, the direct quote will be utilized to explain how a forward contract can be used to implement a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/covered-interest-arbitrage.asp" rel="noopener noreferrer">covered interest arbitrage</a> strategy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Assume that a U.S. currency trader works for a company that routinely sells products in Europe for Euros, and that those Euros ultimately need to be converted back to U.S. Dollars. A trader in this type of position would likely know the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spot_rate.asp" rel="noopener noreferrer">spot rate</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forwardrate.asp" rel="noopener noreferrer">forward rate</a> between the U.S. Dollar and the Euro in the open market, as well as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-theory/08/risk-free-rate-return.asp" rel="noopener noreferrer">the risk-free rate of return</a> for both instruments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> For example, the currency trader knows that the U.S. Dollar spot rate per Euro in the open market is $1.35 U.S. Dollars per Euro, the annualized U.S. risk-free rate is 1% and the European annual risk-free rate is 4%. The one-year currency forward contract in the open market is quoted at a rate of $1.50 U.S. Dollars per Euro. With this information, it is possible for the currency trader to determine if a covered interest arbitrage opportunity is available, and how to establish a position that will earn a risk-free profit for the company by using a forward contract transaction.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-a-covered-interest-arbitrage-strategy"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> A Covered Interest Arbitrage Strategy </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> To initiate a covered interest arbitrage strategy, the currency trader would first need to determine what the forward contract between the U.S. Dollar and Euro should be in an efficient interest rate environment. To make this determination, the trader would divide the U.S. Dollar spot rate per Euro by one plus the European annual risk-free rate, and then multiply that result by one plus the annual U.S. risk-free rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> [1.35 / (1 + 0.04)] x (1 + 0.01) = 1.311 </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> In this case, the one-year forward contract between the U.S. Dollar and the Euro should be selling for $1.311 U.S. Dollars per Euro. Since the one-year forward contract in the open market is selling at $1.50 U.S. Dollars per Euro, the currency trader would know that the forward contract in the open market is overpriced. Accordingly, an astute currency trader would know that anything that is overpriced should be sold to make a profit, and therefore the currency trader would sell the forward contract and buy the Euro currency in the spot market to earn a risk-free rate of return on the investment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <span class="heading-toc" id="toc-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-heading__text"> Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The covered interest arbitrage strategy can be achieved in four simple steps: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Step 1: </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The currency trader would need to take $1.298 and use it to buy €0.962. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> To determine the amount of U.S. Dollars and Euros needed to implement the covered interest arbitrage strategy, the currency trader would divide the spot contract price of $1.35 per Euro by one plus the European annual risk-free rate of 4%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> 1.35 / (1 + 0.04) = 1.298 </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> In this case, $1.298 would be needed to facilitate the transaction. Next, the currency trader would determine how many Euros are needed to facilitate this transaction, which is simply determined by dividing one by one plus the European annual risk-free rate of 4%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> 1 / (1 + 0.04) = 0.962 </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The amount that is needed is €0.962. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-subheading__text"> Step 2: </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> The trader would need to sell a forward contract to deliver €1.0 at the end of the year for a price of $1.50. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-subheading__text"> Step 3: </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The trader would need to hold the Euro position for the year, earning interest at the European risk-free rate of 4%. This position would increase in value from €0.962 to €1.00. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> 0.962 x (1 + 0.04) = 1.000 </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_60-0"> <span class="mntl-sc-block-subheading__text"> Step 4: </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Finally, on the forward contract <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expiration-date.asp" rel="noopener noreferrer">expiration date</a>, the trader would deliver the €1.00 and receive $1.50. This transaction would equate to a risk-free rate of return of 15.6%, which can be determined by dividing $1.50 by $1.298 and subtracting one from the sum to determine the rate of return in the proper units. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> (1.50 / 1.298) – 1 = 0.156 </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> The mechanics of this covered interest arbitrage strategy are very important for investors to understand, because they illustrate why interest rate parity must hold true at all times to keep investors from making unlimited risk-free profits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-inlinevideo mntl-sc-block-inlinevideo mntl-block has-details inline-video" id="mntl-sc-block_67-0"><div class="comp mntl-sc-block-inlinevideo__video-container mntl-block" id="mntl-sc-block-inlinevideo__video-container_1-0"><div class="comp mntl-sc-block-inlinevideo__video mntl-jwplayer mm-video lazyload aspectratio-16:9" data-bgset="https://cdn.jwplayer.com/v2/media/PCiZtW2O/poster.jpg?width=720" data-sizes="auto" id="mntl-sc-block-inlinevideo__video_1-0"></div></div> <h4 class="comp mntl-sc-block-inlinevideo__title mntl-text-block" id="mntl-sc-block-inlinevideo__title_1-0">Covered Interest Arbitrage</h4></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <span class="heading-toc" id="toc-forward-market-opacity"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_69-0"> <span class="mntl-sc-block-heading__text"> Forward Market Opacity </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/072915/how-does-forward-contract-differ-call-option.asp">Forwards provide a level of privacy</a> to both the buyer and seller, and they can be customized to meet both the buyer's and seller's specific needs and intentions. Unfortunately, due to the opaque features of forward contracts, the size of the forward market is not accurately known. This, in turn, makes the extent of forward markets less understood than some other derivative markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Due to the lack of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transparency.asp">transparency</a> that is associated with the use of forward contracts, some potential issues may arise. For example, parties that utilize forward contracts are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp">subject to default risk</a>, their trade completion may be problematic due to the lack of a formalized <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearinghouse.asp">clearinghouse</a>, and they are exposed to potentially large losses if the derivatives contract is structured improperly.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> As a result, there is the potential for severe financial problems in the forward markets to overflow from the parties that engage in these types of transactions to society as a whole. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> To date, severe problems such as systemic default among the parties that engage in forward contracts have not come to fruition. Nevertheless, the economic concept of “too big to fail” will always be a concern, so long as forward contracts are allowed to be undertaken by large organizations. This problem becomes an even greater concern when both the options and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/07/swaps.asp">swaps markets</a> are taken into account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <span class="heading-toc" id="toc-forward-contracts-and-other-derivatives"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-heading__text"> Forward Contracts and Other Derivatives </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> As this article illustrates, forward contracts can be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forwardswap.asp">tailored as very complex financial instruments</a>. The breadth and depth of these types of contracts expand exponentially when one takes into account the different types of underlying financial instruments that can be used to implement a forward contract strategy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Examples include the use of equity forward contracts on individual stock securities or index portfolios, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-income-forward.asp">fixed income forward contracts</a> on securities such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">treasury bills</a>, and interest rate forward contracts on rates such as the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954">Secured Overnight Financing Rate (SOFR)</a>, which are more commonly known in the industry as forward-rate agreements. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Finally, investors should understand that forward contract derivatives are typically considered the foundation of futures contracts, options contracts, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swap.asp">swaps</a> contracts. This is because futures contracts are basically standardized forward contracts that have a formalized exchange and clearinghouse. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/optionscontract.asp">Options contracts</a> are basically forward contracts that provide an investor an option, but not an obligation, to complete a transaction at some point in time. Swaps contracts are basically linked-chain agreements of forward contracts that require action to be taken by investors periodically over time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_87-0"><span class="heading-toc" id="toc-what-is-a-forward-hedge"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Forward Hedge?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A forward hedge is a classic use of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buying-forward.asp">forward contracts to lock in a price today</a> for a product to be bought or sold at a later date. Imagine a farmer plants corn seed in May and harvests in October. The farmer does not want to speculate on the price of corn between May and October, but prefers to lock in the current price, which the farmer has used to budget operating expenses and estimate profit margins. So, the farmer sells a forward contract for corn today. In October, the farmer harvests the corn and sells it. At the same time, they buy back their forward contract. In this way, the farmer has locked-in the price in May, since if Corn rose in the meantime, they would see a profit from the sale of corn but an equivalent loss in the forward. Likewise, if corn prices fell, they would profit from the forward but lose on the physical corn.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_89-0"><span class="heading-toc" id="toc-when-was-the-first-forward-contract-invented"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Was the First Forward Contract Invented?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Financial historians estimate that forward contracts originated early on in human history, as soon as civilization began growing and trading agricultural products. The use of forwards can be traced to Greek and Roman times, and may have occurred earlier still; they have been widely traded in Europe (and subsequently elsewhere) since the Middle Ages.<span class="ql-inline-citation" data-cite="1"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_91-0"><span class="heading-toc" id="toc-how-do-forward-and-futures-contracts-differ"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Forward and Futures Contracts Differ?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Forwards and futures, in many ways, operate in the same way. The major difference is that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contracts</a> have standardized terms and are traded on exchanges, while forwards are customizable and trade over-the-counter (OTC).<span class="ql-inline-citation" data-cite="2"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Once the link between forward contracts and other derivatives is understood, investors can start to realize the financial tools that are at their disposal, the implications that derivatives have for risk management, and how potentially large and important the derivatives market is to a host of governmental agencies, banking institutions, and corporations throughout the world. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> <em>Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.</em> </p></div>

The most complex types of investment products often fall under the broad category of [derivative](https://www.investopedia.com/terms/d/derivative.asp) securities. For most investors, the derivative instrument concept is hard to understand. However, since derivatives are typically used by governmental agencies, banking institutions, asset management firms, and other types of corporations to manage their investment risks, it is important for investors to have a general knowledge of what these products represent and how they are used by investment professionals. Indeed, one of the oldest and most commonly used derivatives is the [forward contract](https://www.investopedia.com/terms/f/forwardcontract.asp), which serves as the conceptual basis for many other types of derivatives that we see today. Here, we take a closer look at forwards and understand how they work and where they are used. ### Key Takeaways * A forward contract is a customized derivative contract obligating counterparties to buy (receive) or sell (deliver) an asset at a specified price on a future date. * A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly useful for hedging. * In forex markets, forwards are used to exploit arbitrage opportunities at the cost of carrying different currencies. * Understanding how forwards work can unlock a greater understanding of more complex and nuanced derivatives products like options and swaps. ## Trading and Settlement Procedures Forward contracts trade in the [over-the-counter (OTC)](https://www.investopedia.com/terms/o/otc.asp) market, meaning they do not trade on an exchange. When a forward contract expires, the transaction is settled in one of two ways. The first way is through a process known as “[physical delivery](https://www.investopedia.com/terms/p/physicaldelivery.asp).” Under this type of settlement, the party that is long the forward contract position will pay the party that is [short the position](https://www.investopedia.com/terms/s/short.asp) when the asset is actually delivered and the transaction is finalized. While the transactional concept of “delivery” is simple to understand, the implementation of delivering the [underlying asset](https://www.investopedia.com/terms/u/underlying-asset.asp) may be very difficult for the party holding the short position. As a result, a forward contract can also be completed through a process known as “cash settlement.” A [cash settlement](https://www.investopedia.com/terms/c/cashsettlement.asp) is more complex than a delivery settlement, but it is still relatively straightforward to understand. For example, suppose that at the beginning of the year a cereal company agrees through a forward contract to buy 1 million bushels of corn at $5 per bushel from a farmer on Nov. 30 of the same year. At the end of November, suppose that corn is selling for $4 per bushel on the open market. In this example, the cereal company, which is long the forward contract position, is due to receive from the farmer an asset that is now worth $4 per bushel. However, since it was agreed at the beginning of the year that the cereal company would pay $5 per bushel, the cereal company could simply request that the farmer sell the corn in the [open market](https://www.investopedia.com/terms/o/open-market.asp) at $4 per bushel, and the cereal company would make a cash payment of $1 per bushel to the farmer. Under this proposal, the farmer would still receive $5 per bushel of corn. In terms of the other side of the transaction, the cereal company would then simply purchase the necessary bushels of corn in the open market at $4 per bushel. The net effect of this process would be a $1 payment per bushel of corn from the cereal company to the farmer. In this case, a cash settlement was used for the sole purpose of simplifying the delivery process. ## Currency Forward Contracts Forward contracts can be tailored in a manner that makes them complex [financial instruments](https://www.investopedia.com/terms/f/financialinstrument.asp). A [currency forward](https://www.investopedia.com/terms/c/currencyforward.asp) contract can be used to help illustrate this point. Before a currency forward contract transaction can be explained, it is first important to understand how currencies are quoted to the public, versus how they are used by [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) to conduct [financial analysis](https://www.investopedia.com/terms/f/financial-analysis.asp). If a tourist visits Times Square in New York City, he will likely find a [currency exchange](https://www.investopedia.com/terms/c/currency-exchange.asp) that posts [exchange rates](https://www.investopedia.com/terms/e/exchangerate.asp) of foreign currency per U.S. dollar. This type of convention is used frequently. It is known as an indirect quote and is probably the manner in which most [retail investors](https://www.investopedia.com/terms/r/retailinvestor.asp) think in terms of exchanging money. However, when conducting financial analysis, institutional investors use the [direct quotation](https://www.investopedia.com/terms/d/directquote.asp) method, which specifies the number of units of domestic currency per unit of foreign currency. This process was established by [analysts](https://www.investopedia.com/terms/a/analyst.asp) in the securities industry, because institutional investors tend to think in terms of the amount of domestic currency required to buy one unit of a given stock, rather than how many shares of stock can be bought with one unit of the domestic currency. Given this convention standard, the direct quote will be utilized to explain how a forward contract can be used to implement a [covered interest arbitrage](https://www.investopedia.com/terms/c/covered-interest-arbitrage.asp) strategy. Assume that a U.S. currency trader works for a company that routinely sells products in Europe for Euros, and that those Euros ultimately need to be converted back to U.S. Dollars. A trader in this type of position would likely know the [spot rate](https://www.investopedia.com/terms/s/spot_rate.asp) and [forward rate](https://www.investopedia.com/terms/f/forwardrate.asp) between the U.S. Dollar and the Euro in the open market, as well as [the risk-free rate of return](https://www.investopedia.com/articles/financial-theory/08/risk-free-rate-return.asp) for both instruments. For example, the currency trader knows that the U.S. Dollar spot rate per Euro in the open market is $1.35 U.S. Dollars per Euro, the annualized U.S. risk-free rate is 1% and the European annual risk-free rate is 4%. The one-year currency forward contract in the open market is quoted at a rate of $1.50 U.S. Dollars per Euro. With this information, it is possible for the currency trader to determine if a covered interest arbitrage opportunity is available, and how to establish a position that will earn a risk-free profit for the company by using a forward contract transaction.  ## A Covered Interest Arbitrage Strategy To initiate a covered interest arbitrage strategy, the currency trader would first need to determine what the forward contract between the U.S. Dollar and Euro should be in an efficient interest rate environment. To make this determination, the trader would divide the U.S. Dollar spot rate per Euro by one plus the European annual risk-free rate, and then multiply that result by one plus the annual U.S. risk-free rate. [1.35 / (1 + 0.04)] x (1 + 0.01) = 1.311 In this case, the one-year forward contract between the U.S. Dollar and the Euro should be selling for $1.311 U.S. Dollars per Euro. Since the one-year forward contract in the open market is selling at $1.50 U.S. Dollars per Euro, the currency trader would know that the forward contract in the open market is overpriced. Accordingly, an astute currency trader would know that anything that is overpriced should be sold to make a profit, and therefore the currency trader would sell the forward contract and buy the Euro currency in the spot market to earn a risk-free rate of return on the investment. ## Example The covered interest arbitrage strategy can be achieved in four simple steps: ### Step 1: The currency trader would need to take $1.298 and use it to buy €0.962. To determine the amount of U.S. Dollars and Euros needed to implement the covered interest arbitrage strategy, the currency trader would divide the spot contract price of $1.35 per Euro by one plus the European annual risk-free rate of 4%. > 1.35 / (1 + 0.04) = 1.298 In this case, $1.298 would be needed to facilitate the transaction. Next, the currency trader would determine how many Euros are needed to facilitate this transaction, which is simply determined by dividing one by one plus the European annual risk-free rate of 4%. > 1 / (1 + 0.04) = 0.962 The amount that is needed is €0.962. ### Step 2: The trader would need to sell a forward contract to deliver €1.0 at the end of the year for a price of $1.50. ### Step 3: The trader would need to hold the Euro position for the year, earning interest at the European risk-free rate of 4%. This position would increase in value from €0.962 to €1.00. > 0.962 x (1 + 0.04) = 1.000 ### Step 4: Finally, on the forward contract [expiration date](https://www.investopedia.com/terms/e/expiration-date.asp), the trader would deliver the €1.00 and receive $1.50. This transaction would equate to a risk-free rate of return of 15.6%, which can be determined by dividing $1.50 by $1.298 and subtracting one from the sum to determine the rate of return in the proper units. > (1.50 / 1.298) – 1 = 0.156 The mechanics of this covered interest arbitrage strategy are very important for investors to understand, because they illustrate why interest rate parity must hold true at all times to keep investors from making unlimited risk-free profits. #### Covered Interest Arbitrage ## Forward Market Opacity [Forwards provide a level of privacy](https://www.investopedia.com/ask/answers/072915/how-does-forward-contract-differ-call-option.asp) to both the buyer and seller, and they can be customized to meet both the buyer's and seller's specific needs and intentions. Unfortunately, due to the opaque features of forward contracts, the size of the forward market is not accurately known. This, in turn, makes the extent of forward markets less understood than some other derivative markets. Due to the lack of [transparency](https://www.investopedia.com/terms/t/transparency.asp) that is associated with the use of forward contracts, some potential issues may arise. For example, parties that utilize forward contracts are [subject to default risk](https://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp), their trade completion may be problematic due to the lack of a formalized [clearinghouse](https://www.investopedia.com/terms/c/clearinghouse.asp), and they are exposed to potentially large losses if the derivatives contract is structured improperly. As a result, there is the potential for severe financial problems in the forward markets to overflow from the parties that engage in these types of transactions to society as a whole. To date, severe problems such as systemic default among the parties that engage in forward contracts have not come to fruition. Nevertheless, the economic concept of “too big to fail” will always be a concern, so long as forward contracts are allowed to be undertaken by large organizations. This problem becomes an even greater concern when both the options and [swaps markets](https://www.investopedia.com/articles/optioninvestor/07/swaps.asp) are taken into account. ## Forward Contracts and Other Derivatives As this article illustrates, forward contracts can be [tailored as very complex financial instruments](https://www.investopedia.com/terms/f/forwardswap.asp). The breadth and depth of these types of contracts expand exponentially when one takes into account the different types of underlying financial instruments that can be used to implement a forward contract strategy. Examples include the use of equity forward contracts on individual stock securities or index portfolios, [fixed income forward contracts](https://www.investopedia.com/terms/f/fixed-income-forward.asp) on securities such as [treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), and interest rate forward contracts on rates such as the [Secured Overnight Financing Rate (SOFR)](https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954), which are more commonly known in the industry as forward-rate agreements. Finally, investors should understand that forward contract derivatives are typically considered the foundation of futures contracts, options contracts, and [swaps](https://www.investopedia.com/terms/s/swap.asp) contracts. This is because futures contracts are basically standardized forward contracts that have a formalized exchange and clearinghouse. [Options contracts](https://www.investopedia.com/terms/o/optionscontract.asp) are basically forward contracts that provide an investor an option, but not an obligation, to complete a transaction at some point in time. Swaps contracts are basically linked-chain agreements of forward contracts that require action to be taken by investors periodically over time. ## What Is a Forward Hedge? A forward hedge is a classic use of [forward contracts to lock in a price today](https://www.investopedia.com/terms/b/buying-forward.asp) for a product to be bought or sold at a later date. Imagine a farmer plants corn seed in May and harvests in October. The farmer does not want to speculate on the price of corn between May and October, but prefers to lock in the current price, which the farmer has used to budget operating expenses and estimate profit margins. So, the farmer sells a forward contract for corn today. In October, the farmer harvests the corn and sells it. At the same time, they buy back their forward contract. In this way, the farmer has locked-in the price in May, since if Corn rose in the meantime, they would see a profit from the sale of corn but an equivalent loss in the forward. Likewise, if corn prices fell, they would profit from the forward but lose on the physical corn. ## When Was the First Forward Contract Invented? Financial historians estimate that forward contracts originated early on in human history, as soon as civilization began growing and trading agricultural products. The use of forwards can be traced to Greek and Roman times, and may have occurred earlier still; they have been widely traded in Europe (and subsequently elsewhere) since the Middle Ages. ## How Do Forward and Futures Contracts Differ? Forwards and futures, in many ways, operate in the same way. The major difference is that [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp) have standardized terms and are traded on exchanges, while forwards are customizable and trade over-the-counter (OTC). ## The Bottom Line Once the link between forward contracts and other derivatives is understood, investors can start to realize the financial tools that are at their disposal, the implications that derivatives have for risk management, and how potentially large and important the derivatives market is to a host of governmental agencies, banking institutions, and corporations throughout the world. *Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.*

The most complex types of investment products often fall under the broad category of derivative securities. For most investors, the derivative instrument concept is hard to understand. However, since derivatives are typically used by governmental agencies, banking institutions, asset management firms, and other types of corporations to manage their investment risks, it is important for investors to have a general knowledge of what these products represent and how they are used by investment professionals. Indeed, one of the oldest and most commonly used derivatives is the forward contract, which serves as the conceptual basis for many other types of derivatives that we see today. Here, we take a closer look at forwards and understand how they work and where they are used. Key Takeaways A forward contract is a customized derivative contract obligating counterparties to buy (receive) or sell (deliver) an asset at a specified price on a future date.A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly useful for hedging.In forex markets, forwards are used to exploit arbitrage opportunities at the cost of carrying different currencies.Understanding how forwards work can unlock a greater understanding of more complex and nuanced derivatives products like options and swaps. Trading and Settlement Procedures Forward contracts trade in the over-the-counter (OTC) market, meaning they do not trade on an exchange. When a forward contract expires, the transaction is settled in one of two ways. The first way is through a process known as “physical delivery.” Under this type of settlement, the party that is long the forward contract position will pay the party that is short the position when the asset is actually delivered and the transaction is finalized. While the transactional concept of “delivery” is simple to understand, the implementation of delivering the underlying asset may be very difficult for the party holding the short position. As a result, a forward contract can also be completed through a process known as “cash settlement.” A cash settlement is more complex than a delivery settlement, but it is still relatively straightforward to understand. For example, suppose that at the beginning of the year a cereal company agrees through a forward contract to buy 1 million bushels of corn at $5 per bushel from a farmer on Nov. 30 of the same year. At the end of November, suppose that corn is selling for $4 per bushel on the open market. In this example, the cereal company, which is long the forward contract position, is due to receive from the farmer an asset that is now worth $4 per bushel. However, since it was agreed at the beginning of the year that the cereal company would pay $5 per bushel, the cereal company could simply request that the farmer sell the corn in the open market at $4 per bushel, and the cereal company would make a cash payment of $1 per bushel to the farmer. Under this proposal, the farmer would still receive $5 per bushel of corn. In terms of the other side of the transaction, the cereal company would then simply purchase the necessary bushels of corn in the open market at $4 per bushel. The net effect of this process would be a $1 payment per bushel of corn from the cereal company to the farmer. In this case, a cash settlement was used for the sole purpose of simplifying the delivery process. Currency Forward Contracts Forward contracts can be tailored in a manner that makes them complex financial instruments. A currency forward contract can be used to help illustrate this point. Before a currency forward contract transaction can be explained, it is first important to understand how currencies are quoted to the public, versus how they are used by institutional investors to conduct financial analysis. If a tourist visits Times Square in New York City, he will likely find a currency exchange that posts exchange rates of foreign currency per U.S. dollar. This type of convention is used frequently. It is known as an indirect quote and is probably the manner in which most retail investors think in terms of exchanging money. However, when conducting financial analysis, institutional investors use the direct quotation method, which specifies the number of units of domestic currency per unit of foreign currency. This process was established by analysts in the securities industry, because institutional investors tend to think in terms of the amount of domestic currency required to buy one unit of a given stock, rather than how many shares of stock can be bought with one unit of the domestic currency. Given this convention standard, the direct quote will be utilized to explain how a forward contract can be used to implement a covered interest arbitrage strategy. Assume that a U.S. currency trader works for a company that routinely sells products in Europe for Euros, and that those Euros ultimately need to be converted back to U.S. Dollars. A trader in this type of position would likely know the spot rate and forward rate between the U.S. Dollar and the Euro in the open market, as well as the risk-free rate of return for both instruments. For example, the currency trader knows that the U.S. Dollar spot rate per Euro in the open market is $1.35 U.S. Dollars per Euro, the annualized U.S. risk-free rate is 1% and the European annual risk-free rate is 4%. The one-year currency forward contract in the open market is quoted at a rate of $1.50 U.S. Dollars per Euro. With this information, it is possible for the currency trader to determine if a covered interest arbitrage opportunity is available, and how to establish a position that will earn a risk-free profit for the company by using a forward contract transaction.  A Covered Interest Arbitrage Strategy To initiate a covered interest arbitrage strategy, the currency trader would first need to determine what the forward contract between the U.S. Dollar and Euro should be in an efficient interest rate environment. To make this determination, the trader would divide the U.S. Dollar spot rate per Euro by one plus the European annual risk-free rate, and then multiply that result by one plus the annual U.S. risk-free rate. [1.35 / (1 + 0.04)] x (1 + 0.01) = 1.311 In this case, the one-year forward contract between the U.S. Dollar and the Euro should be selling for $1.311 U.S. Dollars per Euro. Since the one-year forward contract in the open market is selling at $1.50 U.S. Dollars per Euro, the currency trader would know that the forward contract in the open market is overpriced. Accordingly, an astute currency trader would know that anything that is overpriced should be sold to make a profit, and therefore the currency trader would sell the forward contract and buy the Euro currency in the spot market to earn a risk-free rate of return on the investment. Example The covered interest arbitrage strategy can be achieved in four simple steps: Step 1: The currency trader would need to take $1.298 and use it to buy €0.962. To determine the amount of U.S. Dollars and Euros needed to implement the covered interest arbitrage strategy, the currency trader would divide the spot contract price of $1.35 per Euro by one plus the European annual risk-free rate of 4%. 1.35 / (1 + 0.04) = 1.298 In this case, $1.298 would be needed to facilitate the transaction. Next, the currency trader would determine how many Euros are needed to facilitate this transaction, which is simply determined by dividing one by one plus the European annual risk-free rate of 4%. 1 / (1 + 0.04) = 0.962 The amount that is needed is €0.962. Step 2: The trader would need to sell a forward contract to deliver €1.0 at the end of the year for a price of $1.50. Step 3: The trader would need to hold the Euro position for the year, earning interest at the European risk-free rate of 4%. This position would increase in value from €0.962 to €1.00. 0.962 x (1 + 0.04) = 1.000 Step 4: Finally, on the forward contract expiration date, the trader would deliver the €1.00 and receive $1.50. This transaction would equate to a risk-free rate of return of 15.6%, which can be determined by dividing $1.50 by $1.298 and subtracting one from the sum to determine the rate of return in the proper units. (1.50 / 1.298) – 1 = 0.156 The mechanics of this covered interest arbitrage strategy are very important for investors to understand, because they illustrate why interest rate parity must hold true at all times to keep investors from making unlimited risk-free profits. Covered Interest Arbitrage Forward Market Opacity Forwards provide a level of privacy to both the buyer and seller, and they can be customized to meet both the buyer's and seller's specific needs and intentions. Unfortunately, due to the opaque features of forward contracts, the size of the forward market is not accurately known. This, in turn, makes the extent of forward markets less understood than some other derivative markets. Due to the lack of transparency that is associated with the use of forward contracts, some potential issues may arise. For example, parties that utilize forward contracts are subject to default risk, their trade completion may be problematic due to the lack of a formalized clearinghouse, and they are exposed to potentially large losses if the derivatives contract is structured improperly. As a result, there is the potential for severe financial problems in the forward markets to overflow from the parties that engage in these types of transactions to society as a whole. To date, severe problems such as systemic default among the parties that engage in forward contracts have not come to fruition. Nevertheless, the economic concept of “too big to fail” will always be a concern, so long as forward contracts are allowed to be undertaken by large organizations. This problem becomes an even greater concern when both the options and swaps markets are taken into account. Forward Contracts and Other Derivatives As this article illustrates, forward contracts can be tailored as very complex financial instruments. The breadth and depth of these types of contracts expand exponentially when one takes into account the different types of underlying financial instruments that can be used to implement a forward contract strategy. Examples include the use of equity forward contracts on individual stock securities or index portfolios, fixed income forward contracts on securities such as treasury bills, and interest rate forward contracts on rates such as the Secured Overnight Financing Rate (SOFR), which are more commonly known in the industry as forward-rate agreements. Finally, investors should understand that forward contract derivatives are typically considered the foundation of futures contracts, options contracts, and swaps contracts. This is because futures contracts are basically standardized forward contracts that have a formalized exchange and clearinghouse. Options contracts are basically forward contracts that provide an investor an option, but not an obligation, to complete a transaction at some point in time. Swaps contracts are basically linked-chain agreements of forward contracts that require action to be taken by investors periodically over time. What Is a Forward Hedge? A forward hedge is a classic use of forward contracts to lock in a price today for a product to be bought or sold at a later date. Imagine a farmer plants corn seed in May and harvests in October. The farmer does not want to speculate on the price of corn between May and October, but prefers to lock in the current price, which the farmer has used to budget operating expenses and estimate profit margins. So, the farmer sells a forward contract for corn today. In October, the farmer harvests the corn and sells it. At the same time, they buy back their forward contract. In this way, the farmer has locked-in the price in May, since if Corn rose in the meantime, they would see a profit from the sale of corn but an equivalent loss in the forward. Likewise, if corn prices fell, they would profit from the forward but lose on the physical corn. When Was the First Forward Contract Invented? Financial historians estimate that forward contracts originated early on in human history, as soon as civilization began growing and trading agricultural products. The use of forwards can be traced to Greek and Roman times, and may have occurred earlier still; they have been widely traded in Europe (and subsequently elsewhere) since the Middle Ages. How Do Forward and Futures Contracts Differ? Forwards and futures, in many ways, operate in the same way. The major difference is that futures contracts have standardized terms and are traded on exchanges, while forwards are customizable and trade over-the-counter (OTC). The Bottom Line Once the link between forward contracts and other derivatives is understood, investors can start to realize the financial tools that are at their disposal, the implications that derivatives have for risk management, and how potentially large and important the derivatives market is to a host of governmental agencies, banking institutions, and corporations throughout the world. Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

https://www.investopedia.com/best-invest-traditional-and-roth-ira-5219965

How to Invest in Both a Traditional and a Roth IRA

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> When it comes to saving for retirement, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRAs</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/traditionalira.asp">traditional IRAs</a> are some of the most popular ways to go about it. Though both individual retirement account options are different in their own right, the decision of which one to utilize isn’t binary. With enough planning on how to leverage both types of plans, you can maximize your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">return on investment</a> and enjoy a more lucrative retirement. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>You can have both individual retirement accounts—a Roth and a traditional—at the same time.</li><li>Depending on when you start, you may want to focus more on one type of retirement plan over the other.<br/></li><li>Roth IRA contributions may grow tax-free, though you won't get any immediate tax deductions to reduce your current tax liability.</li><li>Traditional IRA contributions allow for immediate tax deductibility, though earnings in the account are taxable when withdrawn for retirement.</li><li>There are income and contributions limits to be mindful of when contributing to either or both accounts.</li></ul></div></div></div> <span class="heading-toc" id="toc-do-you-need-a-roth-and-a-traditional-ira"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Do You Need a Roth and a Traditional IRA? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> It may sound counterintuitive to split whatever money you plan on saving for retirement into two separate types of IRAs, but there’s a financial strategy behind it. As each type of account boasts different rules and tax benefits, investors can capitalize on having each type of account to maintain financial flexibility in retirement.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp">Roth IRA contributions</a> are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aftertaxcontribution.asp">made after taxes</a>, meaning that you won’t be taxed on the account’s principal when you take your money out later in life. Contributions to traditional IRAs are <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pretaxcontribution.asp">made pretax</a>, so any money that you withdraw later in life will be subject to taxes.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> That being said, taxpayers are often able to claim a deduction on the contributions that they make to their traditional IRAs, so they can soften the blow that they’ll receive in retirement.<span class="ql-inline-citation" data-cite="14"></span> Therefore, there are both current and future tax considerations to be made when investing in both a traditional IRA and Roth IRA. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-how-to-use-2-ira-types"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> How to Use 2 IRA Types </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Having both retirement plan types can be beneficial. However, there are things that you have to remember when making your contributions. By following federal regulations, you can ensure that your retirement accounts will work as efficiently for you as you need them to. This means keeping careful track of activity in both accounts while still keeping each record separately. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> If you create both a traditional IRA and Roth IRA with the same broker, be mindful that both accounts will reside within the same online login. This is especially important to consider when making contributions or withdrawals, as the two types of accounts may be easily confused. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Last, consult your financial advisor about the tax strategies for both accounts. Very broadly speaking, a Roth IRA is better for lower-income individuals who expect to move to higher-income tax brackets in the future. On the other hand, higher-earners may appreciate the immediate tax deductions and do not necessarily expect to need future tax benefits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-keep-an-eye-on-contribution-limits"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Keep an Eye on Contribution Limits </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp">Internal Revenue Service (IRS)</a> has specific limits on how much you can contribute to all of your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/">traditional and Roth IRAs</a>. Each contribution limit below is the aggregate total contributed to each account.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Under guidelines for 2022, your contributions cannot exceed $6,000. The only exception is if you are age 50 or older, which will allow you to contribute another $1,000 among your accounts as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/catchupcontribution.asp">catch-up mechanism</a>. Guidelines for 2023 have increased your contribution limit. Individuals can contribute no more than $6,500 unless they are age 50 or older. The same catch-up contribution for $1,000 applies in 2023.<span class="ql-inline-citation" data-cite="10"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-subheading__text"> Income Considerations: Roth IRA Contributions </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> You cannot make Roth IRA contributions if you make too much money. In addition, the contribution limits above may be reduced if you earn a specific amount. The table below outlines the phase-out ranges for 2022 and 2023 based on your modified adjusted gross income (MAGI).<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_27-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="4">Roth IRA Contribution Limits (Based on MAGI)</th> </tr> <tr> <th> Filing Status</th> <th>2022 MAGI</th> <th>2023 MAGI</th> <th>Roth IRA Contribution Limit</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Single or Head of Household</td> <td>Less than $129,000</td> <td>Less than $138,000</td> <td>Full contribution allowed</td> </tr> <tr> <td> </td> <td>Between $129,000 and $144,000</td> <td>Between $138,000 and $153,000</td> <td>Partial contribution allowed</td> </tr> <tr> <td> </td> <td>$144,000 or greater</td> <td>$153,000 or greater</td> <td>No contribution allowed</td> </tr> <tr> <td>Married Filing Jointly</td> <td>Less than $204,000</td> <td>Less than $218,000</td> <td>Full contribution allowed</td> </tr> <tr> <td> </td> <td>Between $204,000 and $214,000</td> <td>Between $218,000 and $228,000</td> <td>Partial contribution allowed</td> </tr> <tr> <td> </td> <td>$214,000 or greater</td> <td>$228,000 or greater</td> <td>No contribution allowed</td> </tr> <tr> <td>Married Filing Separately</td> <td>$0 to $10,000</td> <td>$0 to $10,000</td> <td>Partial contribution allowed</td> </tr> <tr> <td></td> <td>Greater than $10,000</td> <td>Greater than $10,000</td> <td>No contribution allowed</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-subheading__text"> Income Considerations: Traditional IRA Deductions </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> In order for your contributions to your traditional IRA to be deductible, you must meet certain income thresholds. If you make too much money, your contributions may be fully excluded from deduction. Be mindful that the phase-out ranges mentioned below assume you are covered by a workplace retirement plan; different phase-out ranges may be applicable to your situation if this is not true for you.<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_32-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="4">Traditional IRA Contribution Deduction Eligibility</th> </tr> <tr> <th>Filing Status</th> <th>2022 MAGI Range</th> <th>2023 MAGI Range</th> <th>Deduction Eligibility</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Single</td> <td>Below $68,000</td> <td>Below $73,000</td> <td>Full deduction allowed</td> </tr> <tr> <td> </td> <td>Between $68,000 and $78,000</td> <td>Between $73,000 and $83,000</td> <td>Partial deduction allowed</td> </tr> <tr> <td> </td> <td>Greater than $78,000</td> <td>Greater than $83,000</td> <td>No deduction allowed</td> </tr> <tr> <td>Married Filing Jointly</td> <td>Below $109,000</td> <td>Below $116,000</td> <td>Full deduction allowed</td> </tr> <tr> <td> </td> <td>Between $109,000 and $129,000</td> <td>Between $116,000 and $136,000</td> <td>Partial deduction allowed</td> </tr> <tr> <td> </td> <td>Greater than $129,000</td> <td>Greater than $136,000</td> <td>No deduction allowed</td> </tr> <tr> <td>Married Filing Separately</td> <td>Between $0 and $10,000</td> <td>Between $0 and $10,000</td> <td>Partial deduction allowed</td> </tr> <tr> <td></td> <td>Greater than $10,000</td> <td>Greater than $10,000</td> <td>No deduction allowed</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-broad-ira-contribution-strategy"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Broad IRA Contribution Strategy </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> For many Americans, some years are better than others when it comes to salary. Depending on which <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxbracket.asp">tax bracket</a> you end up in during a given year, you may want to put more money into either your Roth IRA or your traditional IRA. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> On one hand, if you anticipate retiring at a lower tax bracket than you’re currently in, you may want to contribute more to the traditional IRA to pay lower taxes today. The fact that future earnings will be taxed is less of a concern because you expect to shift into a lower tax bracket in the future. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> On the other hand, if you expect to be in a higher tax bracket than your current year, you may want to put more money into your Roth IRA, since you won’t pay taxes on those withdrawals at all. Though you won't get any immediate tax deductions, this is less of a concern because you are currently in a lower tax bracket. This strategy results in your receiving the greatest tax benefit when your tax bracket is highest.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_41-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_42-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Though Roth IRAs do not have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/requiredminimumdistribution.asp">required minimum distributions</a>, traditional IRAs do.<span class="ql-inline-citation" data-cite="9"></span> After your 73rd birthday, you will need to begin withdrawing at least the minimum amount from your account and paying income taxes on those withdrawals. This age limit used to be 72 years old but was increased due to the passing of the SECURE 2.0 Act.<span class="ql-inline-citation" data-cite="13"></span><br/></p></div></div></div> <span class="heading-toc" id="toc-start-contributing-early"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> Start Contributing Early </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> To make the best of your retirement planning, you should start the process as early as possible. The more time that your money spends in a retirement account, the more that it can <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compound</a> and grow. Later in life, if you feel that your money will be better served in a Roth IRA than a traditional IRA, you can always <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rollover.asp">roll over</a> the money.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-can-have-both-types-of-iras-affect-current-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Have Both Types of IRAs Affect Current Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Maintaining both kinds of IRA—a traditional as well as a Roth—not only affects your taxes during retirement but also can land you tax savings today. Contributions to a traditional IRA can reduce your taxable income, allowing you to become eligible for a number of tax credits.</p><p>For example, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-for-qualified-retirement-savings-contribution.asp">Qualified Retirement Savings Contribution Credit</a> provides up to 50% of your total contributions to an IRA or workplace retirement plan in tax credits. As long as your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/agi.asp">adjusted gross income (AGI)</a> doesn’t exceed $34,000 as a single filer and $68,000 if married filing jointly, you can receive at least a portion of the credit for 2022. For 2023, these thresholds are increased to $36,500 for a single filer or $73,000 for a married couple filing a joint return.<span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-are-withdrawals-and-distributions-from-an-ira-taxable"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Withdrawals and Distributions From an IRA Taxable?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Both IRA styles deal with your taxes in a specific way. Deductible contributions and earnings withdrawn or distributed through a traditional IRA are taxable. In a Roth IRA, contributions are immediately taxable, though withdrawals are not, as long as it’s a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualifieddistribution.asp">qualified distribution</a>. Your Roth contributions may be withdrawn at any time, tax- and penalty-free. In both instances, you may be forced to pay an additional 10% tax for early withdrawals if you take money out before you are 59½ years old.<span class="ql-inline-citation" data-cite="14"></span><span class="ql-inline-citation" data-cite="3"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-can-you-over-contribute-into-an-ira"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Over-Contribute Into an IRA?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. If you make excess contributions, you’ll have to pay additional taxes for each year that the extra amount exists in your account. The tax will end when you either withdraw the excess or use it as a future contribution.<span class="ql-inline-citation" data-cite="10"></span><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Managing a traditional IRA as well as a Roth IRA can be a great way to take advantage of both worlds. Since you can ultimately roll your traditional IRA into the Roth, there’s little downside to at least trying to maximize both. Keep in mind the tax advantages and implications of both IRA types, and remember that there are income limits for contributing to a Roth IRA. </p></div>

When it comes to saving for retirement, [Roth IRAs](https://www.investopedia.com/terms/r/rothira.asp) and [traditional IRAs](https://www.investopedia.com/terms/t/traditionalira.asp) are some of the most popular ways to go about it. Though both individual retirement account options are different in their own right, the decision of which one to utilize isn’t binary. With enough planning on how to leverage both types of plans, you can maximize your [return on investment](https://www.investopedia.com/terms/r/returnoninvestment.asp) and enjoy a more lucrative retirement. ### Key Takeaways * You can have both individual retirement accounts—a Roth and a traditional—at the same time. * Depending on when you start, you may want to focus more on one type of retirement plan over the other. * Roth IRA contributions may grow tax-free, though you won't get any immediate tax deductions to reduce your current tax liability. * Traditional IRA contributions allow for immediate tax deductibility, though earnings in the account are taxable when withdrawn for retirement. * There are income and contributions limits to be mindful of when contributing to either or both accounts. ## Do You Need a Roth and a Traditional IRA? It may sound counterintuitive to split whatever money you plan on saving for retirement into two separate types of IRAs, but there’s a financial strategy behind it. As each type of account boasts different rules and tax benefits, investors can capitalize on having each type of account to maintain financial flexibility in retirement. [Roth IRA contributions](https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp) are [made after taxes](https://www.investopedia.com/terms/a/aftertaxcontribution.asp), meaning that you won’t be taxed on the account’s principal when you take your money out later in life. Contributions to traditional IRAs are [made pretax](https://www.investopedia.com/terms/p/pretaxcontribution.asp), so any money that you withdraw later in life will be subject to taxes. That being said, taxpayers are often able to claim a deduction on the contributions that they make to their traditional IRAs, so they can soften the blow that they’ll receive in retirement. Therefore, there are both current and future tax considerations to be made when investing in both a traditional IRA and Roth IRA. ## How to Use 2 IRA Types Having both retirement plan types can be beneficial. However, there are things that you have to remember when making your contributions. By following federal regulations, you can ensure that your retirement accounts will work as efficiently for you as you need them to. This means keeping careful track of activity in both accounts while still keeping each record separately. If you create both a traditional IRA and Roth IRA with the same broker, be mindful that both accounts will reside within the same online login. This is especially important to consider when making contributions or withdrawals, as the two types of accounts may be easily confused. Last, consult your financial advisor about the tax strategies for both accounts. Very broadly speaking, a Roth IRA is better for lower-income individuals who expect to move to higher-income tax brackets in the future. On the other hand, higher-earners may appreciate the immediate tax deductions and do not necessarily expect to need future tax benefits. ## Keep an Eye on Contribution Limits The [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) has specific limits on how much you can contribute to all of your [traditional and Roth IRAs](https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/). Each contribution limit below is the aggregate total contributed to each account. Under guidelines for 2022, your contributions cannot exceed $6,000. The only exception is if you are age 50 or older, which will allow you to contribute another $1,000 among your accounts as a [catch-up mechanism](https://www.investopedia.com/terms/c/catchupcontribution.asp). Guidelines for 2023 have increased your contribution limit. Individuals can contribute no more than $6,500 unless they are age 50 or older. The same catch-up contribution for $1,000 applies in 2023. ### Income Considerations: Roth IRA Contributions You cannot make Roth IRA contributions if you make too much money. In addition, the contribution limits above may be reduced if you earn a specific amount. The table below outlines the phase-out ranges for 2022 and 2023 based on your modified adjusted gross income (MAGI). | Roth IRA Contribution Limits (Based on MAGI) | | | | | --- | --- | --- | --- | | Filing Status | 2022 MAGI | 2023 MAGI | Roth IRA Contribution Limit | | Single or Head of Household | Less than $129,000 | Less than $138,000 | Full contribution allowed | | | Between $129,000 and $144,000 | Between $138,000 and $153,000 | Partial contribution allowed | | | $144,000 or greater | $153,000 or greater | No contribution allowed | | Married Filing Jointly | Less than $204,000 | Less than $218,000 | Full contribution allowed | | | Between $204,000 and $214,000 | Between $218,000 and $228,000 | Partial contribution allowed | | | $214,000 or greater | $228,000 or greater | No contribution allowed | | Married Filing Separately | $0 to $10,000 | $0 to $10,000 | Partial contribution allowed | | | Greater than $10,000 | Greater than $10,000 | No contribution allowed | ### Income Considerations: Traditional IRA Deductions In order for your contributions to your traditional IRA to be deductible, you must meet certain income thresholds. If you make too much money, your contributions may be fully excluded from deduction. Be mindful that the phase-out ranges mentioned below assume you are covered by a workplace retirement plan; different phase-out ranges may be applicable to your situation if this is not true for you. | Traditional IRA Contribution Deduction Eligibility | | | | | --- | --- | --- | --- | | Filing Status | 2022 MAGI Range | 2023 MAGI Range | Deduction Eligibility | | Single | Below $68,000 | Below $73,000 | Full deduction allowed | | | Between $68,000 and $78,000 | Between $73,000 and $83,000 | Partial deduction allowed | | | Greater than $78,000 | Greater than $83,000 | No deduction allowed | | Married Filing Jointly | Below $109,000 | Below $116,000 | Full deduction allowed | | | Between $109,000 and $129,000 | Between $116,000 and $136,000 | Partial deduction allowed | | | Greater than $129,000 | Greater than $136,000 | No deduction allowed | | Married Filing Separately | Between $0 and $10,000 | Between $0 and $10,000 | Partial deduction allowed | | | Greater than $10,000 | Greater than $10,000 | No deduction allowed | ## Broad IRA Contribution Strategy For many Americans, some years are better than others when it comes to salary. Depending on which [tax bracket](https://www.investopedia.com/terms/t/taxbracket.asp) you end up in during a given year, you may want to put more money into either your Roth IRA or your traditional IRA. On one hand, if you anticipate retiring at a lower tax bracket than you’re currently in, you may want to contribute more to the traditional IRA to pay lower taxes today. The fact that future earnings will be taxed is less of a concern because you expect to shift into a lower tax bracket in the future. On the other hand, if you expect to be in a higher tax bracket than your current year, you may want to put more money into your Roth IRA, since you won’t pay taxes on those withdrawals at all. Though you won't get any immediate tax deductions, this is less of a concern because you are currently in a lower tax bracket. This strategy results in your receiving the greatest tax benefit when your tax bracket is highest. ### Important Though Roth IRAs do not have [required minimum distributions](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp), traditional IRAs do. After your 73rd birthday, you will need to begin withdrawing at least the minimum amount from your account and paying income taxes on those withdrawals. This age limit used to be 72 years old but was increased due to the passing of the SECURE 2.0 Act. ## Start Contributing Early To make the best of your retirement planning, you should start the process as early as possible. The more time that your money spends in a retirement account, the more that it can [compound](https://www.investopedia.com/terms/c/compounding.asp) and grow. Later in life, if you feel that your money will be better served in a Roth IRA than a traditional IRA, you can always [roll over](https://www.investopedia.com/terms/r/rollover.asp) the money. ## Can Have Both Types of IRAs Affect Current Taxes? Maintaining both kinds of IRA—a traditional as well as a Roth—not only affects your taxes during retirement but also can land you tax savings today. Contributions to a traditional IRA can reduce your taxable income, allowing you to become eligible for a number of tax credits. For example, the [Qualified Retirement Savings Contribution Credit](https://www.investopedia.com/terms/c/credit-for-qualified-retirement-savings-contribution.asp) provides up to 50% of your total contributions to an IRA or workplace retirement plan in tax credits. As long as your [adjusted gross income (AGI)](https://www.investopedia.com/terms/a/agi.asp) doesn’t exceed $34,000 as a single filer and $68,000 if married filing jointly, you can receive at least a portion of the credit for 2022. For 2023, these thresholds are increased to $36,500 for a single filer or $73,000 for a married couple filing a joint return. ## Are Withdrawals and Distributions From an IRA Taxable? Both IRA styles deal with your taxes in a specific way. Deductible contributions and earnings withdrawn or distributed through a traditional IRA are taxable. In a Roth IRA, contributions are immediately taxable, though withdrawals are not, as long as it’s a [qualified distribution](https://www.investopedia.com/terms/q/qualifieddistribution.asp). Your Roth contributions may be withdrawn at any time, tax- and penalty-free. In both instances, you may be forced to pay an additional 10% tax for early withdrawals if you take money out before you are 59½ years old. ## Can You Over-Contribute Into an IRA? Yes. If you make excess contributions, you’ll have to pay additional taxes for each year that the extra amount exists in your account. The tax will end when you either withdraw the excess or use it as a future contribution. ## The Bottom Line Managing a traditional IRA as well as a Roth IRA can be a great way to take advantage of both worlds. Since you can ultimately roll your traditional IRA into the Roth, there’s little downside to at least trying to maximize both. Keep in mind the tax advantages and implications of both IRA types, and remember that there are income limits for contributing to a Roth IRA.

When it comes to saving for retirement, Roth IRAs and traditional IRAs are some of the most popular ways to go about it. Though both individual retirement account options are different in their own right, the decision of which one to utilize isn’t binary. With enough planning on how to leverage both types of plans, you can maximize your return on investment and enjoy a more lucrative retirement. Key Takeaways You can have both individual retirement accounts—a Roth and a traditional—at the same time.Depending on when you start, you may want to focus more on one type of retirement plan over the other.Roth IRA contributions may grow tax-free, though you won't get any immediate tax deductions to reduce your current tax liability.Traditional IRA contributions allow for immediate tax deductibility, though earnings in the account are taxable when withdrawn for retirement.There are income and contributions limits to be mindful of when contributing to either or both accounts. Do You Need a Roth and a Traditional IRA? It may sound counterintuitive to split whatever money you plan on saving for retirement into two separate types of IRAs, but there’s a financial strategy behind it. As each type of account boasts different rules and tax benefits, investors can capitalize on having each type of account to maintain financial flexibility in retirement. Roth IRA contributions are made after taxes, meaning that you won’t be taxed on the account’s principal when you take your money out later in life. Contributions to traditional IRAs are made pretax, so any money that you withdraw later in life will be subject to taxes. That being said, taxpayers are often able to claim a deduction on the contributions that they make to their traditional IRAs, so they can soften the blow that they’ll receive in retirement. Therefore, there are both current and future tax considerations to be made when investing in both a traditional IRA and Roth IRA. How to Use 2 IRA Types Having both retirement plan types can be beneficial. However, there are things that you have to remember when making your contributions. By following federal regulations, you can ensure that your retirement accounts will work as efficiently for you as you need them to. This means keeping careful track of activity in both accounts while still keeping each record separately. If you create both a traditional IRA and Roth IRA with the same broker, be mindful that both accounts will reside within the same online login. This is especially important to consider when making contributions or withdrawals, as the two types of accounts may be easily confused. Last, consult your financial advisor about the tax strategies for both accounts. Very broadly speaking, a Roth IRA is better for lower-income individuals who expect to move to higher-income tax brackets in the future. On the other hand, higher-earners may appreciate the immediate tax deductions and do not necessarily expect to need future tax benefits. Keep an Eye on Contribution Limits The Internal Revenue Service (IRS) has specific limits on how much you can contribute to all of your traditional and Roth IRAs. Each contribution limit below is the aggregate total contributed to each account. Under guidelines for 2022, your contributions cannot exceed $6,000. The only exception is if you are age 50 or older, which will allow you to contribute another $1,000 among your accounts as a catch-up mechanism. Guidelines for 2023 have increased your contribution limit. Individuals can contribute no more than $6,500 unless they are age 50 or older. The same catch-up contribution for $1,000 applies in 2023. Income Considerations: Roth IRA Contributions You cannot make Roth IRA contributions if you make too much money. In addition, the contribution limits above may be reduced if you earn a specific amount. The table below outlines the phase-out ranges for 2022 and 2023 based on your modified adjusted gross income (MAGI). Roth IRA Contribution Limits (Based on MAGI)  Filing Status 2022 MAGI 2023 MAGI Roth IRA Contribution Limit Single or Head of Household Less than $129,000 Less than $138,000 Full contribution allowed   Between $129,000 and $144,000 Between $138,000 and $153,000 Partial contribution allowed   $144,000 or greater $153,000 or greater No contribution allowed Married Filing Jointly Less than $204,000 Less than $218,000 Full contribution allowed   Between $204,000 and $214,000 Between $218,000 and $228,000 Partial contribution allowed   $214,000 or greater $228,000 or greater No contribution allowed Married Filing Separately $0 to $10,000 $0 to $10,000 Partial contribution allowed Greater than $10,000 Greater than $10,000 No contribution allowed Income Considerations: Traditional IRA Deductions In order for your contributions to your traditional IRA to be deductible, you must meet certain income thresholds. If you make too much money, your contributions may be fully excluded from deduction. Be mindful that the phase-out ranges mentioned below assume you are covered by a workplace retirement plan; different phase-out ranges may be applicable to your situation if this is not true for you. Traditional IRA Contribution Deduction Eligibility Filing Status 2022 MAGI Range 2023 MAGI Range Deduction Eligibility Single Below $68,000 Below $73,000 Full deduction allowed   Between $68,000 and $78,000 Between $73,000 and $83,000 Partial deduction allowed   Greater than $78,000 Greater than $83,000 No deduction allowed Married Filing Jointly Below $109,000 Below $116,000 Full deduction allowed   Between $109,000 and $129,000 Between $116,000 and $136,000 Partial deduction allowed   Greater than $129,000 Greater than $136,000 No deduction allowed Married Filing Separately Between $0 and $10,000 Between $0 and $10,000 Partial deduction allowed Greater than $10,000 Greater than $10,000 No deduction allowed Broad IRA Contribution Strategy For many Americans, some years are better than others when it comes to salary. Depending on which tax bracket you end up in during a given year, you may want to put more money into either your Roth IRA or your traditional IRA. On one hand, if you anticipate retiring at a lower tax bracket than you’re currently in, you may want to contribute more to the traditional IRA to pay lower taxes today. The fact that future earnings will be taxed is less of a concern because you expect to shift into a lower tax bracket in the future. On the other hand, if you expect to be in a higher tax bracket than your current year, you may want to put more money into your Roth IRA, since you won’t pay taxes on those withdrawals at all. Though you won't get any immediate tax deductions, this is less of a concern because you are currently in a lower tax bracket. This strategy results in your receiving the greatest tax benefit when your tax bracket is highest. Important Though Roth IRAs do not have required minimum distributions, traditional IRAs do. After your 73rd birthday, you will need to begin withdrawing at least the minimum amount from your account and paying income taxes on those withdrawals. This age limit used to be 72 years old but was increased due to the passing of the SECURE 2.0 Act. Start Contributing Early To make the best of your retirement planning, you should start the process as early as possible. The more time that your money spends in a retirement account, the more that it can compound and grow. Later in life, if you feel that your money will be better served in a Roth IRA than a traditional IRA, you can always roll over the money. Can Have Both Types of IRAs Affect Current Taxes? Maintaining both kinds of IRA—a traditional as well as a Roth—not only affects your taxes during retirement but also can land you tax savings today. Contributions to a traditional IRA can reduce your taxable income, allowing you to become eligible for a number of tax credits.For example, the Qualified Retirement Savings Contribution Credit provides up to 50% of your total contributions to an IRA or workplace retirement plan in tax credits. As long as your adjusted gross income (AGI) doesn’t exceed $34,000 as a single filer and $68,000 if married filing jointly, you can receive at least a portion of the credit for 2022. For 2023, these thresholds are increased to $36,500 for a single filer or $73,000 for a married couple filing a joint return. Are Withdrawals and Distributions From an IRA Taxable? Both IRA styles deal with your taxes in a specific way. Deductible contributions and earnings withdrawn or distributed through a traditional IRA are taxable. In a Roth IRA, contributions are immediately taxable, though withdrawals are not, as long as it’s a qualified distribution. Your Roth contributions may be withdrawn at any time, tax- and penalty-free. In both instances, you may be forced to pay an additional 10% tax for early withdrawals if you take money out before you are 59½ years old. Can You Over-Contribute Into an IRA? Yes. If you make excess contributions, you’ll have to pay additional taxes for each year that the extra amount exists in your account. The tax will end when you either withdraw the excess or use it as a future contribution. The Bottom Line Managing a traditional IRA as well as a Roth IRA can be a great way to take advantage of both worlds. Since you can ultimately roll your traditional IRA into the Roth, there’s little downside to at least trying to maximize both. Keep in mind the tax advantages and implications of both IRA types, and remember that there are income limits for contributing to a Roth IRA.

https://www.investopedia.com/5-things-to-know-before-the-stock-market-opens-may-17-2024-8649572

5 Things to Know Before the Stock Market Opens

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> China rolls out its strongest measures so far to fix its broken housing market, unveiling plans to buy up unsold homes and loosen mortgages; shares of Reddit (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt">RDDT</a>) are soaring after the social-media platform agreed to share its content with OpenAI; Boeing (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BA">BA</a>) holds its annual meeting of shareholders today, with outgoing CEO Dave Calhoun's status on the board up for debate; voting by around 5,000 employees at a large Mercedes-Benz plant in Alabama on whether to form a union and be represented by the United Auto Workers ends today; and the IEA says the world lacks enough critical minerals to power the clean energy transition. U.S. stock futures are little changed after both the S&amp;P 500 and Nasdaq <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/s-and-p-500-gains-and-losses-today-walmart-stock-soars-after-strong-earnings-report-8649899?hid=8e6700c1a0c3a7e8150effc5f412ac221a2616b4&amp;did=13044931-20240516&amp;utm_campaign=investopedia-daily-post_newsletter&amp;utm_source=investopedia&amp;utm_medium=email&amp;utm_content=051624&amp;lctg=8e6700c1a0c3a7e8150effc5f412ac221a2616b4&amp;lr_input=359fd785d1bbf0599c276fd0c126a1d73ce72dc4006d51bd0ef9700ad6a4e186">retreated from record highs</a>, and the Dow came off the 40,000-point milestone. Here’s what investors need to know today. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <span class="heading-toc" id="toc-1-china-rolls-out-measures-to-fix-broken-housing-market"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> 1. China Rolls Out Measures to Fix Broken Housing Market  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> China has rolled out its strongest measures so far to fix its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fitch-cuts-china-s-outlook-as-real-estate-downturn-hurts-public-finances-8629331">broken housing market</a>, easing mortgage rules and pushing city and local authorities to buy up unsold homes to be converted into affordable housing.<span class="ql-inline-citation" data-cite="11"></span> It is unclear, however, how the country’s cash-strapped local governments will get enough funding to pay for the acquisition. The People’s Bank of China, the country’s central bank, removed the floor on mortgage rates while cutting the minimum down-payment ratio.<span class="ql-inline-citation" data-cite="9"></span> It is also supplying government-backed firms with 300 billion yuan ($42 billion) of funding to buy excess inventory from developers, according to <em>Bloomberg.<span class="ql-inline-citation" data-cite="10"></span> </em>China’s housing downturn has sapped consumer spending, and the country has boosted exports to pump up growth, sparking allegations from the U.S. it is<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/yellen-says-china-s-overcapacity-poses-risks-to-world-economy-8625275"> dumping excess capacity</a>.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <span class="heading-toc" id="toc-2-reddit-soars-after-social-media-platform-strikes-deal-with-openai"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> 2. Reddit Soars After Social-Media Platform Strikes Deal With OpenAI </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Shares of Reddit (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt">RDDT</a>) are jumping 9% in premarket trading after the social-media platform agreed to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/reddit-stock-soars-after-company-inks-partnership-with-chatgpt-owner-openai-8649996">share its content</a> with OpenAI. The partnership with allows the ChatGPT owner to train its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a> models using Reddit content in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators. In addition, Reddit will also add OpenAI as an <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/050815/trends-and-growth-digital-advertising-industry.asp#:~:text=Digital%20advertising%20is%20a%20sales,consumers%20to%20buy%20a%20product.">advertising partner</a>. Reddit struck a similar deal with Alphabet's (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>) Google earlier this year in which it allowed the internet search giant’s AI models, such as Gemini, to make its content available for training via the platform’s <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/application-programming-interface.asp">application programming interface (API)</a>.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-3-boeing-shareholders-to-vote-on-calhouns-board-status"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> 3. Boeing Shareholders to Vote on Calhoun’s Board Status  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Boeing (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BA">BA</a>) holds its annual meeting of shareholders today,<span class="ql-inline-citation" data-cite="8"></span> as the aircraft maker continues to struggle with the fallout from a number of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/boeing-q1-2024-earnings-8637983">safety-related incidents</a> that has led to the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/boeing-ceo-to-step-down-at-end-of-year-amid-737-max-issues-8619721">forthcoming departure</a> of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/ceo.asp">Chief Executive Officer (CEO</a>) Dave Calhoun at the end of the year. One of the issues up for shareholder vote will be whether the outgoing CEO should remain on the board. Proxy advisor Glass Lewis has recommended shareholders vote against Calhoun’s re-election, citing dissatisfaction over efforts to transform the plane maker's safety culture.<span class="ql-inline-citation" data-cite="3"></span> The company has been under pressure after a door plug on an <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/faa-to-investigate-boeing-s-production-after-737-grounding-8425418">Alaska Airlines flight in January </a>blew out of a Boeing 737 Max 9 plane midflight, leading to a <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/boeing-q1-2024-deliveries-fewest-since-2021-8628983">significant slowdown of its production</a> this year, and a slew of investigations by regulators.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-4-voting-ends-at-mercedes-plant-in-alabama-on-whether-to-form-union"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> 4. Voting Ends at Mercedes Plant in Alabama on Whether to Form Union </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Voting by around 5,000 employees at a large Mercedes-Benz plant in Alabama on whether to form a union and be represented by the United Auto Workers concludes today<span class="ql-inline-citation" data-cite="7"></span>. A win in Alabama would further build the union’s momentum, after the UAW won at a Volkswagen plant in Tennessee last month, a victory that gave the union its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/5-things-to-know-before-the-stock-market-opens-april-17-2024-8634439">first contract </a>at a foreign-owned auto-manufacturing plant. Organized labor has historically struggled to make gains in the South.<span class="ql-inline-citation" data-cite="12"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-5-world-lacks-enough-critical-minerals-to-ensure-smooth-clean-energy-transition-iea-says"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> 5. World Lacks Enough Critical Minerals to Ensure Smooth Clean Energy Transition, IEA Says </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There aren't enough critical minerals to ensure a smooth transition to green energy, according to a report from the International Energy Agency.<span class="ql-inline-citation" data-cite="1"></span> “Secure and sustainable access to critical minerals is essential for smooth and affordable clean energy transitions,” IEA Executive Director Fatih Birol said.<span class="ql-inline-citation" data-cite="13"></span> “The world’s appetite for technologies such as solar panels, electric cars and batteries is growing fast—but we cannot satisfy it without reliable and expanding supplies of critical minerals.” The report said IEA analysis showed announced projects are sufficient to meet only 70% of copper and 50% of lithium requirements in 2035. Copper and lithium are key components of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/062315/what-types-raw-materials-would-be-used-auto-manufacturer.asp">electric vehicles</a>.<br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

China rolls out its strongest measures so far to fix its broken housing market, unveiling plans to buy up unsold homes and loosen mortgages; shares of Reddit ([RDDT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt)) are soaring after the social-media platform agreed to share its content with OpenAI; Boeing ([BA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BA)) holds its annual meeting of shareholders today, with outgoing CEO Dave Calhoun's status on the board up for debate; voting by around 5,000 employees at a large Mercedes-Benz plant in Alabama on whether to form a union and be represented by the United Auto Workers ends today; and the IEA says the world lacks enough critical minerals to power the clean energy transition. U.S. stock futures are little changed after both the S&P 500 and Nasdaq [retreated from record highs](https://www.investopedia.com/s-and-p-500-gains-and-losses-today-walmart-stock-soars-after-strong-earnings-report-8649899?hid=8e6700c1a0c3a7e8150effc5f412ac221a2616b4&did=13044931-20240516&utm_campaign=investopedia-daily-post_newsletter&utm_source=investopedia&utm_medium=email&utm_content=051624&lctg=8e6700c1a0c3a7e8150effc5f412ac221a2616b4&lr_input=359fd785d1bbf0599c276fd0c126a1d73ce72dc4006d51bd0ef9700ad6a4e186), and the Dow came off the 40,000-point milestone. Here’s what investors need to know today. ## 1. China Rolls Out Measures to Fix Broken Housing Market China has rolled out its strongest measures so far to fix its [broken housing market](https://www.investopedia.com/fitch-cuts-china-s-outlook-as-real-estate-downturn-hurts-public-finances-8629331), easing mortgage rules and pushing city and local authorities to buy up unsold homes to be converted into affordable housing. It is unclear, however, how the country’s cash-strapped local governments will get enough funding to pay for the acquisition. The People’s Bank of China, the country’s central bank, removed the floor on mortgage rates while cutting the minimum down-payment ratio. It is also supplying government-backed firms with 300 billion yuan ($42 billion) of funding to buy excess inventory from developers, according to *Bloomberg.*China’s housing downturn has sapped consumer spending, and the country has boosted exports to pump up growth, sparking allegations from the U.S. it is[dumping excess capacity](https://www.investopedia.com/yellen-says-china-s-overcapacity-poses-risks-to-world-economy-8625275). ## 2. Reddit Soars After Social-Media Platform Strikes Deal With OpenAI Shares of Reddit ([RDDT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rddt)) are jumping 9% in premarket trading after the social-media platform agreed to [share its content](https://www.investopedia.com/reddit-stock-soars-after-company-inks-partnership-with-chatgpt-owner-openai-8649996) with OpenAI. The partnership with allows the ChatGPT owner to train its [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) models using Reddit content in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators. In addition, Reddit will also add OpenAI as an [advertising partner](https://www.investopedia.com/articles/investing/050815/trends-and-growth-digital-advertising-industry.asp#:~:text=Digital%20advertising%20is%20a%20sales,consumers%20to%20buy%20a%20product.). Reddit struck a similar deal with Alphabet's ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL)) Google earlier this year in which it allowed the internet search giant’s AI models, such as Gemini, to make its content available for training via the platform’s [application programming interface (API)](https://www.investopedia.com/terms/a/application-programming-interface.asp). ## 3. Boeing Shareholders to Vote on Calhoun’s Board Status Boeing ([BA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BA)) holds its annual meeting of shareholders today, as the aircraft maker continues to struggle with the fallout from a number of [safety-related incidents](https://www.investopedia.com/boeing-q1-2024-earnings-8637983) that has led to the [forthcoming departure](https://www.investopedia.com/boeing-ceo-to-step-down-at-end-of-year-amid-737-max-issues-8619721) of [Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) Dave Calhoun at the end of the year. One of the issues up for shareholder vote will be whether the outgoing CEO should remain on the board. Proxy advisor Glass Lewis has recommended shareholders vote against Calhoun’s re-election, citing dissatisfaction over efforts to transform the plane maker's safety culture. The company has been under pressure after a door plug on an [Alaska Airlines flight in January](https://www.investopedia.com/faa-to-investigate-boeing-s-production-after-737-grounding-8425418) blew out of a Boeing 737 Max 9 plane midflight, leading to a [significant slowdown of its production](https://www.investopedia.com/boeing-q1-2024-deliveries-fewest-since-2021-8628983) this year, and a slew of investigations by regulators.  ## 4. Voting Ends at Mercedes Plant in Alabama on Whether to Form Union Voting by around 5,000 employees at a large Mercedes-Benz plant in Alabama on whether to form a union and be represented by the United Auto Workers concludes today. A win in Alabama would further build the union’s momentum, after the UAW won at a Volkswagen plant in Tennessee last month, a victory that gave the union its [first contract](https://www.investopedia.com/5-things-to-know-before-the-stock-market-opens-april-17-2024-8634439) at a foreign-owned auto-manufacturing plant. Organized labor has historically struggled to make gains in the South. ## 5. World Lacks Enough Critical Minerals to Ensure Smooth Clean Energy Transition, IEA Says There aren't enough critical minerals to ensure a smooth transition to green energy, according to a report from the International Energy Agency. “Secure and sustainable access to critical minerals is essential for smooth and affordable clean energy transitions,” IEA Executive Director Fatih Birol said. “The world’s appetite for technologies such as solar panels, electric cars and batteries is growing fast—but we cannot satisfy it without reliable and expanding supplies of critical minerals.” The report said IEA analysis showed announced projects are sufficient to meet only 70% of copper and 50% of lithium requirements in 2035. Copper and lithium are key components of [electric vehicles](https://www.investopedia.com/ask/answers/062315/what-types-raw-materials-would-be-used-auto-manufacturer.asp). Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

China rolls out its strongest measures so far to fix its broken housing market, unveiling plans to buy up unsold homes and loosen mortgages; shares of Reddit (RDDT) are soaring after the social-media platform agreed to share its content with OpenAI; Boeing (BA) holds its annual meeting of shareholders today, with outgoing CEO Dave Calhoun's status on the board up for debate; voting by around 5,000 employees at a large Mercedes-Benz plant in Alabama on whether to form a union and be represented by the United Auto Workers ends today; and the IEA says the world lacks enough critical minerals to power the clean energy transition. U.S. stock futures are little changed after both the S&P 500 and Nasdaq retreated from record highs, and the Dow came off the 40,000-point milestone. Here’s what investors need to know today. 1. China Rolls Out Measures to Fix Broken Housing Market  China has rolled out its strongest measures so far to fix its broken housing market, easing mortgage rules and pushing city and local authorities to buy up unsold homes to be converted into affordable housing. It is unclear, however, how the country’s cash-strapped local governments will get enough funding to pay for the acquisition. The People’s Bank of China, the country’s central bank, removed the floor on mortgage rates while cutting the minimum down-payment ratio. It is also supplying government-backed firms with 300 billion yuan ($42 billion) of funding to buy excess inventory from developers, according to Bloomberg. China’s housing downturn has sapped consumer spending, and the country has boosted exports to pump up growth, sparking allegations from the U.S. it is dumping excess capacity. 2. Reddit Soars After Social-Media Platform Strikes Deal With OpenAI Shares of Reddit (RDDT) are jumping 9% in premarket trading after the social-media platform agreed to share its content with OpenAI. The partnership with allows the ChatGPT owner to train its artificial intelligence (AI) models using Reddit content in exchange for certain OpenAI-powered features being offered to Reddit’s users and moderators. In addition, Reddit will also add OpenAI as an advertising partner. Reddit struck a similar deal with Alphabet's (GOOGL) Google earlier this year in which it allowed the internet search giant’s AI models, such as Gemini, to make its content available for training via the platform’s application programming interface (API). 3. Boeing Shareholders to Vote on Calhoun’s Board Status  Boeing (BA) holds its annual meeting of shareholders today, as the aircraft maker continues to struggle with the fallout from a number of safety-related incidents that has led to the forthcoming departure of Chief Executive Officer (CEO) Dave Calhoun at the end of the year. One of the issues up for shareholder vote will be whether the outgoing CEO should remain on the board. Proxy advisor Glass Lewis has recommended shareholders vote against Calhoun’s re-election, citing dissatisfaction over efforts to transform the plane maker's safety culture. The company has been under pressure after a door plug on an Alaska Airlines flight in January blew out of a Boeing 737 Max 9 plane midflight, leading to a significant slowdown of its production this year, and a slew of investigations by regulators.  4. Voting Ends at Mercedes Plant in Alabama on Whether to Form Union Voting by around 5,000 employees at a large Mercedes-Benz plant in Alabama on whether to form a union and be represented by the United Auto Workers concludes today. A win in Alabama would further build the union’s momentum, after the UAW won at a Volkswagen plant in Tennessee last month, a victory that gave the union its first contract at a foreign-owned auto-manufacturing plant. Organized labor has historically struggled to make gains in the South. 5. World Lacks Enough Critical Minerals to Ensure Smooth Clean Energy Transition, IEA Says There aren't enough critical minerals to ensure a smooth transition to green energy, according to a report from the International Energy Agency. “Secure and sustainable access to critical minerals is essential for smooth and affordable clean energy transitions,” IEA Executive Director Fatih Birol said. “The world’s appetite for technologies such as solar panels, electric cars and batteries is growing fast—but we cannot satisfy it without reliable and expanding supplies of critical minerals.” The report said IEA analysis showed announced projects are sufficient to meet only 70% of copper and 50% of lithium requirements in 2035. Copper and lithium are key components of electric vehicles. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/how-to-talk-to-kids-about-money-8646557

How To Talk To Kids About Money—And Why You Should Do So Early

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you're like most parents, you want your kids to grow up to be financially secure. However, you might find it challenging to start the conversations about money that lead to a solid foundation for future success. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> According to a 2020 T. Rowe Price survey, 41% of parents experience some anxiety discussing financial matters with their kids.<span class="ql-inline-citation" data-cite="1"></span> More recently, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/her-money-mindset-survey-8647284">2024 Her Money Mindset survey</a> from Investopedia and REAL SIMPLE found 20% of parent respondents didn't discuss money with their kids at all.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> While money conversations can feel intimidating, you don't have to be a money expert to teach your children invaluable lessons about personal finance. Here's how to get the money conversation started, make talks age-appropriate, and weave <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/teaching-financial-literacy-starting-early-7372094">financial literacy</a> into your everyday parenting.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Sharing age-appropriate money details with your kids helps them to learn the value of a dollar.</li><li>Parents can use books and apps to increase financial literacy in their children.</li><li>Incorporating money conversations into everyday life can reinforce financial literacy and money management skills.</li><li>Avoid fear- or shame-based tactics to scare kids away from bad habits. Instead, keep positive play and practice central to any discussion of money.</li></ul></div></div></div> <span class="heading-toc" id="toc-why-talking-about-money-with-kids-matters"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Why Talking About Money With Kids Matters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> You may think your child is too young to talk about money. However, kids pick up cues about money—and what it can buy—from the world around them. Young children are already influenced by their external environment, from seeing ads on TV and online to hearing peers talk about vacations and toys. These influences shape their tastes, which will inform their perception of money later in life.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Kids need a knowledgeable and loving adult to help them process these influences and align them with realistic expectations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> "Children will learn about money from watching and listening to their parents, whether their parents talk to them about money or not," says Jen Mayer, an accredited financial counselor and co-founder of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.wearefullyfunded.com/" rel="nofollow">Fully Funded</a>. Mayer says that talking openly about money—how it's earned, managed, and saved—helps kids understand that resources are limited.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> By getting kids involved with hands-on money lessons early, you prepare them to manage their finances independently later. Young people who enter adulthood lacking basic financial literacy are vulnerable to money struggles and get-rich-quick-schemes.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>You can start teaching kids about money as early as when they learn to count. Use cash and coins to teach them math basics. As they age, increase their level of responsibility over household spending.</p></div></div></div> <span class="heading-toc" id="toc-age-appropriate-money-conversations-start-young"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Age-Appropriate Money Conversations Start Young </span> </h2> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_21-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/VXhll/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="When Should Kids Learn About Money?"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The Her Money Mindset Survey from Investopedia and Real Simple found most parents feel their children should learn about money once they are 7-10 years old. Most women respondents who said they don't talk to their kids about money said it's because their children are too young.<br/><br/>However, developmental research shows that children actually start to form emotional reactions to spending and saving money as early as 5-years-old. These attitudes actually translated to real-life spending behaviors later in life, too.<span class="ql-inline-citation" data-cite="4"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> No only can early lessons sink in, but sharing age-appropriate money details with your kids makes them feel included and respected. They see you model transparency, trustworthiness, and responsibility. But it is easier said than done. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A preschooler will grasp very different money concepts than a high schooler, and you might not know where to begin. According to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.pouiconsulting.com/" rel="nofollow">Dr. Traci Williams</a>, a board-certified clinical psychologist and certified financial therapist, you should anticipate that your kids might not immediately understand or engage with the topics you're presenting.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Don't feel that you've failed if your kids don't engage with financial discussions right away. Williams says that when you first start trying to have money conversations "your child may not seem to care and that's OK. At their age, money isn't a priority for them. Continue to share information as the opportunity arises, and try to make it relevant to them and their interests."  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> Ages 3-5: Play Money </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The preschool crowd is still building basic cognitive skills, so keep money talks brief but frequent. Weave them into playtime, daily routines, and hands-on activities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> "Preschoolers can help you count your change and begin learning the denominations of our currency. Play at an imaginary store or restaurant with your toddler or preschooler to demonstrate the process of paying for items," says Williams. "As your child gets older, you can explain how you use money, using trips outside the home as learning opportunities."  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Older preschoolers can read the total at the checkout counter, help you pay the cashier, and count the change. These activities help them understand the basic concept of exchanging money in return for goods and services. They also develop solid vocabulary, knowing the difference between coins and cash. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Once kids have grasped these foundational ideas, Mayer says they can benefit from learning to categorize their money—in other words, they can learn that not all the money they receive goes towards spending.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> "The three-category system of 'spend, save, give' is a good foundation to help kids learn how to be intentional about their money, and teach the habit of saving from an early age," she explains. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Ages 6-10: Allowance Time </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Three-quarters of parent respondents to Real Simple and Investopedia's survey say that children should learn about money during this time (age 7+). Introducing an allowance is one way to start imparting practical money lessons.   </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If you do choose to give your kids an allowance, you can use it to help them set age-appropriate savings goals, like a new toy, gift for someone, or donation to a cause. Guide them through the process of planning and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/budget.asp">budgeting</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>If you're not into allowances, you can still go with them to open their first <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040715/what-should-you-bring-bank-open-checking-account.asp">bank account</a>. This helps them gain familiarity with banks and all the paperwork that goes into managing their own money.<br/></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Williams advises leaning on everyday activities as low-stakes opportunities to introduce money talks. At the grocery store, teach children to compare the prices of products not just by looking at the stickers, but also sizes. On the older end of this age range, kids know enough about math to participate fully in budgeting decisions, coupon clipping, and in-store shopping.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Williams says you can also draw out your kids' motivations by creating a family project around saving for a particular goal, like a special outing or an item the whole family will enjoy. Otherwise, try embedding the same lessons by doing a deep dive into the value of money around fundraisers for their class, scouts, or religious groups.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-subheading__text"> Ages 11-13: Balancing Wants and Needs </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Kids start weighing their own interests and gain an understanding of smart shopping choices in the tween years. When they request the latest toy or electronics, have them compare features, prices, and quality to determine if the value matches the cost. If they have an allowance, help them craft a savings plan and teach them how to shop around for deals—online and in-store. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> This is also a perfect time to make them responsible for monitoring their bank account balances. Doing so can help them make better use of gift-giving seasons—do they want grandma to send toys or would they prefer she deposit the value into their accounts, so they can pay for a summer camp or meet a savings goal? Kids can grasp value at this age, which makes it a great time to help them establish a sound compass around what matters most to them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> This is also a good age to introduce money apps and books that they can play with and read independently.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_60-0"> <span class="mntl-sc-block-subheading__text"> Ages 14-18: Hands-On Practice </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Parents have a responsibility to equip teens with independent money management skills. This is an impressionable time in their lives and lessons learned during this phase can be particularly long-lasting. Older teens will start to get offers for college, jobs, and credit cards—all of which will impact their personal finances for the rest of their lives.   </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Williams says that now is the time to model good money habits. Your kids observe more than you realize, so how you spend your money matters just as much as how you talk about money. Try reading some college savings and career planning books together and discussing whether or not the tips and theories resonate with them. Personal finance isn't one size fits all.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Teens will also benefit from discussions around the emotional aspects of spending and saving. If you're doing it right, this is a time when they will call you out on your own money missteps. This helps them establish their individual money scripts and stories, as differentiated from the ones they inherited from you.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_67-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_68-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Your own money stories might evolve during this soon-to-be empty nester period; together, you can learn how the job market and economy are changing and how you'll confront them from your different stages of adulthood. </p></div></div></div> <span class="heading-toc" id="toc-incorporate-money-into-everyday-conversations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_69-0"> <span class="mntl-sc-block-heading__text"> Incorporate Money Into Everyday Conversations  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> If formal sit-downs to talk finances don't fly with your kids, try teaching real-life money skills on the fly instead. Integrate financial literacy on the daily: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> <li><strong>Big milestones</strong>: Help kids understand that paying for a new car, house, or college degree takes years of forethought. It is easy enough to get them involved in saving, but you also need to teach them about debt. Since most of these items are purchased with loans, seize the opportunity to talk about interest rates, repayment terms, and inflation. Since milestone purchases take time to decide, you can stretch out the lessons over weeks or months.</li><li><strong>Online shopping</strong>: Let kids research prices for similar items across websites. Help them evaluate taxes, shipping or pick-up, warranties, return policies, and more. Now is a good time to chat about internet safety—keeping credit and debit card numbers safe from identity theft.</li><li><strong>Stores</strong>: Let each kid select a few items on the list within a set budget. Then have them find and calculate the total cost of their items, with tax. </li><li><strong>Trips</strong>: Traveling to other countries is enriching because it lets kids compare cultures and learn new practices. If you take an international vacation, teach kids about different currencies and let them calculate how much their favorite foods or toys cost in this new place. Help them understand the basics of trade (imports/exports) and why some things are priced higher or lower in different parts of the world.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_74-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/kFRVP/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="How much do your children know about your household's financial situation?"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-how-to-overcome-common-roadblocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> How To Overcome Common Roadblocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Even with the best intentions, let's be honest: Money talks get tricky. When you've got financial anxiety or trauma, opening up is hard. Remember, there's no need to be perfect or to know it all. Just showing kids how you overcome money challenges builds empathy and resilience.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_79-0"> <span class="mntl-sc-block-subheading__text"> Don't Rely on School </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Though schools today teach some money basics, most don't dig deep into all the money topics kids will face in adulthood. Only 25 U.S. states has some sort of formal financial literacy education requirements in place for high school students.<span class="ql-inline-citation" data-cite="5"></span> Real-life financial decisions boil down to accounting and statistics, so it's surprising that both topics get short shrift in schools. This means that money habits have to come from home, and you're going to be their most important teacher.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-subheading__text"> Don't Tell Yourself It's Too Late  </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Any age is the right age to start money talks. Use everyday spending moments to weave in quick lessons. With time, keep the conversation going by comparing old prices to new ones and constantly questioning <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/difference-between-needs-and-wants-8612333">if purchases are really worth it</a>.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> It is never too late to start talking about money with your kids, even if they're adults. All too often, parents avoid topics like their own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement-planning.asp">retirement</a>, long-term care, and inheritance plans, which directly affect their adult kids. Even if you're not ready to talk about financial literacy with your children, try talking with them about your life plans and how you intend to fund them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_87-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_88-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Financial planners report that often adult children are caught unawares by the passing of a parent.<span class="ql-inline-citation" data-cite="3"></span> Be sure to share estate planning documents and bank account or insurance info well before your kids are ever called upon to use them.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-subheading__text"> Don't Forget That Managing Money Is a Team Sport </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> Because there's so much shame around money, many people only talk about it in hushed tones. It's easy to think that each individual is the sole person responsible for their money successes or follies, but that's not true. Often, money is managed in concert with others with whom your child might not be familiar. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Managing money means juggling a lot more than just your personal spending and saving habits. Talk with kids about the entire ecosystem around money so that they know how to get money help when they need it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <span class="heading-toc" id="toc-frequently-asked-questions-faqs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_94-0"> <span class="mntl-sc-block-heading__text"> Frequently Asked Questions (FAQs) </span> </h2> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_95-0"><span class="heading-toc" id="toc-how-can-i-start-talking-to-my-child-about-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Start Talking to My Child About Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Start money conversations early, using age-appropriate topics. </p><p>Weave lessons organically into everyday routines. Use errands, allowance, and family decisions to introduce money topics. Make discussions engaging and relevant. Let kids share opinions, face consequences, and solve minor money problems.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_97-0"><span class="heading-toc" id="toc-are-there-any-recommended-books-or-apps-for-teaching-kids-about-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Any Recommended Books or Apps for Teaching Kids About Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Check your local library for age-appropriate storybooks about earning, saving, smart spending, and more to share with your kids. You can also try some of these resources:</p><ul><li><strong>Allowance tracker apps</strong>: Apps like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://famzoo.com/" rel="nofollow">FamZoo</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://roostermoney.com/">Rooster Money</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://busykid.com/" rel="nofollow">BusyKid</a> help kids visualize savings progress and budgeting in a fun, engaging way.</li><li><strong>Games and workshops</strong>: Many credit unions and banks offer financial literacy games, summer camps, and workshops. </li><li><strong>Government resources</strong>: The <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp">Consumer Financial Protection Bureau</a> creates free financial education resources like this helpful <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://www.consumerfinance.gov/consumer-tools/educator-tools/youth-financial-education/">Youth Financial Education curriculum</a>. States like <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://portal.ct.gov/OTT/Financial-Wellness/Resources-for-Teachers/Youth-Financial-Education">Connecticut</a> offer financial education portals for teachers, parents, and kids.</li><li><strong>Websites</strong>: <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://www.jumpstart.org/">JumpStart Coalition</a> and <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="externalLink" href="https://www.moneyconfidentkids.com/us/en.html" rel="nofollow">MoneyConfidentKids</a> offer interactive games, printable worksheets, and parenting tips.</li></ul></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_99-0"><span class="heading-toc" id="toc-what-are-the-common-challenges-parents-face-when-discussing-money-with-kids"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Common Challenges Parents Face When Discussing Money With Kids?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>"If you use complicated terms or go into elaborate detail, you'll lose your kids' interest. Keep it simple!" Dr. Williams advises. Start with basic vocabulary and then work your way up to more complex ideas around debt and investing. This may take years.</p><p>Expect your kids to misunderstand, tune out, or ignore you at first. Don't let frustration thwart your efforts. Instead, try to integrate money matters consistently into your daily family life. </p><p>A common challenge is balancing how much information about your own money scripts and struggles to share with your children. For each parent, this will be different. Of course, you don't want them to inherit your traumas or bad habits, but you also don't want to shelter them for too long. </p><p>Rather than starting from the negative with what you can't afford, try talking with your kids about how you can learn new tricks to expand the positive—what you will be able to do and afford in the future. Teach the value of delayed gratification while improving your money hygiene side-by-side with your kids.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_101-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> You don't have to be a money expert to teach your children about the value of a dollar. Learn alongside your child, teach them how to make sound financial decisions, and point them in the direction of credible resources that can support every part of their financial life. <br> </br></p></div>

If you're like most parents, you want your kids to grow up to be financially secure. However, you might find it challenging to start the conversations about money that lead to a solid foundation for future success. According to a 2020 T. Rowe Price survey, 41% of parents experience some anxiety discussing financial matters with their kids. More recently, the [2024 Her Money Mindset survey](https://www.investopedia.com/her-money-mindset-survey-8647284) from Investopedia and REAL SIMPLE found 20% of parent respondents didn't discuss money with their kids at all.  While money conversations can feel intimidating, you don't have to be a money expert to teach your children invaluable lessons about personal finance. Here's how to get the money conversation started, make talks age-appropriate, and weave [financial literacy](https://www.investopedia.com/teaching-financial-literacy-starting-early-7372094) into your everyday parenting.  ### Key Takeaways * Sharing age-appropriate money details with your kids helps them to learn the value of a dollar. * Parents can use books and apps to increase financial literacy in their children. * Incorporating money conversations into everyday life can reinforce financial literacy and money management skills. * Avoid fear- or shame-based tactics to scare kids away from bad habits. Instead, keep positive play and practice central to any discussion of money. ## Why Talking About Money With Kids Matters You may think your child is too young to talk about money. However, kids pick up cues about money—and what it can buy—from the world around them. Young children are already influenced by their external environment, from seeing ads on TV and online to hearing peers talk about vacations and toys. These influences shape their tastes, which will inform their perception of money later in life.  Kids need a knowledgeable and loving adult to help them process these influences and align them with realistic expectations. "Children will learn about money from watching and listening to their parents, whether their parents talk to them about money or not," says Jen Mayer, an accredited financial counselor and co-founder of [Fully Funded](http://www.wearefullyfunded.com/). Mayer says that talking openly about money—how it's earned, managed, and saved—helps kids understand that resources are limited.  By getting kids involved with hands-on money lessons early, you prepare them to manage their finances independently later. Young people who enter adulthood lacking basic financial literacy are vulnerable to money struggles and get-rich-quick-schemes. ### Tip You can start teaching kids about money as early as when they learn to count. Use cash and coins to teach them math basics. As they age, increase their level of responsibility over household spending. ## Age-Appropriate Money Conversations Start Young The Her Money Mindset Survey from Investopedia and Real Simple found most parents feel their children should learn about money once they are 7-10 years old. Most women respondents who said they don't talk to their kids about money said it's because their children are too young. However, developmental research shows that children actually start to form emotional reactions to spending and saving money as early as 5-years-old. These attitudes actually translated to real-life spending behaviors later in life, too. No only can early lessons sink in, but sharing age-appropriate money details with your kids makes them feel included and respected. They see you model transparency, trustworthiness, and responsibility. But it is easier said than done. A preschooler will grasp very different money concepts than a high schooler, and you might not know where to begin. According to [Dr. Traci Williams](https://www.pouiconsulting.com/), a board-certified clinical psychologist and certified financial therapist, you should anticipate that your kids might not immediately understand or engage with the topics you're presenting.  Don't feel that you've failed if your kids don't engage with financial discussions right away. Williams says that when you first start trying to have money conversations "your child may not seem to care and that's OK. At their age, money isn't a priority for them. Continue to share information as the opportunity arises, and try to make it relevant to them and their interests."  ### Ages 3-5: Play Money The preschool crowd is still building basic cognitive skills, so keep money talks brief but frequent. Weave them into playtime, daily routines, and hands-on activities. "Preschoolers can help you count your change and begin learning the denominations of our currency. Play at an imaginary store or restaurant with your toddler or preschooler to demonstrate the process of paying for items," says Williams. "As your child gets older, you can explain how you use money, using trips outside the home as learning opportunities."  Older preschoolers can read the total at the checkout counter, help you pay the cashier, and count the change. These activities help them understand the basic concept of exchanging money in return for goods and services. They also develop solid vocabulary, knowing the difference between coins and cash. Once kids have grasped these foundational ideas, Mayer says they can benefit from learning to categorize their money—in other words, they can learn that not all the money they receive goes towards spending.  "The three-category system of 'spend, save, give' is a good foundation to help kids learn how to be intentional about their money, and teach the habit of saving from an early age," she explains. ### Ages 6-10: Allowance Time Three-quarters of parent respondents to Real Simple and Investopedia's survey say that children should learn about money during this time (age 7+). Introducing an allowance is one way to start imparting practical money lessons.   If you do choose to give your kids an allowance, you can use it to help them set age-appropriate savings goals, like a new toy, gift for someone, or donation to a cause. Guide them through the process of planning and [budgeting](https://www.investopedia.com/terms/b/budget.asp). ### If you're not into allowances, you can still go with them to open their first [bank account](https://www.investopedia.com/ask/answers/040715/what-should-you-bring-bank-open-checking-account.asp). This helps them gain familiarity with banks and all the paperwork that goes into managing their own money. Williams advises leaning on everyday activities as low-stakes opportunities to introduce money talks. At the grocery store, teach children to compare the prices of products not just by looking at the stickers, but also sizes. On the older end of this age range, kids know enough about math to participate fully in budgeting decisions, coupon clipping, and in-store shopping.  Williams says you can also draw out your kids' motivations by creating a family project around saving for a particular goal, like a special outing or an item the whole family will enjoy. Otherwise, try embedding the same lessons by doing a deep dive into the value of money around fundraisers for their class, scouts, or religious groups.  ### Ages 11-13: Balancing Wants and Needs Kids start weighing their own interests and gain an understanding of smart shopping choices in the tween years. When they request the latest toy or electronics, have them compare features, prices, and quality to determine if the value matches the cost. If they have an allowance, help them craft a savings plan and teach them how to shop around for deals—online and in-store. This is also a perfect time to make them responsible for monitoring their bank account balances. Doing so can help them make better use of gift-giving seasons—do they want grandma to send toys or would they prefer she deposit the value into their accounts, so they can pay for a summer camp or meet a savings goal? Kids can grasp value at this age, which makes it a great time to help them establish a sound compass around what matters most to them. This is also a good age to introduce money apps and books that they can play with and read independently.  ### Ages 14-18: Hands-On Practice Parents have a responsibility to equip teens with independent money management skills. This is an impressionable time in their lives and lessons learned during this phase can be particularly long-lasting. Older teens will start to get offers for college, jobs, and credit cards—all of which will impact their personal finances for the rest of their lives.   Williams says that now is the time to model good money habits. Your kids observe more than you realize, so how you spend your money matters just as much as how you talk about money. Try reading some college savings and career planning books together and discussing whether or not the tips and theories resonate with them. Personal finance isn't one size fits all.  Teens will also benefit from discussions around the emotional aspects of spending and saving. If you're doing it right, this is a time when they will call you out on your own money missteps. This helps them establish their individual money scripts and stories, as differentiated from the ones they inherited from you.  ### Your own money stories might evolve during this soon-to-be empty nester period; together, you can learn how the job market and economy are changing and how you'll confront them from your different stages of adulthood.  ## Incorporate Money Into Everyday Conversations If formal sit-downs to talk finances don't fly with your kids, try teaching real-life money skills on the fly instead. Integrate financial literacy on the daily: * **Big milestones**: Help kids understand that paying for a new car, house, or college degree takes years of forethought. It is easy enough to get them involved in saving, but you also need to teach them about debt. Since most of these items are purchased with loans, seize the opportunity to talk about interest rates, repayment terms, and inflation. Since milestone purchases take time to decide, you can stretch out the lessons over weeks or months. * **Online shopping**: Let kids research prices for similar items across websites. Help them evaluate taxes, shipping or pick-up, warranties, return policies, and more. Now is a good time to chat about internet safety—keeping credit and debit card numbers safe from identity theft. * **Stores**: Let each kid select a few items on the list within a set budget. Then have them find and calculate the total cost of their items, with tax. * **Trips**: Traveling to other countries is enriching because it lets kids compare cultures and learn new practices. If you take an international vacation, teach kids about different currencies and let them calculate how much their favorite foods or toys cost in this new place. Help them understand the basics of trade (imports/exports) and why some things are priced higher or lower in different parts of the world. ## How To Overcome Common Roadblocks Even with the best intentions, let's be honest: Money talks get tricky. When you've got financial anxiety or trauma, opening up is hard. Remember, there's no need to be perfect or to know it all. Just showing kids how you overcome money challenges builds empathy and resilience.  ### Don't Rely on School Though schools today teach some money basics, most don't dig deep into all the money topics kids will face in adulthood. Only 25 U.S. states has some sort of formal financial literacy education requirements in place for high school students. Real-life financial decisions boil down to accounting and statistics, so it's surprising that both topics get short shrift in schools. This means that money habits have to come from home, and you're going to be their most important teacher.  ### Don't Tell Yourself It's Too Late Any age is the right age to start money talks. Use everyday spending moments to weave in quick lessons. With time, keep the conversation going by comparing old prices to new ones and constantly questioning [if purchases are really worth it](https://www.investopedia.com/difference-between-needs-and-wants-8612333).  It is never too late to start talking about money with your kids, even if they're adults. All too often, parents avoid topics like their own [retirement](https://www.investopedia.com/terms/r/retirement-planning.asp), long-term care, and inheritance plans, which directly affect their adult kids. Even if you're not ready to talk about financial literacy with your children, try talking with them about your life plans and how you intend to fund them. ### Tip Financial planners report that often adult children are caught unawares by the passing of a parent. Be sure to share estate planning documents and bank account or insurance info well before your kids are ever called upon to use them. ### Don't Forget That Managing Money Is a Team Sport Because there's so much shame around money, many people only talk about it in hushed tones. It's easy to think that each individual is the sole person responsible for their money successes or follies, but that's not true. Often, money is managed in concert with others with whom your child might not be familiar. Managing money means juggling a lot more than just your personal spending and saving habits. Talk with kids about the entire ecosystem around money so that they know how to get money help when they need it. ## Frequently Asked Questions (FAQs) ## How Can I Start Talking to My Child About Money? Start money conversations early, using age-appropriate topics.  Weave lessons organically into everyday routines. Use errands, allowance, and family decisions to introduce money topics. Make discussions engaging and relevant. Let kids share opinions, face consequences, and solve minor money problems. ## Are There Any Recommended Books or Apps for Teaching Kids About Money? Check your local library for age-appropriate storybooks about earning, saving, smart spending, and more to share with your kids. You can also try some of these resources: * **Allowance tracker apps**: Apps like [FamZoo](https://famzoo.com/), [Rooster Money](https://roostermoney.com/), and [BusyKid](https://busykid.com/) help kids visualize savings progress and budgeting in a fun, engaging way. * **Games and workshops**: Many credit unions and banks offer financial literacy games, summer camps, and workshops. * **Government resources**: The [Consumer Financial Protection Bureau](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp) creates free financial education resources like this helpful [Youth Financial Education curriculum](https://www.consumerfinance.gov/consumer-tools/educator-tools/youth-financial-education/). States like [Connecticut](https://portal.ct.gov/OTT/Financial-Wellness/Resources-for-Teachers/Youth-Financial-Education) offer financial education portals for teachers, parents, and kids. * **Websites**: [JumpStart Coalition](https://www.jumpstart.org/) and [MoneyConfidentKids](https://www.moneyconfidentkids.com/us/en.html) offer interactive games, printable worksheets, and parenting tips. ## What Are the Common Challenges Parents Face When Discussing Money With Kids? "If you use complicated terms or go into elaborate detail, you'll lose your kids' interest. Keep it simple!" Dr. Williams advises. Start with basic vocabulary and then work your way up to more complex ideas around debt and investing. This may take years. Expect your kids to misunderstand, tune out, or ignore you at first. Don't let frustration thwart your efforts. Instead, try to integrate money matters consistently into your daily family life.  A common challenge is balancing how much information about your own money scripts and struggles to share with your children. For each parent, this will be different. Of course, you don't want them to inherit your traumas or bad habits, but you also don't want to shelter them for too long.  Rather than starting from the negative with what you can't afford, try talking with your kids about how you can learn new tricks to expand the positive—what you will be able to do and afford in the future. Teach the value of delayed gratification while improving your money hygiene side-by-side with your kids. ## The Bottom Line You don't have to be a money expert to teach your children about the value of a dollar. Learn alongside your child, teach them how to make sound financial decisions, and point them in the direction of credible resources that can support every part of their financial life. 

If you're like most parents, you want your kids to grow up to be financially secure. However, you might find it challenging to start the conversations about money that lead to a solid foundation for future success. According to a 2020 T. Rowe Price survey, 41% of parents experience some anxiety discussing financial matters with their kids. More recently, the 2024 Her Money Mindset survey from Investopedia and REAL SIMPLE found 20% of parent respondents didn't discuss money with their kids at all.  While money conversations can feel intimidating, you don't have to be a money expert to teach your children invaluable lessons about personal finance. Here's how to get the money conversation started, make talks age-appropriate, and weave financial literacy into your everyday parenting.  Key Takeaways Sharing age-appropriate money details with your kids helps them to learn the value of a dollar.Parents can use books and apps to increase financial literacy in their children.Incorporating money conversations into everyday life can reinforce financial literacy and money management skills.Avoid fear- or shame-based tactics to scare kids away from bad habits. Instead, keep positive play and practice central to any discussion of money. Why Talking About Money With Kids Matters You may think your child is too young to talk about money. However, kids pick up cues about money—and what it can buy—from the world around them. Young children are already influenced by their external environment, from seeing ads on TV and online to hearing peers talk about vacations and toys. These influences shape their tastes, which will inform their perception of money later in life.  Kids need a knowledgeable and loving adult to help them process these influences and align them with realistic expectations. "Children will learn about money from watching and listening to their parents, whether their parents talk to them about money or not," says Jen Mayer, an accredited financial counselor and co-founder of Fully Funded. Mayer says that talking openly about money—how it's earned, managed, and saved—helps kids understand that resources are limited.  By getting kids involved with hands-on money lessons early, you prepare them to manage their finances independently later. Young people who enter adulthood lacking basic financial literacy are vulnerable to money struggles and get-rich-quick-schemes. Tip You can start teaching kids about money as early as when they learn to count. Use cash and coins to teach them math basics. As they age, increase their level of responsibility over household spending. Age-Appropriate Money Conversations Start Young The Her Money Mindset Survey from Investopedia and Real Simple found most parents feel their children should learn about money once they are 7-10 years old. Most women respondents who said they don't talk to their kids about money said it's because their children are too young.However, developmental research shows that children actually start to form emotional reactions to spending and saving money as early as 5-years-old. These attitudes actually translated to real-life spending behaviors later in life, too. No only can early lessons sink in, but sharing age-appropriate money details with your kids makes them feel included and respected. They see you model transparency, trustworthiness, and responsibility. But it is easier said than done. A preschooler will grasp very different money concepts than a high schooler, and you might not know where to begin. According to Dr. Traci Williams, a board-certified clinical psychologist and certified financial therapist, you should anticipate that your kids might not immediately understand or engage with the topics you're presenting.  Don't feel that you've failed if your kids don't engage with financial discussions right away. Williams says that when you first start trying to have money conversations "your child may not seem to care and that's OK. At their age, money isn't a priority for them. Continue to share information as the opportunity arises, and try to make it relevant to them and their interests."  Ages 3-5: Play Money The preschool crowd is still building basic cognitive skills, so keep money talks brief but frequent. Weave them into playtime, daily routines, and hands-on activities. "Preschoolers can help you count your change and begin learning the denominations of our currency. Play at an imaginary store or restaurant with your toddler or preschooler to demonstrate the process of paying for items," says Williams. "As your child gets older, you can explain how you use money, using trips outside the home as learning opportunities."  Older preschoolers can read the total at the checkout counter, help you pay the cashier, and count the change. These activities help them understand the basic concept of exchanging money in return for goods and services. They also develop solid vocabulary, knowing the difference between coins and cash. Once kids have grasped these foundational ideas, Mayer says they can benefit from learning to categorize their money—in other words, they can learn that not all the money they receive goes towards spending.  "The three-category system of 'spend, save, give' is a good foundation to help kids learn how to be intentional about their money, and teach the habit of saving from an early age," she explains. Ages 6-10: Allowance Time Three-quarters of parent respondents to Real Simple and Investopedia's survey say that children should learn about money during this time (age 7+). Introducing an allowance is one way to start imparting practical money lessons.   If you do choose to give your kids an allowance, you can use it to help them set age-appropriate savings goals, like a new toy, gift for someone, or donation to a cause. Guide them through the process of planning and budgeting. If you're not into allowances, you can still go with them to open their first bank account. This helps them gain familiarity with banks and all the paperwork that goes into managing their own money. Williams advises leaning on everyday activities as low-stakes opportunities to introduce money talks. At the grocery store, teach children to compare the prices of products not just by looking at the stickers, but also sizes. On the older end of this age range, kids know enough about math to participate fully in budgeting decisions, coupon clipping, and in-store shopping.  Williams says you can also draw out your kids' motivations by creating a family project around saving for a particular goal, like a special outing or an item the whole family will enjoy. Otherwise, try embedding the same lessons by doing a deep dive into the value of money around fundraisers for their class, scouts, or religious groups.  Ages 11-13: Balancing Wants and Needs Kids start weighing their own interests and gain an understanding of smart shopping choices in the tween years. When they request the latest toy or electronics, have them compare features, prices, and quality to determine if the value matches the cost. If they have an allowance, help them craft a savings plan and teach them how to shop around for deals—online and in-store. This is also a perfect time to make them responsible for monitoring their bank account balances. Doing so can help them make better use of gift-giving seasons—do they want grandma to send toys or would they prefer she deposit the value into their accounts, so they can pay for a summer camp or meet a savings goal? Kids can grasp value at this age, which makes it a great time to help them establish a sound compass around what matters most to them. This is also a good age to introduce money apps and books that they can play with and read independently.  Ages 14-18: Hands-On Practice Parents have a responsibility to equip teens with independent money management skills. This is an impressionable time in their lives and lessons learned during this phase can be particularly long-lasting. Older teens will start to get offers for college, jobs, and credit cards—all of which will impact their personal finances for the rest of their lives.   Williams says that now is the time to model good money habits. Your kids observe more than you realize, so how you spend your money matters just as much as how you talk about money. Try reading some college savings and career planning books together and discussing whether or not the tips and theories resonate with them. Personal finance isn't one size fits all.  Teens will also benefit from discussions around the emotional aspects of spending and saving. If you're doing it right, this is a time when they will call you out on your own money missteps. This helps them establish their individual money scripts and stories, as differentiated from the ones they inherited from you.  Your own money stories might evolve during this soon-to-be empty nester period; together, you can learn how the job market and economy are changing and how you'll confront them from your different stages of adulthood.  Incorporate Money Into Everyday Conversations  If formal sit-downs to talk finances don't fly with your kids, try teaching real-life money skills on the fly instead. Integrate financial literacy on the daily: Big milestones: Help kids understand that paying for a new car, house, or college degree takes years of forethought. It is easy enough to get them involved in saving, but you also need to teach them about debt. Since most of these items are purchased with loans, seize the opportunity to talk about interest rates, repayment terms, and inflation. Since milestone purchases take time to decide, you can stretch out the lessons over weeks or months.Online shopping: Let kids research prices for similar items across websites. Help them evaluate taxes, shipping or pick-up, warranties, return policies, and more. Now is a good time to chat about internet safety—keeping credit and debit card numbers safe from identity theft.Stores: Let each kid select a few items on the list within a set budget. Then have them find and calculate the total cost of their items, with tax. Trips: Traveling to other countries is enriching because it lets kids compare cultures and learn new practices. If you take an international vacation, teach kids about different currencies and let them calculate how much their favorite foods or toys cost in this new place. Help them understand the basics of trade (imports/exports) and why some things are priced higher or lower in different parts of the world. How To Overcome Common Roadblocks Even with the best intentions, let's be honest: Money talks get tricky. When you've got financial anxiety or trauma, opening up is hard. Remember, there's no need to be perfect or to know it all. Just showing kids how you overcome money challenges builds empathy and resilience.  Don't Rely on School Though schools today teach some money basics, most don't dig deep into all the money topics kids will face in adulthood. Only 25 U.S. states has some sort of formal financial literacy education requirements in place for high school students. Real-life financial decisions boil down to accounting and statistics, so it's surprising that both topics get short shrift in schools. This means that money habits have to come from home, and you're going to be their most important teacher.  Don't Tell Yourself It's Too Late  Any age is the right age to start money talks. Use everyday spending moments to weave in quick lessons. With time, keep the conversation going by comparing old prices to new ones and constantly questioning if purchases are really worth it.  It is never too late to start talking about money with your kids, even if they're adults. All too often, parents avoid topics like their own retirement, long-term care, and inheritance plans, which directly affect their adult kids. Even if you're not ready to talk about financial literacy with your children, try talking with them about your life plans and how you intend to fund them. Tip Financial planners report that often adult children are caught unawares by the passing of a parent. Be sure to share estate planning documents and bank account or insurance info well before your kids are ever called upon to use them. Don't Forget That Managing Money Is a Team Sport Because there's so much shame around money, many people only talk about it in hushed tones. It's easy to think that each individual is the sole person responsible for their money successes or follies, but that's not true. Often, money is managed in concert with others with whom your child might not be familiar. Managing money means juggling a lot more than just your personal spending and saving habits. Talk with kids about the entire ecosystem around money so that they know how to get money help when they need it. Frequently Asked Questions (FAQs) How Can I Start Talking to My Child About Money? Start money conversations early, using age-appropriate topics. Weave lessons organically into everyday routines. Use errands, allowance, and family decisions to introduce money topics. Make discussions engaging and relevant. Let kids share opinions, face consequences, and solve minor money problems. Are There Any Recommended Books or Apps for Teaching Kids About Money? Check your local library for age-appropriate storybooks about earning, saving, smart spending, and more to share with your kids. You can also try some of these resources:Allowance tracker apps: Apps like FamZoo, Rooster Money, and BusyKid help kids visualize savings progress and budgeting in a fun, engaging way.Games and workshops: Many credit unions and banks offer financial literacy games, summer camps, and workshops. Government resources: The Consumer Financial Protection Bureau creates free financial education resources like this helpful Youth Financial Education curriculum. States like Connecticut offer financial education portals for teachers, parents, and kids.Websites: JumpStart Coalition and MoneyConfidentKids offer interactive games, printable worksheets, and parenting tips. What Are the Common Challenges Parents Face When Discussing Money With Kids? "If you use complicated terms or go into elaborate detail, you'll lose your kids' interest. Keep it simple!" Dr. Williams advises. Start with basic vocabulary and then work your way up to more complex ideas around debt and investing. This may take years.Expect your kids to misunderstand, tune out, or ignore you at first. Don't let frustration thwart your efforts. Instead, try to integrate money matters consistently into your daily family life. A common challenge is balancing how much information about your own money scripts and struggles to share with your children. For each parent, this will be different. Of course, you don't want them to inherit your traumas or bad habits, but you also don't want to shelter them for too long. Rather than starting from the negative with what you can't afford, try talking with your kids about how you can learn new tricks to expand the positive—what you will be able to do and afford in the future. Teach the value of delayed gratification while improving your money hygiene side-by-side with your kids. The Bottom Line You don't have to be a money expert to teach your children about the value of a dollar. Learn alongside your child, teach them how to make sound financial decisions, and point them in the direction of credible resources that can support every part of their financial life. 

https://www.investopedia.com/hiring-a-financial-counselor-5213566

Guide to Hiring a Financial Counselor

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Financial counselors help individuals and families <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/guide-to-financial-literacy-4800530">develop financial literacy skills and establish good financial habits</a>. They offer a broad range of services and might help you tackle an immediate financial crisis, build savings, manage student loans, pay down debt, and refer you to a different type of financial professional when your needs change. If you could benefit from financial education and support, a financial counselor might offer the help you need. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Financial counselors help people build financial skills and improve their overall financial health.</li><li>Financial counselors often help lower-income households manage current expenses, build savings, make plans to pay off debt, and navigate public assistance benefits. </li><li>Financial counselor fees are generally lower than those for financial advisors and planners.</li><li>Military members, university students, and households struggling financially due to the COVID-19 pandemic may have access to free financial counseling.<span class="ql-inline-citation" data-cite="10"></span><br/></li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-a-financial-counselor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Is a Financial Counselor? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Financial counselors are personal finance experts who help clients manage their money more effectively and responsibly. They often provide education and guidance on topics relevant to lower-income households, such as saving, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/budget.asp">budgeting</a>, paying off debt, managing credit, and realizing financial goals, such as buying a house. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Like many titles used by financial professionals, the term “financial counselor” is not regulated—meaning anyone can call themselves one. What’s more, you don’t need any specific licenses or certifications to set up shop as a financial counselor. These factors can make it tricky to find a counselor with the experience and expertise you need.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Still, one certification in the field is gaining traction: the accredited financial counselor (AFC), offered by the Association for Financial Counseling and Planning Education (AFCPE). To earn the certification, candidates must meet ethical, educational, and experience requirements, including a minimum of 1,000 hours of relevant experience in financial counseling.<span class="ql-inline-citation" data-cite="8"></span> There’s also an exam that focuses on nine core competencies: <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li>Gathering client information</li> <li>Helping clients create action plans</li> <li>Developing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/06/financialreporting.asp">financial statements</a>, ratios, and spending plans</li> <li>Money management</li> <li>Credit and debt management</li> <li>Educating clients about major purchases</li> <li>Managing financial risks</li> <li>Discussing investing basics with clients</li> <li>Educating clients about retirement and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a><span class="ql-inline-citation" data-cite="1"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Financial counselors who hold the AFC accreditation must also meet continuing education requirements and abide by a code of ethics.<span class="ql-inline-citation" data-cite="2"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-what-do-financial-counselors-do"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> What Do Financial Counselors Do? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Financial counselors offer support and guidance on a variety of financial topics. They can help you to: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> <li>Build savings</li> <li>Create (and stick to) a budget</li> <li>Create a plan to pay down debt</li> <li>Deal with an immediate financial crisis</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0312/tax-credits-that-can-get-you-a-refund.aspx">Determine if you’re eligible for tax credits</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-improve-your-credit-score-4590097">Improve your credit score</a> </li> <li>Manage lines of credit </li> <li>Manage student loans</li> <li>Modify ineffective money habits</li> <li>Navigate available public benefits and community resources</li> <li>Set and realize financial goals</li> <li>Understand basic financial principles</li> <li>Improve your overall financial health</li> <li>Refer you to an investment advisor or financial planner when you’re ready<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Some financial counselors have extra training in other areas, such as serving the needs of military service members and their families, veterans, and people with disabilities. There are also housing counselors, who specialize in helping people find affordable housing, avoid foreclosure, and manage <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/reverse-mortgage/">reverse mortgages</a>. You can find a housing counselor approved by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/us-department-housing-urban-development-hud.asp">U.S. Department of Housing and Urban Development (HUD)</a> on its website.<span class="ql-inline-citation" data-cite="5"></span> <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A financial counselor can’t make investment recommendations unless registered as an investment advisor.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> If you need help with budgeting, saving, or paying down debt, an AFC-certified financial counselor can be a good choice. However, if you’re looking for investment recommendations, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetmanagement.asp">asset management</a>, retirement planning, complex tax strategies, or a complete financial plan, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp">financial advisor</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/100115/why-your-financial-advisor-should-be-cfp.asp">certified financial planner (CFP) will be a better fit</a>.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-how-much-do-financial-counselors-cost"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> How Much Do Financial Counselors Cost?  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Financial counselors work in various settings—from hospitals and banks to universities and private practices. The cost of meeting with a financial counselor usually depends on where they work, but in many cases the price is lower than working with a financial advisor or CFP.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Financial counselors who work in private practice may offer a free initial session and then charge a flat fee for any subsequent meetings. Others may charge an hourly rate or a monthly subscription. <br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> You may also be able to find free financial counseling services. For example, counselors who work for the military may <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/12-financial-tips-for-military-families-5194431">offer financial counseling to service members</a> at no charge. Likewise, universities with a money management or career center may offer free financial counseling to students. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> No matter where AFC-certified counselors work, they must offer “reasonable” fees that are disclosed upfront to clients.<span class="ql-inline-citation" data-cite="11"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_36-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_37-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>AFCPE-accredited financial counselors and coaches offer unbiased and fully confidential virtual financial counseling and coaching sessions that are free to individuals and families struggling with the financial implications of COVID-19. The program is supported by the Wells Fargo Foundation.<span class="ql-inline-citation" data-cite="10"></span></p></div></div></div> <span class="heading-toc" id="toc-how-to-choose-a-financial-counselor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> How to Choose a Financial Counselor </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> If you think you could benefit from a financial counselor—but don’t happen to know one—start with referrals from friends, colleagues, or family members who seem to have their finances under control. You can also ask your local bank or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a> if it offers financial counseling services. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Once you have a few potential candidates, the AFCPE suggests asking the contenders a few questions before making any decisions:   </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> <li><strong>What are your credentials?</strong> Look for the AFC accreditation, which demonstrates a higher level of education and commitment to the profession.</li><li><strong>What experience do you have?</strong> Find a counselor who has helped people in situations similar to yours.</li><li><strong>How do you stay up to date with developments in personal finance?</strong> AFCs have to meet continuing education requirements and abide by a code of ethics. </li><li><strong>Which services do you offer?</strong> Be sure their services or areas of expertise align with your needs.</li><li><strong>What is your approach?</strong> Make sure their philosophy, personality, and communication style work well for you.  </li><li><strong>Which types of clients do you work with?</strong> Some financial counselors work with clients with a specific minimum net worth, so make sure the counselor is a good fit for your financial situation. </li><li><strong>How much do you charge?</strong> The financial counselor should provide an estimate based on what you want to accomplish.</li><li><strong>Do others stand to gain from the financial advice you give me?</strong> Find out if there are any conflicts of interest.</li><li><strong>Have you ever been disciplined for any unlawful or unethical actions?</strong> You might also want to ask for references and do an online search. <br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The AFCPE emphasizes that "anyone can call themselves a financial counselor, coach, advisor or planner, but a credential demonstrates a higher level of education, specialty or commitment."<span class="ql-inline-citation" data-cite="3"></span> You can verify if a potential candidate has received a qualification by checking the AFCPE directory.<span class="ql-inline-citation" data-cite="7"></span>  <br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-what-is-an-accredited-financial-counselor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Accredited Financial Counselor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The accredited financial counselor (AFC) certification is offered by the Association for Financial Counseling and Planning Education (AFCPE) to certify counselors who have met the organization's educational requirements and pledged to follow its ethical standards. Candidates must have a minimum of 1,000 hours of relevant experience in financial counseling and take continuing education to maintain certification.<span class="ql-inline-citation" data-cite="8"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-what-is-the-difference-between-a-financial-counselor-and-a-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between a Financial Counselor and a Financial Advisor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The primary difference between financial counselors and advisors is the clients they serve. Financial counselors tend to work with lower-income clients, building financial literacy skills and sound financial habits. In contrast, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/050815/what-do-financial-advisers-do.asp">financial advisors typically offer a comprehensive range of services</a> for middle- and higher-income clients, such as investment recommendations, portfolio management, estate planning, tax planning, insurance, and putting the kids through college.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-what-does-a-financial-counselor-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does a Financial Counselor Cost?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>That is decided in part by where they work, whether it be a bank, a hospital, a university, or their own private practice. An initial session is often free, after which a flat fee per meeting, an hourly rate, or a monthly subscription fee are all possible scenarios. University students and military service members and veterans may qualify for free services. The price is generally less than that charged by financial advisors and certified financial planners (CFPs). Financial counselors with the AFC accreditation are required to charge “reasonable” fees and state them up front.<span class="ql-inline-citation" data-cite="11"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Financial counselors provide education and guidance to help people manage their money and improve their financial well-being. Working with a financial counselor can be an excellent first step, as they help lay the foundation for financial success. Once your financial situation is under control, the counselor may refer you to a financial advisor or planner to work on advanced topics, such as investing, tax planning, saving for college, and building a nest egg.<br/> </p></div>

Financial counselors help individuals and families [develop financial literacy skills and establish good financial habits](https://www.investopedia.com/guide-to-financial-literacy-4800530). They offer a broad range of services and might help you tackle an immediate financial crisis, build savings, manage student loans, pay down debt, and refer you to a different type of financial professional when your needs change. If you could benefit from financial education and support, a financial counselor might offer the help you need. ### Key Takeaways * Financial counselors help people build financial skills and improve their overall financial health. * Financial counselors often help lower-income households manage current expenses, build savings, make plans to pay off debt, and navigate public assistance benefits. * Financial counselor fees are generally lower than those for financial advisors and planners. * Military members, university students, and households struggling financially due to the COVID-19 pandemic may have access to free financial counseling. ## What Is a Financial Counselor? Financial counselors are personal finance experts who help clients manage their money more effectively and responsibly. They often provide education and guidance on topics relevant to lower-income households, such as saving, [budgeting](https://www.investopedia.com/terms/b/budget.asp), paying off debt, managing credit, and realizing financial goals, such as buying a house.  Like many titles used by financial professionals, the term “financial counselor” is not regulated—meaning anyone can call themselves one. What’s more, you don’t need any specific licenses or certifications to set up shop as a financial counselor. These factors can make it tricky to find a counselor with the experience and expertise you need. Still, one certification in the field is gaining traction: the accredited financial counselor (AFC), offered by the Association for Financial Counseling and Planning Education (AFCPE). To earn the certification, candidates must meet ethical, educational, and experience requirements, including a minimum of 1,000 hours of relevant experience in financial counseling. There’s also an exam that focuses on nine core competencies:  * Gathering client information * Helping clients create action plans * Developing [financial statements](https://www.investopedia.com/articles/basics/06/financialreporting.asp), ratios, and spending plans * Money management * Credit and debt management * Educating clients about major purchases * Managing financial risks * Discussing investing basics with clients * Educating clients about retirement and [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp) Financial counselors who hold the AFC accreditation must also meet continuing education requirements and abide by a code of ethics. ## What Do Financial Counselors Do? Financial counselors offer support and guidance on a variety of financial topics. They can help you to: * Build savings * Create (and stick to) a budget * Create a plan to pay down debt * Deal with an immediate financial crisis * [Determine if you’re eligible for tax credits](https://www.investopedia.com/financial-edge/0312/tax-credits-that-can-get-you-a-refund.aspx) * [Improve your credit score](https://www.investopedia.com/how-to-improve-your-credit-score-4590097) * Manage lines of credit * Manage student loans * Modify ineffective money habits * Navigate available public benefits and community resources * Set and realize financial goals * Understand basic financial principles * Improve your overall financial health * Refer you to an investment advisor or financial planner when you’re ready Some financial counselors have extra training in other areas, such as serving the needs of military service members and their families, veterans, and people with disabilities. There are also housing counselors, who specialize in helping people find affordable housing, avoid foreclosure, and manage [reverse mortgages](https://www.investopedia.com/mortgage/reverse-mortgage/). You can find a housing counselor approved by the [U.S. Department of Housing and Urban Development (HUD)](https://www.investopedia.com/terms/u/us-department-housing-urban-development-hud.asp) on its website.  ### A financial counselor can’t make investment recommendations unless registered as an investment advisor. If you need help with budgeting, saving, or paying down debt, an AFC-certified financial counselor can be a good choice. However, if you’re looking for investment recommendations, [asset management](https://www.investopedia.com/terms/a/assetmanagement.asp), retirement planning, complex tax strategies, or a complete financial plan, a [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) or [certified financial planner (CFP) will be a better fit](https://www.investopedia.com/articles/investing/100115/why-your-financial-advisor-should-be-cfp.asp). ## How Much Do Financial Counselors Cost? Financial counselors work in various settings—from hospitals and banks to universities and private practices. The cost of meeting with a financial counselor usually depends on where they work, but in many cases the price is lower than working with a financial advisor or CFP. Financial counselors who work in private practice may offer a free initial session and then charge a flat fee for any subsequent meetings. Others may charge an hourly rate or a monthly subscription.  You may also be able to find free financial counseling services. For example, counselors who work for the military may [offer financial counseling to service members](https://www.investopedia.com/12-financial-tips-for-military-families-5194431) at no charge. Likewise, universities with a money management or career center may offer free financial counseling to students.  No matter where AFC-certified counselors work, they must offer “reasonable” fees that are disclosed upfront to clients. ### AFCPE-accredited financial counselors and coaches offer unbiased and fully confidential virtual financial counseling and coaching sessions that are free to individuals and families struggling with the financial implications of COVID-19. The program is supported by the Wells Fargo Foundation. ## How to Choose a Financial Counselor If you think you could benefit from a financial counselor—but don’t happen to know one—start with referrals from friends, colleagues, or family members who seem to have their finances under control. You can also ask your local bank or [credit union](https://www.investopedia.com/terms/c/creditunion.asp) if it offers financial counseling services.  Once you have a few potential candidates, the AFCPE suggests asking the contenders a few questions before making any decisions:   * **What are your credentials?** Look for the AFC accreditation, which demonstrates a higher level of education and commitment to the profession. * **What experience do you have?** Find a counselor who has helped people in situations similar to yours. * **How do you stay up to date with developments in personal finance?** AFCs have to meet continuing education requirements and abide by a code of ethics. * **Which services do you offer?** Be sure their services or areas of expertise align with your needs. * **What is your approach?** Make sure their philosophy, personality, and communication style work well for you. * **Which types of clients do you work with?** Some financial counselors work with clients with a specific minimum net worth, so make sure the counselor is a good fit for your financial situation. * **How much do you charge?** The financial counselor should provide an estimate based on what you want to accomplish. * **Do others stand to gain from the financial advice you give me?** Find out if there are any conflicts of interest. * **Have you ever been disciplined for any unlawful or unethical actions?** You might also want to ask for references and do an online search. The AFCPE emphasizes that "anyone can call themselves a financial counselor, coach, advisor or planner, but a credential demonstrates a higher level of education, specialty or commitment." You can verify if a potential candidate has received a qualification by checking the AFCPE directory.   ## What Is an Accredited Financial Counselor? The accredited financial counselor (AFC) certification is offered by the Association for Financial Counseling and Planning Education (AFCPE) to certify counselors who have met the organization's educational requirements and pledged to follow its ethical standards. Candidates must have a minimum of 1,000 hours of relevant experience in financial counseling and take continuing education to maintain certification. ## What Is the Difference Between a Financial Counselor and a Financial Advisor? The primary difference between financial counselors and advisors is the clients they serve. Financial counselors tend to work with lower-income clients, building financial literacy skills and sound financial habits. In contrast, [financial advisors typically offer a comprehensive range of services](https://www.investopedia.com/articles/personal-finance/050815/what-do-financial-advisers-do.asp) for middle- and higher-income clients, such as investment recommendations, portfolio management, estate planning, tax planning, insurance, and putting the kids through college. ## What Does a Financial Counselor Cost? That is decided in part by where they work, whether it be a bank, a hospital, a university, or their own private practice. An initial session is often free, after which a flat fee per meeting, an hourly rate, or a monthly subscription fee are all possible scenarios. University students and military service members and veterans may qualify for free services. The price is generally less than that charged by financial advisors and certified financial planners (CFPs). Financial counselors with the AFC accreditation are required to charge “reasonable” fees and state them up front. ## The Bottom Line Financial counselors provide education and guidance to help people manage their money and improve their financial well-being. Working with a financial counselor can be an excellent first step, as they help lay the foundation for financial success. Once your financial situation is under control, the counselor may refer you to a financial advisor or planner to work on advanced topics, such as investing, tax planning, saving for college, and building a nest egg.

Financial counselors help individuals and families develop financial literacy skills and establish good financial habits. They offer a broad range of services and might help you tackle an immediate financial crisis, build savings, manage student loans, pay down debt, and refer you to a different type of financial professional when your needs change. If you could benefit from financial education and support, a financial counselor might offer the help you need. Key Takeaways Financial counselors help people build financial skills and improve their overall financial health.Financial counselors often help lower-income households manage current expenses, build savings, make plans to pay off debt, and navigate public assistance benefits. Financial counselor fees are generally lower than those for financial advisors and planners.Military members, university students, and households struggling financially due to the COVID-19 pandemic may have access to free financial counseling. What Is a Financial Counselor? Financial counselors are personal finance experts who help clients manage their money more effectively and responsibly. They often provide education and guidance on topics relevant to lower-income households, such as saving, budgeting, paying off debt, managing credit, and realizing financial goals, such as buying a house.  Like many titles used by financial professionals, the term “financial counselor” is not regulated—meaning anyone can call themselves one. What’s more, you don’t need any specific licenses or certifications to set up shop as a financial counselor. These factors can make it tricky to find a counselor with the experience and expertise you need. Still, one certification in the field is gaining traction: the accredited financial counselor (AFC), offered by the Association for Financial Counseling and Planning Education (AFCPE). To earn the certification, candidates must meet ethical, educational, and experience requirements, including a minimum of 1,000 hours of relevant experience in financial counseling. There’s also an exam that focuses on nine core competencies:  Gathering client information Helping clients create action plans Developing financial statements, ratios, and spending plans Money management Credit and debt management Educating clients about major purchases Managing financial risks Discussing investing basics with clients Educating clients about retirement and estate planning Financial counselors who hold the AFC accreditation must also meet continuing education requirements and abide by a code of ethics. What Do Financial Counselors Do? Financial counselors offer support and guidance on a variety of financial topics. They can help you to: Build savings Create (and stick to) a budget Create a plan to pay down debt Deal with an immediate financial crisis Determine if you’re eligible for tax credits Improve your credit score  Manage lines of credit  Manage student loans Modify ineffective money habits Navigate available public benefits and community resources Set and realize financial goals Understand basic financial principles Improve your overall financial health Refer you to an investment advisor or financial planner when you’re ready Some financial counselors have extra training in other areas, such as serving the needs of military service members and their families, veterans, and people with disabilities. There are also housing counselors, who specialize in helping people find affordable housing, avoid foreclosure, and manage reverse mortgages. You can find a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD) on its website.  A financial counselor can’t make investment recommendations unless registered as an investment advisor. If you need help with budgeting, saving, or paying down debt, an AFC-certified financial counselor can be a good choice. However, if you’re looking for investment recommendations, asset management, retirement planning, complex tax strategies, or a complete financial plan, a financial advisor or certified financial planner (CFP) will be a better fit. How Much Do Financial Counselors Cost?  Financial counselors work in various settings—from hospitals and banks to universities and private practices. The cost of meeting with a financial counselor usually depends on where they work, but in many cases the price is lower than working with a financial advisor or CFP. Financial counselors who work in private practice may offer a free initial session and then charge a flat fee for any subsequent meetings. Others may charge an hourly rate or a monthly subscription.  You may also be able to find free financial counseling services. For example, counselors who work for the military may offer financial counseling to service members at no charge. Likewise, universities with a money management or career center may offer free financial counseling to students.  No matter where AFC-certified counselors work, they must offer “reasonable” fees that are disclosed upfront to clients. AFCPE-accredited financial counselors and coaches offer unbiased and fully confidential virtual financial counseling and coaching sessions that are free to individuals and families struggling with the financial implications of COVID-19. The program is supported by the Wells Fargo Foundation. How to Choose a Financial Counselor If you think you could benefit from a financial counselor—but don’t happen to know one—start with referrals from friends, colleagues, or family members who seem to have their finances under control. You can also ask your local bank or credit union if it offers financial counseling services.  Once you have a few potential candidates, the AFCPE suggests asking the contenders a few questions before making any decisions:   What are your credentials? Look for the AFC accreditation, which demonstrates a higher level of education and commitment to the profession.What experience do you have? Find a counselor who has helped people in situations similar to yours.How do you stay up to date with developments in personal finance? AFCs have to meet continuing education requirements and abide by a code of ethics. Which services do you offer? Be sure their services or areas of expertise align with your needs.What is your approach? Make sure their philosophy, personality, and communication style work well for you.  Which types of clients do you work with? Some financial counselors work with clients with a specific minimum net worth, so make sure the counselor is a good fit for your financial situation. How much do you charge? The financial counselor should provide an estimate based on what you want to accomplish.Do others stand to gain from the financial advice you give me? Find out if there are any conflicts of interest.Have you ever been disciplined for any unlawful or unethical actions? You might also want to ask for references and do an online search.  The AFCPE emphasizes that "anyone can call themselves a financial counselor, coach, advisor or planner, but a credential demonstrates a higher level of education, specialty or commitment." You can verify if a potential candidate has received a qualification by checking the AFCPE directory.   What Is an Accredited Financial Counselor? The accredited financial counselor (AFC) certification is offered by the Association for Financial Counseling and Planning Education (AFCPE) to certify counselors who have met the organization's educational requirements and pledged to follow its ethical standards. Candidates must have a minimum of 1,000 hours of relevant experience in financial counseling and take continuing education to maintain certification. What Is the Difference Between a Financial Counselor and a Financial Advisor? The primary difference between financial counselors and advisors is the clients they serve. Financial counselors tend to work with lower-income clients, building financial literacy skills and sound financial habits. In contrast, financial advisors typically offer a comprehensive range of services for middle- and higher-income clients, such as investment recommendations, portfolio management, estate planning, tax planning, insurance, and putting the kids through college. What Does a Financial Counselor Cost? That is decided in part by where they work, whether it be a bank, a hospital, a university, or their own private practice. An initial session is often free, after which a flat fee per meeting, an hourly rate, or a monthly subscription fee are all possible scenarios. University students and military service members and veterans may qualify for free services. The price is generally less than that charged by financial advisors and certified financial planners (CFPs). Financial counselors with the AFC accreditation are required to charge “reasonable” fees and state them up front. The Bottom Line Financial counselors provide education and guidance to help people manage their money and improve their financial well-being. Working with a financial counselor can be an excellent first step, as they help lay the foundation for financial success. Once your financial situation is under control, the counselor may refer you to a financial advisor or planner to work on advanced topics, such as investing, tax planning, saving for college, and building a nest egg.

https://www.investopedia.com/dow-jones-today-05212024-8651613

Markets News, May 21, 2024: S&P 500 Inches Up to Record Close; Ether Soars on ETF Hopes

<div class="loc article-content"><div class="comp article__primary-video-container--jw mntl-block" id="article__primary-video-container--jw_1-0"></div> <div class="comp liveblog mntl-block" id="liveblog_1-0"><div class="comp mntl-block article-content__description" id="mntl-block_12-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> U.S. stocks ticked up on Tuesday, as investors <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-q1-fy-2025-earnings-preview-8643286">awaited quarterly results</a> Wednesday from AI darling Nvidia (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>) and the closely scrutinized minutes of the Federal Reserve's <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952">May meeting</a>. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Nasdaq Composite and the Dow Jones Industrial Average both rose 0.2% on Tuesday, while the S&amp;P 500 crept up 0.3% to close at an all-time high. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Lowe's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW">LOW</a>) shares fell Tuesday, despite the home-improvement retailer posting first-quarter results that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lowes-stock-rises-as-earnings-top-estimates-despite-pullback-on-big-ticket-spending-8651592">beat top- and bottom-line estimates</a>, in contrast to rival Home Depot (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD">HD</a>),  whose numbers <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-depot-earnings-q1-fy-2024-results-8648018">missed analysts’ forecasts</a> last week. Palo Alto Networks (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW">PANW</a>) also lost ground after the cybersecurity firm issued a<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-to-watch-for-on-palo-alto-networks-stock-after-post-earnings-plunge-8651533"> lackluster current-quarter</a> and full-year outlook. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Ether (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD">ETHUSD</a>) surged Tuesday after big gains Monday amid increasing confidence the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission (SEC</a>) will approve a spot ether ETF. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Oil futures slipped and Treasury yields fell after climbing on Monday. The dollar traded sideways.<br/> </p></div> <div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-05-21t201415242z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p>Stock Indexes Wrap: AI Products Lift Big Tech; Home Retailers, Cybersecurity Stocks Slump</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">16 hr 8 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t201415242z" id="mntl-blogpost__copylink_1-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <strong><u>The Dow</u></strong> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> International Business Machines (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IBM">IBM</a>) rose 2.1% after it said it was <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ibm-strengthens-aws-microsoft-meta-ties-updates-on-ai-push-8651658?">expanding several AI partnerships</a> with companies including Meta and Salesforce.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Shares of Microsoft (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>) rose 0.9% to close just cents shy of a record high after it unveiled new tools to develop AI software during the first day of its Microsoft Build developer conference.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Apple (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>) rose 0.7% as the tech giant asked a New Jersey judge to dismiss <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-the-department-of-justice-is-suing-apple-8612745">the Justice Department’s antitrust lawsuit</a> against the company. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Home Depot (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD">HD</a>) slipped 0.5% as earnings from competitor Lowe’s raised concerns about a prolonged slump in home-improvement spending. <br/> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <strong><u>The S&amp;P 500</u></strong> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Tesla (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>) rose 6.7% after an executive said the electric vehicle maker was on track to begin delivering long-awaited semi trucks in 2026.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Eli Lilly (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY">LLY</a>) gained 2.7% after the company <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/eli-lilly-rises-as-study-shows-omvoh-successful-in-treating-crohn-s-disease-8651860">announced positive results</a> from a phase 3 trial of a prospective Crohn’s disease treatment.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Nordson (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NDSN">NDSN</a>) slumped 9.4% after trimming its full-year <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nordson-stock-tumbles-after-trimming-annual-sales-and-earnings-guidance-8651585">earnings and sales outlook</a>. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> AutoZone (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AZO">AZO</a>) shed 3.3% after the auto parts retailer’s quarterly sales fell short of Wall Street estimates.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Lowe’s (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW">LOW</a>) fell 1.9% after reporting <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lowes-stock-rises-as-earnings-top-estimates-despite-pullback-on-big-ticket-spending-8651592">first-quarter earnings declined</a> from the year-ago period as consumers put off purchasing big-ticket items. <br/> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <strong><u>The Nasdaq 100</u></strong> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Lam Research Corp (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LRCX">LRCX</a>) advanced 2.3% after the semiconductor fabrication equipment maker announced a $10 billion stock buyback authorization and a 10-for-1 stock split.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Nvidia (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>) ticked up 0.4% before <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investors-expect-the-best-from-nvidia-earnings-what-that-could-mean-for-the-stock-8651022">its quarterly earnings report</a> after the bell tomorrow.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Palo Alto Networks (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW">PANW</a>) slid 3.7% after offering lackluster current-quarter bookings guidance, overshadowing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/palo-alto-networks-q3-fy-2024-earnings-8650971">better-than-expected quarterly results</a>.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Cybersecurity peers followed Palo Alto Networks lower. Zscaler (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZS">ZS</a>) slid 2% and Fortinet (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FTNT">FTNT</a>) lost 1.7%. </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_2-0"><span class="heading-toc" id="toc-2024-05-21t194403465z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_2-0"><p>Eli Lilly Rises As Study Shows Omvoh Successful in Treating Crohn's Disease</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_2-0">16 hr 38 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t194403465z" id="mntl-blogpost__copylink_2-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Shares of Eli Lilly (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY">LLY</a>) were on track to close at an all-time high Tuesday as a study showed the pharmaceutical giant’s current drug for ulcerative colitis also was <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/eli-lilly-rises-as-study-shows-omvoh-successful-in-treating-crohn-s-disease-8651860">successful in treating Crohn’s disease</a>.<span class="ql-inline-citation" data-cite="8"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The company reported that a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clinical-trials.asp#:~:text=Phase%203%20trials%20are%20used,is%20approved%20by%20the%20FDA.">Phase 3 trial</a> of mirikizumab, sold under the brand name of Omvoh, found that patients with moderately or severely active Crohn’s disease “achieved statistically significant and clinically meaningful improvements across multiple clinical and endoscopic endpoints at one year.” </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The company noted that this year it has submitted a supplemental Biologics License Application for use of mirikizumab to treat Crohn’s disease with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fda.asp">Food and Drug Administration (FDA)</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/european-medicines-agency-ema.asp">European Medicines Agency (EMA)</a>. It added that it plans to make requests to other global regulators as well.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Eli Lilly shares, which rose 2.7% to $804 late in the session Tuesday, have increased about 38% so far in 2024, boosted by soaring global demand for weight-loss treatments. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bill-mccoll-5186338">Bill McColl</a></em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="2" id="mntl-sc-block-adslot_2-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_3-0"><span class="heading-toc" id="toc-2024-05-21t184632239z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_3-0"><p>Ether Rallies as Market Gets Optimistic About Ether ETF Approval</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_3-0">17 hr 36 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t184632239z" id="mntl-blogpost__copylink_3-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The price of ether (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD">ETH</a>), which is the native cryptocurrency of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum</a> network, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ether-rallies-as-market-gets-optimistic-about-ether-etf-approval-8651614">rallied as much as 20%</a> early Tuesday before giving up some of the gains amid renewed hope for the approval of spot ether <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/etfs-4427784">exchange-traded funds (ETFs)</a> by the U.S. Securities and Exchange Commission (SEC). </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The SEC recently requested that various exchanges update the 19b-4 filings related to the spot ether ETFs on an accelerated basis, <em>CoinDesk</em> reported.<span class="ql-inline-citation" data-cite="6"></span> The SEC took the same step when it was considering bitcoin ETF applications last year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Another important development was <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fidelity-review-4587897">Fidelity</a> amending its ether ETF application to remove staking rewards.<span class="ql-inline-citation" data-cite="7"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The SEC has taken issue with staking, some of which it has argued should be subject to securities laws. Regulators have sued crypto exchanges such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-files-13-charges-against-binance-and-founder-changpeng-zhao-7508246">Binance</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669">Coinbase</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/kraken-to-pay-30-million-shut-down-staking-business-in-sec-settlement-7107971">Kraken</a> for offering it as a service. Fidelity's removing staking from its application is viewed as a move to put the regulator at ease with the ether ETF product. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/kyle-torpey-7368504">Kyle Torpey</a></em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="3" id="mntl-sc-block-adslot_3-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_4-0"><span class="heading-toc" id="toc-2024-05-21t174140314z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_4-0"><p>Palo Alto Networks Slips After Offering Lackluster Revenue Forecast</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_4-0">18 hr 41 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t174140314z" id="mntl-blogpost__copylink_4-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Shares in Palo Alto Networks (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW">PANW</a>) fell in intraday trading on Tuesday after the cybersecurity firm issued a lackluster current-quarter and full-year outlook. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> For the fiscal fourth quarter ending in July, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/siliconvalley.asp">Silicon Valley</a>-based company guided <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a> of $2.15 billion to $2.17 billion, with the $2.16 billion midpoint matching analysts’ forecast. It sees billings in the period, which account for <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deferredrevenue.asp">deferred revenue</a>, coming in between $3.43 billion and $3.48 billion, compared to expectations of $3.45 billion.<span class="ql-inline-citation" data-cite="4"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> For the full fiscal year, the company kept its billings guidance relatively unchanged, expecting it to range from $10.13 billion to $10.18 billion, compared to its earlier forecast of $10.10 billion to $10.20 billion. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> "Minor full-year FY24 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/analyst/03/012903.asp#:~:text=Guidance%20is%20a%20company's%20public,for%20a%20company's%20share%20price.">guidance</a> revisions failed to indicate a meaningful upswing in momentum, and the downstream benefit of increasing platform buy-in from large customers remains to be seen. This was echoed by lackluster guidance for the Q4 FY24 period," Third Bridge analyst Jordan Berger told <em>Reuters.</em><span class="ql-inline-citation" data-cite="5"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Shares opened nearly 7% lower but have ticked up throughout the day. They were down about 2% mid-afternoon Tuesday. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/contributors/54411/">Timothy Smith</a></em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="4" id="mntl-sc-block-adslot_4-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_5-0"><span class="heading-toc" id="toc-2024-05-21t161601900z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_5-0"><h3>Macy's Stock Slides Despite Q1 Results Falling Less Than Expected</h3><p><br/></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_5-0">20 hr 6 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t161601900z" id="mntl-blogpost__copylink_5-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Shares of the iconic retailer Macy's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=M">M</a>) fell in intraday trading Tuesday despite the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/macy-s-stock-rises-as-q1-results-fall-less-than-expected-8651605">release of a first-quarter earnings report</a> that showed the company's turnaround is working.<span class="ql-inline-citation" data-cite="3"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The company, which has been<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/macys-plans-150-store-closures-in-new-strategy-as-chain-faces-proxy-fight-8600871"> closing stores and cutting jobs</a> after <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/macy-s-appoints-activist-investor-board-picks-ending-proxy-fight-8629529">ending a proxy fight</a>, reported first-quarter fiscal 2024 profit and revenue above analyst expectations. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Total revenue came in at $5 billion, just above the $4.97 billion analysts had projected, per estimates compiled by Visible Alpha, but slightly below the $5.17 billion Macy's generated in the first quarter of 2023. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The retailer, which operates its namesake Macy's brand along with Bloomingdale's and Bluemercury, made just $62 million, or 22 cents per share, in profit for the quarter, less than half of the $155 million, or 56 cents per share, it made in the year-ago quarter. That was above the $47.59 million and 16 cents per share analysts had estimated, however. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Macy's also updated its guidance for the full fiscal year, narrowing its projected net sales range to $22.3 billion to $22.9 billion, lifting the lower end from its February outlook of $22.2 billion. Comparable sales for the full year are expected to range from a 1% decline to a 1.5% increase from last year's levels, slightly more optimistic than the 1.5% potential decline Macy's had previously used as the low end of the range. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Shares in the company fell 1.6% and are down around 6% year-to-date. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/aaron-mcdade-8603749">Aaron McDade</a></em><br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="5" id="mntl-sc-block-adslot_5-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_6-0"><span class="heading-toc" id="toc-2024-05-21t143801375z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_6-0"><p>Nordson Stock Tumbles After Company Trims Sales and Earnings Guidance</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_6-0">21 hr 44 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t143801375z" id="mntl-blogpost__copylink_6-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Nordson (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ndsn">NDSN</a>) shares fell sharply in early trading Tuesday after the industrial equipment maker trimmed its annual sales and earnings outlook amid weakness in electronics orders and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/agricultural-etfs-8425680">agricultural</a> challenges in Europe.<span class="ql-inline-citation" data-cite="1"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The Westlake, Ohio-based company said it now expects full-year fiscal 2024 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netsales.asp">net sales</a> growth to come in between flat and up 2%, significantly below its prior forecast of 4% to 7% growth. Analysts had been looking for annual revenue to reach $2.77 billion, representing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/year-over-year.asp">year-over-year (YOY)</a> growth of around 5%. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Nordson also downwardly revised its full-year <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bottomline.asp">bottom line</a> guidance, saying it now projects <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20is%20a%20metric,to%20the%20current%20time%20period.">adjusted earnings</a> of $9.35 to $9.75 per share, below its earlier forecast range of $10.00 to $10.50 a share.<span class="ql-inline-citation" data-cite="2"></span> </p> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_48-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:38.0%;"> <img alt="This image depicts the NDSN chart." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/wVlwhuIAWpTBiUy8EyljGokSmmE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NDSNChart-19c041c93ece4be3a631d53ad822f778.GIF" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/wVlwhuIAWpTBiUy8EyljGokSmmE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NDSNChart-19c041c93ece4be3a631d53ad822f778.GIF" data-srcset="https://www.investopedia.com/thmb/JCmsWa-78p8u4skxMtbSFGW4h14=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/NDSNChart-19c041c93ece4be3a631d53ad822f778.GIF 750w" data-tracking-container="true" height="677" id="mntl-sc-block-image_1-0" width="1780"/> <noscript> <img alt="This image depicts the NDSN chart." class="img--noscript universal-image__image" height="677" sizes="750px" src="https://www.investopedia.com/thmb/wVlwhuIAWpTBiUy8EyljGokSmmE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NDSNChart-19c041c93ece4be3a631d53ad822f778.GIF" srcset="https://www.investopedia.com/thmb/JCmsWa-78p8u4skxMtbSFGW4h14=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/NDSNChart-19c041c93ece4be3a631d53ad822f778.GIF 750w" width="1780"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-text">Source: TradingView.com.</span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The Nordson share price has tracked mostly higher since breaking out from a multi-month <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tradingrange.asp">trading range</a> in mid-December last year. However, the stock sits poised to fall back to the mid portion of the range on Tuesday following the company’s soft guidance.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> If selling intensifies in coming trading sessions, investors should keep an eye on the $230 level, an area where buyers may step in near a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Horizontal%20lines%20are%20commonly%20used,to%20fall%20on%20prior%20occasions.">horizontal line</a> linking a series of price action over the past 20 months that sits in close proximity to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goldencross.asp">golden cross</a> pattern that formed in late last year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Nordson stock was down more than 7% Tuesday morning, plunging into negative territory. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> <em>-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/contributors/54411/">Timothy Smith</a></em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="6" id="mntl-sc-block-adslot_6-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_7-0"><span class="heading-toc" id="toc-2024-05-21t132724785z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_7-0"><p>Stocks Making the Biggest Moves Premarket</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_7-0">22 hr 55 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t132724785z" id="mntl-blogpost__copylink_7-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> <strong>Gains:</strong> </p> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> <li>Lam Research (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LRCX">LRCX</a>): Shares of the semiconductor manufacturing equipment maker rose more than 4% after it announced its board of directors had authorized a $10 billion share buyback program and a 10-for-1 stock split. </li> <li>Coinbase Global (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN">COIN</a>): Shares of the cryptocurrency exchange rose more than 3% as the price of ether soared amid optimism that the Securities and Exchange Commission (SEC) may approve a spot ether ETF.</li> <li>Lowe’s (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW">LOW</a>): Shares of the home improvement retailer rose more than 2% after it reported <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lowes-stock-rises-as-earnings-top-estimates-despite-pullback-on-big-ticket-spending-8651592">better-than-expected earnings</a> despite consumers pulling back on spending on big-ticket items.  <br/></li> </ul> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <strong>Losses:</strong>  </p> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> <li>Palo Alto Networks (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW">PANW</a>): Shares of the cybersecurity firm slid more than 6% after offering <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-to-watch-for-on-palo-alto-networks-stock-after-post-earnings-plunge-8651533">lackluster earnings guidance</a> in a replay of last quarter’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cybersecurity-stocks-tumble-as-palo-alto-cuts-sales-guidance-8597985">“spending fatigue” warning</a> that sent shares plummeting. </li> <li>JD.com (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=JD">JD</a>): Shares of the Chinese e-commerce company slumped 5% after it announced plans to raise capital through a $1.5 billion convertible note offering.</li> <li>Zoom Video (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZM">ZM</a>): Shares of the video conferencing company slipped 2% after its current-quarter earnings guidance fell slightly short of Wall Street’s estimates.</li> </ul></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="7" id="mntl-sc-block-adslot_7-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_8-0"><span class="heading-toc" id="toc-2024-05-21t125608651z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_8-0"><p>Stock Futures Slip From Near Records</p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_8-0">23 hr 26 min ago</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/dow-jones-today-05212024-8651613#toc-2024-05-21t125608651z" id="mntl-blogpost__copylink_8-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Dow futures were little changed in premarket trading on Tuesday. </p> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_58-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:36.8%;"> <img alt="Dow futures (May 21st, 2024)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/RV9PYW57AwN6BrX5nlEluDcKxgs=/1038x0/filters:no_upscale():max_bytes(150000):strip_icc()/YM1_2024-05-21_13-41-49-3097f94d001849bdade31ed5e4ea7689.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/waTd1dUj01_mq9KO76OYqjxjhSU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/YM1_2024-05-21_13-41-49-3097f94d001849bdade31ed5e4ea7689.png" data-srcset="https://www.investopedia.com/thmb/g7p4rM0aBkV2pXkOrgBMQJAGWdk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/YM1_2024-05-21_13-41-49-3097f94d001849bdade31ed5e4ea7689.png 750w" data-tracking-container="true" height="382" id="mntl-sc-block-image_2-0" width="1038"/> <noscript> <img alt="Dow futures (May 21st, 2024)" class="img--noscript universal-image__image" height="382" sizes="750px" src="https://www.investopedia.com/thmb/waTd1dUj01_mq9KO76OYqjxjhSU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/YM1_2024-05-21_13-41-49-3097f94d001849bdade31ed5e4ea7689.png" srcset="https://www.investopedia.com/thmb/g7p4rM0aBkV2pXkOrgBMQJAGWdk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/YM1_2024-05-21_13-41-49-3097f94d001849bdade31ed5e4ea7689.png 750w" width="1038"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> S&amp;P 500 futures dipped 0.1%. </p> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_60-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:36.8%;"> <img alt="S&amp;P futures (May 21st, 2024)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/7kxVb9LwcS0OpTFBpF2QI0_wW9Y=/1038x0/filters:no_upscale():max_bytes(150000):strip_icc()/ES1_2024-05-21_13-41-29-5213574d368743a3937a003bb11a80f7.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/HjvQjPVhOF1WhdETRHm0VpzrM2M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ES1_2024-05-21_13-41-29-5213574d368743a3937a003bb11a80f7.png" data-srcset="https://www.investopedia.com/thmb/oumNZ4ox1cg8q597tlDB_ycC0LA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/ES1_2024-05-21_13-41-29-5213574d368743a3937a003bb11a80f7.png 750w" data-tracking-container="true" height="382" id="mntl-sc-block-image_3-0" width="1038"/> <noscript> <img alt="S&amp;P futures (May 21st, 2024)" class="img--noscript universal-image__image" height="382" sizes="750px" src="https://www.investopedia.com/thmb/HjvQjPVhOF1WhdETRHm0VpzrM2M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ES1_2024-05-21_13-41-29-5213574d368743a3937a003bb11a80f7.png" srcset="https://www.investopedia.com/thmb/oumNZ4ox1cg8q597tlDB_ycC0LA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/ES1_2024-05-21_13-41-29-5213574d368743a3937a003bb11a80f7.png 750w" width="1038"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Nasdaq 100 futures were off 0.2%. </p> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_62-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:36.8%;"> <img alt="Nasdaq futures (May 21st, 2024)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/bjeb3Z6VOa4MERbiYGPK1zC2Mm8=/1038x0/filters:no_upscale():max_bytes(150000):strip_icc()/NQ1_2024-05-21_13-40-22-d76dcb41f37d4378b54027d885a2a773.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/_qTHWBbyD_V3AkmrsVpDL16-L_M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NQ1_2024-05-21_13-40-22-d76dcb41f37d4378b54027d885a2a773.png" data-srcset="https://www.investopedia.com/thmb/nffl3CGIwiSMo79kMo_LLLBIr2s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/NQ1_2024-05-21_13-40-22-d76dcb41f37d4378b54027d885a2a773.png 750w" data-tracking-container="true" height="382" id="mntl-sc-block-image_4-0" width="1038"/> <noscript> <img alt="Nasdaq futures (May 21st, 2024)" class="img--noscript universal-image__image" height="382" sizes="750px" src="https://www.investopedia.com/thmb/_qTHWBbyD_V3AkmrsVpDL16-L_M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NQ1_2024-05-21_13-40-22-d76dcb41f37d4378b54027d885a2a773.png" srcset="https://www.investopedia.com/thmb/nffl3CGIwiSMo79kMo_LLLBIr2s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/NQ1_2024-05-21_13-40-22-d76dcb41f37d4378b54027d885a2a773.png 750w" width="1038"/> </noscript> </div> </div> </figure></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="8" id="mntl-sc-block-adslot_8-0"></div></div></div></div> <div class="comp textnote-placeholder mntl-block" id="textnote-placeholder_1-0"></div> <div class="comp textnote mm-ads-gpt-adunit gpt textnote" id="textnote_1-0"> <div class="wrapper" id="textnote"></div> </div> </div>

U.S. stocks ticked up on Tuesday, as investors [awaited quarterly results](https://www.investopedia.com/nvidia-q1-fy-2025-earnings-preview-8643286) Wednesday from AI darling Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) and the closely scrutinized minutes of the Federal Reserve's [May meeting](https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952). The Nasdaq Composite and the Dow Jones Industrial Average both rose 0.2% on Tuesday, while the S&P 500 crept up 0.3% to close at an all-time high. Lowe's ([LOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW)) shares fell Tuesday, despite the home-improvement retailer posting first-quarter results that [beat top- and bottom-line estimates](https://www.investopedia.com/lowes-stock-rises-as-earnings-top-estimates-despite-pullback-on-big-ticket-spending-8651592), in contrast to rival Home Depot ([HD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD)),  whose numbers [missed analysts’ forecasts](https://www.investopedia.com/home-depot-earnings-q1-fy-2024-results-8648018) last week. Palo Alto Networks ([PANW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW)) also lost ground after the cybersecurity firm issued a [lackluster current-quarter](https://www.investopedia.com/what-to-watch-for-on-palo-alto-networks-stock-after-post-earnings-plunge-8651533) and full-year outlook. Ether ([ETHUSD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD)) surged Tuesday after big gains Monday amid increasing confidence the [Securities and Exchange Commission (SEC](https://www.investopedia.com/terms/s/sec.asp)) will approve a spot ether ETF. Oil futures slipped and Treasury yields fell after climbing on Monday. The dollar traded sideways. ## Stock Indexes Wrap: AI Products Lift Big Tech; Home Retailers, Cybersecurity Stocks Slump 16 hr 8 min ago **The Dow** International Business Machines ([IBM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IBM)) rose 2.1% after it said it was [expanding several AI partnerships](https://www.investopedia.com/ibm-strengthens-aws-microsoft-meta-ties-updates-on-ai-push-8651658?) with companies including Meta and Salesforce.  Shares of Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) rose 0.9% to close just cents shy of a record high after it unveiled new tools to develop AI software during the first day of its Microsoft Build developer conference.  Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) rose 0.7% as the tech giant asked a New Jersey judge to dismiss [the Justice Department’s antitrust lawsuit](https://www.investopedia.com/why-the-department-of-justice-is-suing-apple-8612745) against the company. Home Depot ([HD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=HD)) slipped 0.5% as earnings from competitor Lowe’s raised concerns about a prolonged slump in home-improvement spending.  **The S&P 500** Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) rose 6.7% after an executive said the electric vehicle maker was on track to begin delivering long-awaited semi trucks in 2026.  Eli Lilly ([LLY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY)) gained 2.7% after the company [announced positive results](https://www.investopedia.com/eli-lilly-rises-as-study-shows-omvoh-successful-in-treating-crohn-s-disease-8651860) from a phase 3 trial of a prospective Crohn’s disease treatment.  Nordson ([NDSN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NDSN)) slumped 9.4% after trimming its full-year [earnings and sales outlook](https://www.investopedia.com/nordson-stock-tumbles-after-trimming-annual-sales-and-earnings-guidance-8651585). AutoZone ([AZO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AZO)) shed 3.3% after the auto parts retailer’s quarterly sales fell short of Wall Street estimates.  Lowe’s ([LOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW)) fell 1.9% after reporting [first-quarter earnings declined](https://www.investopedia.com/lowes-stock-rises-as-earnings-top-estimates-despite-pullback-on-big-ticket-spending-8651592) from the year-ago period as consumers put off purchasing big-ticket items.  **The Nasdaq 100** Lam Research Corp ([LRCX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LRCX)) advanced 2.3% after the semiconductor fabrication equipment maker announced a $10 billion stock buyback authorization and a 10-for-1 stock split.  Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) ticked up 0.4% before [its quarterly earnings report](https://www.investopedia.com/investors-expect-the-best-from-nvidia-earnings-what-that-could-mean-for-the-stock-8651022) after the bell tomorrow.  Palo Alto Networks ([PANW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW)) slid 3.7% after offering lackluster current-quarter bookings guidance, overshadowing [better-than-expected quarterly results](https://www.investopedia.com/palo-alto-networks-q3-fy-2024-earnings-8650971).  Cybersecurity peers followed Palo Alto Networks lower. Zscaler ([ZS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZS)) slid 2% and Fortinet ([FTNT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FTNT)) lost 1.7%. ## Eli Lilly Rises As Study Shows Omvoh Successful in Treating Crohn's Disease 16 hr 38 min ago Shares of Eli Lilly ([LLY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY)) were on track to close at an all-time high Tuesday as a study showed the pharmaceutical giant’s current drug for ulcerative colitis also was [successful in treating Crohn’s disease](https://www.investopedia.com/eli-lilly-rises-as-study-shows-omvoh-successful-in-treating-crohn-s-disease-8651860). The company reported that a [Phase 3 trial](https://www.investopedia.com/terms/c/clinical-trials.asp#:~:text=Phase%203%20trials%20are%20used,is%20approved%20by%20the%20FDA.) of mirikizumab, sold under the brand name of Omvoh, found that patients with moderately or severely active Crohn’s disease “achieved statistically significant and clinically meaningful improvements across multiple clinical and endoscopic endpoints at one year.” The company noted that this year it has submitted a supplemental Biologics License Application for use of mirikizumab to treat Crohn’s disease with the [Food and Drug Administration (FDA)](https://www.investopedia.com/terms/f/fda.asp) and [European Medicines Agency (EMA)](https://www.investopedia.com/terms/e/european-medicines-agency-ema.asp). It added that it plans to make requests to other global regulators as well.  Eli Lilly shares, which rose 2.7% to $804 late in the session Tuesday, have increased about 38% so far in 2024, boosted by soaring global demand for weight-loss treatments. *-[Bill McColl](https://www.investopedia.com/bill-mccoll-5186338)* ## Ether Rallies as Market Gets Optimistic About Ether ETF Approval 17 hr 36 min ago The price of ether ([ETH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD)), which is the native cryptocurrency of the [Ethereum](https://www.investopedia.com/terms/e/ethereum.asp) network, [rallied as much as 20%](https://www.investopedia.com/ether-rallies-as-market-gets-optimistic-about-ether-etf-approval-8651614) early Tuesday before giving up some of the gains amid renewed hope for the approval of spot ether [exchange-traded funds (ETFs)](https://www.investopedia.com/etfs-4427784) by the U.S. Securities and Exchange Commission (SEC). The SEC recently requested that various exchanges update the 19b-4 filings related to the spot ether ETFs on an accelerated basis, *CoinDesk* reported. The SEC took the same step when it was considering bitcoin ETF applications last year. Another important development was [Fidelity](https://www.investopedia.com/fidelity-review-4587897) amending its ether ETF application to remove staking rewards. The SEC has taken issue with staking, some of which it has argued should be subject to securities laws. Regulators have sued crypto exchanges such as [Binance](https://www.investopedia.com/sec-files-13-charges-against-binance-and-founder-changpeng-zhao-7508246), [Coinbase](https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669), and [Kraken](https://www.investopedia.com/kraken-to-pay-30-million-shut-down-staking-business-in-sec-settlement-7107971) for offering it as a service. Fidelity's removing staking from its application is viewed as a move to put the regulator at ease with the ether ETF product. *-[Kyle Torpey](https://www.investopedia.com/kyle-torpey-7368504)* ## Palo Alto Networks Slips After Offering Lackluster Revenue Forecast 18 hr 41 min ago Shares in Palo Alto Networks ([PANW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW)) fell in intraday trading on Tuesday after the cybersecurity firm issued a lackluster current-quarter and full-year outlook. For the fiscal fourth quarter ending in July, the [Silicon Valley](https://www.investopedia.com/terms/s/siliconvalley.asp)-based company guided [revenue](https://www.investopedia.com/terms/r/revenue.asp) of $2.15 billion to $2.17 billion, with the $2.16 billion midpoint matching analysts’ forecast. It sees billings in the period, which account for [deferred revenue](https://www.investopedia.com/terms/d/deferredrevenue.asp), coming in between $3.43 billion and $3.48 billion, compared to expectations of $3.45 billion. For the full fiscal year, the company kept its billings guidance relatively unchanged, expecting it to range from $10.13 billion to $10.18 billion, compared to its earlier forecast of $10.10 billion to $10.20 billion. "Minor full-year FY24 [guidance](https://www.investopedia.com/articles/analyst/03/012903.asp#:~:text=Guidance%20is%20a%20company's%20public,for%20a%20company's%20share%20price.) revisions failed to indicate a meaningful upswing in momentum, and the downstream benefit of increasing platform buy-in from large customers remains to be seen. This was echoed by lackluster guidance for the Q4 FY24 period," Third Bridge analyst Jordan Berger told *Reuters.* Shares opened nearly 7% lower but have ticked up throughout the day. They were down about 2% mid-afternoon Tuesday. *-[Timothy Smith](https://www.investopedia.com/contributors/54411/)* ## Macy's Stock Slides Despite Q1 Results Falling Less Than Expected 20 hr 6 min ago Shares of the iconic retailer Macy's ([M](https://www.investopedia.com/markets/quote?tvwidgetsymbol=M)) fell in intraday trading Tuesday despite the [release of a first-quarter earnings report](https://www.investopedia.com/macy-s-stock-rises-as-q1-results-fall-less-than-expected-8651605) that showed the company's turnaround is working. The company, which has been [closing stores and cutting jobs](https://www.investopedia.com/macys-plans-150-store-closures-in-new-strategy-as-chain-faces-proxy-fight-8600871) after [ending a proxy fight](https://www.investopedia.com/macy-s-appoints-activist-investor-board-picks-ending-proxy-fight-8629529), reported first-quarter fiscal 2024 profit and revenue above analyst expectations. Total revenue came in at $5 billion, just above the $4.97 billion analysts had projected, per estimates compiled by Visible Alpha, but slightly below the $5.17 billion Macy's generated in the first quarter of 2023. The retailer, which operates its namesake Macy's brand along with Bloomingdale's and Bluemercury, made just $62 million, or 22 cents per share, in profit for the quarter, less than half of the $155 million, or 56 cents per share, it made in the year-ago quarter. That was above the $47.59 million and 16 cents per share analysts had estimated, however. Macy's also updated its guidance for the full fiscal year, narrowing its projected net sales range to $22.3 billion to $22.9 billion, lifting the lower end from its February outlook of $22.2 billion. Comparable sales for the full year are expected to range from a 1% decline to a 1.5% increase from last year's levels, slightly more optimistic than the 1.5% potential decline Macy's had previously used as the low end of the range. Shares in the company fell 1.6% and are down around 6% year-to-date. *-[Aaron McDade](https://www.investopedia.com/aaron-mcdade-8603749)* ## Nordson Stock Tumbles After Company Trims Sales and Earnings Guidance 21 hr 44 min ago Nordson ([NDSN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ndsn)) shares fell sharply in early trading Tuesday after the industrial equipment maker trimmed its annual sales and earnings outlook amid weakness in electronics orders and [agricultural](https://www.investopedia.com/agricultural-etfs-8425680) challenges in Europe. The Westlake, Ohio-based company said it now expects full-year fiscal 2024 [net sales](https://www.investopedia.com/terms/n/netsales.asp) growth to come in between flat and up 2%, significantly below its prior forecast of 4% to 7% growth. Analysts had been looking for annual revenue to reach $2.77 billion, representing [year-over-year (YOY)](https://www.investopedia.com/terms/y/year-over-year.asp) growth of around 5%. Nordson also downwardly revised its full-year [bottom line](https://www.investopedia.com/terms/b/bottomline.asp) guidance, saying it now projects [adjusted earnings](https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20is%20a%20metric,to%20the%20current%20time%20period.) of $9.35 to $9.75 per share, below its earlier forecast range of $10.00 to $10.50 a share. ![This image depicts the NDSN chart.]() :max_bytes(150000):strip_icc()/NDSNChart-19c041c93ece4be3a631d53ad822f778.GIF) Source: TradingView.com. The Nordson share price has tracked mostly higher since breaking out from a multi-month [trading range](https://www.investopedia.com/terms/t/tradingrange.asp) in mid-December last year. However, the stock sits poised to fall back to the mid portion of the range on Tuesday following the company’s soft guidance.  If selling intensifies in coming trading sessions, investors should keep an eye on the $230 level, an area where buyers may step in near a [horizontal line](https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Horizontal%20lines%20are%20commonly%20used,to%20fall%20on%20prior%20occasions.) linking a series of price action over the past 20 months that sits in close proximity to a [golden cross](https://www.investopedia.com/terms/g/goldencross.asp) pattern that formed in late last year. Nordson stock was down more than 7% Tuesday morning, plunging into negative territory. *-[Timothy Smith](https://www.investopedia.com/contributors/54411/)* ## Stocks Making the Biggest Moves Premarket 22 hr 55 min ago **Gains:** * Lam Research ([LRCX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LRCX)): Shares of the semiconductor manufacturing equipment maker rose more than 4% after it announced its board of directors had authorized a $10 billion share buyback program and a 10-for-1 stock split. * Coinbase Global ([COIN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN)): Shares of the cryptocurrency exchange rose more than 3% as the price of ether soared amid optimism that the Securities and Exchange Commission (SEC) may approve a spot ether ETF. * Lowe’s ([LOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LOW)): Shares of the home improvement retailer rose more than 2% after it reported [better-than-expected earnings](https://www.investopedia.com/lowes-stock-rises-as-earnings-top-estimates-despite-pullback-on-big-ticket-spending-8651592) despite consumers pulling back on spending on big-ticket items. **Losses:**  * Palo Alto Networks ([PANW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PANW)): Shares of the cybersecurity firm slid more than 6% after offering [lackluster earnings guidance](https://www.investopedia.com/what-to-watch-for-on-palo-alto-networks-stock-after-post-earnings-plunge-8651533) in a replay of last quarter’s [“spending fatigue” warning](https://www.investopedia.com/cybersecurity-stocks-tumble-as-palo-alto-cuts-sales-guidance-8597985) that sent shares plummeting. * JD.com ([JD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=JD)): Shares of the Chinese e-commerce company slumped 5% after it announced plans to raise capital through a $1.5 billion convertible note offering. * Zoom Video ([ZM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZM)): Shares of the video conferencing company slipped 2% after its current-quarter earnings guidance fell slightly short of Wall Street’s estimates. ## Stock Futures Slip From Near Records 23 hr 26 min ago Dow futures were little changed in premarket trading on Tuesday. ![Dow futures (May 21st, 2024)]() :max_bytes(150000):strip_icc()/YM1_2024-05-21_13-41-49-3097f94d001849bdade31ed5e4ea7689.png) S&P 500 futures dipped 0.1%. ![S&P futures (May 21st, 2024)]() :max_bytes(150000):strip_icc()/ES1_2024-05-21_13-41-29-5213574d368743a3937a003bb11a80f7.png) Nasdaq 100 futures were off 0.2%. ![Nasdaq futures (May 21st, 2024)]() :max_bytes(150000):strip_icc()/NQ1_2024-05-21_13-40-22-d76dcb41f37d4378b54027d885a2a773.png)

U.S. stocks ticked up on Tuesday, as investors awaited quarterly results Wednesday from AI darling Nvidia (NVDA) and the closely scrutinized minutes of the Federal Reserve's May meeting. The Nasdaq Composite and the Dow Jones Industrial Average both rose 0.2% on Tuesday, while the S&P 500 crept up 0.3% to close at an all-time high. Lowe's (LOW) shares fell Tuesday, despite the home-improvement retailer posting first-quarter results that beat top- and bottom-line estimates, in contrast to rival Home Depot (HD),  whose numbers missed analysts’ forecasts last week. Palo Alto Networks (PANW) also lost ground after the cybersecurity firm issued a lackluster current-quarter and full-year outlook. Ether (ETHUSD) surged Tuesday after big gains Monday amid increasing confidence the Securities and Exchange Commission (SEC) will approve a spot ether ETF. Oil futures slipped and Treasury yields fell after climbing on Monday. The dollar traded sideways. Stock Indexes Wrap: AI Products Lift Big Tech; Home Retailers, Cybersecurity Stocks Slump 16 hr 8 min ago The Dow International Business Machines (IBM) rose 2.1% after it said it was expanding several AI partnerships with companies including Meta and Salesforce.  Shares of Microsoft (MSFT) rose 0.9% to close just cents shy of a record high after it unveiled new tools to develop AI software during the first day of its Microsoft Build developer conference.  Apple (AAPL) rose 0.7% as the tech giant asked a New Jersey judge to dismiss the Justice Department’s antitrust lawsuit against the company. Home Depot (HD) slipped 0.5% as earnings from competitor Lowe’s raised concerns about a prolonged slump in home-improvement spending.  The S&P 500 Tesla (TSLA) rose 6.7% after an executive said the electric vehicle maker was on track to begin delivering long-awaited semi trucks in 2026.  Eli Lilly (LLY) gained 2.7% after the company announced positive results from a phase 3 trial of a prospective Crohn’s disease treatment.  Nordson (NDSN) slumped 9.4% after trimming its full-year earnings and sales outlook. AutoZone (AZO) shed 3.3% after the auto parts retailer’s quarterly sales fell short of Wall Street estimates.  Lowe’s (LOW) fell 1.9% after reporting first-quarter earnings declined from the year-ago period as consumers put off purchasing big-ticket items.  The Nasdaq 100 Lam Research Corp (LRCX) advanced 2.3% after the semiconductor fabrication equipment maker announced a $10 billion stock buyback authorization and a 10-for-1 stock split.  Nvidia (NVDA) ticked up 0.4% before its quarterly earnings report after the bell tomorrow.  Palo Alto Networks (PANW) slid 3.7% after offering lackluster current-quarter bookings guidance, overshadowing better-than-expected quarterly results.  Cybersecurity peers followed Palo Alto Networks lower. Zscaler (ZS) slid 2% and Fortinet (FTNT) lost 1.7%. Eli Lilly Rises As Study Shows Omvoh Successful in Treating Crohn's Disease 16 hr 38 min ago Shares of Eli Lilly (LLY) were on track to close at an all-time high Tuesday as a study showed the pharmaceutical giant’s current drug for ulcerative colitis also was successful in treating Crohn’s disease. The company reported that a Phase 3 trial of mirikizumab, sold under the brand name of Omvoh, found that patients with moderately or severely active Crohn’s disease “achieved statistically significant and clinically meaningful improvements across multiple clinical and endoscopic endpoints at one year.” The company noted that this year it has submitted a supplemental Biologics License Application for use of mirikizumab to treat Crohn’s disease with the Food and Drug Administration (FDA) and European Medicines Agency (EMA). It added that it plans to make requests to other global regulators as well.  Eli Lilly shares, which rose 2.7% to $804 late in the session Tuesday, have increased about 38% so far in 2024, boosted by soaring global demand for weight-loss treatments. -Bill McColl Ether Rallies as Market Gets Optimistic About Ether ETF Approval 17 hr 36 min ago The price of ether (ETH), which is the native cryptocurrency of the Ethereum network, rallied as much as 20% early Tuesday before giving up some of the gains amid renewed hope for the approval of spot ether exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC). The SEC recently requested that various exchanges update the 19b-4 filings related to the spot ether ETFs on an accelerated basis, CoinDesk reported. The SEC took the same step when it was considering bitcoin ETF applications last year. Another important development was Fidelity amending its ether ETF application to remove staking rewards. The SEC has taken issue with staking, some of which it has argued should be subject to securities laws. Regulators have sued crypto exchanges such as Binance, Coinbase, and Kraken for offering it as a service. Fidelity's removing staking from its application is viewed as a move to put the regulator at ease with the ether ETF product. -Kyle Torpey Palo Alto Networks Slips After Offering Lackluster Revenue Forecast 18 hr 41 min ago Shares in Palo Alto Networks (PANW) fell in intraday trading on Tuesday after the cybersecurity firm issued a lackluster current-quarter and full-year outlook. For the fiscal fourth quarter ending in July, the Silicon Valley-based company guided revenue of $2.15 billion to $2.17 billion, with the $2.16 billion midpoint matching analysts’ forecast. It sees billings in the period, which account for deferred revenue, coming in between $3.43 billion and $3.48 billion, compared to expectations of $3.45 billion. For the full fiscal year, the company kept its billings guidance relatively unchanged, expecting it to range from $10.13 billion to $10.18 billion, compared to its earlier forecast of $10.10 billion to $10.20 billion. "Minor full-year FY24 guidance revisions failed to indicate a meaningful upswing in momentum, and the downstream benefit of increasing platform buy-in from large customers remains to be seen. This was echoed by lackluster guidance for the Q4 FY24 period," Third Bridge analyst Jordan Berger told Reuters. Shares opened nearly 7% lower but have ticked up throughout the day. They were down about 2% mid-afternoon Tuesday. -Timothy Smith Macy's Stock Slides Despite Q1 Results Falling Less Than Expected 20 hr 6 min ago Shares of the iconic retailer Macy's (M) fell in intraday trading Tuesday despite the release of a first-quarter earnings report that showed the company's turnaround is working. The company, which has been closing stores and cutting jobs after ending a proxy fight, reported first-quarter fiscal 2024 profit and revenue above analyst expectations. Total revenue came in at $5 billion, just above the $4.97 billion analysts had projected, per estimates compiled by Visible Alpha, but slightly below the $5.17 billion Macy's generated in the first quarter of 2023. The retailer, which operates its namesake Macy's brand along with Bloomingdale's and Bluemercury, made just $62 million, or 22 cents per share, in profit for the quarter, less than half of the $155 million, or 56 cents per share, it made in the year-ago quarter. That was above the $47.59 million and 16 cents per share analysts had estimated, however. Macy's also updated its guidance for the full fiscal year, narrowing its projected net sales range to $22.3 billion to $22.9 billion, lifting the lower end from its February outlook of $22.2 billion. Comparable sales for the full year are expected to range from a 1% decline to a 1.5% increase from last year's levels, slightly more optimistic than the 1.5% potential decline Macy's had previously used as the low end of the range. Shares in the company fell 1.6% and are down around 6% year-to-date. -Aaron McDade Nordson Stock Tumbles After Company Trims Sales and Earnings Guidance 21 hr 44 min ago Nordson (NDSN) shares fell sharply in early trading Tuesday after the industrial equipment maker trimmed its annual sales and earnings outlook amid weakness in electronics orders and agricultural challenges in Europe. The Westlake, Ohio-based company said it now expects full-year fiscal 2024 net sales growth to come in between flat and up 2%, significantly below its prior forecast of 4% to 7% growth. Analysts had been looking for annual revenue to reach $2.77 billion, representing year-over-year (YOY) growth of around 5%. Nordson also downwardly revised its full-year bottom line guidance, saying it now projects adjusted earnings of $9.35 to $9.75 per share, below its earlier forecast range of $10.00 to $10.50 a share. Source: TradingView.com. The Nordson share price has tracked mostly higher since breaking out from a multi-month trading range in mid-December last year. However, the stock sits poised to fall back to the mid portion of the range on Tuesday following the company’s soft guidance.  If selling intensifies in coming trading sessions, investors should keep an eye on the $230 level, an area where buyers may step in near a horizontal line linking a series of price action over the past 20 months that sits in close proximity to a golden cross pattern that formed in late last year. Nordson stock was down more than 7% Tuesday morning, plunging into negative territory. -Timothy Smith Stocks Making the Biggest Moves Premarket 22 hr 55 min ago Gains: Lam Research (LRCX): Shares of the semiconductor manufacturing equipment maker rose more than 4% after it announced its board of directors had authorized a $10 billion share buyback program and a 10-for-1 stock split.  Coinbase Global (COIN): Shares of the cryptocurrency exchange rose more than 3% as the price of ether soared amid optimism that the Securities and Exchange Commission (SEC) may approve a spot ether ETF. Lowe’s (LOW): Shares of the home improvement retailer rose more than 2% after it reported better-than-expected earnings despite consumers pulling back on spending on big-ticket items.   Losses:  Palo Alto Networks (PANW): Shares of the cybersecurity firm slid more than 6% after offering lackluster earnings guidance in a replay of last quarter’s “spending fatigue” warning that sent shares plummeting.  JD.com (JD): Shares of the Chinese e-commerce company slumped 5% after it announced plans to raise capital through a $1.5 billion convertible note offering. Zoom Video (ZM): Shares of the video conferencing company slipped 2% after its current-quarter earnings guidance fell slightly short of Wall Street’s estimates. Stock Futures Slip From Near Records 23 hr 26 min ago Dow futures were little changed in premarket trading on Tuesday. S&P 500 futures dipped 0.1%. Nasdaq 100 futures were off 0.2%.

https://www.investopedia.com/the-ipo-market-is-getting-weird-and-weve-been-here-before-5094348

The IPO Market Is Getting Weird, and We've Been Here Before

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A technology stock completes its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp" rel="noopener noreferrer">initial public offering</a> (IPO), and the founders are stunned watching the shares shoot up in value in trading far beyond the initial offering price. What year does the event described belong to? A year ago, many of us would have placed it somewhere in the late 1990s. However, it seems like the '90s are here again with a frothy IPO market, an updated version of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blankcheckcompany.asp" rel="noopener noreferrer">blank check company</a>, and some seemingly insane tech <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuation.asp" rel="noopener noreferrer">valuations</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>2020 IPOs have seen massive pops on their first day of trading, with the effect on tech stocks being particularly powerful.</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spac.asp" rel="noopener noreferrer">Special purpose acquisition company</a> (SPAC) IPOs have also increased and will result in these capital-flush companies reaching further into the private market for more pre-IPO companies at earlier and earlier stages.</li> <li>The market enthusiasm for tech IPOs is uncomfortably familiar for investors who were around for the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dotcom-bubble.asp" rel="noopener noreferrer">dotcom bubble</a>.</li> </ul></div></div></div> <span class="heading-toc" id="toc-fine-line-between-hot-and-burning"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Fine Line Between Hot and Burning </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The market for tech stocks is hot. Tesla, Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=tsla" rel="noopener noreferrer">TSLA</a>) can attest to that as it continues to defy logic when it comes to the connection between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentals.asp" rel="noopener noreferrer">fundamentals</a> and market performance. But this heat is even more intense when it comes to new tech stocks hitting the market. Citing Dealogic data, The Wall Street Journal indicates that the percentage gain in terms of an IPO pop being enjoyed by stocks on their first day of trading is at its highest in the past 10 years.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> This type of market froth actually makes carrying out an IPO more difficult for investment bankers. In order to have a happy client following the offering, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/syndicate.asp" rel="noopener noreferrer">syndicate</a> wants to see the shares trading within a range of the offering price. When this happens, it suggests that they got the pricing just right. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> When a stock doubles on its first day of trading, as happened with Airbnb, Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=abnb" rel="noopener noreferrer">ABNB</a>) and Snowflake Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=snow" rel="noopener noreferrer">SNOW</a>), it means that the company has left money on the table in a sense even though the shareholders within the company are still happy. The appetite for IPOs and tech stocks, in particular, has companies like Roblox delaying their offering to better understand where they should be pricing to bring in the most capital. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-the-role-of-spacs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> The Role of SPACs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Special purpose acquisition companies (SPACs) have played a large role in the IPO froth in 2020 and now 2021. According to PricewaterhouseCoopers, we haven't seen an IPO year like this since—you guessed it—the 1990s. 2020 saw 183 traditional IPOs and 242 SPAC deals worth $180 billion.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> These types of blank check companies used to be firmly in the realm of speculation, but they are gaining in popularity as returns elsewhere are depressed due to a flood of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-stimulus.asp" rel="noopener noreferrer">stimulus</a> and a pandemic dampening activity. SPACs are still speculative as they are mostly launching to buy into private companies, but more investment capital is flowing into them than ever before. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The number of quality private companies just waiting to go public through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/09/introduction-reverse-mergers.asp" rel="noopener noreferrer">reverse merger</a> is an open question, but the odds are looking good that some SPACs will have to reach deeper into the barrel than their investors may want. There are other pros and cons around the growth in SPACs, including how the companies using them can market themselves prior to "going public," but that is a topic for another day. The important thing to realize for investors looking at the IPO market with confusion is that SPACs will be eating away at the IPO pipeline in their own way due to the capital they have to put to work. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-remembering-what-happened-to-1990s-surge"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Remembering What Happened to 1990s Surge </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In the 1990s, of course, the craze was for companies who took a "www.something.com" approach to their business plans. There are many examples of how frothy the market was for internet stocks. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/08/dotcom-pets-dot-com.asp" rel="noopener noreferrer">Pets.com made an accelerated journey from IPO to insolvency</a> within a year owing to the timing of the IPO at the busting of the dotcom bubble and a number of unresolved issues in the basic business model. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> While we can tell ourselves that the market understands tech better now, there is no denying that the valuations on tech firms old and new are now extremely dependent on growth to catch up. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp" rel="noopener noreferrer">price-to-earnings (P/E) ratios</a> on tech stocks are breaking barriers that were last pierced in the internet bubble, and even ones that were trending toward traditional value, like Microsoft Corporation (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft" rel="noopener noreferrer">MSFT</a>) and Alphabet Inc. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=googl" rel="noopener noreferrer">GOOGL</a>), are climbing up in the 30s again. Although there is a first time for everything, we have historically seen markets ultimately face <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/correction.asp" rel="noopener noreferrer">correction</a> when a sector becomes unmoored from fundamental valuations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The dotcom bubble and bust of the '90s and early 2000s burned a lot of investors and reduced the capital available for the tech companies developing in the following decade. Apparently, those burns have largely healed in the 20 years since, as we are once again seeing incredible valuations on minimal revenue and a frenzy for IPO stocks and pre-IPO companies. Maybe this is that magical time when there are no consequences for valuations outrunning fundamentals, but there are concerning signs for investors who remember what it was like in the '90s. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

A technology stock completes its [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO), and the founders are stunned watching the shares shoot up in value in trading far beyond the initial offering price. What year does the event described belong to? A year ago, many of us would have placed it somewhere in the late 1990s. However, it seems like the '90s are here again with a frothy IPO market, an updated version of the [blank check company](https://www.investopedia.com/terms/b/blankcheckcompany.asp), and some seemingly insane tech [valuations](https://www.investopedia.com/terms/v/valuation.asp). ### Key Takeaways * 2020 IPOs have seen massive pops on their first day of trading, with the effect on tech stocks being particularly powerful. * [Special purpose acquisition company](https://www.investopedia.com/terms/s/spac.asp) (SPAC) IPOs have also increased and will result in these capital-flush companies reaching further into the private market for more pre-IPO companies at earlier and earlier stages. * The market enthusiasm for tech IPOs is uncomfortably familiar for investors who were around for the [dotcom bubble](https://www.investopedia.com/terms/d/dotcom-bubble.asp). ## Fine Line Between Hot and Burning The market for tech stocks is hot. Tesla, Inc. ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tsla)) can attest to that as it continues to defy logic when it comes to the connection between [fundamentals](https://www.investopedia.com/terms/f/fundamentals.asp) and market performance. But this heat is even more intense when it comes to new tech stocks hitting the market. Citing Dealogic data, The Wall Street Journal indicates that the percentage gain in terms of an IPO pop being enjoyed by stocks on their first day of trading is at its highest in the past 10 years. This type of market froth actually makes carrying out an IPO more difficult for investment bankers. In order to have a happy client following the offering, the [syndicate](https://www.investopedia.com/terms/s/syndicate.asp) wants to see the shares trading within a range of the offering price. When this happens, it suggests that they got the pricing just right. When a stock doubles on its first day of trading, as happened with Airbnb, Inc. ([ABNB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=abnb)) and Snowflake Inc. ([SNOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=snow)), it means that the company has left money on the table in a sense even though the shareholders within the company are still happy. The appetite for IPOs and tech stocks, in particular, has companies like Roblox delaying their offering to better understand where they should be pricing to bring in the most capital. ## The Role of SPACs Special purpose acquisition companies (SPACs) have played a large role in the IPO froth in 2020 and now 2021. According to PricewaterhouseCoopers, we haven't seen an IPO year like this since—you guessed it—the 1990s. 2020 saw 183 traditional IPOs and 242 SPAC deals worth $180 billion. These types of blank check companies used to be firmly in the realm of speculation, but they are gaining in popularity as returns elsewhere are depressed due to a flood of [stimulus](https://www.investopedia.com/terms/e/economic-stimulus.asp) and a pandemic dampening activity. SPACs are still speculative as they are mostly launching to buy into private companies, but more investment capital is flowing into them than ever before. The number of quality private companies just waiting to go public through a [reverse merger](https://www.investopedia.com/articles/stocks/09/introduction-reverse-mergers.asp) is an open question, but the odds are looking good that some SPACs will have to reach deeper into the barrel than their investors may want. There are other pros and cons around the growth in SPACs, including how the companies using them can market themselves prior to "going public," but that is a topic for another day. The important thing to realize for investors looking at the IPO market with confusion is that SPACs will be eating away at the IPO pipeline in their own way due to the capital they have to put to work. ## Remembering What Happened to 1990s Surge In the 1990s, of course, the craze was for companies who took a "www.something.com" approach to their business plans. There are many examples of how frothy the market was for internet stocks. [Pets.com made an accelerated journey from IPO to insolvency](https://www.investopedia.com/ask/answers/08/dotcom-pets-dot-com.asp) within a year owing to the timing of the IPO at the busting of the dotcom bubble and a number of unresolved issues in the basic business model. While we can tell ourselves that the market understands tech better now, there is no denying that the valuations on tech firms old and new are now extremely dependent on growth to catch up. The [price-to-earnings (P/E) ratios](https://www.investopedia.com/terms/p/price-earningsratio.asp) on tech stocks are breaking barriers that were last pierced in the internet bubble, and even ones that were trending toward traditional value, like Microsoft Corporation ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft)) and Alphabet Inc. ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=googl)), are climbing up in the 30s again. Although there is a first time for everything, we have historically seen markets ultimately face [correction](https://www.investopedia.com/terms/c/correction.asp) when a sector becomes unmoored from fundamental valuations. ## The Bottom Line The dotcom bubble and bust of the '90s and early 2000s burned a lot of investors and reduced the capital available for the tech companies developing in the following decade. Apparently, those burns have largely healed in the 20 years since, as we are once again seeing incredible valuations on minimal revenue and a frenzy for IPO stocks and pre-IPO companies. Maybe this is that magical time when there are no consequences for valuations outrunning fundamentals, but there are concerning signs for investors who remember what it was like in the '90s. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

A technology stock completes its initial public offering (IPO), and the founders are stunned watching the shares shoot up in value in trading far beyond the initial offering price. What year does the event described belong to? A year ago, many of us would have placed it somewhere in the late 1990s. However, it seems like the '90s are here again with a frothy IPO market, an updated version of the blank check company, and some seemingly insane tech valuations. Key Takeaways 2020 IPOs have seen massive pops on their first day of trading, with the effect on tech stocks being particularly powerful. Special purpose acquisition company (SPAC) IPOs have also increased and will result in these capital-flush companies reaching further into the private market for more pre-IPO companies at earlier and earlier stages. The market enthusiasm for tech IPOs is uncomfortably familiar for investors who were around for the dotcom bubble. Fine Line Between Hot and Burning The market for tech stocks is hot. Tesla, Inc. (TSLA) can attest to that as it continues to defy logic when it comes to the connection between fundamentals and market performance. But this heat is even more intense when it comes to new tech stocks hitting the market. Citing Dealogic data, The Wall Street Journal indicates that the percentage gain in terms of an IPO pop being enjoyed by stocks on their first day of trading is at its highest in the past 10 years. This type of market froth actually makes carrying out an IPO more difficult for investment bankers. In order to have a happy client following the offering, the syndicate wants to see the shares trading within a range of the offering price. When this happens, it suggests that they got the pricing just right. When a stock doubles on its first day of trading, as happened with Airbnb, Inc. (ABNB) and Snowflake Inc. (SNOW), it means that the company has left money on the table in a sense even though the shareholders within the company are still happy. The appetite for IPOs and tech stocks, in particular, has companies like Roblox delaying their offering to better understand where they should be pricing to bring in the most capital. The Role of SPACs Special purpose acquisition companies (SPACs) have played a large role in the IPO froth in 2020 and now 2021. According to PricewaterhouseCoopers, we haven't seen an IPO year like this since—you guessed it—the 1990s. 2020 saw 183 traditional IPOs and 242 SPAC deals worth $180 billion. These types of blank check companies used to be firmly in the realm of speculation, but they are gaining in popularity as returns elsewhere are depressed due to a flood of stimulus and a pandemic dampening activity. SPACs are still speculative as they are mostly launching to buy into private companies, but more investment capital is flowing into them than ever before. The number of quality private companies just waiting to go public through a reverse merger is an open question, but the odds are looking good that some SPACs will have to reach deeper into the barrel than their investors may want. There are other pros and cons around the growth in SPACs, including how the companies using them can market themselves prior to "going public," but that is a topic for another day. The important thing to realize for investors looking at the IPO market with confusion is that SPACs will be eating away at the IPO pipeline in their own way due to the capital they have to put to work. Remembering What Happened to 1990s Surge In the 1990s, of course, the craze was for companies who took a "www.something.com" approach to their business plans. There are many examples of how frothy the market was for internet stocks. Pets.com made an accelerated journey from IPO to insolvency within a year owing to the timing of the IPO at the busting of the dotcom bubble and a number of unresolved issues in the basic business model. While we can tell ourselves that the market understands tech better now, there is no denying that the valuations on tech firms old and new are now extremely dependent on growth to catch up. The price-to-earnings (P/E) ratios on tech stocks are breaking barriers that were last pierced in the internet bubble, and even ones that were trending toward traditional value, like Microsoft Corporation (MSFT) and Alphabet Inc. (GOOGL), are climbing up in the 30s again. Although there is a first time for everything, we have historically seen markets ultimately face correction when a sector becomes unmoored from fundamental valuations. The Bottom Line The dotcom bubble and bust of the '90s and early 2000s burned a lot of investors and reduced the capital available for the tech companies developing in the following decade. Apparently, those burns have largely healed in the 20 years since, as we are once again seeing incredible valuations on minimal revenue and a frenzy for IPO stocks and pre-IPO companies. Maybe this is that magical time when there are no consequences for valuations outrunning fundamentals, but there are concerning signs for investors who remember what it was like in the '90s. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/articles/basics/11/3-s-simple-investing.asp

Investing: An Introduction

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The investment landscape can be extremely dynamic and ever-evolving. But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The first step is learning to distinguish different types of investments and what rung each occupies on the risk ladder. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>Investing can be a daunting prospect for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/10-investing-concepts-beginners-need-to-learn-5219500">beginners</a>, with an enormous variety of possible assets to add to a portfolio.</li> <li>The investment risk ladder identifies asset classes based on their relative riskiness, with cash being the most stable and alternative investments often being the most volatile.</li> <li>Sticking with index funds or exchange-traded funds (ETFs) that mirror the market is often the best path for a new investor.</li> <li>Stocks tend to have higher yields than bonds, but also greater risks. </li> <li>Many investment specialists recommend diversifying one's portfolio.</li> </ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-investment-risk-ladder"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Understanding the Investment Risk Ladder </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Investment risk ladder image showing the types of investments on a scale of least risky to most risky" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Vkvrya3t2rz9uWuXciCmuZ9mftc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/INV-Asset-Classes-114-a82638558a344378aacd8eb1620a4481.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Vkvrya3t2rz9uWuXciCmuZ9mftc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/INV-Asset-Classes-114-a82638558a344378aacd8eb1620a4481.jpg" data-srcset="https://www.investopedia.com/thmb/awHM7gpa99_SxeLoYkDOH6kg1ew=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/INV-Asset-Classes-114-a82638558a344378aacd8eb1620a4481.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Investment risk ladder image showing the types of investments on a scale of least risky to most risky" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/Vkvrya3t2rz9uWuXciCmuZ9mftc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/INV-Asset-Classes-114-a82638558a344378aacd8eb1620a4481.jpg" srcset="https://www.investopedia.com/thmb/awHM7gpa99_SxeLoYkDOH6kg1ew=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/INV-Asset-Classes-114-a82638558a344378aacd8eb1620a4481.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Joules Garcia</p></span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Here are the major asset classes, in ascending order of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risk</a>, on the investment risk ladder. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-subheading__text"> Cash </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp">investors</a> precise knowledge of the interest that they’ll earn but also guarantees that they’ll get their capital back. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> On the downside, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> earned from cash socked away in a savings account seldom beats inflation. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit</a> (CDs) are less <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidasset.asp">liquid</a> instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a CD is locked up for a period of time (months to years), and there are potentially early withdrawal penalties involved.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-subheading__text"> Bonds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bond</a> is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital. Bonds are commonplace in organizations that use them to finance operations, purchases, or other projects.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Bond rates are essentially determined by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a>. Due to this, they are heavily traded during periods of quantitative easing or when the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve</a>—or other central banks—raise interest rates.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-subheading__text"> Mutual Funds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual fund</a> is a type of investment where more than one investor pools their money together to purchase securities. Mutual funds are not necessarily <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passivemanagement.asp">passive</a>, as they are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities.<span class="ql-inline-citation" data-cite="11"></span> Most mutual funds have a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111714/what-minimum-amount-money-i-can-invest-mutual-fund.asp">minimum investment</a> of between $500 and $5,000, and many do not have any minimum at all. Even a relatively small investment provides exposure to as many as 100 different stocks contained within a given fund's <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Mutual funds are sometimes designed to mimic underlying indexes such as the S&amp;P 500 or the Dow Jones Industrial Average. There are also many mutual funds that are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activemanagement.asp">actively managed</a>, meaning that they are updated by portfolio managers who carefully track and adjust their allocations within the fund. However, these funds generally have greater costs—such as yearly management fees and front-end charges—that can cut into an investor’s returns.<span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Mutual funds are valued at the end of the trading day, and all buy and sell transactions are likewise executed after the market closes.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_29-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Many investment specialists advise their clients to diversity into a wide range of securities rather than focusing on just a few stocks.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-subheading__text"> Exchange-Traded Funds (ETFs) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">Exchange-traded funds</a> (ETFs) have become quite popular since their introduction back in the mid-1990s. ETFs are similar to mutual funds, but they trade throughout the day, on a stock exchange. In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day.<span class="ql-inline-citation" data-cite="13"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> ETFs can track an underlying index such as the S&amp;P 500 or any other basket of stocks with which the ETF issuer wants to underline a specific ETF. This can include anything from emerging markets to commodities, individual business sectors such as biotechnology <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/agricultural-etfs-8425680">or agriculture</a>, and more. Due to the ease of trading and broad coverage, ETFs are extremely popular with investors.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-subheading__text"> Stocks </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">Shares of stock</a> let investors participate in a company’s success via increases in the stock’s price and through <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a>. Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Holders of common stock enjoy voting rights at shareholders’ meetings. Holders of preferred stock don’t have voting rights but do receive preference over common shareholders in terms of the dividend payments.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_40-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_41-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Some investments, such as hedge funds, are only permitted to wealthy investors.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Alternative Investments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> There is a vast universe of alternative investments, including the following sectors: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <li><strong>Real estate</strong>: Investors can acquire real estate by directly buying commercial or residential properties. Alternatively, they can purchase shares in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate investment trusts</a> (REITs). REITs act like mutual funds wherein a group of investors pool their money together to purchase properties. They trade like stocks on the same exchange.<span class="ql-inline-citation" data-cite="7"></span></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp"><strong>Hedge funds</strong></a>: Hedge funds may invest in a spectrum of assets designed to deliver beyond market returns, called “alpha.” However, performance is not guaranteed, and hedge funds can see incredible shifts in returns, sometimes underperforming the market by a significant margin.<span class="ql-inline-citation" data-cite="14"></span> Typically only available to accredited investors, these vehicles often require high initial investments of $1 million or more. They also tend to impose net worth requirements. Hedge fund investments may tie up an investor’s money for substantial time periods.<span class="ql-inline-citation" data-cite="9"></span></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privateequity.asp"><strong>Private equity fund</strong></a>: Private equity funds are pooled investment vehicles similar to mutual and hedge funds. A private equity firm, known as the "adviser," pools money invested in the fund by multiple investors and then makes investments on behalf of the fund. Private equity funds often take a controlling interest in an operating company and engage in active management of the company in an effort to bolster its value. Other private equity fund strategies include targeting fast-growing companies or startups. Like a hedge fund, private equity firms tend to focus on long-term investment opportunities of 10 years or more.<span class="ql-inline-citation" data-cite="10"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp"><strong>Commodities</strong></a>: Commodities refer to tangible resources such as gold, silver, and crude oil, as well as agricultural products.<span class="ql-inline-citation" data-cite="8"></span> There are multiple ways of accessing commodity investments. A <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commoditypool.asp">commodity pool</a> or "managed futures fund" is a private investment vehicle combining contributions from multiple investors to trade in the futures and commodities markets. A benefit of commodity pools is that an individual investor's risk is limited to her financial contribution to the fund. Some <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing-commodity-etfs-4690946">specialized ETFs</a> are also designed to focus on commodities.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Order your copy of Investopedia's <a data-component="amazon" data-ordinal="1" data-source="affiliate" data-type="externalLink" href="https://www.amazon.com/dp/1547862912/ref=sr_1_7?keywords=investopedia&amp;qid=1684168403&amp;sr=8-7" rel="sponsored nofollow">What To Do With $10,000 magazine</a> for more wealth-building advice.</p></div></div></div> <span class="heading-toc" id="toc-how-to-invest-sensibly-suitably-and-simply"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> How to Invest Sensibly, Suitably, and Simply </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Many veteran investors diversify their portfolios using the asset classes listed above, with the mix reflecting their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">tolerance for risk</a>. A good piece of advice to investors is to start with simple investments, then incrementally expand their portfolios. Specifically, mutual funds or ETFs are a good first step, before moving on to individual <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/07/getting-started-stocks.asp">stocks</a>, real estate, and other alternative investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> However, most people are too busy to worry about monitoring their portfolios daily. Therefore, sticking with index funds that mirror the market is a viable solution. Steven Goldberg, a principal at the firm <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.tginvesting.com/" rel="nofollow">Tweddell Goldberg Wealth Management</a> and longtime mutual funds columnist at Kiplinger.com, further argues that most individuals only need three <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index funds</a>: one covering the U.S. equity market, another focused on international equities, and the third tracking a broad bond index.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> More hands-on investors, however, may want to choose their own asset mix when crafting a diversified portfolio that fits their risk tolerance, time horizon, and financial goals. This means that you can try to capture excess returns by tilting your portfolio weights to favor certain asset classes depending on the economic environment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <span class="heading-toc" id="toc-asset-class-expectations-given-the-economic-environment"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-heading__text"> Asset Class Expectations Given the Economic Environment </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Let's first consider the relative performance of stocks and bonds, which historically have shown somewhat of an inverse correlation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> <li>When the economy is strong and growing, with low unemployment, stocks tend to perform well as consumers spend and corporate profits rise. At the same time, bonds may underperform as interest rates rise to keep track with economic growth and inflation. When inflation is high, fixed-rate bonds may also fare comparatively worse if the coupon rate is below the rate of inflation.</li><li>When the economy is turning sour and recession hits, unemployment rises and people stop spending as much, hurting corporate profits. This, in turn, can weigh down on stock prices. But, as interest rates fall in response to a sagging economy, bonds may outperform.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Most financial professionals recommend a portfolio mix consisting of stocks and bonds, as described above. Other asset classes, too, may favor certain economic conditions; however, not all asset classes are suitable for investors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> <li>Real estate: A strong economy and low unemployment can lead to a robust housing market, which may benefit real estate investments. However, rising interest rates can put a damper on mortgage borrowing.</li><li>Commodities: Inflationary environments can lead to an increase in the prices of certain commodities, making them a favorable asset class to use as an inflation hedge.</li><li>Alternative investments: Private equity, venture capital, hedge funds, and other non-traditional investments may outperform in an environment of low interest rates and high liquidity. These types of investments, though, are not always available to individual investors and may require a significant outlay of cash and feature lower levels of liquidity.</li><li>Gold: Gold is considered as a safe haven asset and it performs well in times of economic uncertainty, geopolitical tensions and during inflationary environment. This was especially the case during the COVID19 pandemic, which saw gold rise to all-time highs during the Spring of 2020.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span><li>Cash and cash equivalents, (e.g. money market funds and CDs): These also tend to perform relatively well in uncertain or volatile economic environments is because they, too, are considered to be a safe haven. Investors may turn to cash as a way to preserve their capital and limit downside exposure to risk during bear markets. However, in a stable and low-inflation environment, cash will not usually provide returns as high as other asset classes such as stocks or bonds - but the stability and the low risk make a small allocation to cash an attractive option for investors seeking preservation of capital or for short term liquidity needs.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_65-0"><span class="heading-toc" id="toc-what-are-the-different-asset-classes"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Different Asset Classes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Historically, the three main asset classes are considered to be equities (stocks), debt (bonds), and money market instruments. Today, many investors may consider real estate, commodities, futures, derivatives, or even cryptocurrencies to be separate asset classes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-which-asset-classes-are-the-least-liquid"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Asset Classes Are the Least Liquid?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Generally, land and real estate are considered among the least liquid assets, because it can take a long time to buy or sell a property at market price. Money market instruments are the most liquid, because they can easily be sold for their full value.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-what-asset-classes-do-well-during-high-inflation"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Asset Classes Do Well During High Inflation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Real estate and commodities are considered to be good <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/080813/how-profit-inflation.asp">inflation hedges</a>, because their value tends to rise as prices increase. In addition, some <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seriesibond.asp">government bonds</a> are also indexed to inflation, making them an attractive way to store excess cash.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Investment education is essential—as is avoiding investments that you don’t fully understand. Rely on sound recommendations from experienced investors, while dismissing “hot tips” from untrustworthy sources. When consulting professionals, look to independent financial advisors who get paid only for their time, instead of those who collect commissions. And above all, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversify</a> your holdings across a wide swath of assets. </p></div>

The investment landscape can be extremely dynamic and ever-evolving. But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul. The first step is learning to distinguish different types of investments and what rung each occupies on the risk ladder. ### Key Takeaways * Investing can be a daunting prospect for [beginners](https://www.investopedia.com/10-investing-concepts-beginners-need-to-learn-5219500), with an enormous variety of possible assets to add to a portfolio. * The investment risk ladder identifies asset classes based on their relative riskiness, with cash being the most stable and alternative investments often being the most volatile. * Sticking with index funds or exchange-traded funds (ETFs) that mirror the market is often the best path for a new investor. * Stocks tend to have higher yields than bonds, but also greater risks. * Many investment specialists recommend diversifying one's portfolio. ## Understanding the Investment Risk Ladder ![Investment risk ladder image showing the types of investments on a scale of least risky to most risky]() :max_bytes(150000):strip_icc()/INV-Asset-Classes-114-a82638558a344378aacd8eb1620a4481.jpg) Investopedia / Joules Garcia Here are the major asset classes, in ascending order of [risk](https://www.investopedia.com/terms/r/risk.asp), on the investment risk ladder. ### Cash A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives [investors](https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp) precise knowledge of the interest that they’ll earn but also guarantees that they’ll get their capital back. On the downside, the [interest](https://www.investopedia.com/terms/i/interest.asp) earned from cash socked away in a savings account seldom beats inflation. [Certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CDs) are less [liquid](https://www.investopedia.com/terms/l/liquidasset.asp) instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a CD is locked up for a period of time (months to years), and there are potentially early withdrawal penalties involved. ### Bonds A [bond](https://www.investopedia.com/terms/b/bond.asp) is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital. Bonds are commonplace in organizations that use them to finance operations, purchases, or other projects. Bond rates are essentially determined by [interest rates](https://www.investopedia.com/terms/i/interestrate.asp). Due to this, they are heavily traded during periods of quantitative easing or when the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp)—or other central banks—raise interest rates. ### Mutual Funds A [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) is a type of investment where more than one investor pools their money together to purchase securities. Mutual funds are not necessarily [passive](https://www.investopedia.com/terms/p/passivemanagement.asp), as they are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities. Most mutual funds have a [minimum investment](https://www.investopedia.com/ask/answers/111714/what-minimum-amount-money-i-can-invest-mutual-fund.asp) of between $500 and $5,000, and many do not have any minimum at all. Even a relatively small investment provides exposure to as many as 100 different stocks contained within a given fund's [portfolio](https://www.investopedia.com/terms/p/portfolio.asp). Mutual funds are sometimes designed to mimic underlying indexes such as the S&P 500 or the Dow Jones Industrial Average. There are also many mutual funds that are [actively managed](https://www.investopedia.com/terms/a/activemanagement.asp), meaning that they are updated by portfolio managers who carefully track and adjust their allocations within the fund. However, these funds generally have greater costs—such as yearly management fees and front-end charges—that can cut into an investor’s returns. Mutual funds are valued at the end of the trading day, and all buy and sell transactions are likewise executed after the market closes. ### Many investment specialists advise their clients to diversity into a wide range of securities rather than focusing on just a few stocks. ### Exchange-Traded Funds (ETFs) [Exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) have become quite popular since their introduction back in the mid-1990s. ETFs are similar to mutual funds, but they trade throughout the day, on a stock exchange. In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day. ETFs can track an underlying index such as the S&P 500 or any other basket of stocks with which the ETF issuer wants to underline a specific ETF. This can include anything from emerging markets to commodities, individual business sectors such as biotechnology [or agriculture](https://www.investopedia.com/agricultural-etfs-8425680), and more. Due to the ease of trading and broad coverage, ETFs are extremely popular with investors. ### Stocks [Shares of stock](https://www.investopedia.com/terms/s/stock.asp) let investors participate in a company’s success via increases in the stock’s price and through [dividends](https://www.investopedia.com/terms/d/dividend.asp). Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets. Holders of common stock enjoy voting rights at shareholders’ meetings. Holders of preferred stock don’t have voting rights but do receive preference over common shareholders in terms of the dividend payments. ### Some investments, such as hedge funds, are only permitted to wealthy investors. ### Alternative Investments There is a vast universe of alternative investments, including the following sectors: * **Real estate**: Investors can acquire real estate by directly buying commercial or residential properties. Alternatively, they can purchase shares in [real estate investment trusts](https://www.investopedia.com/terms/r/reit.asp) (REITs). REITs act like mutual funds wherein a group of investors pool their money together to purchase properties. They trade like stocks on the same exchange. * [**Hedge funds**](https://www.investopedia.com/terms/h/hedgefund.asp): Hedge funds may invest in a spectrum of assets designed to deliver beyond market returns, called “alpha.” However, performance is not guaranteed, and hedge funds can see incredible shifts in returns, sometimes underperforming the market by a significant margin. Typically only available to accredited investors, these vehicles often require high initial investments of $1 million or more. They also tend to impose net worth requirements. Hedge fund investments may tie up an investor’s money for substantial time periods. * [**Private equity fund**](https://www.investopedia.com/terms/p/privateequity.asp): Private equity funds are pooled investment vehicles similar to mutual and hedge funds. A private equity firm, known as the "adviser," pools money invested in the fund by multiple investors and then makes investments on behalf of the fund. Private equity funds often take a controlling interest in an operating company and engage in active management of the company in an effort to bolster its value. Other private equity fund strategies include targeting fast-growing companies or startups. Like a hedge fund, private equity firms tend to focus on long-term investment opportunities of 10 years or more. * [**Commodities**](https://www.investopedia.com/terms/c/commodity.asp): Commodities refer to tangible resources such as gold, silver, and crude oil, as well as agricultural products. There are multiple ways of accessing commodity investments. A [commodity pool](https://www.investopedia.com/terms/c/commoditypool.asp) or "managed futures fund" is a private investment vehicle combining contributions from multiple investors to trade in the futures and commodities markets. A benefit of commodity pools is that an individual investor's risk is limited to her financial contribution to the fund. Some [specialized ETFs](https://www.investopedia.com/investing-commodity-etfs-4690946) are also designed to focus on commodities. ### Tip Order your copy of Investopedia's [What To Do With $10,000 magazine](https://www.amazon.com/dp/1547862912/ref=sr_1_7?keywords=investopedia&qid=1684168403&sr=8-7) for more wealth-building advice. ## How to Invest Sensibly, Suitably, and Simply Many veteran investors diversify their portfolios using the asset classes listed above, with the mix reflecting their [tolerance for risk](https://www.investopedia.com/terms/r/risktolerance.asp). A good piece of advice to investors is to start with simple investments, then incrementally expand their portfolios. Specifically, mutual funds or ETFs are a good first step, before moving on to individual [stocks](https://www.investopedia.com/articles/basics/07/getting-started-stocks.asp), real estate, and other alternative investments. However, most people are too busy to worry about monitoring their portfolios daily. Therefore, sticking with index funds that mirror the market is a viable solution. Steven Goldberg, a principal at the firm [Tweddell Goldberg Wealth Management](https://www.tginvesting.com/) and longtime mutual funds columnist at Kiplinger.com, further argues that most individuals only need three [index funds](https://www.investopedia.com/terms/i/indexfund.asp): one covering the U.S. equity market, another focused on international equities, and the third tracking a broad bond index. More hands-on investors, however, may want to choose their own asset mix when crafting a diversified portfolio that fits their risk tolerance, time horizon, and financial goals. This means that you can try to capture excess returns by tilting your portfolio weights to favor certain asset classes depending on the economic environment. ## Asset Class Expectations Given the Economic Environment Let's first consider the relative performance of stocks and bonds, which historically have shown somewhat of an inverse correlation: * When the economy is strong and growing, with low unemployment, stocks tend to perform well as consumers spend and corporate profits rise. At the same time, bonds may underperform as interest rates rise to keep track with economic growth and inflation. When inflation is high, fixed-rate bonds may also fare comparatively worse if the coupon rate is below the rate of inflation. * When the economy is turning sour and recession hits, unemployment rises and people stop spending as much, hurting corporate profits. This, in turn, can weigh down on stock prices. But, as interest rates fall in response to a sagging economy, bonds may outperform. Most financial professionals recommend a portfolio mix consisting of stocks and bonds, as described above. Other asset classes, too, may favor certain economic conditions; however, not all asset classes are suitable for investors. * Real estate: A strong economy and low unemployment can lead to a robust housing market, which may benefit real estate investments. However, rising interest rates can put a damper on mortgage borrowing. * Commodities: Inflationary environments can lead to an increase in the prices of certain commodities, making them a favorable asset class to use as an inflation hedge. * Alternative investments: Private equity, venture capital, hedge funds, and other non-traditional investments may outperform in an environment of low interest rates and high liquidity. These types of investments, though, are not always available to individual investors and may require a significant outlay of cash and feature lower levels of liquidity. * Gold: Gold is considered as a safe haven asset and it performs well in times of economic uncertainty, geopolitical tensions and during inflationary environment. This was especially the case during the COVID19 pandemic, which saw gold rise to all-time highs during the Spring of 2020. * Cash and cash equivalents, (e.g. money market funds and CDs): These also tend to perform relatively well in uncertain or volatile economic environments is because they, too, are considered to be a safe haven. Investors may turn to cash as a way to preserve their capital and limit downside exposure to risk during bear markets. However, in a stable and low-inflation environment, cash will not usually provide returns as high as other asset classes such as stocks or bonds - but the stability and the low risk make a small allocation to cash an attractive option for investors seeking preservation of capital or for short term liquidity needs. ## What Are the Different Asset Classes? Historically, the three main asset classes are considered to be equities (stocks), debt (bonds), and money market instruments. Today, many investors may consider real estate, commodities, futures, derivatives, or even cryptocurrencies to be separate asset classes. ## Which Asset Classes Are the Least Liquid? Generally, land and real estate are considered among the least liquid assets, because it can take a long time to buy or sell a property at market price. Money market instruments are the most liquid, because they can easily be sold for their full value. ## What Asset Classes Do Well During High Inflation? Real estate and commodities are considered to be good [inflation hedges](https://www.investopedia.com/articles/investing/080813/how-profit-inflation.asp), because their value tends to rise as prices increase. In addition, some [government bonds](https://www.investopedia.com/terms/s/seriesibond.asp) are also indexed to inflation, making them an attractive way to store excess cash. ## The Bottom Line Investment education is essential—as is avoiding investments that you don’t fully understand. Rely on sound recommendations from experienced investors, while dismissing “hot tips” from untrustworthy sources. When consulting professionals, look to independent financial advisors who get paid only for their time, instead of those who collect commissions. And above all, [diversify](https://www.investopedia.com/terms/d/diversification.asp) your holdings across a wide swath of assets.

The investment landscape can be extremely dynamic and ever-evolving. But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul. The first step is learning to distinguish different types of investments and what rung each occupies on the risk ladder. Key Takeaways Investing can be a daunting prospect for beginners, with an enormous variety of possible assets to add to a portfolio. The investment risk ladder identifies asset classes based on their relative riskiness, with cash being the most stable and alternative investments often being the most volatile. Sticking with index funds or exchange-traded funds (ETFs) that mirror the market is often the best path for a new investor. Stocks tend to have higher yields than bonds, but also greater risks. Many investment specialists recommend diversifying one's portfolio. Understanding the Investment Risk Ladder Investopedia / Joules Garcia Here are the major asset classes, in ascending order of risk, on the investment risk ladder. Cash A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives investors precise knowledge of the interest that they’ll earn but also guarantees that they’ll get their capital back. On the downside, the interest earned from cash socked away in a savings account seldom beats inflation. Certificates of deposit (CDs) are less liquid instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a CD is locked up for a period of time (months to years), and there are potentially early withdrawal penalties involved. Bonds A bond is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital. Bonds are commonplace in organizations that use them to finance operations, purchases, or other projects. Bond rates are essentially determined by interest rates. Due to this, they are heavily traded during periods of quantitative easing or when the Federal Reserve—or other central banks—raise interest rates. Mutual Funds A mutual fund is a type of investment where more than one investor pools their money together to purchase securities. Mutual funds are not necessarily passive, as they are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities. Most mutual funds have a minimum investment of between $500 and $5,000, and many do not have any minimum at all. Even a relatively small investment provides exposure to as many as 100 different stocks contained within a given fund's portfolio. Mutual funds are sometimes designed to mimic underlying indexes such as the S&P 500 or the Dow Jones Industrial Average. There are also many mutual funds that are actively managed, meaning that they are updated by portfolio managers who carefully track and adjust their allocations within the fund. However, these funds generally have greater costs—such as yearly management fees and front-end charges—that can cut into an investor’s returns. Mutual funds are valued at the end of the trading day, and all buy and sell transactions are likewise executed after the market closes. Many investment specialists advise their clients to diversity into a wide range of securities rather than focusing on just a few stocks. Exchange-Traded Funds (ETFs) Exchange-traded funds (ETFs) have become quite popular since their introduction back in the mid-1990s. ETFs are similar to mutual funds, but they trade throughout the day, on a stock exchange. In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day. ETFs can track an underlying index such as the S&P 500 or any other basket of stocks with which the ETF issuer wants to underline a specific ETF. This can include anything from emerging markets to commodities, individual business sectors such as biotechnology or agriculture, and more. Due to the ease of trading and broad coverage, ETFs are extremely popular with investors. Stocks Shares of stock let investors participate in a company’s success via increases in the stock’s price and through dividends. Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets. Holders of common stock enjoy voting rights at shareholders’ meetings. Holders of preferred stock don’t have voting rights but do receive preference over common shareholders in terms of the dividend payments. Some investments, such as hedge funds, are only permitted to wealthy investors. Alternative Investments There is a vast universe of alternative investments, including the following sectors: Real estate: Investors can acquire real estate by directly buying commercial or residential properties. Alternatively, they can purchase shares in real estate investment trusts (REITs). REITs act like mutual funds wherein a group of investors pool their money together to purchase properties. They trade like stocks on the same exchange. Hedge funds: Hedge funds may invest in a spectrum of assets designed to deliver beyond market returns, called “alpha.” However, performance is not guaranteed, and hedge funds can see incredible shifts in returns, sometimes underperforming the market by a significant margin. Typically only available to accredited investors, these vehicles often require high initial investments of $1 million or more. They also tend to impose net worth requirements. Hedge fund investments may tie up an investor’s money for substantial time periods. Private equity fund: Private equity funds are pooled investment vehicles similar to mutual and hedge funds. A private equity firm, known as the "adviser," pools money invested in the fund by multiple investors and then makes investments on behalf of the fund. Private equity funds often take a controlling interest in an operating company and engage in active management of the company in an effort to bolster its value. Other private equity fund strategies include targeting fast-growing companies or startups. Like a hedge fund, private equity firms tend to focus on long-term investment opportunities of 10 years or more. Commodities: Commodities refer to tangible resources such as gold, silver, and crude oil, as well as agricultural products. There are multiple ways of accessing commodity investments. A commodity pool or "managed futures fund" is a private investment vehicle combining contributions from multiple investors to trade in the futures and commodities markets. A benefit of commodity pools is that an individual investor's risk is limited to her financial contribution to the fund. Some specialized ETFs are also designed to focus on commodities. Tip Order your copy of Investopedia's What To Do With $10,000 magazine for more wealth-building advice. How to Invest Sensibly, Suitably, and Simply Many veteran investors diversify their portfolios using the asset classes listed above, with the mix reflecting their tolerance for risk. A good piece of advice to investors is to start with simple investments, then incrementally expand their portfolios. Specifically, mutual funds or ETFs are a good first step, before moving on to individual stocks, real estate, and other alternative investments. However, most people are too busy to worry about monitoring their portfolios daily. Therefore, sticking with index funds that mirror the market is a viable solution. Steven Goldberg, a principal at the firm Tweddell Goldberg Wealth Management and longtime mutual funds columnist at Kiplinger.com, further argues that most individuals only need three index funds: one covering the U.S. equity market, another focused on international equities, and the third tracking a broad bond index. More hands-on investors, however, may want to choose their own asset mix when crafting a diversified portfolio that fits their risk tolerance, time horizon, and financial goals. This means that you can try to capture excess returns by tilting your portfolio weights to favor certain asset classes depending on the economic environment. Asset Class Expectations Given the Economic Environment Let's first consider the relative performance of stocks and bonds, which historically have shown somewhat of an inverse correlation: When the economy is strong and growing, with low unemployment, stocks tend to perform well as consumers spend and corporate profits rise. At the same time, bonds may underperform as interest rates rise to keep track with economic growth and inflation. When inflation is high, fixed-rate bonds may also fare comparatively worse if the coupon rate is below the rate of inflation.When the economy is turning sour and recession hits, unemployment rises and people stop spending as much, hurting corporate profits. This, in turn, can weigh down on stock prices. But, as interest rates fall in response to a sagging economy, bonds may outperform. Most financial professionals recommend a portfolio mix consisting of stocks and bonds, as described above. Other asset classes, too, may favor certain economic conditions; however, not all asset classes are suitable for investors. Real estate: A strong economy and low unemployment can lead to a robust housing market, which may benefit real estate investments. However, rising interest rates can put a damper on mortgage borrowing.Commodities: Inflationary environments can lead to an increase in the prices of certain commodities, making them a favorable asset class to use as an inflation hedge.Alternative investments: Private equity, venture capital, hedge funds, and other non-traditional investments may outperform in an environment of low interest rates and high liquidity. These types of investments, though, are not always available to individual investors and may require a significant outlay of cash and feature lower levels of liquidity.Gold: Gold is considered as a safe haven asset and it performs well in times of economic uncertainty, geopolitical tensions and during inflationary environment. This was especially the case during the COVID19 pandemic, which saw gold rise to all-time highs during the Spring of 2020.Cash and cash equivalents, (e.g. money market funds and CDs): These also tend to perform relatively well in uncertain or volatile economic environments is because they, too, are considered to be a safe haven. Investors may turn to cash as a way to preserve their capital and limit downside exposure to risk during bear markets. However, in a stable and low-inflation environment, cash will not usually provide returns as high as other asset classes such as stocks or bonds - but the stability and the low risk make a small allocation to cash an attractive option for investors seeking preservation of capital or for short term liquidity needs. What Are the Different Asset Classes? Historically, the three main asset classes are considered to be equities (stocks), debt (bonds), and money market instruments. Today, many investors may consider real estate, commodities, futures, derivatives, or even cryptocurrencies to be separate asset classes. Which Asset Classes Are the Least Liquid? Generally, land and real estate are considered among the least liquid assets, because it can take a long time to buy or sell a property at market price. Money market instruments are the most liquid, because they can easily be sold for their full value. What Asset Classes Do Well During High Inflation? Real estate and commodities are considered to be good inflation hedges, because their value tends to rise as prices increase. In addition, some government bonds are also indexed to inflation, making them an attractive way to store excess cash. The Bottom Line Investment education is essential—as is avoiding investments that you don’t fully understand. Rely on sound recommendations from experienced investors, while dismissing “hot tips” from untrustworthy sources. When consulting professionals, look to independent financial advisors who get paid only for their time, instead of those who collect commissions. And above all, diversify your holdings across a wide swath of assets.

https://www.investopedia.com/articles/financial-theory/08/peer-to-peer-lending.asp

Peer-to-Peer Lending Breaks Down Financial Borders

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/peer-to-peer-lending.asp">Peer-to-peer (P2P) lending</a>, also known as "social lending," lets individuals lend and borrow money directly from each other. Just as eBay removes the middleman between buyers and sellers, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp">P2P lending companies</a> such as Prosper eliminate financial intermediaries like banks and credit unions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> P2P lending boosts returns for individuals who supply capital and reduces <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a> for those who use it, but it also demands more time and effort from them and entails more risk. Read on to find out more about this modern type of lending. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <span class="heading-toc" id="toc-social-lending-background"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Social Lending Background </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> P2P lending is the product of vital business, technological, and social trends, including: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <li>A new generation of so-called "freeformers" who couple personal freedom with social activism. Freeformers want to take control of their work and leisure. Rather than work for one company for 35 years, they prefer to collaborate in networks for short periods on various projects. Freeformers are highly suspicious of large institutions; they believe in people, not banks.</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/disintermediation.asp">disintermediation</a> of almost everything. Technological change, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/globalization.asp">globalization</a>, and other international trends continue to reduce the number, size, and role of business intermediates in many industry sectors.</li> <li>The spread of web technologies, which foster "mass collaboration." These new tools enable individuals to work together online in huge groups to achieve mutual goals (eBay and social networking sites like Facebook are examples).</li> <li>The development of microlending to individuals with few assets in developing nations. Community- and social-minded lending entities, such as credit unions, have been around for a long time. But microlending gave impetus to the idea of achieving social goals by making small loans to individuals. (For more, read: <em><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/07/microfinance.asp">Microfinance</a>: What It Is and How to Get Involved</em>.)</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <span class="heading-toc" id="toc-p2p-lending-has-many-branches"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> P2P Lending Has Many Branches </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Like most types of financing, there's lots of variety in P2P lending. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Moreover, the legal issues surrounding P2P lending operations, especially in the U.S., are by no means settled. Questions remain about what kind of an entity a P2P lender is and which regulatory regime applies. Because of these concerns, the U.S. operations of foreign P2P lenders have sometimes strayed far beyond their original <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/businessmodel.asp">business models</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-getting-started"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Getting Started </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> With these caveats in mind, here's how P2P lending works in a typical scenario: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> You sign up and become a member at a P2P lender's website, and this lender acts as an intermediary (it does the recordkeeping, transfers funds among members, etc.). The lending company earns its revenue through fees charged to both lender and borrower. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <span class="heading-toc" id="toc-borrowers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Borrowers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Before you can borrow, the P2P lender performs several checks (personal, employment, credit, etc.). Standards are relatively stringent, and high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrisk.asp">credit risks</a> can't borrow. After acceptance, you have two or more choices. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <li>The P2P lender will assign you to one of four or five risk categories, and you can borrow at the going rate for your risk category on that particular day; or</li><li>You can have your loan auctioned to members with funds to lend. The lender/bidder sees the pertinent information you've provided on the P2P lender's site: the reason(s) you need the money, your financial history, your personal story, even something more personal, like a photo or a poem you wrote. You set an initial interest rate for your loan and accept bids; if the loan is fully funded, lenders can bid down the interest rate they are willing to charge to win the right to fund your venture. (For related reading, see: P2P Lending Sites: How Safe Are They for Borrowers?)</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-lenders"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> Lenders </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> As a lender, besides bidding on individual loans, you can also choose to have the P2P company spread your funds among many borrowers. You decide the risk categories in which to lend; the more risk in your loan portfolio, the higher the return, but the greater the chance of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-pros-and-cons"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> Pros and Cons </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The major benefits of P2P lending for individuals are: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <li>Lenders can enjoy returns several percentage points above those for a bank <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">CD</a>; borrowers enjoy similar cost advantages compared with rates at a bank or credit union.</li> <li>Many individuals like knowing who they're lending money to and why they need the money. Not only does it give them a sense of personal satisfaction, but they can also choose borrowers who they believe will repay the loan in full and on time.</li> <li>There's a charitable aspect to the lending. If a potential borrower has a dodgy financial history but a sympathetic story to tell, a lender can willingly choose to forgo a higher return and assume greater <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risk</a> to fund the loan.</li> <li>There can be a true sense of community at a P2P lender site. Forums tend to be active, with users who eagerly exchange information about lending and borrowing experiences. Proposed changes in the policies of the P2P lender are vigorously debated.</li> <li>Some people just hate banks and will do anything to avoid using them.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Naturally, there is a downside: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> <li>Many borrowers are excluded because they do not have good credit. (For related reading, see: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/120414/what-good-credit-score.asp"><em>What Is a Good Credit Score?</em></a>)</li> <li>Lenders face exposure from defaults, and their funds (with some exceptions) are not insured. The success of P2P lenders to limit loan losses varies by lender and over time. A lender can be talked into making a bad loan with a good sob story.</li> <li>Compared to walking into a bank or credit union, P2P lending can take much more work, especially if the loans are funded through auction. The loan selection and bidding process can demand a level of financial sophistication many people don't have.</li> <li>Although returns to lenders may be higher than those on certificates of deposit, over time, it's not certain they will be higher than those on a publicly traded <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index fund</a>, which requires relatively little work to buy and hold.</li> <li>Not everyone wants their financial story published on the internet; for those with some sense of personal privacy, the big impersonal bank has its benefits.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li>Because this is such a new industry, there are bound to be waves of lender consolidation, interface/administrative changes, and changes to the lending practices themselves. This may be more of a burden and risk than disciplined investors are willing to allow.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <span class="heading-toc" id="toc-conclusion"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-heading__text"> Conclusion </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Despite its drawbacks, P2P lending is gaining traction and seems certain to become more popular. There are P2P lenders in several countries, including Italy, the Netherlands, China, and Japan, with startup operations in many other countries. </p></div>

[Peer-to-peer (P2P) lending](https://www.investopedia.com/terms/p/peer-to-peer-lending.asp), also known as "social lending," lets individuals lend and borrow money directly from each other. Just as eBay removes the middleman between buyers and sellers, [P2P lending companies](https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp) such as Prosper eliminate financial intermediaries like banks and credit unions. P2P lending boosts returns for individuals who supply capital and reduces [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) for those who use it, but it also demands more time and effort from them and entails more risk. Read on to find out more about this modern type of lending. ## Social Lending Background P2P lending is the product of vital business, technological, and social trends, including: 1. A new generation of so-called "freeformers" who couple personal freedom with social activism. Freeformers want to take control of their work and leisure. Rather than work for one company for 35 years, they prefer to collaborate in networks for short periods on various projects. Freeformers are highly suspicious of large institutions; they believe in people, not banks. 2. The [disintermediation](https://www.investopedia.com/terms/d/disintermediation.asp) of almost everything. Technological change, [globalization](https://www.investopedia.com/terms/g/globalization.asp), and other international trends continue to reduce the number, size, and role of business intermediates in many industry sectors. 3. The spread of web technologies, which foster "mass collaboration." These new tools enable individuals to work together online in huge groups to achieve mutual goals (eBay and social networking sites like Facebook are examples). 4. The development of microlending to individuals with few assets in developing nations. Community- and social-minded lending entities, such as credit unions, have been around for a long time. But microlending gave impetus to the idea of achieving social goals by making small loans to individuals. (For more, read: *[Microfinance](https://www.investopedia.com/articles/07/microfinance.asp): What It Is and How to Get Involved*.) ## P2P Lending Has Many Branches Like most types of financing, there's lots of variety in P2P lending. Moreover, the legal issues surrounding P2P lending operations, especially in the U.S., are by no means settled. Questions remain about what kind of an entity a P2P lender is and which regulatory regime applies. Because of these concerns, the U.S. operations of foreign P2P lenders have sometimes strayed far beyond their original [business models](https://www.investopedia.com/terms/b/businessmodel.asp). ## Getting Started With these caveats in mind, here's how P2P lending works in a typical scenario: You sign up and become a member at a P2P lender's website, and this lender acts as an intermediary (it does the recordkeeping, transfers funds among members, etc.). The lending company earns its revenue through fees charged to both lender and borrower. ## Borrowers Before you can borrow, the P2P lender performs several checks (personal, employment, credit, etc.). Standards are relatively stringent, and high [credit risks](https://www.investopedia.com/terms/c/creditrisk.asp) can't borrow. After acceptance, you have two or more choices. * The P2P lender will assign you to one of four or five risk categories, and you can borrow at the going rate for your risk category on that particular day; or * You can have your loan auctioned to members with funds to lend. The lender/bidder sees the pertinent information you've provided on the P2P lender's site: the reason(s) you need the money, your financial history, your personal story, even something more personal, like a photo or a poem you wrote. You set an initial interest rate for your loan and accept bids; if the loan is fully funded, lenders can bid down the interest rate they are willing to charge to win the right to fund your venture. (For related reading, see: P2P Lending Sites: How Safe Are They for Borrowers?) ## Lenders As a lender, besides bidding on individual loans, you can also choose to have the P2P company spread your funds among many borrowers. You decide the risk categories in which to lend; the more risk in your loan portfolio, the higher the return, but the greater the chance of [default](https://www.investopedia.com/terms/d/default2.asp). ## Pros and Cons The major benefits of P2P lending for individuals are: 1. Lenders can enjoy returns several percentage points above those for a bank [CD](https://www.investopedia.com/terms/c/certificateofdeposit.asp); borrowers enjoy similar cost advantages compared with rates at a bank or credit union. 2. Many individuals like knowing who they're lending money to and why they need the money. Not only does it give them a sense of personal satisfaction, but they can also choose borrowers who they believe will repay the loan in full and on time. 3. There's a charitable aspect to the lending. If a potential borrower has a dodgy financial history but a sympathetic story to tell, a lender can willingly choose to forgo a higher return and assume greater [risk](https://www.investopedia.com/terms/r/risk.asp) to fund the loan. 4. There can be a true sense of community at a P2P lender site. Forums tend to be active, with users who eagerly exchange information about lending and borrowing experiences. Proposed changes in the policies of the P2P lender are vigorously debated. 5. Some people just hate banks and will do anything to avoid using them. Naturally, there is a downside: 1. Many borrowers are excluded because they do not have good credit. (For related reading, see: [*What Is a Good Credit Score?*](https://www.investopedia.com/articles/personal-finance/120414/what-good-credit-score.asp)) 2. Lenders face exposure from defaults, and their funds (with some exceptions) are not insured. The success of P2P lenders to limit loan losses varies by lender and over time. A lender can be talked into making a bad loan with a good sob story. 3. Compared to walking into a bank or credit union, P2P lending can take much more work, especially if the loans are funded through auction. The loan selection and bidding process can demand a level of financial sophistication many people don't have. 4. Although returns to lenders may be higher than those on certificates of deposit, over time, it's not certain they will be higher than those on a publicly traded [index fund](https://www.investopedia.com/terms/i/indexfund.asp), which requires relatively little work to buy and hold. 5. Not everyone wants their financial story published on the internet; for those with some sense of personal privacy, the big impersonal bank has its benefits. 7. Because this is such a new industry, there are bound to be waves of lender consolidation, interface/administrative changes, and changes to the lending practices themselves. This may be more of a burden and risk than disciplined investors are willing to allow. ## Conclusion Despite its drawbacks, P2P lending is gaining traction and seems certain to become more popular. There are P2P lenders in several countries, including Italy, the Netherlands, China, and Japan, with startup operations in many other countries.

Peer-to-peer (P2P) lending, also known as "social lending," lets individuals lend and borrow money directly from each other. Just as eBay removes the middleman between buyers and sellers, P2P lending companies such as Prosper eliminate financial intermediaries like banks and credit unions. P2P lending boosts returns for individuals who supply capital and reduces interest rates for those who use it, but it also demands more time and effort from them and entails more risk. Read on to find out more about this modern type of lending. Social Lending Background P2P lending is the product of vital business, technological, and social trends, including: A new generation of so-called "freeformers" who couple personal freedom with social activism. Freeformers want to take control of their work and leisure. Rather than work for one company for 35 years, they prefer to collaborate in networks for short periods on various projects. Freeformers are highly suspicious of large institutions; they believe in people, not banks. The disintermediation of almost everything. Technological change, globalization, and other international trends continue to reduce the number, size, and role of business intermediates in many industry sectors. The spread of web technologies, which foster "mass collaboration." These new tools enable individuals to work together online in huge groups to achieve mutual goals (eBay and social networking sites like Facebook are examples). The development of microlending to individuals with few assets in developing nations. Community- and social-minded lending entities, such as credit unions, have been around for a long time. But microlending gave impetus to the idea of achieving social goals by making small loans to individuals. (For more, read: Microfinance: What It Is and How to Get Involved.) P2P Lending Has Many Branches Like most types of financing, there's lots of variety in P2P lending. Moreover, the legal issues surrounding P2P lending operations, especially in the U.S., are by no means settled. Questions remain about what kind of an entity a P2P lender is and which regulatory regime applies. Because of these concerns, the U.S. operations of foreign P2P lenders have sometimes strayed far beyond their original business models. Getting Started With these caveats in mind, here's how P2P lending works in a typical scenario: You sign up and become a member at a P2P lender's website, and this lender acts as an intermediary (it does the recordkeeping, transfers funds among members, etc.). The lending company earns its revenue through fees charged to both lender and borrower. Borrowers Before you can borrow, the P2P lender performs several checks (personal, employment, credit, etc.). Standards are relatively stringent, and high credit risks can't borrow. After acceptance, you have two or more choices. The P2P lender will assign you to one of four or five risk categories, and you can borrow at the going rate for your risk category on that particular day; orYou can have your loan auctioned to members with funds to lend. The lender/bidder sees the pertinent information you've provided on the P2P lender's site: the reason(s) you need the money, your financial history, your personal story, even something more personal, like a photo or a poem you wrote. You set an initial interest rate for your loan and accept bids; if the loan is fully funded, lenders can bid down the interest rate they are willing to charge to win the right to fund your venture. (For related reading, see: P2P Lending Sites: How Safe Are They for Borrowers?) Lenders As a lender, besides bidding on individual loans, you can also choose to have the P2P company spread your funds among many borrowers. You decide the risk categories in which to lend; the more risk in your loan portfolio, the higher the return, but the greater the chance of default. Pros and Cons The major benefits of P2P lending for individuals are: Lenders can enjoy returns several percentage points above those for a bank CD; borrowers enjoy similar cost advantages compared with rates at a bank or credit union. Many individuals like knowing who they're lending money to and why they need the money. Not only does it give them a sense of personal satisfaction, but they can also choose borrowers who they believe will repay the loan in full and on time. There's a charitable aspect to the lending. If a potential borrower has a dodgy financial history but a sympathetic story to tell, a lender can willingly choose to forgo a higher return and assume greater risk to fund the loan. There can be a true sense of community at a P2P lender site. Forums tend to be active, with users who eagerly exchange information about lending and borrowing experiences. Proposed changes in the policies of the P2P lender are vigorously debated. Some people just hate banks and will do anything to avoid using them. Naturally, there is a downside: Many borrowers are excluded because they do not have good credit. (For related reading, see: What Is a Good Credit Score?) Lenders face exposure from defaults, and their funds (with some exceptions) are not insured. The success of P2P lenders to limit loan losses varies by lender and over time. A lender can be talked into making a bad loan with a good sob story. Compared to walking into a bank or credit union, P2P lending can take much more work, especially if the loans are funded through auction. The loan selection and bidding process can demand a level of financial sophistication many people don't have. Although returns to lenders may be higher than those on certificates of deposit, over time, it's not certain they will be higher than those on a publicly traded index fund, which requires relatively little work to buy and hold. Not everyone wants their financial story published on the internet; for those with some sense of personal privacy, the big impersonal bank has its benefits. Because this is such a new industry, there are bound to be waves of lender consolidation, interface/administrative changes, and changes to the lending practices themselves. This may be more of a burden and risk than disciplined investors are willing to allow. Conclusion Despite its drawbacks, P2P lending is gaining traction and seems certain to become more popular. There are P2P lenders in several countries, including Italy, the Netherlands, China, and Japan, with startup operations in many other countries.

https://www.investopedia.com/titan-review-2023-7963419

Titan Review 2024

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="24" data-sc-ad-track-spacing="100" data-sc-breakpoint="50em" data-sc-content-positions="[300,600,900,1200,1500,1800,2100]" data-sc-load-immediate="1" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="60" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-our-take"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Our Take </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Robo-investing is typically a process where you answer some risk tolerance, age, and income questions to determine a model portfolio that is invested in funds and periodically rebalanced. While Titan offers this service, the company does more than that. Titan offers its investors access to more actively managed funds, which seek to outperform index funds. Titan also offers direct access to alternative asset classes often reserved only for accredited investors, including real estate and venture capital. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The company has seen some changes in its overall offerings going into 2024. It has pared down the cryptocurrency exposure to a 50/50 Ethereum and Bitcoin fund and removed inverse ETFs.<span class="ql-inline-citation" data-cite="15"></span> In terms of the robo-advisory, however, things remain simple and cheap. We’ll dig into the pros and cons of Titan’s more active approach, so you can determine whether the company’s offerings are right for you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_6-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/lYq6I/4/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="2024 Robo-Advisor Reviews"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_9-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros &amp; Cons</h3> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>No fee robo-advisor<br/></p></li> <li><p>Access to alternative assets<br/></p></li> <li><p>Innovative Smart Cash algorithm</p><p><br/></p></li> </ul> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>Standard robo services offering is limited<br/></p></li> <li><p>Limited goal planning tools<br/></p></li> <li><p>No tax-loss harvesting</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-account-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Account Overview </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_12-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>Account Minimum</b></td> <td>$500<span data-cite="16"></span></td> </tr> <tr> <td><b>Fees</b></td> <td>0% for automated portfolios, 0.7% to 0.9% for active portfolios</td> </tr> <tr> <td><b>Goal Setting</b></td> <td>Cash management, short- and long-term investing, retirement</td> </tr> <tr> <td><b>Available Assets</b></td> <td>Stock and bond ETF, mutual funds, private credit, venture capital, cryptocurrency, Treasuries, managed equity strategies</td> </tr> <tr> <td><b>Interest Paid on Cash Balances</b></td> <td>No sweep on robo-advisor, but clients can open a separate Smart Cash account with a 5.3% APY</td> </tr> <tr> <td><b>Customizable Portfolio</b></td> <td>No</td> </tr> <tr> <td><b>View Portfolio Before Funding</b></td> <td>Yes</td> </tr> <tr> <td><b>Customer Service</b></td> <td>Live chat 9 a.m. to 6 p.m. ET, virtual chatbot, email support</td> </tr> <tr> <td><b>Financial Advisor Available</b></td> <td>Yes</td> </tr> <tr> <td><b>Cash Management</b></td> <td>Titan Smart Cash, high-yield savings account, traditional savings account</td> </tr> <tr> <td><b>Tax-Loss Harvesting</b></td> <td>No</td> </tr> <tr> <td><b>External Account Syncing/Consolidation</b></td> <td>No</td> </tr> <tr> <td><b>Mobile App</b></td> <td>Android, iOS</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-account-setup"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> Account Setup </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The account setup is typical for a robo-advisor. Titan requires you to enter your address and contact information and then complete text verification in order to move forward into the basic information-gathering process, mainly identifying your age, net worth, goal for opening the account, investment time horizon, and risk tolerance. For each piece of information requested, there is an option to click and learn why it is necessary. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When you are done inputting your data, the system recommends three different strategies that include more traditional accounts as well as alternative asset accounts. For the passive and actively managed funds, Titan suggests three options: a diversified growth portfolio, an automated stocks and bonds portfolio, and a low-risk portfolio. Custom portfolios are also available. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The minimum account size for passive and actively managed funds at Titan is $500. Expense ratios are passed on for the passive accounts, and there are additional fees and expenses for the actively managed accounts.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Once you decide to move forward, the process is similar to other accounts. You fund the account, then get up and running with your portfolio. A nice feature of Titan-managed accounts is that they support fractional share trading, so you can get invested right away. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_23-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:70.4%;"> <img alt="Account Set Up Titan Review" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/HvBvinA1FrL8PkmJ0rJCufDNzeY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Account-Set-Up-titan-review-2023-7963419-47ec97391ae748a8b7ba35fe6bd089e3.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/HvBvinA1FrL8PkmJ0rJCufDNzeY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Account-Set-Up-titan-review-2023-7963419-47ec97391ae748a8b7ba35fe6bd089e3.jpg" data-srcset="https://www.investopedia.com/thmb/1LOHFhRDs658vaKFxKycis_Z7JE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Account-Set-Up-titan-review-2023-7963419-47ec97391ae748a8b7ba35fe6bd089e3.jpg 750w" data-tracking-container="true" height="1144" id="mntl-sc-block-image_1-0" width="1624"/> <noscript> <img alt="Account Set Up Titan Review" class="img--noscript universal-image__image" height="1144" sizes="750px" src="https://www.investopedia.com/thmb/HvBvinA1FrL8PkmJ0rJCufDNzeY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Account-Set-Up-titan-review-2023-7963419-47ec97391ae748a8b7ba35fe6bd089e3.jpg" srcset="https://www.investopedia.com/thmb/1LOHFhRDs658vaKFxKycis_Z7JE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Account-Set-Up-titan-review-2023-7963419-47ec97391ae748a8b7ba35fe6bd089e3.jpg 750w" width="1624"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Source: Titan</p></span> </figcaption></figure> <span class="heading-toc" id="toc-goal-planning"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Goal Planning </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Goal planning on Titan is somewhat limited. There is a retirement planning tool that takes in your annual income, current retirement assets, and years to retirement to calculate whether you are on track. Beyond that, Titan’s planning tools are unable to account for large purchases such as a home, vehicle, or college. All clients have access to a range of financial calculator tools.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_27-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-advisorinsight" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_28-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Investopedia Robo-Advisor Survey</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>According to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191">Investopedia's 2023 Robo-Advisor Consumer Survey</a>, when asked to choose from a list of up to three top investment goals that they are most likely to use their robo-advisor to plan for, the majority of respondents chose using these digital wealth management platforms to invest for large purchases like houses, vehicles, and travel.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_29-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/K76iX/11/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Goals"></iframe> <cite class="comp mntl-sc-block-iframe__caption mntl-text-block" id="mntl-sc-block-iframe__caption_1-0">Respondents were able to select more than one, up to three.</cite></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <span class="heading-toc" id="toc-account-services"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> Account Services </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Many robo-advisors provide a variety of services for their account holders, including cash management products and customization, as well as various features some investors look for, such as charitable giving tools; a focus on diversity, equity, and inclusion (DEI) or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">environmental, social, and governance</a> (ESG) investing; and the ability to sync and analyze outside accounts. Titan offers some cash management options at this point, but little else.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-subheading__text"> Cash Management </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Titan has a cash management program called Smart Cash, which provides an APY as high as 5.30% or even 6% if you refer a friend right now.<span class="ql-inline-citation" data-cite="1"></span> Titan searches for the best short-term rates across <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp">treasury securities</a> for Smart Cash, so that cash is invested at the highest possible rate for a high after-tax interest rate. Further, the Smart Cash program also spreads investments across institutions to maximum FDIC protection.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Although the Smart Cash cash management services provide a competitive interest rate, Titan does not offer any cash management tools such as checking, bill paying, or other traditional banking services. Compared to other robo-advisors, Titan’s cash management tools are limited, even if the interest rate paid through Smart Cash is competitive. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Portfolio Construction </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Portfolios are created utilizing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/modernportfoliotheory.asp">modern portfolio theory (MPT)</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/meanvariance-analysis.asp">mean-variance analysis</a> optimization.<span class="ql-inline-citation" data-cite="2"></span> The passively managed portfolios are rebalanced when they are flagged by Titan’s algorithms. At a minimum, the rebalancing is quarterly. Actively managed portfolios are also constructed using modern portfolio theory, but are managed more opportunistically in an attempt to obtain better returns than the S&amp;P 500. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> In addition to the automated stock and bond offerings, Titan gives investors access to three actively managed portfolios: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> <li><strong>Titan Flagship</strong>: A fund focused on U.S. large-cap companies</li><li><strong>Titan Opportunities</strong>: A fund looking for small-cap growth </li><li><strong>Titan Offshore</strong>: A fund looking for non-U.S. stocks</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Titan also has a cryptocurrency fund with exposure to Bitcoin and Ethereum.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> There are also non-proprietary alternative investment funds, including Carlyle Tactical Private Credit, Apollo Diversified Credit, ARK Venture, and Apollo Real Estate. These funds often have a higher minimum investment than the Titan funds. It is important to note that the actual robo-advisor controlled portfolios exclusively deal with ETFs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <span class="heading-toc" id="toc-available-assets"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-heading__text"> Available Assets </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_51-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>Individual Stocks</b></td> <td>No</td> </tr> <tr> <td><b>Mutual Funds</b></td> <td>Yes</td> </tr> <tr> <td><b>Fixed Income</b></td> <td>Yes </td> </tr> <tr> <td><b>REITs</b></td> <td>Yes </td> </tr> <tr> <td><b>Socially Responsible or ESG Options</b></td> <td>No</td> </tr> <tr> <td><b>ETFs</b></td> <td>Yes</td> </tr> <tr> <td><b>Non-Proprietary ETFs</b></td> <td>Yes</td> </tr> <tr> <td><b>Private Equity</b></td> <td>Yes</td> </tr> <tr> <td><b>Forex </b></td> <td>No</td> </tr> <tr> <td><b>Crypto</b></td> <td>Yes</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-subheading__text"> Portfolio Customization </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Portfolio customization at Titan is primarily related to the specific answers each client provides when creating or maintaining an account, including the goals they have for the account, how risk-averse they are, and which asset classes they want to invest in. These decisions help Titan determine the portfolio suggestions and mixes. While the portfolios can’t be customized for each client, specific securities can be omitted from a portfolio.<span class="ql-inline-citation" data-cite="2"></span> The crypto portfolio is outside of the robo-advisor account and is not managed by it, although both can be added within the same overall investor account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <span class="heading-toc" id="toc-portfolio-management"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-heading__text"> Portfolio Management </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> The robo-advisor controlled portfolios are rebalanced as needed based on drift triggers. If there is no triggering event, the portfolios are still assessed quarterly at a minimum. The robo-advisor controlled portfolios are not managed for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxgainlossharvesting.asp">tax-loss harvesting</a> and there is no ability to direct charitable giving from these accounts.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Clients can, however, see progress toward their goals in real time. Another positive about Titan is that it supports fractional shares, allowing new funds and dividends to be invested into the portfolio quickly. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_61-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Key Portfolio Management Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <td><b>Automatic Rebalancing</b></td> <td>As needed; triggered by portfolio drift</td> </tr> <tr> <td><b>Reporting Features</b></td> <td>Statements, tax information</td> </tr> <tr> <td><b>Tax-Loss Harvesting</b></td> <td>No </td> </tr> <tr> <td><b>External Account Syncing/Consolidation</b></td> <td>No</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <span class="heading-toc" id="toc-user-experience"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_63-0"> <span class="mntl-sc-block-heading__text"> User Experience  </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_64-0"> <span class="mntl-sc-block-subheading__text"> Desktop </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> The desktop platform works smoothly. It is a basic website that covers all the key information effectively. You can also see the various investment options available without logging in. If you have an account, you can easily choose products to add. The retirement calculators are relatively basic and easy to use on the desktop platform. The website lacks a traditional search bar, but a chatbot and answers function fulfill that need, providing content based on your query.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-subheading__text"> Mobile  </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> The mobile platform largely mirrors the desktop experience, and is easy to navigate. The platform is clearly designed with a mobile-first tilt, so the app and mobile site experience are intuitive and fast. The app has ratings of 4.5 and 4.7 on Google Play and the Apple App Store respectively.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_70-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Mobile Experience Titan Review" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/tgJIglK03Q2HkywVCfHIEIiLrao=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Mobile-Experience-titan-review-2023-7963419copy-26ca4280cad341048ce39e25ae55bc8e.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/tgJIglK03Q2HkywVCfHIEIiLrao=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Mobile-Experience-titan-review-2023-7963419copy-26ca4280cad341048ce39e25ae55bc8e.jpg" data-srcset="https://www.investopedia.com/thmb/s0rR7gTlbhga8QrWzfj8lRKU0nM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Mobile-Experience-titan-review-2023-7963419copy-26ca4280cad341048ce39e25ae55bc8e.jpg 750w" data-tracking-container="true" height="2666" id="mntl-sc-block-image_2-0" width="4000"/> <noscript> <img alt="Mobile Experience Titan Review" class="img--noscript universal-image__image" height="2666" sizes="750px" src="https://www.investopedia.com/thmb/tgJIglK03Q2HkywVCfHIEIiLrao=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Mobile-Experience-titan-review-2023-7963419copy-26ca4280cad341048ce39e25ae55bc8e.jpg" srcset="https://www.investopedia.com/thmb/s0rR7gTlbhga8QrWzfj8lRKU0nM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Mobile-Experience-titan-review-2023-7963419copy-26ca4280cad341048ce39e25ae55bc8e.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>Source: Titan</p></span> </figcaption></figure> <span class="heading-toc" id="toc-customer-service"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> Customer Service </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> <li>Live chat 9 a.m. to 6 p.m ET.</li><li>Virtual chatbot </li><li>Email support</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Customer service at Titan is limited, but prospective and existing clients can speak with customer service via online chat between 9 a.m. and 6 p.m ET. There is no phone support available at this time; however, Titan’s Investor Relations team is staffed with series 7 and series 63-licensed professionals who are available to chat with clients about portfolio construction, investment strategies, and more. Access is available via the Titan app, email, or text chat. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Titan does not provide access to financial planners that can help map out long-term strategies and detailed retirement goals, but it does integrate with some third-party applications. This includes linking to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/empower-review-4587916">Empower</a> (previously called Personal Capital), which offers free financial planning and personal wealth management services that include the ability to link multiple external accounts, including Titan accounts, to show an investor’s complete financial picture. Titan does not provide integration with Mint.com, but an account at Apex, Titan’s clearing firm, can be linked to directly from Mint.com. Titan does not currently integrate with Quicken or any applications related to crypto positions.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <span class="heading-toc" id="toc-security"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-heading__text"> Security  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> Titan provides standard security, which includes encrypted websites that utilize two-step authentication and/or biometrics for safe connections. Titan also provides SIPC and FDIC coverage for accounts. On cash equivalents, Titan is able to utilize multiple banks, which provides coverage for up to $5 million, allowing more investor cash to fall under the FDIC insurance umbrella. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_81-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/UMIsR/3/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Age Group"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <span class="heading-toc" id="toc-education"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-heading__text"> Education  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Titan provides educational and research content on its website. It has research and news update articles, as well as a suite of videos on various educational topics. The videos are typically less than two minutes in length and offer introductions to topics such as “what is venture capital,” “what is the stock market,” “what is robo-investing,” and so on. There is separate retirement planning software on Titan Invest, as well as calculators to see future projections. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> While it is nice to see educational and other supporting information, the larger brokerage companies typically have much more to offer for investing education and market research and it is often available for free without even opening an account. So, while Titan has some decent content, it is not especially unique. Further, while there is an FAQ section on the Titan website, it is difficult to find the page, and more than a few topics don’t have a corresponding FAQ.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div> <span class="heading-toc" id="toc-commissions-and-fees"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_88-0"> <span class="mntl-sc-block-heading__text"> Commissions and Fees </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Fees from Titan vary based on the investments chosen. Some of Titan’s fees are high relative to other, more traditional robo-advisors, but this is largely because of its active management approach for accounts and also because it provides access to asset classes, such as venture capital and credit strategies, that are not typically offered by robo-advisors. The basic robo-advisor accounts, Automated Stocks and Automated Bonds, are fee-free. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> The fees and minimums for various accounts are as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> <li><strong>Smart Cash</strong>: This account has no management fees and just a $5 minimum for getting started and subsequent additions</li><li><strong>Automated strategy accounts</strong>: These act like more traditional robo-investing accounts that provide a model portfolio and periodically rebalance against the portfolio. They have no management fees, but the fund expense ratios are passed through to the investor. This is a low-cost option, as the fund fees are just 0.039% for the Automatic Stocks offering and 0.10% to 0.12% for Automated Bonds.<span class="ql-inline-citation" data-cite="6"></span> While these fees are low, other traditional robo-advisors often have more portfolios available and have lower fees and minimums.</li><li><strong>Actively managed stock accounts</strong>: These require a minimum of $500, and have a management fee that begins at 0.90% of AUM per year up to $25,000 in account value, then 0.80% of AUM per year up to $100,000, and a fee of 0.70% on all remaining assets above $100,000.<span class="ql-inline-citation" data-cite="7"></span> These rates and minimums apply to the Flagship, Opportunities, and Off-Shore actively managed funds. These rates also apply to Titan’s crypto and strategy offerings.<span class="ql-inline-citation" data-cite="8"></span> These management fees are high relative to more traditional robo-advisors, but if performance outpaces the S&amp;P, the higher fees may be worth paying.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> Titan offers additional actively managed, non-proprietary funds. These have different fee structures. For example, the Tactical Private Credit strategy fund has a $2,000 minimum investment, and the same 0.90%, 0.80%, or 0.70% Titan management fee, but there is also a 1% management fee to the external managers, which increases to 15% once a hurdle rate of 6% is achieved. The ARK Innovation Fund only has a $500 minimum investment amount, although management fees are 2.75%.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_97-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> Titan works well and is easy to use, but is it right for you? That depends on what you are looking for. If you want a no-frills robo-advisor with low fees, Titan can be a solid fit. This is especially true if you are looking to have some of your portfolio actively managed or if you want access to private equity, real estate, and credit strategies, Titan offers access to these markets to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nonaccreditedinvestor.asp">non-accredited investors</a> for less than what actual hedge funds charge.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> If you are looking for a full-featured robo-advisor experience, however, Titan can't compete with the more immersive and customizable experiences at Wealthfront and Betterment or the value for money of a Fidelity Go or Schwab Intelligent Portfolios at lower balance, fee-free tiers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> Regarding Titan’s actively managed strategies, the performance of the investments needs to be high enough to make up for the higher management fees. Returns on Titan’s funds benchmarked against the S&amp;P have outperformed during recent stretches, but Titan’s Flagship Fund has an annualized return of 12.31% since inception on Feb. 20, 2018.<span class="ql-inline-citation" data-cite="7"></span> This is ahead of its benchmark currently, but there have been some peaks and valleys as with all active funds.   <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <span class="heading-toc" id="toc-how-does-titan-save-you-money-on-taxes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_104-0"> <span class="mntl-sc-block-heading__text"> How Does Titan Save You Money on Taxes? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> Titan doesn't really do a lot in terms of tax savings beyond using some tax-advantaged treasury funds for the Smart Cash account. The savings account is outside the robo-advisor accounts of Automated Stocks and Automated Bonds, neither of which offer any tax-loss harvesting or tax optimization in terms of asset selection. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <span class="heading-toc" id="toc-is-it-safe-to-use-titan-to-invest"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_107-0"> <span class="mntl-sc-block-heading__text"> Is It Safe to Use Titan to Invest? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> Yes, Titan is safe to use. The company is registered with the SEC and is reputable. The safety of the company and the assets invested in the company, however, is not the same as the safety of the investments chosen. The various investing options at Titan span from a traditional portfolio of ETFs to exposure to other markets, including private equity and real estate, so there is a range of potential investment outcomes.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <span class="heading-toc" id="toc-is-titan-fdic-insured"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_110-0"> <span class="mntl-sc-block-heading__text"> Is Titan FDIC Insured? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_111-0"> The Titan cash product, which is a higher-yield savings vehicle, provides up to $250,000 in FDIC insurance. Customers who sign up for Titan’s Cash Sweep program receive up to $5 million in FDIC insurance; this higher coverage is achieved by the program manager using partner banks to invest cash.<span class="ql-inline-citation" data-cite="1"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_112-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Investment accounts are provided with standard SIPC protection against failure of the brokerage firm, up to $500,000, with a maximum of $250,000 in cash.<span class="ql-inline-citation" data-cite="1"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div> <span class="heading-toc" id="toc-what-is-the-minimum-you-can-invest-with-titan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_115-0"> <span class="mntl-sc-block-heading__text"> What Is the Minimum You Can Invest With Titan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> The minimum investment amount at Titan Invest changes based on the investment vehicle. The Smart Cash product requires just $5. Automated and actively managed accounts require a minimum investment of $500, and some of the specialty funds require at least a $2,000 investment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_117-0"></div> <span class="heading-toc" id="toc-who-is-the-ceo-of-titan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_118-0"> <span class="mntl-sc-block-heading__text"> Who Is the CEO of Titan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> Clayton “Clay” Gardner is co-CEO and founder of the company. Joe Percoco is the other co-CEO. Clay and Joe were friends at Wharton. Their other partner, Max Bernardy, graduated from Stanford. While working at hedge funds and large banks, they thought it would make sense to provide smaller investors with access to the same trading strategies, including access to alternative strategies, offered by hedge funds. Their platform dream, which also included actively managed funds utilizing strategies used by other hedge funds, evolved into Titan. Gardner is responsible for the portfolio creation and active management strategies for the portfolios. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div> <span class="heading-toc" id="toc-how-we-review-robo-advisors"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_121-0"> <span class="mntl-sc-block-heading__text"> How We Review Robo-Advisors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_122-0"> Providing readers with unbiased, comprehensive reviews of digital wealth management companies, more commonly known as robo-advisors, is a top priority of Investopedia. We used our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191">2023 consumer survey</a> to guide the research and weightings for our 2024 robo-advisor awards. To collect the data, we sent a digital survey with 64 questions to each of the 21 companies we included in our rubric. Additionally, our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process spanned from Jan. 8, to Feb. 9, 2024. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_123-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> We then developed a quantitative model that scored each company to rate its performance across nine major categories and 59 criteria to find the best robo-advisors. The score for each company’s overall star rating is a weighted average of the criteria: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_125-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> <li>Account Services: 10.00%</li><li>Account Setup: 5.00%</li><li>Customer Service: 5.00%</li><li>Fees: 15.00%</li><li>Goal Planning: 21.00%</li><li>Portfolio Contents: 17.00%</li><li>Portfolio Management: 17.00%</li><li>Security &amp; Education: 5.00%</li><li>User Experience: 5.00%</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_127-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_128-0"> Additionally, during our 2023 research, many of the companies we reviewed granted our team of expert writers and editors access to live accounts so they could perform hands-on testing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_129-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_130-0"> Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_131-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_132-0"> Read more about <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/robo-advisor-ranking-methodology-4693455">how we research and review robo-advisors</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_133-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_134-0"> Separately, our research team conducted a survey of 205 U.S. adults aged 18 to 72 who are current clients of one of 18 robo-advisors. While the information collected did not influence the development of our ratings model, it was instrumental in gathering the valuable insights published in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191">Investopedia's 2023 Robo-Advisor Consumer Survey</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_135-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_136-0"> Participants in our 2023 Robo-Advisor Survey opted in to an online, self-administered questionnaire from a market research vendor. Data collection took place between Aug. 30 and Sept. 15, 2023, with 11 video interviews conducted with volunteer respondents from Sept. 7 to Sept. 17, 2023. Multiple quality checks, including screeners, attention gauges, comprehension evaluations, and logic metrics, among others, were used to ensure only the highest quality responses were included. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_137-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_138-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Titan Demo Pic Edited" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/gM-yWoLMinLBa4BVYsz_SbEcEq4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-03f26bcfa9dc4e2eab315a35f9086715.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/gM-yWoLMinLBa4BVYsz_SbEcEq4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-03f26bcfa9dc4e2eab315a35f9086715.jpg" data-srcset="https://www.investopedia.com/thmb/xvajwnfmQ1YaG_UYliwrKaGjZVs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-03f26bcfa9dc4e2eab315a35f9086715.jpg 750w" data-tracking-container="true" height="1453" id="mntl-sc-block-image_3-0" width="2179"/> <noscript> <img alt="Titan Demo Pic Edited" class="img--noscript universal-image__image" height="1453" sizes="750px" src="https://www.investopedia.com/thmb/gM-yWoLMinLBa4BVYsz_SbEcEq4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-03f26bcfa9dc4e2eab315a35f9086715.jpg" srcset="https://www.investopedia.com/thmb/xvajwnfmQ1YaG_UYliwrKaGjZVs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-03f26bcfa9dc4e2eab315a35f9086715.jpg 750w" width="2179"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_3-0"> <span class="figure-article-caption-text">From Titan's online demonstration with Investopedia.</span> <span class="figure-article-caption-owner"><p>Titan</p></span> </figcaption></figure> <div class="comp textnote-placeholder mntl-block" id="textnote-placeholder_1-0"></div> <div class="comp textnote mm-ads-gpt-adunit gpt textnote" id="textnote_1-0"> <div class="wrapper" id="textnote"></div> </div></div>

## Our Take Robo-investing is typically a process where you answer some risk tolerance, age, and income questions to determine a model portfolio that is invested in funds and periodically rebalanced. While Titan offers this service, the company does more than that. Titan offers its investors access to more actively managed funds, which seek to outperform index funds. Titan also offers direct access to alternative asset classes often reserved only for accredited investors, including real estate and venture capital. The company has seen some changes in its overall offerings going into 2024. It has pared down the cryptocurrency exposure to a 50/50 Ethereum and Bitcoin fund and removed inverse ETFs. In terms of the robo-advisory, however, things remain simple and cheap. We’ll dig into the pros and cons of Titan’s more active approach, so you can determine whether the company’s offerings are right for you. ### Pros & Cons Pros * No fee robo-advisor * Access to alternative assets * Innovative Smart Cash algorithm Cons * Standard robo services offering is limited * Limited goal planning tools * No tax-loss harvesting ## Account Overview | **Account Minimum** | $500 | | --- | --- | | **Fees** | 0% for automated portfolios, 0.7% to 0.9% for active portfolios | | **Goal Setting** | Cash management, short- and long-term investing, retirement | | **Available Assets** | Stock and bond ETF, mutual funds, private credit, venture capital, cryptocurrency, Treasuries, managed equity strategies | | **Interest Paid on Cash Balances** | No sweep on robo-advisor, but clients can open a separate Smart Cash account with a 5.3% APY | | **Customizable Portfolio** | No | | **View Portfolio Before Funding** | Yes | | **Customer Service** | Live chat 9 a.m. to 6 p.m. ET, virtual chatbot, email support | | **Financial Advisor Available** | Yes | | **Cash Management** | Titan Smart Cash, high-yield savings account, traditional savings account | | **Tax-Loss Harvesting** | No | | **External Account Syncing/Consolidation** | No | | **Mobile App** | Android, iOS | ## Account Setup The account setup is typical for a robo-advisor. Titan requires you to enter your address and contact information and then complete text verification in order to move forward into the basic information-gathering process, mainly identifying your age, net worth, goal for opening the account, investment time horizon, and risk tolerance. For each piece of information requested, there is an option to click and learn why it is necessary. When you are done inputting your data, the system recommends three different strategies that include more traditional accounts as well as alternative asset accounts. For the passive and actively managed funds, Titan suggests three options: a diversified growth portfolio, an automated stocks and bonds portfolio, and a low-risk portfolio. Custom portfolios are also available. The minimum account size for passive and actively managed funds at Titan is $500. Expense ratios are passed on for the passive accounts, and there are additional fees and expenses for the actively managed accounts.  Once you decide to move forward, the process is similar to other accounts. You fund the account, then get up and running with your portfolio. A nice feature of Titan-managed accounts is that they support fractional share trading, so you can get invested right away. ![Account Set Up Titan Review]() :max_bytes(150000):strip_icc()/Account-Set-Up-titan-review-2023-7963419-47ec97391ae748a8b7ba35fe6bd089e3.jpg) Source: Titan ## Goal Planning Goal planning on Titan is somewhat limited. There is a retirement planning tool that takes in your annual income, current retirement assets, and years to retirement to calculate whether you are on track. Beyond that, Titan’s planning tools are unable to account for large purchases such as a home, vehicle, or college. All clients have access to a range of financial calculator tools. ### Investopedia Robo-Advisor Survey According to [Investopedia's 2023 Robo-Advisor Consumer Survey](https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191), when asked to choose from a list of up to three top investment goals that they are most likely to use their robo-advisor to plan for, the majority of respondents chose using these digital wealth management platforms to invest for large purchases like houses, vehicles, and travel. Respondents were able to select more than one, up to three. ## Account Services Many robo-advisors provide a variety of services for their account holders, including cash management products and customization, as well as various features some investors look for, such as charitable giving tools; a focus on diversity, equity, and inclusion (DEI) or [environmental, social, and governance](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) (ESG) investing; and the ability to sync and analyze outside accounts. Titan offers some cash management options at this point, but little else.  ### Cash Management Titan has a cash management program called Smart Cash, which provides an APY as high as 5.30% or even 6% if you refer a friend right now. Titan searches for the best short-term rates across [treasury securities](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp) for Smart Cash, so that cash is invested at the highest possible rate for a high after-tax interest rate. Further, the Smart Cash program also spreads investments across institutions to maximum FDIC protection.  Although the Smart Cash cash management services provide a competitive interest rate, Titan does not offer any cash management tools such as checking, bill paying, or other traditional banking services. Compared to other robo-advisors, Titan’s cash management tools are limited, even if the interest rate paid through Smart Cash is competitive. ### Portfolio Construction Portfolios are created utilizing [modern portfolio theory (MPT)](https://www.investopedia.com/terms/m/modernportfoliotheory.asp) and [mean-variance analysis](https://www.investopedia.com/terms/m/meanvariance-analysis.asp) optimization. The passively managed portfolios are rebalanced when they are flagged by Titan’s algorithms. At a minimum, the rebalancing is quarterly. Actively managed portfolios are also constructed using modern portfolio theory, but are managed more opportunistically in an attempt to obtain better returns than the S&P 500. In addition to the automated stock and bond offerings, Titan gives investors access to three actively managed portfolios: * **Titan Flagship**: A fund focused on U.S. large-cap companies * **Titan Opportunities**: A fund looking for small-cap growth * **Titan Offshore**: A fund looking for non-U.S. stocks Titan also has a cryptocurrency fund with exposure to Bitcoin and Ethereum.  There are also non-proprietary alternative investment funds, including Carlyle Tactical Private Credit, Apollo Diversified Credit, ARK Venture, and Apollo Real Estate. These funds often have a higher minimum investment than the Titan funds. It is important to note that the actual robo-advisor controlled portfolios exclusively deal with ETFs. ## Available Assets | **Individual Stocks** | No | | --- | --- | | **Mutual Funds** | Yes | | **Fixed Income** | Yes | | **REITs** | Yes | | **Socially Responsible or ESG Options** | No | | **ETFs** | Yes | | **Non-Proprietary ETFs** | Yes | | **Private Equity** | Yes | | **Forex** | No | | **Crypto** | Yes | ### Portfolio Customization Portfolio customization at Titan is primarily related to the specific answers each client provides when creating or maintaining an account, including the goals they have for the account, how risk-averse they are, and which asset classes they want to invest in. These decisions help Titan determine the portfolio suggestions and mixes. While the portfolios can’t be customized for each client, specific securities can be omitted from a portfolio. The crypto portfolio is outside of the robo-advisor account and is not managed by it, although both can be added within the same overall investor account. ## Portfolio Management The robo-advisor controlled portfolios are rebalanced as needed based on drift triggers. If there is no triggering event, the portfolios are still assessed quarterly at a minimum. The robo-advisor controlled portfolios are not managed for [tax-loss harvesting](https://www.investopedia.com/terms/t/taxgainlossharvesting.asp) and there is no ability to direct charitable giving from these accounts.  Clients can, however, see progress toward their goals in real time. Another positive about Titan is that it supports fractional shares, allowing new funds and dividends to be invested into the portfolio quickly. | Key Portfolio Management Features | | | --- | --- | | **Automatic Rebalancing** | As needed; triggered by portfolio drift | | **Reporting Features** | Statements, tax information | | **Tax-Loss Harvesting** | No | | **External Account Syncing/Consolidation** | No | ## User Experience ### Desktop The desktop platform works smoothly. It is a basic website that covers all the key information effectively. You can also see the various investment options available without logging in. If you have an account, you can easily choose products to add. The retirement calculators are relatively basic and easy to use on the desktop platform. The website lacks a traditional search bar, but a chatbot and answers function fulfill that need, providing content based on your query.  ### Mobile The mobile platform largely mirrors the desktop experience, and is easy to navigate. The platform is clearly designed with a mobile-first tilt, so the app and mobile site experience are intuitive and fast. The app has ratings of 4.5 and 4.7 on Google Play and the Apple App Store respectively.  ![Mobile Experience Titan Review]() :max_bytes(150000):strip_icc()/Mobile-Experience-titan-review-2023-7963419copy-26ca4280cad341048ce39e25ae55bc8e.jpg) Source: Titan ## Customer Service * Live chat 9 a.m. to 6 p.m ET. * Virtual chatbot * Email support Customer service at Titan is limited, but prospective and existing clients can speak with customer service via online chat between 9 a.m. and 6 p.m ET. There is no phone support available at this time; however, Titan’s Investor Relations team is staffed with series 7 and series 63-licensed professionals who are available to chat with clients about portfolio construction, investment strategies, and more. Access is available via the Titan app, email, or text chat. Titan does not provide access to financial planners that can help map out long-term strategies and detailed retirement goals, but it does integrate with some third-party applications. This includes linking to [Empower](https://www.investopedia.com/empower-review-4587916) (previously called Personal Capital), which offers free financial planning and personal wealth management services that include the ability to link multiple external accounts, including Titan accounts, to show an investor’s complete financial picture. Titan does not provide integration with Mint.com, but an account at Apex, Titan’s clearing firm, can be linked to directly from Mint.com. Titan does not currently integrate with Quicken or any applications related to crypto positions. ## Security Titan provides standard security, which includes encrypted websites that utilize two-step authentication and/or biometrics for safe connections. Titan also provides SIPC and FDIC coverage for accounts. On cash equivalents, Titan is able to utilize multiple banks, which provides coverage for up to $5 million, allowing more investor cash to fall under the FDIC insurance umbrella. ## Education Titan provides educational and research content on its website. It has research and news update articles, as well as a suite of videos on various educational topics. The videos are typically less than two minutes in length and offer introductions to topics such as “what is venture capital,” “what is the stock market,” “what is robo-investing,” and so on. There is separate retirement planning software on Titan Invest, as well as calculators to see future projections. While it is nice to see educational and other supporting information, the larger brokerage companies typically have much more to offer for investing education and market research and it is often available for free without even opening an account. So, while Titan has some decent content, it is not especially unique. Further, while there is an FAQ section on the Titan website, it is difficult to find the page, and more than a few topics don’t have a corresponding FAQ.  ## Commissions and Fees Fees from Titan vary based on the investments chosen. Some of Titan’s fees are high relative to other, more traditional robo-advisors, but this is largely because of its active management approach for accounts and also because it provides access to asset classes, such as venture capital and credit strategies, that are not typically offered by robo-advisors. The basic robo-advisor accounts, Automated Stocks and Automated Bonds, are fee-free. The fees and minimums for various accounts are as follows: * **Smart Cash**: This account has no management fees and just a $5 minimum for getting started and subsequent additions * **Automated strategy accounts**: These act like more traditional robo-investing accounts that provide a model portfolio and periodically rebalance against the portfolio. They have no management fees, but the fund expense ratios are passed through to the investor. This is a low-cost option, as the fund fees are just 0.039% for the Automatic Stocks offering and 0.10% to 0.12% for Automated Bonds. While these fees are low, other traditional robo-advisors often have more portfolios available and have lower fees and minimums. * **Actively managed stock accounts**: These require a minimum of $500, and have a management fee that begins at 0.90% of AUM per year up to $25,000 in account value, then 0.80% of AUM per year up to $100,000, and a fee of 0.70% on all remaining assets above $100,000. These rates and minimums apply to the Flagship, Opportunities, and Off-Shore actively managed funds. These rates also apply to Titan’s crypto and strategy offerings. These management fees are high relative to more traditional robo-advisors, but if performance outpaces the S&P, the higher fees may be worth paying. Titan offers additional actively managed, non-proprietary funds. These have different fee structures. For example, the Tactical Private Credit strategy fund has a $2,000 minimum investment, and the same 0.90%, 0.80%, or 0.70% Titan management fee, but there is also a 1% management fee to the external managers, which increases to 15% once a hurdle rate of 6% is achieved. The ARK Innovation Fund only has a $500 minimum investment amount, although management fees are 2.75%. ## The Bottom Line Titan works well and is easy to use, but is it right for you? That depends on what you are looking for. If you want a no-frills robo-advisor with low fees, Titan can be a solid fit. This is especially true if you are looking to have some of your portfolio actively managed or if you want access to private equity, real estate, and credit strategies, Titan offers access to these markets to [non-accredited investors](https://www.investopedia.com/terms/n/nonaccreditedinvestor.asp) for less than what actual hedge funds charge.  If you are looking for a full-featured robo-advisor experience, however, Titan can't compete with the more immersive and customizable experiences at Wealthfront and Betterment or the value for money of a Fidelity Go or Schwab Intelligent Portfolios at lower balance, fee-free tiers. Regarding Titan’s actively managed strategies, the performance of the investments needs to be high enough to make up for the higher management fees. Returns on Titan’s funds benchmarked against the S&P have outperformed during recent stretches, but Titan’s Flagship Fund has an annualized return of 12.31% since inception on Feb. 20, 2018. This is ahead of its benchmark currently, but there have been some peaks and valleys as with all active funds.    ## How Does Titan Save You Money on Taxes? Titan doesn't really do a lot in terms of tax savings beyond using some tax-advantaged treasury funds for the Smart Cash account. The savings account is outside the robo-advisor accounts of Automated Stocks and Automated Bonds, neither of which offer any tax-loss harvesting or tax optimization in terms of asset selection. ## Is It Safe to Use Titan to Invest? Yes, Titan is safe to use. The company is registered with the SEC and is reputable. The safety of the company and the assets invested in the company, however, is not the same as the safety of the investments chosen. The various investing options at Titan span from a traditional portfolio of ETFs to exposure to other markets, including private equity and real estate, so there is a range of potential investment outcomes.  ## Is Titan FDIC Insured? The Titan cash product, which is a higher-yield savings vehicle, provides up to $250,000 in FDIC insurance. Customers who sign up for Titan’s Cash Sweep program receive up to $5 million in FDIC insurance; this higher coverage is achieved by the program manager using partner banks to invest cash.  Investment accounts are provided with standard SIPC protection against failure of the brokerage firm, up to $500,000, with a maximum of $250,000 in cash.  ## What Is the Minimum You Can Invest With Titan? The minimum investment amount at Titan Invest changes based on the investment vehicle. The Smart Cash product requires just $5. Automated and actively managed accounts require a minimum investment of $500, and some of the specialty funds require at least a $2,000 investment. ## Who Is the CEO of Titan? Clayton “Clay” Gardner is co-CEO and founder of the company. Joe Percoco is the other co-CEO. Clay and Joe were friends at Wharton. Their other partner, Max Bernardy, graduated from Stanford. While working at hedge funds and large banks, they thought it would make sense to provide smaller investors with access to the same trading strategies, including access to alternative strategies, offered by hedge funds. Their platform dream, which also included actively managed funds utilizing strategies used by other hedge funds, evolved into Titan. Gardner is responsible for the portfolio creation and active management strategies for the portfolios. ## How We Review Robo-Advisors Providing readers with unbiased, comprehensive reviews of digital wealth management companies, more commonly known as robo-advisors, is a top priority of Investopedia. We used our [2023 consumer survey](https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191) to guide the research and weightings for our 2024 robo-advisor awards. To collect the data, we sent a digital survey with 64 questions to each of the 21 companies we included in our rubric. Additionally, our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process spanned from Jan. 8, to Feb. 9, 2024. We then developed a quantitative model that scored each company to rate its performance across nine major categories and 59 criteria to find the best robo-advisors. The score for each company’s overall star rating is a weighted average of the criteria: * Account Services: 10.00% * Account Setup: 5.00% * Customer Service: 5.00% * Fees: 15.00% * Goal Planning: 21.00% * Portfolio Contents: 17.00% * Portfolio Management: 17.00% * Security & Education: 5.00% * User Experience: 5.00% Additionally, during our 2023 research, many of the companies we reviewed granted our team of expert writers and editors access to live accounts so they could perform hands-on testing. Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors. Read more about [how we research and review robo-advisors](https://www.investopedia.com/robo-advisor-ranking-methodology-4693455). Separately, our research team conducted a survey of 205 U.S. adults aged 18 to 72 who are current clients of one of 18 robo-advisors. While the information collected did not influence the development of our ratings model, it was instrumental in gathering the valuable insights published in [Investopedia's 2023 Robo-Advisor Consumer Survey](https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191). Participants in our 2023 Robo-Advisor Survey opted in to an online, self-administered questionnaire from a market research vendor. Data collection took place between Aug. 30 and Sept. 15, 2023, with 11 video interviews conducted with volunteer respondents from Sept. 7 to Sept. 17, 2023. Multiple quality checks, including screeners, attention gauges, comprehension evaluations, and logic metrics, among others, were used to ensure only the highest quality responses were included. ![Titan Demo Pic Edited]() :max_bytes(150000):strip_icc()/TitanDemoPicEdited-03f26bcfa9dc4e2eab315a35f9086715.jpg) From Titan's online demonstration with Investopedia. Titan

Our Take Robo-investing is typically a process where you answer some risk tolerance, age, and income questions to determine a model portfolio that is invested in funds and periodically rebalanced. While Titan offers this service, the company does more than that. Titan offers its investors access to more actively managed funds, which seek to outperform index funds. Titan also offers direct access to alternative asset classes often reserved only for accredited investors, including real estate and venture capital. The company has seen some changes in its overall offerings going into 2024. It has pared down the cryptocurrency exposure to a 50/50 Ethereum and Bitcoin fund and removed inverse ETFs. In terms of the robo-advisory, however, things remain simple and cheap. We’ll dig into the pros and cons of Titan’s more active approach, so you can determine whether the company’s offerings are right for you. Pros & Cons Pros No fee robo-advisor Access to alternative assets Innovative Smart Cash algorithm Cons Standard robo services offering is limited Limited goal planning tools No tax-loss harvesting Account Overview Account Minimum $500 Fees 0% for automated portfolios, 0.7% to 0.9% for active portfolios Goal Setting Cash management, short- and long-term investing, retirement Available Assets Stock and bond ETF, mutual funds, private credit, venture capital, cryptocurrency, Treasuries, managed equity strategies Interest Paid on Cash Balances No sweep on robo-advisor, but clients can open a separate Smart Cash account with a 5.3% APY Customizable Portfolio No View Portfolio Before Funding Yes Customer Service Live chat 9 a.m. to 6 p.m. ET, virtual chatbot, email support Financial Advisor Available Yes Cash Management Titan Smart Cash, high-yield savings account, traditional savings account Tax-Loss Harvesting No External Account Syncing/Consolidation No Mobile App Android, iOS Account Setup The account setup is typical for a robo-advisor. Titan requires you to enter your address and contact information and then complete text verification in order to move forward into the basic information-gathering process, mainly identifying your age, net worth, goal for opening the account, investment time horizon, and risk tolerance. For each piece of information requested, there is an option to click and learn why it is necessary. When you are done inputting your data, the system recommends three different strategies that include more traditional accounts as well as alternative asset accounts. For the passive and actively managed funds, Titan suggests three options: a diversified growth portfolio, an automated stocks and bonds portfolio, and a low-risk portfolio. Custom portfolios are also available. The minimum account size for passive and actively managed funds at Titan is $500. Expense ratios are passed on for the passive accounts, and there are additional fees and expenses for the actively managed accounts.  Once you decide to move forward, the process is similar to other accounts. You fund the account, then get up and running with your portfolio. A nice feature of Titan-managed accounts is that they support fractional share trading, so you can get invested right away. Source: Titan Goal Planning Goal planning on Titan is somewhat limited. There is a retirement planning tool that takes in your annual income, current retirement assets, and years to retirement to calculate whether you are on track. Beyond that, Titan’s planning tools are unable to account for large purchases such as a home, vehicle, or college. All clients have access to a range of financial calculator tools. Investopedia Robo-Advisor Survey According to Investopedia's 2023 Robo-Advisor Consumer Survey, when asked to choose from a list of up to three top investment goals that they are most likely to use their robo-advisor to plan for, the majority of respondents chose using these digital wealth management platforms to invest for large purchases like houses, vehicles, and travel. Respondents were able to select more than one, up to three. Account Services Many robo-advisors provide a variety of services for their account holders, including cash management products and customization, as well as various features some investors look for, such as charitable giving tools; a focus on diversity, equity, and inclusion (DEI) or environmental, social, and governance (ESG) investing; and the ability to sync and analyze outside accounts. Titan offers some cash management options at this point, but little else.  Cash Management Titan has a cash management program called Smart Cash, which provides an APY as high as 5.30% or even 6% if you refer a friend right now. Titan searches for the best short-term rates across treasury securities for Smart Cash, so that cash is invested at the highest possible rate for a high after-tax interest rate. Further, the Smart Cash program also spreads investments across institutions to maximum FDIC protection.  Although the Smart Cash cash management services provide a competitive interest rate, Titan does not offer any cash management tools such as checking, bill paying, or other traditional banking services. Compared to other robo-advisors, Titan’s cash management tools are limited, even if the interest rate paid through Smart Cash is competitive. Portfolio Construction Portfolios are created utilizing modern portfolio theory (MPT) and mean-variance analysis optimization. The passively managed portfolios are rebalanced when they are flagged by Titan’s algorithms. At a minimum, the rebalancing is quarterly. Actively managed portfolios are also constructed using modern portfolio theory, but are managed more opportunistically in an attempt to obtain better returns than the S&P 500. In addition to the automated stock and bond offerings, Titan gives investors access to three actively managed portfolios: Titan Flagship: A fund focused on U.S. large-cap companiesTitan Opportunities: A fund looking for small-cap growth Titan Offshore: A fund looking for non-U.S. stocks Titan also has a cryptocurrency fund with exposure to Bitcoin and Ethereum.  There are also non-proprietary alternative investment funds, including Carlyle Tactical Private Credit, Apollo Diversified Credit, ARK Venture, and Apollo Real Estate. These funds often have a higher minimum investment than the Titan funds. It is important to note that the actual robo-advisor controlled portfolios exclusively deal with ETFs. Available Assets Individual Stocks No Mutual Funds Yes Fixed Income Yes  REITs Yes  Socially Responsible or ESG Options No ETFs Yes Non-Proprietary ETFs Yes Private Equity Yes Forex  No Crypto Yes Portfolio Customization Portfolio customization at Titan is primarily related to the specific answers each client provides when creating or maintaining an account, including the goals they have for the account, how risk-averse they are, and which asset classes they want to invest in. These decisions help Titan determine the portfolio suggestions and mixes. While the portfolios can’t be customized for each client, specific securities can be omitted from a portfolio. The crypto portfolio is outside of the robo-advisor account and is not managed by it, although both can be added within the same overall investor account. Portfolio Management The robo-advisor controlled portfolios are rebalanced as needed based on drift triggers. If there is no triggering event, the portfolios are still assessed quarterly at a minimum. The robo-advisor controlled portfolios are not managed for tax-loss harvesting and there is no ability to direct charitable giving from these accounts.  Clients can, however, see progress toward their goals in real time. Another positive about Titan is that it supports fractional shares, allowing new funds and dividends to be invested into the portfolio quickly. Key Portfolio Management Features Automatic Rebalancing As needed; triggered by portfolio drift Reporting Features Statements, tax information Tax-Loss Harvesting No  External Account Syncing/Consolidation No User Experience  Desktop The desktop platform works smoothly. It is a basic website that covers all the key information effectively. You can also see the various investment options available without logging in. If you have an account, you can easily choose products to add. The retirement calculators are relatively basic and easy to use on the desktop platform. The website lacks a traditional search bar, but a chatbot and answers function fulfill that need, providing content based on your query.  Mobile  The mobile platform largely mirrors the desktop experience, and is easy to navigate. The platform is clearly designed with a mobile-first tilt, so the app and mobile site experience are intuitive and fast. The app has ratings of 4.5 and 4.7 on Google Play and the Apple App Store respectively.  Source: Titan Customer Service Live chat 9 a.m. to 6 p.m ET.Virtual chatbot Email support Customer service at Titan is limited, but prospective and existing clients can speak with customer service via online chat between 9 a.m. and 6 p.m ET. There is no phone support available at this time; however, Titan’s Investor Relations team is staffed with series 7 and series 63-licensed professionals who are available to chat with clients about portfolio construction, investment strategies, and more. Access is available via the Titan app, email, or text chat. Titan does not provide access to financial planners that can help map out long-term strategies and detailed retirement goals, but it does integrate with some third-party applications. This includes linking to Empower (previously called Personal Capital), which offers free financial planning and personal wealth management services that include the ability to link multiple external accounts, including Titan accounts, to show an investor’s complete financial picture. Titan does not provide integration with Mint.com, but an account at Apex, Titan’s clearing firm, can be linked to directly from Mint.com. Titan does not currently integrate with Quicken or any applications related to crypto positions. Security  Titan provides standard security, which includes encrypted websites that utilize two-step authentication and/or biometrics for safe connections. Titan also provides SIPC and FDIC coverage for accounts. On cash equivalents, Titan is able to utilize multiple banks, which provides coverage for up to $5 million, allowing more investor cash to fall under the FDIC insurance umbrella. Education  Titan provides educational and research content on its website. It has research and news update articles, as well as a suite of videos on various educational topics. The videos are typically less than two minutes in length and offer introductions to topics such as “what is venture capital,” “what is the stock market,” “what is robo-investing,” and so on. There is separate retirement planning software on Titan Invest, as well as calculators to see future projections. While it is nice to see educational and other supporting information, the larger brokerage companies typically have much more to offer for investing education and market research and it is often available for free without even opening an account. So, while Titan has some decent content, it is not especially unique. Further, while there is an FAQ section on the Titan website, it is difficult to find the page, and more than a few topics don’t have a corresponding FAQ.  Commissions and Fees Fees from Titan vary based on the investments chosen. Some of Titan’s fees are high relative to other, more traditional robo-advisors, but this is largely because of its active management approach for accounts and also because it provides access to asset classes, such as venture capital and credit strategies, that are not typically offered by robo-advisors. The basic robo-advisor accounts, Automated Stocks and Automated Bonds, are fee-free. The fees and minimums for various accounts are as follows: Smart Cash: This account has no management fees and just a $5 minimum for getting started and subsequent additionsAutomated strategy accounts: These act like more traditional robo-investing accounts that provide a model portfolio and periodically rebalance against the portfolio. They have no management fees, but the fund expense ratios are passed through to the investor. This is a low-cost option, as the fund fees are just 0.039% for the Automatic Stocks offering and 0.10% to 0.12% for Automated Bonds. While these fees are low, other traditional robo-advisors often have more portfolios available and have lower fees and minimums.Actively managed stock accounts: These require a minimum of $500, and have a management fee that begins at 0.90% of AUM per year up to $25,000 in account value, then 0.80% of AUM per year up to $100,000, and a fee of 0.70% on all remaining assets above $100,000. These rates and minimums apply to the Flagship, Opportunities, and Off-Shore actively managed funds. These rates also apply to Titan’s crypto and strategy offerings. These management fees are high relative to more traditional robo-advisors, but if performance outpaces the S&P, the higher fees may be worth paying. Titan offers additional actively managed, non-proprietary funds. These have different fee structures. For example, the Tactical Private Credit strategy fund has a $2,000 minimum investment, and the same 0.90%, 0.80%, or 0.70% Titan management fee, but there is also a 1% management fee to the external managers, which increases to 15% once a hurdle rate of 6% is achieved. The ARK Innovation Fund only has a $500 minimum investment amount, although management fees are 2.75%. The Bottom Line Titan works well and is easy to use, but is it right for you? That depends on what you are looking for. If you want a no-frills robo-advisor with low fees, Titan can be a solid fit. This is especially true if you are looking to have some of your portfolio actively managed or if you want access to private equity, real estate, and credit strategies, Titan offers access to these markets to non-accredited investors for less than what actual hedge funds charge.  If you are looking for a full-featured robo-advisor experience, however, Titan can't compete with the more immersive and customizable experiences at Wealthfront and Betterment or the value for money of a Fidelity Go or Schwab Intelligent Portfolios at lower balance, fee-free tiers. Regarding Titan’s actively managed strategies, the performance of the investments needs to be high enough to make up for the higher management fees. Returns on Titan’s funds benchmarked against the S&P have outperformed during recent stretches, but Titan’s Flagship Fund has an annualized return of 12.31% since inception on Feb. 20, 2018. This is ahead of its benchmark currently, but there have been some peaks and valleys as with all active funds.    How Does Titan Save You Money on Taxes? Titan doesn't really do a lot in terms of tax savings beyond using some tax-advantaged treasury funds for the Smart Cash account. The savings account is outside the robo-advisor accounts of Automated Stocks and Automated Bonds, neither of which offer any tax-loss harvesting or tax optimization in terms of asset selection. Is It Safe to Use Titan to Invest? Yes, Titan is safe to use. The company is registered with the SEC and is reputable. The safety of the company and the assets invested in the company, however, is not the same as the safety of the investments chosen. The various investing options at Titan span from a traditional portfolio of ETFs to exposure to other markets, including private equity and real estate, so there is a range of potential investment outcomes.  Is Titan FDIC Insured? The Titan cash product, which is a higher-yield savings vehicle, provides up to $250,000 in FDIC insurance. Customers who sign up for Titan’s Cash Sweep program receive up to $5 million in FDIC insurance; this higher coverage is achieved by the program manager using partner banks to invest cash.  Investment accounts are provided with standard SIPC protection against failure of the brokerage firm, up to $500,000, with a maximum of $250,000 in cash.  What Is the Minimum You Can Invest With Titan? The minimum investment amount at Titan Invest changes based on the investment vehicle. The Smart Cash product requires just $5. Automated and actively managed accounts require a minimum investment of $500, and some of the specialty funds require at least a $2,000 investment. Who Is the CEO of Titan? Clayton “Clay” Gardner is co-CEO and founder of the company. Joe Percoco is the other co-CEO. Clay and Joe were friends at Wharton. Their other partner, Max Bernardy, graduated from Stanford. While working at hedge funds and large banks, they thought it would make sense to provide smaller investors with access to the same trading strategies, including access to alternative strategies, offered by hedge funds. Their platform dream, which also included actively managed funds utilizing strategies used by other hedge funds, evolved into Titan. Gardner is responsible for the portfolio creation and active management strategies for the portfolios. How We Review Robo-Advisors Providing readers with unbiased, comprehensive reviews of digital wealth management companies, more commonly known as robo-advisors, is a top priority of Investopedia. We used our 2023 consumer survey to guide the research and weightings for our 2024 robo-advisor awards. To collect the data, we sent a digital survey with 64 questions to each of the 21 companies we included in our rubric. Additionally, our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process spanned from Jan. 8, to Feb. 9, 2024. We then developed a quantitative model that scored each company to rate its performance across nine major categories and 59 criteria to find the best robo-advisors. The score for each company’s overall star rating is a weighted average of the criteria: Account Services: 10.00%Account Setup: 5.00%Customer Service: 5.00%Fees: 15.00%Goal Planning: 21.00%Portfolio Contents: 17.00%Portfolio Management: 17.00%Security & Education: 5.00%User Experience: 5.00% Additionally, during our 2023 research, many of the companies we reviewed granted our team of expert writers and editors access to live accounts so they could perform hands-on testing. Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors. Read more about how we research and review robo-advisors. Separately, our research team conducted a survey of 205 U.S. adults aged 18 to 72 who are current clients of one of 18 robo-advisors. While the information collected did not influence the development of our ratings model, it was instrumental in gathering the valuable insights published in Investopedia's 2023 Robo-Advisor Consumer Survey. Participants in our 2023 Robo-Advisor Survey opted in to an online, self-administered questionnaire from a market research vendor. Data collection took place between Aug. 30 and Sept. 15, 2023, with 11 video interviews conducted with volunteer respondents from Sept. 7 to Sept. 17, 2023. Multiple quality checks, including screeners, attention gauges, comprehension evaluations, and logic metrics, among others, were used to ensure only the highest quality responses were included. From Titan's online demonstration with Investopedia. Titan

https://www.investopedia.com/articles/investing/032516/how-use-benchmark-evaluate-portfolio.asp

How to Use Benchmarks in Investing

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio. Individual funds and investment portfolios will generally have established <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a> for standard analysis. A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Investors often use the S&amp;P 500 index as an equity performance benchmark because the S&amp;P contains 500 of the largest U.S. publicly traded companies. However, there are many types of benchmarks that investors can use depending on their investments, risk tolerance, and time horizon. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio.</li><li>A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments.</li><li>The S&amp;P 500 index is often used as a benchmark for equities.</li><li>U.S. Treasuries are used for measuring bond returns and risk.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-benchmarks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Understanding Benchmarks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Benchmarks represent a portfolio of unmanaged securities that represent a designated market segment. Institutions manage these portfolios which are known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">indexes</a>. Some of the most common institutions known for index management are Standard &amp; Poor’s (S&amp;P), Russell, and MSCI. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Indexes act as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market-proxy.asp">market proxy</a> and represent various investment asset classes. A benchmark can include broad measures, such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell_1000index.asp">Russell 1000</a>, or specific asset classes like U.S. small-cap <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthstock.asp">growth stocks</a>, high-yield bonds, or emerging markets.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual funds</a> in the investment industry use indexes as the base for a replication strategy. Mutual funds contain pools of investment funds that are actively managed by portfolio managers and invested in various securities, such as stocks, bonds, and money market instruments.<span class="ql-inline-citation" data-cite="3"></span> Fund <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymanager.asp">money managers</a> attempt to produce capital gains or income for the fund's investors.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">Exchange-traded funds (ETFs)</a> also use indexes as the base for a passive replication strategy. ETFs typically track an index, such as the S&amp;P 500 for equity ETFs. These ETFs invest in all the securities of the underlying index which is why they're considered to be passively managed funds.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Investing in a passive fund is the primary way that a retail investor can invest in an index. But the evolution of ETFs has brought about the introduction of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smart-beta-etf.asp">smart beta</a> indexes. These offer customized indexes that rival the capabilities of active managers. Smart beta indexes use advanced methodologies and a rules-based system for selecting investments to be held in portfolios.<span class="ql-inline-citation" data-cite="1"></span> Smart beta funds represent the middle ground between a mutual fund and an ETF. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments.</p></div></div></div> <span class="heading-toc" id="toc-managing-risk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Managing Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Most people invest in a diversified portfolio that includes numerous asset classes to help manage risk. They generally use equities and bonds. Risk metrics can be used to help understand the risks of these investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Risk is most often characterized using variability and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a>. The size of the change in portfolio value measures volatility. Investment funds that contain commodities that have larger moves up and down in value have an increased amount of volatility. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Variability measures the frequency of the change in value. Overall, the more variability, the greater the risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Several measures are used to evaluate portfolio risk and reward. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-subheading__text"> Standard Deviation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeviation.asp">Standard deviation</a> is a statistical measure of volatility. It calculates the variance in price moves of an investment to the mean or average return over a period. The greater the variance between each price of the investment and the mean, the greater the price range or standard deviation. A higher standard deviation indicates more volatility and greater risk.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> Beta </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">Beta</a> is used to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/09/simplified-measuring-interpreting-volatility.asp">measure volatility</a> against a benchmark. A portfolio with a beta of 1.2 is expected to move 120% up or down for every change in the benchmark. A portfolio with a lower beta would be expected to have less up-and-down movement than the benchmark. Beta is usually calculated with the S&amp;P 500 as the benchmark.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-subheading__text"> Sharpe Ratio </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The Sharpe Ratio is a widely used measure of risk-adjusted return. It's the average return earned more than a risk-free investment, such as a U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/government-bond.asp">government bond</a>. A higher Sharpe ratio indicates a superior overall risk-adjusted return.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> These measures are commonly reported with managed investment funds and also by index providers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-portfolios-and-benchmarking"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> Portfolios and Benchmarking </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Fund companies use benchmarks as a gauge for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appraisalratio.asp">performance of a portfolio</a> against its investing universe. Portfolio managers will generally <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/032116/how-select-and-build-benchmark-measure-portfolio-performance.asp">choose a benchmark that's aligned with their investing universe</a>. Active managers seek to outperform their benchmarks. They look to create a return beyond the return of the benchmark. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> But an investor can't necessarily invest in all the securities of an index because all investing comes with some associated fees that will detract from the return of an index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Investors can also use individual indexes combined with risk metrics to analyze their portfolios and choose portfolio allocations. Three benchmarks are commonly used for analyzing and understanding the market environment and various investment opportunities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-subheading__text"> The S&amp;P 500 </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> An investor may want to use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&amp;P 500</a> index as a benchmark for equities because it's the best gauge for large U.S. publicly traded companies. The S&amp;P is the most widely used benchmark for equities. It's typically the litmus test for a portfolio's or fund's performance.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-subheading__text"> The Bloomberg Agg </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The Agg or the Bloomberg U.S. Aggregate Bond Index measures the performance of various fixed-income securities. These include corporate bonds, U.S. government bonds, asset-backed securities, and commercial mortgage-backed securities that are traded in the United States.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> The Agg is used by bond traders, mutual funds, and ETFs as a benchmark to measure the relative performance of the bond or fixed-income market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-subheading__text"> U.S. Treasuries </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp">U.S. Treasury securities</a> are bonds that typically pay a fixed rate of return and they're backed by the U.S. Treasury. Treasuries are considered to be as safe an investment as possible.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Many investment funds and portfolio managers use short-term Treasuries maturing in one or two years as a benchmark for the risk-free rate of return. The investment isn't worth the risk for investors if the rate cannot beat a one-year Treasury security. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_60-0"> <span class="mntl-sc-block-subheading__text"> Examples of Benchmarking </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> An investor must first consider their risk to help determine an appropriate investment benchmark. An appropriate benchmark could be a 60% to 40% allocation if you're willing to take a moderate amount of risk because your profile is a six on a scale of 1-10. It would include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> <li>60% in a Russell 3000 Index investment that's focused on a market capitalization-weighted index universe that includes large-, mid-, and small-cap U.S. stocks<span class="ql-inline-citation" data-cite="11"></span></li><li>40% in a Bloomberg U.S. Aggregate Bond Index investment which includes a universe of U.S. investment-grade government and corporate bonds<span class="ql-inline-citation" data-cite="9"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> An investor would use the Russell 3000 Index as a benchmark for equity and the Bloomberg Agg as a benchmark for fixed income in this scenario. They might also want to use the Sharpe Ratio to ensure that they're optimally diversified and achieve the greatest reward in each allocation for their risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <span class="heading-toc" id="toc-comprehensive-risk-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-heading__text"> Comprehensive Risk Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Risk is a central component of all investing decisions. An investor can better understand how to allocate their investments most prudently by simply using the performance and risk metrics of an index in comparison to investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Risk levels usually vary across equity, fixed-income, and savings investments. Most investors with longer time horizons are willing to invest more heavily in higher-risk investments. Shorter time horizons or a higher need for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> or the ability to convert to cash will lead to lower-risk investments in fixed-income and savings products. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_72-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_73-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Investors can also use indexes and risk metrics to monitor their portfolios within the macro investing environment using these allocations as a guide.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Markets can gradually shift their levels of risk depending on various factors. Economic cycles and monetary policies can be leading variables affecting risk levels. Active investors who use appropriate benchmarking analysis techniques can often more readily capitalize on investment opportunities as they evolve. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Comparing the performance and risk of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/063015/where-can-i-find-yeartodate-ytd-returns-benchmarks.asp">various benchmarks</a> across an entire portfolio or specifically to investment fund mandates can also be important to ensure optimal investing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_78-0"><span class="heading-toc" id="toc-what-is-an-index-in-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Index in Investing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An index is effectively a benchmark. It's a measurement of changes in a securities market based on statistics. An index fund is a pooled investment vehicle that tracks specific indexes. Many mutual funds and exchange-traded funds (ETFs) track and mimic the performance of indexes so they're considered to be safer than some other types of investments.<span class="ql-inline-citation" data-cite="12"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_80-0"><span class="heading-toc" id="toc-what-is-an-exchange-traded-fund-and-should-i-invest-in-one"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Exchange-Traded Fund and Should I Invest in One?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An ETF is a pooled investment vehicle that's funded by numerous investors who receive an interest in the fund that's typically proportionate to their contributions. The fund is usually managed by an SEC-registered advisor firm. Some ETFs, such as index funds, are passively managed and track markets. Others are more actively managed and they trade on a more consistent basis.</p><p>Whether should you invest in an ETF and which type of fund would work best for you can depend on your appetite for risk, but ETFs are considered to be on the safe side of investments overall.<span class="ql-inline-citation" data-cite="13"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_82-0"><span class="heading-toc" id="toc-what-does-volatility-mean-in-an-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Volatility Mean in an Investment?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Volatility is a measurement of how frequently and by how much the price of a given security shifts over a designated period. It has less of an effect on long-term investors because their goal is growth over a matter of years. It can create a bumpy, nerve-wracking road for short-term investors who want to buy in or out of the market at a specific, imminent time.<span class="ql-inline-citation" data-cite="14"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_84-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Benchmarks are tools that can be used in a variety of ways for investors. All managed funds will have an established benchmark by which you can measure the performance of the fund. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Investors can also go beyond standard uses of benchmarking. Using indexes to allocate investments to passive funds with specific portfolio allocations can be one advanced use of benchmarking. Active investors may also choose to follow an array of benchmarks across the risk spectrum, analyzing these benchmarks along with risk characteristics to ensure that their investments are optimally placed with the lowest risk and highest return possible. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Benchmark and risk metric monitoring also allow investors to potentially identify opportunities for shifting portfolio investments to take advantage of market opportunities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Considering different benchmarks simultaneously with their risk characteristics can be a simple technique for all types of investors. Using benchmarks can be very valuable in analyzing current and potential investments. It can also be an effective way to ensure that an investor’s portfolio is optimally diversified and aligned with their goals. </p></div>

A benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio. Individual funds and investment portfolios will generally have established [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp) for standard analysis. A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments. Investors often use the S&P 500 index as an equity performance benchmark because the S&P contains 500 of the largest U.S. publicly traded companies. However, there are many types of benchmarks that investors can use depending on their investments, risk tolerance, and time horizon. ### Key Takeaways * A benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio. * A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments. * The S&P 500 index is often used as a benchmark for equities. * U.S. Treasuries are used for measuring bond returns and risk. ## Understanding Benchmarks Benchmarks represent a portfolio of unmanaged securities that represent a designated market segment. Institutions manage these portfolios which are known as [indexes](https://www.investopedia.com/terms/i/index.asp). Some of the most common institutions known for index management are Standard & Poor’s (S&P), Russell, and MSCI. Indexes act as a [market proxy](https://www.investopedia.com/terms/m/market-proxy.asp) and represent various investment asset classes. A benchmark can include broad measures, such as the [Russell 1000](https://www.investopedia.com/terms/r/russell_1000index.asp), or specific asset classes like U.S. small-cap [growth stocks](https://www.investopedia.com/terms/g/growthstock.asp), high-yield bonds, or emerging markets. Many [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) in the investment industry use indexes as the base for a replication strategy. Mutual funds contain pools of investment funds that are actively managed by portfolio managers and invested in various securities, such as stocks, bonds, and money market instruments. Fund [money managers](https://www.investopedia.com/terms/m/moneymanager.asp) attempt to produce capital gains or income for the fund's investors.  [Exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) also use indexes as the base for a passive replication strategy. ETFs typically track an index, such as the S&P 500 for equity ETFs. These ETFs invest in all the securities of the underlying index which is why they're considered to be passively managed funds. Investing in a passive fund is the primary way that a retail investor can invest in an index. But the evolution of ETFs has brought about the introduction of [smart beta](https://www.investopedia.com/terms/s/smart-beta-etf.asp) indexes. These offer customized indexes that rival the capabilities of active managers. Smart beta indexes use advanced methodologies and a rules-based system for selecting investments to be held in portfolios. Smart beta funds represent the middle ground between a mutual fund and an ETF. ### A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments. ## Managing Risk Most people invest in a diversified portfolio that includes numerous asset classes to help manage risk. They generally use equities and bonds. Risk metrics can be used to help understand the risks of these investments. Risk is most often characterized using variability and [volatility](https://www.investopedia.com/terms/v/volatility.asp). The size of the change in portfolio value measures volatility. Investment funds that contain commodities that have larger moves up and down in value have an increased amount of volatility. Variability measures the frequency of the change in value. Overall, the more variability, the greater the risk. Several measures are used to evaluate portfolio risk and reward. ### Standard Deviation [Standard deviation](https://www.investopedia.com/terms/s/standarddeviation.asp) is a statistical measure of volatility. It calculates the variance in price moves of an investment to the mean or average return over a period. The greater the variance between each price of the investment and the mean, the greater the price range or standard deviation. A higher standard deviation indicates more volatility and greater risk. ### Beta [Beta](https://www.investopedia.com/terms/b/beta.asp) is used to [measure volatility](https://www.investopedia.com/articles/basics/09/simplified-measuring-interpreting-volatility.asp) against a benchmark. A portfolio with a beta of 1.2 is expected to move 120% up or down for every change in the benchmark. A portfolio with a lower beta would be expected to have less up-and-down movement than the benchmark. Beta is usually calculated with the S&P 500 as the benchmark. ### Sharpe Ratio The Sharpe Ratio is a widely used measure of risk-adjusted return. It's the average return earned more than a risk-free investment, such as a U.S. [government bond](https://www.investopedia.com/terms/g/government-bond.asp). A higher Sharpe ratio indicates a superior overall risk-adjusted return. These measures are commonly reported with managed investment funds and also by index providers. ## Portfolios and Benchmarking Fund companies use benchmarks as a gauge for the [performance of a portfolio](https://www.investopedia.com/terms/a/appraisalratio.asp) against its investing universe. Portfolio managers will generally [choose a benchmark that's aligned with their investing universe](https://www.investopedia.com/articles/personal-finance/032116/how-select-and-build-benchmark-measure-portfolio-performance.asp). Active managers seek to outperform their benchmarks. They look to create a return beyond the return of the benchmark. But an investor can't necessarily invest in all the securities of an index because all investing comes with some associated fees that will detract from the return of an index. Investors can also use individual indexes combined with risk metrics to analyze their portfolios and choose portfolio allocations. Three benchmarks are commonly used for analyzing and understanding the market environment and various investment opportunities. ### The S&P 500 An investor may want to use the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) index as a benchmark for equities because it's the best gauge for large U.S. publicly traded companies. The S&P is the most widely used benchmark for equities. It's typically the litmus test for a portfolio's or fund's performance. ### The Bloomberg Agg The Agg or the Bloomberg U.S. Aggregate Bond Index measures the performance of various fixed-income securities. These include corporate bonds, U.S. government bonds, asset-backed securities, and commercial mortgage-backed securities that are traded in the United States. The Agg is used by bond traders, mutual funds, and ETFs as a benchmark to measure the relative performance of the bond or fixed-income market. ### U.S. Treasuries [U.S. Treasury securities](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp) are bonds that typically pay a fixed rate of return and they're backed by the U.S. Treasury. Treasuries are considered to be as safe an investment as possible. Many investment funds and portfolio managers use short-term Treasuries maturing in one or two years as a benchmark for the risk-free rate of return. The investment isn't worth the risk for investors if the rate cannot beat a one-year Treasury security. ### Examples of Benchmarking An investor must first consider their risk to help determine an appropriate investment benchmark. An appropriate benchmark could be a 60% to 40% allocation if you're willing to take a moderate amount of risk because your profile is a six on a scale of 1-10. It would include: * 60% in a Russell 3000 Index investment that's focused on a market capitalization-weighted index universe that includes large-, mid-, and small-cap U.S. stocks * 40% in a Bloomberg U.S. Aggregate Bond Index investment which includes a universe of U.S. investment-grade government and corporate bonds An investor would use the Russell 3000 Index as a benchmark for equity and the Bloomberg Agg as a benchmark for fixed income in this scenario. They might also want to use the Sharpe Ratio to ensure that they're optimally diversified and achieve the greatest reward in each allocation for their risk. ## Comprehensive Risk Considerations Risk is a central component of all investing decisions. An investor can better understand how to allocate their investments most prudently by simply using the performance and risk metrics of an index in comparison to investments. Risk levels usually vary across equity, fixed-income, and savings investments. Most investors with longer time horizons are willing to invest more heavily in higher-risk investments. Shorter time horizons or a higher need for [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) or the ability to convert to cash will lead to lower-risk investments in fixed-income and savings products. ### Investors can also use indexes and risk metrics to monitor their portfolios within the macro investing environment using these allocations as a guide. Markets can gradually shift their levels of risk depending on various factors. Economic cycles and monetary policies can be leading variables affecting risk levels. Active investors who use appropriate benchmarking analysis techniques can often more readily capitalize on investment opportunities as they evolve. Comparing the performance and risk of [various benchmarks](https://www.investopedia.com/ask/answers/063015/where-can-i-find-yeartodate-ytd-returns-benchmarks.asp) across an entire portfolio or specifically to investment fund mandates can also be important to ensure optimal investing. ## What Is an Index in Investing? An index is effectively a benchmark. It's a measurement of changes in a securities market based on statistics. An index fund is a pooled investment vehicle that tracks specific indexes. Many mutual funds and exchange-traded funds (ETFs) track and mimic the performance of indexes so they're considered to be safer than some other types of investments. ## What Is an Exchange-Traded Fund and Should I Invest in One? An ETF is a pooled investment vehicle that's funded by numerous investors who receive an interest in the fund that's typically proportionate to their contributions. The fund is usually managed by an SEC-registered advisor firm. Some ETFs, such as index funds, are passively managed and track markets. Others are more actively managed and they trade on a more consistent basis. Whether should you invest in an ETF and which type of fund would work best for you can depend on your appetite for risk, but ETFs are considered to be on the safe side of investments overall. ## What Does Volatility Mean in an Investment? Volatility is a measurement of how frequently and by how much the price of a given security shifts over a designated period. It has less of an effect on long-term investors because their goal is growth over a matter of years. It can create a bumpy, nerve-wracking road for short-term investors who want to buy in or out of the market at a specific, imminent time. ## The Bottom Line Benchmarks are tools that can be used in a variety of ways for investors. All managed funds will have an established benchmark by which you can measure the performance of the fund. Investors can also go beyond standard uses of benchmarking. Using indexes to allocate investments to passive funds with specific portfolio allocations can be one advanced use of benchmarking. Active investors may also choose to follow an array of benchmarks across the risk spectrum, analyzing these benchmarks along with risk characteristics to ensure that their investments are optimally placed with the lowest risk and highest return possible. Benchmark and risk metric monitoring also allow investors to potentially identify opportunities for shifting portfolio investments to take advantage of market opportunities. Considering different benchmarks simultaneously with their risk characteristics can be a simple technique for all types of investors. Using benchmarks can be very valuable in analyzing current and potential investments. It can also be an effective way to ensure that an investor’s portfolio is optimally diversified and aligned with their goals.

A benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio. Individual funds and investment portfolios will generally have established benchmarks for standard analysis. A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments. Investors often use the S&P 500 index as an equity performance benchmark because the S&P contains 500 of the largest U.S. publicly traded companies. However, there are many types of benchmarks that investors can use depending on their investments, risk tolerance, and time horizon. Key Takeaways A benchmark is a standard or measure that can be used to analyze the allocation, risk, and return of a given portfolio.A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments.The S&P 500 index is often used as a benchmark for equities.U.S. Treasuries are used for measuring bond returns and risk. Understanding Benchmarks Benchmarks represent a portfolio of unmanaged securities that represent a designated market segment. Institutions manage these portfolios which are known as indexes. Some of the most common institutions known for index management are Standard & Poor’s (S&P), Russell, and MSCI. Indexes act as a market proxy and represent various investment asset classes. A benchmark can include broad measures, such as the Russell 1000, or specific asset classes like U.S. small-cap growth stocks, high-yield bonds, or emerging markets. Many mutual funds in the investment industry use indexes as the base for a replication strategy. Mutual funds contain pools of investment funds that are actively managed by portfolio managers and invested in various securities, such as stocks, bonds, and money market instruments. Fund money managers attempt to produce capital gains or income for the fund's investors.  Exchange-traded funds (ETFs) also use indexes as the base for a passive replication strategy. ETFs typically track an index, such as the S&P 500 for equity ETFs. These ETFs invest in all the securities of the underlying index which is why they're considered to be passively managed funds. Investing in a passive fund is the primary way that a retail investor can invest in an index. But the evolution of ETFs has brought about the introduction of smart beta indexes. These offer customized indexes that rival the capabilities of active managers. Smart beta indexes use advanced methodologies and a rules-based system for selecting investments to be held in portfolios. Smart beta funds represent the middle ground between a mutual fund and an ETF. A variety of benchmarks can also be used to understand how a portfolio is performing against various market segments. Managing Risk Most people invest in a diversified portfolio that includes numerous asset classes to help manage risk. They generally use equities and bonds. Risk metrics can be used to help understand the risks of these investments. Risk is most often characterized using variability and volatility. The size of the change in portfolio value measures volatility. Investment funds that contain commodities that have larger moves up and down in value have an increased amount of volatility. Variability measures the frequency of the change in value. Overall, the more variability, the greater the risk. Several measures are used to evaluate portfolio risk and reward. Standard Deviation Standard deviation is a statistical measure of volatility. It calculates the variance in price moves of an investment to the mean or average return over a period. The greater the variance between each price of the investment and the mean, the greater the price range or standard deviation. A higher standard deviation indicates more volatility and greater risk. Beta Beta is used to measure volatility against a benchmark. A portfolio with a beta of 1.2 is expected to move 120% up or down for every change in the benchmark. A portfolio with a lower beta would be expected to have less up-and-down movement than the benchmark. Beta is usually calculated with the S&P 500 as the benchmark. Sharpe Ratio The Sharpe Ratio is a widely used measure of risk-adjusted return. It's the average return earned more than a risk-free investment, such as a U.S. government bond. A higher Sharpe ratio indicates a superior overall risk-adjusted return. These measures are commonly reported with managed investment funds and also by index providers. Portfolios and Benchmarking Fund companies use benchmarks as a gauge for the performance of a portfolio against its investing universe. Portfolio managers will generally choose a benchmark that's aligned with their investing universe. Active managers seek to outperform their benchmarks. They look to create a return beyond the return of the benchmark. But an investor can't necessarily invest in all the securities of an index because all investing comes with some associated fees that will detract from the return of an index. Investors can also use individual indexes combined with risk metrics to analyze their portfolios and choose portfolio allocations. Three benchmarks are commonly used for analyzing and understanding the market environment and various investment opportunities. The S&P 500 An investor may want to use the S&P 500 index as a benchmark for equities because it's the best gauge for large U.S. publicly traded companies. The S&P is the most widely used benchmark for equities. It's typically the litmus test for a portfolio's or fund's performance. The Bloomberg Agg The Agg or the Bloomberg U.S. Aggregate Bond Index measures the performance of various fixed-income securities. These include corporate bonds, U.S. government bonds, asset-backed securities, and commercial mortgage-backed securities that are traded in the United States. The Agg is used by bond traders, mutual funds, and ETFs as a benchmark to measure the relative performance of the bond or fixed-income market. U.S. Treasuries U.S. Treasury securities are bonds that typically pay a fixed rate of return and they're backed by the U.S. Treasury. Treasuries are considered to be as safe an investment as possible. Many investment funds and portfolio managers use short-term Treasuries maturing in one or two years as a benchmark for the risk-free rate of return. The investment isn't worth the risk for investors if the rate cannot beat a one-year Treasury security. Examples of Benchmarking An investor must first consider their risk to help determine an appropriate investment benchmark. An appropriate benchmark could be a 60% to 40% allocation if you're willing to take a moderate amount of risk because your profile is a six on a scale of 1-10. It would include: 60% in a Russell 3000 Index investment that's focused on a market capitalization-weighted index universe that includes large-, mid-, and small-cap U.S. stocks40% in a Bloomberg U.S. Aggregate Bond Index investment which includes a universe of U.S. investment-grade government and corporate bonds An investor would use the Russell 3000 Index as a benchmark for equity and the Bloomberg Agg as a benchmark for fixed income in this scenario. They might also want to use the Sharpe Ratio to ensure that they're optimally diversified and achieve the greatest reward in each allocation for their risk. Comprehensive Risk Considerations Risk is a central component of all investing decisions. An investor can better understand how to allocate their investments most prudently by simply using the performance and risk metrics of an index in comparison to investments. Risk levels usually vary across equity, fixed-income, and savings investments. Most investors with longer time horizons are willing to invest more heavily in higher-risk investments. Shorter time horizons or a higher need for liquidity or the ability to convert to cash will lead to lower-risk investments in fixed-income and savings products. Investors can also use indexes and risk metrics to monitor their portfolios within the macro investing environment using these allocations as a guide. Markets can gradually shift their levels of risk depending on various factors. Economic cycles and monetary policies can be leading variables affecting risk levels. Active investors who use appropriate benchmarking analysis techniques can often more readily capitalize on investment opportunities as they evolve. Comparing the performance and risk of various benchmarks across an entire portfolio or specifically to investment fund mandates can also be important to ensure optimal investing. What Is an Index in Investing? An index is effectively a benchmark. It's a measurement of changes in a securities market based on statistics. An index fund is a pooled investment vehicle that tracks specific indexes. Many mutual funds and exchange-traded funds (ETFs) track and mimic the performance of indexes so they're considered to be safer than some other types of investments. What Is an Exchange-Traded Fund and Should I Invest in One? An ETF is a pooled investment vehicle that's funded by numerous investors who receive an interest in the fund that's typically proportionate to their contributions. The fund is usually managed by an SEC-registered advisor firm. Some ETFs, such as index funds, are passively managed and track markets. Others are more actively managed and they trade on a more consistent basis.Whether should you invest in an ETF and which type of fund would work best for you can depend on your appetite for risk, but ETFs are considered to be on the safe side of investments overall. What Does Volatility Mean in an Investment? Volatility is a measurement of how frequently and by how much the price of a given security shifts over a designated period. It has less of an effect on long-term investors because their goal is growth over a matter of years. It can create a bumpy, nerve-wracking road for short-term investors who want to buy in or out of the market at a specific, imminent time. The Bottom Line Benchmarks are tools that can be used in a variety of ways for investors. All managed funds will have an established benchmark by which you can measure the performance of the fund. Investors can also go beyond standard uses of benchmarking. Using indexes to allocate investments to passive funds with specific portfolio allocations can be one advanced use of benchmarking. Active investors may also choose to follow an array of benchmarks across the risk spectrum, analyzing these benchmarks along with risk characteristics to ensure that their investments are optimally placed with the lowest risk and highest return possible. Benchmark and risk metric monitoring also allow investors to potentially identify opportunities for shifting portfolio investments to take advantage of market opportunities. Considering different benchmarks simultaneously with their risk characteristics can be a simple technique for all types of investors. Using benchmarks can be very valuable in analyzing current and potential investments. It can also be an effective way to ensure that an investor’s portfolio is optimally diversified and aligned with their goals.

https://www.investopedia.com/terms/f/four-percent-rule.asp

What Is the 4% Rule for Withdrawals in Retirement: How Much Can You Spend?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-4-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is the 4% Rule? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The 4% rule for retirement budgeting suggests that a retiree withdraw 4% of the balance in their retirement accounts in the first year after retiring and then withdraw the same dollar amount, adjusted for inflation, every year thereafter. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The 4% rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years. Assuming a reasonable rate of return on investment, the withdrawals will consist primarily of interest and dividends. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Experts disagree on whether the 4% rule is the best option. Many, including the creator of the rule, say that 5% is a better rule for all but the worst-case scenario. Others caution that 3% is safer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after.</li><li>The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.</li><li>The rule was created using historical data on stock and bond returns over the 50 years from 1926 to 1976. Some experts suggest 3% is a safer withdrawal rate with current interest rates; others think 5% could be best.</li><li>Life expectancy plays an important role in determining a sustainable rate.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_10-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="The 4% Rule" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/1AJW94EUG2x-yURVBY-vcjwfpmI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/four-percent-rule-d7211cfc9d234935a4b0ece63f30b930.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/1AJW94EUG2x-yURVBY-vcjwfpmI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/four-percent-rule-d7211cfc9d234935a4b0ece63f30b930.jpg" data-srcset="https://www.investopedia.com/thmb/a47F9ZFyxdV3-XTrHMV-e9M93m4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/four-percent-rule-d7211cfc9d234935a4b0ece63f30b930.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="The 4% Rule" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/1AJW94EUG2x-yURVBY-vcjwfpmI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/four-percent-rule-d7211cfc9d234935a4b0ece63f30b930.jpg" srcset="https://www.investopedia.com/thmb/a47F9ZFyxdV3-XTrHMV-e9M93m4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/four-percent-rule-d7211cfc9d234935a4b0ece63f30b930.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Laura Porter</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-the-4-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Understanding the 4% Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The 4% Rule is a guideline used by some financial planners and retirees to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-long-will-my-401k-last-in-retirement-8621297">estimate a comfortable but safe income</a> for retirement. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> An individual's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeexpectancy.asp">life expectancy</a> plays an important role in determining if the rate will be sustainable. Retirees who live longer need their portfolios to last longer, and their medical costs and other expenses can increase with age. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-subheading__text"> History of the 4% Rule </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The concept of the 4% Rule is attributed to Bill Bengen, a financial adviser in Southern California who created it in the mid-1990s, and has since complained that it has been over-simplified by many of its adherents. He said that the 4% rule was based on a "worst-case" scenario and that 5% would be a more realistic number.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976, focusing heavily on the severe market downturns of the 1930s and early 1970s. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Bengen concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in fewer than 33 years.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <span class="heading-toc" id="toc-accounting-for-inflation"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> Accounting for Inflation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> While some retirees who adhere to the 4% rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a>. Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservesystem.asp">Federal Reserve's</a> target inflation rate, or adjusting withdrawals based on actual inflation rates. The former method provides steady and predictable increases, while the latter method more effectively matches income to cost-of-living changes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_26-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_27-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>While the 4% Rule recommends maintaining a balanced portfolio of 50% common stocks and 50% intermediate-term Treasurys bonds, some financial experts advise maintaining a different allocation, including reducing exposure to stocks in retirement in favor of a mix of cash, bonds, and stocks.</p></div></div></div> <span class="heading-toc" id="toc-advantages-and-disadvantages-of-the-4-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> Advantages and Disadvantages of the 4% Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> While following the 4% rule can make it more likely that your retirement savings will last the remainder of your life, it doesn’t guarantee it. The rule is based on the past performance of the markets, so it doesn't necessarily predict the future. What was considered a safe investment strategy in the past may not be a safe investment strategy in the future if market conditions change. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> There are several scenarios in which the 4% rule might not work for a retiree. A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Furthermore, the 4% Rule does not work unless a retiree remains loyal to it year in and year out. Violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the compound interest that the retiree depends on for sustainability. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> However, there are obvious benefits to the 4% Rule. It is simple to follow and provides for a predictable, steady income. And, if it is successful, the 4% Rule will protect you from running short of funds in retirement. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_38-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>It's simple to follow</p></li> <li><p>Provides predictable, steady income</p></li> <li><p>Protects you from running out of money in retirement</p></li> </ul> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>Requires strict adherence (doesn't respond to lifestyle changes)</p></li> <li><p>Is based on a 'worst-case' scenario of portfolio performance</p></li> <li><p>5%, not 4%, may be a more realistic number</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-the-4-rule-and-economic-crises"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> The 4% Rule and Economic Crises </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Actually, the 4% Rule may be a little on the conservative side. According to Michael Kitces, a financial planner, it was developed to take into account the worst economic situations, such as 1929, and has held up well for those who retired during the two most recent financial crises. Kitces points out: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The 2000 retiree is merely "in line" with the 1929 retiree, and doing better than the rest. And the 2008 retiree—even having started with the global financial crisis out of the gate—is <em>already </em>doing far better than <em>any </em>of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% Rule. </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> This is, of course, not a reason to go beyond it. Safety is a key element for retirees, even if following it may leave those who retire in calmer economic times "with a huge amount of money left over," Kitces notes, adding that "in general, a 4% withdrawal rate is really quite modest relative to the long-term historical average return of almost 8% on a balanced (60/40) portfolio!"<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Meantime, some experts—pointing to the recent low interest rates on bonds and savings—suggest that 3% might be a<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/safe-withdrawal-rate-swr-method.asp"> safer withdrawal rate</a>. The best strategy is to review your situation with a financial planner, starting with how much you have saved, what your current investments are, and when you plan to retire. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_49-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_50-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Read about Investopedia's <a data-component="amazon" data-ordinal="1" data-source="affiliate" data-type="externalLink" href="https://www.amazon.com/Investopedia-10-Rules-Investing/dp/B0CP7T6TQM/" rel="sponsored nofollow">10 Rules of Investing</a> by picking up a copy of our special issue print edition.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-does-the-4-rule-still-work"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the 4% Rule Still Work?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The 4% rule was created to meet the financial needs of a retiree even during a worst-case economic scenario such as a prolonged market downturn. Many financial advisers say that 5% allows for a more comfortable lifestyle while adding only a little more risk. Supporters of a more cautious approach pick 3% as a safer number.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_53-0"><span class="heading-toc" id="toc-how-long-will-my-money-last-using-the-4-rule"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Will My Money Last Using the 4% Rule?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The 4% Rule is intended to make your retirement savings last for 30 years or more. This rate of withdrawals means that most of the money used will be the interest and gains on investments, not principal, assuming a reasonably healthy market return.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_55-0"><span class="heading-toc" id="toc-does-the-4-rule-work-for-early-retirement"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the 4% Rule Work for Early Retirement?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The 4% Rule is focused on preparing for retirement at age 65. If you're hoping to retire early or expect to keep working past age 65, your long-term financial needs <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/063014/6-signs-youre-ready-retire-early.asp">will be different</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_57-0"><span class="heading-toc" id="toc-what-is-a-4-rule-calculator"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a 4% Rule Calculator?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can use any online retirement withdrawal calculator, using the 4% rule as the amount you intend to withdraw annually. One example can be found at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.mycalculators.com/ca/retcalc2m.html" rel="nofollow">MyCalculators</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> For most people, managing retirement savings is a balancing act. If they withdraw too much too fast, they'll risk running out of money. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp#toc-when-to-start-spending">Not withdrawing enough money</a> can deny them the full benefit of their hard-earned savings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> For those who want a rule of thumb to follow, the 4% Rule is an easy-to-use choice. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> <em>Correction</em>—<em>Jan. 20, 2022: </em> An earlier version of this article misstated the type of bonds that might be included in a balanced portfolio of stocks and bonds. They are intermediate-term Treasury bonds, not immediate-term Treasury bonds. </p></div>

## What Is the 4% Rule? The 4% rule for retirement budgeting suggests that a retiree withdraw 4% of the balance in their retirement accounts in the first year after retiring and then withdraw the same dollar amount, adjusted for inflation, every year thereafter. The 4% rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years. Assuming a reasonable rate of return on investment, the withdrawals will consist primarily of interest and dividends. Experts disagree on whether the 4% rule is the best option. Many, including the creator of the rule, say that 5% is a better rule for all but the worst-case scenario. Others caution that 3% is safer. ### Key Takeaways * The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. * The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs. * The rule was created using historical data on stock and bond returns over the 50 years from 1926 to 1976. Some experts suggest 3% is a safer withdrawal rate with current interest rates; others think 5% could be best. * Life expectancy plays an important role in determining a sustainable rate. ![The 4% Rule]() :max_bytes(150000):strip_icc()/four-percent-rule-d7211cfc9d234935a4b0ece63f30b930.jpg) Investopedia / Laura Porter ## Understanding the 4% Rule The 4% Rule is a guideline used by some financial planners and retirees to [estimate a comfortable but safe income](https://www.investopedia.com/how-long-will-my-401k-last-in-retirement-8621297) for retirement. An individual's [life expectancy](https://www.investopedia.com/terms/l/lifeexpectancy.asp) plays an important role in determining if the rate will be sustainable. Retirees who live longer need their portfolios to last longer, and their medical costs and other expenses can increase with age. ### History of the 4% Rule The concept of the 4% Rule is attributed to Bill Bengen, a financial adviser in Southern California who created it in the mid-1990s, and has since complained that it has been over-simplified by many of its adherents. He said that the 4% rule was based on a "worst-case" scenario and that 5% would be a more realistic number. The rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976, focusing heavily on the severe market downturns of the 1930s and early 1970s. Bengen concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in fewer than 33 years. ## Accounting for Inflation While some retirees who adhere to the 4% rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with [inflation](https://www.investopedia.com/terms/i/inflation.asp). Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservesystem.asp) target inflation rate, or adjusting withdrawals based on actual inflation rates. The former method provides steady and predictable increases, while the latter method more effectively matches income to cost-of-living changes. ### While the 4% Rule recommends maintaining a balanced portfolio of 50% common stocks and 50% intermediate-term Treasurys bonds, some financial experts advise maintaining a different allocation, including reducing exposure to stocks in retirement in favor of a mix of cash, bonds, and stocks. ## Advantages and Disadvantages of the 4% Rule While following the 4% rule can make it more likely that your retirement savings will last the remainder of your life, it doesn’t guarantee it. The rule is based on the past performance of the markets, so it doesn't necessarily predict the future. What was considered a safe investment strategy in the past may not be a safe investment strategy in the future if market conditions change. There are several scenarios in which the 4% rule might not work for a retiree. A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio. Furthermore, the 4% Rule does not work unless a retiree remains loyal to it year in and year out. Violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the compound interest that the retiree depends on for sustainability. However, there are obvious benefits to the 4% Rule. It is simple to follow and provides for a predictable, steady income. And, if it is successful, the 4% Rule will protect you from running short of funds in retirement. Pros * It's simple to follow * Provides predictable, steady income * Protects you from running out of money in retirement Cons * Requires strict adherence (doesn't respond to lifestyle changes) * Is based on a 'worst-case' scenario of portfolio performance * 5%, not 4%, may be a more realistic number ## The 4% Rule and Economic Crises Actually, the 4% Rule may be a little on the conservative side. According to Michael Kitces, a financial planner, it was developed to take into account the worst economic situations, such as 1929, and has held up well for those who retired during the two most recent financial crises. Kitces points out: > The 2000 retiree is merely "in line" with the 1929 retiree, and doing better than the rest. And the 2008 retiree—even having started with the global financial crisis out of the gate—is *already*doing far better than *any*of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% Rule. This is, of course, not a reason to go beyond it. Safety is a key element for retirees, even if following it may leave those who retire in calmer economic times "with a huge amount of money left over," Kitces notes, adding that "in general, a 4% withdrawal rate is really quite modest relative to the long-term historical average return of almost 8% on a balanced (60/40) portfolio!" Meantime, some experts—pointing to the recent low interest rates on bonds and savings—suggest that 3% might be a [safer withdrawal rate](https://www.investopedia.com/terms/s/safe-withdrawal-rate-swr-method.asp). The best strategy is to review your situation with a financial planner, starting with how much you have saved, what your current investments are, and when you plan to retire. ### Read about Investopedia's [10 Rules of Investing](https://www.amazon.com/Investopedia-10-Rules-Investing/dp/B0CP7T6TQM/) by picking up a copy of our special issue print edition. ## Does the 4% Rule Still Work? The 4% rule was created to meet the financial needs of a retiree even during a worst-case economic scenario such as a prolonged market downturn. Many financial advisers say that 5% allows for a more comfortable lifestyle while adding only a little more risk. Supporters of a more cautious approach pick 3% as a safer number. ## How Long Will My Money Last Using the 4% Rule? The 4% Rule is intended to make your retirement savings last for 30 years or more. This rate of withdrawals means that most of the money used will be the interest and gains on investments, not principal, assuming a reasonably healthy market return. ## Does the 4% Rule Work for Early Retirement? The 4% Rule is focused on preparing for retirement at age 65. If you're hoping to retire early or expect to keep working past age 65, your long-term financial needs [will be different](https://www.investopedia.com/articles/personal-finance/063014/6-signs-youre-ready-retire-early.asp). ## What Is a 4% Rule Calculator? You can use any online retirement withdrawal calculator, using the 4% rule as the amount you intend to withdraw annually. One example can be found at [MyCalculators](https://www.mycalculators.com/ca/retcalc2m.html). ## The Bottom Line For most people, managing retirement savings is a balancing act. If they withdraw too much too fast, they'll risk running out of money. [Not withdrawing enough money](https://www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp#toc-when-to-start-spending) can deny them the full benefit of their hard-earned savings. For those who want a rule of thumb to follow, the 4% Rule is an easy-to-use choice. *Correction*—*Jan. 20, 2022:* An earlier version of this article misstated the type of bonds that might be included in a balanced portfolio of stocks and bonds. They are intermediate-term Treasury bonds, not immediate-term Treasury bonds.

What Is the 4% Rule? The 4% rule for retirement budgeting suggests that a retiree withdraw 4% of the balance in their retirement accounts in the first year after retiring and then withdraw the same dollar amount, adjusted for inflation, every year thereafter. The 4% rule is intended to supply a steady stream of income while maintaining an adequate account balance for future years. Assuming a reasonable rate of return on investment, the withdrawals will consist primarily of interest and dividends. Experts disagree on whether the 4% rule is the best option. Many, including the creator of the rule, say that 5% is a better rule for all but the worst-case scenario. Others caution that 3% is safer. Key Takeaways The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after.The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.The rule was created using historical data on stock and bond returns over the 50 years from 1926 to 1976. Some experts suggest 3% is a safer withdrawal rate with current interest rates; others think 5% could be best.Life expectancy plays an important role in determining a sustainable rate. Investopedia / Laura Porter Understanding the 4% Rule The 4% Rule is a guideline used by some financial planners and retirees to estimate a comfortable but safe income for retirement. An individual's life expectancy plays an important role in determining if the rate will be sustainable. Retirees who live longer need their portfolios to last longer, and their medical costs and other expenses can increase with age. History of the 4% Rule The concept of the 4% Rule is attributed to Bill Bengen, a financial adviser in Southern California who created it in the mid-1990s, and has since complained that it has been over-simplified by many of its adherents. He said that the 4% rule was based on a "worst-case" scenario and that 5% would be a more realistic number. The rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976, focusing heavily on the severe market downturns of the 1930s and early 1970s. Bengen concluded that, even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in fewer than 33 years. Accounting for Inflation While some retirees who adhere to the 4% rule keep their withdrawal rate constant, the rule allows retirees to increase the rate to keep pace with inflation. Possible ways to adjust for inflation include setting a flat annual increase of 2% per year, which is the Federal Reserve's target inflation rate, or adjusting withdrawals based on actual inflation rates. The former method provides steady and predictable increases, while the latter method more effectively matches income to cost-of-living changes. While the 4% Rule recommends maintaining a balanced portfolio of 50% common stocks and 50% intermediate-term Treasurys bonds, some financial experts advise maintaining a different allocation, including reducing exposure to stocks in retirement in favor of a mix of cash, bonds, and stocks. Advantages and Disadvantages of the 4% Rule While following the 4% rule can make it more likely that your retirement savings will last the remainder of your life, it doesn’t guarantee it. The rule is based on the past performance of the markets, so it doesn't necessarily predict the future. What was considered a safe investment strategy in the past may not be a safe investment strategy in the future if market conditions change. There are several scenarios in which the 4% rule might not work for a retiree. A severe or protracted market downturn can erode the value of a high-risk investment vehicle much faster than it can a typical retirement portfolio. Furthermore, the 4% Rule does not work unless a retiree remains loyal to it year in and year out. Violating the rule one year to splurge on a major purchase can have severe consequences down the road, as this reduces the principal, which directly impacts the compound interest that the retiree depends on for sustainability. However, there are obvious benefits to the 4% Rule. It is simple to follow and provides for a predictable, steady income. And, if it is successful, the 4% Rule will protect you from running short of funds in retirement. Pros It's simple to follow Provides predictable, steady income Protects you from running out of money in retirement Cons Requires strict adherence (doesn't respond to lifestyle changes) Is based on a 'worst-case' scenario of portfolio performance 5%, not 4%, may be a more realistic number The 4% Rule and Economic Crises Actually, the 4% Rule may be a little on the conservative side. According to Michael Kitces, a financial planner, it was developed to take into account the worst economic situations, such as 1929, and has held up well for those who retired during the two most recent financial crises. Kitces points out: The 2000 retiree is merely "in line" with the 1929 retiree, and doing better than the rest. And the 2008 retiree—even having started with the global financial crisis out of the gate—is already doing far better than any of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% Rule. This is, of course, not a reason to go beyond it. Safety is a key element for retirees, even if following it may leave those who retire in calmer economic times "with a huge amount of money left over," Kitces notes, adding that "in general, a 4% withdrawal rate is really quite modest relative to the long-term historical average return of almost 8% on a balanced (60/40) portfolio!" Meantime, some experts—pointing to the recent low interest rates on bonds and savings—suggest that 3% might be a safer withdrawal rate. The best strategy is to review your situation with a financial planner, starting with how much you have saved, what your current investments are, and when you plan to retire. Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition. Does the 4% Rule Still Work? The 4% rule was created to meet the financial needs of a retiree even during a worst-case economic scenario such as a prolonged market downturn. Many financial advisers say that 5% allows for a more comfortable lifestyle while adding only a little more risk. Supporters of a more cautious approach pick 3% as a safer number. How Long Will My Money Last Using the 4% Rule? The 4% Rule is intended to make your retirement savings last for 30 years or more. This rate of withdrawals means that most of the money used will be the interest and gains on investments, not principal, assuming a reasonably healthy market return. Does the 4% Rule Work for Early Retirement? The 4% Rule is focused on preparing for retirement at age 65. If you're hoping to retire early or expect to keep working past age 65, your long-term financial needs will be different. What Is a 4% Rule Calculator? You can use any online retirement withdrawal calculator, using the 4% rule as the amount you intend to withdraw annually. One example can be found at MyCalculators. The Bottom Line For most people, managing retirement savings is a balancing act. If they withdraw too much too fast, they'll risk running out of money. Not withdrawing enough money can deny them the full benefit of their hard-earned savings. For those who want a rule of thumb to follow, the 4% Rule is an easy-to-use choice. Correction—Jan. 20, 2022: An earlier version of this article misstated the type of bonds that might be included in a balanced portfolio of stocks and bonds. They are intermediate-term Treasury bonds, not immediate-term Treasury bonds.

https://www.investopedia.com/terms/i/itraxx-levx-indexes.asp

The iTraxx LevX Indexes

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-the-itraxx-levx-indexes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are the iTraxx LevX Indexes? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The iTraxx LevX are a pair of two tradable indexes that hold credit default swaps (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditdefaultswap.asp" rel="noopener noreferrer">CDSs</a>) representing a diversified basket of the 40 (formerly 35) most liquid European companies that have tradable debt offerings in the secondary market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The LevX indices track what are known as leveraged loan credit default swaps (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan-credit-default-swap.asp" rel="noopener noreferrer">LCDS</a>). A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leveragedloan.asp" rel="noopener noreferrer">leveraged loan</a><strong> </strong>is a type of loan that is extended to companies that already have considerable amounts of debt or poor credit history. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The iTraxx LevX are a pair of tradable LCDS indices that track a basket of CDS issued by European firms.</li><li>One LevX index contains senior debts while the other only tracks subordinated debts.</li><li>An LCDS is a leveraged loan credit default swap, which uses a particular loan's default probabilities as its underlying.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-itraxx-levx-indexes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding the iTraxx LevX Indexes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/itraxx.asp" rel="noopener noreferrer">iTraxx</a> is a group of international credit derivative indices that investors can use to gain or hedge exposure to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_market.asp" rel="noopener noreferrer">credit markets</a> underlying the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditderivative.asp" rel="noopener noreferrer">credit derivatives</a>. The credit derivatives market that iTraxx provides allows parties to transfer the risk and return of underlying assets from one party to another without actually transferring the assets. The iTraxx indices cover credit derivatives markets in Europe, Japan, non-Japan Asia and Australia. The iTraxx indices are also commonly referred to as Markit iTraxx indices. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The iTraxx LevX track liquid loan credit default swaps (LCDSs), with each of the two indices trading on a 5-year maturity that are rolled semi-annually in March and September. The iTraxx LevX Senior Index represents only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seniordebt.asp" rel="noopener noreferrer">senior</a> loans, while the iTraxx LevX Subordinated Index represents <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subordinateddebt.asp" rel="noopener noreferrer">subordinated</a> debt including second- and third-lien loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> A loan credit default swap is a type of credit derivative in which the credit exposure of an underlying loan is exchanged between two parties. A loan credit default swap's structure has the same as a regular credit default swap, except that the underlying reference obligation is limited strictly to syndicated secured loans, rather than any corporate debt. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Loan credit default swaps are also referred to as "loan-only credit default swaps." The LecX indices, in particular, look at leveraged loans in their portfolios. Lenders consider leveraged loans to carry a higher risk of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp" rel="noopener noreferrer">default</a>, and as a result, a leveraged loan is more costly to the borrower. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-how-the-itraxx-levx-indices-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> How the iTraxx LevX Indices Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The index pair offers two pricing sets each day: a mid-day price and end-of-day price. Prices are maintained by a consortium of investment banks, including Morgan Stanley, Barclays Capital, and UBS. Both indexes begin with an initial coupon rate, then trade up or down to reflect market activity. New LevX indexes are released periodically to reflect new debt offerings or new company participation in the leveraged loan markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The iTraxx LevX indexes have been available for trading since late 2006, and while trade volume is still relatively low, the average dollar amount traded is growing. The contracts are mainly used by speculators and large commercial banks as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp" rel="noopener noreferrer">hedge</a> against on balance sheet assets or other portfolios. Demand for indexes like the iTraxx group increased greatly with the spike in leveraged buyouts in the 2004-2007 period, as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leveragedbuyout.asp" rel="noopener noreferrer">LBOs</a> typically create a large amount of low-rated corporate debt. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> If the market perceives that overall credit quality is falling, the price of the iTraxx indexes will also fall, and thus pay a higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon-rate.asp" rel="noopener noreferrer">coupon rate</a>. Because most of the debt covered is leverage loans (lower credit ratings), the index may prove to be more volatile than a hypothetical LCDS based index that covers investment-grade debt offerings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The following are licensed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp" rel="noopener noreferrer">market makers</a> for the iTraxx LevX index: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_26-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 20px;"></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 20px;"></colgroup> <colgroup span="1" style="width: 20px;"></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td> </td> <td>ABN </td> <td> </td> <td> </td> <td>Bank of America </td> </tr> <tr> <td> </td> <td>Barclays Capital </td> <td> </td> <td> </td> <td>BNP Paribas </td> </tr> <tr> <td> </td> <td>Calyon </td> <td> </td> <td> </td> <td>Citigroup </td> </tr> <tr> <td> </td> <td>Commerzbank </td> <td> </td> <td> </td> <td>Credit Suisse </td> </tr> <tr> <td> </td> <td>Deutsche Bank </td> <td> </td> <td> </td> <td>Goldman Sachs </td> </tr> <tr> <td> </td> <td>HSBC </td> <td> </td> <td> </td> <td>JP Morgan </td> </tr> <tr> <td> </td> <td>Merrill Lynch </td> <td> </td> <td> </td> <td>Morgan Stanley </td> </tr> <tr> <td> </td> <td>Royal Bank of Scotland </td> <td> </td> <td> </td> <td>UBS </td> </tr> </tbody> </table> </div></figure></div>

## What Are the iTraxx LevX Indexes? The iTraxx LevX are a pair of two tradable indexes that hold credit default swaps ([CDSs](https://www.investopedia.com/terms/c/creditdefaultswap.asp)) representing a diversified basket of the 40 (formerly 35) most liquid European companies that have tradable debt offerings in the secondary market. The LevX indices track what are known as leveraged loan credit default swaps ([LCDS](https://www.investopedia.com/terms/l/loan-credit-default-swap.asp)). A [leveraged loan](https://www.investopedia.com/terms/l/leveragedloan.asp)is a type of loan that is extended to companies that already have considerable amounts of debt or poor credit history. ### Key Takeaways * The iTraxx LevX are a pair of tradable LCDS indices that track a basket of CDS issued by European firms. * One LevX index contains senior debts while the other only tracks subordinated debts. * An LCDS is a leveraged loan credit default swap, which uses a particular loan's default probabilities as its underlying. ## Understanding the iTraxx LevX Indexes The [iTraxx](https://www.investopedia.com/terms/i/itraxx.asp) is a group of international credit derivative indices that investors can use to gain or hedge exposure to the [credit markets](https://www.investopedia.com/terms/c/credit_market.asp) underlying the [credit derivatives](https://www.investopedia.com/terms/c/creditderivative.asp). The credit derivatives market that iTraxx provides allows parties to transfer the risk and return of underlying assets from one party to another without actually transferring the assets. The iTraxx indices cover credit derivatives markets in Europe, Japan, non-Japan Asia and Australia. The iTraxx indices are also commonly referred to as Markit iTraxx indices. The iTraxx LevX track liquid loan credit default swaps (LCDSs), with each of the two indices trading on a 5-year maturity that are rolled semi-annually in March and September. The iTraxx LevX Senior Index represents only [senior](https://www.investopedia.com/terms/s/seniordebt.asp) loans, while the iTraxx LevX Subordinated Index represents [subordinated](https://www.investopedia.com/terms/s/subordinateddebt.asp) debt including second- and third-lien loans. A loan credit default swap is a type of credit derivative in which the credit exposure of an underlying loan is exchanged between two parties. A loan credit default swap's structure has the same as a regular credit default swap, except that the underlying reference obligation is limited strictly to syndicated secured loans, rather than any corporate debt. Loan credit default swaps are also referred to as "loan-only credit default swaps." The LecX indices, in particular, look at leveraged loans in their portfolios. Lenders consider leveraged loans to carry a higher risk of [default](https://www.investopedia.com/terms/d/default2.asp), and as a result, a leveraged loan is more costly to the borrower. ## How the iTraxx LevX Indices Work The index pair offers two pricing sets each day: a mid-day price and end-of-day price. Prices are maintained by a consortium of investment banks, including Morgan Stanley, Barclays Capital, and UBS. Both indexes begin with an initial coupon rate, then trade up or down to reflect market activity. New LevX indexes are released periodically to reflect new debt offerings or new company participation in the leveraged loan markets. The iTraxx LevX indexes have been available for trading since late 2006, and while trade volume is still relatively low, the average dollar amount traded is growing. The contracts are mainly used by speculators and large commercial banks as a [hedge](https://www.investopedia.com/terms/h/hedge.asp) against on balance sheet assets or other portfolios. Demand for indexes like the iTraxx group increased greatly with the spike in leveraged buyouts in the 2004-2007 period, as [LBOs](https://www.investopedia.com/terms/l/leveragedbuyout.asp) typically create a large amount of low-rated corporate debt. If the market perceives that overall credit quality is falling, the price of the iTraxx indexes will also fall, and thus pay a higher [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp). Because most of the debt covered is leverage loans (lower credit ratings), the index may prove to be more volatile than a hypothetical LCDS based index that covers investment-grade debt offerings. The following are licensed [market makers](https://www.investopedia.com/terms/m/marketmaker.asp) for the iTraxx LevX index: | | ABN | | | Bank of America | | --- | --- | --- | --- | --- | | | Barclays Capital | | | BNP Paribas | | | Calyon | | | Citigroup | | | Commerzbank | | | Credit Suisse | | | Deutsche Bank | | | Goldman Sachs | | | HSBC | | | JP Morgan | | | Merrill Lynch | | | Morgan Stanley | | | Royal Bank of Scotland | | | UBS |

What Are the iTraxx LevX Indexes? The iTraxx LevX are a pair of two tradable indexes that hold credit default swaps (CDSs) representing a diversified basket of the 40 (formerly 35) most liquid European companies that have tradable debt offerings in the secondary market. The LevX indices track what are known as leveraged loan credit default swaps (LCDS). A leveraged loan is a type of loan that is extended to companies that already have considerable amounts of debt or poor credit history. Key Takeaways The iTraxx LevX are a pair of tradable LCDS indices that track a basket of CDS issued by European firms.One LevX index contains senior debts while the other only tracks subordinated debts.An LCDS is a leveraged loan credit default swap, which uses a particular loan's default probabilities as its underlying. Understanding the iTraxx LevX Indexes The iTraxx is a group of international credit derivative indices that investors can use to gain or hedge exposure to the credit markets underlying the credit derivatives. The credit derivatives market that iTraxx provides allows parties to transfer the risk and return of underlying assets from one party to another without actually transferring the assets. The iTraxx indices cover credit derivatives markets in Europe, Japan, non-Japan Asia and Australia. The iTraxx indices are also commonly referred to as Markit iTraxx indices. The iTraxx LevX track liquid loan credit default swaps (LCDSs), with each of the two indices trading on a 5-year maturity that are rolled semi-annually in March and September. The iTraxx LevX Senior Index represents only senior loans, while the iTraxx LevX Subordinated Index represents subordinated debt including second- and third-lien loans. A loan credit default swap is a type of credit derivative in which the credit exposure of an underlying loan is exchanged between two parties. A loan credit default swap's structure has the same as a regular credit default swap, except that the underlying reference obligation is limited strictly to syndicated secured loans, rather than any corporate debt. Loan credit default swaps are also referred to as "loan-only credit default swaps." The LecX indices, in particular, look at leveraged loans in their portfolios. Lenders consider leveraged loans to carry a higher risk of default, and as a result, a leveraged loan is more costly to the borrower. How the iTraxx LevX Indices Work The index pair offers two pricing sets each day: a mid-day price and end-of-day price. Prices are maintained by a consortium of investment banks, including Morgan Stanley, Barclays Capital, and UBS. Both indexes begin with an initial coupon rate, then trade up or down to reflect market activity. New LevX indexes are released periodically to reflect new debt offerings or new company participation in the leveraged loan markets. The iTraxx LevX indexes have been available for trading since late 2006, and while trade volume is still relatively low, the average dollar amount traded is growing. The contracts are mainly used by speculators and large commercial banks as a hedge against on balance sheet assets or other portfolios. Demand for indexes like the iTraxx group increased greatly with the spike in leveraged buyouts in the 2004-2007 period, as LBOs typically create a large amount of low-rated corporate debt. If the market perceives that overall credit quality is falling, the price of the iTraxx indexes will also fall, and thus pay a higher coupon rate. Because most of the debt covered is leverage loans (lower credit ratings), the index may prove to be more volatile than a hypothetical LCDS based index that covers investment-grade debt offerings. The following are licensed market makers for the iTraxx LevX index:   ABN      Bank of America    Barclays Capital      BNP Paribas    Calyon      Citigroup    Commerzbank      Credit Suisse    Deutsche Bank      Goldman Sachs    HSBC      JP Morgan    Merrill Lynch      Morgan Stanley    Royal Bank of Scotland      UBS 

https://www.investopedia.com/why-spot-ether-etfs-could-face-a-difficult-path-to-approval-8609104

Why Spot Ether ETFs Could Face a Difficult Path to Approval

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Applications for spot ether ETFs are before the Securities and Exchange Commission, but some experts aren't optimistic that an approval will be forthcoming.</li><li>Staking, a practice of putting up ether tokens as collateral to support operation of the Ethereum blockchain in exchange for rewards, may be the SEC's biggest concern.</li><li>Another point of difference could arise out of the classification of ether as a security, as opposed to bitcoin, which is considered a commodity.<br/></li><li>The success of spot bitcoin ETFs may have driven optimism for an approval for ether ETFs, but the two products are very different.<br/></li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-regulations-for-financial-advisors-8402046">Securities and Exchange Commission (SEC)</a> is considering applications for spot <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> for ether (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD">ETHUSD</a>), the native token of the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum blockchain</a> and the second largest cryptocurrency by market capitalization. But experts are increasingly skeptical that approval will come any time soon.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The agency's approval of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/where-to-buy-the-new-spot-bitcoin-etfs-8557203#:~:text=A%20spot%20bitcoin%20ETF%20invests,the%20company%20offering%20the%20ETFs.">spot-bitcoin</a> (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=btcusd">BTCUSD</a>) ETFs earlier this year turbocharged the demand for the cryptocurrency, propelling its price to multiple records, but an encore with ether appears less likely due to a number of factors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The SEC has already delayed decisions on approvals for ether ETFs by Fidelity, BlackRock (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK">BLK</a>) and Grayscale, questioning whether the proposals are supported by the same arguments that led to the approval of the bitcoin funds, and over security concerns.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> "My cautiously optimistic attitude for ETH ETFs has changed from recent months. We now believe these will ultimately be denied May 23rd for this round. The SEC hasn't engaged with issuers on Ethereum specifics. Exact opposite of #Bitcoin ETFs this fall," Bloomberg Intelligence's James Seyffart wrote in an X post last week.<span class="ql-inline-citation" data-cite="17"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-staking-may-be-biggest-concern-around-ether-etf"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Staking May Be Biggest Concern Around Ether ETF </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Industry watchers are skeptical that approvals will come in May, as scheduled, for a variety of reasons. Primary among them is the fact that ether is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proof-stake-pos.asp">staked</a>—a process in which cryptocurrency holders lock up their funds as collateral to support the operations of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a> network in exchange for rewards in the form of additional cryptocurrency. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> On March 18, Fidelity added an amendment to its proposal to allow traders to stake some of the assets held, and a day later Grayscale amended its application to add staking as well.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="11"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Last year, the SEC cracked down on staking, fining cryptocurrency exchange <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/kraken-to-pay-30-million-shut-down-staking-business-in-sec-settlement-7107971">Kraken $30 million</a> and forcing the company to shut down its staking-as-a-service business for not following securities law. It also <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669">sued Coinbase</a> (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN">COIN</a>) for its staking offering. That litigation is still in process. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> “When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection,” the SEC said at the time of the Kraken fine.<span class="ql-inline-citation" data-cite="16"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> That could be interesting in the context of an Ether ETF, where investors do not actually hold the tokens. Instead, they get shares in a fund that has pooled their resources to invest in a portfolio comprising the underlying token. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> In a note dated March 12, crypto researcher Noelle Acheson pointed out the uniqueness of staking ether could lead to denial because there's "regulatory fog" surrounding the activity.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-sec-chair-has-consistently-criticized-crypto"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> SEC Chair Has Consistently Criticized Crypto </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-8358373">Spot bitcoin</a> ETFs were approved by the SEC in January after several failed attempts. The regulator had previously denied filings until last year when a U.S. Court of Appeals for the District of Columbia said the SEC failed to adequately explain its reasoning for the rejections, specifically in the case of the conversion of the Grayscale Bitcoin Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC">GBTC</a>) into an ETF. That court ruling led the commission to approve the listing and trading of the spot bitcoin ETF shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Jake Chervinsky, chief legal officer at Variant, an early-stage crypto fund, wrote in post on X March 11  that the commission could come up with new grounds for denial that weren’t tested by Grayscale in court, which would likely also be subject to a court challenge. The SEC is more than willing to take litigation risk and lose in court based on a preference for being viewed as “fighters” in a war against crypto rather than being accused of rolling over, Chervinsky wrote.<span class="ql-inline-citation" data-cite="7"></span><br/><br/>Earlier this month, SEC Chair Gary Gensler declined to say in an interview with <em>Yahoo Finance</em> whether he would approve the Ether ETF applications.<span class="ql-inline-citation" data-cite="9"></span> He continued to criticize cryptocurrency saying it "has challenges" and is "rife with abuses and fraud," <em>Yahoo Finance</em> reported.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-differences-between-ether-and-bitcoin"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> Differences Between Ether and Bitcoin </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Acheson said that there's a conceptual problem for Ether that didn't apply to bitcoin. "This statement may irritate many, but ETH was created to be used, not held," Acheson said. <br/><br/>ETH can be a store of value among <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/031416/bitcoin-vs-ethereum-driven-different-purposes.asp">other functions</a>, but that’s not where its main advantage lies, she said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> "It is the field for the largest distributed computing platform in the world, and powers a range of decentralized applications," Acheson said, while bitcoin in her opinion is a product to be held. "Basically, for BTC a spot ETF makes sense. For ETH, less so," she said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Another point of difference could arise out of the classification of ether as a security, as opposed to bitcoin, which is considered a commodity. <em>Bloomberg </em>reported on Mar. 20 that the SEC is investigating Ethereum Foundation, in what could lead to classification of ether as a security.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> If the SEC is able to classify ether as a security, it would have far reaching consequences not just for the token, but the cryptocurrency markets as a whole. Ether would have to abide by securities laws and the SEC would have more power to regulate the cryptocurrency and how its traded. It could also open doors for other crypto tokens to be classified as securities, leading to greater regulatory scrutiny.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <span class="heading-toc" id="toc-insiders-see-no-reason-for-sec-to-deny-ether-etf"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-heading__text"> Insiders See No Reason for SEC to Deny Ether ETF </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Coinbase's chief legal officer Paul Grewal said in a post on X last week that some regulators in the past have clarified ether's status as commodity while the SEC itself has doubted whether the token could be identified as a security. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> "The SEC has no good reason to deny the ETH ETP applications. And we hope they won’t try to invent one by questioning the long established regulatory status of ETH, which the SEC has repeatedly endorsed," Grewal wrote.<span class="ql-inline-citation" data-cite="15"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> On Monday, Graycale's chief legal officer Craig Salm sounded an optimistic tone in posts on X, saying that the issues that were resolved in the run-up to the approval of the spot bitcoin ETFs were the same as those the SEC must weigh now.<span class="ql-inline-citation" data-cite="18"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> "The only difference is rather than the ETF holding bitcoin, it holds ether," Salm said. "So in many ways, the SEC already has engaged and issuers simply have less to engage on this time." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> "Perhaps I will feel differently as we get closer to final approve/deny dates in late May 2024, but at this point, I don't think perceived lack of engagement from regulators should be indicative of one outcome or another," Salm said. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * Applications for spot ether ETFs are before the Securities and Exchange Commission, but some experts aren't optimistic that an approval will be forthcoming. * Staking, a practice of putting up ether tokens as collateral to support operation of the Ethereum blockchain in exchange for rewards, may be the SEC's biggest concern. * Another point of difference could arise out of the classification of ether as a security, as opposed to bitcoin, which is considered a commodity. * The success of spot bitcoin ETFs may have driven optimism for an approval for ether ETFs, but the two products are very different. The [Securities and Exchange Commission (SEC)](https://www.investopedia.com/crypto-regulations-for-financial-advisors-8402046) is considering applications for spot [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) for ether ([ETHUSD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD)), the native token of the [Ethereum blockchain](https://www.investopedia.com/terms/e/ethereum.asp) and the second largest cryptocurrency by market capitalization. But experts are increasingly skeptical that approval will come any time soon.  The agency's approval of [spot-bitcoin](https://www.investopedia.com/where-to-buy-the-new-spot-bitcoin-etfs-8557203#:~:text=A%20spot%20bitcoin%20ETF%20invests,the%20company%20offering%20the%20ETFs.) ([BTCUSD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=btcusd)) ETFs earlier this year turbocharged the demand for the cryptocurrency, propelling its price to multiple records, but an encore with ether appears less likely due to a number of factors. The SEC has already delayed decisions on approvals for ether ETFs by Fidelity, BlackRock ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK)) and Grayscale, questioning whether the proposals are supported by the same arguments that led to the approval of the bitcoin funds, and over security concerns.  "My cautiously optimistic attitude for ETH ETFs has changed from recent months. We now believe these will ultimately be denied May 23rd for this round. The SEC hasn't engaged with issuers on Ethereum specifics. Exact opposite of #Bitcoin ETFs this fall," Bloomberg Intelligence's James Seyffart wrote in an X post last week. ## Staking May Be Biggest Concern Around Ether ETF Industry watchers are skeptical that approvals will come in May, as scheduled, for a variety of reasons. Primary among them is the fact that ether is [staked](https://www.investopedia.com/terms/p/proof-stake-pos.asp)—a process in which cryptocurrency holders lock up their funds as collateral to support the operations of a [blockchain](https://www.investopedia.com/terms/b/blockchain.asp) network in exchange for rewards in the form of additional cryptocurrency. On March 18, Fidelity added an amendment to its proposal to allow traders to stake some of the assets held, and a day later Grayscale amended its application to add staking as well. Last year, the SEC cracked down on staking, fining cryptocurrency exchange [Kraken $30 million](https://www.investopedia.com/kraken-to-pay-30-million-shut-down-staking-business-in-sec-settlement-7107971) and forcing the company to shut down its staking-as-a-service business for not following securities law. It also [sued Coinbase](https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669) ([COIN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN)) for its staking offering. That litigation is still in process. “When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection,” the SEC said at the time of the Kraken fine. That could be interesting in the context of an Ether ETF, where investors do not actually hold the tokens. Instead, they get shares in a fund that has pooled their resources to invest in a portfolio comprising the underlying token. In a note dated March 12, crypto researcher Noelle Acheson pointed out the uniqueness of staking ether could lead to denial because there's "regulatory fog" surrounding the activity. ## SEC Chair Has Consistently Criticized Crypto [Spot bitcoin](https://www.investopedia.com/spot-bitcoin-etfs-8358373) ETFs were approved by the SEC in January after several failed attempts. The regulator had previously denied filings until last year when a U.S. Court of Appeals for the District of Columbia said the SEC failed to adequately explain its reasoning for the rejections, specifically in the case of the conversion of the Grayscale Bitcoin Trust ([GBTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GBTC)) into an ETF. That court ruling led the commission to approve the listing and trading of the spot bitcoin ETF shares. Jake Chervinsky, chief legal officer at Variant, an early-stage crypto fund, wrote in post on X March 11  that the commission could come up with new grounds for denial that weren’t tested by Grayscale in court, which would likely also be subject to a court challenge. The SEC is more than willing to take litigation risk and lose in court based on a preference for being viewed as “fighters” in a war against crypto rather than being accused of rolling over, Chervinsky wrote. Earlier this month, SEC Chair Gary Gensler declined to say in an interview with *Yahoo Finance* whether he would approve the Ether ETF applications. He continued to criticize cryptocurrency saying it "has challenges" and is "rife with abuses and fraud," *Yahoo Finance* reported. ## Differences Between Ether and Bitcoin Acheson said that there's a conceptual problem for Ether that didn't apply to bitcoin. "This statement may irritate many, but ETH was created to be used, not held," Acheson said.  ETH can be a store of value among [other functions](https://www.investopedia.com/articles/investing/031416/bitcoin-vs-ethereum-driven-different-purposes.asp), but that’s not where its main advantage lies, she said. "It is the field for the largest distributed computing platform in the world, and powers a range of decentralized applications," Acheson said, while bitcoin in her opinion is a product to be held. "Basically, for BTC a spot ETF makes sense. For ETH, less so," she said. Another point of difference could arise out of the classification of ether as a security, as opposed to bitcoin, which is considered a commodity. *Bloomberg* reported on Mar. 20 that the SEC is investigating Ethereum Foundation, in what could lead to classification of ether as a security. If the SEC is able to classify ether as a security, it would have far reaching consequences not just for the token, but the cryptocurrency markets as a whole. Ether would have to abide by securities laws and the SEC would have more power to regulate the cryptocurrency and how its traded. It could also open doors for other crypto tokens to be classified as securities, leading to greater regulatory scrutiny. ## Insiders See No Reason for SEC to Deny Ether ETF Coinbase's chief legal officer Paul Grewal said in a post on X last week that some regulators in the past have clarified ether's status as commodity while the SEC itself has doubted whether the token could be identified as a security. "The SEC has no good reason to deny the ETH ETP applications. And we hope they won’t try to invent one by questioning the long established regulatory status of ETH, which the SEC has repeatedly endorsed," Grewal wrote. On Monday, Graycale's chief legal officer Craig Salm sounded an optimistic tone in posts on X, saying that the issues that were resolved in the run-up to the approval of the spot bitcoin ETFs were the same as those the SEC must weigh now. "The only difference is rather than the ETF holding bitcoin, it holds ether," Salm said. "So in many ways, the SEC already has engaged and issuers simply have less to engage on this time." "Perhaps I will feel differently as we get closer to final approve/deny dates in late May 2024, but at this point, I don't think perceived lack of engagement from regulators should be indicative of one outcome or another," Salm said. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways Applications for spot ether ETFs are before the Securities and Exchange Commission, but some experts aren't optimistic that an approval will be forthcoming.Staking, a practice of putting up ether tokens as collateral to support operation of the Ethereum blockchain in exchange for rewards, may be the SEC's biggest concern.Another point of difference could arise out of the classification of ether as a security, as opposed to bitcoin, which is considered a commodity.The success of spot bitcoin ETFs may have driven optimism for an approval for ether ETFs, but the two products are very different. The Securities and Exchange Commission (SEC) is considering applications for spot exchange-traded funds (ETFs) for ether (ETHUSD), the native token of the Ethereum blockchain and the second largest cryptocurrency by market capitalization. But experts are increasingly skeptical that approval will come any time soon.  The agency's approval of spot-bitcoin (BTCUSD) ETFs earlier this year turbocharged the demand for the cryptocurrency, propelling its price to multiple records, but an encore with ether appears less likely due to a number of factors. The SEC has already delayed decisions on approvals for ether ETFs by Fidelity, BlackRock (BLK) and Grayscale, questioning whether the proposals are supported by the same arguments that led to the approval of the bitcoin funds, and over security concerns.  "My cautiously optimistic attitude for ETH ETFs has changed from recent months. We now believe these will ultimately be denied May 23rd for this round. The SEC hasn't engaged with issuers on Ethereum specifics. Exact opposite of #Bitcoin ETFs this fall," Bloomberg Intelligence's James Seyffart wrote in an X post last week. Staking May Be Biggest Concern Around Ether ETF Industry watchers are skeptical that approvals will come in May, as scheduled, for a variety of reasons. Primary among them is the fact that ether is staked—a process in which cryptocurrency holders lock up their funds as collateral to support the operations of a blockchain network in exchange for rewards in the form of additional cryptocurrency. On March 18, Fidelity added an amendment to its proposal to allow traders to stake some of the assets held, and a day later Grayscale amended its application to add staking as well. Last year, the SEC cracked down on staking, fining cryptocurrency exchange Kraken $30 million and forcing the company to shut down its staking-as-a-service business for not following securities law. It also sued Coinbase (COIN) for its staking offering. That litigation is still in process. “When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection,” the SEC said at the time of the Kraken fine. That could be interesting in the context of an Ether ETF, where investors do not actually hold the tokens. Instead, they get shares in a fund that has pooled their resources to invest in a portfolio comprising the underlying token. In a note dated March 12, crypto researcher Noelle Acheson pointed out the uniqueness of staking ether could lead to denial because there's "regulatory fog" surrounding the activity. SEC Chair Has Consistently Criticized Crypto Spot bitcoin ETFs were approved by the SEC in January after several failed attempts. The regulator had previously denied filings until last year when a U.S. Court of Appeals for the District of Columbia said the SEC failed to adequately explain its reasoning for the rejections, specifically in the case of the conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF. That court ruling led the commission to approve the listing and trading of the spot bitcoin ETF shares. Jake Chervinsky, chief legal officer at Variant, an early-stage crypto fund, wrote in post on X March 11  that the commission could come up with new grounds for denial that weren’t tested by Grayscale in court, which would likely also be subject to a court challenge. The SEC is more than willing to take litigation risk and lose in court based on a preference for being viewed as “fighters” in a war against crypto rather than being accused of rolling over, Chervinsky wrote.Earlier this month, SEC Chair Gary Gensler declined to say in an interview with Yahoo Finance whether he would approve the Ether ETF applications. He continued to criticize cryptocurrency saying it "has challenges" and is "rife with abuses and fraud," Yahoo Finance reported. Differences Between Ether and Bitcoin Acheson said that there's a conceptual problem for Ether that didn't apply to bitcoin. "This statement may irritate many, but ETH was created to be used, not held," Acheson said. ETH can be a store of value among other functions, but that’s not where its main advantage lies, she said. "It is the field for the largest distributed computing platform in the world, and powers a range of decentralized applications," Acheson said, while bitcoin in her opinion is a product to be held. "Basically, for BTC a spot ETF makes sense. For ETH, less so," she said. Another point of difference could arise out of the classification of ether as a security, as opposed to bitcoin, which is considered a commodity. Bloomberg reported on Mar. 20 that the SEC is investigating Ethereum Foundation, in what could lead to classification of ether as a security. If the SEC is able to classify ether as a security, it would have far reaching consequences not just for the token, but the cryptocurrency markets as a whole. Ether would have to abide by securities laws and the SEC would have more power to regulate the cryptocurrency and how its traded. It could also open doors for other crypto tokens to be classified as securities, leading to greater regulatory scrutiny. Insiders See No Reason for SEC to Deny Ether ETF Coinbase's chief legal officer Paul Grewal said in a post on X last week that some regulators in the past have clarified ether's status as commodity while the SEC itself has doubted whether the token could be identified as a security. "The SEC has no good reason to deny the ETH ETP applications. And we hope they won’t try to invent one by questioning the long established regulatory status of ETH, which the SEC has repeatedly endorsed," Grewal wrote. On Monday, Graycale's chief legal officer Craig Salm sounded an optimistic tone in posts on X, saying that the issues that were resolved in the run-up to the approval of the spot bitcoin ETFs were the same as those the SEC must weigh now. "The only difference is rather than the ETF holding bitcoin, it holds ether," Salm said. "So in many ways, the SEC already has engaged and issuers simply have less to engage on this time." "Perhaps I will feel differently as we get closer to final approve/deny dates in late May 2024, but at this point, I don't think perceived lack of engagement from regulators should be indicative of one outcome or another," Salm said. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/magnificent-seven-stocks-8402262

Magnificent 7 Stocks: What You Need to Know

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> “Magnificent Seven” was originally a reference to a 1960 Western film, “The Magnificent Seven,” which was directed by John Sturges and depicts a group of seven gunmen.<span class="ql-inline-citation" data-cite="11"></span> In the world of finance, the term has been repurposed to reference a group of seven high-performing and influential <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stocks</a> in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technology_sector.asp">technology sector</a>, borrowing from the meaning of a powerful group. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Bank of America analyst Michael Hartnett coined the phrase in 2023 when commenting on the seven companies commonly recognized for their market dominance, their technological impact, and their changes to consumer behavior and economic trends: Alphabet (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/alphabet-stock-googl-5095140">GOOGL; GOOG)</a>, Amazon <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/amazon-stock-amzn-5094245">(AMZN)</a>, Apple <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/apple-stock-aapl-5075819">(AAPL)</a>, Meta Platforms <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/facebook-stock-fb-5205635">(META)</a>, Microsoft <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/microsoft-stock-msft-5078359">(MSFT)</a>, NVIDIA <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing-in-nvidia-stock-5216087">(NVDA)</a>, and Tesla <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tesla-stock-tsla-5105321">(TSLA)</a>.<span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.</li><li>Bank of America analyst Michael Hartnett used the film name in 2023 when commenting on these seven firms.</li><li>The performance of the Magnificent Seven stocks is driven by technological innovation, market dominance, financial performance, brand equity, research and development, and global economic conditions.</li><li>The FAANG stocks and Magnificent Seven stocks have some key differences.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> For <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a> considering Magnificent Seven stocks, it is essential to understand their unique position in the market. These companies are at the forefront of sectors such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing-in-electric-vehicles-and-green-transportation-5220604">electric vehicles</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cloud-computing.asp">cloud computing</a>, and digital services and still have the potential for significant growth. Yet, investing in them still carries risks since these factors have already been priced in. There are also the usual risks of <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">market volatility</a>, regulatory changes, technological disruptions, and global economic conditions that can influence their performance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Therefore, while these stocks present exciting prospects, they also require a nuanced understanding of the technology sector’s prospects and a strategic investment approach.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-the-magnificent-7-stocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> The Magnificent 7 Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The Magnificent Seven stocks are a group of the most influential companies in the U.S. stock market. This term has been popularized to describe a set of dominant companies, particularly in the tech sector. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The group comprises Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla and spans four sectors: technology services, electronic technology, retail trade, and consumer durables. They operate across these industries: internet software/services, telecommunications equipment, internet retail, packaged software, semiconductors, and motor vehicles.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> “They are the highest quality names out there and, frankly, if we do go into a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recession.asp">recession</a> next year...I actually think the Magnificent Seven will hold up better,” King Lip, chief strategist for BakerAvenue Wealth Management, told Reuters in November 2023.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-historical-performance-of-the-magnificent-7-stocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Historical Performance of the Magnificent 7 Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The table below displays the performance of the Magnificent Seven stocks over the last three months, one year, and five years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_21-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="4">Magnificent Seven Stock Performance (3 months, 1 year, 5 years)</th> </tr> </thead> <tbody data-check="-1"> <tr> <td><b>Name</b></td> <td><b>3-Month (%)</b></td> <td><b>1-Year (%)</b></td> <td><b>5-Year (%)</b></td> </tr> <tr> <td>Alphabet Inc. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG">GOOG</a>)</td> <td>4.82</td> <td>41.82</td> <td>152.29</td> </tr> <tr> <td>Amazon Inc. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>)</td> <td>6.75</td> <td>49.59</td> <td>80.19</td> </tr> <tr> <td>Apple Inc. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>)</td> <td>8.86</td> <td>25.86</td> <td>340.40</td> </tr> <tr> <td>Meta Platforms Inc. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=META">META</a>)</td> <td>14.23</td> <td>199.12</td> <td>137.05</td> </tr> <tr> <td>Microsoft Corp. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>)</td> <td>15.93</td> <td>57.12</td> <td>240.09</td> </tr> <tr> <td>NVIDIA Corp. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>)</td> <td>12.35</td> <td>215.14</td> <td>1094.64</td> </tr> <tr> <td>Tesla Inc. (<a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>)</td> <td>3.79</td> <td>26.11</td> <td>807.56</td> </tr> </tbody> </table> <figcaption>Data as of Nov. 17, 2023 (source: TradingView)</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_23-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:21.6%;"> <img alt="Historical Performance of the Magnificent Seven Stocks" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Y6F0u2HeLrtW1tCcMOS-8QICZzI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HistoricalPerformanceoftheMagnificentSevenStocks-76466d878ee044ef879f5dbce2612145.JPG" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Y6F0u2HeLrtW1tCcMOS-8QICZzI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HistoricalPerformanceoftheMagnificentSevenStocks-76466d878ee044ef879f5dbce2612145.JPG" data-srcset="https://www.investopedia.com/thmb/uovX-R3UEebt53LVDqxHEI2qdfw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/HistoricalPerformanceoftheMagnificentSevenStocks-76466d878ee044ef879f5dbce2612145.JPG 750w" data-tracking-container="true" height="529" id="mntl-sc-block-image_1-0" width="2444"/> <noscript> <img alt="Historical Performance of the Magnificent Seven Stocks" class="img--noscript universal-image__image" height="529" sizes="750px" src="https://www.investopedia.com/thmb/Y6F0u2HeLrtW1tCcMOS-8QICZzI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HistoricalPerformanceoftheMagnificentSevenStocks-76466d878ee044ef879f5dbce2612145.JPG" srcset="https://www.investopedia.com/thmb/uovX-R3UEebt53LVDqxHEI2qdfw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/HistoricalPerformanceoftheMagnificentSevenStocks-76466d878ee044ef879f5dbce2612145.JPG 750w" width="2444"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-text">Historical Performance of the Magnificent Seven Stocks.</span> <span class="figure-article-caption-owner"><p>TradingView</p></span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Over the past five years, NVIDIA has led the pack with an impressive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/return.asp">return</a> of 1094.64%, closely followed by Tesla, which has had a robust performance with an 807.56% gain. In the Magnificent Seven group, Apple, Microsoft, Alphabet, and Meta each delivered returns exceeding 100%. Amazon.com showed positive growth, but was the only member of this group to register a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdingperiodreturn-yield.asp">holding period return</a> below 100% during the same time frame.<span class="ql-inline-citation" data-cite="6"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <span class="heading-toc" id="toc-factors-driving-the-magnificent-7-stocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> Factors Driving the Magnificent 7 Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The group of stocks known as the Magnificent Seven are at the forefront of technological changes across the economy, and they consistently develop new products and services that drive consumer demand and business growth. Here are other traits common among the Magnificent Seven stocks: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> <li><strong>Adaptability</strong>: Each has adapted to changing market conditions, including shifts in consumer behavior and technological advances, by continuing to invest in research and development.<span class="ql-inline-citation" data-cite="8"></span></li> <li><strong>Financially healthy</strong>: All have had strong financial health, robust <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnings.asp">earnings</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a> growth, and healthy <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancesheet.asp">balance sheets</a>, making them attractive to investors for their growth.</li> <li><strong>Global reach</strong>: Their operations and influence span the globe, allowing them to tap into diverse markets and benefit from international growth.</li> <li><strong>Strong market position</strong>: The Magnificent Seven have strong market positions in their sectors, often holding the dominant <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketshare.asp">market share</a> that gives them a competitive edge.</li> <li><strong>Worldwide brand recognition</strong>: The Magnificent Seven companies have strong <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brand-recognition.asp">brand recognition</a> and a loyal customer base, which should mean consistent revenue streams and the ability to introduce new products successfully.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Because of their size and reach, these companies all face regulatory risks. Regulation changes, especially in data privacy, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/antitrust.asp">antitrust laws</a>, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insights/what-is-international-trade/">international trade</a>, can significantly influence these companies. More broadly, widespread economic changes affect them because of their broad reach, including interest rates, inflation, economic growth, consumer confidence, and investor sentiment.<span class="ql-inline-citation" data-cite="9"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-subheading__text"> The Magnificent 7 Stocks Compared to FAANG </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> In finance and investing, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/faang-stocks.asp">FAANG</a> is an acronym for the shares of five major American tech giants: Meta Platforms (previously Facebook, hence the “F”), Amazon.com, Apple, Netflix (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NFLX">NFLX</a>), and Alphabet (previously Google, hence the “G”). Jim Cramer, host of CNBC’s “Mad Money,” and technical analyst Bob Lang coined the term in 2013, inserting an extra “A” for Apple in 2017.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> FAANG and the Magnificent Seven are both groups of dominant technology firms, yet they have notable differences. The Magnificent Seven group contains a wider array of technology and innovation-driven companies than the more narrowly focused FAANG. It includes behemoths like Microsoft and Tesla, extending its clout across diverse sectors such as software development, hardware, electric vehicles, and artificial intelligence.<span class="ql-inline-citation" data-cite="12"></span> By contrast, FAANG stocks are predominant within internet services, ecommerce, and digital media. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Characterized by their robust growth, market-leading roles, and influence across various technology domains, the Magnificent Seven capture a broader spectrum of the tech industry. Conversely, FAANG is renowned for its rapid expansion, particularly in the internet and digital media segments. In recent years, it has been pivotal in driving the technology sector’s rally. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Thus, while both groups have overlapping members and are powerful forces in the tech world, the Magnificent Seven have more extensive representation across the tech sector. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-risks-and-challenges-of-the-magnificent-7-stocks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> Risks and Challenges of the Magnificent 7 Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Like any investment, putting your money into the Magnificent Seven stocks means taking on risks and challenges. Despite their strong market positions and record of driving technology forward, these companies face factors that could determine their performance. Here are some of them: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <li><strong>Currency fluctuations</strong>: As global entities, these companies face risks associated with currency exchange rate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/080613/effects-currency-fluctuations-economy.asp">fluctuations</a>, affecting their earnings and stock prices.</li> <li><strong><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cybersecurity.asp">Cybersecurity</a> threats</strong>: As technology companies, the Magnificent Seven are prime targets for cyberattacks. A significant breach could lead to substantial financial losses and damage their reputations.<span class="ql-inline-citation" data-cite="10"></span></li> <li><strong>Economic downturns</strong>: Global economic conditions, such as recessions or market downturns, can undermine consumer spending and business investment, transforming their revenues and growth prospects.</li> <li><strong>Geopolitical tensions and trade policies</strong>: International operations expose these companies to geopolitical risks, including trade wars, tariffs, and changing international relations, which can affect their global supply chains and market access.<span class="ql-inline-citation" data-cite="2"></span></li> <li><strong>Key person risk</strong>: Some of these companies are closely associated with their founders or executives, whose departure or loss could dampen investor sentiment and the company’s direction.</li> <li><strong>Market saturation and competition</strong>: As these companies continue to grow, they will face challenges in finding new markets and maintaining their growth rates. Increased competition from established players and emerging startups can also threaten their market share.<span class="ql-inline-citation" data-cite="9"></span> In short, by leading their markets, they are also the targets for any competitors looking to make a mark in their industries.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Regulatory and legal risks</strong>: Tech giants have long been under scrutiny for antitrust concerns, data privacy, and tax practices. Changes in regulations or legal challenges can have significant financial and operational impacts.<span class="ql-inline-citation" data-cite="10"></span> Many of them have been investigated for monopolistic practices, and if they are to increase their already-dominant shares of their markets, they will face more scrutiny.<span class="ql-inline-citation" data-cite="14"></span></li> <li><strong>Technological disruption</strong>: Rapid technological change means these companies must continuously innovate to stay ahead. Failure to adapt to new technologies or trends could lead to a loss of market relevance.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-what-is-the-total-market-capitalization-of-the-magnificent-7-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Total Market Capitalization of the Magnificent 7 Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The total <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market capitalization</a> of the Magnificent Seven stocks was $11.73 trillion as of Nov. 17, 2023.<span class="ql-inline-citation" data-cite="16"></span></p><ul><li>AAPL: $2.985 trillion</li><li>AMZN: $1.5 trillion</li><li>GOOG: $1.703 trillion</li><li>META: $861.007 billion</li><li>MSFT: $2.749 trillion</li><li>NVDA: $1.218 trillion</li><li>TSLA: $744.821 billion<br/></li></ul></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-what-is-the-average-dividend-yield-of-the-magnificent-7-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Average Dividend Yield of the Magnificent 7 Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The average <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a> yield for the companies that pay dividends was 0.45% as of Nov. 17, 2023.<span class="ql-inline-citation" data-cite="16"></span></p><ul><li>AAPL: 0.51%</li><li>AMZN: Amazon does not pay a dividend</li><li>GOOG: Alphabet does not pay a dividend</li><li>META: Meta does not pay a dividend</li><li>MSFT: 0.81%</li><li>NVDA: 0.03%</li><li>TSLA: Tesla does not pay a dividend<br/></li></ul></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-how-would-the-magnificent-7-be-influenced-by-inflation"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Would the Magnificent 7 Be Influenced by Inflation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The impact of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> on the Magnificent Seven is complex. Some key ways that inflation would affect these companies include higher costs for materials, labor, and other operational expenses. Inflation can reduce consumers’ purchasing power, decreasing spending on nonessential goods and services.</p><p>Also, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp">central banks</a> ordinarily respond to high inflation by raising benchmark interest rates. Higher interest rates increase borrowing costs for companies, harming their investment and expansion plans. Nonetheless, the effect of inflation can vary within the Magnificent Seven group and depends on the company’s specific business model, cost structure, and market position.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> The Magnificent Seven stocks represent a cohort of high-performing companies that have garnered significant attention in the investment world for their market dominance, technological advances, and growth potential. These stocks, which include Microsoft, Tesla, and NVIDIA, along with some FAANG members, are known for their influence across various sectors, such as software, hardware, electric vehicles, and artificial intelligence. They have been pivotal in driving technological trends and shaping consumer behavior, making them attractive to investors seeking growth and market leadership. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> However, investors need to know the risks and challenges associated with these stocks. The dynamic nature of the technology sector, regulatory scrutiny, market saturation, and global economic factors like inflation and geopolitical tensions can affect their performance. Additionally, high market valuations bring lofty expectations, and any failure to meet these can lead to significant stock price corrections. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Thus, while the Magnificent Seven offer potential for substantial growth, they also require careful analysis and a balanced approach considering their strengths and the various external factors that could influence their future trajectory. </p></div>

“Magnificent Seven” was originally a reference to a 1960 Western film, “The Magnificent Seven,” which was directed by John Sturges and depicts a group of seven gunmen. In the world of finance, the term has been repurposed to reference a group of seven high-performing and influential [stocks](https://www.investopedia.com/terms/s/stock.asp) in the [technology sector](https://www.investopedia.com/terms/t/technology_sector.asp), borrowing from the meaning of a powerful group. Bank of America analyst Michael Hartnett coined the phrase in 2023 when commenting on the seven companies commonly recognized for their market dominance, their technological impact, and their changes to consumer behavior and economic trends: Alphabet ([GOOGL; GOOG)](https://www.investopedia.com/alphabet-stock-googl-5095140), Amazon [(AMZN)](https://www.investopedia.com/amazon-stock-amzn-5094245), Apple [(AAPL)](https://www.investopedia.com/apple-stock-aapl-5075819), Meta Platforms [(META)](https://www.investopedia.com/facebook-stock-fb-5205635), Microsoft [(MSFT)](https://www.investopedia.com/microsoft-stock-msft-5078359), NVIDIA [(NVDA)](https://www.investopedia.com/investing-in-nvidia-stock-5216087), and Tesla [(TSLA)](https://www.investopedia.com/tesla-stock-tsla-5105321). ### Key Takeaways * The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. * Bank of America analyst Michael Hartnett used the film name in 2023 when commenting on these seven firms. * The performance of the Magnificent Seven stocks is driven by technological innovation, market dominance, financial performance, brand equity, research and development, and global economic conditions. * The FAANG stocks and Magnificent Seven stocks have some key differences. For [investors](https://www.investopedia.com/terms/i/investor.asp) considering Magnificent Seven stocks, it is essential to understand their unique position in the market. These companies are at the forefront of sectors such as [artificial intelligence](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp), [electric vehicles](https://www.investopedia.com/investing-in-electric-vehicles-and-green-transportation-5220604), [cloud computing](https://www.investopedia.com/terms/c/cloud-computing.asp), and digital services and still have the potential for significant growth. Yet, investing in them still carries risks since these factors have already been priced in. There are also the usual risks of [market volatility](https://www.investopedia.com/terms/v/volatility.asp), regulatory changes, technological disruptions, and global economic conditions that can influence their performance. Therefore, while these stocks present exciting prospects, they also require a nuanced understanding of the technology sector’s prospects and a strategic investment approach. ## The Magnificent 7 Stocks The Magnificent Seven stocks are a group of the most influential companies in the U.S. stock market. This term has been popularized to describe a set of dominant companies, particularly in the tech sector. The group comprises Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla and spans four sectors: technology services, electronic technology, retail trade, and consumer durables. They operate across these industries: internet software/services, telecommunications equipment, internet retail, packaged software, semiconductors, and motor vehicles. “They are the highest quality names out there and, frankly, if we do go into a [recession](https://www.investopedia.com/terms/r/recession.asp) next year...I actually think the Magnificent Seven will hold up better,” King Lip, chief strategist for BakerAvenue Wealth Management, told Reuters in November 2023. ## Historical Performance of the Magnificent 7 Stocks The table below displays the performance of the Magnificent Seven stocks over the last three months, one year, and five years. | Magnificent Seven Stock Performance (3 months, 1 year, 5 years) | | | | | --- | --- | --- | --- | | **Name** | **3-Month (%)** | **1-Year (%)** | **5-Year (%)** | | Alphabet Inc. ([GOOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG)) | 4.82 | 41.82 | 152.29 | | Amazon Inc. ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)) | 6.75 | 49.59 | 80.19 | | Apple Inc. ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) | 8.86 | 25.86 | 340.40 | | Meta Platforms Inc. ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META)) | 14.23 | 199.12 | 137.05 | | Microsoft Corp. ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) | 15.93 | 57.12 | 240.09 | | NVIDIA Corp. ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) | 12.35 | 215.14 | 1094.64 | | Tesla Inc. ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) | 3.79 | 26.11 | 807.56 | Data as of Nov. 17, 2023 (source: TradingView) ![Historical Performance of the Magnificent Seven Stocks]() :max_bytes(150000):strip_icc()/HistoricalPerformanceoftheMagnificentSevenStocks-76466d878ee044ef879f5dbce2612145.JPG) Historical Performance of the Magnificent Seven Stocks. TradingView Over the past five years, NVIDIA has led the pack with an impressive [return](https://www.investopedia.com/terms/r/return.asp) of 1094.64%, closely followed by Tesla, which has had a robust performance with an 807.56% gain. In the Magnificent Seven group, Apple, Microsoft, Alphabet, and Meta each delivered returns exceeding 100%. Amazon.com showed positive growth, but was the only member of this group to register a [holding period return](https://www.investopedia.com/terms/h/holdingperiodreturn-yield.asp) below 100% during the same time frame. ## Factors Driving the Magnificent 7 Stocks The group of stocks known as the Magnificent Seven are at the forefront of technological changes across the economy, and they consistently develop new products and services that drive consumer demand and business growth. Here are other traits common among the Magnificent Seven stocks: * **Adaptability**: Each has adapted to changing market conditions, including shifts in consumer behavior and technological advances, by continuing to invest in research and development. * **Financially healthy**: All have had strong financial health, robust [earnings](https://www.investopedia.com/terms/e/earnings.asp), [revenue](https://www.investopedia.com/terms/r/revenue.asp) growth, and healthy [balance sheets](https://www.investopedia.com/terms/b/balancesheet.asp), making them attractive to investors for their growth. * **Global reach**: Their operations and influence span the globe, allowing them to tap into diverse markets and benefit from international growth. * **Strong market position**: The Magnificent Seven have strong market positions in their sectors, often holding the dominant [market share](https://www.investopedia.com/terms/m/marketshare.asp) that gives them a competitive edge. * **Worldwide brand recognition**: The Magnificent Seven companies have strong [brand recognition](https://www.investopedia.com/terms/b/brand-recognition.asp) and a loyal customer base, which should mean consistent revenue streams and the ability to introduce new products successfully. Because of their size and reach, these companies all face regulatory risks. Regulation changes, especially in data privacy, [antitrust laws](https://www.investopedia.com/terms/a/antitrust.asp), and [international trade](https://www.investopedia.com/insights/what-is-international-trade/), can significantly influence these companies. More broadly, widespread economic changes affect them because of their broad reach, including interest rates, inflation, economic growth, consumer confidence, and investor sentiment. ### The Magnificent 7 Stocks Compared to FAANG In finance and investing, [FAANG](https://www.investopedia.com/terms/f/faang-stocks.asp) is an acronym for the shares of five major American tech giants: Meta Platforms (previously Facebook, hence the “F”), Amazon.com, Apple, Netflix ([NFLX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NFLX)), and Alphabet (previously Google, hence the “G”). Jim Cramer, host of CNBC’s “Mad Money,” and technical analyst Bob Lang coined the term in 2013, inserting an extra “A” for Apple in 2017. FAANG and the Magnificent Seven are both groups of dominant technology firms, yet they have notable differences. The Magnificent Seven group contains a wider array of technology and innovation-driven companies than the more narrowly focused FAANG. It includes behemoths like Microsoft and Tesla, extending its clout across diverse sectors such as software development, hardware, electric vehicles, and artificial intelligence. By contrast, FAANG stocks are predominant within internet services, ecommerce, and digital media. Characterized by their robust growth, market-leading roles, and influence across various technology domains, the Magnificent Seven capture a broader spectrum of the tech industry. Conversely, FAANG is renowned for its rapid expansion, particularly in the internet and digital media segments. In recent years, it has been pivotal in driving the technology sector’s rally. Thus, while both groups have overlapping members and are powerful forces in the tech world, the Magnificent Seven have more extensive representation across the tech sector. ## Risks and Challenges of the Magnificent 7 Stocks Like any investment, putting your money into the Magnificent Seven stocks means taking on risks and challenges. Despite their strong market positions and record of driving technology forward, these companies face factors that could determine their performance. Here are some of them: * **Currency fluctuations**: As global entities, these companies face risks associated with currency exchange rate [fluctuations](https://www.investopedia.com/articles/forex/080613/effects-currency-fluctuations-economy.asp), affecting their earnings and stock prices. * **[Cybersecurity](https://www.investopedia.com/terms/c/cybersecurity.asp) threats**: As technology companies, the Magnificent Seven are prime targets for cyberattacks. A significant breach could lead to substantial financial losses and damage their reputations. * **Economic downturns**: Global economic conditions, such as recessions or market downturns, can undermine consumer spending and business investment, transforming their revenues and growth prospects. * **Geopolitical tensions and trade policies**: International operations expose these companies to geopolitical risks, including trade wars, tariffs, and changing international relations, which can affect their global supply chains and market access. * **Key person risk**: Some of these companies are closely associated with their founders or executives, whose departure or loss could dampen investor sentiment and the company’s direction. * **Market saturation and competition**: As these companies continue to grow, they will face challenges in finding new markets and maintaining their growth rates. Increased competition from established players and emerging startups can also threaten their market share. In short, by leading their markets, they are also the targets for any competitors looking to make a mark in their industries. * **Regulatory and legal risks**: Tech giants have long been under scrutiny for antitrust concerns, data privacy, and tax practices. Changes in regulations or legal challenges can have significant financial and operational impacts. Many of them have been investigated for monopolistic practices, and if they are to increase their already-dominant shares of their markets, they will face more scrutiny. * **Technological disruption**: Rapid technological change means these companies must continuously innovate to stay ahead. Failure to adapt to new technologies or trends could lead to a loss of market relevance. ## What Is the Total Market Capitalization of the Magnificent 7 Stocks? The total [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) of the Magnificent Seven stocks was $11.73 trillion as of Nov. 17, 2023. * AAPL: $2.985 trillion * AMZN: $1.5 trillion * GOOG: $1.703 trillion * META: $861.007 billion * MSFT: $2.749 trillion * NVDA: $1.218 trillion * TSLA: $744.821 billion ## What Is the Average Dividend Yield of the Magnificent 7 Stocks? The average [dividend](https://www.investopedia.com/terms/d/dividend.asp) yield for the companies that pay dividends was 0.45% as of Nov. 17, 2023. * AAPL: 0.51% * AMZN: Amazon does not pay a dividend * GOOG: Alphabet does not pay a dividend * META: Meta does not pay a dividend * MSFT: 0.81% * NVDA: 0.03% * TSLA: Tesla does not pay a dividend ## How Would the Magnificent 7 Be Influenced by Inflation? The impact of [inflation](https://www.investopedia.com/terms/i/inflation.asp) on the Magnificent Seven is complex. Some key ways that inflation would affect these companies include higher costs for materials, labor, and other operational expenses. Inflation can reduce consumers’ purchasing power, decreasing spending on nonessential goods and services. Also, [central banks](https://www.investopedia.com/terms/c/centralbank.asp) ordinarily respond to high inflation by raising benchmark interest rates. Higher interest rates increase borrowing costs for companies, harming their investment and expansion plans. Nonetheless, the effect of inflation can vary within the Magnificent Seven group and depends on the company’s specific business model, cost structure, and market position. ## The Bottom Line The Magnificent Seven stocks represent a cohort of high-performing companies that have garnered significant attention in the investment world for their market dominance, technological advances, and growth potential. These stocks, which include Microsoft, Tesla, and NVIDIA, along with some FAANG members, are known for their influence across various sectors, such as software, hardware, electric vehicles, and artificial intelligence. They have been pivotal in driving technological trends and shaping consumer behavior, making them attractive to investors seeking growth and market leadership. However, investors need to know the risks and challenges associated with these stocks. The dynamic nature of the technology sector, regulatory scrutiny, market saturation, and global economic factors like inflation and geopolitical tensions can affect their performance. Additionally, high market valuations bring lofty expectations, and any failure to meet these can lead to significant stock price corrections. Thus, while the Magnificent Seven offer potential for substantial growth, they also require careful analysis and a balanced approach considering their strengths and the various external factors that could influence their future trajectory.

“Magnificent Seven” was originally a reference to a 1960 Western film, “The Magnificent Seven,” which was directed by John Sturges and depicts a group of seven gunmen. In the world of finance, the term has been repurposed to reference a group of seven high-performing and influential stocks in the technology sector, borrowing from the meaning of a powerful group. Bank of America analyst Michael Hartnett coined the phrase in 2023 when commenting on the seven companies commonly recognized for their market dominance, their technological impact, and their changes to consumer behavior and economic trends: Alphabet (GOOGL; GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA). Key Takeaways The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.Bank of America analyst Michael Hartnett used the film name in 2023 when commenting on these seven firms.The performance of the Magnificent Seven stocks is driven by technological innovation, market dominance, financial performance, brand equity, research and development, and global economic conditions.The FAANG stocks and Magnificent Seven stocks have some key differences. For investors considering Magnificent Seven stocks, it is essential to understand their unique position in the market. These companies are at the forefront of sectors such as artificial intelligence, electric vehicles, cloud computing, and digital services and still have the potential for significant growth. Yet, investing in them still carries risks since these factors have already been priced in. There are also the usual risks of market volatility, regulatory changes, technological disruptions, and global economic conditions that can influence their performance. Therefore, while these stocks present exciting prospects, they also require a nuanced understanding of the technology sector’s prospects and a strategic investment approach. The Magnificent 7 Stocks The Magnificent Seven stocks are a group of the most influential companies in the U.S. stock market. This term has been popularized to describe a set of dominant companies, particularly in the tech sector. The group comprises Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla and spans four sectors: technology services, electronic technology, retail trade, and consumer durables. They operate across these industries: internet software/services, telecommunications equipment, internet retail, packaged software, semiconductors, and motor vehicles. “They are the highest quality names out there and, frankly, if we do go into a recession next year...I actually think the Magnificent Seven will hold up better,” King Lip, chief strategist for BakerAvenue Wealth Management, told Reuters in November 2023. Historical Performance of the Magnificent 7 Stocks The table below displays the performance of the Magnificent Seven stocks over the last three months, one year, and five years. Magnificent Seven Stock Performance (3 months, 1 year, 5 years) Name 3-Month (%) 1-Year (%) 5-Year (%) Alphabet Inc. (GOOG) 4.82 41.82 152.29 Amazon Inc. (AMZN) 6.75 49.59 80.19 Apple Inc. (AAPL) 8.86 25.86 340.40 Meta Platforms Inc. (META) 14.23 199.12 137.05 Microsoft Corp. (MSFT) 15.93 57.12 240.09 NVIDIA Corp. (NVDA) 12.35 215.14 1094.64 Tesla Inc. (TSLA) 3.79 26.11 807.56 Data as of Nov. 17, 2023 (source: TradingView) Historical Performance of the Magnificent Seven Stocks. TradingView Over the past five years, NVIDIA has led the pack with an impressive return of 1094.64%, closely followed by Tesla, which has had a robust performance with an 807.56% gain. In the Magnificent Seven group, Apple, Microsoft, Alphabet, and Meta each delivered returns exceeding 100%. Amazon.com showed positive growth, but was the only member of this group to register a holding period return below 100% during the same time frame. Factors Driving the Magnificent 7 Stocks The group of stocks known as the Magnificent Seven are at the forefront of technological changes across the economy, and they consistently develop new products and services that drive consumer demand and business growth. Here are other traits common among the Magnificent Seven stocks: Adaptability: Each has adapted to changing market conditions, including shifts in consumer behavior and technological advances, by continuing to invest in research and development. Financially healthy: All have had strong financial health, robust earnings, revenue growth, and healthy balance sheets, making them attractive to investors for their growth. Global reach: Their operations and influence span the globe, allowing them to tap into diverse markets and benefit from international growth. Strong market position: The Magnificent Seven have strong market positions in their sectors, often holding the dominant market share that gives them a competitive edge. Worldwide brand recognition: The Magnificent Seven companies have strong brand recognition and a loyal customer base, which should mean consistent revenue streams and the ability to introduce new products successfully. Because of their size and reach, these companies all face regulatory risks. Regulation changes, especially in data privacy, antitrust laws, and international trade, can significantly influence these companies. More broadly, widespread economic changes affect them because of their broad reach, including interest rates, inflation, economic growth, consumer confidence, and investor sentiment. The Magnificent 7 Stocks Compared to FAANG In finance and investing, FAANG is an acronym for the shares of five major American tech giants: Meta Platforms (previously Facebook, hence the “F”), Amazon.com, Apple, Netflix (NFLX), and Alphabet (previously Google, hence the “G”). Jim Cramer, host of CNBC’s “Mad Money,” and technical analyst Bob Lang coined the term in 2013, inserting an extra “A” for Apple in 2017. FAANG and the Magnificent Seven are both groups of dominant technology firms, yet they have notable differences. The Magnificent Seven group contains a wider array of technology and innovation-driven companies than the more narrowly focused FAANG. It includes behemoths like Microsoft and Tesla, extending its clout across diverse sectors such as software development, hardware, electric vehicles, and artificial intelligence. By contrast, FAANG stocks are predominant within internet services, ecommerce, and digital media. Characterized by their robust growth, market-leading roles, and influence across various technology domains, the Magnificent Seven capture a broader spectrum of the tech industry. Conversely, FAANG is renowned for its rapid expansion, particularly in the internet and digital media segments. In recent years, it has been pivotal in driving the technology sector’s rally. Thus, while both groups have overlapping members and are powerful forces in the tech world, the Magnificent Seven have more extensive representation across the tech sector. Risks and Challenges of the Magnificent 7 Stocks Like any investment, putting your money into the Magnificent Seven stocks means taking on risks and challenges. Despite their strong market positions and record of driving technology forward, these companies face factors that could determine their performance. Here are some of them: Currency fluctuations: As global entities, these companies face risks associated with currency exchange rate fluctuations, affecting their earnings and stock prices. Cybersecurity threats: As technology companies, the Magnificent Seven are prime targets for cyberattacks. A significant breach could lead to substantial financial losses and damage their reputations. Economic downturns: Global economic conditions, such as recessions or market downturns, can undermine consumer spending and business investment, transforming their revenues and growth prospects. Geopolitical tensions and trade policies: International operations expose these companies to geopolitical risks, including trade wars, tariffs, and changing international relations, which can affect their global supply chains and market access. Key person risk: Some of these companies are closely associated with their founders or executives, whose departure or loss could dampen investor sentiment and the company’s direction. Market saturation and competition: As these companies continue to grow, they will face challenges in finding new markets and maintaining their growth rates. Increased competition from established players and emerging startups can also threaten their market share. In short, by leading their markets, they are also the targets for any competitors looking to make a mark in their industries. Regulatory and legal risks: Tech giants have long been under scrutiny for antitrust concerns, data privacy, and tax practices. Changes in regulations or legal challenges can have significant financial and operational impacts. Many of them have been investigated for monopolistic practices, and if they are to increase their already-dominant shares of their markets, they will face more scrutiny. Technological disruption: Rapid technological change means these companies must continuously innovate to stay ahead. Failure to adapt to new technologies or trends could lead to a loss of market relevance. What Is the Total Market Capitalization of the Magnificent 7 Stocks? The total market capitalization of the Magnificent Seven stocks was $11.73 trillion as of Nov. 17, 2023.AAPL: $2.985 trillionAMZN: $1.5 trillionGOOG: $1.703 trillionMETA: $861.007 billionMSFT: $2.749 trillionNVDA: $1.218 trillionTSLA: $744.821 billion What Is the Average Dividend Yield of the Magnificent 7 Stocks? The average dividend yield for the companies that pay dividends was 0.45% as of Nov. 17, 2023.AAPL: 0.51%AMZN: Amazon does not pay a dividendGOOG: Alphabet does not pay a dividendMETA: Meta does not pay a dividendMSFT: 0.81%NVDA: 0.03%TSLA: Tesla does not pay a dividend How Would the Magnificent 7 Be Influenced by Inflation? The impact of inflation on the Magnificent Seven is complex. Some key ways that inflation would affect these companies include higher costs for materials, labor, and other operational expenses. Inflation can reduce consumers’ purchasing power, decreasing spending on nonessential goods and services.Also, central banks ordinarily respond to high inflation by raising benchmark interest rates. Higher interest rates increase borrowing costs for companies, harming their investment and expansion plans. Nonetheless, the effect of inflation can vary within the Magnificent Seven group and depends on the company’s specific business model, cost structure, and market position. The Bottom Line The Magnificent Seven stocks represent a cohort of high-performing companies that have garnered significant attention in the investment world for their market dominance, technological advances, and growth potential. These stocks, which include Microsoft, Tesla, and NVIDIA, along with some FAANG members, are known for their influence across various sectors, such as software, hardware, electric vehicles, and artificial intelligence. They have been pivotal in driving technological trends and shaping consumer behavior, making them attractive to investors seeking growth and market leadership. However, investors need to know the risks and challenges associated with these stocks. The dynamic nature of the technology sector, regulatory scrutiny, market saturation, and global economic factors like inflation and geopolitical tensions can affect their performance. Additionally, high market valuations bring lofty expectations, and any failure to meet these can lead to significant stock price corrections. Thus, while the Magnificent Seven offer potential for substantial growth, they also require careful analysis and a balanced approach considering their strengths and the various external factors that could influence their future trajectory.

https://www.investopedia.com/what-is-regenerative-finance-refi-7098179

What Is Regenerative Finance (ReFi)?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Regenerative finance (ReFi) is an alternative financial system that focuses on promoting and restoring sustainability and resilience along with monetary gains. It has found favor in the cryptocurrency ecosystem and is often used to describe a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a> project that uses its platform to invest in <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sustainability.asp">sustainability</a>, including environmental, social, and financial stability and growth. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> ReFi projects use raised <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a> to attempt to provide a positive financial impact on the world. This may include money earned from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-are-native-tokens-6754173">crypto token</a> sales, or additional funds raised within the project for specific purposes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Regenerative finance (ReFi) is an alternative financial system that promotes and restores environmental, social, and financial stability along with monetary gains.<br/></li><li>As a departure from traditional finance, ReFi has found applications in the cryptocurrency ecosystem.</li><li>Regenerative finance doesn’t refer to any specific cryptocurrency; rather, it is a movement toward mitigating climate change and improving equality.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-regenerative-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Understanding Regenerative Finance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/finance.asp">Traditional finance</a> has often been criticized for putting short-term profits ahead of long-term sustainability. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> ReFi is a concept borrowed from John Fullerton, who coined the term “regenerative economics” in his 2015 paper titled “Regenerative Capitalism.” Fullerton ascertained that traditional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/020915/what-are-differences-between-capitalism-and-socialism.asp">capitalism</a> doesn’t implicitly prevent negative environmental and societal impacts, but encourages exploring a new “form of capitalism that produces lasting social and economic vitality for global civilization as a whole.”<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Regenerative finance goes a step further than <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">environmental, social, and governance (ESG) investing</a>, and focuses on actually recovering and improving the environmental and societal impacts of traditional capitalism, instead of just reducing the negative side effects.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> There are several ways in which ReFi can be implemented, including the following actions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-subheading__text"> Climate Initiatives </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Some crypto projects are focused on reducing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cap-and-trade.asp">carbon emissions</a>, as well as helping community-led initiatives fight climate change. Organizations such as the Climate Collective help raise awareness for projects that use <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/083115/blockchain-technology-revolutionize-traditional-banking.asp">blockchain technology</a> to deploy regenerative financial solutions.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> These projects can assist by helping companies invest in carbon credits, incentivizing regenerative land-use practices, or even creating platforms to help organize climate-saving initiatives. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-subheading__text"> Cultural Heritage Preservation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Regenerative finance also can help preserve cultural heritage artifacts and historical records, using the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a> to store permanent records. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/non-fungible-tokens-nft-5115211">Non-fungible tokens (NFTs)</a> can be used to create verifiable and immutable records on the blockchain for these artifacts, making them an unchangeable part of history. Companies like Monuverse are doing this already, minting NFTs of Italian heritage items to raise funds and preserve history.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> While traditional methods of recording history or inventorying artifacts are subject to change, the blockchain locks these records into place. And NFTs of some of these items can be minted, allowing cultural centers around the globe to raise funds for the future preservation of historical items. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <span class="heading-toc" id="toc-goals-of-regenerative-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> Goals of Regenerative Finance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Regenerative finance is ultimately designed to create a more balanced, nondestructive economy, which incentivizes social and environmental good.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The goal of ReFi is to create an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economy.asp">economy</a> that thrives off mitigating climate change, reversing some of the effects of carbon emissions, and pursuing social change.</p></div></div></div> <span class="heading-toc" id="toc-risks-of-regenerative-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> Risks of Regenerative Finance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> As with any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/web-20-web-30-5208698">Web3</a> cryptocurrency project, regenerative finance projects can turn out to be a scam. There are always risks when investing in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alternative_investment.asp">alternative assets</a> such as crypto, and regenerative finance isn’t immune to these. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Some projects have lofty goals, but vague language about how those goals will be accomplished. Just because regenerative finance is trending, they are trying to capitalize on the movement. Here are a few things to watch out for: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <li><strong>Lack of token information</strong>: If you are investing in a regenerative finance project, you will want to understand the “tokenomics,” or how the tokens are distributed. If a large amount of tokens is held by founders or early investors, and if tokens are unlocked in large chunks, these can be signs of a scam that will allow the price to rise, then investors can dump all their tokens when they unlock.<br/></li> <li><strong>Direct connection to your digital wallet</strong>:<strong> </strong>If any project wants access to your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/digital-wallet.asp">digital wallet</a>, make sure it is trustworthy. By allowing access, scammers can steal the funds in your wallet very quickly.</li> <li><strong>Lack of a project road map</strong>: If the project doesn’t have a clear road map with date and actions that will be taken, then it may not ever accomplish what it is promising. Make sure the road map is detailed, too.</li> <li><strong>Do your due diligence about the people leading the project</strong>: Look for documentation or information about the team of developers on the project to gauge their authenticity, experience, and track record for running similar projects.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> To use regenerative finance, users can log into a chosen web app, connect a digital wallet, and deposit crypto onto the platform. Once the funds are deposited, users can choose from a list of supported crypto to borrow against the collateral deposited. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Regenerative finance is an automated platform governed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smart-contracts.asp">smart contracts</a>, which means loans are handled instantaneously. Once a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loan</a> is confirmed, the crypto will deposit into a user’s digital wallet. There are no monthly payments required, but the loan will accrue <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>. Loans must be paid back in the cryptocurrency borrowed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-is-a-regenerative-finance-company"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Regenerative Finance Company?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Regenerative finance (ReFi) companies include for-profit crypto companies, nonprofit crypto companies, and even <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/what-dao/">decentralized autonomous organizations (DAOs)</a>. They design technology solutions built on the blockchain to help fund sustainability. These companies include carbon-offset credit-trading platforms, DAOs that raise funds for local environmental initiatives, and NFT companies designed to preserve cultural heritage on the blockchain. These companies typically issue crypto tokens to raise funds for projects and initiatives, as well as provide a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">return on investment</a> for users.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-how-does-regenerative-finance-refi-compare-with-decentralized-finance-defi"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Regenerative Finance (ReFi) Compare with Decentralized Finance (DeFi)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Regenerative finance (ReFi) involves cryptocurrency projects that use their platforms to invest in sustainability practices. They use raised capital to try to make a positive financial impact on the world.</p><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/decentralized-finance-defi-5113835">Decentralized finance (DeFi)</a> is a broad term for decentralized, blockchain-based services that enable basic financial transactions, such as earning interest, borrowing money, storing cash, and purchasing insurance.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-why-does-regenerative-finance-matter"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Does Regenerative Finance Matter?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If regenerative finance is correctly implemented and widely adopted, then the world could experience adequate funding of public goods, rather than using public goods such as trees until they have been depleted. ReFi gives incentives for the financing of public goods, rewarding those who create positive outcomes—such as planting trees, in this example.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Regenerative finance (ReFi) is the crypto-equivalent of ESG investing, but with a more direct (and flexible) approach to making change. Crypto-based projects often can quickly raise capital and generate a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/10/guide-to-calculating-roi.asp">return on investment</a> while directing funds toward immediately impactful initiatives. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> However, just because a crypto project labels itself as “regenerative” doesn’t mean it is a good investment. As with any crypto project, you need to research the team, road map, and reputation of the project before allocating any funds toward it. </p></div>

Regenerative finance (ReFi) is an alternative financial system that focuses on promoting and restoring sustainability and resilience along with monetary gains. It has found favor in the cryptocurrency ecosystem and is often used to describe a [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) project that uses its platform to invest in [sustainability](https://www.investopedia.com/terms/s/sustainability.asp), including environmental, social, and financial stability and growth. ReFi projects use raised [capital](https://www.investopedia.com/terms/c/capital.asp) to attempt to provide a positive financial impact on the world. This may include money earned from [crypto token](https://www.investopedia.com/what-are-native-tokens-6754173) sales, or additional funds raised within the project for specific purposes. ### Key Takeaways * Regenerative finance (ReFi) is an alternative financial system that promotes and restores environmental, social, and financial stability along with monetary gains. * As a departure from traditional finance, ReFi has found applications in the cryptocurrency ecosystem. * Regenerative finance doesn’t refer to any specific cryptocurrency; rather, it is a movement toward mitigating climate change and improving equality. ## Understanding Regenerative Finance [Traditional finance](https://www.investopedia.com/terms/f/finance.asp) has often been criticized for putting short-term profits ahead of long-term sustainability. ReFi is a concept borrowed from John Fullerton, who coined the term “regenerative economics” in his 2015 paper titled “Regenerative Capitalism.” Fullerton ascertained that traditional [capitalism](https://www.investopedia.com/ask/answers/020915/what-are-differences-between-capitalism-and-socialism.asp) doesn’t implicitly prevent negative environmental and societal impacts, but encourages exploring a new “form of capitalism that produces lasting social and economic vitality for global civilization as a whole.” Regenerative finance goes a step further than [environmental, social, and governance (ESG) investing](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp), and focuses on actually recovering and improving the environmental and societal impacts of traditional capitalism, instead of just reducing the negative side effects.  There are several ways in which ReFi can be implemented, including the following actions. ### Climate Initiatives Some crypto projects are focused on reducing [carbon emissions](https://www.investopedia.com/terms/c/cap-and-trade.asp), as well as helping community-led initiatives fight climate change. Organizations such as the Climate Collective help raise awareness for projects that use [blockchain technology](https://www.investopedia.com/articles/investing/083115/blockchain-technology-revolutionize-traditional-banking.asp) to deploy regenerative financial solutions. These projects can assist by helping companies invest in carbon credits, incentivizing regenerative land-use practices, or even creating platforms to help organize climate-saving initiatives. ### Cultural Heritage Preservation Regenerative finance also can help preserve cultural heritage artifacts and historical records, using the [blockchain](https://www.investopedia.com/terms/b/blockchain.asp) to store permanent records. [Non-fungible tokens (NFTs)](https://www.investopedia.com/non-fungible-tokens-nft-5115211) can be used to create verifiable and immutable records on the blockchain for these artifacts, making them an unchangeable part of history. Companies like Monuverse are doing this already, minting NFTs of Italian heritage items to raise funds and preserve history. While traditional methods of recording history or inventorying artifacts are subject to change, the blockchain locks these records into place. And NFTs of some of these items can be minted, allowing cultural centers around the globe to raise funds for the future preservation of historical items. ## Goals of Regenerative Finance Regenerative finance is ultimately designed to create a more balanced, nondestructive economy, which incentivizes social and environmental good. ### The goal of ReFi is to create an [economy](https://www.investopedia.com/terms/e/economy.asp) that thrives off mitigating climate change, reversing some of the effects of carbon emissions, and pursuing social change. ## Risks of Regenerative Finance As with any [Web3](https://www.investopedia.com/web-20-web-30-5208698) cryptocurrency project, regenerative finance projects can turn out to be a scam. There are always risks when investing in [alternative assets](https://www.investopedia.com/terms/a/alternative_investment.asp) such as crypto, and regenerative finance isn’t immune to these. Some projects have lofty goals, but vague language about how those goals will be accomplished. Just because regenerative finance is trending, they are trying to capitalize on the movement. Here are a few things to watch out for: * **Lack of token information**: If you are investing in a regenerative finance project, you will want to understand the “tokenomics,” or how the tokens are distributed. If a large amount of tokens is held by founders or early investors, and if tokens are unlocked in large chunks, these can be signs of a scam that will allow the price to rise, then investors can dump all their tokens when they unlock. * **Direct connection to your digital wallet**:If any project wants access to your [digital wallet](https://www.investopedia.com/terms/d/digital-wallet.asp), make sure it is trustworthy. By allowing access, scammers can steal the funds in your wallet very quickly. * **Lack of a project road map**: If the project doesn’t have a clear road map with date and actions that will be taken, then it may not ever accomplish what it is promising. Make sure the road map is detailed, too. * **Do your due diligence about the people leading the project**: Look for documentation or information about the team of developers on the project to gauge their authenticity, experience, and track record for running similar projects. To use regenerative finance, users can log into a chosen web app, connect a digital wallet, and deposit crypto onto the platform. Once the funds are deposited, users can choose from a list of supported crypto to borrow against the collateral deposited. Regenerative finance is an automated platform governed by [smart contracts](https://www.investopedia.com/terms/s/smart-contracts.asp), which means loans are handled instantaneously. Once a [loan](https://www.investopedia.com/terms/l/loan.asp) is confirmed, the crypto will deposit into a user’s digital wallet. There are no monthly payments required, but the loan will accrue [interest](https://www.investopedia.com/terms/i/interest.asp). Loans must be paid back in the cryptocurrency borrowed. ## What Is a Regenerative Finance Company? Regenerative finance (ReFi) companies include for-profit crypto companies, nonprofit crypto companies, and even [decentralized autonomous organizations (DAOs)](https://www.investopedia.com/tech/what-dao/). They design technology solutions built on the blockchain to help fund sustainability. These companies include carbon-offset credit-trading platforms, DAOs that raise funds for local environmental initiatives, and NFT companies designed to preserve cultural heritage on the blockchain. These companies typically issue crypto tokens to raise funds for projects and initiatives, as well as provide a [return on investment](https://www.investopedia.com/terms/r/returnoninvestment.asp) for users. ## How Does Regenerative Finance (ReFi) Compare with Decentralized Finance (DeFi)? Regenerative finance (ReFi) involves cryptocurrency projects that use their platforms to invest in sustainability practices. They use raised capital to try to make a positive financial impact on the world. [Decentralized finance (DeFi)](https://www.investopedia.com/decentralized-finance-defi-5113835) is a broad term for decentralized, blockchain-based services that enable basic financial transactions, such as earning interest, borrowing money, storing cash, and purchasing insurance. ## Why Does Regenerative Finance Matter? If regenerative finance is correctly implemented and widely adopted, then the world could experience adequate funding of public goods, rather than using public goods such as trees until they have been depleted. ReFi gives incentives for the financing of public goods, rewarding those who create positive outcomes—such as planting trees, in this example. ## The Bottom Line Regenerative finance (ReFi) is the crypto-equivalent of ESG investing, but with a more direct (and flexible) approach to making change. Crypto-based projects often can quickly raise capital and generate a [return on investment](https://www.investopedia.com/articles/basics/10/guide-to-calculating-roi.asp) while directing funds toward immediately impactful initiatives. However, just because a crypto project labels itself as “regenerative” doesn’t mean it is a good investment. As with any crypto project, you need to research the team, road map, and reputation of the project before allocating any funds toward it.

Regenerative finance (ReFi) is an alternative financial system that focuses on promoting and restoring sustainability and resilience along with monetary gains. It has found favor in the cryptocurrency ecosystem and is often used to describe a cryptocurrency project that uses its platform to invest in sustainability, including environmental, social, and financial stability and growth. ReFi projects use raised capital to attempt to provide a positive financial impact on the world. This may include money earned from crypto token sales, or additional funds raised within the project for specific purposes. Key Takeaways Regenerative finance (ReFi) is an alternative financial system that promotes and restores environmental, social, and financial stability along with monetary gains.As a departure from traditional finance, ReFi has found applications in the cryptocurrency ecosystem.Regenerative finance doesn’t refer to any specific cryptocurrency; rather, it is a movement toward mitigating climate change and improving equality. Understanding Regenerative Finance Traditional finance has often been criticized for putting short-term profits ahead of long-term sustainability. ReFi is a concept borrowed from John Fullerton, who coined the term “regenerative economics” in his 2015 paper titled “Regenerative Capitalism.” Fullerton ascertained that traditional capitalism doesn’t implicitly prevent negative environmental and societal impacts, but encourages exploring a new “form of capitalism that produces lasting social and economic vitality for global civilization as a whole.” Regenerative finance goes a step further than environmental, social, and governance (ESG) investing, and focuses on actually recovering and improving the environmental and societal impacts of traditional capitalism, instead of just reducing the negative side effects.  There are several ways in which ReFi can be implemented, including the following actions. Climate Initiatives Some crypto projects are focused on reducing carbon emissions, as well as helping community-led initiatives fight climate change. Organizations such as the Climate Collective help raise awareness for projects that use blockchain technology to deploy regenerative financial solutions. These projects can assist by helping companies invest in carbon credits, incentivizing regenerative land-use practices, or even creating platforms to help organize climate-saving initiatives. Cultural Heritage Preservation Regenerative finance also can help preserve cultural heritage artifacts and historical records, using the blockchain to store permanent records. Non-fungible tokens (NFTs) can be used to create verifiable and immutable records on the blockchain for these artifacts, making them an unchangeable part of history. Companies like Monuverse are doing this already, minting NFTs of Italian heritage items to raise funds and preserve history. While traditional methods of recording history or inventorying artifacts are subject to change, the blockchain locks these records into place. And NFTs of some of these items can be minted, allowing cultural centers around the globe to raise funds for the future preservation of historical items. Goals of Regenerative Finance Regenerative finance is ultimately designed to create a more balanced, nondestructive economy, which incentivizes social and environmental good. The goal of ReFi is to create an economy that thrives off mitigating climate change, reversing some of the effects of carbon emissions, and pursuing social change. Risks of Regenerative Finance As with any Web3 cryptocurrency project, regenerative finance projects can turn out to be a scam. There are always risks when investing in alternative assets such as crypto, and regenerative finance isn’t immune to these. Some projects have lofty goals, but vague language about how those goals will be accomplished. Just because regenerative finance is trending, they are trying to capitalize on the movement. Here are a few things to watch out for: Lack of token information: If you are investing in a regenerative finance project, you will want to understand the “tokenomics,” or how the tokens are distributed. If a large amount of tokens is held by founders or early investors, and if tokens are unlocked in large chunks, these can be signs of a scam that will allow the price to rise, then investors can dump all their tokens when they unlock. Direct connection to your digital wallet: If any project wants access to your digital wallet, make sure it is trustworthy. By allowing access, scammers can steal the funds in your wallet very quickly. Lack of a project road map: If the project doesn’t have a clear road map with date and actions that will be taken, then it may not ever accomplish what it is promising. Make sure the road map is detailed, too. Do your due diligence about the people leading the project: Look for documentation or information about the team of developers on the project to gauge their authenticity, experience, and track record for running similar projects. To use regenerative finance, users can log into a chosen web app, connect a digital wallet, and deposit crypto onto the platform. Once the funds are deposited, users can choose from a list of supported crypto to borrow against the collateral deposited. Regenerative finance is an automated platform governed by smart contracts, which means loans are handled instantaneously. Once a loan is confirmed, the crypto will deposit into a user’s digital wallet. There are no monthly payments required, but the loan will accrue interest. Loans must be paid back in the cryptocurrency borrowed. What Is a Regenerative Finance Company? Regenerative finance (ReFi) companies include for-profit crypto companies, nonprofit crypto companies, and even decentralized autonomous organizations (DAOs). They design technology solutions built on the blockchain to help fund sustainability. These companies include carbon-offset credit-trading platforms, DAOs that raise funds for local environmental initiatives, and NFT companies designed to preserve cultural heritage on the blockchain. These companies typically issue crypto tokens to raise funds for projects and initiatives, as well as provide a return on investment for users. How Does Regenerative Finance (ReFi) Compare with Decentralized Finance (DeFi)? Regenerative finance (ReFi) involves cryptocurrency projects that use their platforms to invest in sustainability practices. They use raised capital to try to make a positive financial impact on the world.Decentralized finance (DeFi) is a broad term for decentralized, blockchain-based services that enable basic financial transactions, such as earning interest, borrowing money, storing cash, and purchasing insurance. Why Does Regenerative Finance Matter? If regenerative finance is correctly implemented and widely adopted, then the world could experience adequate funding of public goods, rather than using public goods such as trees until they have been depleted. ReFi gives incentives for the financing of public goods, rewarding those who create positive outcomes—such as planting trees, in this example. The Bottom Line Regenerative finance (ReFi) is the crypto-equivalent of ESG investing, but with a more direct (and flexible) approach to making change. Crypto-based projects often can quickly raise capital and generate a return on investment while directing funds toward immediately impactful initiatives. However, just because a crypto project labels itself as “regenerative” doesn’t mean it is a good investment. As with any crypto project, you need to research the team, road map, and reputation of the project before allocating any funds toward it.

https://www.investopedia.com/terms/n/non-recoursefinance.asp

Non-Recourse Finance: Definition, Uses, Vs. Recourse Loan

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-non-recourse-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Non-Recourse Finance? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nonrecoursedebt.asp">non-recourse loan</a>, more broadly, is any consumer or commercial debt that is secured only by collateral. In case of default, the lender may not seize any assets of the borrower beyond the collateral. A mortgage loan is typically a non-recourse loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Non-recourse financing entitles the lender to repayment only from the profits of the project that the loan is funding.</li><li>No other assets of the borrower can be seized to recoup the loan upon default.</li><li>Non-recourse financing typically requires substantial collateral and a higher interest rate and is typically used in land development projects.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-non-recourse-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding Non-Recourse Finance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Non-recourse financing is a branch of commercial lending that is characterized by high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalexpenditure.asp">capital expenditures</a>, distant repayment prospects, and uncertain returns. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In fact, it is similar in character and risks to venture capital financing. For example, say a company wants to build a new factory. The borrower presents a bank with a detailed plan for the construction, in addition to a business plan for the greatly-expanded production that it will enable the company to undertake. Repayment can be made only when the factory is up and running, and only with the profits of that production. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The lender is agreeing to terms that do not include access to any of the borrowers' assets beyond the agreed upon <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a>, even if they default on the loans. Payments will only be made when and if the funded projects generate revenue. If a project produces no revenue, the lender receives no payment on the debt. Once the collateral is seized, the bank cannot go after the borrowers in hopes of recouping any remaining losses. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Non-recourse loans and recourse loans are subject to different tax treatments in the U.S.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-where-non-recourse-loans-are-used"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> Where Non-Recourse Loans Are Used </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Compare a non-recourse loan with the more conventional loan, in which the borrower must begin repaying immediately and in installments every month thereafter. Not surprisingly, interest rates are generally higher on non-recourse loans to compensate for the elevated risk. Substantial collateral is also required. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Non-recourse loans are often used to finance commercial real estate ventures and other projects that involve a long lead time to completion. In the case of real estate, the land provides the collateral for the loan. They also are used in the financial industry, with securities used as collateral. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-special-considerations-for-non-recourse-loans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Special Considerations for Non-Recourse Loans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Non-recourse loans and recourse loans are subject to different tax treatments in the U.S. Non-recourse loans are considered to be paid in full once the underlying asset is seized, regardless of the price at which the asset is sold. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> In the case of recourse debt, if the financial institution forgives any part of the debt after <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitedrecoursedebt.asp">the associated asset is seized and sold</a>, the forgiven amount may be treated as ordinary income that the debtor must report to the Internal Revenue Service. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_27-0"><span class="heading-toc" id="toc-are-non-recourse-loans-taxable"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Non-Recourse Loans Taxable?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you default on a non-recourse loan, the amount forgiven or canceled is not taxed.<span class="ql-inline-citation" data-cite="3"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-industries-use-non-recourse-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Industries Use Non-Recourse Loans?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Non-recourse loans are very popular in the real estate industry, in addition to other industries that have long project timelines. Since there may not be any income at the beginning of the project, a non-recourse loan gives a measure of breathing room to project financers.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-can-a-lender-come-for-my-personal-assets-with-a-non-recourse-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Lender Come for My Personal Assets With a Non-Recourse Loan?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No. A non-recourse loan is secured only by the listed collateral. A mortgage is a good example. If you default on your mortgage, the bank can seize the house to recoup their investments, but they can't seize your car or bank accounts.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Non-recourse loans offer several benefits to businesses planning large projects, including different tax considerations, and the ability to avoid payment until the project comes to fruition. While it's never ideal to default on a loan, a non-recourse loan can save your other assets from seizure in the event of default.<br/> </p></div>

## What Is Non-Recourse Finance? Non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral. A [non-recourse loan](https://www.investopedia.com/terms/n/nonrecoursedebt.asp), more broadly, is any consumer or commercial debt that is secured only by collateral. In case of default, the lender may not seize any assets of the borrower beyond the collateral. A mortgage loan is typically a non-recourse loan. ### Key Takeaways * Non-recourse financing entitles the lender to repayment only from the profits of the project that the loan is funding. * No other assets of the borrower can be seized to recoup the loan upon default. * Non-recourse financing typically requires substantial collateral and a higher interest rate and is typically used in land development projects. ## Understanding Non-Recourse Finance Non-recourse financing is a branch of commercial lending that is characterized by high [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp), distant repayment prospects, and uncertain returns. In fact, it is similar in character and risks to venture capital financing. For example, say a company wants to build a new factory. The borrower presents a bank with a detailed plan for the construction, in addition to a business plan for the greatly-expanded production that it will enable the company to undertake. Repayment can be made only when the factory is up and running, and only with the profits of that production. The lender is agreeing to terms that do not include access to any of the borrowers' assets beyond the agreed upon [collateral](https://www.investopedia.com/terms/c/collateral.asp), even if they default on the loans. Payments will only be made when and if the funded projects generate revenue. If a project produces no revenue, the lender receives no payment on the debt. Once the collateral is seized, the bank cannot go after the borrowers in hopes of recouping any remaining losses. ### Non-recourse loans and recourse loans are subject to different tax treatments in the U.S. ## Where Non-Recourse Loans Are Used Compare a non-recourse loan with the more conventional loan, in which the borrower must begin repaying immediately and in installments every month thereafter. Not surprisingly, interest rates are generally higher on non-recourse loans to compensate for the elevated risk. Substantial collateral is also required. Non-recourse loans are often used to finance commercial real estate ventures and other projects that involve a long lead time to completion. In the case of real estate, the land provides the collateral for the loan. They also are used in the financial industry, with securities used as collateral. ## Special Considerations for Non-Recourse Loans Non-recourse loans and recourse loans are subject to different tax treatments in the U.S. Non-recourse loans are considered to be paid in full once the underlying asset is seized, regardless of the price at which the asset is sold. In the case of recourse debt, if the financial institution forgives any part of the debt after [the associated asset is seized and sold](https://www.investopedia.com/terms/l/limitedrecoursedebt.asp), the forgiven amount may be treated as ordinary income that the debtor must report to the Internal Revenue Service. ## Are Non-Recourse Loans Taxable? If you default on a non-recourse loan, the amount forgiven or canceled is not taxed. ## What Industries Use Non-Recourse Loans? Non-recourse loans are very popular in the real estate industry, in addition to other industries that have long project timelines. Since there may not be any income at the beginning of the project, a non-recourse loan gives a measure of breathing room to project financers. ## Can a Lender Come for My Personal Assets With a Non-Recourse Loan? No. A non-recourse loan is secured only by the listed collateral. A mortgage is a good example. If you default on your mortgage, the bank can seize the house to recoup their investments, but they can't seize your car or bank accounts. ## The Bottom Line Non-recourse loans offer several benefits to businesses planning large projects, including different tax considerations, and the ability to avoid payment until the project comes to fruition. While it's never ideal to default on a loan, a non-recourse loan can save your other assets from seizure in the event of default.

What Is Non-Recourse Finance? Non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral. A non-recourse loan, more broadly, is any consumer or commercial debt that is secured only by collateral. In case of default, the lender may not seize any assets of the borrower beyond the collateral. A mortgage loan is typically a non-recourse loan. Key Takeaways Non-recourse financing entitles the lender to repayment only from the profits of the project that the loan is funding.No other assets of the borrower can be seized to recoup the loan upon default.Non-recourse financing typically requires substantial collateral and a higher interest rate and is typically used in land development projects. Understanding Non-Recourse Finance Non-recourse financing is a branch of commercial lending that is characterized by high capital expenditures, distant repayment prospects, and uncertain returns. In fact, it is similar in character and risks to venture capital financing. For example, say a company wants to build a new factory. The borrower presents a bank with a detailed plan for the construction, in addition to a business plan for the greatly-expanded production that it will enable the company to undertake. Repayment can be made only when the factory is up and running, and only with the profits of that production. The lender is agreeing to terms that do not include access to any of the borrowers' assets beyond the agreed upon collateral, even if they default on the loans. Payments will only be made when and if the funded projects generate revenue. If a project produces no revenue, the lender receives no payment on the debt. Once the collateral is seized, the bank cannot go after the borrowers in hopes of recouping any remaining losses. Non-recourse loans and recourse loans are subject to different tax treatments in the U.S. Where Non-Recourse Loans Are Used Compare a non-recourse loan with the more conventional loan, in which the borrower must begin repaying immediately and in installments every month thereafter. Not surprisingly, interest rates are generally higher on non-recourse loans to compensate for the elevated risk. Substantial collateral is also required. Non-recourse loans are often used to finance commercial real estate ventures and other projects that involve a long lead time to completion. In the case of real estate, the land provides the collateral for the loan. They also are used in the financial industry, with securities used as collateral. Special Considerations for Non-Recourse Loans Non-recourse loans and recourse loans are subject to different tax treatments in the U.S. Non-recourse loans are considered to be paid in full once the underlying asset is seized, regardless of the price at which the asset is sold. In the case of recourse debt, if the financial institution forgives any part of the debt after the associated asset is seized and sold, the forgiven amount may be treated as ordinary income that the debtor must report to the Internal Revenue Service. Are Non-Recourse Loans Taxable? If you default on a non-recourse loan, the amount forgiven or canceled is not taxed. What Industries Use Non-Recourse Loans? Non-recourse loans are very popular in the real estate industry, in addition to other industries that have long project timelines. Since there may not be any income at the beginning of the project, a non-recourse loan gives a measure of breathing room to project financers. Can a Lender Come for My Personal Assets With a Non-Recourse Loan? No. A non-recourse loan is secured only by the listed collateral. A mortgage is a good example. If you default on your mortgage, the bank can seize the house to recoup their investments, but they can't seize your car or bank accounts. The Bottom Line Non-recourse loans offer several benefits to businesses planning large projects, including different tax considerations, and the ability to avoid payment until the project comes to fruition. While it's never ideal to default on a loan, a non-recourse loan can save your other assets from seizure in the event of default.

https://www.investopedia.com/investing/beta-know-risk/

What Beta Means When Considering a Stock's Risk

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-beta"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Beta? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Beta is a measure of a stock's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> in relation to the overall market. By definition, the market, such as the S&amp;P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">beta</a> above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Beta is a concept that measures the expected move in a stock relative to movements in the overall market.</li><li>A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.</li><li>Beta is a component of the Capital Asset Pricing Model, which calculates the cost of equity funding and can help determine the rate of return to expect relative to perceived risk.</li><li>Critics argue that beta does not give enough information about the fundamentals of a company and is of limited value when making stock selections.</li><li>Beta is probably a better indicator of short-term rather than long-term risk.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-beta-in-investing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Beta in Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> How should investors assess <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risk</a> in the stocks that they buy or sell? While the concept of risk is hard to factor in stock analysis and valuation, one of the most popular indicators is a statistical measure called beta. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Beta measures risk in the form of volatility against a benchmark and is based on the principle that higher risk come with higher potential rewards. Analysts use beta when they want to determine a stock's risk profile. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/highbetaindex.asp">High-beta stocks</a>, which generally means any stock with a beta higher than 1.0, are supposed to be riskier but provide higher return potential; low-beta stocks, those with a beta under 1.0, pose less risk but also usually lower returns.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_11-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_12-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Beta is a component of the capital asset pricing model (CAPM), which is widely used to determine the rate of return that shareholders might reasonably expect based on perceived investment risk.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-subheading__text"> Beta and CAPM </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Beta is used in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM), a widely used method for pricing risky securities and for generating estimates of the expected returns of assets, particularly stocks. The CAPM formula uses the total average market return and the beta value of the stock to determine the rate of return that shareholders might reasonably expect based on perceived investment risk. In this way, beta can impact a stock's expected rate of return and share valuation.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-how-to-read-stock-betas"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> How to Read Stock Betas </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Beta is a numerical value. The overall market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. Market in this context means an index, such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&amp;P 500</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The S&amp;P 500's 500 constituents will each have different betas based on how they moved in relation to the index over a set timeframe. Companies whose share prices were less volatile than the S&amp;P 500 will have a beta value under 1.0. Conversely, share prices that were more volatile than the S&amp;P 500 will have beta values over 1.0. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The higher the value, the more volatile the share price. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_23-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Beta Values and What They Mean</th> </tr> </thead> <tbody data-check="-1"> <tr> <td>Beta </td> <td> Meaning</td> </tr> <tr> <td>1.0</td> <td>The stock moves in line with the broader market</td> </tr> <tr> <td>2.0</td> <td>The stock moves twice as much as the broader market</td> </tr> <tr> <td>0.0</td> <td>The stock's moves don’t correlate with the broader market</td> </tr> <tr> <td>-1.0</td> <td>The stock moves in the opposite direction of the broader market</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>A negative beta is when an asset moves in the opposite direction of the stock market. An example of this could be gold during economic downturns.<span class="ql-inline-citation" data-cite="12"></span></p></div></div></div> <span class="heading-toc" id="toc-how-is-beta-calculated"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> How Is Beta Calculated? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Beta is calculated using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regression.asp">regression</a> analysis. Numerically, it represents the tendency for a security's returns to respond to swings in the market. </p> <p>To calculate the beta of a security, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/covariance.asp">covariance</a> between the return of the security and the return of the market must be known as well as the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variance.asp">variance</a> of the market returns. The covariance of the return of an asset with the return of the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> is divided by the variance of the return of the benchmark over a certain period.</p> <p><span data-value="\text{Beta} = \frac{\text{Covariance}}{\text{Variance}}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mrow> <mtext> Beta </mtext> <mo> = </mo> <mfrac> <mtext> Covariance </mtext> <mtext> Variance </mtext> </mfrac> </mrow> <annotation encoding="application/x-tex"> \text{Beta} = \frac{\text{Covariance}}{\text{Variance}} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">Beta</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord text mtight"><span class="mord mtight">Variance</span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord text mtight"><span class="mord mtight">Covariance</span></span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span></span></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-high-beta-vs-low-beta-which-is-better"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> High Beta vs Low Beta: Which Is Better? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The higher the risk, the higher the potential reward is a common belief in investment circles. High-beta stocks are supposed to be riskier but provide higher return potential. Conversely, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/082515/how-aqr-places-bets-against-beta.asp">low-beta stocks pose less risk</a> but also offer lower potential returns. Which is best depends on what type of investor you are.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> More conservative investors or those that wish to soon tap into their funds will likely prefer low-beta stocks. These kinds of stocks historically tend to not fluctuate much in value. They are companies that consistently deliver steady revenues and profits in times of economic expansion and hardship. Positive or negative surprises are lacking and valuations are based on very realistic expectations that the company has a history of reaching. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Investors keen to bag big <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp">capital gains</a> or day traders looking to make a quick buck from fluctuating share prices would be more interested in high-beta stocks. The share prices of these companies historically have a tendency to jump around quite a bit. Racy stocks, such as tech upstarts with the potential to revolutionize how certain things are done, fall into this category. Investing in one could make you a fortune or lead to big losses. Their future is unpredictable and that leads to lots of speculation and price movements. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Higher beta stocks also tend to outperform in bull markets when the economy is in expansion mode and confidence is high, whereas lower beta stocks tend to fare better during recessions.<span class="ql-inline-citation" data-cite="9"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>A stock's beta will change over time because it compares the stock's return with the returns of the overall market.</p></div></div></div> <span class="heading-toc" id="toc-low-beta-stock-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> Low Beta Stock Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Low beta stocks tend to be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defensivestock.asp">defensive</a> companies. There is a constant demand for their products or services, regardless of where we are in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-cycle.asp">economic cycle</a>, resulting in steady profits and revenues, which often translate into a steady share price and dividend payments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> A classic example of a low beta stock would be a company like Proctor &amp; Gamble. The maker of household brands such as Pampers, Oral, Pantene, and Gillette, as of July 2023, has a five-year beta of 0.4. In other words, its share price fluctuates much less than the broader market. For every 1% move in the market, Proctor &amp; Gamble's shares moved 0.4% on average. That's good in terms of protecting against losses but also means limited upside potential compared to other options.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <span class="heading-toc" id="toc-high-beta-stock-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> High Beta Stock Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> High beta is generally associated with small companies or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthstock.asp">growth stocks</a>. These are companies that are expected to grow revenues and profit fast and, as a result, experience lots of <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalappreciation.asp">capital appreciation</a> . </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Many of the highest beta stocks are tech companies. A company behind the next big thing typically commands a high valuation. Investors buy the stock based on it living up to its potential, which requires lots of uncertain factors going its way. High hopes create volatility. A slip-up could result in the share price tumbling dramatically. Likewise, a small hint of good news can lead to another big rally. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Tesla falls into this category. There is a lot of hope baked into its share price, resulting in wild swings whenever it fails/exceeds expectations and a five-year beta of 2.08, as of July 2023.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-advantages-of-using-beta-as-a-proxy-for-risk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> Advantages of Using Beta as a Proxy for Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> To followers of CAPM, beta is useful. A stock's price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/safe-haven.asp" rel="noopener noreferrer">safe-haven</a> utility industry stock with a low beta. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Besides, beta offers a clear, quantifiable measure that is easy to work with. Sure, there are variations on beta depending on things such as the market index used and the time period measured. But broadly speaking, the notion of beta is fairly straightforward. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_58-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_59-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Beta is generally more useful as a risk metric for traders moving in and out of trades. For investors with long-term horizons, it's less useful.</p></div></div></div> <span class="heading-toc" id="toc-disadvantages-of-using-beta-as-a-proxy-for-risk"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_60-0"> <span class="mntl-sc-block-heading__text"> Disadvantages of Using Beta as a Proxy for Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> The well-worn definition of risk is the possibility of suffering a loss. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. The trouble is that beta, as a proxy for risk, doesn't distinguish between <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/upside.asp">upside</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downside.asp">downside</a> price movements. For most investors, downside movements are a risk, while upside ones mean opportunity. Beta doesn't help investors tell the difference. For most investors, that doesn't make much sense. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valueinvesting.asp">Value investors</a> scorn the idea of beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value—investors can get the same stock at a lower price despite the rise in the stock's beta following its decline. Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Beta doesn't pay attention to a stock's fundamentals or incorporate new information. Consider a utility company: let's call it Company X. Company X has been considered a defensive stock with a low beta. When it entered the merchant energy business and assumed more debt, X's historic beta no longer captured the substantial risks the company took on. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_69-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_70-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_6-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_6-0"><p>Beta is based on past price movement and the past doesn't necessarily have a bearing on the future.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Another troubling factor is that past price movement is a poor predictor of the future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable. Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it's less useful. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_73-0"><span class="heading-toc" id="toc-does-beta-mean-alpha"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Beta Mean Alpha?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, they are two different things. Beta is a measure of volatility relative to a benchmark. Alpha is excess return in relation to a benchmark and is commonly used to reveal how much active fund managers outperform the index they are trying to beat.<span class="ql-inline-citation" data-cite="11"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_75-0"><span class="heading-toc" id="toc-is-a-beta-of-15-good"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Beta of 1.5 Good?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>That depends on what kind of risk/return you’re looking for. A beta value of 1.5 implies that the stock is 50% more volatile than the broader market. That means higher than average risk and the potential for greater upside.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_77-0"><span class="heading-toc" id="toc-what-does-a-beta-of-10-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does a Beta of 1.0 Mean?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A beta of 1.0 means the stock over the allocated time frame moved similar to the rest of the market. This could be determined as an average level of risk.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_79-0"><span class="heading-toc" id="toc-is-low-beta-bad"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Low Beta Bad?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Low beta generally means lower price volatiltiy than the average stock. That might suit some investors but not everyone.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_81-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> Beta is the volatility of a security or portfolio against its benchmark. It's a numerical value that signifies how much a stock price jumps around. The higher the value, the more the company tends to fluctuate in value. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Ultimately, it's important for investors to make the distinction between short-term risk—where beta and price volatility are useful—and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities. </p></div>

## What Is Beta? Beta is a measure of a stock's [volatility](https://www.investopedia.com/terms/v/volatility.asp) in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a [beta](https://www.investopedia.com/terms/b/beta.asp) above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. ### Key Takeaways * Beta is a concept that measures the expected move in a stock relative to movements in the overall market. * A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility. * Beta is a component of the Capital Asset Pricing Model, which calculates the cost of equity funding and can help determine the rate of return to expect relative to perceived risk. * Critics argue that beta does not give enough information about the fundamentals of a company and is of limited value when making stock selections. * Beta is probably a better indicator of short-term rather than long-term risk. ## Understanding Beta in Investing How should investors assess [risk](https://www.investopedia.com/terms/r/risk.asp) in the stocks that they buy or sell? While the concept of risk is hard to factor in stock analysis and valuation, one of the most popular indicators is a statistical measure called beta. Beta measures risk in the form of volatility against a benchmark and is based on the principle that higher risk come with higher potential rewards. Analysts use beta when they want to determine a stock's risk profile. [High-beta stocks](https://www.investopedia.com/terms/h/highbetaindex.asp), which generally means any stock with a beta higher than 1.0, are supposed to be riskier but provide higher return potential; low-beta stocks, those with a beta under 1.0, pose less risk but also usually lower returns. ### Beta is a component of the capital asset pricing model (CAPM), which is widely used to determine the rate of return that shareholders might reasonably expect based on perceived investment risk. ### Beta and CAPM Beta is used in the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM), a widely used method for pricing risky securities and for generating estimates of the expected returns of assets, particularly stocks. The CAPM formula uses the total average market return and the beta value of the stock to determine the rate of return that shareholders might reasonably expect based on perceived investment risk. In this way, beta can impact a stock's expected rate of return and share valuation. ## How to Read Stock Betas Beta is a numerical value. The overall market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. Market in this context means an index, such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp). The S&P 500's 500 constituents will each have different betas based on how they moved in relation to the index over a set timeframe. Companies whose share prices were less volatile than the S&P 500 will have a beta value under 1.0. Conversely, share prices that were more volatile than the S&P 500 will have beta values over 1.0. The higher the value, the more volatile the share price. | Beta Values and What They Mean | | | --- | --- | | Beta | Meaning | | 1.0 | The stock moves in line with the broader market | | 2.0 | The stock moves twice as much as the broader market | | 0.0 | The stock's moves don’t correlate with the broader market | | -1.0 | The stock moves in the opposite direction of the broader market | ### A negative beta is when an asset moves in the opposite direction of the stock market. An example of this could be gold during economic downturns. ## How Is Beta Calculated? Beta is calculated using [regression](https://www.investopedia.com/terms/r/regression.asp) analysis. Numerically, it represents the tendency for a security's returns to respond to swings in the market.  To calculate the beta of a security, the [covariance](https://www.investopedia.com/terms/c/covariance.asp) between the return of the security and the return of the market must be known as well as the [variance](https://www.investopedia.com/terms/v/variance.asp) of the market returns. The covariance of the return of an asset with the return of the [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) is divided by the variance of the return of the benchmark over a certain period. Beta = Covariance Variance \text{Beta} = \frac{\text{Covariance}}{\text{Variance}} Beta=VarianceCovariance​ ## High Beta vs Low Beta: Which Is Better? The higher the risk, the higher the potential reward is a common belief in investment circles. High-beta stocks are supposed to be riskier but provide higher return potential. Conversely, [low-beta stocks pose less risk](https://www.investopedia.com/articles/investing/082515/how-aqr-places-bets-against-beta.asp) but also offer lower potential returns. Which is best depends on what type of investor you are. More conservative investors or those that wish to soon tap into their funds will likely prefer low-beta stocks. These kinds of stocks historically tend to not fluctuate much in value. They are companies that consistently deliver steady revenues and profits in times of economic expansion and hardship. Positive or negative surprises are lacking and valuations are based on very realistic expectations that the company has a history of reaching. Investors keen to bag big [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) or day traders looking to make a quick buck from fluctuating share prices would be more interested in high-beta stocks. The share prices of these companies historically have a tendency to jump around quite a bit. Racy stocks, such as tech upstarts with the potential to revolutionize how certain things are done, fall into this category. Investing in one could make you a fortune or lead to big losses. Their future is unpredictable and that leads to lots of speculation and price movements. Higher beta stocks also tend to outperform in bull markets when the economy is in expansion mode and confidence is high, whereas lower beta stocks tend to fare better during recessions. ### A stock's beta will change over time because it compares the stock's return with the returns of the overall market. ## Low Beta Stock Example Low beta stocks tend to be [defensive](https://www.investopedia.com/terms/d/defensivestock.asp) companies. There is a constant demand for their products or services, regardless of where we are in the [economic cycle](https://www.investopedia.com/terms/e/economic-cycle.asp), resulting in steady profits and revenues, which often translate into a steady share price and dividend payments. A classic example of a low beta stock would be a company like Proctor & Gamble. The maker of household brands such as Pampers, Oral, Pantene, and Gillette, as of July 2023, has a five-year beta of 0.4. In other words, its share price fluctuates much less than the broader market. For every 1% move in the market, Proctor & Gamble's shares moved 0.4% on average. That's good in terms of protecting against losses but also means limited upside potential compared to other options. ## High Beta Stock Example High beta is generally associated with small companies or [growth stocks](https://www.investopedia.com/terms/g/growthstock.asp). These are companies that are expected to grow revenues and profit fast and, as a result, experience lots of [capital appreciation](https://www.investopedia.com/terms/c/capitalappreciation.asp) . Many of the highest beta stocks are tech companies. A company behind the next big thing typically commands a high valuation. Investors buy the stock based on it living up to its potential, which requires lots of uncertain factors going its way. High hopes create volatility. A slip-up could result in the share price tumbling dramatically. Likewise, a small hint of good news can lead to another big rally. Tesla falls into this category. There is a lot of hope baked into its share price, resulting in wild swings whenever it fails/exceeds expectations and a five-year beta of 2.08, as of July 2023. ## Advantages of Using Beta as a Proxy for Risk To followers of CAPM, beta is useful. A stock's price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say, a [safe-haven](https://www.investopedia.com/terms/s/safe-haven.asp) utility industry stock with a low beta. Besides, beta offers a clear, quantifiable measure that is easy to work with. Sure, there are variations on beta depending on things such as the market index used and the time period measured. But broadly speaking, the notion of beta is fairly straightforward. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method. ### Beta is generally more useful as a risk metric for traders moving in and out of trades. For investors with long-term horizons, it's less useful. ## Disadvantages of Using Beta as a Proxy for Risk The well-worn definition of risk is the possibility of suffering a loss. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. The trouble is that beta, as a proxy for risk, doesn't distinguish between [upside](https://www.investopedia.com/terms/u/upside.asp) and [downside](https://www.investopedia.com/terms/d/downside.asp) price movements. For most investors, downside movements are a risk, while upside ones mean opportunity. Beta doesn't help investors tell the difference. For most investors, that doesn't make much sense. [Value investors](https://www.investopedia.com/terms/v/valueinvesting.asp) scorn the idea of beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value—investors can get the same stock at a lower price despite the rise in the stock's beta following its decline. Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows. Beta doesn't pay attention to a stock's fundamentals or incorporate new information. Consider a utility company: let's call it Company X. Company X has been considered a defensive stock with a low beta. When it entered the merchant energy business and assumed more debt, X's historic beta no longer captured the substantial risks the company took on. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. ### Beta is based on past price movement and the past doesn't necessarily have a bearing on the future. Another troubling factor is that past price movement is a poor predictor of the future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable. Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it's less useful. ## Does Beta Mean Alpha? No, they are two different things. Beta is a measure of volatility relative to a benchmark. Alpha is excess return in relation to a benchmark and is commonly used to reveal how much active fund managers outperform the index they are trying to beat. ## Is a Beta of 1.5 Good? That depends on what kind of risk/return you’re looking for. A beta value of 1.5 implies that the stock is 50% more volatile than the broader market. That means higher than average risk and the potential for greater upside. ## What Does a Beta of 1.0 Mean? A beta of 1.0 means the stock over the allocated time frame moved similar to the rest of the market. This could be determined as an average level of risk. ## Is Low Beta Bad? Low beta generally means lower price volatiltiy than the average stock. That might suit some investors but not everyone. ## The Bottom Line Beta is the volatility of a security or portfolio against its benchmark. It's a numerical value that signifies how much a stock price jumps around. The higher the value, the more the company tends to fluctuate in value. Ultimately, it's important for investors to make the distinction between short-term risk—where beta and price volatility are useful—and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities.

What Is Beta? Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. Key Takeaways Beta is a concept that measures the expected move in a stock relative to movements in the overall market.A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.Beta is a component of the Capital Asset Pricing Model, which calculates the cost of equity funding and can help determine the rate of return to expect relative to perceived risk.Critics argue that beta does not give enough information about the fundamentals of a company and is of limited value when making stock selections.Beta is probably a better indicator of short-term rather than long-term risk. Understanding Beta in Investing How should investors assess risk in the stocks that they buy or sell? While the concept of risk is hard to factor in stock analysis and valuation, one of the most popular indicators is a statistical measure called beta. Beta measures risk in the form of volatility against a benchmark and is based on the principle that higher risk come with higher potential rewards. Analysts use beta when they want to determine a stock's risk profile. High-beta stocks, which generally means any stock with a beta higher than 1.0, are supposed to be riskier but provide higher return potential; low-beta stocks, those with a beta under 1.0, pose less risk but also usually lower returns. Beta is a component of the capital asset pricing model (CAPM), which is widely used to determine the rate of return that shareholders might reasonably expect based on perceived investment risk. Beta and CAPM Beta is used in the capital asset pricing model (CAPM), a widely used method for pricing risky securities and for generating estimates of the expected returns of assets, particularly stocks. The CAPM formula uses the total average market return and the beta value of the stock to determine the rate of return that shareholders might reasonably expect based on perceived investment risk. In this way, beta can impact a stock's expected rate of return and share valuation. How to Read Stock Betas Beta is a numerical value. The overall market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. Market in this context means an index, such as the S&P 500. The S&P 500's 500 constituents will each have different betas based on how they moved in relation to the index over a set timeframe. Companies whose share prices were less volatile than the S&P 500 will have a beta value under 1.0. Conversely, share prices that were more volatile than the S&P 500 will have beta values over 1.0. The higher the value, the more volatile the share price. Beta Values and What They Mean Beta   Meaning 1.0 The stock moves in line with the broader market 2.0 The stock moves twice as much as the broader market 0.0 The stock's moves don’t correlate with the broader market -1.0 The stock moves in the opposite direction of the broader market A negative beta is when an asset moves in the opposite direction of the stock market. An example of this could be gold during economic downturns. How Is Beta Calculated? Beta is calculated using regression analysis. Numerically, it represents the tendency for a security's returns to respond to swings in the market.  To calculate the beta of a security, the covariance between the return of the security and the return of the market must be known as well as the variance of the market returns. The covariance of the return of an asset with the return of the benchmark is divided by the variance of the return of the benchmark over a certain period. Beta = Covariance Variance \text{Beta} = \frac{\text{Covariance}}{\text{Variance}} Beta=VarianceCovariance​ High Beta vs Low Beta: Which Is Better? The higher the risk, the higher the potential reward is a common belief in investment circles. High-beta stocks are supposed to be riskier but provide higher return potential. Conversely, low-beta stocks pose less risk but also offer lower potential returns. Which is best depends on what type of investor you are. More conservative investors or those that wish to soon tap into their funds will likely prefer low-beta stocks. These kinds of stocks historically tend to not fluctuate much in value. They are companies that consistently deliver steady revenues and profits in times of economic expansion and hardship. Positive or negative surprises are lacking and valuations are based on very realistic expectations that the company has a history of reaching. Investors keen to bag big capital gains or day traders looking to make a quick buck from fluctuating share prices would be more interested in high-beta stocks. The share prices of these companies historically have a tendency to jump around quite a bit. Racy stocks, such as tech upstarts with the potential to revolutionize how certain things are done, fall into this category. Investing in one could make you a fortune or lead to big losses. Their future is unpredictable and that leads to lots of speculation and price movements. Higher beta stocks also tend to outperform in bull markets when the economy is in expansion mode and confidence is high, whereas lower beta stocks tend to fare better during recessions. A stock's beta will change over time because it compares the stock's return with the returns of the overall market. Low Beta Stock Example Low beta stocks tend to be defensive companies. There is a constant demand for their products or services, regardless of where we are in the economic cycle, resulting in steady profits and revenues, which often translate into a steady share price and dividend payments. A classic example of a low beta stock would be a company like Proctor & Gamble. The maker of household brands such as Pampers, Oral, Pantene, and Gillette, as of July 2023, has a five-year beta of 0.4. In other words, its share price fluctuates much less than the broader market. For every 1% move in the market, Proctor & Gamble's shares moved 0.4% on average. That's good in terms of protecting against losses but also means limited upside potential compared to other options. High Beta Stock Example High beta is generally associated with small companies or growth stocks. These are companies that are expected to grow revenues and profit fast and, as a result, experience lots of capital appreciation . Many of the highest beta stocks are tech companies. A company behind the next big thing typically commands a high valuation. Investors buy the stock based on it living up to its potential, which requires lots of uncertain factors going its way. High hopes create volatility. A slip-up could result in the share price tumbling dramatically. Likewise, a small hint of good news can lead to another big rally. Tesla falls into this category. There is a lot of hope baked into its share price, resulting in wild swings whenever it fails/exceeds expectations and a five-year beta of 2.08, as of July 2023. Advantages of Using Beta as a Proxy for Risk To followers of CAPM, beta is useful. A stock's price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say, a safe-haven utility industry stock with a low beta. Besides, beta offers a clear, quantifiable measure that is easy to work with. Sure, there are variations on beta depending on things such as the market index used and the time period measured. But broadly speaking, the notion of beta is fairly straightforward. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method. Beta is generally more useful as a risk metric for traders moving in and out of trades. For investors with long-term horizons, it's less useful. Disadvantages of Using Beta as a Proxy for Risk The well-worn definition of risk is the possibility of suffering a loss. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. The trouble is that beta, as a proxy for risk, doesn't distinguish between upside and downside price movements. For most investors, downside movements are a risk, while upside ones mean opportunity. Beta doesn't help investors tell the difference. For most investors, that doesn't make much sense. Value investors scorn the idea of beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value—investors can get the same stock at a lower price despite the rise in the stock's beta following its decline. Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows. Beta doesn't pay attention to a stock's fundamentals or incorporate new information. Consider a utility company: let's call it Company X. Company X has been considered a defensive stock with a low beta. When it entered the merchant energy business and assumed more debt, X's historic beta no longer captured the substantial risks the company took on. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. Beta is based on past price movement and the past doesn't necessarily have a bearing on the future. Another troubling factor is that past price movement is a poor predictor of the future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable. Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it's less useful. Does Beta Mean Alpha? No, they are two different things. Beta is a measure of volatility relative to a benchmark. Alpha is excess return in relation to a benchmark and is commonly used to reveal how much active fund managers outperform the index they are trying to beat. Is a Beta of 1.5 Good? That depends on what kind of risk/return you’re looking for. A beta value of 1.5 implies that the stock is 50% more volatile than the broader market. That means higher than average risk and the potential for greater upside. What Does a Beta of 1.0 Mean? A beta of 1.0 means the stock over the allocated time frame moved similar to the rest of the market. This could be determined as an average level of risk. Is Low Beta Bad? Low beta generally means lower price volatiltiy than the average stock. That might suit some investors but not everyone. The Bottom Line Beta is the volatility of a security or portfolio against its benchmark. It's a numerical value that signifies how much a stock price jumps around. The higher the value, the more the company tends to fluctuate in value. Ultimately, it's important for investors to make the distinction between short-term risk—where beta and price volatility are useful—and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities.

https://www.investopedia.com/terms/m/metrics.asp

Metrics

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-metrics"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are Metrics? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Metrics are measures of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/041114/simple-overview-quantitative-analysis.asp">quantitative assessment</a> commonly used for assessing, comparing, and tracking performance or production. Generally, a group of metrics will typically be used to build a dashboard that management or analysts review on a regular basis to maintain performance assessments, opinions, and business strategies.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_4-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Metrics: Measures of quantitative assessment commonly used for assessing, comparing, and tracking performance or production." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/3x0sL27fLZ1TrSyEjDdkDAkwL-I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/metrics.aspfinal-40312c5e32ab4aadbb522fa7566ebe40.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/3x0sL27fLZ1TrSyEjDdkDAkwL-I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/metrics.aspfinal-40312c5e32ab4aadbb522fa7566ebe40.jpg" data-srcset="https://www.investopedia.com/thmb/lsUwBgFoRY2ldngxBk1L8vmwr3s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/metrics.aspfinal-40312c5e32ab4aadbb522fa7566ebe40.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Metrics: Measures of quantitative assessment commonly used for assessing, comparing, and tracking performance or production." class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/3x0sL27fLZ1TrSyEjDdkDAkwL-I=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/metrics.aspfinal-40312c5e32ab4aadbb522fa7566ebe40.jpg" srcset="https://www.investopedia.com/thmb/lsUwBgFoRY2ldngxBk1L8vmwr3s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/metrics.aspfinal-40312c5e32ab4aadbb522fa7566ebe40.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Candra Huff</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-metrics"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Understanding Metrics </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Metrics have been used in accounting, operations, and performance analysis throughout history. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>Metrics come in a wide range of varieties with industry standards and proprietary models often governing their use.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Executives use them to analyze corporate finance and operational strategies. Analysts use them to form opinions and investment recommendations. Portfolio managers use metrics to guide their investing portfolios. Furthermore, project managers also find them essential in leading and managing strategic projects of all kinds. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Overall, metrics refer to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wide-variety.asp">wide variety</a> of data points generated from a multitude of methods. Best practices across industries have created a common set of comprehensive metrics used in ongoing evaluations. However, individual cases and scenarios typically guide the choice of metrics used. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-choosing-metrics"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> Choosing Metrics </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Every business executive, analyst, portfolio manager, and the project manager has a range of data sources available to them for building and structuring their own metric analysis. This can potentially make it difficult to choose the best metrics needed for important assessments and evaluations. Generally, managers seek to build a dashboard of what has come to be known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/kpi.asp">key performance indicators</a> (KPIs). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In order to establish a useful metric, a manager must first assess its goals. From there, it is important to find the best outputs that measure the activities related to these goals. A final step is also setting goals and targets for KPI metrics that are integrated with business decisions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Academics and corporate researchers have defined many industry metrics and methods that can help shape the building of KPIs and other metric dashboards. An entire decision analysis method called applied information economics was developed by Douglas Hubbard for analyzing metrics in a variety of business applications.<span class="ql-inline-citation" data-cite="1"></span> Other popular decision analysis methods include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cost-benefitanalysis.asp">cost-benefit analysis</a>, forecasting, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/montecarlosimulation.asp">Monte Carlo simulation</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Several businesses have also popularized certain methods that have become industry standards in many sectors. DuPont began using metrics to better their own business and in the process came up with the popular <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dupontanalysis.asp">DuPont analysis</a> which closely isolates variables involved in the return on equity (ROE) metric. GE has also commissioned a set of metrics known as <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/six-sigma.asp">Six Sigma</a> that are commonly used today, with metrics tracked in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.ge.com/">six key areas</a>: critical to quality; defects; process capability; variation; stable operations; and, design for Six Sigma. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <span class="heading-toc" id="toc-examples-of-metrics"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> Examples of Metrics </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> While there are a wide range of metrics, below are some commonly used tools: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <strong>Economic Metrics</strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gdp.asp">Gross domestic product (GDP)</a></li> <li>Inflation</li> <li>Unemployment rate</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <strong>Operational Company Metrics</strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> From a comprehensive perspective, executives, industry analysts, and individual investors often look at key operational performance measures of a company, all from different perspectives. Some top-level operational metrics include measures derived from the analysis of a company’s financial statements. Key financial statement metrics include sales, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ebit.asp">earnings before interest and tax (EBIT)</a>, net income, earnings per share, margins, efficiency ratios, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidityratios.asp">liquidity ratios</a>, leverage ratios, and rates of return. Each of these metrics provides a different insight into the operational efficiency of a company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Executives use these operational metrics to make corporate decisions involving costs, labor, financing, and investing. Executives and analysts also build complex financial models to identify future growth and value prospects, integrating both economic and operational metric forecasts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> There are several metrics that are key to comparing the financial position of companies against their competitors or the market overall. Two of these key comparable metrics, which are based on market value, include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">price-to-earnings ratio</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-to-bookratio.asp">price-to-book ratio</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <strong>Portfolio Management</strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Portfolio managers use metrics to identify investing allocations in a portfolio. All types of metrics are also used for analyzing and investing in securities that fit a specific portfolio strategy. For example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">environmental, social and governance (ESG)</a> criteria are a set of standards for a company's operations that socially conscious investors use to screen potential investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <strong>Project Management Metrics</strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> In project management, metrics are essential in measuring project progression, output targets, and overall project success. Some of the areas where metric analysis is often needed include resources, cost, time, scope, quality, safety, and actions. Project managers have the responsibility to choose metrics that provide the best analysis and directional insight for a project. Metrics are followed in order to measure the overall progression, production, and performance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_46-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_47-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><ul><li>Metrics are measures of quantitative assessment commonly used for comparing, and tracking performance or production.</li><li>Metrics can be used in a variety of scenarios.</li><li>Metrics are heavily relied on in the financial analysis of companies by both internal managers and external stakeholders.</li></ul></div></div></div></div>

## What Are Metrics? Metrics are measures of [quantitative assessment](https://www.investopedia.com/articles/investing/041114/simple-overview-quantitative-analysis.asp) commonly used for assessing, comparing, and tracking performance or production. Generally, a group of metrics will typically be used to build a dashboard that management or analysts review on a regular basis to maintain performance assessments, opinions, and business strategies.  ![Metrics: Measures of quantitative assessment commonly used for assessing, comparing, and tracking performance or production.]() :max_bytes(150000):strip_icc()/metrics.aspfinal-40312c5e32ab4aadbb522fa7566ebe40.jpg) Investopedia / Candra Huff ## Understanding Metrics Metrics have been used in accounting, operations, and performance analysis throughout history. ### Metrics come in a wide range of varieties with industry standards and proprietary models often governing their use. Executives use them to analyze corporate finance and operational strategies. Analysts use them to form opinions and investment recommendations. Portfolio managers use metrics to guide their investing portfolios. Furthermore, project managers also find them essential in leading and managing strategic projects of all kinds. Overall, metrics refer to a [wide variety](https://www.investopedia.com/terms/w/wide-variety.asp) of data points generated from a multitude of methods. Best practices across industries have created a common set of comprehensive metrics used in ongoing evaluations. However, individual cases and scenarios typically guide the choice of metrics used. ## Choosing Metrics Every business executive, analyst, portfolio manager, and the project manager has a range of data sources available to them for building and structuring their own metric analysis. This can potentially make it difficult to choose the best metrics needed for important assessments and evaluations. Generally, managers seek to build a dashboard of what has come to be known as [key performance indicators](https://www.investopedia.com/terms/k/kpi.asp) (KPIs). In order to establish a useful metric, a manager must first assess its goals. From there, it is important to find the best outputs that measure the activities related to these goals. A final step is also setting goals and targets for KPI metrics that are integrated with business decisions. Academics and corporate researchers have defined many industry metrics and methods that can help shape the building of KPIs and other metric dashboards. An entire decision analysis method called applied information economics was developed by Douglas Hubbard for analyzing metrics in a variety of business applications. Other popular decision analysis methods include [cost-benefit analysis](https://www.investopedia.com/terms/c/cost-benefitanalysis.asp), forecasting, and [Monte Carlo simulation](https://www.investopedia.com/terms/m/montecarlosimulation.asp). Several businesses have also popularized certain methods that have become industry standards in many sectors. DuPont began using metrics to better their own business and in the process came up with the popular [DuPont analysis](https://www.investopedia.com/terms/d/dupontanalysis.asp) which closely isolates variables involved in the return on equity (ROE) metric. GE has also commissioned a set of metrics known as [Six Sigma](https://www.investopedia.com/terms/s/six-sigma.asp) that are commonly used today, with metrics tracked in [six key areas](https://www.ge.com/): critical to quality; defects; process capability; variation; stable operations; and, design for Six Sigma. ## Examples of Metrics While there are a wide range of metrics, below are some commonly used tools: **Economic Metrics** * [Gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) * Inflation * Unemployment rate **Operational Company Metrics** From a comprehensive perspective, executives, industry analysts, and individual investors often look at key operational performance measures of a company, all from different perspectives. Some top-level operational metrics include measures derived from the analysis of a company’s financial statements. Key financial statement metrics include sales, [earnings before interest and tax (EBIT)](https://www.investopedia.com/terms/e/ebit.asp), net income, earnings per share, margins, efficiency ratios, [liquidity ratios](https://www.investopedia.com/terms/l/liquidityratios.asp), leverage ratios, and rates of return. Each of these metrics provides a different insight into the operational efficiency of a company. Executives use these operational metrics to make corporate decisions involving costs, labor, financing, and investing. Executives and analysts also build complex financial models to identify future growth and value prospects, integrating both economic and operational metric forecasts. There are several metrics that are key to comparing the financial position of companies against their competitors or the market overall. Two of these key comparable metrics, which are based on market value, include [price-to-earnings ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp) and [price-to-book ratio](https://www.investopedia.com/terms/p/price-to-bookratio.asp). **Portfolio Management** Portfolio managers use metrics to identify investing allocations in a portfolio. All types of metrics are also used for analyzing and investing in securities that fit a specific portfolio strategy. For example, [environmental, social and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) criteria are a set of standards for a company's operations that socially conscious investors use to screen potential investments. **Project Management Metrics** In project management, metrics are essential in measuring project progression, output targets, and overall project success. Some of the areas where metric analysis is often needed include resources, cost, time, scope, quality, safety, and actions. Project managers have the responsibility to choose metrics that provide the best analysis and directional insight for a project. Metrics are followed in order to measure the overall progression, production, and performance. ### Key Takeaways * Metrics are measures of quantitative assessment commonly used for comparing, and tracking performance or production. * Metrics can be used in a variety of scenarios. * Metrics are heavily relied on in the financial analysis of companies by both internal managers and external stakeholders.

What Are Metrics? Metrics are measures of quantitative assessment commonly used for assessing, comparing, and tracking performance or production. Generally, a group of metrics will typically be used to build a dashboard that management or analysts review on a regular basis to maintain performance assessments, opinions, and business strategies.  Investopedia / Candra Huff Understanding Metrics Metrics have been used in accounting, operations, and performance analysis throughout history. Metrics come in a wide range of varieties with industry standards and proprietary models often governing their use. Executives use them to analyze corporate finance and operational strategies. Analysts use them to form opinions and investment recommendations. Portfolio managers use metrics to guide their investing portfolios. Furthermore, project managers also find them essential in leading and managing strategic projects of all kinds. Overall, metrics refer to a wide variety of data points generated from a multitude of methods. Best practices across industries have created a common set of comprehensive metrics used in ongoing evaluations. However, individual cases and scenarios typically guide the choice of metrics used. Choosing Metrics Every business executive, analyst, portfolio manager, and the project manager has a range of data sources available to them for building and structuring their own metric analysis. This can potentially make it difficult to choose the best metrics needed for important assessments and evaluations. Generally, managers seek to build a dashboard of what has come to be known as key performance indicators (KPIs). In order to establish a useful metric, a manager must first assess its goals. From there, it is important to find the best outputs that measure the activities related to these goals. A final step is also setting goals and targets for KPI metrics that are integrated with business decisions. Academics and corporate researchers have defined many industry metrics and methods that can help shape the building of KPIs and other metric dashboards. An entire decision analysis method called applied information economics was developed by Douglas Hubbard for analyzing metrics in a variety of business applications. Other popular decision analysis methods include cost-benefit analysis, forecasting, and Monte Carlo simulation. Several businesses have also popularized certain methods that have become industry standards in many sectors. DuPont began using metrics to better their own business and in the process came up with the popular DuPont analysis which closely isolates variables involved in the return on equity (ROE) metric. GE has also commissioned a set of metrics known as Six Sigma that are commonly used today, with metrics tracked in six key areas: critical to quality; defects; process capability; variation; stable operations; and, design for Six Sigma. Examples of Metrics While there are a wide range of metrics, below are some commonly used tools: Economic Metrics Gross domestic product (GDP) Inflation Unemployment rate Operational Company Metrics From a comprehensive perspective, executives, industry analysts, and individual investors often look at key operational performance measures of a company, all from different perspectives. Some top-level operational metrics include measures derived from the analysis of a company’s financial statements. Key financial statement metrics include sales, earnings before interest and tax (EBIT), net income, earnings per share, margins, efficiency ratios, liquidity ratios, leverage ratios, and rates of return. Each of these metrics provides a different insight into the operational efficiency of a company. Executives use these operational metrics to make corporate decisions involving costs, labor, financing, and investing. Executives and analysts also build complex financial models to identify future growth and value prospects, integrating both economic and operational metric forecasts. There are several metrics that are key to comparing the financial position of companies against their competitors or the market overall. Two of these key comparable metrics, which are based on market value, include price-to-earnings ratio and price-to-book ratio. Portfolio Management Portfolio managers use metrics to identify investing allocations in a portfolio. All types of metrics are also used for analyzing and investing in securities that fit a specific portfolio strategy. For example, environmental, social and governance (ESG) criteria are a set of standards for a company's operations that socially conscious investors use to screen potential investments. Project Management Metrics In project management, metrics are essential in measuring project progression, output targets, and overall project success. Some of the areas where metric analysis is often needed include resources, cost, time, scope, quality, safety, and actions. Project managers have the responsibility to choose metrics that provide the best analysis and directional insight for a project. Metrics are followed in order to measure the overall progression, production, and performance. Key Takeaways Metrics are measures of quantitative assessment commonly used for comparing, and tracking performance or production.Metrics can be used in a variety of scenarios.Metrics are heavily relied on in the financial analysis of companies by both internal managers and external stakeholders.

https://www.investopedia.com/terms/p/porter.asp

Porter's Five Forces Explained and How to Use the Model

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-porters-five-forces"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are Porter's Five Forces? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Michael Porter's five-force strategic analysis model, introduced in a 1979 article published in the <em>Harvard Business Review</em>, remains a fundamental tool for strategic analysts plotting the competitive landscape of an industry.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> In a bid to mirror the complexity real strategists would face while keeping their strategic analysis manageable, Porter set out five forces at play in a given industry: internal competition, the potential for new entrants, the negotiating power of suppliers, the negotiating power of customers, and the ability of customers to find substitutes. Below, we take you through each of Porter's five forces, detail the significant critiques of his approach, and show how to apply the model to specific markets.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Porter's five forces are used to identify and analyze an industry's competitive forces.</li><li>The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector's products.</li><li>The model guides businesses in determining the intensity of competition and potential profitability within their market, helping them better understand where power lies in their sector.</li><li>Porter's model was meant to critique "perfectly competitive" business models, unlike real-world markets where competitors aren't just rivals and firms in specific industries tend to rise and fall together.</li><li>Criticisms mounted against the model include that it's too static, doesn't speak to the advantages or problems of specific companies, doesn't account enough for collaborative business models, and doesn't apply as well to quick-changing markets.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Porter's 5 Forces" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/-tjW8epK5z7DOvErsPQy8RJXIys=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/porter_final-b4b8e5b2014544dbaa1884017efbc164.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/-tjW8epK5z7DOvErsPQy8RJXIys=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/porter_final-b4b8e5b2014544dbaa1884017efbc164.png" data-srcset="https://www.investopedia.com/thmb/JxQNkCN-8jmDCO-YEqsXNAD1w2Y=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/porter_final-b4b8e5b2014544dbaa1884017efbc164.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Porter's 5 Forces" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/-tjW8epK5z7DOvErsPQy8RJXIys=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/porter_final-b4b8e5b2014544dbaa1884017efbc164.png" srcset="https://www.investopedia.com/thmb/JxQNkCN-8jmDCO-YEqsXNAD1w2Y=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/porter_final-b4b8e5b2014544dbaa1884017efbc164.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Xiaojie Liu</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-porters-five-forces"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding Porter's Five Forces </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Strategic analysis at the time of Porter's article tended not only to love acronyms (SWOT, PEST, PESTEL, BCG Matrix, ETPS, etc.) but also models focused on the internal dynamics of individual companies.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> While it would be unfair to suggest they ignored the competitive environment companies face, they were typically vague while doing so; e.g., the "opportunities" and "threats" of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swot.asp">SWOT</a> analysis were too "macro" for many dealing with the challenges of specific industries. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Porter's 1979 article was also a broadside against the theoretical models found in the curriculums of the major business schools, where future strategists dealt with a "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/perfectcompetition.asp">perfectly competitive</a>" market characterized by equilibrium and no specific firm influencing prices—a model they were unlikely to find in the real world. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The first sentence of Porter's 1979 article could hardly be less controversial: "The essence of strategy formulation is coping with competition."<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> It's the following sentence that, in its understated way, would prove far more consequential: "Yet it is easy to view competition too narrowly and too pessimistically."<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Rather than viewing competition narrowly as rivalry among existing competitors, which is his first force, Porter expanded the concept to include four others: the bargaining power of suppliers and buyers, the threat of new entrants, and the threat of substitute products or services. Let's take these in turn. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Subscribe to "Term of the Day" and learn a new financial term every day. Stay informed and make smart financial decisions. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/term-of-the-day-newsletter-term-a-7551183">Sign up now</a>.</p></div></div></div> <span class="heading-toc" id="toc-porters-five-forces"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Porter's Five Forces </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> 1. Competitive Rivals </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Porter's first force is what we usually mean when discussing business <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042115/what-factors-influence-competition-microeconomics.asp">competition</a>. We think of Pepsi and Coca-Cola for soft drinks, Apple and Samsung for smartphones, Nike and Adidas for sneakers, and Ford and General Motors for autos. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Indeed, some of these rivalries are so influential that consumers split almost culturally among those who have an iPhone, drive a Ford, or prefer Netflix to Hulu. Thus, it's no accident that we also consider business competition chiefly a war among rivals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Such rivalries can lead to price wars, high-priced marketing battles, and races for slight advances that could mean a competitive advantage. These tactics can stimulate companies to make ever better products but also erode profits and market stability.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Several factors contribute to the intensity of competitive rivalry in an industry:<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> <li><strong>The number of competitors</strong>: The more competitors in an industry, the more fierce the rivalry, each fighting for scraps of market share.</li> <li><strong>Industry growth</strong>: In an expanding industry, competition is usually less dramatic because the market is growing so fast that competitors have little need to fight for customers—think of the automobile industry of the early 20th century and the dot-com boom of the late 1990s. However, in a stagnant or declining industry, competition can be ferocious as firms fight for a larger piece of a shrinking pie, such as in the global coal mining or print media industries of today.</li> <li><strong>Similarities in what's offered</strong>: When the products or services in a market are awfully similar (think of the lower page of results in any Amazon product search), competition tends to be intense because customers can easily switch. However, if a company offers a unique product or service or has earned brand loyalty, this can reduce competitive rivalry. Apple, Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>) comes to mind in tech goods, just as Rao's Italian sauces or King Arthur flour do in your supermarket aisles, each charging a higher price given its style, taste, or whatever makes it unique.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Exit barriers</strong>: When it's difficult or costly for companies to leave the industry due to specialized assets, contractual obligations, or emotional attachment, they may choose to stay and compete, even if the market's prospects grow dimmer by the day. The airline industry is a classic example. Airlines have high costs for their assets, contractual obligations (leasing agreements and labor contracts), and regulatory requirements, which means that when airlines face a shrinking market—or even an unprofitable route—they can't retreat from the market quickly.</li> <li><strong>Fixed costs</strong>: Porter notes that if an industry has high fixed costs, companies have a "strong temptation" to cut prices rather than slow production when demand slackens. Paper and aluminum manufacturing are two good examples that Porter gives.<span class="ql-inline-citation" data-cite="2"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-subheading__text"> 2. Potential for New Entrants in an Industry </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Industries where new firms can enter more easily almost always have lower profit margins, and the firms involved each have less market share.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The sector for local restaurants has relatively <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/barrierstoentry.asp">low entry requirements</a>: there aren't significant investments or regulatory hurdles to surmount before opening to the public. Thus, it's also the case that your favorite restaurant may not stay open for long, given the hypercompetitive environment and constant entrance of new restaurants opening. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Here are factors in measuring how much new entrants threaten an industry:<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> <li><strong>Economies of scale</strong>: Industries where large-scale production leads to lower costs face less of a threat from new entrants. New firms would need to achieve a similar size to compete on price, which might be difficult or costly.</li> <li><strong>Product differentiation</strong>: When existing firms have strong brand identities or customer loyalty, it's harder for new entrants to gain market share, reducing the threat of entry.</li> <li><strong>Capital requirements</strong>: High startup costs for equipment, facilities, etc., can deter new entrants. For example, starting a car manufacturing business requires significant investment, so until Tesla Inc.'s (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>) growth in the early 2010s, Americans from the 1950s could have named the major U.S. car brands of the early 2000s.</li> <li><strong>Access to distribution channels</strong>: If existing firms control the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/distribution-channel.asp">distribution channels</a>—retail stores, online platforms, cable infrastructure, etc.—then new entrants would need to find a way to replicate that structure while competing with the established firms on price, a tricky proposition.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Regulations</strong>: Licenses, safety standards, and other regulatory standards can create barriers, making it too ungainly or costly for new firms to enter the market. Examples would include those looking to build new hotels in downtown areas or supply power to a region.</li> <li><strong>Switching costs</strong>: If it's costly or difficult for customers to switch from existing firms to new entrants, the threat of entry is lower.<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> 3. Supplier Power </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Suppliers are powerful when they are the only source of something important that a firm needs, can differentiate their product, or have strong brands.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> When the power of suppliers in an industry is high, this raises costs or otherwise limits the resources a firm needs. Here are some factors used to measure the supplier power of an industry:<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li><strong>The number of suppliers</strong>: When few firms can give a company something it needs to stay in business, each has greater negotiating power. They can raise prices or reduce quality without fear of losing business.</li> <li><strong>Uniqueness</strong>: If a supplier provides a unique product or it's not easy to find a substitute, it is more dominant. Businesses can't easily switch to another <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vendor.asp">supplier</a>.</li> <li><strong>Switching costs</strong>: If it's costly or time-consuming to switch suppliers, then they have more power. Businesses are less likely to switch, even if prices increase.</li> <li><strong>Forward integration</strong>: If suppliers can move into the buyer's industry, they have more power. They already have access to the necessary supplies, making it difficult for their former buyers to compete once they decide to enter the market themselves.</li> <li><strong>Industry importance</strong>: Some sectors are tightly intertwined, such as automotive suppliers and the major auto companies or the semiconductor and tech industries, which can balance the power between the suppliers and those in the sector. This is because the supplier needs these buyers to do well so that it can, too. When a supplier can just as easily sell its products elsewhere, that gives it a great deal more power.<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-subheading__text"> 4. Customer Power </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> When customers have more strength, they can exert pressure on businesses to provide better products or services at lower prices. This force intensifies under certain conditions: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <li><strong>The number of buyers</strong>: The fewer the buyers, the more they have power. In sectors like aerospace manufacturing, each major airline, the industry's customers, has significant leverage in negotiations and can demand favorable terms because the sellers depend on their business.</li> <li><strong>Purchase size</strong>: Just like you head off to the big box stores to buy in bulk for a cheaper per-unit cost on whatever now fills up your garage, major retail chains like Walmart Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt">WMT</a>) buy in large volumes and can negotiate better terms and discounts.</li> <li><strong>Switching costs</strong>: In industries like telecommunications, where it's easy for consumers to switch providers, companies such as Verizon Communications, Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vz">VZ</a>) and AT&amp;T Inc. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=t">T</a>) have to offer competitive terms.</li> <li><strong>Price sensitivity</strong>: In the fast-fashion industry, where customers are highly price-sensitive, brands must keep their prices low to attract cost-conscious consumers.</li> <li><strong>Informed buyers</strong>: In many sectors, the customers are savvy, know the competitive terrain well, and thus can negotiate better prices.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_57-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_58-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Porter chose the metaphor of forces because they aren't static, so business must constantly adjust their strategies as forces in an industry change.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-subheading__text"> 5. Threat of Substitutes </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> When customers can find substitutes for a sector's services, that's a major threat to the companies in that industry.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Here are some ways that this threat can be magnified:<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> <li><strong>Relative price performance</strong>: If the cost of a substitute is lower and its performance is comparable or better, customers are likely to switch to the substitute. For instance, streaming services like Netflix became a substitute for traditional cable TV, providing a lower price that soon threatened the cable industry.</li> <li><strong>Customer willingness to go elsewhere</strong>: The threat is high if buyers find it easy to switch to a substitute. For example, in the early 2010s, customers found switching from taxis to ride-sharing apps like Uber or Lyft cheaper and easier.</li> <li><strong>The sense that products are similar</strong>: If buyers perceive that there are few differences between your product and a substitute, even if there are, they may be more likely to switch.</li> <li><strong>Availability of close substitutes</strong>: Though this sounds the same as the last bullet point, you have to strategize differently around it. There are times when potential <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/substitute.asp">substitutes</a> are very different from a company's products but consumers still treat them as the same. But in other cases, there are genuinely similar products in the market and the threat of substitutes is high, such as between brand-name and generic medications.<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-competitive-measures"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-heading__text"> Competitive Measures </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> When published, Michael Porter's framework marked a departure from the then-dominant models of business strategy, steeped in classic competition theory.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Those models, still echoed in Economics 101 textbooks, rested on several key, if questionable, assumptions: markets as arenas for many small firms with no significant market power, homogeneous products, perfect information symmetry, and no barriers to market entry or exit. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> While helpful for learning basic principles, this idealized view could be taken to an extreme when strategizing with neatly constructed supply and demand curves, assuming, for instance, new market entrants would stabilize rising prices by increasing supply. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Business strategists need to deal with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/industrysector.asp">sectors</a> where information asymmetry, product differentiation, and significant entry and exit barriers are common. Firms do have some control over prices, contradicting classical assumptions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> In short, where economists assumed most markets acted like the model, for Porter, most firms are in industries with entrenched interests and different supplier and customer relations. They need strategies for dealing with anything but perfect competition.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-subheading__text"> Mild-to-Intense Competition </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Porter's five forces come together in different ways for any given sector. He labeled industry competition as ranging from "intense" to "mild," with profits harder to achieve as the intensity in a sector rises. In intensely competitive industries, all or most of the five forces have a strong influence.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/020515/fast-food-versus-fast-casual.asp">fast food industry</a> is Porter's own example, which still remains the case.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> In this sector, there's a fierce rivalry among established players like McDonald's and Burger King, high bargaining power for suppliers and customers, and a relentless threat of new entrants and substitutes, all of which means profits are constantly getting squeezed for anyone in the sector. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Meanwhile, in "mild" industries, such as commercial aircraft manufacturing, there are weaker forces. Here, low supplier bargaining power, a minimal threat of new entrants, and a lack of direct substitutes (like commercial aircraft for long-distance travel) help form a sector more conducive to higher profits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <span class="heading-toc" id="toc-applying-the-model"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_86-0"> <span class="mntl-sc-block-heading__text"> Applying the Model </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Since his 1979 <em>Harvard Business Review </em>article, Porter has published many books on strategic analysis, including works where he has expanded on his five-force model. He's also become very concise in providing the specific steps in performing an industry analysis:<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> <li><strong>Define the industry</strong>: The process begins with a clear description of the industry, helping you to focus your analysis.</li><li><strong>Identify the key players</strong>: Specify and group the major actors in the sector into strategic categories based on relevant criteria.</li><li><strong>Assess the strategic strengths</strong>: This means evaluating the firm and its industry to determine the better and worse strategies that can be applied.</li><li><strong>Analyze the industry structure</strong>: This involves examining the overall structure of the industry, particularly the factors that influence how profitable it is.</li><li><strong>Evaluating the competitive forces</strong>: Only once you've done the above does Porter advise doing a detailed analysis of the five competitive forces, assessing their positive and negative effects, and then looking forward to any changes in these forces ahead.</li><li><strong>Identify the factors you have some control over</strong>: Here, you want to pinpoint aspects of the industry structure that could be influenced by competitors, new market entrants, or your firm. In sum, what can be changed?<br/></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <span class="heading-toc" id="toc-critiques-of-the-five-forces"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_91-0"> <span class="mntl-sc-block-heading__text"> Critiques of the Five Forces </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Porter’s model helped reframe the understanding of competition. It wasn’t confined to direct rivals but extended to suppliers and customers—traditionally viewed in a transactional light. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Suppliers, especially those with unique resources or enjoying a monopoly, could dictate terms, lower profits, or, in extreme cases, forward-integrate into the buyer’s industry. Customers, too, wield power, especially when buying in bulk or when they can just go elsewhere quickly or choose to bypass companies for in-house products.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> But the model has its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/103116/pitfalls-porters-5-forces.asp">pitfalls</a>. For example, many have critiqued the model’s emphasis on sector affiliation. Porter concentrates on industry-wide forces, which can sideline an individual company’s unique strategies and advantages. This industry-centric view may not fully capture how distinct company characteristics can change the game, not just play within an industry’s preset rules.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> The model assumes clear lines among sectors, which may not be tenable given the increasingly blurred lines in today’s business world, where companies are simultaneously in several sectors. Industries are no longer isolated silos; instead, they often intersect and interact, leading to a far more complex environment than the model suggests.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Porter’s five-force model has also been critiqued for not adequately addressing the role of partnerships and collaboration.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> While Porter certainly entertained a competitive model where rivalry wasn’t just a war to the death, the problem is that he didn’t go far enough. In an interconnected global economy, alliances and cooperative strategies are often as pivotal to success as having a competitive advantage, a factor that the model doesn’t explicitly consider. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> Another critique that can be filed under “going in the right direction but not far enough” is that the model is too static and fails to account for industries with rapid changes in technology and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-theory.asp">consumer preferences</a>. While effective in stable sectors, critics say it doesn’t apply well to industries marked by fast-paced innovation and shifting demand.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> Most strikingly, Porter’s model generalizes competition, implying a seemingly uniform industry structure for every market.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> This might overlook the unique competitive scenarios in different sectors and the increasing importance of the nontraditional strategies involved in digital transformation and platform-based competition.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_110-0"><span class="heading-toc" id="toc-how-does-porters-five-forces-differ-from-swot-analysis"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Porter's Five Forces Differ From SWOT Analysis?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Both are strategic planning tools, but they serve different purposes. The five-force model analyzes the competitive environment of an industry, looking at its intensity and the bargaining power of suppliers and customers. SWOT analysis, meanwhile, is broader and assesses a company's internal strengths and weaknesses as well as its external opportunities and threats.</p><p>It can assist in strategic planning by pinpointing areas where the company excels and faces obstacles, helping to align the company's strategy with its internal resources and prospects in the market while mitigating its vulnerabilities and external challenges.<br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_112-0"><span class="heading-toc" id="toc-how-can-porters-five-forces-address-the-effects-of-globalization-on-an-industry"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can Porter's Five Forces Address the Effects of Globalization on an Industry?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Porter's model has been used to analyze how globalization affects industry competition. For instance, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/030215/how-does-globalization-impact-comparative-advantage.asp">globalization</a> lowers barriers to entry in specific industries, intensifying the threat of new entrants from different regions.<span class="ql-inline-citation" data-cite="3"></span></p><p>It can also expand the pool of potential substitutes and alter the power dynamics with suppliers and customers worldwide. While Porter and others were doing this analysis for industries facing global competition decades ago, it's still applicable to sectors undergoing this process in the 2020s.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_114-0"><span class="heading-toc" id="toc-how-does-porters-five-forces-model-apply-to-the-ai-sector"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Porter's Five-Forces Model Apply to the AI Sector?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Using the model, we would begin by looking at the competitive rivalry. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">AI sector</a> is marked by high competition with key players ranging from tech giants to small startups. Rapid advances mean companies have to move quickly simply to maintain relevance. We would then need to gauge the power of suppliers of data sets and specialized hardware, which have ample power since AI firms rely heavily on these resources.</p><p>Moving to consumers, we would need to review the needs of individual consumers and whether larger companies can force AI firms to negotiate better services and prices for them. The field of AI has been attracting many new entrants, but there are significant barriers to entry, including high initial research and development costs. Lastly, the threat from the last force, the possibility of substitutes, depends on what a firm wants to do with its AI-based technology. The more complicated the tasks the AI is given, the more likely other goods and services can't substitute for it.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_116-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> Porter's five-forces model sets out essential criteria for considering a company's competitive landscape: the power of suppliers and buyers, the threat of new entrants and substitutes, and competitive rivalry. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> While the economic terrain has evolved significantly since the 1970s and Porter has updated his work ever since, the principles underlying Porter's model remain current. It's still the case that companies don't rise and fall on their portfolio of products alone but are jockeying with others in industries that have their own logic and structural forces at play. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_121-0"> Today, while the five-forces model may require adapting it to rapid technological change and the importance of collaboration across many industries, it's a reliable way to help guide companies needing to navigate industry-specific challenges in their competitive strategy. </p></div>

## What Are Porter's Five Forces? Michael Porter's five-force strategic analysis model, introduced in a 1979 article published in the *Harvard Business Review*, remains a fundamental tool for strategic analysts plotting the competitive landscape of an industry. In a bid to mirror the complexity real strategists would face while keeping their strategic analysis manageable, Porter set out five forces at play in a given industry: internal competition, the potential for new entrants, the negotiating power of suppliers, the negotiating power of customers, and the ability of customers to find substitutes. Below, we take you through each of Porter's five forces, detail the significant critiques of his approach, and show how to apply the model to specific markets. ### Key Takeaways * Porter's five forces are used to identify and analyze an industry's competitive forces. * The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector's products. * The model guides businesses in determining the intensity of competition and potential profitability within their market, helping them better understand where power lies in their sector. * Porter's model was meant to critique "perfectly competitive" business models, unlike real-world markets where competitors aren't just rivals and firms in specific industries tend to rise and fall together. * Criticisms mounted against the model include that it's too static, doesn't speak to the advantages or problems of specific companies, doesn't account enough for collaborative business models, and doesn't apply as well to quick-changing markets. ![Porter's 5 Forces]() :max_bytes(150000):strip_icc()/porter_final-b4b8e5b2014544dbaa1884017efbc164.png) Investopedia / Xiaojie Liu ## Understanding Porter's Five Forces Strategic analysis at the time of Porter's article tended not only to love acronyms (SWOT, PEST, PESTEL, BCG Matrix, ETPS, etc.) but also models focused on the internal dynamics of individual companies. While it would be unfair to suggest they ignored the competitive environment companies face, they were typically vague while doing so; e.g., the "opportunities" and "threats" of [SWOT](https://www.investopedia.com/terms/s/swot.asp) analysis were too "macro" for many dealing with the challenges of specific industries. Porter's 1979 article was also a broadside against the theoretical models found in the curriculums of the major business schools, where future strategists dealt with a "[perfectly competitive](https://www.investopedia.com/terms/p/perfectcompetition.asp)" market characterized by equilibrium and no specific firm influencing prices—a model they were unlikely to find in the real world. The first sentence of Porter's 1979 article could hardly be less controversial: "The essence of strategy formulation is coping with competition." It's the following sentence that, in its understated way, would prove far more consequential: "Yet it is easy to view competition too narrowly and too pessimistically." Rather than viewing competition narrowly as rivalry among existing competitors, which is his first force, Porter expanded the concept to include four others: the bargaining power of suppliers and buyers, the threat of new entrants, and the threat of substitute products or services. Let's take these in turn. ### Subscribe to "Term of the Day" and learn a new financial term every day. Stay informed and make smart financial decisions. [Sign up now](https://www.investopedia.com/term-of-the-day-newsletter-term-a-7551183). ## Porter's Five Forces ### 1. Competitive Rivals Porter's first force is what we usually mean when discussing business [competition](https://www.investopedia.com/ask/answers/042115/what-factors-influence-competition-microeconomics.asp). We think of Pepsi and Coca-Cola for soft drinks, Apple and Samsung for smartphones, Nike and Adidas for sneakers, and Ford and General Motors for autos. Indeed, some of these rivalries are so influential that consumers split almost culturally among those who have an iPhone, drive a Ford, or prefer Netflix to Hulu. Thus, it's no accident that we also consider business competition chiefly a war among rivals. Such rivalries can lead to price wars, high-priced marketing battles, and races for slight advances that could mean a competitive advantage. These tactics can stimulate companies to make ever better products but also erode profits and market stability. Several factors contribute to the intensity of competitive rivalry in an industry: * **The number of competitors**: The more competitors in an industry, the more fierce the rivalry, each fighting for scraps of market share. * **Industry growth**: In an expanding industry, competition is usually less dramatic because the market is growing so fast that competitors have little need to fight for customers—think of the automobile industry of the early 20th century and the dot-com boom of the late 1990s. However, in a stagnant or declining industry, competition can be ferocious as firms fight for a larger piece of a shrinking pie, such as in the global coal mining or print media industries of today. * **Similarities in what's offered**: When the products or services in a market are awfully similar (think of the lower page of results in any Amazon product search), competition tends to be intense because customers can easily switch. However, if a company offers a unique product or service or has earned brand loyalty, this can reduce competitive rivalry. Apple, Inc. ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) comes to mind in tech goods, just as Rao's Italian sauces or King Arthur flour do in your supermarket aisles, each charging a higher price given its style, taste, or whatever makes it unique. * **Exit barriers**: When it's difficult or costly for companies to leave the industry due to specialized assets, contractual obligations, or emotional attachment, they may choose to stay and compete, even if the market's prospects grow dimmer by the day. The airline industry is a classic example. Airlines have high costs for their assets, contractual obligations (leasing agreements and labor contracts), and regulatory requirements, which means that when airlines face a shrinking market—or even an unprofitable route—they can't retreat from the market quickly. * **Fixed costs**: Porter notes that if an industry has high fixed costs, companies have a "strong temptation" to cut prices rather than slow production when demand slackens. Paper and aluminum manufacturing are two good examples that Porter gives. ### 2. Potential for New Entrants in an Industry Industries where new firms can enter more easily almost always have lower profit margins, and the firms involved each have less market share. The sector for local restaurants has relatively [low entry requirements](https://www.investopedia.com/terms/b/barrierstoentry.asp): there aren't significant investments or regulatory hurdles to surmount before opening to the public. Thus, it's also the case that your favorite restaurant may not stay open for long, given the hypercompetitive environment and constant entrance of new restaurants opening. Here are factors in measuring how much new entrants threaten an industry: * **Economies of scale**: Industries where large-scale production leads to lower costs face less of a threat from new entrants. New firms would need to achieve a similar size to compete on price, which might be difficult or costly. * **Product differentiation**: When existing firms have strong brand identities or customer loyalty, it's harder for new entrants to gain market share, reducing the threat of entry. * **Capital requirements**: High startup costs for equipment, facilities, etc., can deter new entrants. For example, starting a car manufacturing business requires significant investment, so until Tesla Inc.'s ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) growth in the early 2010s, Americans from the 1950s could have named the major U.S. car brands of the early 2000s. * **Access to distribution channels**: If existing firms control the [distribution channels](https://www.investopedia.com/terms/d/distribution-channel.asp)—retail stores, online platforms, cable infrastructure, etc.—then new entrants would need to find a way to replicate that structure while competing with the established firms on price, a tricky proposition. * **Regulations**: Licenses, safety standards, and other regulatory standards can create barriers, making it too ungainly or costly for new firms to enter the market. Examples would include those looking to build new hotels in downtown areas or supply power to a region. * **Switching costs**: If it's costly or difficult for customers to switch from existing firms to new entrants, the threat of entry is lower. ### 3. Supplier Power Suppliers are powerful when they are the only source of something important that a firm needs, can differentiate their product, or have strong brands. When the power of suppliers in an industry is high, this raises costs or otherwise limits the resources a firm needs. Here are some factors used to measure the supplier power of an industry: * **The number of suppliers**: When few firms can give a company something it needs to stay in business, each has greater negotiating power. They can raise prices or reduce quality without fear of losing business. * **Uniqueness**: If a supplier provides a unique product or it's not easy to find a substitute, it is more dominant. Businesses can't easily switch to another [supplier](https://www.investopedia.com/terms/v/vendor.asp). * **Switching costs**: If it's costly or time-consuming to switch suppliers, then they have more power. Businesses are less likely to switch, even if prices increase. * **Forward integration**: If suppliers can move into the buyer's industry, they have more power. They already have access to the necessary supplies, making it difficult for their former buyers to compete once they decide to enter the market themselves. * **Industry importance**: Some sectors are tightly intertwined, such as automotive suppliers and the major auto companies or the semiconductor and tech industries, which can balance the power between the suppliers and those in the sector. This is because the supplier needs these buyers to do well so that it can, too. When a supplier can just as easily sell its products elsewhere, that gives it a great deal more power. ### 4. Customer Power When customers have more strength, they can exert pressure on businesses to provide better products or services at lower prices. This force intensifies under certain conditions: * **The number of buyers**: The fewer the buyers, the more they have power. In sectors like aerospace manufacturing, each major airline, the industry's customers, has significant leverage in negotiations and can demand favorable terms because the sellers depend on their business. * **Purchase size**: Just like you head off to the big box stores to buy in bulk for a cheaper per-unit cost on whatever now fills up your garage, major retail chains like Walmart Inc. ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt)) buy in large volumes and can negotiate better terms and discounts. * **Switching costs**: In industries like telecommunications, where it's easy for consumers to switch providers, companies such as Verizon Communications, Inc. ([VZ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vz)) and AT&T Inc. ([T](https://www.investopedia.com/markets/quote?tvwidgetsymbol=t)) have to offer competitive terms. * **Price sensitivity**: In the fast-fashion industry, where customers are highly price-sensitive, brands must keep their prices low to attract cost-conscious consumers. * **Informed buyers**: In many sectors, the customers are savvy, know the competitive terrain well, and thus can negotiate better prices. ### Porter chose the metaphor of forces because they aren't static, so business must constantly adjust their strategies as forces in an industry change. ### 5. Threat of Substitutes When customers can find substitutes for a sector's services, that's a major threat to the companies in that industry. Here are some ways that this threat can be magnified: * **Relative price performance**: If the cost of a substitute is lower and its performance is comparable or better, customers are likely to switch to the substitute. For instance, streaming services like Netflix became a substitute for traditional cable TV, providing a lower price that soon threatened the cable industry. * **Customer willingness to go elsewhere**: The threat is high if buyers find it easy to switch to a substitute. For example, in the early 2010s, customers found switching from taxis to ride-sharing apps like Uber or Lyft cheaper and easier. * **The sense that products are similar**: If buyers perceive that there are few differences between your product and a substitute, even if there are, they may be more likely to switch. * **Availability of close substitutes**: Though this sounds the same as the last bullet point, you have to strategize differently around it. There are times when potential [substitutes](https://www.investopedia.com/terms/s/substitute.asp) are very different from a company's products but consumers still treat them as the same. But in other cases, there are genuinely similar products in the market and the threat of substitutes is high, such as between brand-name and generic medications. ## Competitive Measures When published, Michael Porter's framework marked a departure from the then-dominant models of business strategy, steeped in classic competition theory. Those models, still echoed in Economics 101 textbooks, rested on several key, if questionable, assumptions: markets as arenas for many small firms with no significant market power, homogeneous products, perfect information symmetry, and no barriers to market entry or exit. While helpful for learning basic principles, this idealized view could be taken to an extreme when strategizing with neatly constructed supply and demand curves, assuming, for instance, new market entrants would stabilize rising prices by increasing supply. Business strategists need to deal with [sectors](https://www.investopedia.com/ask/answers/05/industrysector.asp) where information asymmetry, product differentiation, and significant entry and exit barriers are common. Firms do have some control over prices, contradicting classical assumptions. In short, where economists assumed most markets acted like the model, for Porter, most firms are in industries with entrenched interests and different supplier and customer relations. They need strategies for dealing with anything but perfect competition. ### Mild-to-Intense Competition Porter's five forces come together in different ways for any given sector. He labeled industry competition as ranging from "intense" to "mild," with profits harder to achieve as the intensity in a sector rises. In intensely competitive industries, all or most of the five forces have a strong influence. The [fast food industry](https://www.investopedia.com/articles/investing/020515/fast-food-versus-fast-casual.asp) is Porter's own example, which still remains the case. In this sector, there's a fierce rivalry among established players like McDonald's and Burger King, high bargaining power for suppliers and customers, and a relentless threat of new entrants and substitutes, all of which means profits are constantly getting squeezed for anyone in the sector. Meanwhile, in "mild" industries, such as commercial aircraft manufacturing, there are weaker forces. Here, low supplier bargaining power, a minimal threat of new entrants, and a lack of direct substitutes (like commercial aircraft for long-distance travel) help form a sector more conducive to higher profits. ## Applying the Model Since his 1979 *Harvard Business Review* article, Porter has published many books on strategic analysis, including works where he has expanded on his five-force model. He's also become very concise in providing the specific steps in performing an industry analysis: 1. **Define the industry**: The process begins with a clear description of the industry, helping you to focus your analysis. 2. **Identify the key players**: Specify and group the major actors in the sector into strategic categories based on relevant criteria. 3. **Assess the strategic strengths**: This means evaluating the firm and its industry to determine the better and worse strategies that can be applied. 4. **Analyze the industry structure**: This involves examining the overall structure of the industry, particularly the factors that influence how profitable it is. 5. **Evaluating the competitive forces**: Only once you've done the above does Porter advise doing a detailed analysis of the five competitive forces, assessing their positive and negative effects, and then looking forward to any changes in these forces ahead. 6. **Identify the factors you have some control over**: Here, you want to pinpoint aspects of the industry structure that could be influenced by competitors, new market entrants, or your firm. In sum, what can be changed? ## Critiques of the Five Forces Porter’s model helped reframe the understanding of competition. It wasn’t confined to direct rivals but extended to suppliers and customers—traditionally viewed in a transactional light. Suppliers, especially those with unique resources or enjoying a monopoly, could dictate terms, lower profits, or, in extreme cases, forward-integrate into the buyer’s industry. Customers, too, wield power, especially when buying in bulk or when they can just go elsewhere quickly or choose to bypass companies for in-house products. But the model has its [pitfalls](https://www.investopedia.com/articles/investing/103116/pitfalls-porters-5-forces.asp). For example, many have critiqued the model’s emphasis on sector affiliation. Porter concentrates on industry-wide forces, which can sideline an individual company’s unique strategies and advantages. This industry-centric view may not fully capture how distinct company characteristics can change the game, not just play within an industry’s preset rules. The model assumes clear lines among sectors, which may not be tenable given the increasingly blurred lines in today’s business world, where companies are simultaneously in several sectors. Industries are no longer isolated silos; instead, they often intersect and interact, leading to a far more complex environment than the model suggests. Porter’s five-force model has also been critiqued for not adequately addressing the role of partnerships and collaboration. While Porter certainly entertained a competitive model where rivalry wasn’t just a war to the death, the problem is that he didn’t go far enough. In an interconnected global economy, alliances and cooperative strategies are often as pivotal to success as having a competitive advantage, a factor that the model doesn’t explicitly consider. Another critique that can be filed under “going in the right direction but not far enough” is that the model is too static and fails to account for industries with rapid changes in technology and [consumer preferences](https://www.investopedia.com/terms/c/consumer-theory.asp). While effective in stable sectors, critics say it doesn’t apply well to industries marked by fast-paced innovation and shifting demand. Most strikingly, Porter’s model generalizes competition, implying a seemingly uniform industry structure for every market. This might overlook the unique competitive scenarios in different sectors and the increasing importance of the nontraditional strategies involved in digital transformation and platform-based competition. ## How Does Porter's Five Forces Differ From SWOT Analysis? Both are strategic planning tools, but they serve different purposes. The five-force model analyzes the competitive environment of an industry, looking at its intensity and the bargaining power of suppliers and customers. SWOT analysis, meanwhile, is broader and assesses a company's internal strengths and weaknesses as well as its external opportunities and threats. It can assist in strategic planning by pinpointing areas where the company excels and faces obstacles, helping to align the company's strategy with its internal resources and prospects in the market while mitigating its vulnerabilities and external challenges. ## How Can Porter's Five Forces Address the Effects of Globalization on an Industry? Porter's model has been used to analyze how globalization affects industry competition. For instance, [globalization](https://www.investopedia.com/ask/answers/030215/how-does-globalization-impact-comparative-advantage.asp) lowers barriers to entry in specific industries, intensifying the threat of new entrants from different regions. It can also expand the pool of potential substitutes and alter the power dynamics with suppliers and customers worldwide. While Porter and others were doing this analysis for industries facing global competition decades ago, it's still applicable to sectors undergoing this process in the 2020s. ## How Does Porter's Five-Forces Model Apply to the AI Sector? Using the model, we would begin by looking at the competitive rivalry. The [AI sector](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) is marked by high competition with key players ranging from tech giants to small startups. Rapid advances mean companies have to move quickly simply to maintain relevance. We would then need to gauge the power of suppliers of data sets and specialized hardware, which have ample power since AI firms rely heavily on these resources. Moving to consumers, we would need to review the needs of individual consumers and whether larger companies can force AI firms to negotiate better services and prices for them. The field of AI has been attracting many new entrants, but there are significant barriers to entry, including high initial research and development costs. Lastly, the threat from the last force, the possibility of substitutes, depends on what a firm wants to do with its AI-based technology. The more complicated the tasks the AI is given, the more likely other goods and services can't substitute for it. ## The Bottom Line Porter's five-forces model sets out essential criteria for considering a company's competitive landscape: the power of suppliers and buyers, the threat of new entrants and substitutes, and competitive rivalry. While the economic terrain has evolved significantly since the 1970s and Porter has updated his work ever since, the principles underlying Porter's model remain current. It's still the case that companies don't rise and fall on their portfolio of products alone but are jockeying with others in industries that have their own logic and structural forces at play. Today, while the five-forces model may require adapting it to rapid technological change and the importance of collaboration across many industries, it's a reliable way to help guide companies needing to navigate industry-specific challenges in their competitive strategy.

What Are Porter's Five Forces? Michael Porter's five-force strategic analysis model, introduced in a 1979 article published in the Harvard Business Review, remains a fundamental tool for strategic analysts plotting the competitive landscape of an industry. In a bid to mirror the complexity real strategists would face while keeping their strategic analysis manageable, Porter set out five forces at play in a given industry: internal competition, the potential for new entrants, the negotiating power of suppliers, the negotiating power of customers, and the ability of customers to find substitutes. Below, we take you through each of Porter's five forces, detail the significant critiques of his approach, and show how to apply the model to specific markets. Key Takeaways Porter's five forces are used to identify and analyze an industry's competitive forces.The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector's products.The model guides businesses in determining the intensity of competition and potential profitability within their market, helping them better understand where power lies in their sector.Porter's model was meant to critique "perfectly competitive" business models, unlike real-world markets where competitors aren't just rivals and firms in specific industries tend to rise and fall together.Criticisms mounted against the model include that it's too static, doesn't speak to the advantages or problems of specific companies, doesn't account enough for collaborative business models, and doesn't apply as well to quick-changing markets. Investopedia / Xiaojie Liu Understanding Porter's Five Forces Strategic analysis at the time of Porter's article tended not only to love acronyms (SWOT, PEST, PESTEL, BCG Matrix, ETPS, etc.) but also models focused on the internal dynamics of individual companies. While it would be unfair to suggest they ignored the competitive environment companies face, they were typically vague while doing so; e.g., the "opportunities" and "threats" of SWOT analysis were too "macro" for many dealing with the challenges of specific industries. Porter's 1979 article was also a broadside against the theoretical models found in the curriculums of the major business schools, where future strategists dealt with a "perfectly competitive" market characterized by equilibrium and no specific firm influencing prices—a model they were unlikely to find in the real world. The first sentence of Porter's 1979 article could hardly be less controversial: "The essence of strategy formulation is coping with competition." It's the following sentence that, in its understated way, would prove far more consequential: "Yet it is easy to view competition too narrowly and too pessimistically." Rather than viewing competition narrowly as rivalry among existing competitors, which is his first force, Porter expanded the concept to include four others: the bargaining power of suppliers and buyers, the threat of new entrants, and the threat of substitute products or services. Let's take these in turn. Subscribe to "Term of the Day" and learn a new financial term every day. Stay informed and make smart financial decisions. Sign up now. Porter's Five Forces 1. Competitive Rivals Porter's first force is what we usually mean when discussing business competition. We think of Pepsi and Coca-Cola for soft drinks, Apple and Samsung for smartphones, Nike and Adidas for sneakers, and Ford and General Motors for autos. Indeed, some of these rivalries are so influential that consumers split almost culturally among those who have an iPhone, drive a Ford, or prefer Netflix to Hulu. Thus, it's no accident that we also consider business competition chiefly a war among rivals. Such rivalries can lead to price wars, high-priced marketing battles, and races for slight advances that could mean a competitive advantage. These tactics can stimulate companies to make ever better products but also erode profits and market stability. Several factors contribute to the intensity of competitive rivalry in an industry: The number of competitors: The more competitors in an industry, the more fierce the rivalry, each fighting for scraps of market share. Industry growth: In an expanding industry, competition is usually less dramatic because the market is growing so fast that competitors have little need to fight for customers—think of the automobile industry of the early 20th century and the dot-com boom of the late 1990s. However, in a stagnant or declining industry, competition can be ferocious as firms fight for a larger piece of a shrinking pie, such as in the global coal mining or print media industries of today. Similarities in what's offered: When the products or services in a market are awfully similar (think of the lower page of results in any Amazon product search), competition tends to be intense because customers can easily switch. However, if a company offers a unique product or service or has earned brand loyalty, this can reduce competitive rivalry. Apple, Inc. (AAPL) comes to mind in tech goods, just as Rao's Italian sauces or King Arthur flour do in your supermarket aisles, each charging a higher price given its style, taste, or whatever makes it unique. Exit barriers: When it's difficult or costly for companies to leave the industry due to specialized assets, contractual obligations, or emotional attachment, they may choose to stay and compete, even if the market's prospects grow dimmer by the day. The airline industry is a classic example. Airlines have high costs for their assets, contractual obligations (leasing agreements and labor contracts), and regulatory requirements, which means that when airlines face a shrinking market—or even an unprofitable route—they can't retreat from the market quickly. Fixed costs: Porter notes that if an industry has high fixed costs, companies have a "strong temptation" to cut prices rather than slow production when demand slackens. Paper and aluminum manufacturing are two good examples that Porter gives. 2. Potential for New Entrants in an Industry Industries where new firms can enter more easily almost always have lower profit margins, and the firms involved each have less market share. The sector for local restaurants has relatively low entry requirements: there aren't significant investments or regulatory hurdles to surmount before opening to the public. Thus, it's also the case that your favorite restaurant may not stay open for long, given the hypercompetitive environment and constant entrance of new restaurants opening. Here are factors in measuring how much new entrants threaten an industry: Economies of scale: Industries where large-scale production leads to lower costs face less of a threat from new entrants. New firms would need to achieve a similar size to compete on price, which might be difficult or costly. Product differentiation: When existing firms have strong brand identities or customer loyalty, it's harder for new entrants to gain market share, reducing the threat of entry. Capital requirements: High startup costs for equipment, facilities, etc., can deter new entrants. For example, starting a car manufacturing business requires significant investment, so until Tesla Inc.'s (TSLA) growth in the early 2010s, Americans from the 1950s could have named the major U.S. car brands of the early 2000s. Access to distribution channels: If existing firms control the distribution channels—retail stores, online platforms, cable infrastructure, etc.—then new entrants would need to find a way to replicate that structure while competing with the established firms on price, a tricky proposition. Regulations: Licenses, safety standards, and other regulatory standards can create barriers, making it too ungainly or costly for new firms to enter the market. Examples would include those looking to build new hotels in downtown areas or supply power to a region. Switching costs: If it's costly or difficult for customers to switch from existing firms to new entrants, the threat of entry is lower. 3. Supplier Power Suppliers are powerful when they are the only source of something important that a firm needs, can differentiate their product, or have strong brands. When the power of suppliers in an industry is high, this raises costs or otherwise limits the resources a firm needs. Here are some factors used to measure the supplier power of an industry: The number of suppliers: When few firms can give a company something it needs to stay in business, each has greater negotiating power. They can raise prices or reduce quality without fear of losing business. Uniqueness: If a supplier provides a unique product or it's not easy to find a substitute, it is more dominant. Businesses can't easily switch to another supplier. Switching costs: If it's costly or time-consuming to switch suppliers, then they have more power. Businesses are less likely to switch, even if prices increase. Forward integration: If suppliers can move into the buyer's industry, they have more power. They already have access to the necessary supplies, making it difficult for their former buyers to compete once they decide to enter the market themselves. Industry importance: Some sectors are tightly intertwined, such as automotive suppliers and the major auto companies or the semiconductor and tech industries, which can balance the power between the suppliers and those in the sector. This is because the supplier needs these buyers to do well so that it can, too. When a supplier can just as easily sell its products elsewhere, that gives it a great deal more power. 4. Customer Power When customers have more strength, they can exert pressure on businesses to provide better products or services at lower prices. This force intensifies under certain conditions: The number of buyers: The fewer the buyers, the more they have power. In sectors like aerospace manufacturing, each major airline, the industry's customers, has significant leverage in negotiations and can demand favorable terms because the sellers depend on their business. Purchase size: Just like you head off to the big box stores to buy in bulk for a cheaper per-unit cost on whatever now fills up your garage, major retail chains like Walmart Inc. (WMT) buy in large volumes and can negotiate better terms and discounts. Switching costs: In industries like telecommunications, where it's easy for consumers to switch providers, companies such as Verizon Communications, Inc. (VZ) and AT&T Inc. (T) have to offer competitive terms. Price sensitivity: In the fast-fashion industry, where customers are highly price-sensitive, brands must keep their prices low to attract cost-conscious consumers. Informed buyers: In many sectors, the customers are savvy, know the competitive terrain well, and thus can negotiate better prices. Porter chose the metaphor of forces because they aren't static, so business must constantly adjust their strategies as forces in an industry change. 5. Threat of Substitutes When customers can find substitutes for a sector's services, that's a major threat to the companies in that industry. Here are some ways that this threat can be magnified: Relative price performance: If the cost of a substitute is lower and its performance is comparable or better, customers are likely to switch to the substitute. For instance, streaming services like Netflix became a substitute for traditional cable TV, providing a lower price that soon threatened the cable industry. Customer willingness to go elsewhere: The threat is high if buyers find it easy to switch to a substitute. For example, in the early 2010s, customers found switching from taxis to ride-sharing apps like Uber or Lyft cheaper and easier. The sense that products are similar: If buyers perceive that there are few differences between your product and a substitute, even if there are, they may be more likely to switch. Availability of close substitutes: Though this sounds the same as the last bullet point, you have to strategize differently around it. There are times when potential substitutes are very different from a company's products but consumers still treat them as the same. But in other cases, there are genuinely similar products in the market and the threat of substitutes is high, such as between brand-name and generic medications. Competitive Measures When published, Michael Porter's framework marked a departure from the then-dominant models of business strategy, steeped in classic competition theory. Those models, still echoed in Economics 101 textbooks, rested on several key, if questionable, assumptions: markets as arenas for many small firms with no significant market power, homogeneous products, perfect information symmetry, and no barriers to market entry or exit. While helpful for learning basic principles, this idealized view could be taken to an extreme when strategizing with neatly constructed supply and demand curves, assuming, for instance, new market entrants would stabilize rising prices by increasing supply. Business strategists need to deal with sectors where information asymmetry, product differentiation, and significant entry and exit barriers are common. Firms do have some control over prices, contradicting classical assumptions. In short, where economists assumed most markets acted like the model, for Porter, most firms are in industries with entrenched interests and different supplier and customer relations. They need strategies for dealing with anything but perfect competition. Mild-to-Intense Competition Porter's five forces come together in different ways for any given sector. He labeled industry competition as ranging from "intense" to "mild," with profits harder to achieve as the intensity in a sector rises. In intensely competitive industries, all or most of the five forces have a strong influence. The fast food industry is Porter's own example, which still remains the case. In this sector, there's a fierce rivalry among established players like McDonald's and Burger King, high bargaining power for suppliers and customers, and a relentless threat of new entrants and substitutes, all of which means profits are constantly getting squeezed for anyone in the sector. Meanwhile, in "mild" industries, such as commercial aircraft manufacturing, there are weaker forces. Here, low supplier bargaining power, a minimal threat of new entrants, and a lack of direct substitutes (like commercial aircraft for long-distance travel) help form a sector more conducive to higher profits. Applying the Model Since his 1979 Harvard Business Review article, Porter has published many books on strategic analysis, including works where he has expanded on his five-force model. He's also become very concise in providing the specific steps in performing an industry analysis: Define the industry: The process begins with a clear description of the industry, helping you to focus your analysis.Identify the key players: Specify and group the major actors in the sector into strategic categories based on relevant criteria.Assess the strategic strengths: This means evaluating the firm and its industry to determine the better and worse strategies that can be applied.Analyze the industry structure: This involves examining the overall structure of the industry, particularly the factors that influence how profitable it is.Evaluating the competitive forces: Only once you've done the above does Porter advise doing a detailed analysis of the five competitive forces, assessing their positive and negative effects, and then looking forward to any changes in these forces ahead.Identify the factors you have some control over: Here, you want to pinpoint aspects of the industry structure that could be influenced by competitors, new market entrants, or your firm. In sum, what can be changed? Critiques of the Five Forces Porter’s model helped reframe the understanding of competition. It wasn’t confined to direct rivals but extended to suppliers and customers—traditionally viewed in a transactional light. Suppliers, especially those with unique resources or enjoying a monopoly, could dictate terms, lower profits, or, in extreme cases, forward-integrate into the buyer’s industry. Customers, too, wield power, especially when buying in bulk or when they can just go elsewhere quickly or choose to bypass companies for in-house products. But the model has its pitfalls. For example, many have critiqued the model’s emphasis on sector affiliation. Porter concentrates on industry-wide forces, which can sideline an individual company’s unique strategies and advantages. This industry-centric view may not fully capture how distinct company characteristics can change the game, not just play within an industry’s preset rules. The model assumes clear lines among sectors, which may not be tenable given the increasingly blurred lines in today’s business world, where companies are simultaneously in several sectors. Industries are no longer isolated silos; instead, they often intersect and interact, leading to a far more complex environment than the model suggests. Porter’s five-force model has also been critiqued for not adequately addressing the role of partnerships and collaboration. While Porter certainly entertained a competitive model where rivalry wasn’t just a war to the death, the problem is that he didn’t go far enough. In an interconnected global economy, alliances and cooperative strategies are often as pivotal to success as having a competitive advantage, a factor that the model doesn’t explicitly consider. Another critique that can be filed under “going in the right direction but not far enough” is that the model is too static and fails to account for industries with rapid changes in technology and consumer preferences. While effective in stable sectors, critics say it doesn’t apply well to industries marked by fast-paced innovation and shifting demand. Most strikingly, Porter’s model generalizes competition, implying a seemingly uniform industry structure for every market. This might overlook the unique competitive scenarios in different sectors and the increasing importance of the nontraditional strategies involved in digital transformation and platform-based competition. How Does Porter's Five Forces Differ From SWOT Analysis? Both are strategic planning tools, but they serve different purposes. The five-force model analyzes the competitive environment of an industry, looking at its intensity and the bargaining power of suppliers and customers. SWOT analysis, meanwhile, is broader and assesses a company's internal strengths and weaknesses as well as its external opportunities and threats.It can assist in strategic planning by pinpointing areas where the company excels and faces obstacles, helping to align the company's strategy with its internal resources and prospects in the market while mitigating its vulnerabilities and external challenges. How Can Porter's Five Forces Address the Effects of Globalization on an Industry? Porter's model has been used to analyze how globalization affects industry competition. For instance, globalization lowers barriers to entry in specific industries, intensifying the threat of new entrants from different regions.It can also expand the pool of potential substitutes and alter the power dynamics with suppliers and customers worldwide. While Porter and others were doing this analysis for industries facing global competition decades ago, it's still applicable to sectors undergoing this process in the 2020s. How Does Porter's Five-Forces Model Apply to the AI Sector? Using the model, we would begin by looking at the competitive rivalry. The AI sector is marked by high competition with key players ranging from tech giants to small startups. Rapid advances mean companies have to move quickly simply to maintain relevance. We would then need to gauge the power of suppliers of data sets and specialized hardware, which have ample power since AI firms rely heavily on these resources.Moving to consumers, we would need to review the needs of individual consumers and whether larger companies can force AI firms to negotiate better services and prices for them. The field of AI has been attracting many new entrants, but there are significant barriers to entry, including high initial research and development costs. Lastly, the threat from the last force, the possibility of substitutes, depends on what a firm wants to do with its AI-based technology. The more complicated the tasks the AI is given, the more likely other goods and services can't substitute for it. The Bottom Line Porter's five-forces model sets out essential criteria for considering a company's competitive landscape: the power of suppliers and buyers, the threat of new entrants and substitutes, and competitive rivalry. While the economic terrain has evolved significantly since the 1970s and Porter has updated his work ever since, the principles underlying Porter's model remain current. It's still the case that companies don't rise and fall on their portfolio of products alone but are jockeying with others in industries that have their own logic and structural forces at play. Today, while the five-forces model may require adapting it to rapid technological change and the importance of collaboration across many industries, it's a reliable way to help guide companies needing to navigate industry-specific challenges in their competitive strategy.

https://www.investopedia.com/us-economy-news-today-april-23-8637269

US Economy News Today: Fed's Uncertainty Is Acutely Impacting Home Buyers and Sellers

<div class="loc article-content"><div class="comp article__primary-video-container--jw mntl-block" id="article__primary-video-container--jw_1-0"></div> <div class="comp liveblog mntl-block" id="liveblog_1-0"><div class="comp mntl-block article-content__description" id="mntl-block_12-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Today, new home sales grew more than expected, business activity slowed and one economist calculated what increased oil prices in the wake of geopolitical turmoil could do to inflation.<br/> </p></div> <div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-04-23t193620935z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p><strong>Home Buyers and Sellers Feeling Pressure From Fed's Increased Uncertainty</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">April 23, 2024 03:36 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-april-23-8637269#toc-2024-04-23t193620935z" id="mntl-blogpost__copylink_1-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> While some parts of the economy <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/three-reasons-high-interest-rates-have-not-stopped-people-from-spending-8635158">seem to keep chugging</a> without much impact from the Federal Reserve's interest rate hikes, the central bank's monetary policy has been substantially <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tightmonetarypolicy.asp">restrictive</a> on housing, one economist writes. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> BMO Economics Senior Economist Sal Guatieri said home buyers and sellers are bearing the brunt of high interest rates, which have been held at more than a two-decades high for much of the past year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Federal Reserve officials largely walked back expectations for an impending rate cut in the lead-up to their meeting at the end of the month. A rate cut would have been a reprieve for owners with better terms who have been discouraged from selling and potential buyers who have been priced out of the market. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> “Home buyers can only wish the Fed was in more of a rush to reduce rates. While most sectors continue to show resiliency, the housing market isn’t one of them,” Guatieri wrote in a recent report. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In his note, Guatieri pointed out that not only are home sales about 20% below long-run averages, the softened demand is keeping builders from starting work on new homes at about equally low levels. The main culprit, Guatieri wrote, is persistently high borrowing costs.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> And it will likely get worse before it gets better. Investors are losing hope that cuts to the fed funds rate are imminent and many forecasts now predict only one rate cut later this year. That could cause mortgage rates to rise even further. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Mortgages rise and fall <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/122203.asp">in tandem with Treasury yields</a>, both of which are influenced by the Federal Reserve's fed funds rate. As the Fed's path forward becomes <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/when-will-the-federal-reserve-start-cutting-interest-rates-8624420">increasingly uncertain</a>, mortgage rates could tick up in response. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Read more about how the Federal Reserve's high interest rates impact the housing market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/homebuyers-and-sellers-may-be-suffering-the-most-under-high-interest-rates-8637256">here</a>. </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_2-0"><span class="heading-toc" id="toc-2024-04-23t191116592z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_2-0"><p><strong>Further Turmoil in the Middle East Could Roil Oil Markets—And, In Turn, US Inflation</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_2-0">April 23, 2024 03:11 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-april-23-8637269#toc-2024-04-23t191116592z" id="mntl-blogpost__copylink_2-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Recent tensions in the Middle East may not create a big impact for the U.S. economy, analysts said, but that could change if things escalate and drive up <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/072515/top-factors-reports-affect-price-oil.asp">oil prices</a>.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> After Israel and Iran recently exchanged drone and missile strikes, the recent standoff may come to a close, Wells Fargo said in a commentary. Forecasters at the bank wrote the conflict was likely to remain “contained” and have minimal impact on the U.S. economy. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> However, if oil prices tick up in response, it could have knock-on effect on inflation. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Oxford Economics’ Ryan Sweet calculated that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumerpriceindex.asp">Consumer Price Index</a> measure of inflation would rise by a half-percentage-point if oil prices were to jump to $100 per barrel. Meanwhile, $120 per barrel would push it higher by more than one percentage point, Sweet found. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Inflation has already been more stubborn than anticipated this year, and further growth could make it even harder for the Federal Reserve to cut interest rates soon. The policymakers have kept their influential fed funds rate at a more than two decades high in hopes of containing inflation, making borrowing costs on mortgages, credit cards and other loans expensive. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Read more about the economic impacts of Israel and Iran tensions <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-an-escalation-in-middle-east-tensions-could-affect-the-us-economy-8636446">here</a>. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <em>-Terry Lane</em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="2" id="mntl-sc-block-adslot_2-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_3-0"><span class="heading-toc" id="toc-2024-04-23t151436984z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_3-0"><p><strong>Manufacturing, Services PMI Drop Shows Business Activity Slowing</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_3-0">April 23, 2024 11:14 AM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-april-23-8637269#toc-2024-04-23t151436984z" id="mntl-blogpost__copylink_3-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Business activity slowed in April, with both the services and manufacturing sectors underperforming expectations, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pmi.asp">Purchasing Manager Index (PMI)</a> readings issued by S&amp;P Global Market Intelligence. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The services PMI dropped to 50.9 in April while the manufacturing PMI slipped a full point to 49.9.<span class="ql-inline-citation" data-cite="2"></span>  Economists surveyed by the <em>Wall Street Journal</em> and <em>Dow Jones Newswire </em>expected both indexes to improve to 52.0.<span class="ql-inline-citation" data-cite="3"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> “The U.S. economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April,” said Chris Wiliamson, the chief business economist at S&amp;P Global Market Intelligence. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The muted readings come after <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-april-3-8624031#toc-2024-04-03t160722606z">last month’s services</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-april-1-8622839#toc-2024-04-01t151200145z">manufacturing PMI</a> readings also indicated that growth was slowing. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> New orders declined for the first time in six months, the report showed, with employers responding by scaling back employment for the first time in nearly four years. Additionally, business confidence was at its lowest point since November. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The slower production levels also helped put downward pressure on prices, with overall incoming and output prices increasing at lower levels, though manufacturers reported that their input costs were at a one-year high. Williamson noted the higher manufacturing costs could indicate new inflationary pressures, in line with reports showing prices <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">have edged upward in 2024</a> after slowing significantly last year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> “Notably, the drivers of inflation have changed. Manufacturing has now registered the steeper rate of price increases in three of the past four months, with factory cost pressures intensifying in April amid higher raw material and fuel prices, contrasting with the wage-related services-led price pressures seen throughout much of 2023,” he wrote.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <em>-Terry Lane</em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="3" id="mntl-sc-block-adslot_3-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_4-0"><span class="heading-toc" id="toc-2024-04-23t143816495z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_4-0"><p><strong> New Home Sales Jumped 8.8% In March</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_4-0">April 23, 2024 10:38 AM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-april-23-8637269#toc-2024-04-23t143816495z" id="mntl-blogpost__copylink_4-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> With used homes hard to come by, people looking for a place to live are buying more newly built ones. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Sales of newly built homes rose 8.8% in March from February the Census Bureau said Tuesday.<span class="ql-inline-citation" data-cite="1"></span> If houses sold at the same pace they did in March, 693,000 would be sold over the course of the year, the fastest pace since September according to seasonally-adjusted data. Sales were up 8.3% over the last 12 months.<br/><br/>The brisk pace of new home sales suggests that homebuilders may be justified in their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-april-15-8631409">growing confidence in their corner</a> of the housing market, according to recent surveys. That’s a sharp contrast to sales of existing homes, which have <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-sales-february-8612653">been languishing</a> because so few homeowners are willing to sell and abandon their low fixed mortgage rates for today’s rates near two-decade highs.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> While high mortgage rates have made <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/high-mortgage-rates-prevented-the-sale-of-more-than-million-homes-8610712">buying a house unaffordable</a> for many first-time buyers, builders have found ways to sweeten the pot.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> “The willingness of the major homebuilders to utilize incentives such as price reductions, mortgage rate buy-downs and paying buyers closings costs continue to support a healthy pace of new home sales,” Gregg Logan, managing director of RCLCO Real Estate Consulting, wrote in a commentary.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> To be sure, Tuesday’s data should be taken with a grain of salt. The bureau’s figures are prone to large swings up and down from month to month, and come with a large margin of error—March’s sales figures could be 17.2% higher or lower than reported, according to the bureau.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> If the data turns out to be accurate, increased homebuilding could help relieve a longstanding housing shortage that’s driving up prices and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-housing-shortage-is-hurting-almost-every-part-of-the-economy-8636226">hurting the U.S. economy overall</a>.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> "The jump in sales is welcome, but the country remains more than 4 million homes below what’s needed for the number of American families today,”  Robert Frick, corporate economist at  Navy Federal Credit Union, said in a commentary. “We’ll need to see lower mortgage rates to spur much more building to make up that deficit."<br> </br></p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="4" id="mntl-sc-block-adslot_4-0"></div></div></div></div> <div class="comp textnote-placeholder mntl-block" id="textnote-placeholder_1-0"></div> <div class="comp textnote mm-ads-gpt-adunit gpt textnote" id="textnote_1-0"> <div class="wrapper" id="textnote"></div> </div> </div>

Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. Today, new home sales grew more than expected, business activity slowed and one economist calculated what increased oil prices in the wake of geopolitical turmoil could do to inflation. ## **Home Buyers and Sellers Feeling Pressure From Fed's Increased Uncertainty** April 23, 2024 03:36 PM EDT While some parts of the economy [seem to keep chugging](https://www.investopedia.com/three-reasons-high-interest-rates-have-not-stopped-people-from-spending-8635158) without much impact from the Federal Reserve's interest rate hikes, the central bank's monetary policy has been substantially [restrictive](https://www.investopedia.com/terms/t/tightmonetarypolicy.asp) on housing, one economist writes. BMO Economics Senior Economist Sal Guatieri said home buyers and sellers are bearing the brunt of high interest rates, which have been held at more than a two-decades high for much of the past year. Federal Reserve officials largely walked back expectations for an impending rate cut in the lead-up to their meeting at the end of the month. A rate cut would have been a reprieve for owners with better terms who have been discouraged from selling and potential buyers who have been priced out of the market. “Home buyers can only wish the Fed was in more of a rush to reduce rates. While most sectors continue to show resiliency, the housing market isn’t one of them,” Guatieri wrote in a recent report. In his note, Guatieri pointed out that not only are home sales about 20% below long-run averages, the softened demand is keeping builders from starting work on new homes at about equally low levels. The main culprit, Guatieri wrote, is persistently high borrowing costs.  And it will likely get worse before it gets better. Investors are losing hope that cuts to the fed funds rate are imminent and many forecasts now predict only one rate cut later this year. That could cause mortgage rates to rise even further. Mortgages rise and fall [in tandem with Treasury yields](https://www.investopedia.com/articles/03/122203.asp), both of which are influenced by the Federal Reserve's fed funds rate. As the Fed's path forward becomes [increasingly uncertain](https://www.investopedia.com/when-will-the-federal-reserve-start-cutting-interest-rates-8624420), mortgage rates could tick up in response. Read more about how the Federal Reserve's high interest rates impact the housing market [here](https://www.investopedia.com/homebuyers-and-sellers-may-be-suffering-the-most-under-high-interest-rates-8637256). ## **Further Turmoil in the Middle East Could Roil Oil Markets—And, In Turn, US Inflation** April 23, 2024 03:11 PM EDT Recent tensions in the Middle East may not create a big impact for the U.S. economy, analysts said, but that could change if things escalate and drive up [oil prices](https://www.investopedia.com/articles/investing/072515/top-factors-reports-affect-price-oil.asp).  After Israel and Iran recently exchanged drone and missile strikes, the recent standoff may come to a close, Wells Fargo said in a commentary. Forecasters at the bank wrote the conflict was likely to remain “contained” and have minimal impact on the U.S. economy. However, if oil prices tick up in response, it could have knock-on effect on inflation. Oxford Economics’ Ryan Sweet calculated that the [Consumer Price Index](https://www.investopedia.com/terms/c/consumerpriceindex.asp) measure of inflation would rise by a half-percentage-point if oil prices were to jump to $100 per barrel. Meanwhile, $120 per barrel would push it higher by more than one percentage point, Sweet found. Inflation has already been more stubborn than anticipated this year, and further growth could make it even harder for the Federal Reserve to cut interest rates soon. The policymakers have kept their influential fed funds rate at a more than two decades high in hopes of containing inflation, making borrowing costs on mortgages, credit cards and other loans expensive. Read more about the economic impacts of Israel and Iran tensions [here](https://www.investopedia.com/how-an-escalation-in-middle-east-tensions-could-affect-the-us-economy-8636446). *-Terry Lane* ## **Manufacturing, Services PMI Drop Shows Business Activity Slowing** April 23, 2024 11:14 AM EDT Business activity slowed in April, with both the services and manufacturing sectors underperforming expectations, according to [Purchasing Manager Index (PMI)](https://www.investopedia.com/terms/p/pmi.asp) readings issued by S&P Global Market Intelligence. The services PMI dropped to 50.9 in April while the manufacturing PMI slipped a full point to 49.9.  Economists surveyed by the *Wall Street Journal* and *Dow Jones Newswire* expected both indexes to improve to 52.0. “The U.S. economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April,” said Chris Wiliamson, the chief business economist at S&P Global Market Intelligence. The muted readings come after [last month’s services](https://www.investopedia.com/us-economy-news-today-april-3-8624031#toc-2024-04-03t160722606z) and [manufacturing PMI](https://www.investopedia.com/us-economy-news-today-april-1-8622839#toc-2024-04-01t151200145z) readings also indicated that growth was slowing. New orders declined for the first time in six months, the report showed, with employers responding by scaling back employment for the first time in nearly four years. Additionally, business confidence was at its lowest point since November. The slower production levels also helped put downward pressure on prices, with overall incoming and output prices increasing at lower levels, though manufacturers reported that their input costs were at a one-year high. Williamson noted the higher manufacturing costs could indicate new inflationary pressures, in line with reports showing prices [have edged upward in 2024](https://www.investopedia.com/inflation-heated-up-in-march-8629363) after slowing significantly last year. “Notably, the drivers of inflation have changed. Manufacturing has now registered the steeper rate of price increases in three of the past four months, with factory cost pressures intensifying in April amid higher raw material and fuel prices, contrasting with the wage-related services-led price pressures seen throughout much of 2023,” he wrote.  *-Terry Lane* ## **New Home Sales Jumped 8.8% In March** April 23, 2024 10:38 AM EDT With used homes hard to come by, people looking for a place to live are buying more newly built ones. Sales of newly built homes rose 8.8% in March from February the Census Bureau said Tuesday. If houses sold at the same pace they did in March, 693,000 would be sold over the course of the year, the fastest pace since September according to seasonally-adjusted data. Sales were up 8.3% over the last 12 months. The brisk pace of new home sales suggests that homebuilders may be justified in their [growing confidence in their corner](https://www.investopedia.com/us-economy-news-today-april-15-8631409) of the housing market, according to recent surveys. That’s a sharp contrast to sales of existing homes, which have [been languishing](https://www.investopedia.com/home-sales-february-8612653) because so few homeowners are willing to sell and abandon their low fixed mortgage rates for today’s rates near two-decade highs.  While high mortgage rates have made [buying a house unaffordable](https://www.investopedia.com/high-mortgage-rates-prevented-the-sale-of-more-than-million-homes-8610712) for many first-time buyers, builders have found ways to sweeten the pot.  “The willingness of the major homebuilders to utilize incentives such as price reductions, mortgage rate buy-downs and paying buyers closings costs continue to support a healthy pace of new home sales,” Gregg Logan, managing director of RCLCO Real Estate Consulting, wrote in a commentary.  To be sure, Tuesday’s data should be taken with a grain of salt. The bureau’s figures are prone to large swings up and down from month to month, and come with a large margin of error—March’s sales figures could be 17.2% higher or lower than reported, according to the bureau.  If the data turns out to be accurate, increased homebuilding could help relieve a longstanding housing shortage that’s driving up prices and [hurting the U.S. economy overall](https://www.investopedia.com/the-housing-shortage-is-hurting-almost-every-part-of-the-economy-8636226).  "The jump in sales is welcome, but the country remains more than 4 million homes below what’s needed for the number of American families today,”  Robert Frick, corporate economist at  Navy Federal Credit Union, said in a commentary. “We’ll need to see lower mortgage rates to spur much more building to make up that deficit."

Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. Today, new home sales grew more than expected, business activity slowed and one economist calculated what increased oil prices in the wake of geopolitical turmoil could do to inflation. Home Buyers and Sellers Feeling Pressure From Fed's Increased Uncertainty April 23, 2024 03:36 PM EDT While some parts of the economy seem to keep chugging without much impact from the Federal Reserve's interest rate hikes, the central bank's monetary policy has been substantially restrictive on housing, one economist writes. BMO Economics Senior Economist Sal Guatieri said home buyers and sellers are bearing the brunt of high interest rates, which have been held at more than a two-decades high for much of the past year. Federal Reserve officials largely walked back expectations for an impending rate cut in the lead-up to their meeting at the end of the month. A rate cut would have been a reprieve for owners with better terms who have been discouraged from selling and potential buyers who have been priced out of the market. “Home buyers can only wish the Fed was in more of a rush to reduce rates. While most sectors continue to show resiliency, the housing market isn’t one of them,” Guatieri wrote in a recent report. In his note, Guatieri pointed out that not only are home sales about 20% below long-run averages, the softened demand is keeping builders from starting work on new homes at about equally low levels. The main culprit, Guatieri wrote, is persistently high borrowing costs.  And it will likely get worse before it gets better. Investors are losing hope that cuts to the fed funds rate are imminent and many forecasts now predict only one rate cut later this year. That could cause mortgage rates to rise even further. Mortgages rise and fall in tandem with Treasury yields, both of which are influenced by the Federal Reserve's fed funds rate. As the Fed's path forward becomes increasingly uncertain, mortgage rates could tick up in response. Read more about how the Federal Reserve's high interest rates impact the housing market here. Further Turmoil in the Middle East Could Roil Oil Markets—And, In Turn, US Inflation April 23, 2024 03:11 PM EDT Recent tensions in the Middle East may not create a big impact for the U.S. economy, analysts said, but that could change if things escalate and drive up oil prices.  After Israel and Iran recently exchanged drone and missile strikes, the recent standoff may come to a close, Wells Fargo said in a commentary. Forecasters at the bank wrote the conflict was likely to remain “contained” and have minimal impact on the U.S. economy. However, if oil prices tick up in response, it could have knock-on effect on inflation. Oxford Economics’ Ryan Sweet calculated that the Consumer Price Index measure of inflation would rise by a half-percentage-point if oil prices were to jump to $100 per barrel. Meanwhile, $120 per barrel would push it higher by more than one percentage point, Sweet found. Inflation has already been more stubborn than anticipated this year, and further growth could make it even harder for the Federal Reserve to cut interest rates soon. The policymakers have kept their influential fed funds rate at a more than two decades high in hopes of containing inflation, making borrowing costs on mortgages, credit cards and other loans expensive. Read more about the economic impacts of Israel and Iran tensions here. -Terry Lane Manufacturing, Services PMI Drop Shows Business Activity Slowing April 23, 2024 11:14 AM EDT Business activity slowed in April, with both the services and manufacturing sectors underperforming expectations, according to Purchasing Manager Index (PMI) readings issued by S&P Global Market Intelligence. The services PMI dropped to 50.9 in April while the manufacturing PMI slipped a full point to 49.9.  Economists surveyed by the Wall Street Journal and Dow Jones Newswire expected both indexes to improve to 52.0. “The U.S. economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April,” said Chris Wiliamson, the chief business economist at S&P Global Market Intelligence. The muted readings come after last month’s services and manufacturing PMI readings also indicated that growth was slowing. New orders declined for the first time in six months, the report showed, with employers responding by scaling back employment for the first time in nearly four years. Additionally, business confidence was at its lowest point since November. The slower production levels also helped put downward pressure on prices, with overall incoming and output prices increasing at lower levels, though manufacturers reported that their input costs were at a one-year high. Williamson noted the higher manufacturing costs could indicate new inflationary pressures, in line with reports showing prices have edged upward in 2024 after slowing significantly last year. “Notably, the drivers of inflation have changed. Manufacturing has now registered the steeper rate of price increases in three of the past four months, with factory cost pressures intensifying in April amid higher raw material and fuel prices, contrasting with the wage-related services-led price pressures seen throughout much of 2023,” he wrote.  -Terry Lane  New Home Sales Jumped 8.8% In March April 23, 2024 10:38 AM EDT With used homes hard to come by, people looking for a place to live are buying more newly built ones. Sales of newly built homes rose 8.8% in March from February the Census Bureau said Tuesday. If houses sold at the same pace they did in March, 693,000 would be sold over the course of the year, the fastest pace since September according to seasonally-adjusted data. Sales were up 8.3% over the last 12 months.The brisk pace of new home sales suggests that homebuilders may be justified in their growing confidence in their corner of the housing market, according to recent surveys. That’s a sharp contrast to sales of existing homes, which have been languishing because so few homeowners are willing to sell and abandon their low fixed mortgage rates for today’s rates near two-decade highs.  While high mortgage rates have made buying a house unaffordable for many first-time buyers, builders have found ways to sweeten the pot.  “The willingness of the major homebuilders to utilize incentives such as price reductions, mortgage rate buy-downs and paying buyers closings costs continue to support a healthy pace of new home sales,” Gregg Logan, managing director of RCLCO Real Estate Consulting, wrote in a commentary.  To be sure, Tuesday’s data should be taken with a grain of salt. The bureau’s figures are prone to large swings up and down from month to month, and come with a large margin of error—March’s sales figures could be 17.2% higher or lower than reported, according to the bureau.  If the data turns out to be accurate, increased homebuilding could help relieve a longstanding housing shortage that’s driving up prices and hurting the U.S. economy overall.  "The jump in sales is welcome, but the country remains more than 4 million homes below what’s needed for the number of American families today,”  Robert Frick, corporate economist at  Navy Federal Credit Union, said in a commentary. “We’ll need to see lower mortgage rates to spur much more building to make up that deficit."

https://www.investopedia.com/terms/p/powerofattorney.asp

Power of Attorney (POA): Meaning, Types, and How and Why to Set One Up

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-power-of-attorney-poa"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Power of Attorney (POA)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A power of attorney (POA) is a legal authorization that gives the agent or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/attorneyinfact.asp">attorney-in-fact</a> the authority to act on behalf of an individual referred to as the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> POAs can be financial or they can pertain to health care. Both provide the attorney-in-fact with general or limited powers.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A power of attorney is a legal document that gives one person the power to act for another. </li><li>The person who receives the authority is referred to as the agent or attorney-in-fact.</li><li>The subject of the POA is called the principal.</li><li>The agent can have broad legal authority or limited authority to make decisions about the principal's property, finances, or medical care.</li><li>A durable power of attorney continues to remain in effect if the principal becomes ill or disabled and cannot act personally.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-power-of-attorney-poa-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> How a Power of Attorney (POA) Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A power of attorney is a legal document that binds the agent or attorney-in-fact and the principal. It's used in the event of a principal's temporary or permanent illness or disability or when they can't sign necessary documents.<span class="ql-inline-citation" data-cite="4"></span> Both parties must sign the document and a third party is usually required to witness it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Most POA documents authorize the agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. The agreement automatically ends if the principal becomes incapable of making decisions for themself.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined in the agreement. In the case of a married couple, the authorization may be invalidated if the principal and the agent divorce. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Someone who wants the power of attorney to remain in effect after their health deteriorates should sign a durable power of attorney (DPOA). This remains in force even if the person they're representing becomes mentally or physically incapacitated but it doesn't persist after the principal's death. The authority is also voided if the power of attorney isn't designated as durable and the client becomes mentally incapacitated.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> There are many good reasons to make a power of attorney because it ensures that someone will look after your financial affairs if you become incapacitated. But signing a POA that grants broad authority to an agent is very much like signing a blank check. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-types-of-powers-of-attorney"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Types of Powers of Attorney </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> A durable POA takes effect when the document is signed and continues in the case of incapacitation of the principal. A springing power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to only medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The two key types of POAs are financial and health care.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-health-care-power-of-attorney-hcpoa"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Health Care Power of Attorney (HCPOA) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The principal can sign a durable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hcpa.asp">health care POA (HCPOA)</a> if they want an agent to have the power to make health-related decisions for them. This document is also called a health care <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proxydirective.asp">proxy</a>. It outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition. This POA kicks in when the principal can no longer make health-related decisions on their own.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-financial-power-of-attorney"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> Financial Power of Attorney </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-power-attorney.asp">financial POA</a> allows an agent to manage the business and financial affairs of the principal, such as signing checks, filing tax returns, depositing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/06/socialsecurity.asp">Social Security checks</a>, and managing investment accounts when and if the principal becomes unable to understand or make decisions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The agent must carry out the principal’s wishes to the best of their ability, at least to the extent of what the agreement spells out as being the agent’s responsibility. A financial POA can give the agent a wide range of power over the principal's bank account, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Financial POAs can be divided up into several categories. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-subheading__text"> General Power POA </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> This POA allows the agent to act on behalf of the principal in all matters as allowed by state law. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal.<span class="ql-inline-citation" data-cite="5"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> Limited POA </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limited_power_of_attorney.asp">limited power of attorney</a> gives the agent the power to act on behalf of the principal in specific matters or events. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> It might explicitly state that the agent is only permitted to manage the principal's retirement accounts. This type of POA may be in effect for a specific period. The authorization might be effective only for two years if the principal will be out of the country for that length of time.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Durable Power of Attorney (DPOA) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> A durable POA (DPOA) remains in control of certain legal, property, or financial matters that are specifically spelled out in the agreement even if and when the principal becomes mentally incapacitated. A DPOA can pay medical bills on behalf of the principal but the durable agent can't make decisions related to the principal's health, such as taking them off life support.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> Springing Power of Attorney </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The conditions for which a durable POA may become active are set up in a document called a "springing" power of attorney. A springing POA defines the kind of event or level of incapacitation that should occur before the DPOA springs into effect.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA. A springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_50-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_51-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>An individual who's appointed as the agent in a power of attorney is not necessarily an attorney. The person could be a trusted family member, friend, or acquaintance.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div> <span class="heading-toc" id="toc-how-to-set-up-a-power-of-attorney"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> How to Set Up a Power of Attorney </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> You can buy or download a POA template but be sure it's for your state because requirements can differ. There's no standard POA form for all 50 states, although all states do accept some version of a durable power of attorney.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> A few key powers cannot be delegated, including the right to make, amend, or revoke a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/will.asp">will</a> or contract a marriage in most states, although a handful of states do allow this. You can't delegate the power to vote but the guardian can request a ballot on behalf of the principal. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Some rules generally apply in all states and jurisdictions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-subheading__text"> Put It in Writing </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Some regions of the country accept oral POA grants but verbal instruction isn't a reliable substitute for spelling out the terms word-for-word on paper. Written clarity helps to avoid arguments and confusion later at a crucial time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-subheading__text"> Use the Proper Format </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Decide what powers you want to grant and prepare a POA that's specific to that desire. The POA must also satisfy the requirements of your state. Perform an Internet search or ask a local estate planning professional to help you find a form that will be accepted by a court of law in the state where you live. The best option is to seek the help of an attorney. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-subheading__text"> Delegate the Powers </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> A POA can be as broad or as limited as the principal wishes but each of the powers granted must be clear even if the principal grants the agent a general POA. The principal can't grant sweeping, nonspecific authority such as, “I delegate all things having to do with my life.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_68-0"> <span class="mntl-sc-block-subheading__text"> Specify Durability </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> A POA terminates if the principal becomes incapacitated in most states. The only way an agent can keep their power if this happens is if the POA is written with an indication that it's durable. This designation makes it last for the principal's lifetime unless the principal revokes it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-subheading__text"> Notarize the POA </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Powers of attorney must be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-notary-services-5085059">notarized</a> in most states. It's potentially easier for the agent if a notary’s seal and signature are on the document even in states that don't require it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_74-0"> <span class="mntl-sc-block-subheading__text"> File the POA </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Some states require that specific kinds of POAs be filed with a court or government office before they can be made valid so look into the rules where you live. Ohio requires that any POA used to grant grandparents <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/guardian.asp">guardianship</a> over a child must be filed with the juvenile court.<span class="ql-inline-citation" data-cite="2"></span> It also requires that a POA that transfers real estate must be recorded by the county in which the property is located.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Not all powers of attorney must be formally recorded or filed but it's a standard practice for many estate planners and individuals who want to create a record that the document exists. File it with your state or county to be on the safe side.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_79-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_80-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>You can start the process of establishing a power of attorney by locating a lawyer who specializes in family or estate law in your state. Legal services offices that are staffed with credentialed attorneys exist in virtually every part of the United States if attorney fees are more than you can afford. Visit the Legal Services Corporation's website and use the "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lsc.gov/about-lsc/what-legal-aid/get-legal-help">Get Legal Help</a>" search function. Clients who qualify will receive <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/08/pro-bono.asp">pro bono</a> cost-free assistance.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-choosing-an-agent"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_81-0"> <span class="mntl-sc-block-heading__text"> Choosing an Agent </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> A POA grants immense ownership authority and responsibility. It's a matter of life and death in the case of a medical POA. You could find yourself facing financial privation or bankruptcy if you end up with a mishandled or abused durable POA. Choose your agent with the greatest care to ensure your wishes are carried out to the greatest extent possible. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> It's critical to name someone who is both trustworthy and capable to serve as your agent. Any mistakes may be difficult to correct and there may be a danger of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/self-dealing.asp">self-dealing</a> depending on the extent of the powers you grant. An agent may have access to your bank accounts, the power to make gifts and transfer your funds, and the ability to sell your property. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> Your agent can be any competent adult, including a professional such as an attorney, accountant, or banker. But they may also be a family member such as a spouse, an adult child, or another relative. Naming a family member as your agent saves the fees a professional would charge and may also keep confidential information about your finances and other private matters “in the family." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_88-0"> <span class="mntl-sc-block-subheading__text"> Naming Your Child As Your Agent </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Parents who create POAs often choose their adult children to serve as their agents. The relative youth of the child is an advantage when the purpose of the POA is to relieve a parent of the burden of managing the details of financial and investment affairs or provide management for their affairs should they become incapacitated. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> A spouse who is near the same age as the person creating the POA may come to suffer the same debilities that led the POA’s creator to establish the POA in the first place. A child who is honest, capable, and who respects the parent’s desires can be a good choice for an agent but there may be complications. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> Parents may struggle with the decision of who to select if they have more than one child. The good news is that you can have multiple POAs naming separate agents and customize them for each child’s skill set, temperament, and ability to act on your behalf. Specific abilities of your children may make them best suited to take on particular roles in managing your affairs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> You can use limited POAs to give each child different, defined, and limited power over specific aspects of your finances: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> <li>Managing everyday expenses of the family</li><li>Receiving income from and paying expenses on real estate</li><li>Controlling a financial portfolio</li><li>Managing insurance and annuities</li><li>Running a family’s small business</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_99-0"> <span class="mntl-sc-block-subheading__text"> Choosing Multiple Agents </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> More than one agent can be named in a POA, either with the authority to act separately or they can be required to act jointly. Having two agents who are separately authorized to manage routine items can be a convenience if one becomes unavailable for some reason. Requiring two or more to agree on major actions like selling a house can ensure family agreement over major decisions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> But naming multiple agents can cause problems if disputes arise between them. An investment account may be effectively frozen if two agents are required to act jointly in managing it but they disagree as to how to do so. Be sure that your chosen agents not only have the skills for the task but personalities to cooperate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> A general POA enables the agent to act with the authority of the POA’s creator in all matters. A special POA can limit that authority to a specific subject, such as managing an investment account, or to a limited time when the creator of the POA is unavailable. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_106-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_107-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Maybe one of your agents is a busy <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fa-profession/092516/10-most-famous-financial-advisors-brka.asp">financial expert</a> who lives in a distant city and another works part-time and lives conveniently close by. You can have one POA that names the first to manage your investment portfolio and another that names the second to manage your routine daily expenses if necessary and pay your monthly bills.</p></div></div></div> <span class="heading-toc" id="toc-risks-and-precautions"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_108-0"> <span class="mntl-sc-block-heading__text"> Risks and Precautions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_109-0"> Periodically review and update the POAs you've created when and if family circumstances change. You can cancel a POA by simply writing a letter that identifies it and states that you're revoking it then delivering the letter to your former agent. Some states require such a letter to be notarized. It’s also a good idea to send copies to third parties with whom the agent may have acted on your behalf. Then create a new POA and deliver it to your new choice of an agent.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_111-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/101514/power-attorney-do-you-need-one.asp">power of attorney</a> can provide you with both convenience and protection by giving a trusted individual the legal authority to act on your behalf and in your interests. Adult children who are both trustworthy and capable of accomplishing your wishes may make the best agents but don’t name a person simply because they're related to you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_112-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Trusted professional advisors such as lawyers, accountants, and doctors can help you understand the wisdom and necessity of adopting POAs. You can do so gradually if you aren't comfortable granting broad powers all at once but don’t delay. There could be costly consequences because the grantor must be mentally competent to create a power of attorney. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_115-0"> It's too late to create a POA if you lose the capacity to manage your affairs. Court proceedings may be required at that point. It would become necessary for someone to go to court to ask to be named as your conservator or guardian, a process that may prove costly and slow. It could also be contested, leading to family conflicts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_116-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> Make sure the POA requires that the agent periodically report all actions taken to a trusted third party whom family members agree upon, such as the family’s lawyer or accountant. You can also name two agents and require they agree on major transactions, such as the sale of a home. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> Nobody may have the right to take <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/032615/take-these-simple-steps-open-ira.asp">individual retirement account (IRA)</a> distributions the parent needs for income, borrow funds to pay medical bills, or deal with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp">Internal Revenue Service (IRS)</a> concerning the parent’s taxes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_121-0"><span class="heading-toc" id="toc-can-somebody-with-power-of-attorney-do-anything-they-please"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Somebody With Power of Attorney Do Anything They Please?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No. The scope of legal authority that's granted by a POA is laid out when it's established. The person who is granted power of attorney has a legal fiduciary duty to make decisions that are in the best interests of the person they're representing.<span class="ql-inline-citation" data-cite="5"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_122-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_123-0"><span class="heading-toc" id="toc-can-next-of-kin-override-a-power-of-attorney"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Next of Kin Override a Power of Attorney?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No. Next of kin or other family members do not have any legal authority to override or nullify an existing power of attorney.<br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_124-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_125-0"><span class="heading-toc" id="toc-how-can-i-revoke-a-power-of-attorney-that-ive-given-to-someone"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Revoke a Power of Attorney That I've Given to Someone?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Power of attorney can be terminated if you expressly revoke it. It may also have a set termination date or duration of time for which it's in force. A POA will also end if you become mentally incapacitated unless it is a durable power of attorney. All powers of attorney cease if you die.<span class="ql-inline-citation" data-cite="5"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_126-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_127-0"><span class="heading-toc" id="toc-who-can-i-name-to-have-power-of-attorney"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Can I Name to Have Power of Attorney?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can technically name anybody as your agent as long as it's done under your free will and you're mentally competent.<span class="ql-inline-citation" data-cite="4"></span> It should be somebody trustworthy and capable, such as a spouse, close family member, or friend. You can also designate your lawyer to have a POA.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_128-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_129-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_130-0"> Creating a power of attorney and specifying how it will operate even if you lose your ability to think or function ensures that you'll have a plan in place for overseeing your financial affairs and health directives if and when you're unable to do so. Be sure to choose somebody you trust and who will be able to faithfully carry out their responsibilities on your behalf. </p></div>

## What Is a Power of Attorney (POA)? A power of attorney (POA) is a legal authorization that gives the agent or [attorney-in-fact](https://www.investopedia.com/terms/a/attorneyinfact.asp) the authority to act on behalf of an individual referred to as the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care. POAs can be financial or they can pertain to health care. Both provide the attorney-in-fact with general or limited powers. ### Key Takeaways * A power of attorney is a legal document that gives one person the power to act for another. * The person who receives the authority is referred to as the agent or attorney-in-fact. * The subject of the POA is called the principal. * The agent can have broad legal authority or limited authority to make decisions about the principal's property, finances, or medical care. * A durable power of attorney continues to remain in effect if the principal becomes ill or disabled and cannot act personally. ## How a Power of Attorney (POA) Works A power of attorney is a legal document that binds the agent or attorney-in-fact and the principal. It's used in the event of a principal's temporary or permanent illness or disability or when they can't sign necessary documents. Both parties must sign the document and a third party is usually required to witness it. Most POA documents authorize the agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. The agreement automatically ends if the principal becomes incapable of making decisions for themself. A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined in the agreement. In the case of a married couple, the authorization may be invalidated if the principal and the agent divorce. ### Someone who wants the power of attorney to remain in effect after their health deteriorates should sign a durable power of attorney (DPOA). This remains in force even if the person they're representing becomes mentally or physically incapacitated but it doesn't persist after the principal's death. The authority is also voided if the power of attorney isn't designated as durable and the client becomes mentally incapacitated. There are many good reasons to make a power of attorney because it ensures that someone will look after your financial affairs if you become incapacitated. But signing a POA that grants broad authority to an agent is very much like signing a blank check. ## Types of Powers of Attorney A durable POA takes effect when the document is signed and continues in the case of incapacitation of the principal. A springing power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to only medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person. The two key types of POAs are financial and health care. ## Health Care Power of Attorney (HCPOA) The principal can sign a durable [health care POA (HCPOA)](https://www.investopedia.com/terms/h/hcpa.asp) if they want an agent to have the power to make health-related decisions for them. This document is also called a health care [proxy](https://www.investopedia.com/terms/p/proxydirective.asp). It outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition. This POA kicks in when the principal can no longer make health-related decisions on their own. ## Financial Power of Attorney A [financial POA](https://www.investopedia.com/terms/f/financial-power-attorney.asp) allows an agent to manage the business and financial affairs of the principal, such as signing checks, filing tax returns, depositing [Social Security checks](https://www.investopedia.com/articles/retirement/06/socialsecurity.asp), and managing investment accounts when and if the principal becomes unable to understand or make decisions. The agent must carry out the principal’s wishes to the best of their ability, at least to the extent of what the agreement spells out as being the agent’s responsibility. A financial POA can give the agent a wide range of power over the principal's bank account, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations. Financial POAs can be divided up into several categories. ### General Power POA This POA allows the agent to act on behalf of the principal in all matters as allowed by state law. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal. ### Limited POA A [limited power of attorney](https://www.investopedia.com/terms/l/limited_power_of_attorney.asp) gives the agent the power to act on behalf of the principal in specific matters or events. It might explicitly state that the agent is only permitted to manage the principal's retirement accounts. This type of POA may be in effect for a specific period. The authorization might be effective only for two years if the principal will be out of the country for that length of time. ### Durable Power of Attorney (DPOA) A durable POA (DPOA) remains in control of certain legal, property, or financial matters that are specifically spelled out in the agreement even if and when the principal becomes mentally incapacitated. A DPOA can pay medical bills on behalf of the principal but the durable agent can't make decisions related to the principal's health, such as taking them off life support. ### Springing Power of Attorney The conditions for which a durable POA may become active are set up in a document called a "springing" power of attorney. A springing POA defines the kind of event or level of incapacitation that should occur before the DPOA springs into effect. A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA. A springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened. ### An individual who's appointed as the agent in a power of attorney is not necessarily an attorney. The person could be a trusted family member, friend, or acquaintance. ## How to Set Up a Power of Attorney You can buy or download a POA template but be sure it's for your state because requirements can differ. There's no standard POA form for all 50 states, although all states do accept some version of a durable power of attorney. A few key powers cannot be delegated, including the right to make, amend, or revoke a [will](https://www.investopedia.com/terms/w/will.asp) or contract a marriage in most states, although a handful of states do allow this. You can't delegate the power to vote but the guardian can request a ballot on behalf of the principal. Some rules generally apply in all states and jurisdictions. ### Put It in Writing Some regions of the country accept oral POA grants but verbal instruction isn't a reliable substitute for spelling out the terms word-for-word on paper. Written clarity helps to avoid arguments and confusion later at a crucial time. ### Use the Proper Format Decide what powers you want to grant and prepare a POA that's specific to that desire. The POA must also satisfy the requirements of your state. Perform an Internet search or ask a local estate planning professional to help you find a form that will be accepted by a court of law in the state where you live. The best option is to seek the help of an attorney. ### Delegate the Powers A POA can be as broad or as limited as the principal wishes but each of the powers granted must be clear even if the principal grants the agent a general POA. The principal can't grant sweeping, nonspecific authority such as, “I delegate all things having to do with my life.” ### Specify Durability A POA terminates if the principal becomes incapacitated in most states. The only way an agent can keep their power if this happens is if the POA is written with an indication that it's durable. This designation makes it last for the principal's lifetime unless the principal revokes it. ### Notarize the POA Powers of attorney must be [notarized](https://www.investopedia.com/best-online-notary-services-5085059) in most states. It's potentially easier for the agent if a notary’s seal and signature are on the document even in states that don't require it. ### File the POA Some states require that specific kinds of POAs be filed with a court or government office before they can be made valid so look into the rules where you live. Ohio requires that any POA used to grant grandparents [guardianship](https://www.investopedia.com/terms/g/guardian.asp) over a child must be filed with the juvenile court. It also requires that a POA that transfers real estate must be recorded by the county in which the property is located. Not all powers of attorney must be formally recorded or filed but it's a standard practice for many estate planners and individuals who want to create a record that the document exists. File it with your state or county to be on the safe side. ### You can start the process of establishing a power of attorney by locating a lawyer who specializes in family or estate law in your state. Legal services offices that are staffed with credentialed attorneys exist in virtually every part of the United States if attorney fees are more than you can afford. Visit the Legal Services Corporation's website and use the "[Get Legal Help](https://www.lsc.gov/about-lsc/what-legal-aid/get-legal-help)" search function. Clients who qualify will receive [pro bono](https://www.investopedia.com/ask/answers/08/pro-bono.asp) cost-free assistance. ## Choosing an Agent A POA grants immense ownership authority and responsibility. It's a matter of life and death in the case of a medical POA. You could find yourself facing financial privation or bankruptcy if you end up with a mishandled or abused durable POA. Choose your agent with the greatest care to ensure your wishes are carried out to the greatest extent possible. It's critical to name someone who is both trustworthy and capable to serve as your agent. Any mistakes may be difficult to correct and there may be a danger of [self-dealing](https://www.investopedia.com/terms/s/self-dealing.asp) depending on the extent of the powers you grant. An agent may have access to your bank accounts, the power to make gifts and transfer your funds, and the ability to sell your property. Your agent can be any competent adult, including a professional such as an attorney, accountant, or banker. But they may also be a family member such as a spouse, an adult child, or another relative. Naming a family member as your agent saves the fees a professional would charge and may also keep confidential information about your finances and other private matters “in the family." ### Naming Your Child As Your Agent Parents who create POAs often choose their adult children to serve as their agents. The relative youth of the child is an advantage when the purpose of the POA is to relieve a parent of the burden of managing the details of financial and investment affairs or provide management for their affairs should they become incapacitated. A spouse who is near the same age as the person creating the POA may come to suffer the same debilities that led the POA’s creator to establish the POA in the first place. A child who is honest, capable, and who respects the parent’s desires can be a good choice for an agent but there may be complications. Parents may struggle with the decision of who to select if they have more than one child. The good news is that you can have multiple POAs naming separate agents and customize them for each child’s skill set, temperament, and ability to act on your behalf. Specific abilities of your children may make them best suited to take on particular roles in managing your affairs. You can use limited POAs to give each child different, defined, and limited power over specific aspects of your finances: * Managing everyday expenses of the family * Receiving income from and paying expenses on real estate * Controlling a financial portfolio * Managing insurance and annuities * Running a family’s small business ### Choosing Multiple Agents More than one agent can be named in a POA, either with the authority to act separately or they can be required to act jointly. Having two agents who are separately authorized to manage routine items can be a convenience if one becomes unavailable for some reason. Requiring two or more to agree on major actions like selling a house can ensure family agreement over major decisions. But naming multiple agents can cause problems if disputes arise between them. An investment account may be effectively frozen if two agents are required to act jointly in managing it but they disagree as to how to do so. Be sure that your chosen agents not only have the skills for the task but personalities to cooperate. A general POA enables the agent to act with the authority of the POA’s creator in all matters. A special POA can limit that authority to a specific subject, such as managing an investment account, or to a limited time when the creator of the POA is unavailable. ### Maybe one of your agents is a busy [financial expert](https://www.investopedia.com/articles/fa-profession/092516/10-most-famous-financial-advisors-brka.asp) who lives in a distant city and another works part-time and lives conveniently close by. You can have one POA that names the first to manage your investment portfolio and another that names the second to manage your routine daily expenses if necessary and pay your monthly bills. ## Risks and Precautions Periodically review and update the POAs you've created when and if family circumstances change. You can cancel a POA by simply writing a letter that identifies it and states that you're revoking it then delivering the letter to your former agent. Some states require such a letter to be notarized. It’s also a good idea to send copies to third parties with whom the agent may have acted on your behalf. Then create a new POA and deliver it to your new choice of an agent. A [power of attorney](https://www.investopedia.com/articles/personal-finance/101514/power-attorney-do-you-need-one.asp) can provide you with both convenience and protection by giving a trusted individual the legal authority to act on your behalf and in your interests. Adult children who are both trustworthy and capable of accomplishing your wishes may make the best agents but don’t name a person simply because they're related to you. Trusted professional advisors such as lawyers, accountants, and doctors can help you understand the wisdom and necessity of adopting POAs. You can do so gradually if you aren't comfortable granting broad powers all at once but don’t delay. There could be costly consequences because the grantor must be mentally competent to create a power of attorney. It's too late to create a POA if you lose the capacity to manage your affairs. Court proceedings may be required at that point. It would become necessary for someone to go to court to ask to be named as your conservator or guardian, a process that may prove costly and slow. It could also be contested, leading to family conflicts. Make sure the POA requires that the agent periodically report all actions taken to a trusted third party whom family members agree upon, such as the family’s lawyer or accountant. You can also name two agents and require they agree on major transactions, such as the sale of a home. Nobody may have the right to take [individual retirement account (IRA)](https://www.investopedia.com/articles/personal-finance/032615/take-these-simple-steps-open-ira.asp) distributions the parent needs for income, borrow funds to pay medical bills, or deal with the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) concerning the parent’s taxes. ## Can Somebody With Power of Attorney Do Anything They Please? No. The scope of legal authority that's granted by a POA is laid out when it's established. The person who is granted power of attorney has a legal fiduciary duty to make decisions that are in the best interests of the person they're representing. ## Can Next of Kin Override a Power of Attorney? No. Next of kin or other family members do not have any legal authority to override or nullify an existing power of attorney. ## How Can I Revoke a Power of Attorney That I've Given to Someone? Power of attorney can be terminated if you expressly revoke it. It may also have a set termination date or duration of time for which it's in force. A POA will also end if you become mentally incapacitated unless it is a durable power of attorney. All powers of attorney cease if you die. ## Who Can I Name to Have Power of Attorney? You can technically name anybody as your agent as long as it's done under your free will and you're mentally competent. It should be somebody trustworthy and capable, such as a spouse, close family member, or friend. You can also designate your lawyer to have a POA. ## The Bottom Line Creating a power of attorney and specifying how it will operate even if you lose your ability to think or function ensures that you'll have a plan in place for overseeing your financial affairs and health directives if and when you're unable to do so. Be sure to choose somebody you trust and who will be able to faithfully carry out their responsibilities on your behalf.

What Is a Power of Attorney (POA)? A power of attorney (POA) is a legal authorization that gives the agent or attorney-in-fact the authority to act on behalf of an individual referred to as the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care. POAs can be financial or they can pertain to health care. Both provide the attorney-in-fact with general or limited powers. Key Takeaways A power of attorney is a legal document that gives one person the power to act for another. The person who receives the authority is referred to as the agent or attorney-in-fact.The subject of the POA is called the principal.The agent can have broad legal authority or limited authority to make decisions about the principal's property, finances, or medical care.A durable power of attorney continues to remain in effect if the principal becomes ill or disabled and cannot act personally. How a Power of Attorney (POA) Works A power of attorney is a legal document that binds the agent or attorney-in-fact and the principal. It's used in the event of a principal's temporary or permanent illness or disability or when they can't sign necessary documents. Both parties must sign the document and a third party is usually required to witness it. Most POA documents authorize the agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. The agreement automatically ends if the principal becomes incapable of making decisions for themself. A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined in the agreement. In the case of a married couple, the authorization may be invalidated if the principal and the agent divorce. Someone who wants the power of attorney to remain in effect after their health deteriorates should sign a durable power of attorney (DPOA). This remains in force even if the person they're representing becomes mentally or physically incapacitated but it doesn't persist after the principal's death. The authority is also voided if the power of attorney isn't designated as durable and the client becomes mentally incapacitated. There are many good reasons to make a power of attorney because it ensures that someone will look after your financial affairs if you become incapacitated. But signing a POA that grants broad authority to an agent is very much like signing a blank check. Types of Powers of Attorney A durable POA takes effect when the document is signed and continues in the case of incapacitation of the principal. A springing power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to only medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person. The two key types of POAs are financial and health care. Health Care Power of Attorney (HCPOA) The principal can sign a durable health care POA (HCPOA) if they want an agent to have the power to make health-related decisions for them. This document is also called a health care proxy. It outlines the principal’s consent to give the agent POA privileges in the event of an unfortunate medical condition. This POA kicks in when the principal can no longer make health-related decisions on their own. Financial Power of Attorney A financial POA allows an agent to manage the business and financial affairs of the principal, such as signing checks, filing tax returns, depositing Social Security checks, and managing investment accounts when and if the principal becomes unable to understand or make decisions. The agent must carry out the principal’s wishes to the best of their ability, at least to the extent of what the agreement spells out as being the agent’s responsibility. A financial POA can give the agent a wide range of power over the principal's bank account, including the ability to make deposits and withdrawals, sign checks, and make or change beneficiary designations. Financial POAs can be divided up into several categories. General Power POA This POA allows the agent to act on behalf of the principal in all matters as allowed by state law. The agent under such an agreement may be authorized to handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal. Limited POA A limited power of attorney gives the agent the power to act on behalf of the principal in specific matters or events. It might explicitly state that the agent is only permitted to manage the principal's retirement accounts. This type of POA may be in effect for a specific period. The authorization might be effective only for two years if the principal will be out of the country for that length of time. Durable Power of Attorney (DPOA) A durable POA (DPOA) remains in control of certain legal, property, or financial matters that are specifically spelled out in the agreement even if and when the principal becomes mentally incapacitated. A DPOA can pay medical bills on behalf of the principal but the durable agent can't make decisions related to the principal's health, such as taking them off life support. Springing Power of Attorney The conditions for which a durable POA may become active are set up in a document called a "springing" power of attorney. A springing POA defines the kind of event or level of incapacitation that should occur before the DPOA springs into effect. A power of attorney can remain dormant until a negative health occurrence activates it to a DPOA. A springing power of attorney should be very carefully worded to avoid any problems in identifying precisely when and if the triggering event has happened. An individual who's appointed as the agent in a power of attorney is not necessarily an attorney. The person could be a trusted family member, friend, or acquaintance. How to Set Up a Power of Attorney You can buy or download a POA template but be sure it's for your state because requirements can differ. There's no standard POA form for all 50 states, although all states do accept some version of a durable power of attorney. A few key powers cannot be delegated, including the right to make, amend, or revoke a will or contract a marriage in most states, although a handful of states do allow this. You can't delegate the power to vote but the guardian can request a ballot on behalf of the principal. Some rules generally apply in all states and jurisdictions. Put It in Writing Some regions of the country accept oral POA grants but verbal instruction isn't a reliable substitute for spelling out the terms word-for-word on paper. Written clarity helps to avoid arguments and confusion later at a crucial time. Use the Proper Format Decide what powers you want to grant and prepare a POA that's specific to that desire. The POA must also satisfy the requirements of your state. Perform an Internet search or ask a local estate planning professional to help you find a form that will be accepted by a court of law in the state where you live. The best option is to seek the help of an attorney. Delegate the Powers A POA can be as broad or as limited as the principal wishes but each of the powers granted must be clear even if the principal grants the agent a general POA. The principal can't grant sweeping, nonspecific authority such as, “I delegate all things having to do with my life.” Specify Durability A POA terminates if the principal becomes incapacitated in most states. The only way an agent can keep their power if this happens is if the POA is written with an indication that it's durable. This designation makes it last for the principal's lifetime unless the principal revokes it. Notarize the POA Powers of attorney must be notarized in most states. It's potentially easier for the agent if a notary’s seal and signature are on the document even in states that don't require it. File the POA Some states require that specific kinds of POAs be filed with a court or government office before they can be made valid so look into the rules where you live. Ohio requires that any POA used to grant grandparents guardianship over a child must be filed with the juvenile court. It also requires that a POA that transfers real estate must be recorded by the county in which the property is located. Not all powers of attorney must be formally recorded or filed but it's a standard practice for many estate planners and individuals who want to create a record that the document exists. File it with your state or county to be on the safe side. You can start the process of establishing a power of attorney by locating a lawyer who specializes in family or estate law in your state. Legal services offices that are staffed with credentialed attorneys exist in virtually every part of the United States if attorney fees are more than you can afford. Visit the Legal Services Corporation's website and use the "Get Legal Help" search function. Clients who qualify will receive pro bono cost-free assistance. Choosing an Agent A POA grants immense ownership authority and responsibility. It's a matter of life and death in the case of a medical POA. You could find yourself facing financial privation or bankruptcy if you end up with a mishandled or abused durable POA. Choose your agent with the greatest care to ensure your wishes are carried out to the greatest extent possible. It's critical to name someone who is both trustworthy and capable to serve as your agent. Any mistakes may be difficult to correct and there may be a danger of self-dealing depending on the extent of the powers you grant. An agent may have access to your bank accounts, the power to make gifts and transfer your funds, and the ability to sell your property. Your agent can be any competent adult, including a professional such as an attorney, accountant, or banker. But they may also be a family member such as a spouse, an adult child, or another relative. Naming a family member as your agent saves the fees a professional would charge and may also keep confidential information about your finances and other private matters “in the family." Naming Your Child As Your Agent Parents who create POAs often choose their adult children to serve as their agents. The relative youth of the child is an advantage when the purpose of the POA is to relieve a parent of the burden of managing the details of financial and investment affairs or provide management for their affairs should they become incapacitated. A spouse who is near the same age as the person creating the POA may come to suffer the same debilities that led the POA’s creator to establish the POA in the first place. A child who is honest, capable, and who respects the parent’s desires can be a good choice for an agent but there may be complications. Parents may struggle with the decision of who to select if they have more than one child. The good news is that you can have multiple POAs naming separate agents and customize them for each child’s skill set, temperament, and ability to act on your behalf. Specific abilities of your children may make them best suited to take on particular roles in managing your affairs. You can use limited POAs to give each child different, defined, and limited power over specific aspects of your finances: Managing everyday expenses of the familyReceiving income from and paying expenses on real estateControlling a financial portfolioManaging insurance and annuitiesRunning a family’s small business Choosing Multiple Agents More than one agent can be named in a POA, either with the authority to act separately or they can be required to act jointly. Having two agents who are separately authorized to manage routine items can be a convenience if one becomes unavailable for some reason. Requiring two or more to agree on major actions like selling a house can ensure family agreement over major decisions. But naming multiple agents can cause problems if disputes arise between them. An investment account may be effectively frozen if two agents are required to act jointly in managing it but they disagree as to how to do so. Be sure that your chosen agents not only have the skills for the task but personalities to cooperate. A general POA enables the agent to act with the authority of the POA’s creator in all matters. A special POA can limit that authority to a specific subject, such as managing an investment account, or to a limited time when the creator of the POA is unavailable. Maybe one of your agents is a busy financial expert who lives in a distant city and another works part-time and lives conveniently close by. You can have one POA that names the first to manage your investment portfolio and another that names the second to manage your routine daily expenses if necessary and pay your monthly bills. Risks and Precautions Periodically review and update the POAs you've created when and if family circumstances change. You can cancel a POA by simply writing a letter that identifies it and states that you're revoking it then delivering the letter to your former agent. Some states require such a letter to be notarized. It’s also a good idea to send copies to third parties with whom the agent may have acted on your behalf. Then create a new POA and deliver it to your new choice of an agent. A power of attorney can provide you with both convenience and protection by giving a trusted individual the legal authority to act on your behalf and in your interests. Adult children who are both trustworthy and capable of accomplishing your wishes may make the best agents but don’t name a person simply because they're related to you. Trusted professional advisors such as lawyers, accountants, and doctors can help you understand the wisdom and necessity of adopting POAs. You can do so gradually if you aren't comfortable granting broad powers all at once but don’t delay. There could be costly consequences because the grantor must be mentally competent to create a power of attorney. It's too late to create a POA if you lose the capacity to manage your affairs. Court proceedings may be required at that point. It would become necessary for someone to go to court to ask to be named as your conservator or guardian, a process that may prove costly and slow. It could also be contested, leading to family conflicts. Make sure the POA requires that the agent periodically report all actions taken to a trusted third party whom family members agree upon, such as the family’s lawyer or accountant. You can also name two agents and require they agree on major transactions, such as the sale of a home. Nobody may have the right to take individual retirement account (IRA) distributions the parent needs for income, borrow funds to pay medical bills, or deal with the Internal Revenue Service (IRS) concerning the parent’s taxes. Can Somebody With Power of Attorney Do Anything They Please? No. The scope of legal authority that's granted by a POA is laid out when it's established. The person who is granted power of attorney has a legal fiduciary duty to make decisions that are in the best interests of the person they're representing. Can Next of Kin Override a Power of Attorney? No. Next of kin or other family members do not have any legal authority to override or nullify an existing power of attorney. How Can I Revoke a Power of Attorney That I've Given to Someone? Power of attorney can be terminated if you expressly revoke it. It may also have a set termination date or duration of time for which it's in force. A POA will also end if you become mentally incapacitated unless it is a durable power of attorney. All powers of attorney cease if you die. Who Can I Name to Have Power of Attorney? You can technically name anybody as your agent as long as it's done under your free will and you're mentally competent. It should be somebody trustworthy and capable, such as a spouse, close family member, or friend. You can also designate your lawyer to have a POA. The Bottom Line Creating a power of attorney and specifying how it will operate even if you lose your ability to think or function ensures that you'll have a plan in place for overseeing your financial affairs and health directives if and when you're unable to do so. Be sure to choose somebody you trust and who will be able to faithfully carry out their responsibilities on your behalf.

https://www.investopedia.com/30-year-mortgage-rates-fall-to-2-week-low-8602858

30-Year Mortgage Rates Fall to 2-Week Low

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Rates on 30-year new purchase mortgages dipped for a second consecutive day Thursday, falling to 7.36%—their cheapest level in two weeks. Almost all other new purchase and refi mortgage types also saw rate declines Thursday. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Rates vary widely across lenders, so it's always smart to shop around for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">your best mortgage option</a> and compare rates regularly, no matter the type of home loan you're seeking. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_5-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.36%</td> <td>7.82%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.34%</td> <td>7.77%</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.82%</td> <td>6.83%</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.72%</td> <td>6.87%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.69%</td> <td>7.74%</td> </tr> </tbody> </table> <figcaption>National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_7-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> After shooting up last week to 7.48%, the priciest level in almost three months, rates on 30-year new purchase mortgages have dropped to a lower 7.36% average. Thursday's decline of 6 basis points takes the flagship average to its lowest mark since Feb. 15. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Given that 30-year rates dipped into 6% territory at the start of February, the current average is still elevated. But rates are notably cheaper than October, when the 30-year average notched a historic 23-year peak of 8.45%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_14-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Klznx/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="History of 30y average since Jun 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_17-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Rates on 15-year new purchase loans subtracted a similar 5 basis points Thursday, lowering the average to 6.72%. That's almost two-thirds of a percentage point more expensive than we saw just before the new year, when 15-year rates sank to a seven-month low of 6.10%. But last October, 15-year rates soared to a 7.59% peak—their highest level since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> After jumping Tuesday to a three-month-high of 6.95%, jumbo 30-year rates subtracted an eighth of a point Thursday to average a lower held 6.82%. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Almost all other new purchase rates also dropped Thursday, with the 20-year, VA 30-year, and FHA 30-year averages falling by double-digit basis points. The only non-declining averages were for adjustable-rate loans that were flat or moved just slightly higher, </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_25-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.36%</td> <td>-0.06</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.34%</td> <td>-0.15</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.12%</td> <td>-0.16</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.82%</td> <td>-0.13</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.12%</td> <td>-0.18</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.72%</td> <td>-0.05</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.83%</td> <td>-0.03</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.77%</td> <td>-0.01</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.62%</td> <td>-0.06</td> </tr> <tr> <td>10/6 ARM</td> <td>7.58%</td> <td>+0.03</td> </tr> <tr> <td>7/6 ARM</td> <td>7.54%</td> <td>-0.01</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.45%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.69%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_27-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/uU57J/3/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and this week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Most refinancing averages also declined Thursday, though the 30-year refi average fell more substantially than its new purchase sibling. With the refi average subtracting 11 basis points, the spread between 30-year new purchase and refi rates narrowed a bit to 46 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Similar to new purchase rates, Thursday's 15-year refi average gave up 7 basis points and the jumbo 30-year refi average dropped an eighth of a point. The biggest refi mover was 20-year refi loans, whose average sank 17 basis points, while the only refi type to rise was 10/6 ARM loans, which ticked up a minor 3 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_39-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 157px;"></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - Refinance</th> </tr> <tr> <th>Loan Type</th> <th><b>Refinance Rates</b></th> <th>Daily Change</th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.82%</td> <td>-0.11</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.77%</td> <td>-0.08</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.54%</td> <td>-0.01</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.83%</td> <td>-0.12</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.47%</td> <td>-0.17</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.87%</td> <td>-0.07</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.97%</td> <td>-0.06</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.81%</td> <td>-0.04</td> </tr> <tr> <td>10/6 ARM</td> <td>7.74%</td> <td>+0.03</td> </tr> <tr> <td>7/6 ARM</td> <td>7.83%</td> <td>-0.07</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.74%</td> <td>-0.03</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_43-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_44-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here.</p></div></div></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_45-0"><div class="comp mortgage-loan-calculator mntl-block" data-defer="load" id="mortgage-loan-calculator_1-0"></div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-lowest-mortgage-rates-by-state"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> Lowest Mortgage Rates by State </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The states with the cheapest 30-year new purchase rates were Mississippi, Vermont, Hawaii, Iowa, and Louisiana, while the states with the most expensive rates were Minnesota, Oregon, Arizona, Georgia, and Nevada. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_52-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/axA8w/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="State-by-state average minimum rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <li>The level and direction of the bond market, especially 10-year Treasury yields</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li> <li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/jerome-powell-5210572">Jerome Powell</a> stated that inflation is still too high, and they will therefore proceed cautiously on deciding <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695">when to make the first rate cut</a>. Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%.<span class="ql-inline-citation" data-cite="5"></span> But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value ratio (LTV)</a> of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>

Rates on 30-year new purchase mortgages dipped for a second consecutive day Thursday, falling to 7.36%—their cheapest level in two weeks. Almost all other new purchase and refi mortgage types also saw rate declines Thursday. Rates vary widely across lenders, so it's always smart to shop around for [your best mortgage option](https://www.investopedia.com/mortgage-rates-5094943) and compare rates regularly, no matter the type of home loan you're seeking. | National Averages of Lenders' Best Rates | | | | --- | --- | --- | | **Loan Type** | **New Purchase** | **Refinance** | | 30-Year Fixed | 7.36% | 7.82% | | FHA 30-Year Fixed | 7.34% | 7.77% | | Jumbo 30-Year Fixed | 6.82% | 6.83% | | 15-Year Fixed | 6.72% | 6.87% | | 5/6 ARM | 7.69% | 7.74% | National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. ## Today's Mortgage Rate Averages: New Purchase After shooting up last week to 7.48%, the priciest level in almost three months, rates on 30-year new purchase mortgages have dropped to a lower 7.36% average. Thursday's decline of 6 basis points takes the flagship average to its lowest mark since Feb. 15. Given that 30-year rates dipped into 6% territory at the start of February, the current average is still elevated. But rates are notably cheaper than October, when the 30-year average notched a historic 23-year peak of 8.45%. [Compare the Best Mortgage Rates Today - May 21, 2024](https://www.investopedia.com/mortgage-rates-5094943) Rates on 15-year new purchase loans subtracted a similar 5 basis points Thursday, lowering the average to 6.72%. That's almost two-thirds of a percentage point more expensive than we saw just before the new year, when 15-year rates sank to a seven-month low of 6.10%. But last October, 15-year rates soared to a 7.59% peak—their highest level since 2000. After jumping Tuesday to a three-month-high of 6.95%, jumbo 30-year rates subtracted an eighth of a point Thursday to average a lower held 6.82%. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. Almost all other new purchase rates also dropped Thursday, with the 20-year, VA 30-year, and FHA 30-year averages falling by double-digit basis points. The only non-declining averages were for adjustable-rate loans that were flat or moved just slightly higher, | National Averages of Lenders' Best Rates - New Purchase | | | | --- | --- | --- | | Loan Type | **New Purchase Rates** | **Daily Change** | | 30-Year Fixed | 7.36% | -0.06 | | FHA 30-Year Fixed | 7.34% | -0.15 | | VA 30-Year Fixed | 7.12% | -0.16 | | Jumbo 30-Year Fixed | 6.82% | -0.13 | | 20-Year Fixed | 7.12% | -0.18 | | 15-Year Fixed | 6.72% | -0.05 | | FHA 15-Year Fixed | 6.83% | -0.03 | | Jumbo 15-Year Fixed | 6.77% | -0.01 | | 10-Year Fixed | 6.62% | -0.06 | | 10/6 ARM | 7.58% | +0.03 | | 7/6 ARM | 7.54% | -0.01 | | Jumbo 7/6 ARM | 6.45% | No Change | | 5/6 ARM | 7.69% | +0.01 | | Jumbo 5/6 ARM | 6.55% | No Change | ## The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and this week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a *weekly* average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with [discount points](https://www.investopedia.com/terms/d/discountpoints.asp), while Investopedia’s averages only include zero-point loans. ## Today's Mortgage Rate Averages: Refinancing Most refinancing averages also declined Thursday, though the 30-year refi average fell more substantially than its new purchase sibling. With the refi average subtracting 11 basis points, the spread between 30-year new purchase and refi rates narrowed a bit to 46 basis points. Similar to new purchase rates, Thursday's 15-year refi average gave up 7 basis points and the jumbo 30-year refi average dropped an eighth of a point. The biggest refi mover was 20-year refi loans, whose average sank 17 basis points, while the only refi type to rise was 10/6 ARM loans, which ticked up a minor 3 basis points. | National Averages of Lenders' Best Rates - Refinance | | | | --- | --- | --- | | Loan Type | **Refinance Rates** | Daily Change | | 30-Year Fixed | 7.82% | -0.11 | | FHA 30-Year Fixed | 7.77% | -0.08 | | VA 30-Year Fixed | 7.54% | -0.01 | | Jumbo 30-Year Fixed | 6.83% | -0.12 | | 20-Year Fixed | 7.47% | -0.17 | | 15-Year Fixed | 6.87% | -0.07 | | FHA 15-Year Fixed | 6.97% | -0.06 | | Jumbo 15-Year Fixed | 6.78% | No Change | | 10-Year Fixed | 6.81% | -0.04 | | 10/6 ARM | 7.74% | +0.03 | | 7/6 ARM | 7.83% | -0.07 | | Jumbo 7/6 ARM | 6.55% | No Change | | 5/6 ARM | 7.74% | -0.03 | | Jumbo 5/6 ARM | 6.55% | No Change | Calculate monthly payments for different loan scenarios with our [Mortgage Calculator](https://www.investopedia.com/mortgage-calculator-5084794). ### The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. ## Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Vermont, Hawaii, Iowa, and Louisiana, while the states with the most expensive rates were Minnesota, Oregon, Arizona, Georgia, and Nevada. ## What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: * The level and direction of the bond market, especially 10-year Treasury yields * The [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservebank.asp) current monetary policy, especially as it relates to bond buying and funding government-backed mortgages * Competition between [mortgage lenders and across loan types](https://www.investopedia.com/best-mortgage-lenders-5076852) Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This [bond-buying policy](https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp) is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair [Jerome Powell](https://www.investopedia.com/jerome-powell-5210572) stated that inflation is still too high, and they will therefore proceed cautiously on deciding [when to make the first rate cut](https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695). Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%. But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. ## How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a [loan-to-value ratio (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

Rates on 30-year new purchase mortgages dipped for a second consecutive day Thursday, falling to 7.36%—their cheapest level in two weeks. Almost all other new purchase and refi mortgage types also saw rate declines Thursday. Rates vary widely across lenders, so it's always smart to shop around for your best mortgage option and compare rates regularly, no matter the type of home loan you're seeking. National Averages of Lenders' Best Rates Loan Type New Purchase Refinance 30-Year Fixed 7.36% 7.82% FHA 30-Year Fixed 7.34% 7.77% Jumbo 30-Year Fixed 6.82% 6.83% 15-Year Fixed 6.72% 6.87% 5/6 ARM 7.69% 7.74% National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. Today's Mortgage Rate Averages: New Purchase After shooting up last week to 7.48%, the priciest level in almost three months, rates on 30-year new purchase mortgages have dropped to a lower 7.36% average. Thursday's decline of 6 basis points takes the flagship average to its lowest mark since Feb. 15. Given that 30-year rates dipped into 6% territory at the start of February, the current average is still elevated. But rates are notably cheaper than October, when the 30-year average notched a historic 23-year peak of 8.45%. Compare the Best Mortgage Rates Today - May 21, 2024 Rates on 15-year new purchase loans subtracted a similar 5 basis points Thursday, lowering the average to 6.72%. That's almost two-thirds of a percentage point more expensive than we saw just before the new year, when 15-year rates sank to a seven-month low of 6.10%. But last October, 15-year rates soared to a 7.59% peak—their highest level since 2000. After jumping Tuesday to a three-month-high of 6.95%, jumbo 30-year rates subtracted an eighth of a point Thursday to average a lower held 6.82%. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. Almost all other new purchase rates also dropped Thursday, with the 20-year, VA 30-year, and FHA 30-year averages falling by double-digit basis points. The only non-declining averages were for adjustable-rate loans that were flat or moved just slightly higher, National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.36% -0.06 FHA 30-Year Fixed 7.34% -0.15 VA 30-Year Fixed 7.12% -0.16 Jumbo 30-Year Fixed 6.82% -0.13 20-Year Fixed 7.12% -0.18 15-Year Fixed 6.72% -0.05 FHA 15-Year Fixed 6.83% -0.03 Jumbo 15-Year Fixed 6.77% -0.01 10-Year Fixed 6.62% -0.06 10/6 ARM 7.58% +0.03 7/6 ARM 7.54% -0.01 Jumbo 7/6 ARM 6.45% No Change 5/6 ARM 7.69% +0.01 Jumbo 5/6 ARM 6.55% No Change The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and this week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a weekly average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with discount points, while Investopedia’s averages only include zero-point loans. Today's Mortgage Rate Averages: Refinancing Most refinancing averages also declined Thursday, though the 30-year refi average fell more substantially than its new purchase sibling. With the refi average subtracting 11 basis points, the spread between 30-year new purchase and refi rates narrowed a bit to 46 basis points. Similar to new purchase rates, Thursday's 15-year refi average gave up 7 basis points and the jumbo 30-year refi average dropped an eighth of a point. The biggest refi mover was 20-year refi loans, whose average sank 17 basis points, while the only refi type to rise was 10/6 ARM loans, which ticked up a minor 3 basis points. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 7.82% -0.11 FHA 30-Year Fixed 7.77% -0.08 VA 30-Year Fixed 7.54% -0.01 Jumbo 30-Year Fixed 6.83% -0.12 20-Year Fixed 7.47% -0.17 15-Year Fixed 6.87% -0.07 FHA 15-Year Fixed 6.97% -0.06 Jumbo 15-Year Fixed 6.78% No Change 10-Year Fixed 6.81% -0.04 10/6 ARM 7.74% +0.03 7/6 ARM 7.83% -0.07 Jumbo 7/6 ARM 6.55% No Change 5/6 ARM 7.74% -0.03 Jumbo 5/6 ARM 6.55% No Change Calculate monthly payments for different loan scenarios with our Mortgage Calculator. The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Vermont, Hawaii, Iowa, and Louisiana, while the states with the most expensive rates were Minnesota, Oregon, Arizona, Georgia, and Nevada. What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: The level and direction of the bond market, especially 10-year Treasury yields The Federal Reserve's current monetary policy, especially as it relates to bond buying and funding government-backed mortgages Competition between mortgage lenders and across loan types Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This bond-buying policy is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the federal funds rate to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair Jerome Powell stated that inflation is still too high, and they will therefore proceed cautiously on deciding when to make the first rate cut. Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%. But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a loan-to-value ratio (LTV) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

https://www.investopedia.com/insights/new-approach-esg-scoring/

A New Approach to ESG Scoring

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Scoring publicly-traded companies on their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">environmental, social, and governance</a> (ESG) could now be easier following <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://russellinvestments.com/us/insights/articles/materiality-matters">new research by Russell Investments</a>. The firm has created a metric that more accurately identifies ESG factors, which could impact the financial performance of the firms. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Scott Bennett, director of equity strategy and research at Russell Investments, co-authored a paper titled <em>Materiality Matters: Targeting ESG issues that impact performance</em>. Bennett writes, “We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability,” Bennett said. “Our material scores are 65% correlated to traditional ESG scores, but they are meaningfully different.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <span class="heading-toc" id="toc-a-new-methodology"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> A New Methodology </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The new scores allow ESG investors to differentiate between companies in a more precise way. According to Emily Steinbarth, quantitative analyst at Russell, who co-authored the study, the firm created the new scoring methodology with comprehensive ESG scores from data provider Sustainalytics, which "are used for a wide variety of reasons beyond investment selection, and the industry-level materiality map developed by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sustainability-accounting-standards-board-7484327">Sustainability Accounting Standards Board (SASB)</a>." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The new scores were back-tested to a period between December 2012 and June 2017 using the Russell Global Large Cap Index. The research team found that a listed company's material ESG score offers a promising signal for informing investment decisions, producing measurably better performance than traditional ESG scores during the back-tested period. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Bennett added that the results of this study are aligned with the expectations of sustainable investment industry research organizations, such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-the-tcfd-task-force-on-climate-related-financial-disclosures-4771379">Task Force on Climate-related Financial Disclosures</a> (TCFD) and the United Nations-backed <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/un-principles-responsible-investment-pri.asp">Principle for Responsible Investment</a> (PRI). <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="http://www.oecd.org/investment/mne/38783873.pdf">These NGOs</a> <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.fsb-tcfd.org/wp-content/uploads/2016/12/16_1221_TCFD_Report_Letter.pdf">recommend</a> that companies focus on the material ESG issues that directly affect their bottom line. An electric utility, for example, would make carbon emissions a material ESG factor in measuring the long-term impact on its ability to provide cleaner energy resources to business and residential customers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-following-the-money"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> Following the Money </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Led by women and millennials, who will control the majority of wealth in the U.S. within 15 years, sustainability-focused investors are demanding more opportunity to incorporate ESG metrics into portfolio analysis. In turn, financial advisors are demanding better information from asset managers about how they use ESG analysis to reduce risk and create a performance advantage. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Publicly traded companies are next in line to be vetted in relation to ESG data, and today are more sensitive to investor demand for material information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> This change has been driven by rising importance of intangibles to publicly traded companies. According to David Post of the Sustainability Accounting Standards Board (SASB), intangibles now fill 80% of company balance sheets. This increases company exposure to short-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reputational-risk.asp">reputational risk</a>. Internal focus on the ESG metrics that matter to a company today is, thus, more important than it was five years ago.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-blackrock-support"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Blackrock Support </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> As a materiality-focused approach to understanding ESG moves to center stage, large asset managers are calling for awareness of which off-the-balance-sheet issues create risk and opportunity for firms. In a recent letter to the CEOs of companies owned in its portfolios, BlackRock CEO Larry Fink recently drew attention to “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter">A New Model for Corporate Governance</a>” focused on long-term value creation for shareholders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> BlackRock’s assets under management are heavily weighted toward index-based, low-cost portfolios. In passive portfolio structures that incorporate ESG analysis, asset managers cannot express disapproval of corporate governance policy decisions by selling a company’s stock as long as it is included in the relevant index. This potentially impacts the asset manager’s fiduciary obligation to its shareholders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Fink’s remarks are especially valuable to consider in relation to research of the kind that Russell Investments has done to develop company and industry-specific ESG metrics that affect performance. Accurate measurement of material ESG metrics at the company level is more important than ever. In fact, the early results of this research have encouraged Russell Investments to incorporate the new material ESG scoring approach into its current decarbonization strategy. This strategy serves as the foundation for low carbon investment funds available in several markets globally. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The research also confirms a founding premise for the work of the SASB since its inception, which is that markets don’t need more ESG data, they need better ESG data for investors to use in the portfolio securities selection process. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The Russell ESG score helps investors compare companies and make informed decisions. As the importance of intangible concepts rises in importance to investors, the ESG scores become more important as well. There are several rating agencies that also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/company-esg-score-7480372">score companies on reaching ESG goals</a>. These include Bloomberg, Morningstar, and MSCI.<br/> </p></div>

Scoring publicly-traded companies on their [environmental, social, and governance](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) (ESG) could now be easier following [new research by Russell Investments](https://russellinvestments.com/us/insights/articles/materiality-matters). The firm has created a metric that more accurately identifies ESG factors, which could impact the financial performance of the firms. Scott Bennett, director of equity strategy and research at Russell Investments, co-authored a paper titled *Materiality Matters: Targeting ESG issues that impact performance*. Bennett writes, “We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability,” Bennett said. “Our material scores are 65% correlated to traditional ESG scores, but they are meaningfully different.” ## A New Methodology The new scores allow ESG investors to differentiate between companies in a more precise way. According to Emily Steinbarth, quantitative analyst at Russell, who co-authored the study, the firm created the new scoring methodology with comprehensive ESG scores from data provider Sustainalytics, which "are used for a wide variety of reasons beyond investment selection, and the industry-level materiality map developed by the [Sustainability Accounting Standards Board (SASB)](https://www.investopedia.com/sustainability-accounting-standards-board-7484327)." The new scores were back-tested to a period between December 2012 and June 2017 using the Russell Global Large Cap Index. The research team found that a listed company's material ESG score offers a promising signal for informing investment decisions, producing measurably better performance than traditional ESG scores during the back-tested period. Bennett added that the results of this study are aligned with the expectations of sustainable investment industry research organizations, such as the [Task Force on Climate-related Financial Disclosures](https://www.investopedia.com/what-is-the-tcfd-task-force-on-climate-related-financial-disclosures-4771379) (TCFD) and the United Nations-backed [Principle for Responsible Investment](https://www.investopedia.com/terms/u/un-principles-responsible-investment-pri.asp) (PRI). [These NGOs](http://www.oecd.org/investment/mne/38783873.pdf) [recommend](https://www.fsb-tcfd.org/wp-content/uploads/2016/12/16_1221_TCFD_Report_Letter.pdf) that companies focus on the material ESG issues that directly affect their bottom line. An electric utility, for example, would make carbon emissions a material ESG factor in measuring the long-term impact on its ability to provide cleaner energy resources to business and residential customers. ## Following the Money Led by women and millennials, who will control the majority of wealth in the U.S. within 15 years, sustainability-focused investors are demanding more opportunity to incorporate ESG metrics into portfolio analysis. In turn, financial advisors are demanding better information from asset managers about how they use ESG analysis to reduce risk and create a performance advantage. Publicly traded companies are next in line to be vetted in relation to ESG data, and today are more sensitive to investor demand for material information. This change has been driven by rising importance of intangibles to publicly traded companies. According to David Post of the Sustainability Accounting Standards Board (SASB), intangibles now fill 80% of company balance sheets. This increases company exposure to short-term [reputational risk](https://www.investopedia.com/terms/r/reputational-risk.asp). Internal focus on the ESG metrics that matter to a company today is, thus, more important than it was five years ago.  ## Blackrock Support As a materiality-focused approach to understanding ESG moves to center stage, large asset managers are calling for awareness of which off-the-balance-sheet issues create risk and opportunity for firms. In a recent letter to the CEOs of companies owned in its portfolios, BlackRock CEO Larry Fink recently drew attention to “[A New Model for Corporate Governance](https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter)” focused on long-term value creation for shareholders. BlackRock’s assets under management are heavily weighted toward index-based, low-cost portfolios. In passive portfolio structures that incorporate ESG analysis, asset managers cannot express disapproval of corporate governance policy decisions by selling a company’s stock as long as it is included in the relevant index. This potentially impacts the asset manager’s fiduciary obligation to its shareholders. Fink’s remarks are especially valuable to consider in relation to research of the kind that Russell Investments has done to develop company and industry-specific ESG metrics that affect performance. Accurate measurement of material ESG metrics at the company level is more important than ever. In fact, the early results of this research have encouraged Russell Investments to incorporate the new material ESG scoring approach into its current decarbonization strategy. This strategy serves as the foundation for low carbon investment funds available in several markets globally. The research also confirms a founding premise for the work of the SASB since its inception, which is that markets don’t need more ESG data, they need better ESG data for investors to use in the portfolio securities selection process. ## The Bottom Line The Russell ESG score helps investors compare companies and make informed decisions. As the importance of intangible concepts rises in importance to investors, the ESG scores become more important as well. There are several rating agencies that also [score companies on reaching ESG goals](https://www.investopedia.com/company-esg-score-7480372). These include Bloomberg, Morningstar, and MSCI.

Scoring publicly-traded companies on their environmental, social, and governance (ESG) could now be easier following new research by Russell Investments. The firm has created a metric that more accurately identifies ESG factors, which could impact the financial performance of the firms. Scott Bennett, director of equity strategy and research at Russell Investments, co-authored a paper titled Materiality Matters: Targeting ESG issues that impact performance. Bennett writes, “We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability,” Bennett said. “Our material scores are 65% correlated to traditional ESG scores, but they are meaningfully different.” A New Methodology The new scores allow ESG investors to differentiate between companies in a more precise way. According to Emily Steinbarth, quantitative analyst at Russell, who co-authored the study, the firm created the new scoring methodology with comprehensive ESG scores from data provider Sustainalytics, which "are used for a wide variety of reasons beyond investment selection, and the industry-level materiality map developed by the Sustainability Accounting Standards Board (SASB)." The new scores were back-tested to a period between December 2012 and June 2017 using the Russell Global Large Cap Index. The research team found that a listed company's material ESG score offers a promising signal for informing investment decisions, producing measurably better performance than traditional ESG scores during the back-tested period. Bennett added that the results of this study are aligned with the expectations of sustainable investment industry research organizations, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the United Nations-backed Principle for Responsible Investment (PRI). These NGOs recommend that companies focus on the material ESG issues that directly affect their bottom line. An electric utility, for example, would make carbon emissions a material ESG factor in measuring the long-term impact on its ability to provide cleaner energy resources to business and residential customers. Following the Money Led by women and millennials, who will control the majority of wealth in the U.S. within 15 years, sustainability-focused investors are demanding more opportunity to incorporate ESG metrics into portfolio analysis. In turn, financial advisors are demanding better information from asset managers about how they use ESG analysis to reduce risk and create a performance advantage. Publicly traded companies are next in line to be vetted in relation to ESG data, and today are more sensitive to investor demand for material information. This change has been driven by rising importance of intangibles to publicly traded companies. According to David Post of the Sustainability Accounting Standards Board (SASB), intangibles now fill 80% of company balance sheets. This increases company exposure to short-term reputational risk. Internal focus on the ESG metrics that matter to a company today is, thus, more important than it was five years ago.  Blackrock Support As a materiality-focused approach to understanding ESG moves to center stage, large asset managers are calling for awareness of which off-the-balance-sheet issues create risk and opportunity for firms. In a recent letter to the CEOs of companies owned in its portfolios, BlackRock CEO Larry Fink recently drew attention to “A New Model for Corporate Governance” focused on long-term value creation for shareholders. BlackRock’s assets under management are heavily weighted toward index-based, low-cost portfolios. In passive portfolio structures that incorporate ESG analysis, asset managers cannot express disapproval of corporate governance policy decisions by selling a company’s stock as long as it is included in the relevant index. This potentially impacts the asset manager’s fiduciary obligation to its shareholders. Fink’s remarks are especially valuable to consider in relation to research of the kind that Russell Investments has done to develop company and industry-specific ESG metrics that affect performance. Accurate measurement of material ESG metrics at the company level is more important than ever. In fact, the early results of this research have encouraged Russell Investments to incorporate the new material ESG scoring approach into its current decarbonization strategy. This strategy serves as the foundation for low carbon investment funds available in several markets globally. The research also confirms a founding premise for the work of the SASB since its inception, which is that markets don’t need more ESG data, they need better ESG data for investors to use in the portfolio securities selection process. The Bottom Line The Russell ESG score helps investors compare companies and make informed decisions. As the importance of intangible concepts rises in importance to investors, the ESG scores become more important as well. There are several rating agencies that also score companies on reaching ESG goals. These include Bloomberg, Morningstar, and MSCI.

https://www.investopedia.com/ask/answers/041015/what-are-some-best-small-cap-index-funds.asp

What are some of the best small-cap index funds?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The best <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-cap.asp">small-cap</a> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index funds</a> are the <a class="termLink" data-component="link" data-inlink="link_1" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ishares.asp">iShares</a> Russell 2000 ETF (<a class="link-symbol" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwm">IWM</a>), <a class="termLink" data-component="link" data-inlink="link_2" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spiders.asp">SPDR</a> S&amp;P 600 Small Cap ETF (<a class="link-symbol" data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=sly">SLY</a>), Vanguard Russell 2000 ETF (<a class="link-symbol" data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vtwo">VTWO</a>) and Vanguard Small Cap <a class="termLink" data-component="link" data-inlink="link_3" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">Index Fund</a> (<a class="link-symbol" data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vb">VB</a>). These funds are rated highly by <em>U.S. News &amp; World Report </em>in terms of liquidity, costs and diversification. These are all <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a>. IWM is the most tracked and traded. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Many investors prefer watching small-cap funds to more mainstream market indexes such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&amp;P 500 </a>or <a class="termLink" data-component="link" data-inlink="link_7" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average (DJIA),</a> feeling they are a better representation of the economy and overall <a class="termLink" data-component="link" data-inlink="link_8" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockmarket.asp"> stock market</a>. This is because small-cap companies are more sensitive to <a class="termLink" data-component="link" data-inlink="link_9" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economicgrowth.asp">economic growth</a> and are domestically focused. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Small caps are unique in that they are highly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leveraged </a>to the economy. These companies have smaller <a class="termLink" data-component="link" data-inlink="link_10" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancesheet.asp">balance sheets</a> and are more exposed to the <a class="termLink" data-component="link" data-inlink="link_11" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-cycle.asp">economic cycle</a>. During <a class="termLink" data-component="link" data-inlink="link_12" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recession.asp">recessions</a>, many may go bankrupt. This is in contrast to <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/midcapstock.asp">mid-cap</a> and <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/large-cap.asp">large-cap</a> companies that have more established operations and reserves to get through and thrive during turbulent times. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> For these reasons, small caps are considered a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leadingindicator.asp">leading indicator</a> for the economy. When <a class="termLink" data-component="link" data-inlink="link_14" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trader.asp">traders</a> become enthused about prospects for economic growth, they move into small caps. When they are worried about a slowdown, they start to sell small caps first. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Large-cap companies tend to do business all over the world. More than half of the revenues of the firms in the S&amp;P 500 come from abroad. In contrast, more than 90% of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenues</a> of small caps comes in domestically. Therefore, periods of relative outperformance by small caps over large caps is meaningful in implying domestic economic strength. </p></div>

The best [small-cap](https://www.investopedia.com/terms/s/small-cap.asp) [index funds](https://www.investopedia.com/terms/i/indexfund.asp) are the [iShares](https://www.investopedia.com/terms/i/ishares.asp) Russell 2000 ETF ([IWM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwm)), [SPDR](https://www.investopedia.com/terms/s/spiders.asp) S&P 600 Small Cap ETF ([SLY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sly)), Vanguard Russell 2000 ETF ([VTWO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vtwo)) and Vanguard Small Cap [Index Fund](https://www.investopedia.com/terms/i/indexfund.asp) ([VB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vb)). These funds are rated highly by *U.S. News & World Report* in terms of liquidity, costs and diversification. These are all [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). IWM is the most tracked and traded. Many investors prefer watching small-cap funds to more mainstream market indexes such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) or [Dow Jones Industrial Average (DJIA),](https://www.investopedia.com/terms/d/djia.asp) feeling they are a better representation of the economy and overall [stock market](https://www.investopedia.com/terms/s/stockmarket.asp). This is because small-cap companies are more sensitive to [economic growth](https://www.investopedia.com/terms/e/economicgrowth.asp) and are domestically focused. Small caps are unique in that they are highly [leveraged](https://www.investopedia.com/terms/l/leverage.asp) to the economy. These companies have smaller [balance sheets](https://www.investopedia.com/terms/b/balancesheet.asp) and are more exposed to the [economic cycle](https://www.investopedia.com/terms/e/economic-cycle.asp). During [recessions](https://www.investopedia.com/terms/r/recession.asp), many may go bankrupt. This is in contrast to [mid-cap](https://www.investopedia.com/terms/m/midcapstock.asp) and [large-cap](https://www.investopedia.com/terms/l/large-cap.asp) companies that have more established operations and reserves to get through and thrive during turbulent times. For these reasons, small caps are considered a [leading indicator](https://www.investopedia.com/terms/l/leadingindicator.asp) for the economy. When [traders](https://www.investopedia.com/terms/t/trader.asp) become enthused about prospects for economic growth, they move into small caps. When they are worried about a slowdown, they start to sell small caps first. Large-cap companies tend to do business all over the world. More than half of the revenues of the firms in the S&P 500 come from abroad. In contrast, more than 90% of the [revenues](https://www.investopedia.com/terms/r/revenue.asp) of small caps comes in domestically. Therefore, periods of relative outperformance by small caps over large caps is meaningful in implying domestic economic strength.

The best small-cap index funds are the iShares Russell 2000 ETF (IWM), SPDR S&P 600 Small Cap ETF (SLY), Vanguard Russell 2000 ETF (VTWO) and Vanguard Small Cap Index Fund (VB). These funds are rated highly by U.S. News & World Report in terms of liquidity, costs and diversification. These are all exchange-traded funds (ETFs). IWM is the most tracked and traded. Many investors prefer watching small-cap funds to more mainstream market indexes such as the S&P 500 or Dow Jones Industrial Average (DJIA), feeling they are a better representation of the economy and overall stock market. This is because small-cap companies are more sensitive to economic growth and are domestically focused. Small caps are unique in that they are highly leveraged to the economy. These companies have smaller balance sheets and are more exposed to the economic cycle. During recessions, many may go bankrupt. This is in contrast to mid-cap and large-cap companies that have more established operations and reserves to get through and thrive during turbulent times. For these reasons, small caps are considered a leading indicator for the economy. When traders become enthused about prospects for economic growth, they move into small caps. When they are worried about a slowdown, they start to sell small caps first. Large-cap companies tend to do business all over the world. More than half of the revenues of the firms in the S&P 500 come from abroad. In contrast, more than 90% of the revenues of small caps comes in domestically. Therefore, periods of relative outperformance by small caps over large caps is meaningful in implying domestic economic strength.

https://www.investopedia.com/regulator-pushes-federal-home-loan-banks-reform-after-spring-banking-crisis-8398996

Regulator Pushes Federal Home Loan Banks Reform After Spring Banking Crisis

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Federal Home Loan Bank System has been a key way for lenders to access cash when in need. </li><li>After the turmoil in the banking system that occurred in the spring, the FHLB system loaned money to distressed entities like Silicon Valley and First Republic banks. </li><li>That has led to the Federal Housing Finance Agency, the regulator in charge of the system, to propose reforms that would refocus the government enterprise company on its original purpose—supporting mortgage lending. </li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The regulator in charge of a “lender of last resort” for banks wants the government enterprise company to get back to its roots after it loaned money to banks in turmoil this spring.<br/><br/>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhfa.asp">Federal Housing Finance Agency</a>, which oversees the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhlb.asp">Federal Home Loan Bank</a> (FHLB) system, proposed reforms Tuesday that would make the entity focus more on financing housing.<span class="ql-inline-citation" data-cite="1"></span> The reforms would curtail its current role as a lender of last resort to banks—a role that the FHFA said was more appropriately filled by the Federal Reserve’s discount window, which serves the same purpose.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The system came under scrutiny this spring after lending billions to Silicon Valley, First Republic, Signature, and Silvergate banks, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/who-is-paying-for-svb-first-republic-bank-bailouts-7487138">all of which ultimately failed</a>, roiling the U.S. financial system.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In its report, the FHFA said it would take steps to make sure FHL banks do more to support housing. The FHFA said it would push lawmakers to at least double the current requirement that FHL banks use at least 10% of their earnings for affordable housing programs.<span class="ql-inline-citation" data-cite="1"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Like its better-known cousins, Fannie Mae and Freddie Mac, the FHLB system is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gse.asp">government-sponsored enterprise</a> and has an implicit guarantee that the federal government would bail it out if need be.<span class="ql-inline-citation" data-cite="2"></span> It also doesn’t have to pay most state and federal taxes.   </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> It was created by Congress more than 90 years ago to help financial institutions make home loans in the midst of the Great Depression. Its mission has shifted over the years, and today the 11 regional banks that make up the FHLB system largely provide loans, called “advances” to the 6,800 private financial institutions that own and fund the system, both in the course of normal business and in desperate times.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span>  </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

### Key Takeaways * The Federal Home Loan Bank System has been a key way for lenders to access cash when in need. * After the turmoil in the banking system that occurred in the spring, the FHLB system loaned money to distressed entities like Silicon Valley and First Republic banks. * That has led to the Federal Housing Finance Agency, the regulator in charge of the system, to propose reforms that would refocus the government enterprise company on its original purpose—supporting mortgage lending. The regulator in charge of a “lender of last resort” for banks wants the government enterprise company to get back to its roots after it loaned money to banks in turmoil this spring. The [Federal Housing Finance Agency](https://www.investopedia.com/terms/f/fhfa.asp), which oversees the [Federal Home Loan Bank](https://www.investopedia.com/terms/f/fhlb.asp) (FHLB) system, proposed reforms Tuesday that would make the entity focus more on financing housing. The reforms would curtail its current role as a lender of last resort to banks—a role that the FHFA said was more appropriately filled by the Federal Reserve’s discount window, which serves the same purpose.  The system came under scrutiny this spring after lending billions to Silicon Valley, First Republic, Signature, and Silvergate banks, [all of which ultimately failed](https://www.investopedia.com/who-is-paying-for-svb-first-republic-bank-bailouts-7487138), roiling the U.S. financial system.  In its report, the FHFA said it would take steps to make sure FHL banks do more to support housing. The FHFA said it would push lawmakers to at least double the current requirement that FHL banks use at least 10% of their earnings for affordable housing programs.  Like its better-known cousins, Fannie Mae and Freddie Mac, the FHLB system is a [government-sponsored enterprise](https://www.investopedia.com/terms/g/gse.asp) and has an implicit guarantee that the federal government would bail it out if need be. It also doesn’t have to pay most state and federal taxes.   It was created by Congress more than 90 years ago to help financial institutions make home loans in the midst of the Great Depression. Its mission has shifted over the years, and today the 11 regional banks that make up the FHLB system largely provide loans, called “advances” to the 6,800 private financial institutions that own and fund the system, both in the course of normal business and in desperate times.  Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Key Takeaways The Federal Home Loan Bank System has been a key way for lenders to access cash when in need. After the turmoil in the banking system that occurred in the spring, the FHLB system loaned money to distressed entities like Silicon Valley and First Republic banks. That has led to the Federal Housing Finance Agency, the regulator in charge of the system, to propose reforms that would refocus the government enterprise company on its original purpose—supporting mortgage lending. The regulator in charge of a “lender of last resort” for banks wants the government enterprise company to get back to its roots after it loaned money to banks in turmoil this spring.The Federal Housing Finance Agency, which oversees the Federal Home Loan Bank (FHLB) system, proposed reforms Tuesday that would make the entity focus more on financing housing. The reforms would curtail its current role as a lender of last resort to banks—a role that the FHFA said was more appropriately filled by the Federal Reserve’s discount window, which serves the same purpose.  The system came under scrutiny this spring after lending billions to Silicon Valley, First Republic, Signature, and Silvergate banks, all of which ultimately failed, roiling the U.S. financial system.  In its report, the FHFA said it would take steps to make sure FHL banks do more to support housing. The FHFA said it would push lawmakers to at least double the current requirement that FHL banks use at least 10% of their earnings for affordable housing programs.  Like its better-known cousins, Fannie Mae and Freddie Mac, the FHLB system is a government-sponsored enterprise and has an implicit guarantee that the federal government would bail it out if need be. It also doesn’t have to pay most state and federal taxes.   It was created by Congress more than 90 years ago to help financial institutions make home loans in the midst of the Great Depression. Its mission has shifted over the years, and today the 11 regional banks that make up the FHLB system largely provide loans, called “advances” to the 6,800 private financial institutions that own and fund the system, both in the course of normal business and in desperate times.  Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/articles/investing/102715/calculating-value-basis-points-excel.asp

Calculating the Dollar Value of Basis Points in Excel

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> In the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedincome.asp" rel="noopener noreferrer">fixed income</a> market, each financial instrument's smallest increment of movement is called a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tick.asp" rel="noopener noreferrer">tick</a>. Each variation cannot be lower than a tick, and it is determined according to the value of the instrument traded. The most common types of fixed-income instruments are government and corporate bonds. In this article, we'll review how basis points are used to reflect changes in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp" rel="noopener noreferrer">interest rates</a> in fixed-income investments and how to calculate the dollar value of a basis point using Excel. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>In finance, a basis point is a unit of measure that reflects the percentage change in the value or interest rate of a financial instrument.</li><li>A basis point is equal to one-hundredth of 1%, or 0.01%.</li><li>Central banks are in charge of a nation's monetary policy and are responsible for setting interest rates.</li><li>While it's common for central banks to change interest rates by 25 to 50 basis points, a change of 100 points or more may signal an attempt to correct a deteriorating economy.</li><li>The federal funds rate—one of the most important interest rates in the U.S. economy—influences rates for everything from home and auto loans to the interest rates charged on credit cards.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-are-basis-points"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Are Basis Points? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> For the market rate, the minimum unit is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-basis-point-bps/" rel="noopener noreferrer">basis point</a> (BPS). If a rate goes from 2% to 2.1%, the rate will be increased by 10 basis points. The basis point corresponds to one-hundredth of 1%, or 0.01%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> This term is frequently used in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetarypolicy.asp" rel="noopener noreferrer">monetary policy</a> rate sector, where one does not speak of a percentage variation but basis points. Thus a rise in the interest rate from 1.3% to 1.35% does not increase by 3.84%, but by five basis points. It is common to hear media commentators state that such an increase corresponds to an increase of 0.05%. However, this is not the case; the increase is, in fact, five basis points <em>up</em> to 3.84%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <span class="heading-toc" id="toc-basis-points-and-interest-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Basis Points and Interest Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Often interest rates change from 25 to 50 basis points. But even an increase of a few basis points on an interest rate may result in an overall increase of all levels, whether in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_market.asp" rel="noopener noreferrer">credit markets</a> or real estate markets. The largest market moves, such as those between 100 and 200 basis points, are rare and often signal an impetus to fundamentally change the monetary policy of the country or correct a deteriorating economic environment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> For example, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp" rel="noopener noreferrer">central bank</a>, by changing its rates, can significantly impact the economy of a country. Thus, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp" rel="noopener noreferrer">rising interest rates</a> can not only slow growth but also inflation. Conversely, a sharp drop in interest rates will result in a boom in the economy because <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/easy-money.asp" rel="noopener noreferrer">money is cheaper to obtain</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-basis-points-interest-rates-and-borrowing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Basis Points, Interest Rates, and Borrowing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Borrowing rates for individuals closely follow bank-lending rates, which in turn reflect rates set by central banks. Often banks borrow from each other the money they lend out to clients. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interbankrate.asp" rel="noopener noreferrer">interbank rate</a> is the rate of interest charged on short-term loans made between institutions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> These short-term loans are of one week or less. Some, made to meet <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/requiredreserves.asp" rel="noopener noreferrer">reserve requirements</a>, are just for one day—literally overnight—and these loans are made at a rate known as the overnight rate or (in the U.S.) the federal funds rate.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp" rel="noopener noreferrer">fed funds rate</a>, as it's colloquially known, is one of the most important interest rates in the U.S. economy. Lenders derive their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primerate.asp" rel="noopener noreferrer">prime interest rate</a>, the rate they charge their most creditworthy borrowers, from it. <span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The terms for other consumer loans or investment instruments, like a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp" rel="noopener noreferrer">certificate of deposit</a> (CD), are then based on this prime rate. You've probably seen an interest rate advertised as "prime plus 3%!" or "two points above prime!" Thus, the fed funds rate ends up influencing short-term interest rates for everything from home and auto loans to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp" rel="noopener noreferrer">annual percentage rates</a> (APR) for credit cards. Longer-term rates reflect it too, albeit indirectly. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-calculating-the-dollar-value-of-a-basis-point"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Calculating the Dollar Value of a Basis Point </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Calculating the dollar value of basis points is a straightforward procedure in Excel. As an example, say we have a one-year loan of $1,000,000. Let’s calculate the value of a 1.5 basis-point change on an annual, quarterly, or monthly basis. We would simply prorate the value of the change in basis by four if for a quarter period, and by 12 on a monthly time span. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> We multiply the value of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstrument.asp" rel="noopener noreferrer">financial instrument</a> we wish to compute by the change in basis points. Here we multiply C9 by C11 and divide by 10,000. 10,000 corresponds to 0.01 of 1%. 0.01*0.01=0.0001. The "VLOOKUP" takes care of the prorating on a quarterly or monthly basis. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Here we see that the value of 1.5 basis points on $1,000,000 prorated to a monthly basis corresponds to $12.50. </p></div>

In the [fixed income](https://www.investopedia.com/terms/f/fixedincome.asp) market, each financial instrument's smallest increment of movement is called a [tick](https://www.investopedia.com/terms/t/tick.asp). Each variation cannot be lower than a tick, and it is determined according to the value of the instrument traded. The most common types of fixed-income instruments are government and corporate bonds. In this article, we'll review how basis points are used to reflect changes in [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) in fixed-income investments and how to calculate the dollar value of a basis point using Excel. ### Key Takeaways * In finance, a basis point is a unit of measure that reflects the percentage change in the value or interest rate of a financial instrument. * A basis point is equal to one-hundredth of 1%, or 0.01%. * Central banks are in charge of a nation's monetary policy and are responsible for setting interest rates. * While it's common for central banks to change interest rates by 25 to 50 basis points, a change of 100 points or more may signal an attempt to correct a deteriorating economy. * The federal funds rate—one of the most important interest rates in the U.S. economy—influences rates for everything from home and auto loans to the interest rates charged on credit cards. ## What Are Basis Points? For the market rate, the minimum unit is the [basis point](https://www.investopedia.com/ask/answers/what-basis-point-bps/) (BPS). If a rate goes from 2% to 2.1%, the rate will be increased by 10 basis points. The basis point corresponds to one-hundredth of 1%, or 0.01%. This term is frequently used in the [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) rate sector, where one does not speak of a percentage variation but basis points. Thus a rise in the interest rate from 1.3% to 1.35% does not increase by 3.84%, but by five basis points. It is common to hear media commentators state that such an increase corresponds to an increase of 0.05%. However, this is not the case; the increase is, in fact, five basis points *up* to 3.84%. ## Basis Points and Interest Rates Often interest rates change from 25 to 50 basis points. But even an increase of a few basis points on an interest rate may result in an overall increase of all levels, whether in [credit markets](https://www.investopedia.com/terms/c/credit_market.asp) or real estate markets. The largest market moves, such as those between 100 and 200 basis points, are rare and often signal an impetus to fundamentally change the monetary policy of the country or correct a deteriorating economic environment. For example, a [central bank](https://www.investopedia.com/terms/c/centralbank.asp), by changing its rates, can significantly impact the economy of a country. Thus, [rising interest rates](https://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp) can not only slow growth but also inflation. Conversely, a sharp drop in interest rates will result in a boom in the economy because [money is cheaper to obtain](https://www.investopedia.com/terms/e/easy-money.asp). ## Basis Points, Interest Rates, and Borrowing Borrowing rates for individuals closely follow bank-lending rates, which in turn reflect rates set by central banks. Often banks borrow from each other the money they lend out to clients. The [interbank rate](https://www.investopedia.com/terms/i/interbankrate.asp) is the rate of interest charged on short-term loans made between institutions. These short-term loans are of one week or less. Some, made to meet [reserve requirements](https://www.investopedia.com/terms/r/requiredreserves.asp), are just for one day—literally overnight—and these loans are made at a rate known as the overnight rate or (in the U.S.) the federal funds rate. The [fed funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp), as it's colloquially known, is one of the most important interest rates in the U.S. economy. Lenders derive their [prime interest rate](https://www.investopedia.com/terms/p/primerate.asp), the rate they charge their most creditworthy borrowers, from it.  The terms for other consumer loans or investment instruments, like a [certificate of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CD), are then based on this prime rate. You've probably seen an interest rate advertised as "prime plus 3%!" or "two points above prime!" Thus, the fed funds rate ends up influencing short-term interest rates for everything from home and auto loans to the [annual percentage rates](https://www.investopedia.com/terms/a/apr.asp) (APR) for credit cards. Longer-term rates reflect it too, albeit indirectly. ## Calculating the Dollar Value of a Basis Point Calculating the dollar value of basis points is a straightforward procedure in Excel. As an example, say we have a one-year loan of $1,000,000. Let’s calculate the value of a 1.5 basis-point change on an annual, quarterly, or monthly basis. We would simply prorate the value of the change in basis by four if for a quarter period, and by 12 on a monthly time span. We multiply the value of the [financial instrument](https://www.investopedia.com/terms/f/financialinstrument.asp) we wish to compute by the change in basis points. Here we multiply C9 by C11 and divide by 10,000. 10,000 corresponds to 0.01 of 1%. 0.01\*0.01=0.0001. The "VLOOKUP" takes care of the prorating on a quarterly or monthly basis. Here we see that the value of 1.5 basis points on $1,000,000 prorated to a monthly basis corresponds to $12.50.

In the fixed income market, each financial instrument's smallest increment of movement is called a tick. Each variation cannot be lower than a tick, and it is determined according to the value of the instrument traded. The most common types of fixed-income instruments are government and corporate bonds. In this article, we'll review how basis points are used to reflect changes in interest rates in fixed-income investments and how to calculate the dollar value of a basis point using Excel. Key Takeaways In finance, a basis point is a unit of measure that reflects the percentage change in the value or interest rate of a financial instrument.A basis point is equal to one-hundredth of 1%, or 0.01%.Central banks are in charge of a nation's monetary policy and are responsible for setting interest rates.While it's common for central banks to change interest rates by 25 to 50 basis points, a change of 100 points or more may signal an attempt to correct a deteriorating economy.The federal funds rate—one of the most important interest rates in the U.S. economy—influences rates for everything from home and auto loans to the interest rates charged on credit cards. What Are Basis Points? For the market rate, the minimum unit is the basis point (BPS). If a rate goes from 2% to 2.1%, the rate will be increased by 10 basis points. The basis point corresponds to one-hundredth of 1%, or 0.01%. This term is frequently used in the monetary policy rate sector, where one does not speak of a percentage variation but basis points. Thus a rise in the interest rate from 1.3% to 1.35% does not increase by 3.84%, but by five basis points. It is common to hear media commentators state that such an increase corresponds to an increase of 0.05%. However, this is not the case; the increase is, in fact, five basis points up to 3.84%. Basis Points and Interest Rates Often interest rates change from 25 to 50 basis points. But even an increase of a few basis points on an interest rate may result in an overall increase of all levels, whether in credit markets or real estate markets. The largest market moves, such as those between 100 and 200 basis points, are rare and often signal an impetus to fundamentally change the monetary policy of the country or correct a deteriorating economic environment. For example, a central bank, by changing its rates, can significantly impact the economy of a country. Thus, rising interest rates can not only slow growth but also inflation. Conversely, a sharp drop in interest rates will result in a boom in the economy because money is cheaper to obtain. Basis Points, Interest Rates, and Borrowing Borrowing rates for individuals closely follow bank-lending rates, which in turn reflect rates set by central banks. Often banks borrow from each other the money they lend out to clients. The interbank rate is the rate of interest charged on short-term loans made between institutions. These short-term loans are of one week or less. Some, made to meet reserve requirements, are just for one day—literally overnight—and these loans are made at a rate known as the overnight rate or (in the U.S.) the federal funds rate. The fed funds rate, as it's colloquially known, is one of the most important interest rates in the U.S. economy. Lenders derive their prime interest rate, the rate they charge their most creditworthy borrowers, from it.  The terms for other consumer loans or investment instruments, like a certificate of deposit (CD), are then based on this prime rate. You've probably seen an interest rate advertised as "prime plus 3%!" or "two points above prime!" Thus, the fed funds rate ends up influencing short-term interest rates for everything from home and auto loans to the annual percentage rates (APR) for credit cards. Longer-term rates reflect it too, albeit indirectly. Calculating the Dollar Value of a Basis Point Calculating the dollar value of basis points is a straightforward procedure in Excel. As an example, say we have a one-year loan of $1,000,000. Let’s calculate the value of a 1.5 basis-point change on an annual, quarterly, or monthly basis. We would simply prorate the value of the change in basis by four if for a quarter period, and by 12 on a monthly time span. We multiply the value of the financial instrument we wish to compute by the change in basis points. Here we multiply C9 by C11 and divide by 10,000. 10,000 corresponds to 0.01 of 1%. 0.01*0.01=0.0001. The "VLOOKUP" takes care of the prorating on a quarterly or monthly basis. Here we see that the value of 1.5 basis points on $1,000,000 prorated to a monthly basis corresponds to $12.50.

https://www.investopedia.com/us-economy-news-today-8635358

US Economy News Today: Federal Reserve Officials Downplay Rate Cut Expectations

<div class="loc article-content"><div class="comp article__primary-video-container--jw mntl-block" id="article__primary-video-container--jw_1-0"></div> <div class="comp liveblog mntl-block" id="liveblog_1-0"><div class="comp mntl-block article-content__description" id="mntl-block_12-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Today, Federal Reserve speakers continued to parse incoming data in public speaking engagements and the Fed's turn toward "higher for longer" interest rates put more pressure on the housing market. </p></div> <div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-04-18t185857237z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p><strong>Williams, Bostic Downplay Rate Cuts in Public Remarks</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">April 18, 2024 02:58 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t185857237z" id="mntl-blogpost__copylink_1-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Federal Reserve officials continued to downplay expectations on rate cuts, with Atlanta Fed President Raphael Bostic and New York Fed President John Williams arguing that more progress on inflation was needed before bringing down borrowing costs. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> In remarks to Prosperity Partnership Fort Lauderdale, Bostic said the Federal Reserve likely wouldn’t cut rates until later in the year, pointing to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-have-forecasters-underestimated-the-us-economy-lately-8633636">data showing continued strength in the U.S. economy</a>.<span class="ql-inline-citation" data-cite="3"></span>   </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> “I’m not in a mad dash hurry to get there, if all of these other good things are happening,” Bostic said about rate cuts. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Bostic’s remarks were consistent with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-april-9-8628760#toc-2024-04-09t214321182z">comments he made a week earlier</a>, where he forecasted only one rate cut in 2024 that would come in the year’s final quarter. During the most recent meeting of the Federal Reserve, officials forecasted that the central bank could cut rates <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723">as many as three times</a>. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In his comments during Semafor’s World Economy Summit, Williams offered less certainty on the timing of rate cuts but said he believed that inflation remained on a path towards the 2% target.<span class="ql-inline-citation" data-cite="4"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> “I think we have interest rates at a place that is moving us gradually to our goals,” Williams said. “Interest rates will need to be lower, at some point, but the timing of that is driven by the economy.” </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <em>-Terry Lane</em><br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_2-0"><span class="heading-toc" id="toc-2024-04-18t185159178z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_2-0"><p><strong>Drop in Leading Economic Indicators Shows Continued Economic Uncertainty</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_2-0">April 18, 2024 02:51 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t185159178z" id="mntl-blogpost__copylink_2-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The Conference Board’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cili.asp">Leading Economic Index (LEI)</a> ticked lower in March to decline to 102.4, giving back<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-march-21-8612566#toc-2024-03-21t175741258z"> gains it reported last month</a> and showing the economy remains on an uncertain path.<span class="ql-inline-citation" data-cite="2"></span>  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Over the six months starting in September, the LEI shrank by 2.2%, a smaller jump than in the six months prior. However, it remains above levels that could indicate a recession is coming. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> “Overall, the index points to a fragile—even if not recessionary—outlook for the U.S. economy,” said Justyna Zabinska-La Monica, the Conference Board’s senior manager of business cycle indicators. “Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024.” </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The report pointed to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yieldspread.asp">lower yields on Treasury bonds</a>, fewer building permits, declining consumer expectations and a slow-down in new orders as some of the factors dragging down the LEI. On the other hand, rising stock prices helped minimize the declines in the index.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Coming after it moved higher for the first time in almost two years, the slip in the LEI shows that interest-rate sensitive sectors may continue to be struggling.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> “The teetering is illustrative of rising uncertainty on the path of the U.S. economy in the coming year,” wrote Wells Fargo economists Tim Quinlan and Nicole Cervi. “Overall, the mixed signals from the LEI's components point to activity in interest-rate sensitive sectors wavering in anticipation of lower borrowing costs this year.” </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <em>-Terry Lane</em><br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="2" id="mntl-sc-block-adslot_2-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_3-0"><span class="heading-toc" id="toc-2024-04-18t160150249z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_3-0"><p><strong>Mortgage Rates Top 7% As Hope For Imminent Fed Funds Rate Cuts Fade</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_3-0">April 18, 2024 12:01 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t160150249z" id="mntl-blogpost__copylink_3-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The average interest rate on a 30-year, fixed-rate mortgage rose to 7.10% this week, according to Freddie Mac. That's up from 6.88% in the prior week and up from 6.39% this time last year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The rate jump comes as persistent inflation has caused forecasters and some Federal Reserve officials to push the timeline for when rate cuts will occur. The fed fund rate is highly influential and impacts mortgages as well as auto loans and other types of credit. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Investors are losing hope that cuts to the fed funds rate are imminent and many forecasts now predict only one rate cut later this year. That could cause mortgage rates to rise. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year," said Sam Khater, Freddie Mac’s chief economist in a prepared statement. "Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”<br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="3" id="mntl-sc-block-adslot_3-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_4-0"><span class="heading-toc" id="toc-2024-04-18t145138110z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_4-0"><p><strong>More Homes Went Up For Sale In March</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_4-0">April 18, 2024 10:51 AM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t145138110z" id="mntl-blogpost__copylink_4-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> For-sale listings got a boost in March but found fewer buyers as high mortgage rates kept their chokehold on the housing market.<br/><br/>The number of homes for sale rose for a third month in a row, to 1.11 million from 1.06 million in February, reaching the most since November, the National Association of Realtors said Thursday. However, the slight uptick in inventory wasn’t enough to spur sales, which fell 4.3% from February. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The new data showed the market is still being stifled by high mortgage rates. With the average rate for a 30-year mortgage nearing 7% last week, homeowners remain reluctant to sell and give up mortgages they locked in years ago when rates were low. Although the number of homes for sale was up 14% from a year ago, they were well below the 1.7 million typically on sale that month pre-pandemic.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Read more about the number of homes for sale and how it's impacting the market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/more-homes-went-up-for-sale-in-march-but-found-fewer-buyers-8635363">here</a>.<br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="4" id="mntl-sc-block-adslot_4-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_5-0"><span class="heading-toc" id="toc-2024-04-18t140915706z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_5-0"><p><strong>Philadelphia-Area Manufacturing Jumps in April, Prices Move Higher</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_5-0">April 18, 2024 10:09 AM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t140915706z" id="mntl-blogpost__copylink_5-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Manufacturing activity in the Philadelphia area <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-march-21-8612566#toc-2024-03-21t135807450z">continues to trend higher</a>, with an index measuring the industry coming in positive for the third consecutive month and posting its highest reading since April 2022.<span class="ql-inline-citation" data-cite="1"></span> </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The Philadelphia Federal Reserve’s Manufacturing Business Outlook Index jumped 12 points to reach 15.5 in April, with more than a third of firms reporting an increase in activity. The survey of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/manufacturing-production.asp">manufacturing</a> firms in an area that includes Delaware and parts of Pennsylvania and New Jersey also showed that new orders and shipments rose in April.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> There were also indications of price increases, with the prices paid index delivering its highest reading since December. In the survey, 26% of firms reported paying higher prices, and 12% said they raised the prices of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-goods.asp">goods</a> they produced.  </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <em>-Terry Lane</em><br> </br></p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="5" id="mntl-sc-block-adslot_5-0"></div></div></div></div> <div class="comp textnote-placeholder mntl-block" id="textnote-placeholder_1-0"></div> <div class="comp textnote mm-ads-gpt-adunit gpt textnote" id="textnote_1-0"> <div class="wrapper" id="textnote"></div> </div> </div>

Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. Today, Federal Reserve speakers continued to parse incoming data in public speaking engagements and the Fed's turn toward "higher for longer" interest rates put more pressure on the housing market. ## **Williams, Bostic Downplay Rate Cuts in Public Remarks** April 18, 2024 02:58 PM EDT Federal Reserve officials continued to downplay expectations on rate cuts, with Atlanta Fed President Raphael Bostic and New York Fed President John Williams arguing that more progress on inflation was needed before bringing down borrowing costs. In remarks to Prosperity Partnership Fort Lauderdale, Bostic said the Federal Reserve likely wouldn’t cut rates until later in the year, pointing to [data showing continued strength in the U.S. economy](https://www.investopedia.com/why-have-forecasters-underestimated-the-us-economy-lately-8633636).   “I’m not in a mad dash hurry to get there, if all of these other good things are happening,” Bostic said about rate cuts. Bostic’s remarks were consistent with [comments he made a week earlier](https://www.investopedia.com/us-economy-news-today-april-9-8628760#toc-2024-04-09t214321182z), where he forecasted only one rate cut in 2024 that would come in the year’s final quarter. During the most recent meeting of the Federal Reserve, officials forecasted that the central bank could cut rates [as many as three times](https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723). In his comments during Semafor’s World Economy Summit, Williams offered less certainty on the timing of rate cuts but said he believed that inflation remained on a path towards the 2% target. “I think we have interest rates at a place that is moving us gradually to our goals,” Williams said. “Interest rates will need to be lower, at some point, but the timing of that is driven by the economy.” *-Terry Lane* ## **Drop in Leading Economic Indicators Shows Continued Economic Uncertainty** April 18, 2024 02:51 PM EDT The Conference Board’s [Leading Economic Index (LEI)](https://www.investopedia.com/terms/c/cili.asp) ticked lower in March to decline to 102.4, giving back [gains it reported last month](https://www.investopedia.com/us-economy-news-today-march-21-8612566#toc-2024-03-21t175741258z) and showing the economy remains on an uncertain path.  Over the six months starting in September, the LEI shrank by 2.2%, a smaller jump than in the six months prior. However, it remains above levels that could indicate a recession is coming. “Overall, the index points to a fragile—even if not recessionary—outlook for the U.S. economy,” said Justyna Zabinska-La Monica, the Conference Board’s senior manager of business cycle indicators. “Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024.” The report pointed to [lower yields on Treasury bonds](https://www.investopedia.com/terms/y/yieldspread.asp), fewer building permits, declining consumer expectations and a slow-down in new orders as some of the factors dragging down the LEI. On the other hand, rising stock prices helped minimize the declines in the index.  Coming after it moved higher for the first time in almost two years, the slip in the LEI shows that interest-rate sensitive sectors may continue to be struggling.  “The teetering is illustrative of rising uncertainty on the path of the U.S. economy in the coming year,” wrote Wells Fargo economists Tim Quinlan and Nicole Cervi. “Overall, the mixed signals from the LEI's components point to activity in interest-rate sensitive sectors wavering in anticipation of lower borrowing costs this year.” *-Terry Lane* ## **Mortgage Rates Top 7% As Hope For Imminent Fed Funds Rate Cuts Fade** April 18, 2024 12:01 PM EDT The average interest rate on a 30-year, fixed-rate mortgage rose to 7.10% this week, according to Freddie Mac. That's up from 6.88% in the prior week and up from 6.39% this time last year. The rate jump comes as persistent inflation has caused forecasters and some Federal Reserve officials to push the timeline for when rate cuts will occur. The fed fund rate is highly influential and impacts mortgages as well as auto loans and other types of credit. Investors are losing hope that cuts to the fed funds rate are imminent and many forecasts now predict only one rate cut later this year. That could cause mortgage rates to rise. “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year," said Sam Khater, Freddie Mac’s chief economist in a prepared statement. "Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.” ## **More Homes Went Up For Sale In March** April 18, 2024 10:51 AM EDT For-sale listings got a boost in March but found fewer buyers as high mortgage rates kept their chokehold on the housing market. The number of homes for sale rose for a third month in a row, to 1.11 million from 1.06 million in February, reaching the most since November, the National Association of Realtors said Thursday. However, the slight uptick in inventory wasn’t enough to spur sales, which fell 4.3% from February. The new data showed the market is still being stifled by high mortgage rates. With the average rate for a 30-year mortgage nearing 7% last week, homeowners remain reluctant to sell and give up mortgages they locked in years ago when rates were low. Although the number of homes for sale was up 14% from a year ago, they were well below the 1.7 million typically on sale that month pre-pandemic.  Read more about the number of homes for sale and how it's impacting the market [here](https://www.investopedia.com/more-homes-went-up-for-sale-in-march-but-found-fewer-buyers-8635363). ## **Philadelphia-Area Manufacturing Jumps in April, Prices Move Higher** April 18, 2024 10:09 AM EDT Manufacturing activity in the Philadelphia area [continues to trend higher](https://www.investopedia.com/us-economy-news-today-march-21-8612566#toc-2024-03-21t135807450z), with an index measuring the industry coming in positive for the third consecutive month and posting its highest reading since April 2022. The Philadelphia Federal Reserve’s Manufacturing Business Outlook Index jumped 12 points to reach 15.5 in April, with more than a third of firms reporting an increase in activity. The survey of [manufacturing](https://www.investopedia.com/terms/m/manufacturing-production.asp) firms in an area that includes Delaware and parts of Pennsylvania and New Jersey also showed that new orders and shipments rose in April.  There were also indications of price increases, with the prices paid index delivering its highest reading since December. In the survey, 26% of firms reported paying higher prices, and 12% said they raised the prices of the [goods](https://www.investopedia.com/terms/c/consumer-goods.asp) they produced.  *-Terry Lane*

Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. Today, Federal Reserve speakers continued to parse incoming data in public speaking engagements and the Fed's turn toward "higher for longer" interest rates put more pressure on the housing market. Williams, Bostic Downplay Rate Cuts in Public Remarks April 18, 2024 02:58 PM EDT Federal Reserve officials continued to downplay expectations on rate cuts, with Atlanta Fed President Raphael Bostic and New York Fed President John Williams arguing that more progress on inflation was needed before bringing down borrowing costs. In remarks to Prosperity Partnership Fort Lauderdale, Bostic said the Federal Reserve likely wouldn’t cut rates until later in the year, pointing to data showing continued strength in the U.S. economy.   “I’m not in a mad dash hurry to get there, if all of these other good things are happening,” Bostic said about rate cuts. Bostic’s remarks were consistent with comments he made a week earlier, where he forecasted only one rate cut in 2024 that would come in the year’s final quarter. During the most recent meeting of the Federal Reserve, officials forecasted that the central bank could cut rates as many as three times. In his comments during Semafor’s World Economy Summit, Williams offered less certainty on the timing of rate cuts but said he believed that inflation remained on a path towards the 2% target. “I think we have interest rates at a place that is moving us gradually to our goals,” Williams said. “Interest rates will need to be lower, at some point, but the timing of that is driven by the economy.” -Terry Lane Drop in Leading Economic Indicators Shows Continued Economic Uncertainty April 18, 2024 02:51 PM EDT The Conference Board’s Leading Economic Index (LEI) ticked lower in March to decline to 102.4, giving back gains it reported last month and showing the economy remains on an uncertain path.  Over the six months starting in September, the LEI shrank by 2.2%, a smaller jump than in the six months prior. However, it remains above levels that could indicate a recession is coming. “Overall, the index points to a fragile—even if not recessionary—outlook for the U.S. economy,” said Justyna Zabinska-La Monica, the Conference Board’s senior manager of business cycle indicators. “Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024.” The report pointed to lower yields on Treasury bonds, fewer building permits, declining consumer expectations and a slow-down in new orders as some of the factors dragging down the LEI. On the other hand, rising stock prices helped minimize the declines in the index.  Coming after it moved higher for the first time in almost two years, the slip in the LEI shows that interest-rate sensitive sectors may continue to be struggling.  “The teetering is illustrative of rising uncertainty on the path of the U.S. economy in the coming year,” wrote Wells Fargo economists Tim Quinlan and Nicole Cervi. “Overall, the mixed signals from the LEI's components point to activity in interest-rate sensitive sectors wavering in anticipation of lower borrowing costs this year.” -Terry Lane Mortgage Rates Top 7% As Hope For Imminent Fed Funds Rate Cuts Fade April 18, 2024 12:01 PM EDT The average interest rate on a 30-year, fixed-rate mortgage rose to 7.10% this week, according to Freddie Mac. That's up from 6.88% in the prior week and up from 6.39% this time last year. The rate jump comes as persistent inflation has caused forecasters and some Federal Reserve officials to push the timeline for when rate cuts will occur. The fed fund rate is highly influential and impacts mortgages as well as auto loans and other types of credit. Investors are losing hope that cuts to the fed funds rate are imminent and many forecasts now predict only one rate cut later this year. That could cause mortgage rates to rise. “As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year," said Sam Khater, Freddie Mac’s chief economist in a prepared statement. "Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.” More Homes Went Up For Sale In March April 18, 2024 10:51 AM EDT For-sale listings got a boost in March but found fewer buyers as high mortgage rates kept their chokehold on the housing market.The number of homes for sale rose for a third month in a row, to 1.11 million from 1.06 million in February, reaching the most since November, the National Association of Realtors said Thursday. However, the slight uptick in inventory wasn’t enough to spur sales, which fell 4.3% from February. The new data showed the market is still being stifled by high mortgage rates. With the average rate for a 30-year mortgage nearing 7% last week, homeowners remain reluctant to sell and give up mortgages they locked in years ago when rates were low. Although the number of homes for sale was up 14% from a year ago, they were well below the 1.7 million typically on sale that month pre-pandemic.  Read more about the number of homes for sale and how it's impacting the market here. Philadelphia-Area Manufacturing Jumps in April, Prices Move Higher April 18, 2024 10:09 AM EDT Manufacturing activity in the Philadelphia area continues to trend higher, with an index measuring the industry coming in positive for the third consecutive month and posting its highest reading since April 2022. The Philadelphia Federal Reserve’s Manufacturing Business Outlook Index jumped 12 points to reach 15.5 in April, with more than a third of firms reporting an increase in activity. The survey of manufacturing firms in an area that includes Delaware and parts of Pennsylvania and New Jersey also showed that new orders and shipments rose in April.  There were also indications of price increases, with the prices paid index delivering its highest reading since December. In the survey, 26% of firms reported paying higher prices, and 12% said they raised the prices of the goods they produced.  -Terry Lane

https://www.investopedia.com/best-bank-account-bonuses-5104710

Best Bank Bonuses

<div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content list-sc" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body"> <svg class="mntl-svg-resource is-hidden"> <defs> <symbol id="featured-partners__info-svg"><svg fill="none" height="13" width="12" xmlns="http://www.w3.org/2000/svg"><path d="M5.5 9h1V6h-1v3zM6 1.5c-2.76 0-5 2.24-5 5s2.24 5 5 5 5-2.24 5-5-2.24-5-5-5zm0 9c-2.205 0-4-1.795-4-4s1.795-4 4-4 4 1.795 4 4-1.795 4-4 4zM5.5 5h1V4h-1v1z" fill="#000" fill-opacity=".95" fill-rule="evenodd"></path></svg></symbol> <symbol id="light-box-arrow"><svg viewbox="2575 18840 48 48" xmlns="http://www.w3.org/2000/svg"><g transform="translate(1355 18464)"><circle cx="24" cy="24" fill="#fff" r="24" transform="translate(1220 376)"></circle><path d="M1248.675 390l9.38 9.38M1258.055 399.38l-9.38 9.553M1232 399.38h25.186" fill="none" stroke="#000" stroke-linecap="round" stroke-miterlimit="10" stroke-width="3"></path></g></svg></symbol> </defs> </svg> <span class="comp external-content mntl-external-component" id="external-content_1-0"><div class="u-font-carbon--dd112"> <div class="comp product-roundup-content--finance product-roundup--base product-roundup--base" data-tracking-container="true" data-tracking-id="PRM Roundup | PRM Template" id="product-roundup-content--finance_1-0"> <div class="article-content"> <div class="article-intro article-content__description article-container expert-content structured-content text-passage"> <div class="comp mntl-sc-page--commerce intro-content prm-sc-page mntl-sc-page mntl-block" id="intro-content_1-0"> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0"> When you’re in the market for a new or additional checking or savings account, it can be lucrative to consider available bank bonuses. That’s because banks are so hungry for new customers that they aren’t just paying token gestures to win your business—many are offering hundreds of dollars to new customers. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-1"> To help you earn as much as you can from a new account that meets your needs, we’ve rounded up our top picks for checking and savings account bonuses. We looked not only at bonus amounts, but how easy or difficult the requirements are to meet, how long you’ll have to wait for your bonus, what fees you might face, and all the other details you need to make a smart decision.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-2"> Just be sure to read the bank’s fine print carefully. Scoring bank bonuses means following the rules, and you’ll want to make sure you follow everything to the letter because missing a requirement means missing your bonus. But don’t worry, our list of winners will arm you with the information you need, which can add a hundred or more free dollars to your bank balance. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div><!-- end: comp mntl-sc-page--commerce intro-content prm-sc-page mntl-sc-page mntl-block --> <div class="comp js-toc-appear product-roundup-content__summary-list summary-list--finance summary-list--roundup summary-list" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" id="product-roundup-content__summary-list_1-0"> <span class="heading-toc" id="summary-list"></span> <h2 class="summary-list__title"> The Best Bank Bonuses for 2024 </h2> <ul class="summary-list__content"> <li class="summary-list__item"> <span class="summary-list__item-top-pick-container"> <strong class="summary-list__item-category">Best Overall:</strong> <a class="summary-list__item-top-pick" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://www.associatedbank.com/yourmoneyworkshere" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> Associated Bank</a><!-- end: summary-list__item-top-pick --> </span> </li> <li class="summary-list__item"> <span class="summary-list__item-top-pick-container"> <strong class="summary-list__item-category">Best for a Modest Balance:</strong> <a class="summary-list__item-top-pick" data-affiliate-link-rewriter="u1=${REQUEST_ID}-${DOC_ID}" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&amp;offerid=942342.138&amp;type=3&amp;subid=0" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> Chase</a><!-- end: summary-list__item-top-pick --> </span> </li> <li class="summary-list__item"> <span class="summary-list__item-top-pick-container"> <strong class="summary-list__item-category">Best for Building a Savings Habit:</strong> <a class="summary-list__item-top-pick" data-click-action="OffPageClick - External" data-tracking-container="true" data-tracking-id="PRM Roundup | Summary List" href="https://ww2.alliantcreditunion.org/ultimate-opportunity-savings" rel="nofollow noskim noopener sponsored nocaes" target="_blank"> Alliant Credit Union</a><!-- end: summary-list__item-top-pick --> </span> </li> </ul> </div><!-- end: comp js-toc-appear product-roundup-content__summary-list summary-list--finance summary-list--roundup summary-list --> <div class="comp mntl-sc-page--commerce post-intro prm-sc-page mntl-sc-page mntl-block" id="post-intro_1-0"> <div class="comp mntl-sc-block--ma-rate-table--finance-mma mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_2-0"> <div class="comp ma-rate-table--finance-mma mntl-block" id="ma-rate-table--finance-mma_1-0"></div><!-- end: comp ma-rate-table--finance-mma mntl-block --> </div><!-- end: comp mntl-sc-block--ma-rate-table--finance-mma mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block --> </div><!-- end: comp mntl-sc-page--commerce post-intro prm-sc-page mntl-sc-page mntl-block --> </div> <div class="article-body"> <div class="loc article-left-nav article-body__left-nav product-roundup__left-nav js-sticky-container"> <div class="comp sticky-toc-widget sticky-toc--finance product-roundup__toc sticky-toc--finance-roundup sticky-toc--roundup sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="product-roundup__toc_1-0"> <div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_1-0"> <div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_1-0"> <div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_1-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_1-0"> Best Bank Bonuses</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> <div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_1-0"> <button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="Expand" id="mntl-toc-toggle__btn_1-0"> Expand</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block --> </div><!-- end: comp mntl-toc-toggle mntl-block --> </div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block --> <div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-Best Bank Bonuses" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_1-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_2-0"> Best Bank Bonuses</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> </div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block --> <ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_1-0"> <li class="comp toc__listsc-item mntl-toc-list-item mntl-toc__list-item" id="toc__listsc-item_1-0"> <a class="mntl-toc__list-item-link js-mntl-toc-link" href="#summary-list" rel="nocaes"> <span class="link__wrapper">Our Top Picks</span> </a><!-- end: mntl-toc__list-item-link js-mntl-toc-link --></li><!-- end: comp toc__listsc-item mntl-toc-list-item mntl-toc__list-item --> <li class="comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item" data-click-action="OnPageClick-Associated Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__list-item_2-0"> <a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Associated Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-overall-associated-bank" rel="nocaes"> <span class="link__wrapper">Associated Bank</span> </a><!-- end: mntl-toc__list-item-link js-mntl-toc-link --></li><!-- end: comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item --> <li class="comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item" data-click-action="OnPageClick-Chase" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__list-item_2-0-1"> <a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Chase" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-a-modest-balance-chase" rel="nocaes"> <span class="link__wrapper">Chase</span> </a><!-- end: mntl-toc__list-item-link js-mntl-toc-link --></li><!-- end: comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item --> <li class="comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item" data-click-action="OnPageClick-Alliant Credit Union" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__list-item_2-0-2"> <a class="mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Alliant Credit Union" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-best-for-building-a-savings-habit-alliant-credit-union" rel="nocaes"> <span class="link__wrapper">Alliant Credit Union</span> </a><!-- end: mntl-toc__list-item-link js-mntl-toc-link --></li><!-- end: comp nested-toc-item mntl-toc__list-item mntl-toc-list-item mntl-toc__list-item --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_1-0"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bottom Line" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-bottom-line" id="mntl-toc__list-item-link_1-0" rel="nocaes"><span class="link__wrapper">Bottom Line</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_1-0-1"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-1"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Compare Providers" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-compare-providers" id="mntl-toc__list-item-link_1-0-1" rel="nocaes"><span class="link__wrapper">Compare Providers</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_1-0-2"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-2"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros and Cons" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-and-cons-of-bank-account-bonuses" id="mntl-toc__list-item-link_1-0-2" rel="nocaes"><span class="link__wrapper">Pros and Cons</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_1-0-3"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-3"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Alternatives" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-alternatives-to-bank-account-bonuses" id="mntl-toc__list-item-link_1-0-3" rel="nocaes"><span class="link__wrapper">Alternatives</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_1-0-4"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-4"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-FAQs" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-faqs-35087862-6c17-4805-8e6a-bc3040fa6698" id="mntl-toc__list-item-link_1-0-4" rel="nocaes"><span class="link__wrapper">FAQs</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_1-0-5"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_1-0-5"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-we-chose-the-best-bank-bonuses" id="mntl-toc__list-item-link_1-0-5" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> </ul><!-- end: comp mntl-toc__list-heading expert-content mntl-toc__list --> </div><!-- end: comp mntl-toc__inner mntl-block --> </div><!-- end: comp toc-wrapper mntl-toc mntl-block --> </div><!-- end: comp sticky-toc-widget sticky-toc--finance product-roundup__toc sticky-toc--finance-roundup sticky-toc--roundup sticky-toc--base mntl-sticky-toc mntl-block --> </div> <div class="loc article-body__inner article-body__inner"> <div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0"> <span class="heading-toc" id="toc-best-overall-associated-bank"></span> <h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0"> <span class="split-text__item"> <span class="split-text__secondary-wrapper"> <span class="split-text__item-secondary">Best Overall</span> </span> </span>: <span class="split-text__item"> <span class="split-text__secondary-wrapper"> <span class="split-text__item-secondary"> Associated Bank</span> </span> </span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text --> <hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0"/><!-- end: comp list-sc-item__header-break mntl-block --> <div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0"> <div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0"> <div class="tabbed-sc-block-intro"> <figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0" style="--imgWidth: 0px"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="Associated Bank" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/hGTwDSenAbSulWhnd9AyJpA6gPo=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Associated_Bank-3ccb643fee6a463a924e12a44c147788.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Associated Bank" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/hGTwDSenAbSulWhnd9AyJpA6gPo=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Associated_Bank-3ccb643fee6a463a924e12a44c147788.jpg" width="1500"/> </noscript> </div> </div> <figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p> Associated Bank</p></span> </figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption --> </figure><!-- end: comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res --> <div class="tabbed-sc-block-intro__content"> <div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-1"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-click-action="OffPageClick - External" data-retailer-caption="at Associated Bank" data-retailer-type="other" data-tracking-container="true" href="https://www.associatedbank.com/yourmoneyworkshere" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block --> </div> </div> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-2"> For those who can set up <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directdeposit.asp" rel="noopener noreferrer">direct deposit</a> for their paycheck, pension, or Social Security benefits, Associated Bank offers one of the largest bank bonuses around, as well as one of the easiest to earn, making it our overall winner. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-3"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Bonuses of $300, $400, or $600 all represent a substantial return on your money</p></li> <li><p>Very minimal direct deposit requirement</p></li> <li><p>Gives you 90 days to make your direct deposits</p></li> <li><p>Free checking option, plus two additional account choices</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Direct deposit is required to earn the bonus.</p></li> <li><p>Paper checks don’t come with the free checking account.</p></li> <li><p>Very low interest rates on their other accounts (savings, money market, CDs)</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-4"> If you don’t live in the upper Midwest, you may not have heard of Associated Bank, but don’t let that stop you from taking a look at their generous bonus offers of $300, $400, and $600. All you have to do is receive at least $500 in direct deposits during the first 90 days your checking account is open, and maintain an average daily balance of at least $1,000 during the second and third months. These easy requirements and the substantial reward earn it top marks for overall best banking bonus. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-5"> That minimal balance will earn you $300 cash back. But you can maximize your bonus by simply boosting your average daily balance to $5,000 during days 31-90, earning $400, or to $10,000 to reap the top bonus of $600.<span class="ql-inline-citation" data-cite="5"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-6"> This is a great return on your money. If you score the $600 bonus on a $10,000 balance, you’ve earned a 6% return. And the return on investment for the smaller balances is even better: 8% on $5,000, or a whopping 30% on $1,000. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-7"> To make the decision even more appealing, Associated offers three different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/complete-guide-checking-accounts/">checking account</a> types, one of which is free, and the others with waivable monthly maintenance fees. The ability to conveniently send and receive money with Zelle is included, as is free access to more than 30,000 MoneyPass network ATMs across the country.<span class="ql-inline-citation" data-cite="6"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div><!-- end: comp list-sc-item__intro mntl-block --> </div><!-- end: comp list-sc-item__content mntl-block --> </div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block --> <div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-1"> <span class="heading-toc" id="toc-best-for-a-modest-balance-chase"></span> <h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-1"> <span class="split-text__item"> <span class="split-text__secondary-wrapper"> <span class="split-text__item-secondary">Best for a Modest Balance</span> </span> </span>: <span class="split-text__item"> <span class="split-text__secondary-wrapper"> <span class="split-text__item-secondary"> Chase</span> </span> </span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text --> <hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-1"/><!-- end: comp list-sc-item__header-break mntl-block --> <div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-1"> <div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-1"> <div class="tabbed-sc-block-intro"> <figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-8" style="--imgWidth: 0px"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="Chase" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/jqjFv5cfbY7drLNzkZ2wjZLlwi0=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Chase-0751615f65d44a3c998420332607891f.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-1" width="1500"/> <noscript> <img alt="Chase" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/jqjFv5cfbY7drLNzkZ2wjZLlwi0=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Chase-0751615f65d44a3c998420332607891f.jpg" width="1500"/> </noscript> </div> </div> <figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-1"> <span class="figure-article-caption-owner"><p> Chase</p></span> </figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption --> </figure><!-- end: comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res --> <div class="tabbed-sc-block-intro__content"> <div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-9"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-1"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="u1=${REQUEST_ID}-${DOC_ID}" data-click-action="OffPageClick - External" data-retailer-caption="at Chase" data-retailer-type="other" data-tracking-container="true" href="https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&amp;offerid=942342.138&amp;type=3&amp;subid=0" id="button_1-0-1" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block --> </div> </div> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-10"> Chase’s current checking account bonus is one of the easiest to earn. And because its requirement for holding funds in the account is minimal, we’ve chosen it as the best bank bonus for those with modest balances. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-11"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Only direct deposit is required; no minimum balance is needed to earn the bonus.</p></li> <li><p>The required direct deposit is only $500 in 90 days</p></li> <li><p>If you live in a state where Chase operates, in-branch banking is possible.</p></li> <li><p>The bonus will be paid within a short 15 days after meeting requirements.</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>The account charges a $12 fee, though it can be waived.</p></li> <li><p>Other bank bonuses are higher if you can meet the requirements.</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-12"> As the country’s largest bank, Chase hardly needs an introduction. It offers a full complement of virtually every type of bank account, loan, or credit card, and a well-honed website and mobile app for digital banking. It also operates over 4,800 branches across the country, more than any other bank.<span class="ql-inline-citation" data-cite="9"></span> Add to that Chase’s minimal bonus requirements and we’ve got our winner for best bonus on smaller balances. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-13"> Earning Chase’s $200 checking account bonus is very straightforward. Simply have a direct deposit or deposits totaling at least $500 hit your new account within 90 days of opening. This stands out from most direct deposit bonus offers, because $500 across 90 days is very easy for most people to reach, making Chase a good option for those receiving smaller payroll or benefits checks. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-14"> It’s also well-suited to those who don’t want to keep a lot of money in the account, as there is no balance requirement to earn the bonus. That said, the account does charge a $12 monthly maintenance fee, and one of the ways to have it waived is to hold a $1,500 minimum daily balance in this account, or $5,000 across multiple Chase accounts. There are fees if you withdraw from a non-Chase ATM: $3 fee per withdrawal in the U.S., Puerto Rico and the U.S. Virgin Islands, $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-15"> Fortunately, you can also waive the fee with electronic deposits of any kind. If your direct deposits and any other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120">ACH deposits</a> to the account total at least $500, your monthly fee will be waived.<span class="ql-inline-citation" data-cite="10"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-16"> Read our full <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-bank-review-4845620">Chase Bank review</a>. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div><!-- end: comp list-sc-item__intro mntl-block --> </div><!-- end: comp list-sc-item__content mntl-block --> </div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block --> <div class="comp mntl-sc-list-item structured-content list-sc-item mntl-block" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard" id="list-sc-item_1-0-2"> <span class="heading-toc" id="toc-best-for-building-a-savings-habit-alliant-credit-union"></span> <h3 class="comp list-sc-item__heading split-text--roundup-title split-text" data-click-action="Null" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Header" id="list-sc-item__heading_1-0-2"> <span class="split-text__item"> <span class="split-text__secondary-wrapper"> <span class="split-text__item-secondary">Best for Building a Savings Habit</span> </span> </span>: <span class="split-text__item"> <span class="split-text__secondary-wrapper"> <span class="split-text__item-secondary"> Alliant Credit Union</span> </span> </span></h3><!-- end: comp list-sc-item__heading split-text--roundup-title split-text --> <hr class="comp list-sc-item__header-break mntl-block" id="list-sc-item__header-break_1-0-2"/><!-- end: comp list-sc-item__header-break mntl-block --> <div class="comp list-sc-item__content mntl-block" id="list-sc-item__content_1-0-2"> <div class="comp list-sc-item__intro mntl-block" id="list-sc-item__intro_1-0-2"> <div class="tabbed-sc-block-intro"> <figure class="comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res" data-click-action="OffPageNavClick" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Logo" id="mntl-sc-block_3-0-17" style="--imgWidth: 0px"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="Alliant Credit Union" class="lazyload universal-image__image" data-click-action="Null" data-click-tracked="true" data-expand="300" data-img-lightbox="false" data-src="https://www.investopedia.com/thmb/3XP4FSE5OsEumXMLu5Wk-chFr3s=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Alliant-a34ee57c611d4e40bb55115475e2aff9.jpg" data-tracking-container="false" height="750" id="mntl-sc-block-image_1-0-2" width="1500"/> <noscript> <img alt="Alliant Credit Union" class="img--noscript universal-image__image" height="750" src="https://www.investopedia.com/thmb/3XP4FSE5OsEumXMLu5Wk-chFr3s=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Alliant-a34ee57c611d4e40bb55115475e2aff9.jpg" width="1500"/> </noscript> </div> </div> <figcaption class="comp figure-caption mntl-figure-caption figure-article-caption" id="mntl-figure-caption_1-0-2"> <span class="figure-article-caption-owner"><p> Alliant Credit Union</p></span> </figcaption><!-- end: comp figure-caption mntl-figure-caption figure-article-caption --> </figure><!-- end: comp mntl-sc-block-image figure-2x1 mntl-sc-block prm-sc-block-image mntl-sc-block-universal-image figure-landscape figure-high-res --> <div class="tabbed-sc-block-intro__content"> <div class="comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="true" data-link-closest-header="false" data-tracking-container="true" data-tracking-id="PRM Roundup | ProductCard - Button" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_3-0-18"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0-2"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-click-action="OffPageClick - External" data-retailer-caption="at Alliant Credit Union" data-retailer-type="other" data-tracking-container="true" href="https://ww2.alliantcreditunion.org/ultimate-opportunity-savings" id="button_1-0-2" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block --> </div> </div> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-19"> With its bonus paid at the end of a year of regular savings deposits, Alliant Credit Union earns our top award for best bank bonus aimed at helping you build a savings habit. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_3-0-20"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Very low balance requirement, and no direct deposit needed</p></li> <li><p>The bonus amounts to more than an 8% return on your money</p></li> <li><p>The account earns a competitive interest rate</p></li> <li><p>No monthly maintenance fees on the account.</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Smaller bonus than other offers</p></li> <li><p>Must become a member of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp" rel="noopener noreferrer">credit union</a> (though it’s easy and free)</p></li> <li><p>Must wait a year to receive your bonus</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-21"> Suze Orman wants you to get in a habit of saving every month, and she’s put her name behind a special savings account at Alliant Credit Union that rewards you for doing just that. It’s called The Ultimate Opportunity Savings Account and it’s a great choice for those who simply want to slowly accumulate savings, all while being rewarded with a little something extra after achieving that goal for a year. This earns it our top honor for best bank bonus for those building a savings habit. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-22"> The way it works is you make a deposit into the savings account of at least $100 every month for 12 months. You need to keep that amount in the account so that at the end of the year, you still have at least $1,200 on deposit. At that point, Alliant will add its $100 bonus to your account. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-23"> This is a great return, though since it’s a small balance amount, the bonus is also small compared to other bank offers. But the account also pays a competitive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings</a> rate on your balance and is completely fee-free, even providing free access to a network of 80,000 ATMs nationwide.<span class="ql-inline-citation" data-cite="11"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-24"> Joining Alliant is easy, and free as well. If you don’t meet one of their standard eligibility requirements such as working at a participating company or living in the Chicago area, you can still join by agreeing to a membership in their affiliated nonprofit, Foster Care to Success, which serves thousands of foster teens across the U.S. Alliant will even pay the $5 membership fee on your behalf.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div><!-- end: comp list-sc-item__intro mntl-block --> </div><!-- end: comp list-sc-item__content mntl-block --> </div><!-- end: comp mntl-sc-list-item structured-content list-sc-item mntl-block --> </div> <div class="article-outro article-container"> <div class="comp mntl-sc-page--commerce structured-content article-outro__content prm-sc-page mntl-sc-page mntl-block" id="article-outro__content_1-0"> <span class="heading-toc" id="toc-bottom-line"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0"> <span class="mntl-sc-block-heading__text"> Bottom Line </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-1"> This list of winning bank bonuses should set up almost anyone looking for an account that matches their banking needs while also providing a significant cash infusion in exchange for following some basic requirements. For those who can manage a direct deposit, Associated Bank’s three bonuses are top-paying options, offering a generous bonus for a minimal direct deposit threshold and a modest minimum balance. It also scores high marks for requiring the minimum balance for such a relatively short time (60 days). </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-2"> Direct deposit is not possible for everyone, however. And for some, it’s simply not an appealing option. Our list of best bonuses for no direct deposit, for high earners, and for those carrying a low balance should provide something for everyone. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-compare-providers"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-3"> <span class="mntl-sc-block-heading__text"> Compare Providers </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="PRM Roundup | Table Block" id="mntl-sc-block_4-0-4"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th><b>Financial Institution</b></th> <th><b>Why We Picked It</b></th> <th><b>Key Benefit</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.associatedbank.com/yourmoneyworkshere" rel="sponsored nofollow">Associated Bank</a></td> <td>Best Overall</td> <td>High return for a modest direct deposit and balance</td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="u1=${REQUEST_ID}-${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&amp;offerid=942342.138&amp;type=3&amp;subid=0" rel="sponsored nofollow">Chase</a></td> <td>Best for a Modest Balance</td> <td>Very minimal direct deposit and balance requirements</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://ww2.alliantcreditunion.org/ultimate-opportunity-savings" rel="sponsored nofollow">Alliant Credit Union</a></td> <td>Best for Building a Savings Habit</td> <td>Be generously rewarded for monthly savings deposits</td> </tr> </tbody> </table> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <div class="comp theme-whatyouneedtoknow mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0-5"> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"> <p><strong>In the News: </strong>The Fed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952">held rates steady</a> for a sixth consecutive time at its meeting that concluded May 1, 2024. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%.<span class="ql-inline-citation" data-cite="18"></span><span class="ql-inline-citation" data-cite="17"></span><br/></p> <p>After looking for a good bank account bonus, check out the institution's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">high-yield savings accounts</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">CD rates</a>. These are directly impacted by the Fed's rate hikes. Depositing money into multiple accounts at the bank may help you maximize the amount of money you can earn on the cash you keep there.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-whatyouneedtoknow mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <span class="heading-toc" id="toc-pros-and-cons-of-bank-account-bonuses"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-6"> <span class="mntl-sc-block-heading__text"> Pros and Cons of Bank Account Bonuses </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_4-0-7"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Can earn substantial sums</p></li> <li><p>Access to new bank benefits</p></li> <li><p>Requirements may be easy to meet</p></li> <li><p>Good way to “test-drive” a new bank</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Can be a hassle to switch</p></li> <li><p>Some people are excluded</p></li> <li><p>May require a substantial deposit</p></li> <li><p>Bank account bonuses are taxable</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> <h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-8"> <span class="mntl-sc-block-subheading__text"> Pros Explained </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-9"> <li><strong>Can earn substantial sums:</strong> The best bank account bonuses are worth hundreds or even thousands of dollars, all for relatively little work on your part. </li><li><strong>Access to new bank benefits:</strong> Many banks offer special benefits for customers, such as discounts with certain retailers or access to car-buying programs. </li><li><strong>Requirements may be easy to meet:</strong> Some bank account bonuses don’t have too many requirements beyond just opening a new account and keeping a certain amount of cash there for a set period of time. </li><li><strong>Good way to “test-drive” a new bank:</strong> If you’ve been thinking about switching all of your accounts to a new bank, this gives you a chance to see how it operates without committing all of your cash over just yet. </li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <h3 class="comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_4-0-10"> <span class="mntl-sc-block-subheading__text"> Cons Explained </span> </h3><!-- end: comp mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-11"> <li><strong>Can be a hassle to switch:</strong> Bank account bonuses require you to meet certain conditions, which you’ll need to meet while still maintaining your current account (if you’re not switching entirely).</li><li><strong>Some people are excluded:</strong> New bank account bonuses are generally only available to new customers that are depositing “new money” to the bank—i.e., cash that’s previously been stored at another bank. </li><li><strong>May require a substantial deposit:</strong> The best bank account bonuses are frequently offered for people making the largest deposits, often ranging into thousands of dollars. Not everyone has that kind of money lying around. </li><li><strong>Bank account bonuses are taxable:</strong> The IRS treats bank account bonuses the same as interest payments, meaning you’ll owe income taxes on them. The bank will issue you a 1099-INT at the end of the year for this.<span class="ql-inline-citation" data-cite="15"></span>  </li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0-12"> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-1"> <p>If you’re not switching banks entirely it’s a good idea to develop strategies to maintain multiple bank accounts at once, such as by using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">budgeting apps</a> or adding a task on your to-do list to check all your accounts regularly. </p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <span class="heading-toc" id="toc-alternatives-to-bank-account-bonuses"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-13"> <span class="mntl-sc-block-heading__text"> Alternatives to Bank Account Bonuses </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-14"> You can earn a lot of extra money relatively easily with bank account bonuses, but there are other ways to put your money to work for you as well. Here are a few choices: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-15"> <li><strong>Investing:</strong> Although you won’t earn guaranteed returns like with an FDIC-insured bank account, it’s easy for anyone to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investing.asp">get started investing</a>. </li> <li><strong>Credit card bonuses:</strong> Many banks <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">offer credit card bonuses</a> if you sign up for a new account and spend a certain amount of money within the first three months. </li> <li><strong>Savings account bonuses:</strong> Many banks also offer bonuses if you <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-account-bonuses-7152450">sign up for a new savings account</a> and meet the requirements to earn the reward.</li> <li><strong>Passive income side hustles:</strong> The whole blogosphere is full of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-ways-to-earn-passive-income-7481030">passive income</a> ideas and how-tos that can show you how to develop small income streams with a minimal amount of effort.</li> <li><strong>High-yield savings accounts and CDs:</strong> Many banks—especially online banks—offer very high rates on these two types of accounts. It’s not a bonus per se, but your returns could be even higher, especially over the long term. See the <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-account-bonuses-7152450">best high-yield savings accounts</a> and the <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates</a> to see what you could earn.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp related-link mntl-sc-block prm-sc-block-featuredlink--finance prm-sc-block-featuredlink mntl-sc-block-featuredlink mntl-block" id="mntl-sc-block_4-0-16"> <a class="mntl-sc-block-featuredlink__link mntl-text-link" data-click-action="OffPageClick - Internal [Read our full methodology]" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Featured Link" href="https://www.investopedia.com/best-online-banks-5190371" id="mntl-sc-block-featuredlink__link_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">The 6 Best Online Banks for May 2024</span></a><!-- end: mntl-sc-block-featuredlink__link mntl-text-link --> </div><!-- end: comp related-link mntl-sc-block prm-sc-block-featuredlink--finance prm-sc-block-featuredlink mntl-sc-block-featuredlink mntl-block --> <div class="comp mntl-sc-block prm-sc-block-faq--finance prm-sc-block-faq mntl-sc-block-faq mntl-block" data-click-action="OnPageClick - FAQ Header" data-tracking-container="true" data-tracking-id="PRM Roundup | FAQ" id="mntl-sc-block_4-0-17"> <span class="heading-toc" id="toc-faqs-35087862-6c17-4805-8e6a-bc3040fa6698"></span> <h2 class="comp mntl-sc-block-faq__title mntl-text-block" id="mntl-sc-block-faq__title_1-0"> Frequently Asked Questions</h2><!-- end: comp mntl-sc-block-faq__title mntl-text-block --> <ul class="comp mntl-sc-block-faq__content mntl-accordion" id="mntl-sc-block-faq__content_1-0"> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-0" tabindex="-1"> <h3 class="accordion__title">How Do Bank Account Bonuses Work?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-0"> <div class="faq-accordion__item-answer"> <p>Bank bonuses are essentially an incentive with strings. If you follow all the requirements carefully, the bank will pay you the advertised bonus. But miss on any one of the rules, and the bank is entitled to scrap your bonus. The onus is on you to make sure you check off all the required boxes.</p><p>This doesn’t mean bonuses are hard to earn. They generally have two types of rules: a direct deposit requirement and a required minimum balance for a set time period. Occasionally a bonus will require both of these, but more often, it’s one or the other. If direct deposit is required, the offer will generally specify the minimum amount that needs to be deposited and within how many days of first opening your account.</p><p>Balance requirements also specify a dollar amount—in this case, how much you have to keep on account—and a time duration. Most typically, they require the minimum balance to be held at the bank for 60 or 90 days.</p><p>After you meet the requirements, you are entitled to your bonus. That doesn’t mean you’ll receive it instantly. Most bank bonus offers will indicate an outside date (e.g., within 30 days of meeting the bonus requirements) by which they will credit the bonus to your account.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-1" tabindex="-1"> <h3 class="accordion__title">Are Bank Bonuses Worth It?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-1"> <div class="faq-accordion__item-answer"> <p>Scoring a bank bonus is like massively turbocharging the interest you can earn on your cash in the bank. The typical savings account pays less than 0.10% APY, and even the very best high-yield savings accounts in the country are paying far below 1%. In other words, it is really hard to earn much from your money right now.</p><p>Earning a cash bonus can change that, by sending your annual percentage return into the mid to high single digits, or even double digits. Take a bonus offer of $300 on a $5,000 balance: that’s a 6% return earned in just a month. Or a $700 bonus earned on $50,000: that’s 1.8% over just two months, and is more than double what you can earn in the best savings account over a full year’s time.</p><p>Also lucrative are the bonuses that don’t require a minimum balance, and instead focus solely on direct deposit. With no requirement for the cash that’s been deposited into the account to stay in that account, you can earn a bonus simply for the effort of changing your direct deposit instructions. The offers from Chase and HSBC are both good examples of earning free cash simply for setting up a new direct deposit routing.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-2" tabindex="-1"> <h3 class="accordion__title">Why Do Banks Offer a Bonus for Opening an Account?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-2"> <div class="faq-accordion__item-answer"> <p>You might wonder why banks are willing to pay this much to attract your business. The answer is really two-fold. First, the competition is tight in consumer banking, and banks and credit unions are almost always hungry for new customers. That’s because having enough consumer deposits on hand enables the bank to make more loans, which is where it likely makes the lion’s share of its profits.</p><p>Second, the banks know that, in the end, they won’t have to pay that bonus amount for every customer they acquire. While you may personally be careful enough to follow all the bonus requirements successfully, others will in some way miss the mark on their end of the deal and thus be denied the bonus. So while the bank may sign up thousands of customers with a bonus offer, it will ultimately only pay bonuses to some fraction of those customers.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-3" tabindex="-1"> <h3 class="accordion__title">Are Bank Bonuses Taxed?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-3"> <div class="faq-accordion__item-answer"> <p>When banks pay you a bonus, they treat that payment just like any other interest payment on your account. And when the year ends and tax season rolls around, they will send you a 1099-INT form reporting the total amount of interest and bonus you received. To the IRS, there is no distinction between these two types of payments from the bank.<span class="ql-inline-citation" data-cite="14"></span></p><p>On your tax return, all of that bank income will count as interest income, which is taxed at the same rate as all of your wages and other income.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-4" tabindex="-1"> <h3 class="accordion__title">What Is a Bank Account Bonus?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-4"> <div class="faq-accordion__item-answer"> <p>A bank account bonus is a reward that banks typically use to woo new customers into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-checking-account-online-4797805">opening new checking</a> and savings accounts, but banks offer bonuses for opening other deposit account types too. Bonuses have certain requirements and limitations which you’ll need to meet, such as depositing a certain amount of money for a pre-set period of time.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-5" tabindex="-1"> <h3 class="accordion__title">What Banks Are Offering Bonuses for New Accounts?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-5"> <div class="faq-accordion__item-answer"> <p>Banks that are trying to grow in size frequently offer bonuses as a way to bring more customers through the door. It’s similar to how an employer might offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/signing-bonus.asp">signing bonuses</a> to attract quality new employees. See our list of banks above for the best new account bonuses.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> <li class="accordion__item js-accordion-item is-active"> <div class="accordion__header js-accordion-trigger" id="mntl-sc-block-faq__content_1-section-6" tabindex="-1"> <h3 class="accordion__title">Can You Switch Bank Accounts for a Promotion?</h3> </div><!--end accordion__header--> <div class="accordion__body"> <div class="comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content" id="mntl-sc-block-faq__accordion-content_1-0-section-6"> <div class="faq-accordion__item-answer"> <p>Yes, you can switch banks to get a promotional offer. Once you’ve earned the bonus, it’s yours to keep and you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-close-a-savings-account-7500880">close your account</a> at any time after that if you wish.</p> </div> </div><!-- end: comp class com.about.mantle.model.extended.docv2.sc.blocks.StructuredContentFaqEx$Faq mntl-sc-block-faq__accordion-content --> </div><!--end accordion__body--> </li><!--end accordion__item--> </ul><!-- end: comp mntl-sc-block-faq__content mntl-accordion --> <!--end accordion --> </div><!-- end: comp mntl-sc-block prm-sc-block-faq--finance prm-sc-block-faq mntl-sc-block-faq mntl-block --> <span class="heading-toc" id="toc-how-we-chose-the-best-bank-bonuses"></span> <h2 class="comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_4-0-18"> <span class="mntl-sc-block-heading__text"> How We Chose the Best Bank Bonuses </span> </h2><!-- end: comp mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_4-0-19"> We searched the web for all the current bank bonus offers we could find, digging up almost 30. We then prioritized nationwide offers and those from banks serving a large number of states. From there, we compiled each offer’s bonus amount, direct deposit requirement, minimum balance and duration, and account fees, ultimately comparing the options to select our winners in each category. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div><!-- end: comp mntl-sc-page--commerce structured-content article-outro__content prm-sc-page mntl-sc-page mntl-block --> </div> <figure class="comp figure-landscape primary-image--roundup primary-image mntl-universal-primary-image primary-image" id="primary-image--roundup_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:69.4%;"> <img alt="A young woman in sunglasses holds a bank card in one hand and shopping bags over her shoulder." class="primary-image__image mntl-primary-image--blurry" height="5192" onload="(function(e){e.classList.add('loaded')})(this)" sizes="750px" src="https://www.investopedia.com/thmb/9dHR34QML1hLxI5kANJlLLBKV1M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/trendyyoungwomanholdsbankcard-98cf32d8bbde4b52a9abaacd01441660.jpeg" srcset="https://www.investopedia.com/thmb/sFnGs-XLcVMlpJtFL4XmUBcjNvs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/trendyyoungwomanholdsbankcard-98cf32d8bbde4b52a9abaacd01441660.jpeg 750w" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhCgAHAPUAABITGCkkKz1CSGJKQIpjXIqAga2usq65v7GmrLOvsL68va+/zLC5wLG6wbS+x73H0L7H0LvJ1MajjcC+v+K3sO7OucfFxsLL1MDO2cLO2sbP2MTQ3MfU3cnT3MnT3crU3svV39XV18rX4MzW4M3X4M3X4c7Y4tHb5NLb5NPc5dPd5tXe59bf6Mzy5djh6tni69vk69vk7d7l7d/m7t738ePi5+Hl6Ofo7ent7u7s8e/w9BITGBITGBITGBITGBITGCwAAAAACgAHAEUIUQAxcBhhwgQIEBsiLHigYUIBGzUCtGBhooSKCjMoDJDhIoWHAw0YhACgA8YLFCNEnHDxgoCAFSdAZOhAQsINHDkSxFjxwQGECxYMKEBAI8WIgAA7')" width="7471"/> <noscript> <img alt="A young woman in sunglasses holds a bank card in one hand and shopping bags over her shoulder." class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="5192" sizes="750px" src="https://www.investopedia.com/thmb/9dHR34QML1hLxI5kANJlLLBKV1M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/trendyyoungwomanholdsbankcard-98cf32d8bbde4b52a9abaacd01441660.jpeg" srcset="https://www.investopedia.com/thmb/sFnGs-XLcVMlpJtFL4XmUBcjNvs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/trendyyoungwomanholdsbankcard-98cf32d8bbde4b52a9abaacd01441660.jpeg 750w" width="7471"/> </noscript> </div> </div> <figcaption class="comp primary-image__figcap mntl-figure-caption figure-article-caption" id="primary-image__figcap_1-0"> <span class="figure-article-caption-owner"><p>Issarawat Tattong / Getty Images</p></span> </figcaption><!-- end: comp primary-image__figcap mntl-figure-caption figure-article-caption --> </figure><!-- end: comp figure-landscape primary-image--roundup primary-image mntl-universal-primary-image primary-image --> </div> </div> </div><!-- end: comp product-roundup-content--finance product-roundup--base product-roundup--base --> </div> </span> </div><div class="loc content-bottom"><div class="comp prm-article-sources article-sources mntl-article-sources mntl-expandable-block" data-scroll-offset="100" id="prm-article-sources_1-0"><div class="loc toggle-content"><div class="comp mntl-article-sources__wrapper mntl-block article-sources__wrapper" data-click-tracked="true" id="mntl-article-sources__wrapper_1-0"><div class="comp mntl-article-sources__heading mntl-text-block article-sources__heading" id="mntl-article-sources__heading_1-0">Article Sources</div> <div class="comp mntl-article-sources__icon-wrapper mntl-block article-sources__icon-wrapper" id="mntl-article-sources__icon-wrapper_1-0"><div class="comp article-sources__show-icon mntl-block" id="article-sources__show-icon_1-0"></div> <div class="comp article-sources__hide-icon mntl-block" id="article-sources__hide-icon_1-0"></div></div></div> </div><div class="loc expandable-content"> <div class="comp article-sources__disclaimer mntl-block" id="article-sources__disclaimer_1-0">Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our <a class="article-sources__disclaimer-text-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/legal-4768893#EditorialPolicy" id="article-sources__disclaimer-text-link_1-0" rel="nocaes"><span class="link__wrapper">editorial policy.</span></a></div> <div class="comp mntl-article-sources__citation-sources-1 mntl-citation-sources mntl-sources" data-tracking-container="true" id="mntl-article-sources__citation-sources-1_1-0"> <ol class="mntl-sources__content"> <li class="mntl-sources__source" id="citation-5"><p>Associated Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.associatedbank.com/yourmoneyworkshere" rel="nofollow sponsored">Great Checking Options and up to $600? You Got It</a>."</p></li> <li class="mntl-sources__source" id="citation-6"><p>Associated Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.associatedbank.com/personal/personal-checking/checking-account-benefits/atm-solutions" rel="nofollow sponsored">ATMs Where You Need Them</a>."</p></li> <li class="mntl-sources__source" id="citation-9"><p>Federal Reserve. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/releases/lbr/current/">Large Commercial Banks</a>."</p></li> <li class="mntl-sources__source" id="citation-10"><p>Chase. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://account.chase.com/consumer/banking/FE22222?jp_cmp=rb/942342/aff/3_138/na&amp;CODE=RL7M2q.4kuk-eQswlZNWcy3YMc_jJp3RvA&amp;MSC=RL7M2q.4kuk-eQswlZNWcy3YMc_jJp3RvA" rel="nofollow sponsored">Enjoy $200</a>."</p></li> <li class="mntl-sources__source" id="citation-11"><p>Alliant Credit Union. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://promo.alliantcreditunion.org/ultimate-opportunity-savings" rel="nofollow sponsored">The Ultimate Opportunity Savings Account</a>."</p></li> <li class="mntl-sources__source" id="citation-18"><p>Bureau of Labor Statistics. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bls.gov/news.release/cpi.nr0.htm">Consumer Price Index</a>."</p></li> <li class="mntl-sources__source" id="citation-17"><p>Federal Reserve. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm">Federal Reserve Issues FOMC Statement</a>."</p></li> <li class="mntl-sources__source" id="citation-15"><p>Internal Revenue Service. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/pub/irs-pdf/i1099int.pdf">Instructions for Forms 1099-INT and 1099-OID</a>.”</p></li> <li class="mntl-sources__source" id="citation-14"><p>Internal Revenue Service. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/taxtopics/tc403">Topic No. 403, Interest Received</a>."</p></li> </ol> </div> </div></div> <div class="comp prm-recirc related-recirc-section--articles mntl-block" data-tracking-container="true" id="prm-recirc_1-0"><section class="comp related-articles" data-tracking-container="true" id="related-articles_1-0"> <span class="related-articles__header type--camel"> Related Articles </span> <div class="loc recirc-content"><div class="comp related-articles__card-list-1 card-list--related-articles mntl-document-card-list mntl-card-list mntl-block" data-chunk="36" id="related-articles__card-list-1_1-0"><a class="comp mntl-card-list-items mntl-document-card mntl-card related-articles__link card" data-cta="Read Now ▸" data-doc-id="8644606" data-ordinal="1" data-tax-levels="" 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Here's Everything You Need To Know</span></a> <div class="comp related-terms__description mntl-text-block" id="related-terms__description_1-0">A checking account is an account held at a financial institution that allows deposits and withdrawals. 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When you’re in the market for a new or additional checking or savings account, it can be lucrative to consider available bank bonuses. That’s because banks are so hungry for new customers that they aren’t just paying token gestures to win your business—many are offering hundreds of dollars to new customers. To help you earn as much as you can from a new account that meets your needs, we’ve rounded up our top picks for checking and savings account bonuses. We looked not only at bonus amounts, but how easy or difficult the requirements are to meet, how long you’ll have to wait for your bonus, what fees you might face, and all the other details you need to make a smart decision.  Just be sure to read the bank’s fine print carefully. Scoring bank bonuses means following the rules, and you’ll want to make sure you follow everything to the letter because missing a requirement means missing your bonus. But don’t worry, our list of winners will arm you with the information you need, which can add a hundred or more free dollars to your bank balance. ## The Best Bank Bonuses for 2024 * **Best Overall:** [Associated Bank](https://www.associatedbank.com/yourmoneyworkshere) * **Best for a Modest Balance:** [Chase](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=942342.138&type=3&subid=0) * **Best for Building a Savings Habit:** [Alliant Credit Union](https://ww2.alliantcreditunion.org/ultimate-opportunity-savings) Best Bank Bonuses Expand Best Bank Bonuses * [Our Top Picks](#summary-list) * [Associated Bank](#toc-best-overall-associated-bank) * [Chase](#toc-best-for-a-modest-balance-chase) * [Alliant Credit Union](#toc-best-for-building-a-savings-habit-alliant-credit-union) * [Bottom Line](#toc-bottom-line) * [Compare Providers](#toc-compare-providers) * [Pros and Cons](#toc-pros-and-cons-of-bank-account-bonuses) * [Alternatives](#toc-alternatives-to-bank-account-bonuses) * [FAQs](#toc-faqs-35087862-6c17-4805-8e6a-bc3040fa6698) * [Methodology](#toc-how-we-chose-the-best-bank-bonuses) ### Best Overall : Associated Bank --- ![Associated Bank]() :fill(white):max_bytes(150000):strip_icc()/Associated_Bank-3ccb643fee6a463a924e12a44c147788.jpg)  Associated Bank [Apply Now](https://www.associatedbank.com/yourmoneyworkshere) For those who can set up [direct deposit](https://www.investopedia.com/terms/d/directdeposit.asp) for their paycheck, pension, or Social Security benefits, Associated Bank offers one of the largest bank bonuses around, as well as one of the easiest to earn, making it our overall winner. Pros * Bonuses of $300, $400, or $600 all represent a substantial return on your money * Very minimal direct deposit requirement * Gives you 90 days to make your direct deposits * Free checking option, plus two additional account choices Cons * Direct deposit is required to earn the bonus. * Paper checks don’t come with the free checking account. * Very low interest rates on their other accounts (savings, money market, CDs) If you don’t live in the upper Midwest, you may not have heard of Associated Bank, but don’t let that stop you from taking a look at their generous bonus offers of $300, $400, and $600. All you have to do is receive at least $500 in direct deposits during the first 90 days your checking account is open, and maintain an average daily balance of at least $1,000 during the second and third months. These easy requirements and the substantial reward earn it top marks for overall best banking bonus. That minimal balance will earn you $300 cash back. But you can maximize your bonus by simply boosting your average daily balance to $5,000 during days 31-90, earning $400, or to $10,000 to reap the top bonus of $600. This is a great return on your money. If you score the $600 bonus on a $10,000 balance, you’ve earned a 6% return. And the return on investment for the smaller balances is even better: 8% on $5,000, or a whopping 30% on $1,000. To make the decision even more appealing, Associated offers three different [checking account](https://www.investopedia.com/personal-finance/complete-guide-checking-accounts/) types, one of which is free, and the others with waivable monthly maintenance fees. The ability to conveniently send and receive money with Zelle is included, as is free access to more than 30,000 MoneyPass network ATMs across the country. ### Best for a Modest Balance : Chase --- ![Chase]() :fill(white):max_bytes(150000):strip_icc()/Chase-0751615f65d44a3c998420332607891f.jpg)  Chase [Apply Now](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=942342.138&type=3&subid=0) Chase’s current checking account bonus is one of the easiest to earn. And because its requirement for holding funds in the account is minimal, we’ve chosen it as the best bank bonus for those with modest balances. Pros * Only direct deposit is required; no minimum balance is needed to earn the bonus. * The required direct deposit is only $500 in 90 days * If you live in a state where Chase operates, in-branch banking is possible. * The bonus will be paid within a short 15 days after meeting requirements. Cons * The account charges a $12 fee, though it can be waived. * Other bank bonuses are higher if you can meet the requirements. As the country’s largest bank, Chase hardly needs an introduction. It offers a full complement of virtually every type of bank account, loan, or credit card, and a well-honed website and mobile app for digital banking. It also operates over 4,800 branches across the country, more than any other bank. Add to that Chase’s minimal bonus requirements and we’ve got our winner for best bonus on smaller balances. Earning Chase’s $200 checking account bonus is very straightforward. Simply have a direct deposit or deposits totaling at least $500 hit your new account within 90 days of opening. This stands out from most direct deposit bonus offers, because $500 across 90 days is very easy for most people to reach, making Chase a good option for those receiving smaller payroll or benefits checks. It’s also well-suited to those who don’t want to keep a lot of money in the account, as there is no balance requirement to earn the bonus. That said, the account does charge a $12 monthly maintenance fee, and one of the ways to have it waived is to hold a $1,500 minimum daily balance in this account, or $5,000 across multiple Chase accounts. There are fees if you withdraw from a non-Chase ATM: $3 fee per withdrawal in the U.S., Puerto Rico and the U.S. Virgin Islands, $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. Fortunately, you can also waive the fee with electronic deposits of any kind. If your direct deposits and any other [ACH deposits](https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120) to the account total at least $500, your monthly fee will be waived. Read our full [Chase Bank review](https://www.investopedia.com/chase-bank-review-4845620). ### Best for Building a Savings Habit : Alliant Credit Union --- ![Alliant Credit Union]() :fill(white):max_bytes(150000):strip_icc()/Alliant-a34ee57c611d4e40bb55115475e2aff9.jpg)  Alliant Credit Union [Apply Now](https://ww2.alliantcreditunion.org/ultimate-opportunity-savings) With its bonus paid at the end of a year of regular savings deposits, Alliant Credit Union earns our top award for best bank bonus aimed at helping you build a savings habit. Pros * Very low balance requirement, and no direct deposit needed * The bonus amounts to more than an 8% return on your money * The account earns a competitive interest rate * No monthly maintenance fees on the account. Cons * Smaller bonus than other offers * Must become a member of the [credit union](https://www.investopedia.com/terms/c/creditunion.asp) (though it’s easy and free) * Must wait a year to receive your bonus Suze Orman wants you to get in a habit of saving every month, and she’s put her name behind a special savings account at Alliant Credit Union that rewards you for doing just that. It’s called The Ultimate Opportunity Savings Account and it’s a great choice for those who simply want to slowly accumulate savings, all while being rewarded with a little something extra after achieving that goal for a year. This earns it our top honor for best bank bonus for those building a savings habit. The way it works is you make a deposit into the savings account of at least $100 every month for 12 months. You need to keep that amount in the account so that at the end of the year, you still have at least $1,200 on deposit. At that point, Alliant will add its $100 bonus to your account. This is a great return, though since it’s a small balance amount, the bonus is also small compared to other bank offers. But the account also pays a competitive [high-yield savings](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) rate on your balance and is completely fee-free, even providing free access to a network of 80,000 ATMs nationwide. Joining Alliant is easy, and free as well. If you don’t meet one of their standard eligibility requirements such as working at a participating company or living in the Chicago area, you can still join by agreeing to a membership in their affiliated nonprofit, Foster Care to Success, which serves thousands of foster teens across the U.S. Alliant will even pay the $5 membership fee on your behalf.  ## Bottom Line This list of winning bank bonuses should set up almost anyone looking for an account that matches their banking needs while also providing a significant cash infusion in exchange for following some basic requirements. For those who can manage a direct deposit, Associated Bank’s three bonuses are top-paying options, offering a generous bonus for a minimal direct deposit threshold and a modest minimum balance. It also scores high marks for requiring the minimum balance for such a relatively short time (60 days). Direct deposit is not possible for everyone, however. And for some, it’s simply not an appealing option. Our list of best bonuses for no direct deposit, for high earners, and for those carrying a low balance should provide something for everyone. ## Compare Providers | **Financial Institution** | **Why We Picked It** | **Key Benefit** | | --- | --- | --- | | [Associated Bank](https://www.associatedbank.com/yourmoneyworkshere) | Best Overall | High return for a modest direct deposit and balance | | [Chase](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=942342.138&type=3&subid=0) | Best for a Modest Balance | Very minimal direct deposit and balance requirements | | [Alliant Credit Union](https://ww2.alliantcreditunion.org/ultimate-opportunity-savings) | Best for Building a Savings Habit | Be generously rewarded for monthly savings deposits | **In the News:** The Fed [held rates steady](https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952) for a sixth consecutive time at its meeting that concluded May 1, 2024. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%. After looking for a good bank account bonus, check out the institution's [high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) and [CD rates](https://www.investopedia.com/best-cd-rates-4770214). These are directly impacted by the Fed's rate hikes. Depositing money into multiple accounts at the bank may help you maximize the amount of money you can earn on the cash you keep there. ## Pros and Cons of Bank Account Bonuses Pros * Can earn substantial sums * Access to new bank benefits * Requirements may be easy to meet * Good way to “test-drive” a new bank Cons * Can be a hassle to switch * Some people are excluded * May require a substantial deposit * Bank account bonuses are taxable ### Pros Explained * **Can earn substantial sums:** The best bank account bonuses are worth hundreds or even thousands of dollars, all for relatively little work on your part. * **Access to new bank benefits:** Many banks offer special benefits for customers, such as discounts with certain retailers or access to car-buying programs. * **Requirements may be easy to meet:** Some bank account bonuses don’t have too many requirements beyond just opening a new account and keeping a certain amount of cash there for a set period of time. * **Good way to “test-drive” a new bank:** If you’ve been thinking about switching all of your accounts to a new bank, this gives you a chance to see how it operates without committing all of your cash over just yet. ### Cons Explained * **Can be a hassle to switch:** Bank account bonuses require you to meet certain conditions, which you’ll need to meet while still maintaining your current account (if you’re not switching entirely). * **Some people are excluded:** New bank account bonuses are generally only available to new customers that are depositing “new money” to the bank—i.e., cash that’s previously been stored at another bank. * **May require a substantial deposit:** The best bank account bonuses are frequently offered for people making the largest deposits, often ranging into thousands of dollars. Not everyone has that kind of money lying around. * **Bank account bonuses are taxable:** The IRS treats bank account bonuses the same as interest payments, meaning you’ll owe income taxes on them. The bank will issue you a 1099-INT at the end of the year for this. If you’re not switching banks entirely it’s a good idea to develop strategies to maintain multiple bank accounts at once, such as by using [budgeting apps](https://www.investopedia.com/best-budgeting-apps-5085405) or adding a task on your to-do list to check all your accounts regularly.  ## Alternatives to Bank Account Bonuses You can earn a lot of extra money relatively easily with bank account bonuses, but there are other ways to put your money to work for you as well. Here are a few choices: * **Investing:** Although you won’t earn guaranteed returns like with an FDIC-insured bank account, it’s easy for anyone to [get started investing](https://www.investopedia.com/terms/i/investing.asp). * **Credit card bonuses:** Many banks [offer credit card bonuses](https://www.investopedia.com/best-credit-cards-4801582) if you sign up for a new account and spend a certain amount of money within the first three months. * **Savings account bonuses:** Many banks also offer bonuses if you [sign up for a new savings account](https://www.investopedia.com/best-savings-account-bonuses-7152450) and meet the requirements to earn the reward. * **Passive income side hustles:** The whole blogosphere is full of [passive income](https://www.investopedia.com/best-ways-to-earn-passive-income-7481030) ideas and how-tos that can show you how to develop small income streams with a minimal amount of effort. * **High-yield savings accounts and CDs:** Many banks—especially online banks—offer very high rates on these two types of accounts. It’s not a bonus per se, but your returns could be even higher, especially over the long term. See the [best high-yield savings accounts](https://www.investopedia.com/best-savings-account-bonuses-7152450) and the [best CD rates](https://www.investopedia.com/best-cd-rates-4770214) to see what you could earn. [The 6 Best Online Banks for May 2024](https://www.investopedia.com/best-online-banks-5190371) ## Frequently Asked Questions * ### How Do Bank Account Bonuses Work? Bank bonuses are essentially an incentive with strings. If you follow all the requirements carefully, the bank will pay you the advertised bonus. But miss on any one of the rules, and the bank is entitled to scrap your bonus. The onus is on you to make sure you check off all the required boxes. This doesn’t mean bonuses are hard to earn. They generally have two types of rules: a direct deposit requirement and a required minimum balance for a set time period. Occasionally a bonus will require both of these, but more often, it’s one or the other. If direct deposit is required, the offer will generally specify the minimum amount that needs to be deposited and within how many days of first opening your account. Balance requirements also specify a dollar amount—in this case, how much you have to keep on account—and a time duration. Most typically, they require the minimum balance to be held at the bank for 60 or 90 days. After you meet the requirements, you are entitled to your bonus. That doesn’t mean you’ll receive it instantly. Most bank bonus offers will indicate an outside date (e.g., within 30 days of meeting the bonus requirements) by which they will credit the bonus to your account. * ### Are Bank Bonuses Worth It? Scoring a bank bonus is like massively turbocharging the interest you can earn on your cash in the bank. The typical savings account pays less than 0.10% APY, and even the very best high-yield savings accounts in the country are paying far below 1%. In other words, it is really hard to earn much from your money right now. Earning a cash bonus can change that, by sending your annual percentage return into the mid to high single digits, or even double digits. Take a bonus offer of $300 on a $5,000 balance: that’s a 6% return earned in just a month. Or a $700 bonus earned on $50,000: that’s 1.8% over just two months, and is more than double what you can earn in the best savings account over a full year’s time. Also lucrative are the bonuses that don’t require a minimum balance, and instead focus solely on direct deposit. With no requirement for the cash that’s been deposited into the account to stay in that account, you can earn a bonus simply for the effort of changing your direct deposit instructions. The offers from Chase and HSBC are both good examples of earning free cash simply for setting up a new direct deposit routing. * ### Why Do Banks Offer a Bonus for Opening an Account? You might wonder why banks are willing to pay this much to attract your business. The answer is really two-fold. First, the competition is tight in consumer banking, and banks and credit unions are almost always hungry for new customers. That’s because having enough consumer deposits on hand enables the bank to make more loans, which is where it likely makes the lion’s share of its profits. Second, the banks know that, in the end, they won’t have to pay that bonus amount for every customer they acquire. While you may personally be careful enough to follow all the bonus requirements successfully, others will in some way miss the mark on their end of the deal and thus be denied the bonus. So while the bank may sign up thousands of customers with a bonus offer, it will ultimately only pay bonuses to some fraction of those customers. * ### Are Bank Bonuses Taxed? When banks pay you a bonus, they treat that payment just like any other interest payment on your account. And when the year ends and tax season rolls around, they will send you a 1099-INT form reporting the total amount of interest and bonus you received. To the IRS, there is no distinction between these two types of payments from the bank. On your tax return, all of that bank income will count as interest income, which is taxed at the same rate as all of your wages and other income. * ### What Is a Bank Account Bonus? A bank account bonus is a reward that banks typically use to woo new customers into [opening new checking](https://www.investopedia.com/how-to-open-a-checking-account-online-4797805) and savings accounts, but banks offer bonuses for opening other deposit account types too. Bonuses have certain requirements and limitations which you’ll need to meet, such as depositing a certain amount of money for a pre-set period of time. * ### What Banks Are Offering Bonuses for New Accounts? Banks that are trying to grow in size frequently offer bonuses as a way to bring more customers through the door. It’s similar to how an employer might offer [signing bonuses](https://www.investopedia.com/terms/s/signing-bonus.asp) to attract quality new employees. See our list of banks above for the best new account bonuses. * ### Can You Switch Bank Accounts for a Promotion? Yes, you can switch banks to get a promotional offer. Once you’ve earned the bonus, it’s yours to keep and you can [close your account](https://www.investopedia.com/how-to-close-a-savings-account-7500880) at any time after that if you wish. ## How We Chose the Best Bank Bonuses We searched the web for all the current bank bonus offers we could find, digging up almost 30. We then prioritized nationwide offers and those from banks serving a large number of states. From there, we compiled each offer’s bonus amount, direct deposit requirement, minimum balance and duration, and account fees, ultimately comparing the options to select our winners in each category. :max_bytes(150000):strip_icc()/trendyyoungwomanholdsbankcard-98cf32d8bbde4b52a9abaacd01441660.jpeg) :max_bytes(150000):strip_icc()/trendyyoungwomanholdsbankcard-98cf32d8bbde4b52a9abaacd01441660.jpeg) Issarawat Tattong / Getty Images Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. Associated Bank. "[Great Checking Options and up to $600? You Got It](https://www.associatedbank.com/yourmoneyworkshere)." 2. Associated Bank. "[ATMs Where You Need Them](https://www.associatedbank.com/personal/personal-checking/checking-account-benefits/atm-solutions)." 3. Federal Reserve. "[Large Commercial Banks](https://www.federalreserve.gov/releases/lbr/current/)." 4. Chase. "[Enjoy $200](https://account.chase.com/consumer/banking/FE22222?jp_cmp=rb/942342/aff/3_138/na&CODE=RL7M2q.4kuk-eQswlZNWcy3YMc_jJp3RvA&MSC=RL7M2q.4kuk-eQswlZNWcy3YMc_jJp3RvA)." 5. Alliant Credit Union. "[The Ultimate Opportunity Savings Account](https://promo.alliantcreditunion.org/ultimate-opportunity-savings)." 6. Bureau of Labor Statistics. "[Consumer Price Index](https://www.bls.gov/news.release/cpi.nr0.htm)." 7. Federal Reserve. "[Federal Reserve Issues FOMC Statement](https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm)." 8. Internal Revenue Service. “[Instructions for Forms 1099-INT and 1099-OID](https://www.irs.gov/pub/irs-pdf/i1099int.pdf).” 9. Internal Revenue Service. "[Topic No. 403, Interest Received](https://www.irs.gov/taxtopics/tc403)." Related Articles [![A happy couple stand at their kitchen table, looking at a laptop.]() :max_bytes(150000):strip_icc()/happy-couple-in-kitchen-laptop-9633de3233f14fa3b6d70c1b44a89c28.jpeg) TD Bank Extends $300 Checking Account Bonus to May 31, 2024](https://www.investopedia.com/td-bank-extends-300-dollar-checking-account-bonus-to-may-31-2024-8644606) [![A smiling woman looks at a laptop while holding a payment card.]() :max_bytes(150000):strip_icc()/womanlooksatlaptophappilywithcard-65c613fd779b46599c27530ac5cb6bce.jpeg) Best Checking Account Bonuses for May 2024](https://www.investopedia.com/best-checking-account-bonuses-7152530) [![M&T Bank]() :max_bytes(150000):strip_icc()/MT_Bank-7840092bc5e1499aad776f1203f5eb56.jpg) M&T Bank Review 2024](https://www.investopedia.com/m-and-t-bank-review-8639263) [![A woman sits on a couch with a laptop, happily holding up a bank card.]() :max_bytes(150000):strip_icc()/Womanholdingbankcardwithlaptop-543e1930c4914e62ba9b798cd99fa7eb.jpeg) Earn Up to $300 With a TD Bank Checking Account Bonus by April 30, 2024](https://www.investopedia.com/earn-up-to-300-dollars-with-a-td-bank-checking-account-bonus-by-april-30-2024-8638637) [![Regions Bank]() :max_bytes(150000):strip_icc()/regions-bank-260ece120ed749a2a89d384e566304dd.jpg) Regions Bank Review 2024](https://www.investopedia.com/regions-bank-review-8644041) [![A man sits on the floor with his laptop, smiling and holding a payment card.]() :max_bytes(150000):strip_icc()/Happymanonfloorwithlaptop-79ffba3a23dc4698bca5c7f775ca7ce4.jpeg) Best Savings Account Bonuses for May 2024](https://www.investopedia.com/best-savings-account-bonuses-7152450) Related Terms [What Is a Checking Account? Here's Everything You Need To Know](https://www.investopedia.com/terms/c/checkingaccount.asp) A checking account is an account held at a financial institution that allows deposits and withdrawals. Learn how checking accounts work and how to get one. [more](https://www.investopedia.com/terms/c/checkingaccount.asp) [What Is a Savings Account and How Does It Work?](https://www.investopedia.com/terms/s/savingsaccount.asp) A savings account is a deposit account held at a financial institution that provides security for your principal and a modest interest rate. [more](https://www.investopedia.com/terms/s/savingsaccount.asp) [What Is a High-Yield Checking Account?](https://www.investopedia.com/high-yield-checking-account-8610476) A high-yield checking account provides interest at an above-average rate, in some cases above 5% or 6% APY. But these accounts usually come with stringent requirements. [more](https://www.investopedia.com/high-yield-checking-account-8610476) [What Is Online Banking? Definition and How It Works](https://www.investopedia.com/terms/o/onlinebanking.asp) Online banking allows a user to conduct financial transactions via the Internet. Online banking is also known as Internet banking or web banking. [more](https://www.investopedia.com/terms/o/onlinebanking.asp) [What Is a Certificate of Deposit (CD) and What Can It Do for You?](https://www.investopedia.com/terms/c/certificateofdeposit.asp) A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate on money held for an agreed upon period of time. [more](https://www.investopedia.com/terms/c/certificateofdeposit.asp) [Types of Specialty Certificates of Deposit (CDs) Explained](https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646) Specialty CDs offer features such as the ability to add to the principal or avoid early withdrawal fees. Some options offer more flexibility but may have lower rates than standard CDs. [more](https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646)

When you’re in the market for a new or additional checking or savings account, it can be lucrative to consider available bank bonuses. That’s because banks are so hungry for new customers that they aren’t just paying token gestures to win your business—many are offering hundreds of dollars to new customers. To help you earn as much as you can from a new account that meets your needs, we’ve rounded up our top picks for checking and savings account bonuses. We looked not only at bonus amounts, but how easy or difficult the requirements are to meet, how long you’ll have to wait for your bonus, what fees you might face, and all the other details you need to make a smart decision.  Just be sure to read the bank’s fine print carefully. Scoring bank bonuses means following the rules, and you’ll want to make sure you follow everything to the letter because missing a requirement means missing your bonus. But don’t worry, our list of winners will arm you with the information you need, which can add a hundred or more free dollars to your bank balance. The Best Bank Bonuses for 2024 Best Overall: Associated Bank Best for a Modest Balance: Chase Best for Building a Savings Habit: Alliant Credit Union Best Bank Bonuses Expand Best Bank Bonuses Our Top Picks Associated Bank Chase Alliant Credit Union Bottom Line Compare Providers Pros and Cons Alternatives FAQs Methodology Best Overall : Associated Bank  Associated Bank Apply Now For those who can set up direct deposit for their paycheck, pension, or Social Security benefits, Associated Bank offers one of the largest bank bonuses around, as well as one of the easiest to earn, making it our overall winner. Pros Bonuses of $300, $400, or $600 all represent a substantial return on your money Very minimal direct deposit requirement Gives you 90 days to make your direct deposits Free checking option, plus two additional account choices Cons Direct deposit is required to earn the bonus. Paper checks don’t come with the free checking account. Very low interest rates on their other accounts (savings, money market, CDs) If you don’t live in the upper Midwest, you may not have heard of Associated Bank, but don’t let that stop you from taking a look at their generous bonus offers of $300, $400, and $600. All you have to do is receive at least $500 in direct deposits during the first 90 days your checking account is open, and maintain an average daily balance of at least $1,000 during the second and third months. These easy requirements and the substantial reward earn it top marks for overall best banking bonus. That minimal balance will earn you $300 cash back. But you can maximize your bonus by simply boosting your average daily balance to $5,000 during days 31-90, earning $400, or to $10,000 to reap the top bonus of $600. This is a great return on your money. If you score the $600 bonus on a $10,000 balance, you’ve earned a 6% return. And the return on investment for the smaller balances is even better: 8% on $5,000, or a whopping 30% on $1,000. To make the decision even more appealing, Associated offers three different checking account types, one of which is free, and the others with waivable monthly maintenance fees. The ability to conveniently send and receive money with Zelle is included, as is free access to more than 30,000 MoneyPass network ATMs across the country. Best for a Modest Balance : Chase  Chase Apply Now Chase’s current checking account bonus is one of the easiest to earn. And because its requirement for holding funds in the account is minimal, we’ve chosen it as the best bank bonus for those with modest balances. Pros Only direct deposit is required; no minimum balance is needed to earn the bonus. The required direct deposit is only $500 in 90 days If you live in a state where Chase operates, in-branch banking is possible. The bonus will be paid within a short 15 days after meeting requirements. Cons The account charges a $12 fee, though it can be waived. Other bank bonuses are higher if you can meet the requirements. As the country’s largest bank, Chase hardly needs an introduction. It offers a full complement of virtually every type of bank account, loan, or credit card, and a well-honed website and mobile app for digital banking. It also operates over 4,800 branches across the country, more than any other bank. Add to that Chase’s minimal bonus requirements and we’ve got our winner for best bonus on smaller balances. Earning Chase’s $200 checking account bonus is very straightforward. Simply have a direct deposit or deposits totaling at least $500 hit your new account within 90 days of opening. This stands out from most direct deposit bonus offers, because $500 across 90 days is very easy for most people to reach, making Chase a good option for those receiving smaller payroll or benefits checks. It’s also well-suited to those who don’t want to keep a lot of money in the account, as there is no balance requirement to earn the bonus. That said, the account does charge a $12 monthly maintenance fee, and one of the ways to have it waived is to hold a $1,500 minimum daily balance in this account, or $5,000 across multiple Chase accounts. There are fees if you withdraw from a non-Chase ATM: $3 fee per withdrawal in the U.S., Puerto Rico and the U.S. Virgin Islands, $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. Fortunately, you can also waive the fee with electronic deposits of any kind. If your direct deposits and any other ACH deposits to the account total at least $500, your monthly fee will be waived. Read our full Chase Bank review. Best for Building a Savings Habit : Alliant Credit Union  Alliant Credit Union Apply Now With its bonus paid at the end of a year of regular savings deposits, Alliant Credit Union earns our top award for best bank bonus aimed at helping you build a savings habit. Pros Very low balance requirement, and no direct deposit needed The bonus amounts to more than an 8% return on your money The account earns a competitive interest rate No monthly maintenance fees on the account. Cons Smaller bonus than other offers Must become a member of the credit union (though it’s easy and free) Must wait a year to receive your bonus Suze Orman wants you to get in a habit of saving every month, and she’s put her name behind a special savings account at Alliant Credit Union that rewards you for doing just that. It’s called The Ultimate Opportunity Savings Account and it’s a great choice for those who simply want to slowly accumulate savings, all while being rewarded with a little something extra after achieving that goal for a year. This earns it our top honor for best bank bonus for those building a savings habit. The way it works is you make a deposit into the savings account of at least $100 every month for 12 months. You need to keep that amount in the account so that at the end of the year, you still have at least $1,200 on deposit. At that point, Alliant will add its $100 bonus to your account. This is a great return, though since it’s a small balance amount, the bonus is also small compared to other bank offers. But the account also pays a competitive high-yield savings rate on your balance and is completely fee-free, even providing free access to a network of 80,000 ATMs nationwide. Joining Alliant is easy, and free as well. If you don’t meet one of their standard eligibility requirements such as working at a participating company or living in the Chicago area, you can still join by agreeing to a membership in their affiliated nonprofit, Foster Care to Success, which serves thousands of foster teens across the U.S. Alliant will even pay the $5 membership fee on your behalf.  Bottom Line This list of winning bank bonuses should set up almost anyone looking for an account that matches their banking needs while also providing a significant cash infusion in exchange for following some basic requirements. For those who can manage a direct deposit, Associated Bank’s three bonuses are top-paying options, offering a generous bonus for a minimal direct deposit threshold and a modest minimum balance. It also scores high marks for requiring the minimum balance for such a relatively short time (60 days). Direct deposit is not possible for everyone, however. And for some, it’s simply not an appealing option. Our list of best bonuses for no direct deposit, for high earners, and for those carrying a low balance should provide something for everyone. Compare Providers Financial Institution Why We Picked It Key Benefit Associated Bank Best Overall High return for a modest direct deposit and balance Chase Best for a Modest Balance Very minimal direct deposit and balance requirements Alliant Credit Union Best for Building a Savings Habit Be generously rewarded for monthly savings deposits In the News: The Fed held rates steady for a sixth consecutive time at its meeting that concluded May 1, 2024. The 5.25% to 5.50% range is the highest the federal funds rate has been since 2001, and Fed officials noted in their statement that there has been a lack of progress toward the committee’s goal of lowering inflation. With consumer prices showing a 3.5% inflation rate in March, Fed officials don’t foresee reducing their benchmark rate until they're confident inflation is moving toward 2%. After looking for a good bank account bonus, check out the institution's high-yield savings accounts and CD rates. These are directly impacted by the Fed's rate hikes. Depositing money into multiple accounts at the bank may help you maximize the amount of money you can earn on the cash you keep there. Pros and Cons of Bank Account Bonuses Pros Can earn substantial sums Access to new bank benefits Requirements may be easy to meet Good way to “test-drive” a new bank Cons Can be a hassle to switch Some people are excluded May require a substantial deposit Bank account bonuses are taxable Pros Explained Can earn substantial sums: The best bank account bonuses are worth hundreds or even thousands of dollars, all for relatively little work on your part. Access to new bank benefits: Many banks offer special benefits for customers, such as discounts with certain retailers or access to car-buying programs. Requirements may be easy to meet: Some bank account bonuses don’t have too many requirements beyond just opening a new account and keeping a certain amount of cash there for a set period of time. Good way to “test-drive” a new bank: If you’ve been thinking about switching all of your accounts to a new bank, this gives you a chance to see how it operates without committing all of your cash over just yet.  Cons Explained Can be a hassle to switch: Bank account bonuses require you to meet certain conditions, which you’ll need to meet while still maintaining your current account (if you’re not switching entirely).Some people are excluded: New bank account bonuses are generally only available to new customers that are depositing “new money” to the bank—i.e., cash that’s previously been stored at another bank. May require a substantial deposit: The best bank account bonuses are frequently offered for people making the largest deposits, often ranging into thousands of dollars. Not everyone has that kind of money lying around. Bank account bonuses are taxable: The IRS treats bank account bonuses the same as interest payments, meaning you’ll owe income taxes on them. The bank will issue you a 1099-INT at the end of the year for this.   If you’re not switching banks entirely it’s a good idea to develop strategies to maintain multiple bank accounts at once, such as by using budgeting apps or adding a task on your to-do list to check all your accounts regularly.  Alternatives to Bank Account Bonuses You can earn a lot of extra money relatively easily with bank account bonuses, but there are other ways to put your money to work for you as well. Here are a few choices: Investing: Although you won’t earn guaranteed returns like with an FDIC-insured bank account, it’s easy for anyone to get started investing.  Credit card bonuses: Many banks offer credit card bonuses if you sign up for a new account and spend a certain amount of money within the first three months.  Savings account bonuses: Many banks also offer bonuses if you sign up for a new savings account and meet the requirements to earn the reward. Passive income side hustles: The whole blogosphere is full of passive income ideas and how-tos that can show you how to develop small income streams with a minimal amount of effort. High-yield savings accounts and CDs: Many banks—especially online banks—offer very high rates on these two types of accounts. It’s not a bonus per se, but your returns could be even higher, especially over the long term. See the best high-yield savings accounts and the best CD rates to see what you could earn. The 6 Best Online Banks for May 2024 Frequently Asked Questions How Do Bank Account Bonuses Work? Bank bonuses are essentially an incentive with strings. If you follow all the requirements carefully, the bank will pay you the advertised bonus. But miss on any one of the rules, and the bank is entitled to scrap your bonus. The onus is on you to make sure you check off all the required boxes.This doesn’t mean bonuses are hard to earn. They generally have two types of rules: a direct deposit requirement and a required minimum balance for a set time period. Occasionally a bonus will require both of these, but more often, it’s one or the other. If direct deposit is required, the offer will generally specify the minimum amount that needs to be deposited and within how many days of first opening your account.Balance requirements also specify a dollar amount—in this case, how much you have to keep on account—and a time duration. Most typically, they require the minimum balance to be held at the bank for 60 or 90 days.After you meet the requirements, you are entitled to your bonus. That doesn’t mean you’ll receive it instantly. Most bank bonus offers will indicate an outside date (e.g., within 30 days of meeting the bonus requirements) by which they will credit the bonus to your account. Are Bank Bonuses Worth It? Scoring a bank bonus is like massively turbocharging the interest you can earn on your cash in the bank. The typical savings account pays less than 0.10% APY, and even the very best high-yield savings accounts in the country are paying far below 1%. In other words, it is really hard to earn much from your money right now.Earning a cash bonus can change that, by sending your annual percentage return into the mid to high single digits, or even double digits. Take a bonus offer of $300 on a $5,000 balance: that’s a 6% return earned in just a month. Or a $700 bonus earned on $50,000: that’s 1.8% over just two months, and is more than double what you can earn in the best savings account over a full year’s time.Also lucrative are the bonuses that don’t require a minimum balance, and instead focus solely on direct deposit. With no requirement for the cash that’s been deposited into the account to stay in that account, you can earn a bonus simply for the effort of changing your direct deposit instructions. The offers from Chase and HSBC are both good examples of earning free cash simply for setting up a new direct deposit routing. Why Do Banks Offer a Bonus for Opening an Account? You might wonder why banks are willing to pay this much to attract your business. The answer is really two-fold. First, the competition is tight in consumer banking, and banks and credit unions are almost always hungry for new customers. That’s because having enough consumer deposits on hand enables the bank to make more loans, which is where it likely makes the lion’s share of its profits.Second, the banks know that, in the end, they won’t have to pay that bonus amount for every customer they acquire. While you may personally be careful enough to follow all the bonus requirements successfully, others will in some way miss the mark on their end of the deal and thus be denied the bonus. So while the bank may sign up thousands of customers with a bonus offer, it will ultimately only pay bonuses to some fraction of those customers. Are Bank Bonuses Taxed? When banks pay you a bonus, they treat that payment just like any other interest payment on your account. And when the year ends and tax season rolls around, they will send you a 1099-INT form reporting the total amount of interest and bonus you received. To the IRS, there is no distinction between these two types of payments from the bank.On your tax return, all of that bank income will count as interest income, which is taxed at the same rate as all of your wages and other income. What Is a Bank Account Bonus? A bank account bonus is a reward that banks typically use to woo new customers into opening new checking and savings accounts, but banks offer bonuses for opening other deposit account types too. Bonuses have certain requirements and limitations which you’ll need to meet, such as depositing a certain amount of money for a pre-set period of time. What Banks Are Offering Bonuses for New Accounts? Banks that are trying to grow in size frequently offer bonuses as a way to bring more customers through the door. It’s similar to how an employer might offer signing bonuses to attract quality new employees. See our list of banks above for the best new account bonuses. Can You Switch Bank Accounts for a Promotion? Yes, you can switch banks to get a promotional offer. Once you’ve earned the bonus, it’s yours to keep and you can close your account at any time after that if you wish. How We Chose the Best Bank Bonuses We searched the web for all the current bank bonus offers we could find, digging up almost 30. We then prioritized nationwide offers and those from banks serving a large number of states. From there, we compiled each offer’s bonus amount, direct deposit requirement, minimum balance and duration, and account fees, ultimately comparing the options to select our winners in each category. Issarawat Tattong / Getty Images Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Associated Bank. "Great Checking Options and up to $600? You Got It." Associated Bank. "ATMs Where You Need Them." Federal Reserve. "Large Commercial Banks." Chase. "Enjoy $200." Alliant Credit Union. "The Ultimate Opportunity Savings Account." Bureau of Labor Statistics. "Consumer Price Index." Federal Reserve. "Federal Reserve Issues FOMC Statement." Internal Revenue Service. “Instructions for Forms 1099-INT and 1099-OID.” Internal Revenue Service. "Topic No. 403, Interest Received." Related Articles TD Bank Extends $300 Checking Account Bonus to May 31, 2024 Best Checking Account Bonuses for May 2024 M&T Bank Review 2024 Earn Up to $300 With a TD Bank Checking Account Bonus by April 30, 2024 Regions Bank Review 2024 Best Savings Account Bonuses for May 2024 Related Terms What Is a Checking Account? Here's Everything You Need To Know A checking account is an account held at a financial institution that allows deposits and withdrawals. Learn how checking accounts work and how to get one. more What Is a Savings Account and How Does It Work? A savings account is a deposit account held at a financial institution that provides security for your principal and a modest interest rate. more What Is a High-Yield Checking Account? A high-yield checking account provides interest at an above-average rate, in some cases above 5% or 6% APY. But these accounts usually come with stringent requirements. more What Is Online Banking? Definition and How It Works Online banking allows a user to conduct financial transactions via the Internet. Online banking is also known as Internet banking or web banking. more What Is a Certificate of Deposit (CD) and What Can It Do for You? A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate on money held for an agreed upon period of time. more Types of Specialty Certificates of Deposit (CDs) Explained Specialty CDs offer features such as the ability to add to the principal or avoid early withdrawal fees. Some options offer more flexibility but may have lower rates than standard CDs. more

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Axie Infinity: What it is and How it Works

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you were to close your eyes fall asleep and wake up on July 6, 2016, you would rise to find that the price of bitcoin was trading between $670 and $681, the iPhone SE was the newest phone in town, and the soon-to-be-craze known as Pokémon Go was just being released.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="14"></span><span class="ql-inline-citation" data-cite="13"></span> For many this probably sounds like a lifetime ago. it is astonishing to think about how much technological change has occurred in six short years. About one year later in December 2017, the idea to combine aspects of the crypto universe with online gaming would to come life in the minds of the people at the Vietnamese studio Sky Mavis.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="16"></span> In the article below we’ll look at the online game known as Axie Infinity, discuss what it is and how it has been evolving since the start of development in 2017. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Axie Infinity is an online game universe revolving around Pokémon-esque creatures known as Axies.</li><li>Axie Infinity is different than other online games because of the synergy between standard online gaming and blockchain technology.</li><li>Axie Infinity is recognized as a leader in play-to-earn (P2E) gaming.</li></ul></div></div></div> <span class="heading-toc" id="toc-axie-infinity-universe"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Axie Infinity Universe </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Axie Infinity is an online game universe revolving around Pokémon-esque creatures known as Axies. Players can collect Axies as virtual pets with aspirations to battle, breed, collect, raise, and build kingdoms for their Axies. What makes Axie Infinity different than other online games is the synergy it has established between standard <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/about-the-splinterlands-blockchain-game-5248808">online gaming and blockchain</a>. The Ethereum-based game utilizes a design that allows players to own their virtual assets, and for the game to reward players who are able to reach an advanced level of skill.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> To get started, users need to work through a multi-step setup process to connect digital wallets and their Axie Infinity account, which is all detailed in the game’s onboarding guide.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Once the accounts are successfully connected, the player can interact with the digital marketplace. To play, users need 3 Axies. Once the player has 3 Axies then they can download the application and start playing. There is a lot of nuance around the cost of an Axie since the average price that is paid fluctuates based on factors such as rarity, experience, attributes, and type. At the time of writing, the least expensive Axies cost around $30, known as ‘Floor Axies’. Floor Axies are often weak in battle and likely won’t be able to earn much for its owner. At the time of writing, players can expect to pay a few hundred U.S. dollars for a usable team of Axies and upwards of $1,000 for a rare Mystic Axie.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-non-fungible-tokens-nfts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> Non Fungible Tokens (NFTs) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Axie Infinity is recognized as the leader in NFT gaming.  In-game digital assets such as the Axie creatures are represented by NFTs. These cryptographically unique tokens, as discussed, confers ownership, and allows the player to trade axis on the game’s marketplace for real money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> In the realm of NFT projects, Axie Infinity holds the record for the third-highest all-time sales. As of March 2022, Axie Infinity generated $4.17 billion in all-time NFT sales below Opensea’s $23.21 billion and LooksRare’s reported $18 billion.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-play-to-earn-business-model-p2e"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> Play-to-Earn Business Model (P2E) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The play-to-earn business model is new to the gaming industry and is designed to reward participants who add value in certain ways to the game’s world or ecosystem. The basis of play-to-earn is predominantly based on the freemium model, which means that it is free to get started and then the user can pay to add new features, content, gear, or simply to progress more quickly through the game. As of late February 2022, Axie Infinity does not follow the typical free-to-play model since players are required to start with 3 Axies, but according to decrypt.co, the company is reportedly planning on releasing free in-game starter monsters to appeal to new users who aren’t ready to pay the premiums needed in the current model.<span class="ql-inline-citation" data-cite="9"></span> Granted, starter monsters will likely not be able to earn the player much in terms of reward tokens, but the shift could open the game to an even wider audience. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <span class="heading-toc" id="toc-governance-tokens-axie-infinity-shards-axs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> Governance Tokens - Axie Infinity Shards ($AXS) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> One of the most significant Ethereum tokens is known as ERC-20, which emerged as a technical standard used for all smart contracts on the Ethereum blockchain. While the details go beyond the scope of this article, it is relevant here because Axie Infinity Shards (AXS) are an ERC-20 governance token for the Axie Universe. It can be thought of as the native currency to the game and holders can claim rewards if they stake their tokens, play the game, and participate in key governance votes.<span class="ql-inline-citation" data-cite="17"></span> As of February 27, 2022, the relative to the U.S. dollar AXS has increased by over 3,000% over the past year.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The AXS tokens are an intentional move by Sky Mavis to decentralize the ownership and governance of Axie infinity so that it aligns the interests between the developers and the community of players that actually play the game.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-reward-tokens--smooth-love-potion-slp"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> Reward Tokens – Smooth Love Potion (SLP) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> A Smooth Love Potion (SLP), formerly known as small love potion, is a reward token within Axie Infinity that can be earned by players in certain ways by playing the game in battle or adventure mode. SLP is an ERC-20 utility token that carries a value like other cryptocurrencies and can be bought and sold on a decentralized exchange. The value of an SLP relative to the U.S. dollar hasn’t performed so well when compared to AXS and is down sharply over the past year. Unlike AXS, which has a supply cap of 270 million tokens, SLP has an uncapped number of tokens that could exist in the future.<span class="ql-inline-citation" data-cite="19"></span><span class="ql-inline-citation" data-cite="18"></span> The uncertainty around the future supply of SLP has greatly impacted its value and concerns around its stability have caused many to question what will happen in the future. Sky Mavis has made some adjustments to the emission rate in recent months and potential changes based on governance votes in the future will likely continue to drastically impact the value of SLP.<span class="ql-inline-citation" data-cite="20"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-virtual-land"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> Virtual Land </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Lunacia, the Axie homeland is tokenized plots of virtual land called Terra, and will act as home bases of operation for players’ Axies. While the gameplay is still being actively developed, the idea behind these virtual plots is that players will be able to purchase, rent, and be developed by players. Virtual landowners will be able to find AXS tokens on their plots as well as different types of resources that spawn in nodes across Lunacia. Resources can be used to upgrade Axies and land. While the concept is still in early stages, the impact on the future of the game is endless and lays out a path for continued popularity into the future.<span class="ql-inline-citation" data-cite="21"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The convergence of the crypto universe with online gaming in the form of Axie Infinity marks an interesting shift in the future of not only online gaming, but also in the growing importance of digital ownership. For many, this game is their first foray into blockchain-based games or experiences. While there are still some challenges and uncertainties around block-chain-based experiences, it is noteworthy that such a project exists and it is likely to have an impact on future trends. With the development of land-based gameplay on Lunacia, or the continued breeding of unique Axies, it will be interesting to see what the future holds for Axie Infinity. </p></div>

If you were to close your eyes fall asleep and wake up on July 6, 2016, you would rise to find that the price of bitcoin was trading between $670 and $681, the iPhone SE was the newest phone in town, and the soon-to-be-craze known as Pokémon Go was just being released. For many this probably sounds like a lifetime ago. it is astonishing to think about how much technological change has occurred in six short years. About one year later in December 2017, the idea to combine aspects of the crypto universe with online gaming would to come life in the minds of the people at the Vietnamese studio Sky Mavis. In the article below we’ll look at the online game known as Axie Infinity, discuss what it is and how it has been evolving since the start of development in 2017. ### Key Takeaways * Axie Infinity is an online game universe revolving around Pokémon-esque creatures known as Axies. * Axie Infinity is different than other online games because of the synergy between standard online gaming and blockchain technology. * Axie Infinity is recognized as a leader in play-to-earn (P2E) gaming. ## Axie Infinity Universe Axie Infinity is an online game universe revolving around Pokémon-esque creatures known as Axies. Players can collect Axies as virtual pets with aspirations to battle, breed, collect, raise, and build kingdoms for their Axies. What makes Axie Infinity different than other online games is the synergy it has established between standard [online gaming and blockchain](https://www.investopedia.com/about-the-splinterlands-blockchain-game-5248808). The Ethereum-based game utilizes a design that allows players to own their virtual assets, and for the game to reward players who are able to reach an advanced level of skill. To get started, users need to work through a multi-step setup process to connect digital wallets and their Axie Infinity account, which is all detailed in the game’s onboarding guide. Once the accounts are successfully connected, the player can interact with the digital marketplace. To play, users need 3 Axies. Once the player has 3 Axies then they can download the application and start playing. There is a lot of nuance around the cost of an Axie since the average price that is paid fluctuates based on factors such as rarity, experience, attributes, and type. At the time of writing, the least expensive Axies cost around $30, known as ‘Floor Axies’. Floor Axies are often weak in battle and likely won’t be able to earn much for its owner. At the time of writing, players can expect to pay a few hundred U.S. dollars for a usable team of Axies and upwards of $1,000 for a rare Mystic Axie. ## Non Fungible Tokens (NFTs) Axie Infinity is recognized as the leader in NFT gaming.  In-game digital assets such as the Axie creatures are represented by NFTs. These cryptographically unique tokens, as discussed, confers ownership, and allows the player to trade axis on the game’s marketplace for real money. In the realm of NFT projects, Axie Infinity holds the record for the third-highest all-time sales. As of March 2022, Axie Infinity generated $4.17 billion in all-time NFT sales below Opensea’s $23.21 billion and LooksRare’s reported $18 billion. ## Play-to-Earn Business Model (P2E) The play-to-earn business model is new to the gaming industry and is designed to reward participants who add value in certain ways to the game’s world or ecosystem. The basis of play-to-earn is predominantly based on the freemium model, which means that it is free to get started and then the user can pay to add new features, content, gear, or simply to progress more quickly through the game. As of late February 2022, Axie Infinity does not follow the typical free-to-play model since players are required to start with 3 Axies, but according to decrypt.co, the company is reportedly planning on releasing free in-game starter monsters to appeal to new users who aren’t ready to pay the premiums needed in the current model. Granted, starter monsters will likely not be able to earn the player much in terms of reward tokens, but the shift could open the game to an even wider audience. ## Governance Tokens - Axie Infinity Shards ($AXS) One of the most significant Ethereum tokens is known as ERC-20, which emerged as a technical standard used for all smart contracts on the Ethereum blockchain. While the details go beyond the scope of this article, it is relevant here because Axie Infinity Shards (AXS) are an ERC-20 governance token for the Axie Universe. It can be thought of as the native currency to the game and holders can claim rewards if they stake their tokens, play the game, and participate in key governance votes. As of February 27, 2022, the relative to the U.S. dollar AXS has increased by over 3,000% over the past year. The AXS tokens are an intentional move by Sky Mavis to decentralize the ownership and governance of Axie infinity so that it aligns the interests between the developers and the community of players that actually play the game. ## Reward Tokens – Smooth Love Potion (SLP) A Smooth Love Potion (SLP), formerly known as small love potion, is a reward token within Axie Infinity that can be earned by players in certain ways by playing the game in battle or adventure mode. SLP is an ERC-20 utility token that carries a value like other cryptocurrencies and can be bought and sold on a decentralized exchange. The value of an SLP relative to the U.S. dollar hasn’t performed so well when compared to AXS and is down sharply over the past year. Unlike AXS, which has a supply cap of 270 million tokens, SLP has an uncapped number of tokens that could exist in the future. The uncertainty around the future supply of SLP has greatly impacted its value and concerns around its stability have caused many to question what will happen in the future. Sky Mavis has made some adjustments to the emission rate in recent months and potential changes based on governance votes in the future will likely continue to drastically impact the value of SLP. ## Virtual Land Lunacia, the Axie homeland is tokenized plots of virtual land called Terra, and will act as home bases of operation for players’ Axies. While the gameplay is still being actively developed, the idea behind these virtual plots is that players will be able to purchase, rent, and be developed by players. Virtual landowners will be able to find AXS tokens on their plots as well as different types of resources that spawn in nodes across Lunacia. Resources can be used to upgrade Axies and land. While the concept is still in early stages, the impact on the future of the game is endless and lays out a path for continued popularity into the future. ## The Bottom Line The convergence of the crypto universe with online gaming in the form of Axie Infinity marks an interesting shift in the future of not only online gaming, but also in the growing importance of digital ownership. For many, this game is their first foray into blockchain-based games or experiences. While there are still some challenges and uncertainties around block-chain-based experiences, it is noteworthy that such a project exists and it is likely to have an impact on future trends. With the development of land-based gameplay on Lunacia, or the continued breeding of unique Axies, it will be interesting to see what the future holds for Axie Infinity.

If you were to close your eyes fall asleep and wake up on July 6, 2016, you would rise to find that the price of bitcoin was trading between $670 and $681, the iPhone SE was the newest phone in town, and the soon-to-be-craze known as Pokémon Go was just being released. For many this probably sounds like a lifetime ago. it is astonishing to think about how much technological change has occurred in six short years. About one year later in December 2017, the idea to combine aspects of the crypto universe with online gaming would to come life in the minds of the people at the Vietnamese studio Sky Mavis. In the article below we’ll look at the online game known as Axie Infinity, discuss what it is and how it has been evolving since the start of development in 2017. Key Takeaways Axie Infinity is an online game universe revolving around Pokémon-esque creatures known as Axies.Axie Infinity is different than other online games because of the synergy between standard online gaming and blockchain technology.Axie Infinity is recognized as a leader in play-to-earn (P2E) gaming. Axie Infinity Universe Axie Infinity is an online game universe revolving around Pokémon-esque creatures known as Axies. Players can collect Axies as virtual pets with aspirations to battle, breed, collect, raise, and build kingdoms for their Axies. What makes Axie Infinity different than other online games is the synergy it has established between standard online gaming and blockchain. The Ethereum-based game utilizes a design that allows players to own their virtual assets, and for the game to reward players who are able to reach an advanced level of skill. To get started, users need to work through a multi-step setup process to connect digital wallets and their Axie Infinity account, which is all detailed in the game’s onboarding guide. Once the accounts are successfully connected, the player can interact with the digital marketplace. To play, users need 3 Axies. Once the player has 3 Axies then they can download the application and start playing. There is a lot of nuance around the cost of an Axie since the average price that is paid fluctuates based on factors such as rarity, experience, attributes, and type. At the time of writing, the least expensive Axies cost around $30, known as ‘Floor Axies’. Floor Axies are often weak in battle and likely won’t be able to earn much for its owner. At the time of writing, players can expect to pay a few hundred U.S. dollars for a usable team of Axies and upwards of $1,000 for a rare Mystic Axie. Non Fungible Tokens (NFTs) Axie Infinity is recognized as the leader in NFT gaming.  In-game digital assets such as the Axie creatures are represented by NFTs. These cryptographically unique tokens, as discussed, confers ownership, and allows the player to trade axis on the game’s marketplace for real money. In the realm of NFT projects, Axie Infinity holds the record for the third-highest all-time sales. As of March 2022, Axie Infinity generated $4.17 billion in all-time NFT sales below Opensea’s $23.21 billion and LooksRare’s reported $18 billion. Play-to-Earn Business Model (P2E) The play-to-earn business model is new to the gaming industry and is designed to reward participants who add value in certain ways to the game’s world or ecosystem. The basis of play-to-earn is predominantly based on the freemium model, which means that it is free to get started and then the user can pay to add new features, content, gear, or simply to progress more quickly through the game. As of late February 2022, Axie Infinity does not follow the typical free-to-play model since players are required to start with 3 Axies, but according to decrypt.co, the company is reportedly planning on releasing free in-game starter monsters to appeal to new users who aren’t ready to pay the premiums needed in the current model. Granted, starter monsters will likely not be able to earn the player much in terms of reward tokens, but the shift could open the game to an even wider audience. Governance Tokens - Axie Infinity Shards ($AXS) One of the most significant Ethereum tokens is known as ERC-20, which emerged as a technical standard used for all smart contracts on the Ethereum blockchain. While the details go beyond the scope of this article, it is relevant here because Axie Infinity Shards (AXS) are an ERC-20 governance token for the Axie Universe. It can be thought of as the native currency to the game and holders can claim rewards if they stake their tokens, play the game, and participate in key governance votes. As of February 27, 2022, the relative to the U.S. dollar AXS has increased by over 3,000% over the past year. The AXS tokens are an intentional move by Sky Mavis to decentralize the ownership and governance of Axie infinity so that it aligns the interests between the developers and the community of players that actually play the game. Reward Tokens – Smooth Love Potion (SLP) A Smooth Love Potion (SLP), formerly known as small love potion, is a reward token within Axie Infinity that can be earned by players in certain ways by playing the game in battle or adventure mode. SLP is an ERC-20 utility token that carries a value like other cryptocurrencies and can be bought and sold on a decentralized exchange. The value of an SLP relative to the U.S. dollar hasn’t performed so well when compared to AXS and is down sharply over the past year. Unlike AXS, which has a supply cap of 270 million tokens, SLP has an uncapped number of tokens that could exist in the future. The uncertainty around the future supply of SLP has greatly impacted its value and concerns around its stability have caused many to question what will happen in the future. Sky Mavis has made some adjustments to the emission rate in recent months and potential changes based on governance votes in the future will likely continue to drastically impact the value of SLP. Virtual Land Lunacia, the Axie homeland is tokenized plots of virtual land called Terra, and will act as home bases of operation for players’ Axies. While the gameplay is still being actively developed, the idea behind these virtual plots is that players will be able to purchase, rent, and be developed by players. Virtual landowners will be able to find AXS tokens on their plots as well as different types of resources that spawn in nodes across Lunacia. Resources can be used to upgrade Axies and land. While the concept is still in early stages, the impact on the future of the game is endless and lays out a path for continued popularity into the future. The Bottom Line The convergence of the crypto universe with online gaming in the form of Axie Infinity marks an interesting shift in the future of not only online gaming, but also in the growing importance of digital ownership. For many, this game is their first foray into blockchain-based games or experiences. While there are still some challenges and uncertainties around block-chain-based experiences, it is noteworthy that such a project exists and it is likely to have an impact on future trends. With the development of land-based gameplay on Lunacia, or the continued breeding of unique Axies, it will be interesting to see what the future holds for Axie Infinity.

https://www.investopedia.com/cd-early-withdrawal-penalty-5225111

CD Early Withdrawal Penalty

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-cd-early-withdrawal-penalty"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a CD Early Withdrawal Penalty? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Investors have many options available to save their cash. Some come with high risks while others are fairly secure. Among low-risk investment options is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificate of deposit</a> (CD). It allows you to deposit a lump sum and earn a certain amount of interest at the same time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> There is no risk to CDs and they are insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a>.<span class="ql-inline-citation" data-cite="14"></span> But there is a trade-off though: You must keep your money locked up for a certain amount of time to reap the benefits. Making an early withdrawal, though, could result in a loss of interest. But that's not all. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> There are generally fees for taking your cash out of a CD before the maturity date This is referred to as a CD early withdrawal penalty. But there may be ways to avoid paying this penalty. Here is how they work and what you can do to avoid them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A certificate of deposit is a savings account that allows investors to deposit a lump sum and earn interest until a certain maturity date.</li><li>A CD early withdrawal penalty is a fee you may have to pay if you take money out of a certificate of deposit (CD) before its term ends. </li><li>CD early withdrawal penalties can vary widely among financial institutions.</li><li>You should check your CD agreement for any early withdrawal penalties, ideally before you purchase that CD, but definitely before you cash it in early. </li><li>In some cases, you may be able to have an early withdrawal penalty waived.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-cd-early-withdrawal-penalties-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> How CD Early Withdrawal Penalties Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> When you buy a certificate of deposit from a bank or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a>, you make an agreement: You promise to leave your money there for a specified period of time and the financial institution agrees to pay you a certain rate of interest in exchange. That rate is typically higher than what you'd receive from a savings or checking account. But the CD is less <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquid</a> than other types of accounts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> There may come a time when you'll need access to the money in your CD. You can generally do that if you do have an urgent need. But keep in mind that this often comes with a penalty if you decide to make an early withdrawal.<span class="ql-inline-citation" data-cite="15"></span> The amount of that early withdrawal penalty can vary from one <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstitution.asp">financial institution</a> to another. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Federal law stipulates a minimum that banks must charge for early withdrawals within six days of account opening, which is seven days' worth of interest. But it doesn't set a maximum, so your penalty can be considerably higher.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The way that most penalties are expressed in most CD agreements is that a bank or other issuer can charge you a portion of the interest you would have earned if you'd left the money in the vehicle until the maturity date. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> CDs with longer terms tend to have higher early withdrawal penalties. For example: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li>You might be charged the equivalent of three months' interest for an early withdrawal from a CD that matures in six months or less.</li><li>If you have a five-year CD, the penalty might be 12 months' worth of interest.<span class="ql-inline-citation" data-cite="16"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Be sure you should check the agreement before making an investment and definitely do so before withdrawing your money. You may find that it makes more sense to leave the CD untouched and try to come up with cash from some other source. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> An early withdrawal penalty can mean walking away from a CD with less money than you put in. If you take out a two-year CD, for example, and then withdraw your money within the first year, the penalty will likely exceed the interest your CD earned over the same period. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_27-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_28-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>An early withdrawal penalty is noted on the Form 1099-INT you receive from your financial institution, showing the interest you earned for the year. The penalty is tax-deductible as an adjustment to income.<span class="ql-inline-citation" data-cite="10"></span></p></div></div></div> <span class="heading-toc" id="toc-avoiding-cd-early-withdrawal-penalties"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> Avoiding CD Early Withdrawal Penalties </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> CDs can be a safe place to put money that you're reasonably certain you won't need for a while—at least until after the CD's term ends. However, you may face an unexpected financial emergency or investment opportunity and have no other choice but to cash in your CD and suffer the consequences. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> That said, there are several ways to avoid or reduce your CD early withdrawal penalties. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-subheading__text"> Liquid Certificates of Deposit (CD) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> If you haven't purchased the CD yet, consider a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp">liquid CD</a> or no-penalty CD. They may also be called breakable CDs. These types of CDs allow you to access your money with lower (or no) early withdrawal penalties. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> But they do come with a drawback. The downside is that they pay lower rates of interest. If you are looking for a new CD, but have a suspicion you might need the money before its term ends, these alternative CDs could be a practical option. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Ask for a Waiver </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> If you're already in a CD and need to withdraw your money early, ask your bank or credit union if it will waive the fees. That may seem like a crazy idea—and it might turn out to be if your CD is with a big corporate bank. But if it's with a smaller institution, where they know you, they might let you off the hook. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> According to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp">Consumer Financial Protection Bureau (CFPB)</a>, some financial institutions will also agree in advance to waive any penalty once you have had the CD for a certain period of time.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-subheading__text"> Qualifying for a Waiver </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If you are withdrawing money because of an emergency, you might qualify for a fee <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/waiver.asp">waiver</a>. You can usually qualify for a waiver in cases of death, disability, or court-determined incompetence, for example.<span class="ql-inline-citation" data-cite="13"></span> Banks are permitted to waive penalties in these situations, but they're not required to do so by law. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-subheading__text"> Look Elsewhere for Cash </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> You may want to consider withdrawing money from another vehicle if you can. One place you can turn to is your rainy day or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency fund</a> if you have one set up. Most people choose to invest money into a savings account for emergencies. These are highly liquid investment vehicles that may not incur any fees. Be sure to check with your financial institution about the rules with savings accounts, such as minimum balance requirements. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> If you're considering a loan or using your credit card to access some cash, though, you'll have to weigh out the pros and cons. Make sure you do the math and ensure you don't end up spending more on interest than you would if you were to pay the early withdrawal fee for taking your money out of the CD before the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturitydate.asp">maturity date</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_52-0"><span class="heading-toc" id="toc-how-much-are-cd-early-withdrawal-fees"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Are CD Early Withdrawal Fees?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It depends, in part, on the financial institution that issued your CD. Most banks charge at least 90 days' interest for early withdrawals and some charge a lot more. Your CD agreement should spell out how it calculates the fee.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-can-i-avoid-cd-early-withdrawal-penalties"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Avoid CD Early Withdrawal Penalties?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Banks sometimes waive CD early withdrawal penalties if you need the money for an emergency. You should phone your bank—and talk to a human—to ask about a waiver. If the bank won't budge, it might be worth looking at other ways of coming up with emergency funds.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_56-0"><span class="heading-toc" id="toc-do-all-cds-have-early-withdrawal-penalties"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do All CDs Have Early Withdrawal Penalties?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No. There are some types of CDs—liquid CDs and no-penalty CDs, for example—that have no or low withdrawal penalties. The downside is that these CDs generally pay less interest than standard CDs. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokered-cd.asp">Brokered CDs</a>, which you can buy from a brokerage firm, are another option; rather than cashing in a brokered CD early, you can try to sell it to another investor on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondarymarket.asp">secondary market</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> If you need to take money out of a certificate of deposit (CD) before its term ends, you will often have to pay an early withdrawal penalty. These penalties can vary widely among financial institutions and are worth checking before you commit to buying a CD. You may also be able to get the fee waived in certain situations. </p></div>

## What Is a CD Early Withdrawal Penalty? Investors have many options available to save their cash. Some come with high risks while others are fairly secure. Among low-risk investment options is the [certificate of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CD). It allows you to deposit a lump sum and earn a certain amount of interest at the same time. There is no risk to CDs and they are insured by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). But there is a trade-off though: You must keep your money locked up for a certain amount of time to reap the benefits. Making an early withdrawal, though, could result in a loss of interest. But that's not all. There are generally fees for taking your cash out of a CD before the maturity date This is referred to as a CD early withdrawal penalty. But there may be ways to avoid paying this penalty. Here is how they work and what you can do to avoid them. ### Key Takeaways * A certificate of deposit is a savings account that allows investors to deposit a lump sum and earn interest until a certain maturity date. * A CD early withdrawal penalty is a fee you may have to pay if you take money out of a certificate of deposit (CD) before its term ends. * CD early withdrawal penalties can vary widely among financial institutions. * You should check your CD agreement for any early withdrawal penalties, ideally before you purchase that CD, but definitely before you cash it in early. * In some cases, you may be able to have an early withdrawal penalty waived. ## How CD Early Withdrawal Penalties Work When you buy a certificate of deposit from a bank or [credit union](https://www.investopedia.com/terms/c/creditunion.asp), you make an agreement: You promise to leave your money there for a specified period of time and the financial institution agrees to pay you a certain rate of interest in exchange. That rate is typically higher than what you'd receive from a savings or checking account. But the CD is less [liquid](https://www.investopedia.com/terms/l/liquidity.asp) than other types of accounts. There may come a time when you'll need access to the money in your CD. You can generally do that if you do have an urgent need. But keep in mind that this often comes with a penalty if you decide to make an early withdrawal. The amount of that early withdrawal penalty can vary from one [financial institution](https://www.investopedia.com/terms/f/financialinstitution.asp) to another. Federal law stipulates a minimum that banks must charge for early withdrawals within six days of account opening, which is seven days' worth of interest. But it doesn't set a maximum, so your penalty can be considerably higher. The way that most penalties are expressed in most CD agreements is that a bank or other issuer can charge you a portion of the interest you would have earned if you'd left the money in the vehicle until the maturity date. CDs with longer terms tend to have higher early withdrawal penalties. For example: * You might be charged the equivalent of three months' interest for an early withdrawal from a CD that matures in six months or less. * If you have a five-year CD, the penalty might be 12 months' worth of interest. Be sure you should check the agreement before making an investment and definitely do so before withdrawing your money. You may find that it makes more sense to leave the CD untouched and try to come up with cash from some other source. An early withdrawal penalty can mean walking away from a CD with less money than you put in. If you take out a two-year CD, for example, and then withdraw your money within the first year, the penalty will likely exceed the interest your CD earned over the same period. ### An early withdrawal penalty is noted on the Form 1099-INT you receive from your financial institution, showing the interest you earned for the year. The penalty is tax-deductible as an adjustment to income. ## Avoiding CD Early Withdrawal Penalties CDs can be a safe place to put money that you're reasonably certain you won't need for a while—at least until after the CD's term ends. However, you may face an unexpected financial emergency or investment opportunity and have no other choice but to cash in your CD and suffer the consequences. That said, there are several ways to avoid or reduce your CD early withdrawal penalties. ### Liquid Certificates of Deposit (CD) If you haven't purchased the CD yet, consider a [liquid CD](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp) or no-penalty CD. They may also be called breakable CDs. These types of CDs allow you to access your money with lower (or no) early withdrawal penalties. But they do come with a drawback. The downside is that they pay lower rates of interest. If you are looking for a new CD, but have a suspicion you might need the money before its term ends, these alternative CDs could be a practical option. ### Ask for a Waiver If you're already in a CD and need to withdraw your money early, ask your bank or credit union if it will waive the fees. That may seem like a crazy idea—and it might turn out to be if your CD is with a big corporate bank. But if it's with a smaller institution, where they know you, they might let you off the hook. According to the [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp), some financial institutions will also agree in advance to waive any penalty once you have had the CD for a certain period of time. ### Qualifying for a Waiver If you are withdrawing money because of an emergency, you might qualify for a fee [waiver](https://www.investopedia.com/terms/w/waiver.asp). You can usually qualify for a waiver in cases of death, disability, or court-determined incompetence, for example. Banks are permitted to waive penalties in these situations, but they're not required to do so by law. ### Look Elsewhere for Cash You may want to consider withdrawing money from another vehicle if you can. One place you can turn to is your rainy day or [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) if you have one set up. Most people choose to invest money into a savings account for emergencies. These are highly liquid investment vehicles that may not incur any fees. Be sure to check with your financial institution about the rules with savings accounts, such as minimum balance requirements. If you're considering a loan or using your credit card to access some cash, though, you'll have to weigh out the pros and cons. Make sure you do the math and ensure you don't end up spending more on interest than you would if you were to pay the early withdrawal fee for taking your money out of the CD before the [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp). ## How Much Are CD Early Withdrawal Fees? It depends, in part, on the financial institution that issued your CD. Most banks charge at least 90 days' interest for early withdrawals and some charge a lot more. Your CD agreement should spell out how it calculates the fee. ## Can I Avoid CD Early Withdrawal Penalties? Banks sometimes waive CD early withdrawal penalties if you need the money for an emergency. You should phone your bank—and talk to a human—to ask about a waiver. If the bank won't budge, it might be worth looking at other ways of coming up with emergency funds. ## Do All CDs Have Early Withdrawal Penalties? No. There are some types of CDs—liquid CDs and no-penalty CDs, for example—that have no or low withdrawal penalties. The downside is that these CDs generally pay less interest than standard CDs. [Brokered CDs](https://www.investopedia.com/terms/b/brokered-cd.asp), which you can buy from a brokerage firm, are another option; rather than cashing in a brokered CD early, you can try to sell it to another investor on the [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp). ## The Bottom Line If you need to take money out of a certificate of deposit (CD) before its term ends, you will often have to pay an early withdrawal penalty. These penalties can vary widely among financial institutions and are worth checking before you commit to buying a CD. You may also be able to get the fee waived in certain situations.

What Is a CD Early Withdrawal Penalty? Investors have many options available to save their cash. Some come with high risks while others are fairly secure. Among low-risk investment options is the certificate of deposit (CD). It allows you to deposit a lump sum and earn a certain amount of interest at the same time. There is no risk to CDs and they are insured by the Federal Deposit Insurance Corporation (FDIC). But there is a trade-off though: You must keep your money locked up for a certain amount of time to reap the benefits. Making an early withdrawal, though, could result in a loss of interest. But that's not all. There are generally fees for taking your cash out of a CD before the maturity date This is referred to as a CD early withdrawal penalty. But there may be ways to avoid paying this penalty. Here is how they work and what you can do to avoid them. Key Takeaways A certificate of deposit is a savings account that allows investors to deposit a lump sum and earn interest until a certain maturity date.A CD early withdrawal penalty is a fee you may have to pay if you take money out of a certificate of deposit (CD) before its term ends. CD early withdrawal penalties can vary widely among financial institutions.You should check your CD agreement for any early withdrawal penalties, ideally before you purchase that CD, but definitely before you cash it in early. In some cases, you may be able to have an early withdrawal penalty waived. How CD Early Withdrawal Penalties Work When you buy a certificate of deposit from a bank or credit union, you make an agreement: You promise to leave your money there for a specified period of time and the financial institution agrees to pay you a certain rate of interest in exchange. That rate is typically higher than what you'd receive from a savings or checking account. But the CD is less liquid than other types of accounts. There may come a time when you'll need access to the money in your CD. You can generally do that if you do have an urgent need. But keep in mind that this often comes with a penalty if you decide to make an early withdrawal. The amount of that early withdrawal penalty can vary from one financial institution to another. Federal law stipulates a minimum that banks must charge for early withdrawals within six days of account opening, which is seven days' worth of interest. But it doesn't set a maximum, so your penalty can be considerably higher. The way that most penalties are expressed in most CD agreements is that a bank or other issuer can charge you a portion of the interest you would have earned if you'd left the money in the vehicle until the maturity date. CDs with longer terms tend to have higher early withdrawal penalties. For example: You might be charged the equivalent of three months' interest for an early withdrawal from a CD that matures in six months or less.If you have a five-year CD, the penalty might be 12 months' worth of interest. Be sure you should check the agreement before making an investment and definitely do so before withdrawing your money. You may find that it makes more sense to leave the CD untouched and try to come up with cash from some other source. An early withdrawal penalty can mean walking away from a CD with less money than you put in. If you take out a two-year CD, for example, and then withdraw your money within the first year, the penalty will likely exceed the interest your CD earned over the same period. An early withdrawal penalty is noted on the Form 1099-INT you receive from your financial institution, showing the interest you earned for the year. The penalty is tax-deductible as an adjustment to income. Avoiding CD Early Withdrawal Penalties CDs can be a safe place to put money that you're reasonably certain you won't need for a while—at least until after the CD's term ends. However, you may face an unexpected financial emergency or investment opportunity and have no other choice but to cash in your CD and suffer the consequences. That said, there are several ways to avoid or reduce your CD early withdrawal penalties. Liquid Certificates of Deposit (CD) If you haven't purchased the CD yet, consider a liquid CD or no-penalty CD. They may also be called breakable CDs. These types of CDs allow you to access your money with lower (or no) early withdrawal penalties. But they do come with a drawback. The downside is that they pay lower rates of interest. If you are looking for a new CD, but have a suspicion you might need the money before its term ends, these alternative CDs could be a practical option. Ask for a Waiver If you're already in a CD and need to withdraw your money early, ask your bank or credit union if it will waive the fees. That may seem like a crazy idea—and it might turn out to be if your CD is with a big corporate bank. But if it's with a smaller institution, where they know you, they might let you off the hook. According to the Consumer Financial Protection Bureau (CFPB), some financial institutions will also agree in advance to waive any penalty once you have had the CD for a certain period of time. Qualifying for a Waiver If you are withdrawing money because of an emergency, you might qualify for a fee waiver. You can usually qualify for a waiver in cases of death, disability, or court-determined incompetence, for example. Banks are permitted to waive penalties in these situations, but they're not required to do so by law. Look Elsewhere for Cash You may want to consider withdrawing money from another vehicle if you can. One place you can turn to is your rainy day or emergency fund if you have one set up. Most people choose to invest money into a savings account for emergencies. These are highly liquid investment vehicles that may not incur any fees. Be sure to check with your financial institution about the rules with savings accounts, such as minimum balance requirements. If you're considering a loan or using your credit card to access some cash, though, you'll have to weigh out the pros and cons. Make sure you do the math and ensure you don't end up spending more on interest than you would if you were to pay the early withdrawal fee for taking your money out of the CD before the maturity date. How Much Are CD Early Withdrawal Fees? It depends, in part, on the financial institution that issued your CD. Most banks charge at least 90 days' interest for early withdrawals and some charge a lot more. Your CD agreement should spell out how it calculates the fee. Can I Avoid CD Early Withdrawal Penalties? Banks sometimes waive CD early withdrawal penalties if you need the money for an emergency. You should phone your bank—and talk to a human—to ask about a waiver. If the bank won't budge, it might be worth looking at other ways of coming up with emergency funds. Do All CDs Have Early Withdrawal Penalties? No. There are some types of CDs—liquid CDs and no-penalty CDs, for example—that have no or low withdrawal penalties. The downside is that these CDs generally pay less interest than standard CDs. Brokered CDs, which you can buy from a brokerage firm, are another option; rather than cashing in a brokered CD early, you can try to sell it to another investor on the secondary market. The Bottom Line If you need to take money out of a certificate of deposit (CD) before its term ends, you will often have to pay an early withdrawal penalty. These penalties can vary widely among financial institutions and are worth checking before you commit to buying a CD. You may also be able to get the fee waived in certain situations.

https://www.investopedia.com/what-is-an-auto-loan-8598793

What Is an Auto Loan? A Comprehensive Guide to Vehicle Financing

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-auto-loan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Auto Loan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394">auto loan</a> is a type of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-loans-5076025">secured loan</a> for purchasing a car or other vehicle. The vehicle itself serves as collateral for the loan and can be <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-if-i-don-t-pay-my-car-loan-7557588">repossessed</a> by the lender if the borrower <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">defaults</a>. Auto loans today come in many different terms, or lengths, typically ranging from 36 to 72 months, but sometimes up to 96 months. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Auto loans are a common way to buy new or used cars today and are widely available from banks, credit unions, and other sources.</li><li>Your credit score can play a major role in the interest rate you will have to pay.</li><li>Loan rates are also affected by such factors as the size and length of the loan and the value of the car.</li><li>The longer the loan term, the lower your monthly payments may be, but the more you'll pay in total by the time the loan ends.</li><li>Many lenders will pre-qualify you for a loan. That can be helpful in comparing different loan offers side by side.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-auto-loans-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How Auto Loans Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-car-loans-work-5202265">Auto loans work</a> like many other types of loans, with some key differences. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> As mentioned above, auto loans are secured, with the vehicle serving as collateral. That contrasts with many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loans-4689729">personal loans</a>, which are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecuredloan.asp">unsecured</a>. Like personal loans, however, your creditworthiness, as demonstrated by your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a> and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit reports</a>, will play a major role in whether a lender will make a car loan to you and, if so, what interest rate it will charge. The better your credit, the better the deal should be. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Some auto loans require no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/down_payment.asp">down payment</a>, but experts often recommend making a down payment of 10% to 20% of the car's value.<span class="ql-inline-citation" data-cite="6"></span> That will reduce the amount you have to borrow (and eventually pay back) as well as the interest you'll pay over the course of the loan. Some lenders may also offer you a lower interest rate in return for a higher down payment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Auto loans are widely available from banks, credit unions, online lenders, and car dealerships. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">$47,401</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The average cost of a new car in early 2024.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-factors-to-consider-when-getting-an-auto-loan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> Factors to Consider When Getting an Auto Loan </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <li><strong>Credit score.</strong> Your credit score will impact the interest rates that lenders offer. The higher your credit score the more likely you will be to receive loan offers with good interest rates.</li> <li><strong>Down payment.</strong> While you do not necessarily have to make a down payment to qualify for an auto loan, doing so could lower your interest rate, monthly payments, and total loan cost.</li> <li><strong>Terms and conditions.</strong> It is important to understand all of the terms and conditions of your loan, including:</li> <li class="ql-indent-1"><strong>Principal.</strong> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp#">principal</a> is the amount of money you're borrowing. Lenders will use this figure to calculate your interest and fees. In a typical, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/amortized_loan.asp">amortized</a> auto loan, each of your monthly payments will pay off a portion of the principal along with interest.<span class="ql-inline-citation" data-cite="5"></span></li> <li class="ql-indent-1"><strong>APR and interest rate.</strong> The terms <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100314/what-difference-between-interest-rate-and-annual-percentage-rate-apr.asp#">annual percentage rate (APR) and interest rate</a> are often used interchangeably, but there are some important differences. The interest rate is simply the rate you're charged on the principle, while APR also includes any other fees and costs associated with the loan. To fairly compare different loans, use their APRs.<br/></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li class="ql-indent-1"><strong>Loan repayment period.</strong> Lenders may offer you loans with a variety of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/loan-terms-5075341">repayment periods</a>, typically ranging from 36 to 72 months, although shorter and longer repayment terms are sometimes available. In general, the longer the repayment period, the lower your monthly payments will be, but the more you'll pay in total over the life of the loan.</li> <li class="ql-indent-1"><strong>Prepayment penalties.</strong> Some lenders charge <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prepaymentpenalty.asp">prepayment penalties</a> if you pay the loan back before the date it would normally have come to an end.<span class="ql-inline-citation" data-cite="7"></span></li> <li class="ql-indent-1"><strong>Other fees and charges. </strong>Auto loans can have additional fees, such as an <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination-fee.asp">origination fee</a> and a loan processing fee, all of which should be spelled out in the contract.</li> <li class="ql-indent-1"><strong>Total cost of the loan.</strong> This is how much you will have paid for the car when all is said and done, including the down payment, monthly payments, and any fees.<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_20-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_21-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">Auto Loan Calculator </h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You can use an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761">auto loan calculator</a> to determine how your car price, down payment, loan term, and interest rate will impact your monthly payments and overall loan cost.</p></div></div></div> <span class="heading-toc" id="toc-types-of-auto-loans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Types of Auto Loans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> You can get an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394">auto loan</a> for a new car or used car. The interest rate for a used car loan is typically higher than one for a new car. For example, the average APR for used car loans was recently 11.6%, compared to an average of 7.1% for new car loans.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Auto loans are also available for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-refinance-a-car-loan-7368491">refinancing your current car loan</a> or for purchasing a car that is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/012915/car-leases-should-you-take-purchase-option.asp">nearing the end of its lease</a> term. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Regardless of why you are exploring auto loans, you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-pre-approved-for-a-car-loan-7485858">get pre-approved for a car loan</a> to compare your options and choose the best one for you.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-tips-for-getting-the-best-auto-loan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> Tips for Getting the Best Auto Loan </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li><strong>Improve your credit score.</strong> You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-improve-your-credit-score-4590097">improve your credit</a> by making on-time bill payments, lowering your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratio</a>, keeping your oldest accounts open, paying off any delinquent debt, and building out a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/thin-file.asp">thin credit file</a>.</li> <li><strong>Compare loan offers.</strong> Your first loan offer isn't necessarily the best. You can get <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/preapproval.asp">pre-approved</a> for multiple loans and compare your options.</li> <li><strong>Negotiate terms.</strong> You may be able to <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/loan-terms-5075341">negotiate</a> your loan's APR and/or fees, especially if you have strong credit. It is always worth asking lenders for better terms.</li> <li><strong>Understand before signing. </strong>To avoid unpleasant surprises down the road, make sure you understand all of the loan provisions and fees before you sign the loan agreement.<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <span class="heading-toc" id="toc-alternatives-to-an-auto-loan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> Alternatives to an Auto Loan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> While auto loans are the right choice in many cases, there are alternatives you can consider. It is possible to purchase a car with cash, of course, if you can come up with the money. You can also explore the possibility of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-use-a-personal-loan-to-buy-a-car-7643631">buying a car with a personal loan</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-does-leasing-a-car-work-5119459">leasing a vehicle</a> rather than buying one. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Leasing a car involves making monthly payments to a lender in exchange for use of the car for a specific length of time or number of miles. The monthly payments for a lease are typically lower than those for an auto loan, but bear in mind that you don't accumulate any equity in the vehicle.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-what-is-the-minimum-credit-score-required-to-qualify-for-an-auto-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Minimum Credit Score Required to Qualify for an Auto Loan?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While there is no official minimum credit score to qualify for an auto loan, you will likely need a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-credit-score-do-you-need-to-buy-a-car-5181034">credit score of 661 or higher</a> to obtain a loan with a good interest rate.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-can-i-get-an-auto-loan-with-no-down-payment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Get an Auto Loan With No Down Payment?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You do not need to make a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/company-insights/083016/heres-how-get-car-no-down-payment.asp">down payment</a> to qualify for many auto loans, but you can expect the interest rate to be higher if you decide to finance the entire purchase.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-are-there-any-penalties-for-paying-off-an-auto-loan-early"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Any Penalties for Paying Off an Auto Loan Early?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-early-loan-payoff-7505190">pay off your car loan early</a>, your lender may charge a prepayment penalty. These penalties are typically calculated as a percentage of your loan amount.<span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_43-0"><span class="heading-toc" id="toc-what-is-gap-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Gap Insurance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gapinsurance.asp">Gap insurance</a> is a special type of auto insurance that will make up the gap between your car's value and your loan balance if you owe more than the car is worth. It can be useful in the event of an accident in which your car is totaled.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-when-do-you-receive-the-title-for-your-vehicle"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Do You Receive the Title for Your Vehicle?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Your lender will <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-a-title-for-a-car-5116241">hold your car's title</a> until you have fully paid off your auto loan. After that, the lender will typically mail the vehicle title to you.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Given the high prices of cars today, many people need to take out an auto loan to finance the purchase. Before you apply for a loan, consider whether you can afford the monthly payments and how they will affect your overall budget. Be sure to compare loan offers from multiple lenders and don't hesitate to try to negotiate a better deal.<br> </br></p></div>

## What Is an Auto Loan? An [auto loan](https://www.investopedia.com/best-auto-loan-rates-4846394) is a type of [secured loan](https://www.investopedia.com/secured-loans-5076025) for purchasing a car or other vehicle. The vehicle itself serves as collateral for the loan and can be [repossessed](https://www.investopedia.com/what-happens-if-i-don-t-pay-my-car-loan-7557588) by the lender if the borrower [defaults](https://www.investopedia.com/terms/d/default2.asp). Auto loans today come in many different terms, or lengths, typically ranging from 36 to 72 months, but sometimes up to 96 months. ### Key Takeaways * Auto loans are a common way to buy new or used cars today and are widely available from banks, credit unions, and other sources. * Your credit score can play a major role in the interest rate you will have to pay. * Loan rates are also affected by such factors as the size and length of the loan and the value of the car. * The longer the loan term, the lower your monthly payments may be, but the more you'll pay in total by the time the loan ends. * Many lenders will pre-qualify you for a loan. That can be helpful in comparing different loan offers side by side. ## How Auto Loans Work [Auto loans work](https://www.investopedia.com/how-car-loans-work-5202265) like many other types of loans, with some key differences. As mentioned above, auto loans are secured, with the vehicle serving as collateral. That contrasts with many [personal loans](https://www.investopedia.com/personal-loans-4689729), which are [unsecured](https://www.investopedia.com/terms/u/unsecuredloan.asp). Like personal loans, however, your creditworthiness, as demonstrated by your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) and [credit reports](https://www.investopedia.com/terms/c/creditreport.asp), will play a major role in whether a lender will make a car loan to you and, if so, what interest rate it will charge. The better your credit, the better the deal should be. Some auto loans require no [down payment](https://www.investopedia.com/terms/d/down_payment.asp), but experts often recommend making a down payment of 10% to 20% of the car's value. That will reduce the amount you have to borrow (and eventually pay back) as well as the interest you'll pay over the course of the loan. Some lenders may also offer you a lower interest rate in return for a higher down payment. Auto loans are widely available from banks, credit unions, online lenders, and car dealerships. ### $47,401 The average cost of a new car in early 2024. ## Factors to Consider When Getting an Auto Loan * **Credit score.** Your credit score will impact the interest rates that lenders offer. The higher your credit score the more likely you will be to receive loan offers with good interest rates. * **Down payment.** While you do not necessarily have to make a down payment to qualify for an auto loan, doing so could lower your interest rate, monthly payments, and total loan cost. * **Terms and conditions.** It is important to understand all of the terms and conditions of your loan, including: * **Principal.** The [principal](https://www.investopedia.com/terms/p/principal.asp#) is the amount of money you're borrowing. Lenders will use this figure to calculate your interest and fees. In a typical, [amortized](https://www.investopedia.com/terms/a/amortized_loan.asp) auto loan, each of your monthly payments will pay off a portion of the principal along with interest. * **APR and interest rate.** The terms [annual percentage rate (APR) and interest rate](https://www.investopedia.com/ask/answers/100314/what-difference-between-interest-rate-and-annual-percentage-rate-apr.asp#) are often used interchangeably, but there are some important differences. The interest rate is simply the rate you're charged on the principle, while APR also includes any other fees and costs associated with the loan. To fairly compare different loans, use their APRs. * **Loan repayment period.** Lenders may offer you loans with a variety of [repayment periods](https://www.investopedia.com/loan-terms-5075341), typically ranging from 36 to 72 months, although shorter and longer repayment terms are sometimes available. In general, the longer the repayment period, the lower your monthly payments will be, but the more you'll pay in total over the life of the loan. * **Prepayment penalties.** Some lenders charge [prepayment penalties](https://www.investopedia.com/terms/p/prepaymentpenalty.asp) if you pay the loan back before the date it would normally have come to an end. * **Other fees and charges.** Auto loans can have additional fees, such as an [origination fee](https://www.investopedia.com/terms/o/origination-fee.asp) and a loan processing fee, all of which should be spelled out in the contract. * **Total cost of the loan.** This is how much you will have paid for the car when all is said and done, including the down payment, monthly payments, and any fees. ### Auto Loan Calculator You can use an [auto loan calculator](https://www.investopedia.com/car-loan-calculator-5084761) to determine how your car price, down payment, loan term, and interest rate will impact your monthly payments and overall loan cost. ## Types of Auto Loans You can get an [auto loan](https://www.investopedia.com/best-auto-loan-rates-4846394) for a new car or used car. The interest rate for a used car loan is typically higher than one for a new car. For example, the average APR for used car loans was recently 11.6%, compared to an average of 7.1% for new car loans. Auto loans are also available for [refinancing your current car loan](https://www.investopedia.com/how-to-refinance-a-car-loan-7368491) or for purchasing a car that is [nearing the end of its lease](https://www.investopedia.com/articles/personal-finance/012915/car-leases-should-you-take-purchase-option.asp) term. Regardless of why you are exploring auto loans, you can [get pre-approved for a car loan](https://www.investopedia.com/how-to-get-pre-approved-for-a-car-loan-7485858) to compare your options and choose the best one for you. ## Tips for Getting the Best Auto Loan * **Improve your credit score.** You can [improve your credit](https://www.investopedia.com/how-to-improve-your-credit-score-4590097) by making on-time bill payments, lowering your [credit utilization ratio](https://www.investopedia.com/terms/c/credit-utilization-rate.asp), keeping your oldest accounts open, paying off any delinquent debt, and building out a [thin credit file](https://www.investopedia.com/terms/t/thin-file.asp). * **Compare loan offers.** Your first loan offer isn't necessarily the best. You can get [pre-approved](https://www.investopedia.com/terms/p/preapproval.asp) for multiple loans and compare your options. * **Negotiate terms.** You may be able to [negotiate](https://www.investopedia.com/loan-terms-5075341) your loan's APR and/or fees, especially if you have strong credit. It is always worth asking lenders for better terms. * **Understand before signing.** To avoid unpleasant surprises down the road, make sure you understand all of the loan provisions and fees before you sign the loan agreement. ## Alternatives to an Auto Loan While auto loans are the right choice in many cases, there are alternatives you can consider. It is possible to purchase a car with cash, of course, if you can come up with the money. You can also explore the possibility of [buying a car with a personal loan](https://www.investopedia.com/how-to-use-a-personal-loan-to-buy-a-car-7643631) or [leasing a vehicle](https://www.investopedia.com/how-does-leasing-a-car-work-5119459) rather than buying one. Leasing a car involves making monthly payments to a lender in exchange for use of the car for a specific length of time or number of miles. The monthly payments for a lease are typically lower than those for an auto loan, but bear in mind that you don't accumulate any equity in the vehicle. ## What Is the Minimum Credit Score Required to Qualify for an Auto Loan? While there is no official minimum credit score to qualify for an auto loan, you will likely need a [credit score of 661 or higher](https://www.investopedia.com/what-credit-score-do-you-need-to-buy-a-car-5181034) to obtain a loan with a good interest rate. ## Can I Get an Auto Loan With No Down Payment? You do not need to make a [down payment](https://www.investopedia.com/articles/company-insights/083016/heres-how-get-car-no-down-payment.asp) to qualify for many auto loans, but you can expect the interest rate to be higher if you decide to finance the entire purchase. ## Are There Any Penalties for Paying Off an Auto Loan Early? If you [pay off your car loan early](https://www.investopedia.com/what-happens-early-loan-payoff-7505190), your lender may charge a prepayment penalty. These penalties are typically calculated as a percentage of your loan amount. ## What Is Gap Insurance? [Gap insurance](https://www.investopedia.com/terms/g/gapinsurance.asp) is a special type of auto insurance that will make up the gap between your car's value and your loan balance if you owe more than the car is worth. It can be useful in the event of an accident in which your car is totaled. ## When Do You Receive the Title for Your Vehicle? Your lender will [hold your car's title](https://www.investopedia.com/how-to-get-a-title-for-a-car-5116241) until you have fully paid off your auto loan. After that, the lender will typically mail the vehicle title to you. ## The Bottom Line Given the high prices of cars today, many people need to take out an auto loan to finance the purchase. Before you apply for a loan, consider whether you can afford the monthly payments and how they will affect your overall budget. Be sure to compare loan offers from multiple lenders and don't hesitate to try to negotiate a better deal.

What Is an Auto Loan? An auto loan is a type of secured loan for purchasing a car or other vehicle. The vehicle itself serves as collateral for the loan and can be repossessed by the lender if the borrower defaults. Auto loans today come in many different terms, or lengths, typically ranging from 36 to 72 months, but sometimes up to 96 months. Key Takeaways Auto loans are a common way to buy new or used cars today and are widely available from banks, credit unions, and other sources.Your credit score can play a major role in the interest rate you will have to pay.Loan rates are also affected by such factors as the size and length of the loan and the value of the car.The longer the loan term, the lower your monthly payments may be, but the more you'll pay in total by the time the loan ends.Many lenders will pre-qualify you for a loan. That can be helpful in comparing different loan offers side by side. How Auto Loans Work Auto loans work like many other types of loans, with some key differences. As mentioned above, auto loans are secured, with the vehicle serving as collateral. That contrasts with many personal loans, which are unsecured. Like personal loans, however, your creditworthiness, as demonstrated by your credit score and credit reports, will play a major role in whether a lender will make a car loan to you and, if so, what interest rate it will charge. The better your credit, the better the deal should be. Some auto loans require no down payment, but experts often recommend making a down payment of 10% to 20% of the car's value. That will reduce the amount you have to borrow (and eventually pay back) as well as the interest you'll pay over the course of the loan. Some lenders may also offer you a lower interest rate in return for a higher down payment. Auto loans are widely available from banks, credit unions, online lenders, and car dealerships. $47,401 The average cost of a new car in early 2024. Factors to Consider When Getting an Auto Loan Credit score. Your credit score will impact the interest rates that lenders offer. The higher your credit score the more likely you will be to receive loan offers with good interest rates. Down payment. While you do not necessarily have to make a down payment to qualify for an auto loan, doing so could lower your interest rate, monthly payments, and total loan cost. Terms and conditions. It is important to understand all of the terms and conditions of your loan, including: Principal. The principal is the amount of money you're borrowing. Lenders will use this figure to calculate your interest and fees. In a typical, amortized auto loan, each of your monthly payments will pay off a portion of the principal along with interest. APR and interest rate. The terms annual percentage rate (APR) and interest rate are often used interchangeably, but there are some important differences. The interest rate is simply the rate you're charged on the principle, while APR also includes any other fees and costs associated with the loan. To fairly compare different loans, use their APRs. Loan repayment period. Lenders may offer you loans with a variety of repayment periods, typically ranging from 36 to 72 months, although shorter and longer repayment terms are sometimes available. In general, the longer the repayment period, the lower your monthly payments will be, but the more you'll pay in total over the life of the loan. Prepayment penalties. Some lenders charge prepayment penalties if you pay the loan back before the date it would normally have come to an end. Other fees and charges. Auto loans can have additional fees, such as an origination fee and a loan processing fee, all of which should be spelled out in the contract. Total cost of the loan. This is how much you will have paid for the car when all is said and done, including the down payment, monthly payments, and any fees. Auto Loan Calculator You can use an auto loan calculator to determine how your car price, down payment, loan term, and interest rate will impact your monthly payments and overall loan cost. Types of Auto Loans You can get an auto loan for a new car or used car. The interest rate for a used car loan is typically higher than one for a new car. For example, the average APR for used car loans was recently 11.6%, compared to an average of 7.1% for new car loans. Auto loans are also available for refinancing your current car loan or for purchasing a car that is nearing the end of its lease term. Regardless of why you are exploring auto loans, you can get pre-approved for a car loan to compare your options and choose the best one for you. Tips for Getting the Best Auto Loan Improve your credit score. You can improve your credit by making on-time bill payments, lowering your credit utilization ratio, keeping your oldest accounts open, paying off any delinquent debt, and building out a thin credit file. Compare loan offers. Your first loan offer isn't necessarily the best. You can get pre-approved for multiple loans and compare your options. Negotiate terms. You may be able to negotiate your loan's APR and/or fees, especially if you have strong credit. It is always worth asking lenders for better terms. Understand before signing. To avoid unpleasant surprises down the road, make sure you understand all of the loan provisions and fees before you sign the loan agreement. Alternatives to an Auto Loan While auto loans are the right choice in many cases, there are alternatives you can consider. It is possible to purchase a car with cash, of course, if you can come up with the money. You can also explore the possibility of buying a car with a personal loan or leasing a vehicle rather than buying one. Leasing a car involves making monthly payments to a lender in exchange for use of the car for a specific length of time or number of miles. The monthly payments for a lease are typically lower than those for an auto loan, but bear in mind that you don't accumulate any equity in the vehicle. What Is the Minimum Credit Score Required to Qualify for an Auto Loan? While there is no official minimum credit score to qualify for an auto loan, you will likely need a credit score of 661 or higher to obtain a loan with a good interest rate. Can I Get an Auto Loan With No Down Payment? You do not need to make a down payment to qualify for many auto loans, but you can expect the interest rate to be higher if you decide to finance the entire purchase. Are There Any Penalties for Paying Off an Auto Loan Early? If you pay off your car loan early, your lender may charge a prepayment penalty. These penalties are typically calculated as a percentage of your loan amount. What Is Gap Insurance? Gap insurance is a special type of auto insurance that will make up the gap between your car's value and your loan balance if you owe more than the car is worth. It can be useful in the event of an accident in which your car is totaled. When Do You Receive the Title for Your Vehicle? Your lender will hold your car's title until you have fully paid off your auto loan. After that, the lender will typically mail the vehicle title to you. The Bottom Line Given the high prices of cars today, many people need to take out an auto loan to finance the purchase. Before you apply for a loan, consider whether you can afford the monthly payments and how they will affect your overall budget. Be sure to compare loan offers from multiple lenders and don't hesitate to try to negotiate a better deal.

https://www.investopedia.com/the-express-podcast-episode-180-8619953

A New Wave of Optimism Reawakens the Bulls

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block megaphone" id="mntl-sc-block_1-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://playlist.megaphone.fm/?e=MERE6504211401" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="A New Wave of Optimism Reawakens the Bulls"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <strong>Subscribe Now</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197" rel="nofollow">Apple Podcasts</a> / <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9" rel="nofollow">Spotify</a> / <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver">Google Podcasts</a> / <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://player.fm/series/2836180">PlayerFM</a> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Ryan Detrick, chief market strategist at Carson Group, climbs back aboard The Express to break down the recent "Everything Rally," and why history and recent economic data suggest that this trend in motion should stay in motion. Plus, companies are piling on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> and the share <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp">buybacks</a> to entice investors and jolt their earnings. Investors are scooping up those benefits and are as confident in future returns as they've been in a long time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <strong>Links for Show Notes: </strong><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm">https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/individual-investors-optimism-grows-albeit-cautiously-as-stocks-back-off-highs-8611333">https://www.investopedia.com/individual-investors-optimism-grows-albeit-cautiously-as-stocks-back-off-highs-8611333</a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/02/041702.asp">https://www.investopedia.com/articles/02/041702.asp</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.janushenderson.com/en-us/advisor/insights/global-dividend-index/">https://www.janushenderson.com/en-us/advisor/insights/global-dividend-index/</a></li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://www.spglobal.com/spdji/en/corporate-news/article/sp-500-q4-2023-buybacks-increase-180-compared-to-q3/" rel="nofollow">https://www.spglobal.com/spdji/en/corporate-news/article/sp-500-q4-2023-buybacks-increase-180-compared-to-q3/</a></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.carsongroup.com/insights/">https://www.carsongroup.com/insights/</a></li> <li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://www.carsongroup.com/insights/blog/why-high-interest-rates-havent-hurt-the-consumer-and-maybe-even-helped/">https://www.carsongroup.com/insights/blog/why-high-interest-rates-havent-hurt-the-consumer-and-maybe-even-helped/</a></li> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/antitrust.asp">https://www.investopedia.com/terms/a/antitrust.asp</a></li> <li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sherman-antiturst-act.asp">https://www.investopedia.com/terms/s/sherman-antiturst-act.asp</a></li> <li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-to-expect-in-the-markets-this-week-march-25-2024-8613096">https://www.investopedia.com/what-to-expect-in-the-markets-this-week-march-25-2024-8613096</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <strong>Do you have a news tip for Investopedia reporters?</strong> Please email us at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="mailto:tips@investopedia.com">tips@investopedia.com</a> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

**Subscribe Now**: [Apple Podcasts](https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197) / [Spotify](https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9) / [Google Podcasts](https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver) / [PlayerFM](https://player.fm/series/2836180) Ryan Detrick, chief market strategist at Carson Group, climbs back aboard The Express to break down the recent "Everything Rally," and why history and recent economic data suggest that this trend in motion should stay in motion. Plus, companies are piling on the [dividends](https://www.investopedia.com/terms/d/dividend.asp) and the share [buybacks](https://www.investopedia.com/terms/b/buyback.asp) to entice investors and jolt their earnings. Investors are scooping up those benefits and are as confident in future returns as they've been in a long time. **Links for Show Notes:** * <https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm> * <https://www.investopedia.com/individual-investors-optimism-grows-albeit-cautiously-as-stocks-back-off-highs-8611333> * <https://www.investopedia.com/articles/02/041702.asp> * <https://www.janushenderson.com/en-us/advisor/insights/global-dividend-index/> * <https://www.spglobal.com/spdji/en/corporate-news/article/sp-500-q4-2023-buybacks-increase-180-compared-to-q3/> * <https://www.carsongroup.com/insights/> * <https://www.carsongroup.com/insights/blog/why-high-interest-rates-havent-hurt-the-consumer-and-maybe-even-helped/> * <https://www.investopedia.com/terms/a/antitrust.asp> * <https://www.investopedia.com/terms/s/sherman-antiturst-act.asp> * <https://www.investopedia.com/what-to-expect-in-the-markets-this-week-march-25-2024-8613096> **Do you have a news tip for Investopedia reporters?** Please email us at [tips@investopedia.com](mailto:tips@investopedia.com) Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM Ryan Detrick, chief market strategist at Carson Group, climbs back aboard The Express to break down the recent "Everything Rally," and why history and recent economic data suggest that this trend in motion should stay in motion. Plus, companies are piling on the dividends and the share buybacks to entice investors and jolt their earnings. Investors are scooping up those benefits and are as confident in future returns as they've been in a long time. Links for Show Notes: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm https://www.investopedia.com/individual-investors-optimism-grows-albeit-cautiously-as-stocks-back-off-highs-8611333 https://www.investopedia.com/articles/02/041702.asp https://www.janushenderson.com/en-us/advisor/insights/global-dividend-index/ https://www.spglobal.com/spdji/en/corporate-news/article/sp-500-q4-2023-buybacks-increase-180-compared-to-q3/ https://www.carsongroup.com/insights/ https://www.carsongroup.com/insights/blog/why-high-interest-rates-havent-hurt-the-consumer-and-maybe-even-helped/ https://www.investopedia.com/terms/a/antitrust.asp https://www.investopedia.com/terms/s/sherman-antiturst-act.asp https://www.investopedia.com/what-to-expect-in-the-markets-this-week-march-25-2024-8613096 Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/terms/p/post-trade-processing.asp

Post-Trade Processing: Definition, How It Works, and Examples

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-post-trade-processing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Post-Trade Processing? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Post-trade processing occurs after a trade is complete. At this point, the buyer and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seller.asp">seller</a> compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a> and cash. Post-trade processing is especially important in markets that are not standardized, such as the over-the-counter (OTC) markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Post-trade processing occurs after a trade is complete.</li><li>At this point, the buyer and the seller compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of securities and cash.</li><li>Post-trade processing will usually include a settlement period and involve a clearing process.</li><li>OTC trades that do not rely on centralized clearinghouses will need to settle their own trades, which exposes counterparty risk and settlement risk.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-post-trade-processing-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How Post-Trade Processing Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Post-trade processing is important in that it verifies the details of a transaction. Markets and prices move fast; <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transactions</a> are executed quickly, often instantaneously. Many securities <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trade.asp">trades</a> are done over the phone; the ability for mistakes is inherent, despite traders’ skill. Increasingly trades are executed at high frequency by computers only. The chance for small mistakes to compound remains high. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Post-trade processing allows the buyer and seller of securities to root out and rectify these errors. In addition to matching the details of the buy and sell orders, post-trade processing includes shifting records of ownership and authorizing payment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-trade-clearing-and-settlement"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Trade Clearing and Settlement </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> After a trade is executed, the transaction enters what is known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlement_period.asp">settlement period</a>. During settlement, the buyer must make payment for the securities they purchased while the seller must deliver the security that was acquired. Depending on the type of security, settlement dates will vary. As an example of how settlement dates work, let's say that an investor buys shares of Amazon (AMZN) on Monday, Jan. 28, 2019. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp">broker</a> will debit the investor's account for the total cost of the order immediately after its filled, but the status as a shareholder of Amazon will not be settled in the company's record books for the investor until Wednesday, Jan. 30. At that time, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investor</a> would become a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp">shareholder</a> of record. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Once the trade has settled, and the funds in any sale of stock or another type of security have been credited to your account, the investor may choose to withdraw the funds, reinvest in new security or hold the amount in cash within the account. For those looking to cash out some of the profits (or what's left from a loss), check to see if your broker offers transfers to your bank account using the Automated Clearing House (ACH) or by using a wire transfer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">T+2</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The settlement period for post-trade processing of stocks and several other exchange-traded assets.  In March 2017, the SEC shortened the settlement period from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tplus1.asp">T+3 to T+2 days </a>to reflect improvements in technology, increased trading volumes and changes in investment products and the trading landscape.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearing.asp">Clearing</a> is the process of reconciling purchases and sales of various options, futures, or securities, as well as the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer. Non-cleared trades can result in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlementrisk.asp">settlement risk</a>, and if trades do not clear accounting errors will arise where real money can be lost. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outtrade.asp">out trade</a> is a trade that cannot be placed because it was received by an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchange.asp">exchange</a> with conflicting information. The associated clearinghouse cannot settle the trade because the data submitted by parties on both sides of the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dk.asp">transaction is inconsistent or contradictory</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-examples-of-post-trade-processing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Examples of Post-Trade Processing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> On the NYSE Bonds Platform, following trade completions, all Depository Trust &amp; Clearing Corporation (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dtcc.asp">DTCC</a>) / National Securities Clearing Corporation (NSCC) Regional Interface Organization (RIO) eligible bond trades are sent to NSCC in order to match trade details of both buyers and respective sellers. Details are transmitted through the RIO.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Post-trade services have recently come to the forefront as a means for financial firms to diversify their revenue streams. Due to a combination of new regulations, the standardization of derivatives, and increased need for more complex processing measures, due to the growth of alternative assets, post-trade services are an area in which some firms have a chance to outstrip competitors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_27-0"><span class="heading-toc" id="toc-is-anything-being-done-to-shorten-post-trade-processing"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Anything Being Done to Shorten Post-Trade Processing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. In Spring of 2022, the SEC announced a new proposal to shorten the clearing time for most stock trades to T+1 and solicit comment on further shortening it to same-day settlement, or T+0. If approved, the proposal anticipates an effective date around Q1 2024.<span class="ql-inline-citation" data-cite="3"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-why-does-the-trade-date-differ-from-the-settlement-date-for-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Does the Trade Date Differ From the Settlement Date for Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you buy or sell shares of stock or other securities, the settlement date will often be between one and three days after the actual trade date. This is because it takes time for the post-trade processing, clearing, and settlement of the trade. Much of this has to do with older systems still in place to reconcile asset ownership and payment between exchanges, clearing firms, and brokerages.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-what-kinds-of-securities-currently-clear-t2-t1"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Kinds of Securities Currently Clear T+2? T+1?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Most stocks, ETFs, corporate bonds, municipal bonds, and spot FX trades settle T+2. Listed options and government securities clear T+1. Certificates of deposit (CDs) and commercial paper settle T+0.</p></div> </div></div>

## What Is Post-Trade Processing? Post-trade processing occurs after a trade is complete. At this point, the buyer and the [seller](https://www.investopedia.com/terms/s/seller.asp) compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of [securities](https://www.investopedia.com/terms/s/security.asp) and cash. Post-trade processing is especially important in markets that are not standardized, such as the over-the-counter (OTC) markets. ### Key Takeaways * Post-trade processing occurs after a trade is complete. * At this point, the buyer and the seller compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of securities and cash. * Post-trade processing will usually include a settlement period and involve a clearing process. * OTC trades that do not rely on centralized clearinghouses will need to settle their own trades, which exposes counterparty risk and settlement risk. ## How Post-Trade Processing Works Post-trade processing is important in that it verifies the details of a transaction. Markets and prices move fast; [transactions](https://www.investopedia.com/terms/t/transaction.asp) are executed quickly, often instantaneously. Many securities [trades](https://www.investopedia.com/terms/t/trade.asp) are done over the phone; the ability for mistakes is inherent, despite traders’ skill. Increasingly trades are executed at high frequency by computers only. The chance for small mistakes to compound remains high. Post-trade processing allows the buyer and seller of securities to root out and rectify these errors. In addition to matching the details of the buy and sell orders, post-trade processing includes shifting records of ownership and authorizing payment. ## Trade Clearing and Settlement After a trade is executed, the transaction enters what is known as the [settlement period](https://www.investopedia.com/terms/s/settlement_period.asp). During settlement, the buyer must make payment for the securities they purchased while the seller must deliver the security that was acquired. Depending on the type of security, settlement dates will vary. As an example of how settlement dates work, let's say that an investor buys shares of Amazon (AMZN) on Monday, Jan. 28, 2019. The [broker](https://www.investopedia.com/terms/b/broker.asp) will debit the investor's account for the total cost of the order immediately after its filled, but the status as a shareholder of Amazon will not be settled in the company's record books for the investor until Wednesday, Jan. 30. At that time, the [investor](https://www.investopedia.com/terms/i/investor.asp) would become a [shareholder](https://www.investopedia.com/terms/s/shareholder.asp) of record. Once the trade has settled, and the funds in any sale of stock or another type of security have been credited to your account, the investor may choose to withdraw the funds, reinvest in new security or hold the amount in cash within the account. For those looking to cash out some of the profits (or what's left from a loss), check to see if your broker offers transfers to your bank account using the Automated Clearing House (ACH) or by using a wire transfer. ### T+2 The settlement period for post-trade processing of stocks and several other exchange-traded assets.  In March 2017, the SEC shortened the settlement period from [T+3 to T+2 days](https://www.investopedia.com/terms/t/tplus1.asp) to reflect improvements in technology, increased trading volumes and changes in investment products and the trading landscape. [Clearing](https://www.investopedia.com/terms/c/clearing.asp) is the process of reconciling purchases and sales of various options, futures, or securities, as well as the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer. Non-cleared trades can result in [settlement risk](https://www.investopedia.com/terms/s/settlementrisk.asp), and if trades do not clear accounting errors will arise where real money can be lost. An [out trade](https://www.investopedia.com/terms/o/outtrade.asp) is a trade that cannot be placed because it was received by an [exchange](https://www.investopedia.com/terms/e/exchange.asp) with conflicting information. The associated clearinghouse cannot settle the trade because the data submitted by parties on both sides of the [transaction is inconsistent or contradictory](https://www.investopedia.com/terms/d/dk.asp). ## Examples of Post-Trade Processing On the NYSE Bonds Platform, following trade completions, all Depository Trust & Clearing Corporation ([DTCC](https://www.investopedia.com/terms/d/dtcc.asp)) / National Securities Clearing Corporation (NSCC) Regional Interface Organization (RIO) eligible bond trades are sent to NSCC in order to match trade details of both buyers and respective sellers. Details are transmitted through the RIO. Post-trade services have recently come to the forefront as a means for financial firms to diversify their revenue streams. Due to a combination of new regulations, the standardization of derivatives, and increased need for more complex processing measures, due to the growth of alternative assets, post-trade services are an area in which some firms have a chance to outstrip competitors. ## Is Anything Being Done to Shorten Post-Trade Processing? Yes. In Spring of 2022, the SEC announced a new proposal to shorten the clearing time for most stock trades to T+1 and solicit comment on further shortening it to same-day settlement, or T+0. If approved, the proposal anticipates an effective date around Q1 2024. ## Why Does the Trade Date Differ From the Settlement Date for Stocks? If you buy or sell shares of stock or other securities, the settlement date will often be between one and three days after the actual trade date. This is because it takes time for the post-trade processing, clearing, and settlement of the trade. Much of this has to do with older systems still in place to reconcile asset ownership and payment between exchanges, clearing firms, and brokerages. ## What Kinds of Securities Currently Clear T+2? T+1? Most stocks, ETFs, corporate bonds, municipal bonds, and spot FX trades settle T+2. Listed options and government securities clear T+1. Certificates of deposit (CDs) and commercial paper settle T+0.

What Is Post-Trade Processing? Post-trade processing occurs after a trade is complete. At this point, the buyer and the seller compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of securities and cash. Post-trade processing is especially important in markets that are not standardized, such as the over-the-counter (OTC) markets. Key Takeaways Post-trade processing occurs after a trade is complete.At this point, the buyer and the seller compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of securities and cash.Post-trade processing will usually include a settlement period and involve a clearing process.OTC trades that do not rely on centralized clearinghouses will need to settle their own trades, which exposes counterparty risk and settlement risk. How Post-Trade Processing Works Post-trade processing is important in that it verifies the details of a transaction. Markets and prices move fast; transactions are executed quickly, often instantaneously. Many securities trades are done over the phone; the ability for mistakes is inherent, despite traders’ skill. Increasingly trades are executed at high frequency by computers only. The chance for small mistakes to compound remains high. Post-trade processing allows the buyer and seller of securities to root out and rectify these errors. In addition to matching the details of the buy and sell orders, post-trade processing includes shifting records of ownership and authorizing payment. Trade Clearing and Settlement After a trade is executed, the transaction enters what is known as the settlement period. During settlement, the buyer must make payment for the securities they purchased while the seller must deliver the security that was acquired. Depending on the type of security, settlement dates will vary. As an example of how settlement dates work, let's say that an investor buys shares of Amazon (AMZN) on Monday, Jan. 28, 2019. The broker will debit the investor's account for the total cost of the order immediately after its filled, but the status as a shareholder of Amazon will not be settled in the company's record books for the investor until Wednesday, Jan. 30. At that time, the investor would become a shareholder of record. Once the trade has settled, and the funds in any sale of stock or another type of security have been credited to your account, the investor may choose to withdraw the funds, reinvest in new security or hold the amount in cash within the account. For those looking to cash out some of the profits (or what's left from a loss), check to see if your broker offers transfers to your bank account using the Automated Clearing House (ACH) or by using a wire transfer. T+2 The settlement period for post-trade processing of stocks and several other exchange-traded assets.  In March 2017, the SEC shortened the settlement period from T+3 to T+2 days to reflect improvements in technology, increased trading volumes and changes in investment products and the trading landscape. Clearing is the process of reconciling purchases and sales of various options, futures, or securities, as well as the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer. Non-cleared trades can result in settlement risk, and if trades do not clear accounting errors will arise where real money can be lost. An out trade is a trade that cannot be placed because it was received by an exchange with conflicting information. The associated clearinghouse cannot settle the trade because the data submitted by parties on both sides of the transaction is inconsistent or contradictory. Examples of Post-Trade Processing On the NYSE Bonds Platform, following trade completions, all Depository Trust & Clearing Corporation (DTCC) / National Securities Clearing Corporation (NSCC) Regional Interface Organization (RIO) eligible bond trades are sent to NSCC in order to match trade details of both buyers and respective sellers. Details are transmitted through the RIO. Post-trade services have recently come to the forefront as a means for financial firms to diversify their revenue streams. Due to a combination of new regulations, the standardization of derivatives, and increased need for more complex processing measures, due to the growth of alternative assets, post-trade services are an area in which some firms have a chance to outstrip competitors. Is Anything Being Done to Shorten Post-Trade Processing? Yes. In Spring of 2022, the SEC announced a new proposal to shorten the clearing time for most stock trades to T+1 and solicit comment on further shortening it to same-day settlement, or T+0. If approved, the proposal anticipates an effective date around Q1 2024. Why Does the Trade Date Differ From the Settlement Date for Stocks? If you buy or sell shares of stock or other securities, the settlement date will often be between one and three days after the actual trade date. This is because it takes time for the post-trade processing, clearing, and settlement of the trade. Much of this has to do with older systems still in place to reconcile asset ownership and payment between exchanges, clearing firms, and brokerages. What Kinds of Securities Currently Clear T+2? T+1? Most stocks, ETFs, corporate bonds, municipal bonds, and spot FX trades settle T+2. Listed options and government securities clear T+1. Certificates of deposit (CDs) and commercial paper settle T+0.

https://www.investopedia.com/articles/financial-advisors/021716/savings-bonds-vs-cds-which-better-2016.asp

U.S. Savings Bonds vs. CDs: What’s the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> U.S. savings bonds and certificates of deposit (CDs) are both savings vehicles that offer a modest profit for a high degree of safety. In both cases, the investor is lending some cash in return for the payment of a set amount of interest. Both are easy, convenient ways to invest without <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/06/firstbroker.asp">going through a broker</a>. Your savings will be safe and earn interest. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> There are differences, though, and the biggest comes down to time. U.S. savings bonds are designed to be a long-term investment, while CDs can be found with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturities</a> as short as one month. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>If you’re investing for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/longterm.asp">long term</a>, a U.S. savings bond is a good choice.</li> <li>The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases.</li> <li>If you’re saving for the short term, a CD offers greater flexibility than a savings bond.</li> </ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_7-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Savings Bonds vs. CDs" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/965ok6p_lux4hv_gCa1-k_mnsKc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/savings-bonds-vs-cds-which-better-2016.asp_V1-4754e38f62f64fc7bb19a06de61c8817.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/965ok6p_lux4hv_gCa1-k_mnsKc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/savings-bonds-vs-cds-which-better-2016.asp_V1-4754e38f62f64fc7bb19a06de61c8817.png" data-srcset="https://www.investopedia.com/thmb/_NxJolCg_Pv_xG8FkJy1MN5QkKM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/savings-bonds-vs-cds-which-better-2016.asp_V1-4754e38f62f64fc7bb19a06de61c8817.png 750w" data-tracking-container="true" height="4000" id="mntl-sc-block-image_1-0" width="6000"/> <noscript> <img alt="Savings Bonds vs. CDs" class="img--noscript universal-image__image" height="4000" sizes="750px" src="https://www.investopedia.com/thmb/965ok6p_lux4hv_gCa1-k_mnsKc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/savings-bonds-vs-cds-which-better-2016.asp_V1-4754e38f62f64fc7bb19a06de61c8817.png" srcset="https://www.investopedia.com/thmb/_NxJolCg_Pv_xG8FkJy1MN5QkKM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/savings-bonds-vs-cds-which-better-2016.asp_V1-4754e38f62f64fc7bb19a06de61c8817.png 750w" width="6000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Hilary Allison</p></span> </figcaption></figure> <span class="heading-toc" id="toc-us-savings-bonds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> U.S. Savings Bonds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ussavingsbonds.asp">U.S. savings bond</a> is guaranteed to double in value over 20 years, and it can keep earning interest if held for up to 30 years. That’s why the savings bond is a traditional gift for newborn babies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> A savings bond cannot be cashed in during the first year, and a penalty of three months’ interest is imposed for cashing it in before five years have passed. After that, the owner of the bond will get back the purchase price in full and forgo future interest payments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> There are two main varieties of U.S. government savings bonds: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/101316/u-s-savings-bonds-best-longterm-bond-investment-available.asp">The Series EE savings bond pays a fixed interest</a> that is guaranteed to double the value of the bond over 20 years. The rate is fixed when the bond is purchased, and tax is deferred until the bond is cashed. The interest rate on EE bonds through April 2024 is fixed at 2.70%.<span class="ql-inline-citation" data-cite="11"></span></li> <li>The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seriesibond.asp">Series I savings bond</a> has both a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed</a> and a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variableinterestrate.asp">variable</a> interest rate. The fixed rate is set when the bond is purchased, and the variable rate is adjusted every six months based on consumer price inflation. That can prevent a case of investor’s remorse if interest rates soar during the bond’s life. The interest rate on I bonds through April 2024 is fixed at 5.27%.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-certificates-of-deposit-cds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> Certificates of Deposit (CDs) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit (CDs)</a> are issued by banks and are a form of savings account. They pay a little more interest than a regular savings account. A CD can be bought for a term as short as one month and as long as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-10-year-cd-rates-4783528">10 years</a>. The shorter the term, the lower the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rate</a>.<span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The interest rates offered at any given time are tied to the current prime rate. Thus, if you’re CD shopping at a time of low rates and rock-bottom inflation, it makes sense to avoid tying up your money for a long period. If it looks like interest rates will rise soon, you can buy a one-, three-, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267">six-month CD</a> and shop around for a better deal when it matures. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Some investors use a strategy called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cd-ladder.asp">laddering</a> to invest in CDs. They buy a new CD every month or every three months regardless of the interest rates offered. That gives them exposure to the highest rates available at any given time while ensuring that some cash is readily available as an older CD matures. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Of the two investment options, CDs are the more flexible. You don’t have to commit to a long-term investment or tie up your money for an extended period. However, should you need to redeem the CD early, you will be assessed a penalty. It’s also not a good idea to keep your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency fund</a> in a CD because <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earlywithdrawal.asp">early withdrawal</a> penalties can eat up several months of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> and even a small amount of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a>.<span class="ql-inline-citation" data-cite="13"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_26-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_27-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>It pays to shop around for a CD, as each bank sets its rates based on the current prime rate.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-should-i-keep-my-emergency-savings-in-a-bond-or-a-certificate-of-deposit-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should I Keep My Emergency Savings in a Bond or a Certificate of Deposit (CD)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can store your emergency fund in a bond or a certificate of deposit (CD). However, should you need to withdraw your money immediately if a financial emergency arises, you will incur a penalty fee if the CD or bond has not reached maturity.<span class="ql-inline-citation" data-cite="13"></span> So, it can be more prudent to keep emergency funds in a more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidasset.asp">liquid</a> account like a high-yield money market savings account.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-is-it-better-to-invest-in-cds-or-bonds"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is It Better to Invest in CDs or Bonds?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Both CDs and U.S. savings bonds have various maturities and interest rates and offer the lowest investment risk for investors. CDs feature Federal Deposit Insurance Corp. (FDIC) protection up to $250,000 per account.<span class="ql-inline-citation" data-cite="14"></span> U.S. savings bonds are backed by the full faith and credit of the United States and do not limit the coverage amount.<span class="ql-inline-citation" data-cite="10"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_32-0"><span class="heading-toc" id="toc-how-do-i-buy-a-savings-bond"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Buy a Savings Bond?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>To buy an EE savings bond, you’ll have to do so online at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.treasurydirect.gov/savings-bonds/manage-bonds/treasurydirect/" rel="sponsored nofollow">TreasuryDirect</a>. Once you make an account, you’ll be able to purchase the bond. You can also buy paper Series I bonds using your federal tax return.<span class="ql-inline-citation" data-cite="9"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Both savings bonds and CDs are considered extremely safe investments. U.S. savings bonds have a AAA rating and are “backed by the full faith and credit of the U.S. government.” CDs up to $250,000 are fully insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp. (FDIC)</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Income earned from CDs is taxable at both the state and federal level. Also, these earnings are taxed as interest income rather than as capital gains, which carries a lower rate. You should receive a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/form-1099-int.asp">1099-INT form</a> from the financial institution that holds the CD.<span class="ql-inline-citation" data-cite="2"></span> When your earnings span several tax years, you will pay tax only on the portion that was earned in that taxing year. Should you hold the CD in a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-advantaged.asp">tax-advantaged</a> retirement account, such as a 401(k) or an individual retirement account (IRA), these taxes can be deferred.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Any interest earned from a saving bond is taxable. You will need to report this interest income on your annual federal tax filing. However, there are no state and local taxes assessed.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Also, Series EE and Series I bonds may qualify for education tax exclusion if you use them to pay for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qhee.asp">qualified higher education expenses</a> and you are a qualified taxpayer.<span class="ql-inline-citation" data-cite="3"></span> These funds may help you offset the cost of tuition and other fees. </p></div>

U.S. savings bonds and certificates of deposit (CDs) are both savings vehicles that offer a modest profit for a high degree of safety. In both cases, the investor is lending some cash in return for the payment of a set amount of interest. Both are easy, convenient ways to invest without [going through a broker](https://www.investopedia.com/articles/younginvestors/06/firstbroker.asp). Your savings will be safe and earn interest. There are differences, though, and the biggest comes down to time. U.S. savings bonds are designed to be a long-term investment, while CDs can be found with [maturities](https://www.investopedia.com/terms/m/maturity.asp) as short as one month. ### Key Takeaways * If you’re investing for the [long term](https://www.investopedia.com/terms/l/longterm.asp), a U.S. savings bond is a good choice. * The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. * If you’re saving for the short term, a CD offers greater flexibility than a savings bond. ![Savings Bonds vs. CDs]() :max_bytes(150000):strip_icc()/savings-bonds-vs-cds-which-better-2016.asp_V1-4754e38f62f64fc7bb19a06de61c8817.png) Investopedia / Hilary Allison ## U.S. Savings Bonds A [U.S. savings bond](https://www.investopedia.com/terms/u/ussavingsbonds.asp) is guaranteed to double in value over 20 years, and it can keep earning interest if held for up to 30 years. That’s why the savings bond is a traditional gift for newborn babies. A savings bond cannot be cashed in during the first year, and a penalty of three months’ interest is imposed for cashing it in before five years have passed. After that, the owner of the bond will get back the purchase price in full and forgo future interest payments. There are two main varieties of U.S. government savings bonds: * [The Series EE savings bond pays a fixed interest](https://www.investopedia.com/articles/investing/101316/u-s-savings-bonds-best-longterm-bond-investment-available.asp) that is guaranteed to double the value of the bond over 20 years. The rate is fixed when the bond is purchased, and tax is deferred until the bond is cashed. The interest rate on EE bonds through April 2024 is fixed at 2.70%. * The [Series I savings bond](https://www.investopedia.com/terms/s/seriesibond.asp) has both a [fixed](https://www.investopedia.com/terms/f/fixedinterestrate.asp) and a [variable](https://www.investopedia.com/terms/v/variableinterestrate.asp) interest rate. The fixed rate is set when the bond is purchased, and the variable rate is adjusted every six months based on consumer price inflation. That can prevent a case of investor’s remorse if interest rates soar during the bond’s life. The interest rate on I bonds through April 2024 is fixed at 5.27%. ## Certificates of Deposit (CDs) [Certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) are issued by banks and are a form of savings account. They pay a little more interest than a regular savings account. A CD can be bought for a term as short as one month and as long as [10 years](https://www.investopedia.com/best-10-year-cd-rates-4783528). The shorter the term, the lower the [interest rate](https://www.investopedia.com/terms/i/interestrate.asp). The interest rates offered at any given time are tied to the current prime rate. Thus, if you’re CD shopping at a time of low rates and rock-bottom inflation, it makes sense to avoid tying up your money for a long period. If it looks like interest rates will rise soon, you can buy a one-, three-, or [six-month CD](https://www.investopedia.com/best-6-month-cd-rates-4783267) and shop around for a better deal when it matures. Some investors use a strategy called [laddering](https://www.investopedia.com/terms/c/cd-ladder.asp) to invest in CDs. They buy a new CD every month or every three months regardless of the interest rates offered. That gives them exposure to the highest rates available at any given time while ensuring that some cash is readily available as an older CD matures. Of the two investment options, CDs are the more flexible. You don’t have to commit to a long-term investment or tie up your money for an extended period. However, should you need to redeem the CD early, you will be assessed a penalty. It’s also not a good idea to keep your [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) in a CD because [early withdrawal](https://www.investopedia.com/terms/e/earlywithdrawal.asp) penalties can eat up several months of [interest](https://www.investopedia.com/terms/i/interest.asp) and even a small amount of [principal](https://www.investopedia.com/terms/p/principal.asp). ### It pays to shop around for a CD, as each bank sets its rates based on the current prime rate. ## Should I Keep My Emergency Savings in a Bond or a Certificate of Deposit (CD)? You can store your emergency fund in a bond or a certificate of deposit (CD). However, should you need to withdraw your money immediately if a financial emergency arises, you will incur a penalty fee if the CD or bond has not reached maturity. So, it can be more prudent to keep emergency funds in a more [liquid](https://www.investopedia.com/terms/l/liquidasset.asp) account like a high-yield money market savings account. ## Is It Better to Invest in CDs or Bonds? Both CDs and U.S. savings bonds have various maturities and interest rates and offer the lowest investment risk for investors. CDs feature Federal Deposit Insurance Corp. (FDIC) protection up to $250,000 per account. U.S. savings bonds are backed by the full faith and credit of the United States and do not limit the coverage amount. ## How Do I Buy a Savings Bond? To buy an EE savings bond, you’ll have to do so online at [TreasuryDirect](https://www.treasurydirect.gov/savings-bonds/manage-bonds/treasurydirect/). Once you make an account, you’ll be able to purchase the bond. You can also buy paper Series I bonds using your federal tax return. ## The Bottom Line Both savings bonds and CDs are considered extremely safe investments. U.S. savings bonds have a AAA rating and are “backed by the full faith and credit of the U.S. government.” CDs up to $250,000 are fully insured by the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). Income earned from CDs is taxable at both the state and federal level. Also, these earnings are taxed as interest income rather than as capital gains, which carries a lower rate. You should receive a [1099-INT form](https://www.investopedia.com/terms/f/form-1099-int.asp) from the financial institution that holds the CD. When your earnings span several tax years, you will pay tax only on the portion that was earned in that taxing year. Should you hold the CD in a [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) retirement account, such as a 401(k) or an individual retirement account (IRA), these taxes can be deferred. Any interest earned from a saving bond is taxable. You will need to report this interest income on your annual federal tax filing. However, there are no state and local taxes assessed. Also, Series EE and Series I bonds may qualify for education tax exclusion if you use them to pay for [qualified higher education expenses](https://www.investopedia.com/terms/q/qhee.asp) and you are a qualified taxpayer. These funds may help you offset the cost of tuition and other fees.

U.S. savings bonds and certificates of deposit (CDs) are both savings vehicles that offer a modest profit for a high degree of safety. In both cases, the investor is lending some cash in return for the payment of a set amount of interest. Both are easy, convenient ways to invest without going through a broker. Your savings will be safe and earn interest. There are differences, though, and the biggest comes down to time. U.S. savings bonds are designed to be a long-term investment, while CDs can be found with maturities as short as one month. Key Takeaways If you’re investing for the long term, a U.S. savings bond is a good choice. The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you’re saving for the short term, a CD offers greater flexibility than a savings bond. Investopedia / Hilary Allison U.S. Savings Bonds A U.S. savings bond is guaranteed to double in value over 20 years, and it can keep earning interest if held for up to 30 years. That’s why the savings bond is a traditional gift for newborn babies. A savings bond cannot be cashed in during the first year, and a penalty of three months’ interest is imposed for cashing it in before five years have passed. After that, the owner of the bond will get back the purchase price in full and forgo future interest payments. There are two main varieties of U.S. government savings bonds: The Series EE savings bond pays a fixed interest that is guaranteed to double the value of the bond over 20 years. The rate is fixed when the bond is purchased, and tax is deferred until the bond is cashed. The interest rate on EE bonds through April 2024 is fixed at 2.70%. The Series I savings bond has both a fixed and a variable interest rate. The fixed rate is set when the bond is purchased, and the variable rate is adjusted every six months based on consumer price inflation. That can prevent a case of investor’s remorse if interest rates soar during the bond’s life. The interest rate on I bonds through April 2024 is fixed at 5.27%. Certificates of Deposit (CDs) Certificates of deposit (CDs) are issued by banks and are a form of savings account. They pay a little more interest than a regular savings account. A CD can be bought for a term as short as one month and as long as 10 years. The shorter the term, the lower the interest rate. The interest rates offered at any given time are tied to the current prime rate. Thus, if you’re CD shopping at a time of low rates and rock-bottom inflation, it makes sense to avoid tying up your money for a long period. If it looks like interest rates will rise soon, you can buy a one-, three-, or six-month CD and shop around for a better deal when it matures. Some investors use a strategy called laddering to invest in CDs. They buy a new CD every month or every three months regardless of the interest rates offered. That gives them exposure to the highest rates available at any given time while ensuring that some cash is readily available as an older CD matures. Of the two investment options, CDs are the more flexible. You don’t have to commit to a long-term investment or tie up your money for an extended period. However, should you need to redeem the CD early, you will be assessed a penalty. It’s also not a good idea to keep your emergency fund in a CD because early withdrawal penalties can eat up several months of interest and even a small amount of principal. It pays to shop around for a CD, as each bank sets its rates based on the current prime rate. Should I Keep My Emergency Savings in a Bond or a Certificate of Deposit (CD)? You can store your emergency fund in a bond or a certificate of deposit (CD). However, should you need to withdraw your money immediately if a financial emergency arises, you will incur a penalty fee if the CD or bond has not reached maturity. So, it can be more prudent to keep emergency funds in a more liquid account like a high-yield money market savings account. Is It Better to Invest in CDs or Bonds? Both CDs and U.S. savings bonds have various maturities and interest rates and offer the lowest investment risk for investors. CDs feature Federal Deposit Insurance Corp. (FDIC) protection up to $250,000 per account. U.S. savings bonds are backed by the full faith and credit of the United States and do not limit the coverage amount. How Do I Buy a Savings Bond? To buy an EE savings bond, you’ll have to do so online at TreasuryDirect. Once you make an account, you’ll be able to purchase the bond. You can also buy paper Series I bonds using your federal tax return. The Bottom Line Both savings bonds and CDs are considered extremely safe investments. U.S. savings bonds have a AAA rating and are “backed by the full faith and credit of the U.S. government.” CDs up to $250,000 are fully insured by the Federal Deposit Insurance Corp. (FDIC). Income earned from CDs is taxable at both the state and federal level. Also, these earnings are taxed as interest income rather than as capital gains, which carries a lower rate. You should receive a 1099-INT form from the financial institution that holds the CD. When your earnings span several tax years, you will pay tax only on the portion that was earned in that taxing year. Should you hold the CD in a tax-advantaged retirement account, such as a 401(k) or an individual retirement account (IRA), these taxes can be deferred. Any interest earned from a saving bond is taxable. You will need to report this interest income on your annual federal tax filing. However, there are no state and local taxes assessed. Also, Series EE and Series I bonds may qualify for education tax exclusion if you use them to pay for qualified higher education expenses and you are a qualified taxpayer. These funds may help you offset the cost of tuition and other fees.

https://www.investopedia.com/ask/answers/difference-between-bank-guarantee-and-letter-of-credit/

Bank Guarantee vs. Letter of Credit: What's the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A bank guarantee and a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/letterofcredit.asp">letter of credit</a> are both promises from a financial institution that a borrower will be able to repay a debt to another party, no matter the debtor's financial circumstances. While different, both bank guarantees and letters of credit assure the third party that if the borrowing party can't repay what it owes, the financial institution will <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060215/what-difference-between-bank-guarantee-and-bond.asp">step in on behalf of the borrower</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> By <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040615/how-does-company-obtain-bank-guarantee.asp">providing financial backing</a> for the borrowing party (often at the request of the other one), these promises serve to reduce risk factors, encouraging the transaction to proceed. But they work in slightly different ways and in different situations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Letters of credit are especially important in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insights/what-is-international-trade/">international trade</a> due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting in person.<span class="ql-inline-citation" data-cite="1"></span> While letters of credit are primarily used in global transactions, bank guarantees are often used in real estate contracts and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/infrastructure.asp">infrastructure</a> projects.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_7-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_8-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A bank guarantee is a promise from a lending institution that ensures the bank will step up if a debtor can't cover a debt.</li><li>Letters of credit are also financial promises on behalf of one party in a transaction and are especially significant in international trade.</li><li>Bank guarantees are often used in real estate contracts and infrastructure projects, while letters of credit are primarily used in global transactions.</li></ul></div></div></div> <span class="heading-toc" id="toc-bank-guarantee"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Bank Guarantee </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankguarantee.asp">Bank guarantees</a> represent a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiary</a>. The bank only pays that amount if the opposing party does not fulfill the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/obligation.asp">obligations</a> outlined by the contract. The guarantee can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Bank guarantees protect both parties in a contractual agreement from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrisk.asp">credit risk</a>. For instance, a construction company and its cement supplier may enter into a contract to build a mall. Both parties may have to issue bank guarantees to prove their financial bona fides and capability. In a case where the supplier fails to deliver cement within a specified time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-subheading__text"> Types of Bank Guarantees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Bank guarantees are just like any other kind of financial instrument—they can take on various forms. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/letter_of_guarantee.asp">letters of guarantee</a> help parties involved in large transactions rest assured that they will be paid. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Banks can issue guarantees as direct guarantees between the bank and a domestic or foreign business entity. Banks will issue indirect guarantees when the subject of the guarantee is a government agency or another public entity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The most common kinds of guarantees include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li><strong>Shipping guarantees: </strong>This kind of guarantee is given to the carrier for a shipment that arrives before any documents are received.<span class="ql-inline-citation" data-cite="5"></span></li> <li><strong>Loan guarantees: </strong>An institution that issues a loan guarantee pledges to take on the financial obligation if the borrower defaults.<span class="ql-inline-citation" data-cite="15"></span></li> <li><strong>Advanced payment guarantees: </strong>This guarantee acts to back up a contract's performance. Basically, this guarantee is a form of collateral to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reimbursement.asp">reimburse</a> advance payment should the seller not supply the goods specified in the contract.<span class="ql-inline-citation" data-cite="6"></span></li> <li><strong>Confirmed payment guarantees:</strong> With this irrevocable obligation, a specific amount is paid by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">bank</a> to a beneficiary on behalf of the client by a certain date.<span class="ql-inline-citation" data-cite="7"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Bank guarantees are commonly used by contractors while letters of credit are issued for importing and exporting companies.</p></div></div></div> <span class="heading-toc" id="toc-letter-of-credit"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> Letter of Credit </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Sometimes referred to as documentary credit, a letter of credit acts as a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/promissorynote.asp">promissory note</a> from a financial institution—usually a bank or <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a>. It guarantees a buyer's payment to a seller or a borrower's payment to a lender will be received on time and for the full amount. It also states that if the buyer can't make a payment on the purchase, the bank will cover the full or remaining amount owed.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A letter of credit represents an obligation taken on by a bank to make a payment once certain criteria are met. After these terms are completed and confirmed, the bank will transfer the funds. The letter of credit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transferable-letter-of-credit.asp">ensures the payment will be made</a> as long as the services are performed. The letter of credit basically substitutes the bank's credit for that of its client, ensuring correct and timely payment.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> For example, say a U.S. wholesaler receives an order from a new client, a Canadian company. Because the wholesaler has no way of knowing whether this new client can fulfill its payment obligations, it requests a letter of credit is provided in the purchasing contract. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The purchasing company applies for a letter of credit at a bank where it already has funds or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit (LOC)</a>. The bank issuing the letter of credit holds payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped. After the goods have been shipped, the bank would pay the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wholesaling.asp">wholesaler</a> their due as long as the terms of the sales contract are met, such as delivery before a certain time or confirmation from the buyer that the goods were received undamaged.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-subheading__text"> Types of Letters of Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Just like bank guarantees, letters of credit also vary based on the need for them. The following are some of the most commonly used letters of credit: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <li>An <strong>irrevocable letter of credit</strong> ensures the buyer is obligated to the seller.<span class="ql-inline-citation" data-cite="10"></span></li> <li>A <strong>confirmed letter of credit </strong>comes from a second bank, which guarantees the letter when the first one has questionable credit. The confirming bank ensures payment in the event the company or issuing bank <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> on their obligations.<span class="ql-inline-citation" data-cite="10"></span></li> <li>An <strong>import letter of credit</strong> allows importers to make payments immediately by providing them with a short-term <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashadvance.asp">cash advance</a>.<span class="ql-inline-citation" data-cite="11"></span></li> <li>An <strong>export letter of credit</strong> lets the buyer's bank know it must pay the seller, provided all the conditions of the contract are met.<span class="ql-inline-citation" data-cite="12"></span></li> <li>A<strong> revolving letter of credit</strong> lets customers make draws—within limits—during a certain time period.<span class="ql-inline-citation" data-cite="13"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_39-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Bank Guarantee vs. Letter of Credit" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/RQW9lGF6IABz3W_lQm97dTNQmHU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/difference-between-bank-guarantee-and-letter-of-credit-final-2824492ac4f3481490982697b3e4a59d.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/RQW9lGF6IABz3W_lQm97dTNQmHU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/difference-between-bank-guarantee-and-letter-of-credit-final-2824492ac4f3481490982697b3e4a59d.jpg" data-srcset="https://www.investopedia.com/thmb/JI7oMnmV7d37A5JUPEVlo7tfBi4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/difference-between-bank-guarantee-and-letter-of-credit-final-2824492ac4f3481490982697b3e4a59d.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Bank Guarantee vs. Letter of Credit" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/RQW9lGF6IABz3W_lQm97dTNQmHU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/difference-between-bank-guarantee-and-letter-of-credit-final-2824492ac4f3481490982697b3e4a59d.jpg" srcset="https://www.investopedia.com/thmb/JI7oMnmV7d37A5JUPEVlo7tfBi4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/difference-between-bank-guarantee-and-letter-of-credit-final-2824492ac4f3481490982697b3e4a59d.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jake Shi</p></span> </figcaption></figure> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Both bank guarantees and letters of credit work to reduce the risk in a business agreement or deal. Parties are more likely to agree to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transaction</a> because they have less liability when a letter of credit or bank guarantee is active. These agreements are particularly important and useful in what would otherwise be risky transactions, such as certain real estate and international trade contracts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Banks thoroughly screen clients interested in one of these documents. After the bank determines that the applicant is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-worthiness.asp">creditworthy</a> and has a reasonable risk, a monetary limit is placed on the agreement. The bank agrees to be obligated up to, but not exceeding, the limit. This protects the bank by providing a specific threshold of risk.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Another key difference between bank guarantees and letters of credit lies in the parties that use them. Bank guarantees are normally used by contractors who bid on large projects. By providing a bank guarantee, the contractor provides proof of its financial credibility. In essence, the guarantee assures the entity behind the project it is financially stable enough to take it on from beginning to end.<span class="ql-inline-citation" data-cite="2"></span> Letters of credit, on the other hand, are commonly used by companies that regularly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-and-exports.asp">import and export</a> goods.<span class="ql-inline-citation" data-cite="9"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-do-i-have-to-have-an-account-to-get-a-letter-of-credit-from-a-bank"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Have to Have an Account to Get a Letter of Credit From a Bank?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040615/how-does-company-obtain-bank-guarantee.asp">don't necessarily have to be a client</a> of the bank or financial institution that supplies your letter of credit. However, you will have to apply for the letter of credit. Since the bank is essentially vouching for your ability to pay your debt, they will need to know that you are capable of fulfilling your agreement. While you can apply to any institution that supplies letters of credit, you may find more success working with an institution where you already have a relationship.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-when-would-i-need-a-bank-guarantee"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Would I Need a Bank Guarantee?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Bank guarantees are typically used by contractors <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060215/why-bank-guarantee-important-longterm-project-contract.asp">to insure large projects</a> such as construction projects.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-do-i-have-to-pay-for-a-letter-of-credit-or-bank-guarantee"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Have to Pay for a Letter of Credit or Bank Guarantee?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. Financial institutions charge a percentage of the total insured by a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/letterofcredit.asp">letter of credit.</a> This can range from 0.75–1.5% of the total. Bank guarantees can cost anywhere from 0.5% to 1.5% of the total amount.<br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-subheading__text"> The Bottom Line </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Letters of credit and bank guarantees may be necessary for large projects and international business deals. Your bank may offer this service for a fee. If they don't, they should be able to guide your to a commercial bank that can help.<br/> </p></div>

A bank guarantee and a [letter of credit](https://www.investopedia.com/terms/l/letterofcredit.asp) are both promises from a financial institution that a borrower will be able to repay a debt to another party, no matter the debtor's financial circumstances. While different, both bank guarantees and letters of credit assure the third party that if the borrowing party can't repay what it owes, the financial institution will [step in on behalf of the borrower](https://www.investopedia.com/ask/answers/060215/what-difference-between-bank-guarantee-and-bond.asp). By [providing financial backing](https://www.investopedia.com/ask/answers/040615/how-does-company-obtain-bank-guarantee.asp) for the borrowing party (often at the request of the other one), these promises serve to reduce risk factors, encouraging the transaction to proceed. But they work in slightly different ways and in different situations. Letters of credit are especially important in [international trade](https://www.investopedia.com/insights/what-is-international-trade/) due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting in person. While letters of credit are primarily used in global transactions, bank guarantees are often used in real estate contracts and [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) projects. ### Key Takeaways * A bank guarantee is a promise from a lending institution that ensures the bank will step up if a debtor can't cover a debt. * Letters of credit are also financial promises on behalf of one party in a transaction and are especially significant in international trade. * Bank guarantees are often used in real estate contracts and infrastructure projects, while letters of credit are primarily used in global transactions. ## Bank Guarantee [Bank guarantees](https://www.investopedia.com/terms/b/bankguarantee.asp) represent a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp). The bank only pays that amount if the opposing party does not fulfill the [obligations](https://www.investopedia.com/terms/o/obligation.asp) outlined by the contract. The guarantee can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract. Bank guarantees protect both parties in a contractual agreement from [credit risk](https://www.investopedia.com/terms/c/creditrisk.asp). For instance, a construction company and its cement supplier may enter into a contract to build a mall. Both parties may have to issue bank guarantees to prove their financial bona fides and capability. In a case where the supplier fails to deliver cement within a specified time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee. ### Types of Bank Guarantees Bank guarantees are just like any other kind of financial instrument—they can take on various forms. The [letters of guarantee](https://www.investopedia.com/terms/l/letter_of_guarantee.asp) help parties involved in large transactions rest assured that they will be paid. Banks can issue guarantees as direct guarantees between the bank and a domestic or foreign business entity. Banks will issue indirect guarantees when the subject of the guarantee is a government agency or another public entity. The most common kinds of guarantees include: * **Shipping guarantees:** This kind of guarantee is given to the carrier for a shipment that arrives before any documents are received. * **Loan guarantees:** An institution that issues a loan guarantee pledges to take on the financial obligation if the borrower defaults. * **Advanced payment guarantees:** This guarantee acts to back up a contract's performance. Basically, this guarantee is a form of collateral to [reimburse](https://www.investopedia.com/terms/r/reimbursement.asp) advance payment should the seller not supply the goods specified in the contract. * **Confirmed payment guarantees:** With this irrevocable obligation, a specific amount is paid by the [bank](https://www.investopedia.com/terms/b/bank.asp) to a beneficiary on behalf of the client by a certain date. ### Bank guarantees are commonly used by contractors while letters of credit are issued for importing and exporting companies. ## Letter of Credit Sometimes referred to as documentary credit, a letter of credit acts as a [promissory note](https://www.investopedia.com/terms/p/promissorynote.asp) from a financial institution—usually a bank or [credit union](https://www.investopedia.com/terms/c/creditunion.asp). It guarantees a buyer's payment to a seller or a borrower's payment to a lender will be received on time and for the full amount. It also states that if the buyer can't make a payment on the purchase, the bank will cover the full or remaining amount owed. A letter of credit represents an obligation taken on by a bank to make a payment once certain criteria are met. After these terms are completed and confirmed, the bank will transfer the funds. The letter of credit [ensures the payment will be made](https://www.investopedia.com/terms/t/transferable-letter-of-credit.asp) as long as the services are performed. The letter of credit basically substitutes the bank's credit for that of its client, ensuring correct and timely payment. For example, say a U.S. wholesaler receives an order from a new client, a Canadian company. Because the wholesaler has no way of knowing whether this new client can fulfill its payment obligations, it requests a letter of credit is provided in the purchasing contract. The purchasing company applies for a letter of credit at a bank where it already has funds or a [line of credit (LOC)](https://www.investopedia.com/terms/l/lineofcredit.asp). The bank issuing the letter of credit holds payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped. After the goods have been shipped, the bank would pay the [wholesaler](https://www.investopedia.com/terms/w/wholesaling.asp) their due as long as the terms of the sales contract are met, such as delivery before a certain time or confirmation from the buyer that the goods were received undamaged. ### Types of Letters of Credit Just like bank guarantees, letters of credit also vary based on the need for them. The following are some of the most commonly used letters of credit: * An **irrevocable letter of credit** ensures the buyer is obligated to the seller. * A **confirmed letter of credit** comes from a second bank, which guarantees the letter when the first one has questionable credit. The confirming bank ensures payment in the event the company or issuing bank [default](https://www.investopedia.com/terms/d/default2.asp) on their obligations. * An **import letter of credit** allows importers to make payments immediately by providing them with a short-term [cash advance](https://www.investopedia.com/terms/c/cashadvance.asp). * An **export letter of credit** lets the buyer's bank know it must pay the seller, provided all the conditions of the contract are met. * A **revolving letter of credit** lets customers make draws—within limits—during a certain time period. ![Bank Guarantee vs. Letter of Credit]() :max_bytes(150000):strip_icc()/difference-between-bank-guarantee-and-letter-of-credit-final-2824492ac4f3481490982697b3e4a59d.jpg) Investopedia / Jake Shi ## Special Considerations Both bank guarantees and letters of credit work to reduce the risk in a business agreement or deal. Parties are more likely to agree to the [transaction](https://www.investopedia.com/terms/t/transaction.asp) because they have less liability when a letter of credit or bank guarantee is active. These agreements are particularly important and useful in what would otherwise be risky transactions, such as certain real estate and international trade contracts. Banks thoroughly screen clients interested in one of these documents. After the bank determines that the applicant is [creditworthy](https://www.investopedia.com/terms/c/credit-worthiness.asp) and has a reasonable risk, a monetary limit is placed on the agreement. The bank agrees to be obligated up to, but not exceeding, the limit. This protects the bank by providing a specific threshold of risk. Another key difference between bank guarantees and letters of credit lies in the parties that use them. Bank guarantees are normally used by contractors who bid on large projects. By providing a bank guarantee, the contractor provides proof of its financial credibility. In essence, the guarantee assures the entity behind the project it is financially stable enough to take it on from beginning to end. Letters of credit, on the other hand, are commonly used by companies that regularly [import and export](https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-and-exports.asp) goods. ## Do I Have to Have an Account to Get a Letter of Credit From a Bank? You [don't necessarily have to be a client](https://www.investopedia.com/ask/answers/040615/how-does-company-obtain-bank-guarantee.asp) of the bank or financial institution that supplies your letter of credit. However, you will have to apply for the letter of credit. Since the bank is essentially vouching for your ability to pay your debt, they will need to know that you are capable of fulfilling your agreement. While you can apply to any institution that supplies letters of credit, you may find more success working with an institution where you already have a relationship. ## When Would I Need a Bank Guarantee? Bank guarantees are typically used by contractors [to insure large projects](https://www.investopedia.com/ask/answers/060215/why-bank-guarantee-important-longterm-project-contract.asp) such as construction projects. ## Do I Have to Pay for a Letter of Credit or Bank Guarantee? Yes. Financial institutions charge a percentage of the total insured by a [letter of credit.](https://www.investopedia.com/terms/l/letterofcredit.asp) This can range from 0.75–1.5% of the total. Bank guarantees can cost anywhere from 0.5% to 1.5% of the total amount. ### The Bottom Line Letters of credit and bank guarantees may be necessary for large projects and international business deals. Your bank may offer this service for a fee. If they don't, they should be able to guide your to a commercial bank that can help.

A bank guarantee and a letter of credit are both promises from a financial institution that a borrower will be able to repay a debt to another party, no matter the debtor's financial circumstances. While different, both bank guarantees and letters of credit assure the third party that if the borrowing party can't repay what it owes, the financial institution will step in on behalf of the borrower. By providing financial backing for the borrowing party (often at the request of the other one), these promises serve to reduce risk factors, encouraging the transaction to proceed. But they work in slightly different ways and in different situations. Letters of credit are especially important in international trade due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting in person. While letters of credit are primarily used in global transactions, bank guarantees are often used in real estate contracts and infrastructure projects. Key Takeaways A bank guarantee is a promise from a lending institution that ensures the bank will step up if a debtor can't cover a debt.Letters of credit are also financial promises on behalf of one party in a transaction and are especially significant in international trade.Bank guarantees are often used in real estate contracts and infrastructure projects, while letters of credit are primarily used in global transactions. Bank Guarantee Bank guarantees represent a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary. The bank only pays that amount if the opposing party does not fulfill the obligations outlined by the contract. The guarantee can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract. Bank guarantees protect both parties in a contractual agreement from credit risk. For instance, a construction company and its cement supplier may enter into a contract to build a mall. Both parties may have to issue bank guarantees to prove their financial bona fides and capability. In a case where the supplier fails to deliver cement within a specified time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee. Types of Bank Guarantees Bank guarantees are just like any other kind of financial instrument—they can take on various forms. The letters of guarantee help parties involved in large transactions rest assured that they will be paid. Banks can issue guarantees as direct guarantees between the bank and a domestic or foreign business entity. Banks will issue indirect guarantees when the subject of the guarantee is a government agency or another public entity. The most common kinds of guarantees include: Shipping guarantees: This kind of guarantee is given to the carrier for a shipment that arrives before any documents are received. Loan guarantees: An institution that issues a loan guarantee pledges to take on the financial obligation if the borrower defaults. Advanced payment guarantees: This guarantee acts to back up a contract's performance. Basically, this guarantee is a form of collateral to reimburse advance payment should the seller not supply the goods specified in the contract. Confirmed payment guarantees: With this irrevocable obligation, a specific amount is paid by the bank to a beneficiary on behalf of the client by a certain date. Bank guarantees are commonly used by contractors while letters of credit are issued for importing and exporting companies. Letter of Credit Sometimes referred to as documentary credit, a letter of credit acts as a promissory note from a financial institution—usually a bank or credit union. It guarantees a buyer's payment to a seller or a borrower's payment to a lender will be received on time and for the full amount. It also states that if the buyer can't make a payment on the purchase, the bank will cover the full or remaining amount owed. A letter of credit represents an obligation taken on by a bank to make a payment once certain criteria are met. After these terms are completed and confirmed, the bank will transfer the funds. The letter of credit ensures the payment will be made as long as the services are performed. The letter of credit basically substitutes the bank's credit for that of its client, ensuring correct and timely payment. For example, say a U.S. wholesaler receives an order from a new client, a Canadian company. Because the wholesaler has no way of knowing whether this new client can fulfill its payment obligations, it requests a letter of credit is provided in the purchasing contract. The purchasing company applies for a letter of credit at a bank where it already has funds or a line of credit (LOC). The bank issuing the letter of credit holds payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped. After the goods have been shipped, the bank would pay the wholesaler their due as long as the terms of the sales contract are met, such as delivery before a certain time or confirmation from the buyer that the goods were received undamaged. Types of Letters of Credit Just like bank guarantees, letters of credit also vary based on the need for them. The following are some of the most commonly used letters of credit: An irrevocable letter of credit ensures the buyer is obligated to the seller. A confirmed letter of credit comes from a second bank, which guarantees the letter when the first one has questionable credit. The confirming bank ensures payment in the event the company or issuing bank default on their obligations. An import letter of credit allows importers to make payments immediately by providing them with a short-term cash advance. An export letter of credit lets the buyer's bank know it must pay the seller, provided all the conditions of the contract are met. A revolving letter of credit lets customers make draws—within limits—during a certain time period. Investopedia / Jake Shi Special Considerations Both bank guarantees and letters of credit work to reduce the risk in a business agreement or deal. Parties are more likely to agree to the transaction because they have less liability when a letter of credit or bank guarantee is active. These agreements are particularly important and useful in what would otherwise be risky transactions, such as certain real estate and international trade contracts. Banks thoroughly screen clients interested in one of these documents. After the bank determines that the applicant is creditworthy and has a reasonable risk, a monetary limit is placed on the agreement. The bank agrees to be obligated up to, but not exceeding, the limit. This protects the bank by providing a specific threshold of risk. Another key difference between bank guarantees and letters of credit lies in the parties that use them. Bank guarantees are normally used by contractors who bid on large projects. By providing a bank guarantee, the contractor provides proof of its financial credibility. In essence, the guarantee assures the entity behind the project it is financially stable enough to take it on from beginning to end. Letters of credit, on the other hand, are commonly used by companies that regularly import and export goods. Do I Have to Have an Account to Get a Letter of Credit From a Bank? You don't necessarily have to be a client of the bank or financial institution that supplies your letter of credit. However, you will have to apply for the letter of credit. Since the bank is essentially vouching for your ability to pay your debt, they will need to know that you are capable of fulfilling your agreement. While you can apply to any institution that supplies letters of credit, you may find more success working with an institution where you already have a relationship. When Would I Need a Bank Guarantee? Bank guarantees are typically used by contractors to insure large projects such as construction projects. Do I Have to Pay for a Letter of Credit or Bank Guarantee? Yes. Financial institutions charge a percentage of the total insured by a letter of credit. This can range from 0.75–1.5% of the total. Bank guarantees can cost anywhere from 0.5% to 1.5% of the total amount. The Bottom Line Letters of credit and bank guarantees may be necessary for large projects and international business deals. Your bank may offer this service for a fee. If they don't, they should be able to guide your to a commercial bank that can help.

https://www.investopedia.com/ask/answers/long-short-fund.asp

Long-Short Mutual Fund: What it is, How it Works

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A long-short fund is a mutual fund that holds investments <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/long.asp">long</a> and in addition it sells <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a> it does not own (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">short</a>). The goal of a long-short fund is to find investments anticipated to go up, and find investments anticipated to go down, and invest in both in an attempt to increase returns. For example, if an investor puts $100 into a long-short mutual fund, the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundmanager.asp">fund manager </a>will generally take the whole $100 and invest long in assets he thinks will do well. Then the manager will use this equity as margin to open a short position and sell assets he thinks will do poorly. When he shorts these assets he will receive cash, say $30 for this example. He would then use this $30 to invest long into more assets, so in total he would have $130 long portfolio and $30 short portfolio, effectively using your $100 initial investment to make $160 worth of investments. This type of long-short fund in the example is called a 130/30 mutual fund. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <span class="heading-toc" id="toc-long-short-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> Long-Short Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Traditionally, the majority of mutual funds are long-only, meaning if something was considered <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/undervalued.asp">undervalued</a>, it would be invested in, and if a security was thought to be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overvalued.asp">overvalued</a>, the only thing investors are able to do is to avoid investing in it. Long-short funds allow the manager more flexibility to act on his analysis. However, investors should be aware of the risks associated with investing in this type of mutual fund. If the fund manager made good investments, the combination of a long and short portfolio would <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a> the funds return upwards. On the other hand, instead of just picking stocks that managers think will go up, they also have to predict which stocks are going down, which means the managers stock picking skill is very important. If mutual fund historical performance is any indication, it is extremely difficult to find a fund manager that consistently outperforms the market in long-only funds. Finding one that can predict stocks that go up and stocks that go down may be even more challenging. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-advisorinsight" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Advisor Insight</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/rebecca-dawson-4692618">Rebecca Dawson</a><br/>Silber Bennett Financial, <em>Los Angeles, CA</em></p> <p>Long-short mutual funds are market neutral, dividing their exposure equally between long and short positions in an attempt to earn a modest return that is not tied to the market's swings. The strategy seeks capital growth and income.</p> <p>Long-short strategies are best suited to investors who expect low returns from stocks in coming years, because these strategies do not rely solely on market returns. In this environment, the best funds might be those that seek to reduce stock market exposure without eliminating it.</p> <p>The goal is to get most of the market's returns when stocks go up, while paring the losses when stocks tumble. The problem with these funds is that neutral investors might prefer them, while any investor who is either bullish or bearish have better options.</p></div></div></div></div>

A long-short fund is a mutual fund that holds investments [long](https://www.investopedia.com/terms/l/long.asp) and in addition it sells [securities](https://www.investopedia.com/terms/s/security.asp) it does not own ([short](https://www.investopedia.com/terms/s/short.asp)). The goal of a long-short fund is to find investments anticipated to go up, and find investments anticipated to go down, and invest in both in an attempt to increase returns. For example, if an investor puts $100 into a long-short mutual fund, the [fund manager](https://www.investopedia.com/terms/f/fundmanager.asp) will generally take the whole $100 and invest long in assets he thinks will do well. Then the manager will use this equity as margin to open a short position and sell assets he thinks will do poorly. When he shorts these assets he will receive cash, say $30 for this example. He would then use this $30 to invest long into more assets, so in total he would have $130 long portfolio and $30 short portfolio, effectively using your $100 initial investment to make $160 worth of investments. This type of long-short fund in the example is called a 130/30 mutual fund. ## Long-Short Funds Traditionally, the majority of mutual funds are long-only, meaning if something was considered [undervalued](https://www.investopedia.com/terms/u/undervalued.asp), it would be invested in, and if a security was thought to be [overvalued](https://www.investopedia.com/terms/o/overvalued.asp), the only thing investors are able to do is to avoid investing in it. Long-short funds allow the manager more flexibility to act on his analysis. However, investors should be aware of the risks associated with investing in this type of mutual fund. If the fund manager made good investments, the combination of a long and short portfolio would [leverage](https://www.investopedia.com/terms/l/leverage.asp) the funds return upwards. On the other hand, instead of just picking stocks that managers think will go up, they also have to predict which stocks are going down, which means the managers stock picking skill is very important. If mutual fund historical performance is any indication, it is extremely difficult to find a fund manager that consistently outperforms the market in long-only funds. Finding one that can predict stocks that go up and stocks that go down may be even more challenging. ### Advisor Insight [Rebecca Dawson](https://www.investopedia.com/rebecca-dawson-4692618) Silber Bennett Financial, *Los Angeles, CA* Long-short mutual funds are market neutral, dividing their exposure equally between long and short positions in an attempt to earn a modest return that is not tied to the market's swings. The strategy seeks capital growth and income. Long-short strategies are best suited to investors who expect low returns from stocks in coming years, because these strategies do not rely solely on market returns. In this environment, the best funds might be those that seek to reduce stock market exposure without eliminating it. The goal is to get most of the market's returns when stocks go up, while paring the losses when stocks tumble. The problem with these funds is that neutral investors might prefer them, while any investor who is either bullish or bearish have better options.

A long-short fund is a mutual fund that holds investments long and in addition it sells securities it does not own (short). The goal of a long-short fund is to find investments anticipated to go up, and find investments anticipated to go down, and invest in both in an attempt to increase returns. For example, if an investor puts $100 into a long-short mutual fund, the fund manager will generally take the whole $100 and invest long in assets he thinks will do well. Then the manager will use this equity as margin to open a short position and sell assets he thinks will do poorly. When he shorts these assets he will receive cash, say $30 for this example. He would then use this $30 to invest long into more assets, so in total he would have $130 long portfolio and $30 short portfolio, effectively using your $100 initial investment to make $160 worth of investments. This type of long-short fund in the example is called a 130/30 mutual fund. Long-Short Funds Traditionally, the majority of mutual funds are long-only, meaning if something was considered undervalued, it would be invested in, and if a security was thought to be overvalued, the only thing investors are able to do is to avoid investing in it. Long-short funds allow the manager more flexibility to act on his analysis. However, investors should be aware of the risks associated with investing in this type of mutual fund. If the fund manager made good investments, the combination of a long and short portfolio would leverage the funds return upwards. On the other hand, instead of just picking stocks that managers think will go up, they also have to predict which stocks are going down, which means the managers stock picking skill is very important. If mutual fund historical performance is any indication, it is extremely difficult to find a fund manager that consistently outperforms the market in long-only funds. Finding one that can predict stocks that go up and stocks that go down may be even more challenging. Advisor Insight Rebecca DawsonSilber Bennett Financial, Los Angeles, CA Long-short mutual funds are market neutral, dividing their exposure equally between long and short positions in an attempt to earn a modest return that is not tied to the market's swings. The strategy seeks capital growth and income. Long-short strategies are best suited to investors who expect low returns from stocks in coming years, because these strategies do not rely solely on market returns. In this environment, the best funds might be those that seek to reduce stock market exposure without eliminating it. The goal is to get most of the market's returns when stocks go up, while paring the losses when stocks tumble. The problem with these funds is that neutral investors might prefer them, while any investor who is either bullish or bearish have better options.

https://www.investopedia.com/simple-agreement-for-future-equity-8414773

What Is a Simple Agreement for Future Equity (SAFE)?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> A simple agreement for future equity (SAFE) is a financial instrument first offered in 2013 that has gained popularity in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/startup.asp">startup</a> ecosystem, particularly among early-stage companies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> SAFEs do not represent a current <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equity.asp">equity</a> stake in a company. Instead, the SAFE terms must be met before you receive this stake. A SAFE is usually triggered when a specific amount of funding is met.<span class="ql-inline-citation" data-cite="2"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Simple agreements for future equity, or SAFEs, are flexible agreements providing future equity rights without immediate valuation.</li><li>SAFEs are commonly used for early-stage startup funding.</li><li>Conversion terms are triggered by specific events like equity funding rounds or acquisitions.</li><li>They differ from traditional financing methods, not accruing interest or having a maturity date.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-safes-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> How SAFEs Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> SAFEs emerged as a popular fundraising option after 2013 when Y Combinator, a tech startup company, introduced it.<span class="ql-inline-citation" data-cite="1"></span> Since then, they have become more widely used, especially among early-stage startups, as a more straightforward and faster alternative to equity financing or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convertibledebenture.asp">convertible notes</a>.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Startups use SAFEs to receive funding without determining a valuation or issuing equity immediately. Investors invest in the startup, but rather than getting shares right away. Their investment converts into equity only once a predefined triggering event occurs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Common <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/triggeringevent.asp">triggering events</a>, also known as conversion terms, include an equity financing round, an acquisition, or an initial public offering (IPO). Conversions usually happen at a discount or valuation cap as an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crossoverinvestor.asp">incentive to invest early</a>.<span class="ql-inline-citation" data-cite="2"></span> Suppose the triggering event does not occur before the maturity date. In that case, the investor can ask for a payout of the original investment or convert it into equity at the company’s discretion. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_14-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_15-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A SAFE is not a loan; it doesn’t accrue interest and doesn’t have a maturity date. This makes it different from traditional financing models.</p></div></div></div> <span class="heading-toc" id="toc-benefits-of-a-safe"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Benefits of a SAFE </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> SAFEs have several benefits for both the startup and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investor</a>. For both parties, the most significant advantage is their simplicity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> SAFEs are typically shorter and less complex than traditional equity or debt financing documents, which speeds up the negotiation process. This enables startups to focus on their business rather than getting bogged down in lengthy funding negotiations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> SAFEs also often have customizable terms that can be tailored to fit the specific needs of the startup and its investors. This flexibility can include valuation caps and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountrate.asp">discount rates</a>, allowing startups to negotiate terms that align with their growth strategy and funding needs.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Since investor returns are directly tied to the equity they receive, their success is aligned with the startup’s success. This can encourage investors to contribute more than just capital. They might offer mentorship, industry contacts, and strategic advice to help the startup succeed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Benefits for Startups </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Startups often struggle with accurate and fair <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuation.asp">valuation</a> in their early stages. SAFEs let them postpone this challenge until a later funding round, usually when more information is available to determine the company’s worth. This can prevent founders from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/undervalued.asp">undervaluing</a> their company early on. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Early-stage funding rounds can also lead to significant equity dilution for founders. SAFEs can be structured to lower this dilution compared with traditional equity financing, enabling founders to keep more control over the company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Unlike convertible notes, SAFEs are not debt instruments and don’t accrue interest.<span class="ql-inline-citation" data-cite="8"></span> This aspect is helpful for startups since it avoids the pressure of accumulating debt and the obligation of making repayments. This can be challenging for companies still working on generating <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a> or with high <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/burnrate.asp">burn rates</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> Benefits for Investors </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> For investors, the primary attraction of a SAFE is the potential for high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/return.asp">returns</a>. If the startup succeeds, their equity could <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciate</a> substantially. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Since SAFEs are used primarily in early-stage startups, the initial investment is typically lower than in later funding rounds. This lower entry point reduces the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risk</a> for investors while still allowing them to be part of a potentially successful venture. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> In some cases, SAFEs can include provisions that give early investors some priority over future investors. This can consist of early access to new shares or discounts in future rounds, which can attract investors looking to maximize their investment benefits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> SAFEs also have a straightforward <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exitstrategy.asp">exit strategy</a>. Once the agreement is converted into equity, investors can stay invested or exit through secondary sales, an acquisition, or an IPO of the startup. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <span class="heading-toc" id="toc-risks-and-considerations-of-safes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-heading__text"> Risks and Considerations of SAFEs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> When a startup defers its valuation to a later round, there’s a risk that it will become <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overvalued.asp">overvalued</a>. If the company doesn’t meet its expected growth benchmarks, it might face difficulties raising funds or satisfying investor expectations based on the agreed-upon cap. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> While SAFEs initially lower the risk of dilution, converting these instruments into equity during subsequent funding rounds can dilute the founders’ stakes later. This could be more than originally anticipated, especially if the startup has to raise more funds at a lower valuation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> For investors, SAFEs don’t provide immediate ownership in the company. This means investors won’t have equity or voting rights until the SAFE converts, which might not happen if the company doesn’t survive until its later funding round. If the startup fails before the conversion event, SAFE investors may end up with nothing. Unlike debt instruments, SAFEs typically don’t protect investors like creditors if there’s a company liquidation.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_48-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_49-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>In some cases, triggering events in a SAFE might not occur, leaving investors without equity. For instance, if a startup becomes financially self-sufficient, no longer requires additional funding, and isn’t acquired by another entity, then the conditions for converting the SAFE into equity might never be met. This scenario could mean the investor doesn’t receive equity despite the initial investment.<span class="ql-inline-citation" data-cite="2"></span> </p></div></div></div> <span class="heading-toc" id="toc-safes-vs-other-early-round-financing-instruments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_50-0"> <span class="mntl-sc-block-heading__text"> SAFEs vs. Other Early-Round Financing Instruments </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> To better understand SAFEs, it’s helpful to survey the landscape of startup financing and compare the instruments commonly available to entrepreneurs and early-stage investors. Each carries its own set of features, benefits, and considerations. This table offers a concise yet comprehensive overview, highlighting the key differences in structure, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conversionratio.asp">conversion mechanisms</a>, and investor rights.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_53-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="5">Early-Round Financing Instruments</th> </tr> <tr> <th><b>Feature</b></th> <th><b>SAFEs</b></th> <th><b>Convertible Notes</b></th> <th><b>Equity Financing</b></th> <th><b>Loans</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Structure</b></td> <td>Equity warrant (future equity rights, not debt)</td> <td>Debts that convert to equity</td> <td>Direct ownership in company</td> <td>Debt</td> </tr> <tr> <td><b>Conversion to Equity</b></td> <td>At next funding round or liquidity event, often with valuation cap or discount</td> <td>Convert at specified triggers, often with interest and discount</td> <td>Immediate equity issuance</td> <td>Do not convert to equity</td> </tr> <tr> <td><b>Interest Accrual</b></td> <td>No</td> <td>Yes</td> <td>No</td> <td>Yes</td> </tr> <tr> <td><b>Maturity Date</b></td> <td>No maturity date</td> <td>Have a maturity date</td> <td>N/A</td> <td>Have a maturity date</td> </tr> <tr> <td><b>Investor Rights</b></td> <td>Limited until conversion</td> <td>Creditor rights until conversion, then equity rights</td> <td>Immediate equity rights (voting, dividends)</td> <td>Creditors’ rights</td> </tr> <tr> <td><b>Valuation Determination</b></td> <td>Deferred until conversion</td> <td>Can be determined at conversion</td> <td>Determined at investment</td> <td>N/A</td> </tr> <tr> <td><b>Immediate Equity</b></td> <td>No</td> <td>No, until conversion</td> <td>Yes</td> <td>No</td> </tr> <tr> <td><b>Debt Obligation</b></td> <td>No</td> <td>Yes, until conversion</td> <td>No</td> <td>Yes</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_55-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_56-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>SAFEs have become increasingly common among startups since they were introduced by the venture capital fund and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incubatorfirm.asp">incubator</a> Y Combinator in 2013. SAFEs have been used by countless startups for early-stage fundraising.<span class="ql-inline-citation" data-cite="1"></span><br/></p></div></div></div> <span class="heading-toc" id="toc-legal-and-regulatory-considerations-of-safes"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-heading__text"> Legal and Regulatory Considerations of SAFEs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> From a legal perspective, SAFEs are generally viewed as derivative contracts providing rights to future equity ownership (i.e., warrants without an expiration date). As such, they fall under specific state and federal regulations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Once triggered, shares issued from a SAFE are considered securities.<span class="ql-inline-citation" data-cite="6"></span> As such, they must comply with securities laws, requiring registration with or an exemption from the U.S. Securities and Exchange Commission (SEC). A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulationd.asp">Regulation D</a> filing is commonly needed within 15 days of the first investment.<span class="ql-inline-citation" data-cite="7"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_62-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_63-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>It’s crucial to consult with legal and financial experts to understand the full implications of a SAFE, including potential tax consequences and compliance with securities laws.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> For investors, SAFEs don’t usually entail voting rights. However, agreements may grant voting rights on specific matters related to the SAFE. Some SAFEs may include terms allowing the company to repurchase the investor’s future equity rights instead of conversion. Should the company be dissolved, the terms will state what happens to the investments in the SAFE, which could include a total loss.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-what-is-the-valuation-cap-in-a-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Valuation Cap in a SAFE?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A valuation cap in a SAFE sets the maximum value in equity you can get in the agreement. If the company’s valuation when a triggering event (like a funding round) occurs is more than the cap, then your SAFE is converted using the valuation cap’s value. This can result in you receiving more shares. The cap is designed to reward early investors for taking on more risk by getting in at an earlier stage.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-what-is-a-pre-money-vs-post-money-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Pre-Money vs. Post-Money SAFE?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/difference-between-premoney-and-postmoney/">Pre-money and post-money</a> SAFEs differ in how the company’s value is determined in a SAFE investment. For a pre-money SAFE, the valuation cap is set before including the amount raised in the SAFE round, which can lead to a greater dilution for founders since all SAFEs and funding affect the valuation. In a post-money SAFE, the valuation cap includes the SAFE investments.</p><p>Originally, pre-money SAFEs were used when startups raised smaller amounts before a priced round. These were seen as early investments in the future priced round. However, as fundraising evolved, startups began raising larger amounts in seed rounds, now considered separate financing. In 2018, the post-money SAFE was introduced, allowing for a clearer calculation of company ownership after accounting for SAFE investments. This had advantages for both founders and investors in understanding the dilution and ownership stakes.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="1"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_70-0"><span class="heading-toc" id="toc-how-is-a-safe-taxed"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is a SAFE Taxed?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While the initial investment amount into a SAFE would not cause any tax liability for the investor when investing, its conversion into equity means it becomes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxableevent.asp">taxable</a>. When the SAFE is converted into equity shares, any gains above your original investment are subject to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital_gains_tax.asp">capital gains tax</a> should you sell your shares. For the company, although a SAFE is not debt or equity at first, the proceeds from investors do count as taxable revenue.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_72-0"><span class="heading-toc" id="toc-can-a-safe-be-used-at-a-later-funding-round"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a SAFE Be Used at a Later Funding Round?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>SAFEs are typically associated with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seedcapital.asp">seed stage funding</a>, given their simplicity and the flexibility they provide to manage an uncertain valuation. While uncommon, they can be adapted for use in later funding rounds. The key is to tailor the SAFE terms to suit the more mature stage of the company by adjusting the valuation cap and discount rate to reflect the company’s growth and market conditions.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_74-0"><span class="heading-toc" id="toc-how-does-a-safe-impact-a-startups-cap-table"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a SAFE Impact a Startup’s Cap Table?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A SAFE influences a startup’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalization-table.asp">capitalization table (cap table)</a> at the time of conversion, not when the SAFE is initially issued. This means that the investor’s potential equity stake is not immediately reflected in the cap table. Once there is a triggering event like a funding round or a sale, the SAFE is converted into equity, increasing the number of shares outstanding and altering the ownership percentages, potentially diluting earlier investors’ shares.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> A SAFE is a popular financial instrument in the startup ecosystem, primarily used by early-stage companies. Startups can use it to adapt to changes while securing funding without providing immediate equity stakes or determining a set value for their shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> SAFEs let investors convert their cash investments into equity when specified events occur, often at a discount or a maximum value. Key benefits include simplicity, customizable terms, aligning investor and startup success, and lowering the potential for diluting founders’ stakes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> However, since SAFEs do not confer any shares or rights until conversion, the investor may lose all their money if the company never reaches the predetermined milestones. </p></div>

A simple agreement for future equity (SAFE) is a financial instrument first offered in 2013 that has gained popularity in the [startup](https://www.investopedia.com/terms/s/startup.asp) ecosystem, particularly among early-stage companies. SAFEs do not represent a current [equity](https://www.investopedia.com/terms/e/equity.asp) stake in a company. Instead, the SAFE terms must be met before you receive this stake. A SAFE is usually triggered when a specific amount of funding is met. ### Key Takeaways * Simple agreements for future equity, or SAFEs, are flexible agreements providing future equity rights without immediate valuation. * SAFEs are commonly used for early-stage startup funding. * Conversion terms are triggered by specific events like equity funding rounds or acquisitions. * They differ from traditional financing methods, not accruing interest or having a maturity date. ## How SAFEs Work SAFEs emerged as a popular fundraising option after 2013 when Y Combinator, a tech startup company, introduced it. Since then, they have become more widely used, especially among early-stage startups, as a more straightforward and faster alternative to equity financing or [convertible notes](https://www.investopedia.com/terms/c/convertibledebenture.asp). Startups use SAFEs to receive funding without determining a valuation or issuing equity immediately. Investors invest in the startup, but rather than getting shares right away. Their investment converts into equity only once a predefined triggering event occurs. Common [triggering events](https://www.investopedia.com/terms/t/triggeringevent.asp), also known as conversion terms, include an equity financing round, an acquisition, or an initial public offering (IPO). Conversions usually happen at a discount or valuation cap as an [incentive to invest early](https://www.investopedia.com/terms/c/crossoverinvestor.asp). Suppose the triggering event does not occur before the maturity date. In that case, the investor can ask for a payout of the original investment or convert it into equity at the company’s discretion. ### A SAFE is not a loan; it doesn’t accrue interest and doesn’t have a maturity date. This makes it different from traditional financing models. ## Benefits of a SAFE SAFEs have several benefits for both the startup and the [investor](https://www.investopedia.com/terms/i/investor.asp). For both parties, the most significant advantage is their simplicity. SAFEs are typically shorter and less complex than traditional equity or debt financing documents, which speeds up the negotiation process. This enables startups to focus on their business rather than getting bogged down in lengthy funding negotiations. SAFEs also often have customizable terms that can be tailored to fit the specific needs of the startup and its investors. This flexibility can include valuation caps and [discount rates](https://www.investopedia.com/terms/d/discountrate.asp), allowing startups to negotiate terms that align with their growth strategy and funding needs. Since investor returns are directly tied to the equity they receive, their success is aligned with the startup’s success. This can encourage investors to contribute more than just capital. They might offer mentorship, industry contacts, and strategic advice to help the startup succeed. ### Benefits for Startups Startups often struggle with accurate and fair [valuation](https://www.investopedia.com/terms/v/valuation.asp) in their early stages. SAFEs let them postpone this challenge until a later funding round, usually when more information is available to determine the company’s worth. This can prevent founders from [undervaluing](https://www.investopedia.com/terms/u/undervalued.asp) their company early on. Early-stage funding rounds can also lead to significant equity dilution for founders. SAFEs can be structured to lower this dilution compared with traditional equity financing, enabling founders to keep more control over the company. Unlike convertible notes, SAFEs are not debt instruments and don’t accrue interest. This aspect is helpful for startups since it avoids the pressure of accumulating debt and the obligation of making repayments. This can be challenging for companies still working on generating [revenue](https://www.investopedia.com/terms/r/revenue.asp) or with high [burn rates](https://www.investopedia.com/terms/b/burnrate.asp). ### Benefits for Investors For investors, the primary attraction of a SAFE is the potential for high [returns](https://www.investopedia.com/terms/r/return.asp). If the startup succeeds, their equity could [appreciate](https://www.investopedia.com/terms/a/appreciation.asp) substantially. Since SAFEs are used primarily in early-stage startups, the initial investment is typically lower than in later funding rounds. This lower entry point reduces the [risk](https://www.investopedia.com/terms/r/risk.asp) for investors while still allowing them to be part of a potentially successful venture. In some cases, SAFEs can include provisions that give early investors some priority over future investors. This can consist of early access to new shares or discounts in future rounds, which can attract investors looking to maximize their investment benefits. SAFEs also have a straightforward [exit strategy](https://www.investopedia.com/terms/e/exitstrategy.asp). Once the agreement is converted into equity, investors can stay invested or exit through secondary sales, an acquisition, or an IPO of the startup. ## Risks and Considerations of SAFEs When a startup defers its valuation to a later round, there’s a risk that it will become [overvalued](https://www.investopedia.com/terms/o/overvalued.asp). If the company doesn’t meet its expected growth benchmarks, it might face difficulties raising funds or satisfying investor expectations based on the agreed-upon cap. While SAFEs initially lower the risk of dilution, converting these instruments into equity during subsequent funding rounds can dilute the founders’ stakes later. This could be more than originally anticipated, especially if the startup has to raise more funds at a lower valuation. For investors, SAFEs don’t provide immediate ownership in the company. This means investors won’t have equity or voting rights until the SAFE converts, which might not happen if the company doesn’t survive until its later funding round. If the startup fails before the conversion event, SAFE investors may end up with nothing. Unlike debt instruments, SAFEs typically don’t protect investors like creditors if there’s a company liquidation. ### In some cases, triggering events in a SAFE might not occur, leaving investors without equity. For instance, if a startup becomes financially self-sufficient, no longer requires additional funding, and isn’t acquired by another entity, then the conditions for converting the SAFE into equity might never be met. This scenario could mean the investor doesn’t receive equity despite the initial investment.  ## SAFEs vs. Other Early-Round Financing Instruments To better understand SAFEs, it’s helpful to survey the landscape of startup financing and compare the instruments commonly available to entrepreneurs and early-stage investors. Each carries its own set of features, benefits, and considerations. This table offers a concise yet comprehensive overview, highlighting the key differences in structure, [conversion mechanisms](https://www.investopedia.com/terms/c/conversionratio.asp), and investor rights.  | Early-Round Financing Instruments | | | | | | --- | --- | --- | --- | --- | | **Feature** | **SAFEs** | **Convertible Notes** | **Equity Financing** | **Loans** | | **Structure** | Equity warrant (future equity rights, not debt) | Debts that convert to equity | Direct ownership in company | Debt | | **Conversion to Equity** | At next funding round or liquidity event, often with valuation cap or discount | Convert at specified triggers, often with interest and discount | Immediate equity issuance | Do not convert to equity | | **Interest Accrual** | No | Yes | No | Yes | | **Maturity Date** | No maturity date | Have a maturity date | N/A | Have a maturity date | | **Investor Rights** | Limited until conversion | Creditor rights until conversion, then equity rights | Immediate equity rights (voting, dividends) | Creditors’ rights | | **Valuation Determination** | Deferred until conversion | Can be determined at conversion | Determined at investment | N/A | | **Immediate Equity** | No | No, until conversion | Yes | No | | **Debt Obligation** | No | Yes, until conversion | No | Yes | ### SAFEs have become increasingly common among startups since they were introduced by the venture capital fund and [incubator](https://www.investopedia.com/terms/i/incubatorfirm.asp) Y Combinator in 2013. SAFEs have been used by countless startups for early-stage fundraising. ## Legal and Regulatory Considerations of SAFEs From a legal perspective, SAFEs are generally viewed as derivative contracts providing rights to future equity ownership (i.e., warrants without an expiration date). As such, they fall under specific state and federal regulations. Once triggered, shares issued from a SAFE are considered securities. As such, they must comply with securities laws, requiring registration with or an exemption from the U.S. Securities and Exchange Commission (SEC). A [Regulation D](https://www.investopedia.com/terms/r/regulationd.asp) filing is commonly needed within 15 days of the first investment. ### It’s crucial to consult with legal and financial experts to understand the full implications of a SAFE, including potential tax consequences and compliance with securities laws. For investors, SAFEs don’t usually entail voting rights. However, agreements may grant voting rights on specific matters related to the SAFE. Some SAFEs may include terms allowing the company to repurchase the investor’s future equity rights instead of conversion. Should the company be dissolved, the terms will state what happens to the investments in the SAFE, which could include a total loss. ## What Is the Valuation Cap in a SAFE? A valuation cap in a SAFE sets the maximum value in equity you can get in the agreement. If the company’s valuation when a triggering event (like a funding round) occurs is more than the cap, then your SAFE is converted using the valuation cap’s value. This can result in you receiving more shares. The cap is designed to reward early investors for taking on more risk by getting in at an earlier stage. ## What Is a Pre-Money vs. Post-Money SAFE? [Pre-money and post-money](https://www.investopedia.com/ask/answers/difference-between-premoney-and-postmoney/) SAFEs differ in how the company’s value is determined in a SAFE investment. For a pre-money SAFE, the valuation cap is set before including the amount raised in the SAFE round, which can lead to a greater dilution for founders since all SAFEs and funding affect the valuation. In a post-money SAFE, the valuation cap includes the SAFE investments. Originally, pre-money SAFEs were used when startups raised smaller amounts before a priced round. These were seen as early investments in the future priced round. However, as fundraising evolved, startups began raising larger amounts in seed rounds, now considered separate financing. In 2018, the post-money SAFE was introduced, allowing for a clearer calculation of company ownership after accounting for SAFE investments. This had advantages for both founders and investors in understanding the dilution and ownership stakes. ## How Is a SAFE Taxed? While the initial investment amount into a SAFE would not cause any tax liability for the investor when investing, its conversion into equity means it becomes [taxable](https://www.investopedia.com/terms/t/taxableevent.asp). When the SAFE is converted into equity shares, any gains above your original investment are subject to [capital gains tax](https://www.investopedia.com/terms/c/capital_gains_tax.asp) should you sell your shares. For the company, although a SAFE is not debt or equity at first, the proceeds from investors do count as taxable revenue. ## Can a SAFE Be Used at a Later Funding Round? SAFEs are typically associated with [seed stage funding](https://www.investopedia.com/terms/s/seedcapital.asp), given their simplicity and the flexibility they provide to manage an uncertain valuation. While uncommon, they can be adapted for use in later funding rounds. The key is to tailor the SAFE terms to suit the more mature stage of the company by adjusting the valuation cap and discount rate to reflect the company’s growth and market conditions. ## How Does a SAFE Impact a Startup’s Cap Table? A SAFE influences a startup’s [capitalization table (cap table)](https://www.investopedia.com/terms/c/capitalization-table.asp) at the time of conversion, not when the SAFE is initially issued. This means that the investor’s potential equity stake is not immediately reflected in the cap table. Once there is a triggering event like a funding round or a sale, the SAFE is converted into equity, increasing the number of shares outstanding and altering the ownership percentages, potentially diluting earlier investors’ shares. ## The Bottom Line A SAFE is a popular financial instrument in the startup ecosystem, primarily used by early-stage companies. Startups can use it to adapt to changes while securing funding without providing immediate equity stakes or determining a set value for their shares. SAFEs let investors convert their cash investments into equity when specified events occur, often at a discount or a maximum value. Key benefits include simplicity, customizable terms, aligning investor and startup success, and lowering the potential for diluting founders’ stakes. However, since SAFEs do not confer any shares or rights until conversion, the investor may lose all their money if the company never reaches the predetermined milestones.

A simple agreement for future equity (SAFE) is a financial instrument first offered in 2013 that has gained popularity in the startup ecosystem, particularly among early-stage companies. SAFEs do not represent a current equity stake in a company. Instead, the SAFE terms must be met before you receive this stake. A SAFE is usually triggered when a specific amount of funding is met. Key Takeaways Simple agreements for future equity, or SAFEs, are flexible agreements providing future equity rights without immediate valuation.SAFEs are commonly used for early-stage startup funding.Conversion terms are triggered by specific events like equity funding rounds or acquisitions.They differ from traditional financing methods, not accruing interest or having a maturity date. How SAFEs Work SAFEs emerged as a popular fundraising option after 2013 when Y Combinator, a tech startup company, introduced it. Since then, they have become more widely used, especially among early-stage startups, as a more straightforward and faster alternative to equity financing or convertible notes. Startups use SAFEs to receive funding without determining a valuation or issuing equity immediately. Investors invest in the startup, but rather than getting shares right away. Their investment converts into equity only once a predefined triggering event occurs. Common triggering events, also known as conversion terms, include an equity financing round, an acquisition, or an initial public offering (IPO). Conversions usually happen at a discount or valuation cap as an incentive to invest early. Suppose the triggering event does not occur before the maturity date. In that case, the investor can ask for a payout of the original investment or convert it into equity at the company’s discretion. A SAFE is not a loan; it doesn’t accrue interest and doesn’t have a maturity date. This makes it different from traditional financing models. Benefits of a SAFE SAFEs have several benefits for both the startup and the investor. For both parties, the most significant advantage is their simplicity. SAFEs are typically shorter and less complex than traditional equity or debt financing documents, which speeds up the negotiation process. This enables startups to focus on their business rather than getting bogged down in lengthy funding negotiations. SAFEs also often have customizable terms that can be tailored to fit the specific needs of the startup and its investors. This flexibility can include valuation caps and discount rates, allowing startups to negotiate terms that align with their growth strategy and funding needs. Since investor returns are directly tied to the equity they receive, their success is aligned with the startup’s success. This can encourage investors to contribute more than just capital. They might offer mentorship, industry contacts, and strategic advice to help the startup succeed. Benefits for Startups Startups often struggle with accurate and fair valuation in their early stages. SAFEs let them postpone this challenge until a later funding round, usually when more information is available to determine the company’s worth. This can prevent founders from undervaluing their company early on. Early-stage funding rounds can also lead to significant equity dilution for founders. SAFEs can be structured to lower this dilution compared with traditional equity financing, enabling founders to keep more control over the company. Unlike convertible notes, SAFEs are not debt instruments and don’t accrue interest. This aspect is helpful for startups since it avoids the pressure of accumulating debt and the obligation of making repayments. This can be challenging for companies still working on generating revenue or with high burn rates. Benefits for Investors For investors, the primary attraction of a SAFE is the potential for high returns. If the startup succeeds, their equity could appreciate substantially. Since SAFEs are used primarily in early-stage startups, the initial investment is typically lower than in later funding rounds. This lower entry point reduces the risk for investors while still allowing them to be part of a potentially successful venture. In some cases, SAFEs can include provisions that give early investors some priority over future investors. This can consist of early access to new shares or discounts in future rounds, which can attract investors looking to maximize their investment benefits. SAFEs also have a straightforward exit strategy. Once the agreement is converted into equity, investors can stay invested or exit through secondary sales, an acquisition, or an IPO of the startup. Risks and Considerations of SAFEs When a startup defers its valuation to a later round, there’s a risk that it will become overvalued. If the company doesn’t meet its expected growth benchmarks, it might face difficulties raising funds or satisfying investor expectations based on the agreed-upon cap. While SAFEs initially lower the risk of dilution, converting these instruments into equity during subsequent funding rounds can dilute the founders’ stakes later. This could be more than originally anticipated, especially if the startup has to raise more funds at a lower valuation. For investors, SAFEs don’t provide immediate ownership in the company. This means investors won’t have equity or voting rights until the SAFE converts, which might not happen if the company doesn’t survive until its later funding round. If the startup fails before the conversion event, SAFE investors may end up with nothing. Unlike debt instruments, SAFEs typically don’t protect investors like creditors if there’s a company liquidation. In some cases, triggering events in a SAFE might not occur, leaving investors without equity. For instance, if a startup becomes financially self-sufficient, no longer requires additional funding, and isn’t acquired by another entity, then the conditions for converting the SAFE into equity might never be met. This scenario could mean the investor doesn’t receive equity despite the initial investment.  SAFEs vs. Other Early-Round Financing Instruments To better understand SAFEs, it’s helpful to survey the landscape of startup financing and compare the instruments commonly available to entrepreneurs and early-stage investors. Each carries its own set of features, benefits, and considerations. This table offers a concise yet comprehensive overview, highlighting the key differences in structure, conversion mechanisms, and investor rights.  Early-Round Financing Instruments Feature SAFEs Convertible Notes Equity Financing Loans Structure Equity warrant (future equity rights, not debt) Debts that convert to equity Direct ownership in company Debt Conversion to Equity At next funding round or liquidity event, often with valuation cap or discount Convert at specified triggers, often with interest and discount Immediate equity issuance Do not convert to equity Interest Accrual No Yes No Yes Maturity Date No maturity date Have a maturity date N/A Have a maturity date Investor Rights Limited until conversion Creditor rights until conversion, then equity rights Immediate equity rights (voting, dividends) Creditors’ rights Valuation Determination Deferred until conversion Can be determined at conversion Determined at investment N/A Immediate Equity No No, until conversion Yes No Debt Obligation No Yes, until conversion No Yes SAFEs have become increasingly common among startups since they were introduced by the venture capital fund and incubator Y Combinator in 2013. SAFEs have been used by countless startups for early-stage fundraising. Legal and Regulatory Considerations of SAFEs From a legal perspective, SAFEs are generally viewed as derivative contracts providing rights to future equity ownership (i.e., warrants without an expiration date). As such, they fall under specific state and federal regulations. Once triggered, shares issued from a SAFE are considered securities. As such, they must comply with securities laws, requiring registration with or an exemption from the U.S. Securities and Exchange Commission (SEC). A Regulation D filing is commonly needed within 15 days of the first investment. It’s crucial to consult with legal and financial experts to understand the full implications of a SAFE, including potential tax consequences and compliance with securities laws. For investors, SAFEs don’t usually entail voting rights. However, agreements may grant voting rights on specific matters related to the SAFE. Some SAFEs may include terms allowing the company to repurchase the investor’s future equity rights instead of conversion. Should the company be dissolved, the terms will state what happens to the investments in the SAFE, which could include a total loss. What Is the Valuation Cap in a SAFE? A valuation cap in a SAFE sets the maximum value in equity you can get in the agreement. If the company’s valuation when a triggering event (like a funding round) occurs is more than the cap, then your SAFE is converted using the valuation cap’s value. This can result in you receiving more shares. The cap is designed to reward early investors for taking on more risk by getting in at an earlier stage. What Is a Pre-Money vs. Post-Money SAFE? Pre-money and post-money SAFEs differ in how the company’s value is determined in a SAFE investment. For a pre-money SAFE, the valuation cap is set before including the amount raised in the SAFE round, which can lead to a greater dilution for founders since all SAFEs and funding affect the valuation. In a post-money SAFE, the valuation cap includes the SAFE investments.Originally, pre-money SAFEs were used when startups raised smaller amounts before a priced round. These were seen as early investments in the future priced round. However, as fundraising evolved, startups began raising larger amounts in seed rounds, now considered separate financing. In 2018, the post-money SAFE was introduced, allowing for a clearer calculation of company ownership after accounting for SAFE investments. This had advantages for both founders and investors in understanding the dilution and ownership stakes. How Is a SAFE Taxed? While the initial investment amount into a SAFE would not cause any tax liability for the investor when investing, its conversion into equity means it becomes taxable. When the SAFE is converted into equity shares, any gains above your original investment are subject to capital gains tax should you sell your shares. For the company, although a SAFE is not debt or equity at first, the proceeds from investors do count as taxable revenue. Can a SAFE Be Used at a Later Funding Round? SAFEs are typically associated with seed stage funding, given their simplicity and the flexibility they provide to manage an uncertain valuation. While uncommon, they can be adapted for use in later funding rounds. The key is to tailor the SAFE terms to suit the more mature stage of the company by adjusting the valuation cap and discount rate to reflect the company’s growth and market conditions. How Does a SAFE Impact a Startup’s Cap Table? A SAFE influences a startup’s capitalization table (cap table) at the time of conversion, not when the SAFE is initially issued. This means that the investor’s potential equity stake is not immediately reflected in the cap table. Once there is a triggering event like a funding round or a sale, the SAFE is converted into equity, increasing the number of shares outstanding and altering the ownership percentages, potentially diluting earlier investors’ shares. The Bottom Line A SAFE is a popular financial instrument in the startup ecosystem, primarily used by early-stage companies. Startups can use it to adapt to changes while securing funding without providing immediate equity stakes or determining a set value for their shares. SAFEs let investors convert their cash investments into equity when specified events occur, often at a discount or a maximum value. Key benefits include simplicity, customizable terms, aligning investor and startup success, and lowering the potential for diluting founders’ stakes. However, since SAFEs do not confer any shares or rights until conversion, the investor may lose all their money if the company never reaches the predetermined milestones.

https://www.investopedia.com/terms/p/price-channel.asp

Price Channel: Meaning, Overview, Analysis

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-price-channel"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Price Channel? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term price channel refers to a signal that appears on a chart when a security's price becomes bounded between two parallel lines. The price channel may be termed horizontal, ascending, or descending depending on the direction of the trend. Price channels are often used by traders who practice the art of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> to gauge the momentum and direction of a security's price action and to identify <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tradingchannel.asp">trading channels</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A price channel occurs when a security's price oscillates between two parallel lines that are either horizontal, ascending, or descending. </li><li>The channel is formed when a security's price is buffeted by supply and demand. </li><li>Price channels are quite useful in identifying breakouts, which is when a security's price breaches either the upper or lower channel trendline.</li><li>Traders can sell when the price approaches the price channel's upper trendline and buy when it tests the lower trendline.</li><li>Maximize your gains when the security follows a delineated price channel path by using long and short positions.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-price-channel"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding a Price Channel </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A price channel forms when a security's price is buffeted by the forces of supply and demand. This movement can be upward, downward, or sideways <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trend.asp">trending</a>. These forces affect the price of a security and can cause it to create a prolonged price channel. The dominance of one force determines the price channel’s trending direction. Price channels can occur over various time frames. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Traders are always on the lookout for chart patterns that can aid them in their trading decisions. This is especially true for individuals who are disciples of technical analysis. Once a security's price action carves out a set of highs and lows that follow a discernible pattern and can be connected by two parallel lines, a price channel has been formed. You can see this visualized in the chart below.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_11-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:63.3%;"> <img alt="Price Channel" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/kEhR1XvIOdUNau-iWyShCz2Cplk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PriceChannel2-f2b5fb4fc7d44b4294d5af1d00022da3.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/kEhR1XvIOdUNau-iWyShCz2Cplk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PriceChannel2-f2b5fb4fc7d44b4294d5af1d00022da3.png" data-srcset="https://www.investopedia.com/thmb/3-mk0nNEvDGzXBRKr3eUuHa_1DM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/PriceChannel2-f2b5fb4fc7d44b4294d5af1d00022da3.png 750w" data-tracking-container="true" height="3959" id="mntl-sc-block-image_1-0" width="6250"/> <noscript> <img alt="Price Channel" class="img--noscript universal-image__image" height="3959" sizes="750px" src="https://www.investopedia.com/thmb/kEhR1XvIOdUNau-iWyShCz2Cplk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PriceChannel2-f2b5fb4fc7d44b4294d5af1d00022da3.png" srcset="https://www.investopedia.com/thmb/3-mk0nNEvDGzXBRKr3eUuHa_1DM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/PriceChannel2-f2b5fb4fc7d44b4294d5af1d00022da3.png 750w" width="6250"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner">Image by Julie Bang © Investopedia 2019</span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trendline.asp">trendline</a> is drawn when the price pivots higher while the upper trendline is drawn when the price pivots lower. The steepness of inclines and declines determine the direction of the price channel's trend. An upward or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ascendingchannel.asp">ascending price channel</a> is bounded by trendlines with a positive slope. It indicates that the price is trending higher with each price change. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Likewise, a downward, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/descendingchannel.asp">descending price channel</a> has trendlines with a negative slope. This indicates that the price trends lower with each price change. The two lines of a price channel represent support and resistance. Support and resistance lines can provide signals for profitable investment trades. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Price channels are quite useful in identifying breakouts, which is when a security's price breaches either the upper or lower channel trendline. Traders can also trade within the channel. This means selling the security when the price approaches the channel's upper trendline and buying when it tests the channel's lower trendline. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Price channels can be created by all types of vehicles, instruments, and securities. They include futures, stocks, mutual funds, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> among others.</p></div></div></div> <span class="heading-toc" id="toc-price-channel-analysis"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-heading__text"> Price Channel Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> There are a few ways to benefit from correctly identifying price channels. The best chance to maximize your gains happens when the security follows a delineated price channel path by using both <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/long.asp">long</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">short</a> positions. Furthermore, consider the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <li><strong>During an uptrend:</strong> A bullish investor may want to keep their holdings at the upward bound in anticipation of a breakout, which would lead to a surge in price. Investors may want to consider selling the asset or taking a short position when it hits the upper trendline as long as it looks like the security will remain within the price channel.</li><li><strong>During a downtrend:</strong> Investors may want to short the stock at the upper bound and take an even deeper short position they confirm a breakout. If an investor expects the price action to stay within the boundaries of the price channel, they could go against the trend and take a long position to maximize their profits.</li> </ul></div>

## What Is a Price Channel? The term price channel refers to a signal that appears on a chart when a security's price becomes bounded between two parallel lines. The price channel may be termed horizontal, ascending, or descending depending on the direction of the trend. Price channels are often used by traders who practice the art of [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) to gauge the momentum and direction of a security's price action and to identify [trading channels](https://www.investopedia.com/terms/t/tradingchannel.asp). ### Key Takeaways * A price channel occurs when a security's price oscillates between two parallel lines that are either horizontal, ascending, or descending. * The channel is formed when a security's price is buffeted by supply and demand. * Price channels are quite useful in identifying breakouts, which is when a security's price breaches either the upper or lower channel trendline. * Traders can sell when the price approaches the price channel's upper trendline and buy when it tests the lower trendline. * Maximize your gains when the security follows a delineated price channel path by using long and short positions. ## Understanding a Price Channel A price channel forms when a security's price is buffeted by the forces of supply and demand. This movement can be upward, downward, or sideways [trending](https://www.investopedia.com/terms/t/trend.asp). These forces affect the price of a security and can cause it to create a prolonged price channel. The dominance of one force determines the price channel’s trending direction. Price channels can occur over various time frames. Traders are always on the lookout for chart patterns that can aid them in their trading decisions. This is especially true for individuals who are disciples of technical analysis. Once a security's price action carves out a set of highs and lows that follow a discernible pattern and can be connected by two parallel lines, a price channel has been formed. You can see this visualized in the chart below. ![Price Channel]() :max_bytes(150000):strip_icc()/PriceChannel2-f2b5fb4fc7d44b4294d5af1d00022da3.png) Image by Julie Bang © Investopedia 2019 The lower [trendline](https://www.investopedia.com/terms/t/trendline.asp) is drawn when the price pivots higher while the upper trendline is drawn when the price pivots lower. The steepness of inclines and declines determine the direction of the price channel's trend. An upward or [ascending price channel](https://www.investopedia.com/terms/a/ascendingchannel.asp) is bounded by trendlines with a positive slope. It indicates that the price is trending higher with each price change. Likewise, a downward, or [descending price channel](https://www.investopedia.com/terms/d/descendingchannel.asp) has trendlines with a negative slope. This indicates that the price trends lower with each price change. The two lines of a price channel represent support and resistance. Support and resistance lines can provide signals for profitable investment trades. ## Special Considerations Price channels are quite useful in identifying breakouts, which is when a security's price breaches either the upper or lower channel trendline. Traders can also trade within the channel. This means selling the security when the price approaches the channel's upper trendline and buying when it tests the channel's lower trendline. ### Price channels can be created by all types of vehicles, instruments, and securities. They include futures, stocks, mutual funds, and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) among others. ## Price Channel Analysis There are a few ways to benefit from correctly identifying price channels. The best chance to maximize your gains happens when the security follows a delineated price channel path by using both [long](https://www.investopedia.com/terms/l/long.asp) and [short](https://www.investopedia.com/terms/s/short.asp) positions. Furthermore, consider the following: * **During an uptrend:** A bullish investor may want to keep their holdings at the upward bound in anticipation of a breakout, which would lead to a surge in price. Investors may want to consider selling the asset or taking a short position when it hits the upper trendline as long as it looks like the security will remain within the price channel. * **During a downtrend:** Investors may want to short the stock at the upper bound and take an even deeper short position they confirm a breakout. If an investor expects the price action to stay within the boundaries of the price channel, they could go against the trend and take a long position to maximize their profits.

What Is a Price Channel? The term price channel refers to a signal that appears on a chart when a security's price becomes bounded between two parallel lines. The price channel may be termed horizontal, ascending, or descending depending on the direction of the trend. Price channels are often used by traders who practice the art of technical analysis to gauge the momentum and direction of a security's price action and to identify trading channels. Key Takeaways A price channel occurs when a security's price oscillates between two parallel lines that are either horizontal, ascending, or descending. The channel is formed when a security's price is buffeted by supply and demand. Price channels are quite useful in identifying breakouts, which is when a security's price breaches either the upper or lower channel trendline.Traders can sell when the price approaches the price channel's upper trendline and buy when it tests the lower trendline.Maximize your gains when the security follows a delineated price channel path by using long and short positions. Understanding a Price Channel A price channel forms when a security's price is buffeted by the forces of supply and demand. This movement can be upward, downward, or sideways trending. These forces affect the price of a security and can cause it to create a prolonged price channel. The dominance of one force determines the price channel’s trending direction. Price channels can occur over various time frames. Traders are always on the lookout for chart patterns that can aid them in their trading decisions. This is especially true for individuals who are disciples of technical analysis. Once a security's price action carves out a set of highs and lows that follow a discernible pattern and can be connected by two parallel lines, a price channel has been formed. You can see this visualized in the chart below. Image by Julie Bang © Investopedia 2019 The lower trendline is drawn when the price pivots higher while the upper trendline is drawn when the price pivots lower. The steepness of inclines and declines determine the direction of the price channel's trend. An upward or ascending price channel is bounded by trendlines with a positive slope. It indicates that the price is trending higher with each price change. Likewise, a downward, or descending price channel has trendlines with a negative slope. This indicates that the price trends lower with each price change. The two lines of a price channel represent support and resistance. Support and resistance lines can provide signals for profitable investment trades. Special Considerations Price channels are quite useful in identifying breakouts, which is when a security's price breaches either the upper or lower channel trendline. Traders can also trade within the channel. This means selling the security when the price approaches the channel's upper trendline and buying when it tests the channel's lower trendline. Price channels can be created by all types of vehicles, instruments, and securities. They include futures, stocks, mutual funds, and exchange-traded funds (ETFs) among others. Price Channel Analysis There are a few ways to benefit from correctly identifying price channels. The best chance to maximize your gains happens when the security follows a delineated price channel path by using both long and short positions. Furthermore, consider the following: During an uptrend: A bullish investor may want to keep their holdings at the upward bound in anticipation of a breakout, which would lead to a surge in price. Investors may want to consider selling the asset or taking a short position when it hits the upper trendline as long as it looks like the security will remain within the price channel.During a downtrend: Investors may want to short the stock at the upper bound and take an even deeper short position they confirm a breakout. If an investor expects the price action to stay within the boundaries of the price channel, they could go against the trend and take a long position to maximize their profits.

https://www.investopedia.com/visa-mastercard-and-american-express-suspend-russia-operations-5221406

Visa, Mastercard and American Express Suspend Russian Operations

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Over the weekend, Visa and Mastercard announced that they would suspend their operations in Russia. A day later, American Express followed suit, adding Belarus as the Russian invasion continues in Ukraine. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Visa, Mastercard and American Express have announced that they will suspend their operations in Russia.</li><li>The announcements followed steps taken by the payment processing companies to comply with sanctions against the country.</li><li>Russian banks will no longer receive payment support from the three companies, and cards issued outside of the country will not work within its borders.</li><li>Russians won't be impacted heavily by the decisions due to the country's homegrown payment processor, Mir.</li></ul></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-subheading__text"> Payment Processors Add to the Growing List of Sanctions Against Russia </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Over the past two weeks, the Russian invasion of Ukraine has resulted in an onslaught of government sanctions, as well as steps taken by private companies against the Putin administration. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Over the weekend, payment processing companies Visa, Mastercard and American Express announced that they would suspend operations and support in the country. American Express also included neighboring country Belarus in its decision. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> According to the companies, cards issued by Russian banks will no longer receive support on their networks, and cards issued by non-Russian banks will not work if used with Russian merchants or ATMs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In a statement, Mastercard noted that it had operated in Russia for more than 25 years and is interested in resuming operations when the time is right.<span class="ql-inline-citation" data-cite="1"></span> The company has also donated $2 million to support relief efforts in Ukraine and invites others to donate to the American Red Cross and Save the Children.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Al Kelly, chairman and CEO of Visa, said, "We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed. This war and the ongoing threat to peace and stability demand we respond in line with our values."<span class="ql-inline-citation" data-cite="2"></span> The Visa Foundation has also announced it will provide a $2 million grant to the U.S. Fund for UNICEF to support humanitarian efforts in Ukraine.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In a memo to American Express employees, chairman and CEO Stephen Squeri noted that the decision is in addition to the steps the bank has taken to halt relationships with sanctioned Russian banks, as well as the $1 million in aid pledged to organizations providing relief in Ukraine.<span class="ql-inline-citation" data-cite="3"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-subheading__text"> How Payment Processing Suspensions Will Impact Russia </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The decisions by Visa, Mastercard and American Express may not impact Russian citizens and banks as much as you might think, at least not in the short term. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Following similar sanctions by the U.S. in 2014, when Russia annexed Crimea from Ukraine, the Russian Central Bank developed Mir, a payment system for domestic transactions. Because many banks use Mir instead of Visa, Mastercard and American Express to process payments, they claim that Russians can continue to use their cards for purchases, transferring funds, withdrawing cash and account access until their expiration date.<span class="ql-inline-citation" data-cite="6"></span><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:tips@investopedia.com" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">tips@investopedia.com</span></a></div></div>

Over the weekend, Visa and Mastercard announced that they would suspend their operations in Russia. A day later, American Express followed suit, adding Belarus as the Russian invasion continues in Ukraine. ### Key Takeaways * Visa, Mastercard and American Express have announced that they will suspend their operations in Russia. * The announcements followed steps taken by the payment processing companies to comply with sanctions against the country. * Russian banks will no longer receive payment support from the three companies, and cards issued outside of the country will not work within its borders. * Russians won't be impacted heavily by the decisions due to the country's homegrown payment processor, Mir. ### Payment Processors Add to the Growing List of Sanctions Against Russia Over the past two weeks, the Russian invasion of Ukraine has resulted in an onslaught of government sanctions, as well as steps taken by private companies against the Putin administration. Over the weekend, payment processing companies Visa, Mastercard and American Express announced that they would suspend operations and support in the country. American Express also included neighboring country Belarus in its decision. According to the companies, cards issued by Russian banks will no longer receive support on their networks, and cards issued by non-Russian banks will not work if used with Russian merchants or ATMs. In a statement, Mastercard noted that it had operated in Russia for more than 25 years and is interested in resuming operations when the time is right. The company has also donated $2 million to support relief efforts in Ukraine and invites others to donate to the American Red Cross and Save the Children. Al Kelly, chairman and CEO of Visa, said, "We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed. This war and the ongoing threat to peace and stability demand we respond in line with our values." The Visa Foundation has also announced it will provide a $2 million grant to the U.S. Fund for UNICEF to support humanitarian efforts in Ukraine. In a memo to American Express employees, chairman and CEO Stephen Squeri noted that the decision is in addition to the steps the bank has taken to halt relationships with sanctioned Russian banks, as well as the $1 million in aid pledged to organizations providing relief in Ukraine. ### How Payment Processing Suspensions Will Impact Russia The decisions by Visa, Mastercard and American Express may not impact Russian citizens and banks as much as you might think, at least not in the short term. Following similar sanctions by the U.S. in 2014, when Russia annexed Crimea from Ukraine, the Russian Central Bank developed Mir, a payment system for domestic transactions. Because many banks use Mir instead of Visa, Mastercard and American Express to process payments, they claim that Russians can continue to use their cards for purchases, transferring funds, withdrawing cash and account access until their expiration date. Do you have a news tip for Investopedia reporters? Please email us at [tips@investopedia.com](mailto:tips@investopedia.com)

Over the weekend, Visa and Mastercard announced that they would suspend their operations in Russia. A day later, American Express followed suit, adding Belarus as the Russian invasion continues in Ukraine. Key Takeaways Visa, Mastercard and American Express have announced that they will suspend their operations in Russia.The announcements followed steps taken by the payment processing companies to comply with sanctions against the country.Russian banks will no longer receive payment support from the three companies, and cards issued outside of the country will not work within its borders.Russians won't be impacted heavily by the decisions due to the country's homegrown payment processor, Mir. Payment Processors Add to the Growing List of Sanctions Against Russia Over the past two weeks, the Russian invasion of Ukraine has resulted in an onslaught of government sanctions, as well as steps taken by private companies against the Putin administration. Over the weekend, payment processing companies Visa, Mastercard and American Express announced that they would suspend operations and support in the country. American Express also included neighboring country Belarus in its decision. According to the companies, cards issued by Russian banks will no longer receive support on their networks, and cards issued by non-Russian banks will not work if used with Russian merchants or ATMs. In a statement, Mastercard noted that it had operated in Russia for more than 25 years and is interested in resuming operations when the time is right. The company has also donated $2 million to support relief efforts in Ukraine and invites others to donate to the American Red Cross and Save the Children. Al Kelly, chairman and CEO of Visa, said, "We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed. This war and the ongoing threat to peace and stability demand we respond in line with our values." The Visa Foundation has also announced it will provide a $2 million grant to the U.S. Fund for UNICEF to support humanitarian efforts in Ukraine. In a memo to American Express employees, chairman and CEO Stephen Squeri noted that the decision is in addition to the steps the bank has taken to halt relationships with sanctioned Russian banks, as well as the $1 million in aid pledged to organizations providing relief in Ukraine. How Payment Processing Suspensions Will Impact Russia The decisions by Visa, Mastercard and American Express may not impact Russian citizens and banks as much as you might think, at least not in the short term. Following similar sanctions by the U.S. in 2014, when Russia annexed Crimea from Ukraine, the Russian Central Bank developed Mir, a payment system for domestic transactions. Because many banks use Mir instead of Visa, Mastercard and American Express to process payments, they claim that Russians can continue to use their cards for purchases, transferring funds, withdrawing cash and account access until their expiration date. Do you have a news tip for Investopedia reporters? Please email us at tips@investopedia.com

https://www.investopedia.com/terms/c/commercialbank.asp

How Do Commercial Banks Work, and Why Do They Matter?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-commercial-bank"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Commercial Bank? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term commercial <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">bank</a> refers to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstitution.asp">financial institution</a> that accepts <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deposit.asp">deposits</a> and offers different banking and financial products. Commercial banks provide these services to people and businesses. Commercial banks make money by providing and earning <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a> to make these loans.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Commercial banks offer basic banking services, including deposit accounts and loans, to consumers and businesses.</li><li>These financial institutions make money from a variety of fees and by earning interest income from loans.</li><li>Commercial banks have traditionally been located in physical locations, but a growing number now operate exclusively online.</li><li>Commercial banks are important to the economy because they create capital, credit, and liquidity in the market.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_6-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Commercial Bank" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/RDKszAFpS_9iGdUkDtx_su_sBhQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/COMMERCIAL-BANK-FINAL-64996d1c0c1748d5994860dd9c190045.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/RDKszAFpS_9iGdUkDtx_su_sBhQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/COMMERCIAL-BANK-FINAL-64996d1c0c1748d5994860dd9c190045.jpg" data-srcset="https://www.investopedia.com/thmb/0luBxdMvqrrrucdNP-H2d5_uv_U=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/COMMERCIAL-BANK-FINAL-64996d1c0c1748d5994860dd9c190045.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Commercial Bank" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/RDKszAFpS_9iGdUkDtx_su_sBhQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/COMMERCIAL-BANK-FINAL-64996d1c0c1748d5994860dd9c190045.jpg" srcset="https://www.investopedia.com/thmb/0luBxdMvqrrrucdNP-H2d5_uv_U=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/COMMERCIAL-BANK-FINAL-64996d1c0c1748d5994860dd9c190045.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Yurle Villegas / Investopedia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-how-commercial-banks-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> How Commercial Banks Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Commercial banks provide basic banking services and products to the general public, both individual consumers and businesses. The following table highlights some of the key services commercial banks provide to their retail customers: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_10-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 218px;"></colgroup> <colgroup span="1" style="width: 150px;"></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>Banking Services</b> </td> <td><b>Lending Services</b> </td> <td><b>Investment Services</b></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/checking-vs-savings-accounts-4783514">Checking and savings accounts</a> </td> <td>Loans and <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage.asp">mortgages</a></td> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit (CDs)</a> </td> </tr> <tr> <td>Debit card transactions</td> <td>Lines of credit</td> <td>Retirement account services</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/safe-deposit-box.asp">Safe deposit boxes</a></td> <td>Letters of Credit</td> <td>Investment portfolio services</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Business banking services also include bank accounts, investments, and lending products. Commercial banks also provide their business clients with merchant services, which allows companies to accept payments electronically from their customers.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> These financial institutions have traditionally been located in buildings where customers come to use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/professionals/121615/bank-teller-career-path-qualifications.asp">teller</a> window services and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atm.asp">automated teller machines (ATMs)</a> to do their routine banking. With the rise in internet technology, most banks now allow their customers to do most of the same services <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/onlinebanking.asp">online</a> that they could do in person, including <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transfer.asp">transfers</a>, deposits, and bill <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payment.asp">payments</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The money that customers deposit at commercial banks is insured by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a>, including cash in savings accounts and CDs. Customers have the option to withdraw money upon demand, and the balances are fully insured up to $250,000. Therefore, banks do not have to pay much for this money.<span class="ql-inline-citation" data-cite="1"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A growing number of commercial banks operate exclusively online, where all transactions with the commercial bank must be made electronically. Because these banks don’t have any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brickandmortar.asp">brick-and-mortar</a> locations, they can offer a wider range of products and services at a lower cost—or none at all—to their customers.</p></div></div></div> <span class="heading-toc" id="toc-how-commercial-banks-make-money"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> How Commercial Banks Make Money </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Banks make money by imposing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/service-charge.asp">service charges</a> on their customers. These <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fee.asp">fees</a> vary based on the products, ranging from account fees (monthly maintenance charges, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-balance.asp">minimum balance</a> fees, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a> fees, and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nsf.asp">non-sufficient funds [NSF]</a> charges), safe deposit box fees, and <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/late-fee.asp">late fees</a>. Many loan products also contain fees in addition to interest charges. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rate</a> paid by banks on the money they borrow is less than the rate charged on the money they lend. For example, a bank may offer savings account customers an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Many banks pay their customers no interest (or very little) at all on checking account balances and offer interest rates for savings accounts that are well below U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">Treasury bond (T-bond)</a> rates.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-commercial-banks-and-lending"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> Commercial Banks and Lending </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Consumer lending makes up the bulk of North American bank lending. Some of the most significant categories include residential mortgages, automobile lending, and credit cards. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-subheading__text"> Residential Mortgages </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Mortgages make up by far the largest share. Mortgages are used to buy properties, and the homes themselves are often the security that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateralization.asp">collateralizes</a> the loan. Mortgages are typically written for 30-year repayment periods, and interest rates may be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-rate_mortgage.asp">fixed</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arm.asp">adjustable</a>, or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variable-rate-mortgage.asp">variable</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Although a variety of more exotic mortgage products were offered during the U.S. housing bubble of the 2000s, many of the riskier products, including pick-a-payment mortgages and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negativelyamortizingloan.asp">negative amortization loans</a>, are much less common now. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-subheading__text"> Auto Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Automobile lending is another significant category of secured lending for many banks. Compared to mortgage lending, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/auto-loans-4689734">auto loans</a> are typically for shorter terms and higher rates. Banks face extensive competition in auto lending from other financial institutions, like captive auto financing operations run by automobile manufacturers and dealers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_38-0"> <span class="mntl-sc-block-subheading__text"> Credit Cards </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">Credit cards</a> are another significant type of financing. Credit cards are, in essence, personal lines of credit that can be drawn down at any time. Private card issuers offer them through commercial banks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp">Visa and Mastercard</a> run the networks through which money is moved around between the shopper’s bank and the merchant’s bank after a transaction. Not all banks engage in credit card lending, as the rates of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> are traditionally much higher than in mortgage lending or other types of secured lending. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Credit card lending delivers lucrative fees for banks. For example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interchange-rate.asp">interchange fees</a> are charged to merchants for accepting the card and entering into the transaction. Banks also charge customers late-payment fees, currency exchange, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overlimit-fee.asp">over-limit</a>, and other fees, as well as elevated rates on the balances that credit card users carry from one month to the next.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_45-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_46-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">4,867</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The total number of commercial banks in the United States in 2023.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div> <span class="heading-toc" id="toc-importance-of-commercial-banks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> Importance of Commercial Banks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Commercial banks are an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/062513/role-commercial-banks-economy.asp">important part of the economy</a>. They not only provide consumers with an essential service but also help create capital and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> in the market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit.asp">credit</a>, which leads to an increase in production, employment, and consumer spending, thereby boosting the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economy.asp">economy</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> As such, these banks are heavily regulated by a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp">central bank</a> in their country or region. For instance, central banks impose <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/requiredreserves.asp">reserve requirements</a> on commercial banks. This means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankrun.asp">rushes to withdraw funds</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-commercial-banks-vs-investment-banks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> Commercial Banks vs. Investment Banks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Both commercial and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentbank.asp">investment banks</a> provide important services and play key roles in the economy. For much of the 20th century, these two branches of the banking industry were generally kept separate from one another in the United States, thanks to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/071603.asp">Glass-Steagall Act of 1933</a>, which was passed during the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great_depression.asp">Great Depression</a>.<span class="ql-inline-citation" data-cite="5"></span> It was largely repealed by the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/glba.asp">Gramm-Leach-Bliley Act of 1999</a>, allowing for the creation of <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-holding-company-fhc.asp">financial holding companies</a> that could have both commercial and investment bank subsidiaries.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> While commercial banks traditionally provide services to individuals and businesses, investment banks focus on offering banking services to large <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/company.asp">companies</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a>. They act as financial intermediaries, providing their clients with <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriting.asp">underwriting</a> services, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mergersandacquisitions.asp">merger and acquisition (M&amp;A)</a> strategies, corporate reorganization services, and other types of brokerage services for institutional and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hnwi.asp">high-net-worth individuals (HNWIs)</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> While commercial banking clients include individual consumers and small businesses, investment banking clients include governments, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp">hedge funds</a>, other financial institutions, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp">pension funds</a>, and large companies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_61-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_62-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>The Gramm-Leach-Bliley Act tore down the wall between commercial and investment banks but maintained some safeguards. For instance, it forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity—to prevent banks from promoting securities underwritten by other subsidiaries to their customers—and placed size limitations on subsidiaries.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-examples-of-commercial-banks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_63-0"> <span class="mntl-sc-block-heading__text"> Examples of Commercial Banks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Some of the world’s largest financial institutions are commercial banks or have commercial banking operations—many of which can be found in the U.S. For instance: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-bank-review-4845620">Chase Bank</a> is the commercial banking unit of JPMorgan Chase (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=JPM">JPM</a>). Headquartered in New York City, Chase Bank reported more than $3.39 trillion in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a> as of December 2023.<span class="ql-inline-citation" data-cite="3"></span></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bank-of-america-bank-review-5069877">Bank of America</a> (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BAC">BAC</a>) is the second-largest U.S. bank, with more than $2.54 trillion in assets and 6 million customers, including both retail clients and small and midsize businesses.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> As noted above, banking has had to change with the rise of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fintech.asp">financial technology (fintech)</a>. Some of the major commercial banks have an increased online presence. Some banks operate exclusively online. For example, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ally-bank-review-4842316">Ally Bank</a> (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ALLY">ALLY</a>) is one of the major online commercial banks in the United States. The bank is headquartered in Detroit and has $196 billion in assets as of December 2023.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_70-0"><span class="heading-toc" id="toc-is-my-bank-a-commercial-bank"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is My Bank a Commercial Bank?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Possibly! Commercial banks are what most people think of when they hear the term “bank.” Commercial banks are for-profit institutions that accept deposits, make loans, safeguard assets, and work with many different types of clients, including the general public and businesses. However, if your account is with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-a-community-bank-5069678">community bank</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a>, it probably would not be a commercial bank.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_72-0"><span class="heading-toc" id="toc-what-role-do-commercial-banks-play-in-the-economy"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Role Do Commercial Banks Play in the Economy?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Commercial banks are crucial to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fractionalreservebanking.asp">fractional reserve banking</a> system, currently found in most developed countries. This allows banks to extend new loans of up to (typically) 90% of the deposits they have on hand, theoretically growing the economy by freeing capital for lending.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_74-0"><span class="heading-toc" id="toc-is-my-money-safe-at-a-commercial-bank"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is My Money Safe at a Commercial Bank?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>For the most part, yes. Commercial banks are heavily regulated, and most deposit accounts are covered up to $250,000 by the Federal Deposit Insurance Corporation.<span class="ql-inline-citation" data-cite="6"></span> Moreover, commercial and investment banking funds cannot be co-mingled by law.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Commercial banks are a critical component of the U.S. economy by providing vital capital to businesses and individuals in the form of credit and loans. They provide a secure place where people save money, earn interest, and make payments through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/check.asp">checks</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">debit cards</a>, and credit cards. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> Commercial banks are typically in brick-and-mortar locations in cities and towns, many with extensive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/branch-banking.asp">branch networks</a>. A growing number have no physical location, however—instead, they are accessible online and through mobile applications. </p></div>

## What Is a Commercial Bank? The term commercial [bank](https://www.investopedia.com/terms/b/bank.asp) refers to a [financial institution](https://www.investopedia.com/terms/f/financialinstitution.asp) that accepts [deposits](https://www.investopedia.com/terms/d/deposit.asp) and offers different banking and financial products. Commercial banks provide these services to people and businesses. Commercial banks make money by providing and earning [interest](https://www.investopedia.com/terms/i/interest.asp) from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the [capital](https://www.investopedia.com/terms/c/capital.asp) to make these loans. ### Key Takeaways * Commercial banks offer basic banking services, including deposit accounts and loans, to consumers and businesses. * These financial institutions make money from a variety of fees and by earning interest income from loans. * Commercial banks have traditionally been located in physical locations, but a growing number now operate exclusively online. * Commercial banks are important to the economy because they create capital, credit, and liquidity in the market. ![Commercial Bank]() :max_bytes(150000):strip_icc()/COMMERCIAL-BANK-FINAL-64996d1c0c1748d5994860dd9c190045.jpg) Yurle Villegas / Investopedia ## How Commercial Banks Work Commercial banks provide basic banking services and products to the general public, both individual consumers and businesses. The following table highlights some of the key services commercial banks provide to their retail customers: | **Banking Services** | **Lending Services** | **Investment Services** | | --- | --- | --- | | [Checking and savings accounts](https://www.investopedia.com/checking-vs-savings-accounts-4783514) | Loans and [mortgages](https://www.investopedia.com/terms/m/mortgage.asp) | [Certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) | | Debit card transactions | Lines of credit | Retirement account services | | [Safe deposit boxes](https://www.investopedia.com/terms/s/safe-deposit-box.asp) | Letters of Credit | Investment portfolio services | Business banking services also include bank accounts, investments, and lending products. Commercial banks also provide their business clients with merchant services, which allows companies to accept payments electronically from their customers. These financial institutions have traditionally been located in buildings where customers come to use [teller](https://www.investopedia.com/articles/professionals/121615/bank-teller-career-path-qualifications.asp) window services and [automated teller machines (ATMs)](https://www.investopedia.com/terms/a/atm.asp) to do their routine banking. With the rise in internet technology, most banks now allow their customers to do most of the same services [online](https://www.investopedia.com/terms/o/onlinebanking.asp) that they could do in person, including [transfers](https://www.investopedia.com/terms/t/transfer.asp), deposits, and bill [payments](https://www.investopedia.com/terms/p/payment.asp). The money that customers deposit at commercial banks is insured by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp), including cash in savings accounts and CDs. Customers have the option to withdraw money upon demand, and the balances are fully insured up to $250,000. Therefore, banks do not have to pay much for this money. ### A growing number of commercial banks operate exclusively online, where all transactions with the commercial bank must be made electronically. Because these banks don’t have any [brick-and-mortar](https://www.investopedia.com/terms/b/brickandmortar.asp) locations, they can offer a wider range of products and services at a lower cost—or none at all—to their customers. ## How Commercial Banks Make Money Banks make money by imposing [service charges](https://www.investopedia.com/terms/s/service-charge.asp) on their customers. These [fees](https://www.investopedia.com/terms/f/fee.asp) vary based on the products, ranging from account fees (monthly maintenance charges, [minimum balance](https://www.investopedia.com/terms/m/minimum-balance.asp) fees, [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fees, and [non-sufficient funds [NSF]](https://www.investopedia.com/terms/n/nsf.asp) charges), safe deposit box fees, and [late fees](https://www.investopedia.com/terms/l/late-fee.asp). Many loan products also contain fees in addition to interest charges. Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) paid by banks on the money they borrow is less than the rate charged on the money they lend. For example, a bank may offer savings account customers an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually. Many banks pay their customers no interest (or very little) at all on checking account balances and offer interest rates for savings accounts that are well below U.S. [Treasury bond (T-bond)](https://www.investopedia.com/terms/t/treasurybond.asp) rates. ## Commercial Banks and Lending Consumer lending makes up the bulk of North American bank lending. Some of the most significant categories include residential mortgages, automobile lending, and credit cards. ### Residential Mortgages Mortgages make up by far the largest share. Mortgages are used to buy properties, and the homes themselves are often the security that [collateralizes](https://www.investopedia.com/terms/c/collateralization.asp) the loan. Mortgages are typically written for 30-year repayment periods, and interest rates may be [fixed](https://www.investopedia.com/terms/f/fixed-rate_mortgage.asp), [adjustable](https://www.investopedia.com/terms/a/arm.asp), or [variable](https://www.investopedia.com/terms/v/variable-rate-mortgage.asp). Although a variety of more exotic mortgage products were offered during the U.S. housing bubble of the 2000s, many of the riskier products, including pick-a-payment mortgages and [negative amortization loans](https://www.investopedia.com/terms/n/negativelyamortizingloan.asp), are much less common now. ### Auto Loans Automobile lending is another significant category of secured lending for many banks. Compared to mortgage lending, [auto loans](https://www.investopedia.com/auto-loans-4689734) are typically for shorter terms and higher rates. Banks face extensive competition in auto lending from other financial institutions, like captive auto financing operations run by automobile manufacturers and dealers. ### Credit Cards [Credit cards](https://www.investopedia.com/terms/c/creditcard.asp) are another significant type of financing. Credit cards are, in essence, personal lines of credit that can be drawn down at any time. Private card issuers offer them through commercial banks. [Visa and Mastercard](https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp) run the networks through which money is moved around between the shopper’s bank and the merchant’s bank after a transaction. Not all banks engage in credit card lending, as the rates of [default](https://www.investopedia.com/terms/d/default2.asp) are traditionally much higher than in mortgage lending or other types of secured lending. Credit card lending delivers lucrative fees for banks. For example, [interchange fees](https://www.investopedia.com/terms/i/interchange-rate.asp) are charged to merchants for accepting the card and entering into the transaction. Banks also charge customers late-payment fees, currency exchange, [over-limit](https://www.investopedia.com/terms/o/overlimit-fee.asp), and other fees, as well as elevated rates on the balances that credit card users carry from one month to the next. ### 4,867 The total number of commercial banks in the United States in 2023. ## Importance of Commercial Banks Commercial banks are an [important part of the economy](https://www.investopedia.com/articles/investing/062513/role-commercial-banks-economy.asp). They not only provide consumers with an essential service but also help create capital and [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) in the market. Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of [credit](https://www.investopedia.com/terms/c/credit.asp), which leads to an increase in production, employment, and consumer spending, thereby boosting the [economy](https://www.investopedia.com/terms/e/economy.asp). As such, these banks are heavily regulated by a [central bank](https://www.investopedia.com/terms/c/centralbank.asp) in their country or region. For instance, central banks impose [reserve requirements](https://www.investopedia.com/terms/r/requiredreserves.asp) on commercial banks. This means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public [rushes to withdraw funds](https://www.investopedia.com/terms/b/bankrun.asp). ## Commercial Banks vs. Investment Banks Both commercial and [investment banks](https://www.investopedia.com/terms/i/investmentbank.asp) provide important services and play key roles in the economy. For much of the 20th century, these two branches of the banking industry were generally kept separate from one another in the United States, thanks to the [Glass-Steagall Act of 1933](https://www.investopedia.com/articles/03/071603.asp), which was passed during the [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp). It was largely repealed by the [Gramm-Leach-Bliley Act of 1999](https://www.investopedia.com/terms/g/glba.asp), allowing for the creation of [financial holding companies](https://www.investopedia.com/terms/f/financial-holding-company-fhc.asp) that could have both commercial and investment bank subsidiaries. While commercial banks traditionally provide services to individuals and businesses, investment banks focus on offering banking services to large [companies](https://www.investopedia.com/terms/c/company.asp) and [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp). They act as financial intermediaries, providing their clients with [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) services, [merger and acquisition (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp) strategies, corporate reorganization services, and other types of brokerage services for institutional and [high-net-worth individuals (HNWIs)](https://www.investopedia.com/terms/h/hnwi.asp). While commercial banking clients include individual consumers and small businesses, investment banking clients include governments, [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp), other financial institutions, [pension funds](https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp), and large companies. ### The Gramm-Leach-Bliley Act tore down the wall between commercial and investment banks but maintained some safeguards. For instance, it forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity—to prevent banks from promoting securities underwritten by other subsidiaries to their customers—and placed size limitations on subsidiaries. ## Examples of Commercial Banks Some of the world’s largest financial institutions are commercial banks or have commercial banking operations—many of which can be found in the U.S. For instance: * [Chase Bank](https://www.investopedia.com/chase-bank-review-4845620) is the commercial banking unit of JPMorgan Chase ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=JPM)). Headquartered in New York City, Chase Bank reported more than $3.39 trillion in [assets](https://www.investopedia.com/terms/a/asset.asp) as of December 2023. * [Bank of America](https://www.investopedia.com/bank-of-america-bank-review-5069877) ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BAC)) is the second-largest U.S. bank, with more than $2.54 trillion in assets and 6 million customers, including both retail clients and small and midsize businesses. As noted above, banking has had to change with the rise of [financial technology (fintech)](https://www.investopedia.com/terms/f/fintech.asp). Some of the major commercial banks have an increased online presence. Some banks operate exclusively online. For example, [Ally Bank](https://www.investopedia.com/ally-bank-review-4842316) ([ALLY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ALLY)) is one of the major online commercial banks in the United States. The bank is headquartered in Detroit and has $196 billion in assets as of December 2023. ## Is My Bank a Commercial Bank? Possibly! Commercial banks are what most people think of when they hear the term “bank.” Commercial banks are for-profit institutions that accept deposits, make loans, safeguard assets, and work with many different types of clients, including the general public and businesses. However, if your account is with a [community bank](https://www.investopedia.com/what-is-a-community-bank-5069678) or [credit union](https://www.investopedia.com/terms/c/creditunion.asp), it probably would not be a commercial bank. ## What Role Do Commercial Banks Play in the Economy? Commercial banks are crucial to the [fractional reserve banking](https://www.investopedia.com/terms/f/fractionalreservebanking.asp) system, currently found in most developed countries. This allows banks to extend new loans of up to (typically) 90% of the deposits they have on hand, theoretically growing the economy by freeing capital for lending. ## Is My Money Safe at a Commercial Bank? For the most part, yes. Commercial banks are heavily regulated, and most deposit accounts are covered up to $250,000 by the Federal Deposit Insurance Corporation. Moreover, commercial and investment banking funds cannot be co-mingled by law. ## The Bottom Line Commercial banks are a critical component of the U.S. economy by providing vital capital to businesses and individuals in the form of credit and loans. They provide a secure place where people save money, earn interest, and make payments through [checks](https://www.investopedia.com/terms/c/check.asp), [debit cards](https://www.investopedia.com/terms/d/debitcard.asp), and credit cards. Commercial banks are typically in brick-and-mortar locations in cities and towns, many with extensive [branch networks](https://www.investopedia.com/terms/b/branch-banking.asp). A growing number have no physical location, however—instead, they are accessible online and through mobile applications.

What Is a Commercial Bank? The term commercial bank refers to a financial institution that accepts deposits and offers different banking and financial products. Commercial banks provide these services to people and businesses. Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans. Key Takeaways Commercial banks offer basic banking services, including deposit accounts and loans, to consumers and businesses.These financial institutions make money from a variety of fees and by earning interest income from loans.Commercial banks have traditionally been located in physical locations, but a growing number now operate exclusively online.Commercial banks are important to the economy because they create capital, credit, and liquidity in the market. Yurle Villegas / Investopedia How Commercial Banks Work Commercial banks provide basic banking services and products to the general public, both individual consumers and businesses. The following table highlights some of the key services commercial banks provide to their retail customers: Banking Services  Lending Services  Investment Services Checking and savings accounts  Loans and mortgages Certificates of deposit (CDs)  Debit card transactions Lines of credit Retirement account services Safe deposit boxes Letters of Credit Investment portfolio services Business banking services also include bank accounts, investments, and lending products. Commercial banks also provide their business clients with merchant services, which allows companies to accept payments electronically from their customers. These financial institutions have traditionally been located in buildings where customers come to use teller window services and automated teller machines (ATMs) to do their routine banking. With the rise in internet technology, most banks now allow their customers to do most of the same services online that they could do in person, including transfers, deposits, and bill payments. The money that customers deposit at commercial banks is insured by the Federal Deposit Insurance Corporation (FDIC), including cash in savings accounts and CDs. Customers have the option to withdraw money upon demand, and the balances are fully insured up to $250,000. Therefore, banks do not have to pay much for this money. A growing number of commercial banks operate exclusively online, where all transactions with the commercial bank must be made electronically. Because these banks don’t have any brick-and-mortar locations, they can offer a wider range of products and services at a lower cost—or none at all—to their customers. How Commercial Banks Make Money Banks make money by imposing service charges on their customers. These fees vary based on the products, ranging from account fees (monthly maintenance charges, minimum balance fees, overdraft fees, and non-sufficient funds [NSF] charges), safe deposit box fees, and late fees. Many loan products also contain fees in addition to interest charges. Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend. For example, a bank may offer savings account customers an annual interest rate of 0.25%, while charging mortgage clients 4.75% in interest annually. Many banks pay their customers no interest (or very little) at all on checking account balances and offer interest rates for savings accounts that are well below U.S. Treasury bond (T-bond) rates. Commercial Banks and Lending Consumer lending makes up the bulk of North American bank lending. Some of the most significant categories include residential mortgages, automobile lending, and credit cards. Residential Mortgages Mortgages make up by far the largest share. Mortgages are used to buy properties, and the homes themselves are often the security that collateralizes the loan. Mortgages are typically written for 30-year repayment periods, and interest rates may be fixed, adjustable, or variable. Although a variety of more exotic mortgage products were offered during the U.S. housing bubble of the 2000s, many of the riskier products, including pick-a-payment mortgages and negative amortization loans, are much less common now. Auto Loans Automobile lending is another significant category of secured lending for many banks. Compared to mortgage lending, auto loans are typically for shorter terms and higher rates. Banks face extensive competition in auto lending from other financial institutions, like captive auto financing operations run by automobile manufacturers and dealers. Credit Cards Credit cards are another significant type of financing. Credit cards are, in essence, personal lines of credit that can be drawn down at any time. Private card issuers offer them through commercial banks. Visa and Mastercard run the networks through which money is moved around between the shopper’s bank and the merchant’s bank after a transaction. Not all banks engage in credit card lending, as the rates of default are traditionally much higher than in mortgage lending or other types of secured lending. Credit card lending delivers lucrative fees for banks. For example, interchange fees are charged to merchants for accepting the card and entering into the transaction. Banks also charge customers late-payment fees, currency exchange, over-limit, and other fees, as well as elevated rates on the balances that credit card users carry from one month to the next. 4,867 The total number of commercial banks in the United States in 2023. Importance of Commercial Banks Commercial banks are an important part of the economy. They not only provide consumers with an essential service but also help create capital and liquidity in the market. Commercial banks ensure liquidity by taking the funds that their customers deposit in their accounts and lending them out to others. Commercial banks play a role in the creation of credit, which leads to an increase in production, employment, and consumer spending, thereby boosting the economy. As such, these banks are heavily regulated by a central bank in their country or region. For instance, central banks impose reserve requirements on commercial banks. This means that banks are required to hold a certain percentage of their consumer deposits at the central bank as a cushion if the public rushes to withdraw funds. Commercial Banks vs. Investment Banks Both commercial and investment banks provide important services and play key roles in the economy. For much of the 20th century, these two branches of the banking industry were generally kept separate from one another in the United States, thanks to the Glass-Steagall Act of 1933, which was passed during the Great Depression. It was largely repealed by the Gramm-Leach-Bliley Act of 1999, allowing for the creation of financial holding companies that could have both commercial and investment bank subsidiaries. While commercial banks traditionally provide services to individuals and businesses, investment banks focus on offering banking services to large companies and institutional investors. They act as financial intermediaries, providing their clients with underwriting services, merger and acquisition (M&A) strategies, corporate reorganization services, and other types of brokerage services for institutional and high-net-worth individuals (HNWIs). While commercial banking clients include individual consumers and small businesses, investment banking clients include governments, hedge funds, other financial institutions, pension funds, and large companies. The Gramm-Leach-Bliley Act tore down the wall between commercial and investment banks but maintained some safeguards. For instance, it forbids a bank and a nonbank subsidiary of the same holding company from marketing the products or services of the other entity—to prevent banks from promoting securities underwritten by other subsidiaries to their customers—and placed size limitations on subsidiaries. Examples of Commercial Banks Some of the world’s largest financial institutions are commercial banks or have commercial banking operations—many of which can be found in the U.S. For instance: Chase Bank is the commercial banking unit of JPMorgan Chase (JPM). Headquartered in New York City, Chase Bank reported more than $3.39 trillion in assets as of December 2023. Bank of America (BAC) is the second-largest U.S. bank, with more than $2.54 trillion in assets and 6 million customers, including both retail clients and small and midsize businesses. As noted above, banking has had to change with the rise of financial technology (fintech). Some of the major commercial banks have an increased online presence. Some banks operate exclusively online. For example, Ally Bank (ALLY) is one of the major online commercial banks in the United States. The bank is headquartered in Detroit and has $196 billion in assets as of December 2023. Is My Bank a Commercial Bank? Possibly! Commercial banks are what most people think of when they hear the term “bank.” Commercial banks are for-profit institutions that accept deposits, make loans, safeguard assets, and work with many different types of clients, including the general public and businesses. However, if your account is with a community bank or credit union, it probably would not be a commercial bank. What Role Do Commercial Banks Play in the Economy? Commercial banks are crucial to the fractional reserve banking system, currently found in most developed countries. This allows banks to extend new loans of up to (typically) 90% of the deposits they have on hand, theoretically growing the economy by freeing capital for lending. Is My Money Safe at a Commercial Bank? For the most part, yes. Commercial banks are heavily regulated, and most deposit accounts are covered up to $250,000 by the Federal Deposit Insurance Corporation. Moreover, commercial and investment banking funds cannot be co-mingled by law. The Bottom Line Commercial banks are a critical component of the U.S. economy by providing vital capital to businesses and individuals in the form of credit and loans. They provide a secure place where people save money, earn interest, and make payments through checks, debit cards, and credit cards. Commercial banks are typically in brick-and-mortar locations in cities and towns, many with extensive branch networks. A growing number have no physical location, however—instead, they are accessible online and through mobile applications.

https://www.investopedia.com/terms/a/anticpatory-breach.asp

Anticipatory Breach: Contract Law Definition and Example

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-anticipatory-breach"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Anticipatory Breach? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An anticipatory breach of contract is an action that shows one party's intention to fail to fulfill its contractual obligations to another party. An anticipatory breach can end the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/counterparty.asp">counterparty's</a> responsibility to perform its duties. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Demonstrating the other party's intention to breach the contract gives the counterparty grounds for beginning legal action. An anticipatory breach is also referred to as an anticipatory <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repudiation.asp">repudiation</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>An anticipatory breach, or repudiation, preempts a failure of a party to meet its contractual obligations to another party.</li><li>Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court.</li><li>The intent to break the contract must be an absolute refusal to fulfill the terms in order for it to qualify as an anticipatory breach.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-anticipatory-breaches"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding Anticipatory Breaches </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> An anticipatory breach occurs when a party demonstrates its intention to break a contract. However, vocal or written confirmation is not required, and failure to perform any obligation in a timely matter can result in a breach. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> By declaring an anticipatory breach, the counterparty may begin legal action immediately rather than waiting until the terms of a contract are actually broken. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-subheading__text"> Compensation Considerations </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. That could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach. It also might mean seeking a third party who could perform the duties outlined in the original contract. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-requirements-for-an-anticipatory-breach"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Requirements for an Anticipatory Breach </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach. The expected breach cannot be based solely on the assumption that the other party will not meet its obligations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If the anticipatory breach involves the sale of goods, then section 2-609 of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uniform-commercial-code.asp">Uniform Commercial Code</a> (UCC) also lays down several requirements. The party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled. While awaiting assurance, payments and other duties can and should be stopped. If the other party does not offer the proper assurance within 30 days, the contract is officially breached.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The requirements for an anticipatory breach can vary. It is a good idea to consult an attorney before taking any action.</p></div></div></div> <span class="heading-toc" id="toc-example-of-an-anticipatory-breach"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> Example of an Anticipatory Breach </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Let's say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline. If the developer requests regular updates on the project and is not pleased with the latest results, this is not grounds to claim an anticipatory breach. The architects may be behind schedule while continuing to work on the project. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> If the architects took actions that made it impossible to meet the deadline, it would constitute an anticipatory breach. For example, the architects might halt all work on the first project and commit all their resources to a new project with a different developer. That would preclude them from fulfilling the initial contract. </p></div>

## What Is an Anticipatory Breach? An anticipatory breach of contract is an action that shows one party's intention to fail to fulfill its contractual obligations to another party. An anticipatory breach can end the [counterparty's](https://www.investopedia.com/terms/c/counterparty.asp) responsibility to perform its duties. Demonstrating the other party's intention to breach the contract gives the counterparty grounds for beginning legal action. An anticipatory breach is also referred to as an anticipatory [repudiation](https://www.investopedia.com/terms/r/repudiation.asp). ### Key Takeaways * An anticipatory breach, or repudiation, preempts a failure of a party to meet its contractual obligations to another party. * Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. * The intent to break the contract must be an absolute refusal to fulfill the terms in order for it to qualify as an anticipatory breach. ## Understanding Anticipatory Breaches An anticipatory breach occurs when a party demonstrates its intention to break a contract. However, vocal or written confirmation is not required, and failure to perform any obligation in a timely matter can result in a breach. By declaring an anticipatory breach, the counterparty may begin legal action immediately rather than waiting until the terms of a contract are actually broken. ### Compensation Considerations Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. That could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach. It also might mean seeking a third party who could perform the duties outlined in the original contract. ## Requirements for an Anticipatory Breach The intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach. The expected breach cannot be based solely on the assumption that the other party will not meet its obligations. If the anticipatory breach involves the sale of goods, then section 2-609 of the [Uniform Commercial Code](https://www.investopedia.com/terms/u/uniform-commercial-code.asp) (UCC) also lays down several requirements. The party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled. While awaiting assurance, payments and other duties can and should be stopped. If the other party does not offer the proper assurance within 30 days, the contract is officially breached. ### The requirements for an anticipatory breach can vary. It is a good idea to consult an attorney before taking any action. ## Example of an Anticipatory Breach Let's say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline. If the developer requests regular updates on the project and is not pleased with the latest results, this is not grounds to claim an anticipatory breach. The architects may be behind schedule while continuing to work on the project. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken. If the architects took actions that made it impossible to meet the deadline, it would constitute an anticipatory breach. For example, the architects might halt all work on the first project and commit all their resources to a new project with a different developer. That would preclude them from fulfilling the initial contract.

What Is an Anticipatory Breach? An anticipatory breach of contract is an action that shows one party's intention to fail to fulfill its contractual obligations to another party. An anticipatory breach can end the counterparty's responsibility to perform its duties. Demonstrating the other party's intention to breach the contract gives the counterparty grounds for beginning legal action. An anticipatory breach is also referred to as an anticipatory repudiation. Key Takeaways An anticipatory breach, or repudiation, preempts a failure of a party to meet its contractual obligations to another party.Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court.The intent to break the contract must be an absolute refusal to fulfill the terms in order for it to qualify as an anticipatory breach. Understanding Anticipatory Breaches An anticipatory breach occurs when a party demonstrates its intention to break a contract. However, vocal or written confirmation is not required, and failure to perform any obligation in a timely matter can result in a breach. By declaring an anticipatory breach, the counterparty may begin legal action immediately rather than waiting until the terms of a contract are actually broken. Compensation Considerations Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. That could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach. It also might mean seeking a third party who could perform the duties outlined in the original contract. Requirements for an Anticipatory Breach The intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach. The expected breach cannot be based solely on the assumption that the other party will not meet its obligations. If the anticipatory breach involves the sale of goods, then section 2-609 of the Uniform Commercial Code (UCC) also lays down several requirements. The party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled. While awaiting assurance, payments and other duties can and should be stopped. If the other party does not offer the proper assurance within 30 days, the contract is officially breached. The requirements for an anticipatory breach can vary. It is a good idea to consult an attorney before taking any action. Example of an Anticipatory Breach Let's say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline. If the developer requests regular updates on the project and is not pleased with the latest results, this is not grounds to claim an anticipatory breach. The architects may be behind schedule while continuing to work on the project. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken. If the architects took actions that made it impossible to meet the deadline, it would constitute an anticipatory breach. For example, the architects might halt all work on the first project and commit all their resources to a new project with a different developer. That would preclude them from fulfilling the initial contract.

https://www.investopedia.com/top-cds-may-1-2024-best-1-year-rate-falls-while-4-year-rate-rises-8642183

Top CDs May 1, 2024 - Best 1-Year Rate Falls, While 4-Year Rate Rises

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_1-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:75.1%;"> <img alt="Top nationwide rate in each CD term from 3 months to 5 years, ranging from 4.70% to 5.65% APY. Rates current as of May 1, 2024." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/gT0EmRTELdh9mRlpHF0Po8MNlsE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1-13d91758099446ce8036568f835a49eb.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/gT0EmRTELdh9mRlpHF0Po8MNlsE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1-13d91758099446ce8036568f835a49eb.png" data-srcset="https://www.investopedia.com/thmb/zSOIOYFY20OzlopByoH88CmJigs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1-13d91758099446ce8036568f835a49eb.png 750w" data-tracking-container="true" height="1864" id="mntl-sc-block-image_1-0" width="2480"/> <noscript> <img alt="Top nationwide rate in each CD term from 3 months to 5 years, ranging from 4.70% to 5.65% APY. Rates current as of May 1, 2024." class="img--noscript universal-image__image" height="1864" sizes="750px" src="https://www.investopedia.com/thmb/gT0EmRTELdh9mRlpHF0Po8MNlsE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1-13d91758099446ce8036568f835a49eb.png" srcset="https://www.investopedia.com/thmb/zSOIOYFY20OzlopByoH88CmJigs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1-13d91758099446ce8036568f835a49eb.png 750w" width="2480"/> </noscript> </div> </div> </figure> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_2-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_3-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>The leading nationally available 1-year CD rate dropped today, from 5.60% to 5.40% APY, but the top 4-year rate climbed, moving up to 4.86% from 4.70%. </li> <li>Overall, the top nationwide CD rate continues to 5.65% APY, available from <a class="pseudoStyle" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mutualone.com/client-services/rates-calculators/deposit-rates/&amp;lender=MutualOne%20Bank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">MutualOne Bank</a> for a 3-month term.</li> <li>Today's runner-up is <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&amp;lender=Newtek%20Bank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Newtek Bank</a>, which is offering 5.55% APY on a slightly longer 6 months.</li> <li>Want to lock your rate further into the future? You can snag rates as high as 5.40% for 12-15 months, up to 5.30% for 2 years, or between 4.70% and 5.00% for 3 to 5 years.</li> <li>The <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates</a> have been gradually dipping for months, in anticipation of future Fed rate cuts. But recent inflation readings suggest it could be a while before the central bank feels comfortable lowering rates.</li> </ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Below you'll find featured rates available from our partners, followed by details from our ranking of the best CDs available nationwide. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--ma-rate-table--finance-mma" id="mntl-sc-block_6-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div class="comp ma-rate-table--finance-mma mntl-block" id="ma-rate-table--finance-mma_1-0"></div><!-- end: comp ma-rate-table--finance-mma mntl-block --> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <span class="heading-toc" id="toc-lock-in-530-to-565-apy-for-3-to-23-months"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Lock In 5.30% to 5.65% APY for 3 to 23 Months </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The top rate you can earn with a nationally available CD continues to be 5.65% APY. MutualOne Bank renewed that rate after withdrawing it nationally two weeks earlier. But it's a short-term offer, providing only a 3-month rate lock. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> That's why you may prefer the next best rate of 5.55% APY, which is available from Newtek Bank for 6 months. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> For a longer duration, you can earn up to 5.40% with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650">leading 1-year</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-18-month-cd-rates-5272348">18-month rate</a>. In total, 13 CDs are paying 5.40% APY or better, with terms of 3 to 15 months. For a slightly longer lock, though, you might like <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&amp;lender=Credit%20Human&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Credit Human's</a> offer of 5.30% on a take-your-pick term of 18-23 months.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_15-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:44.1%;"> <img alt="Range of the Top 15 CD Rates per Term - May 1, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/76j0g7PhL9mtYYIdnWn3pxh_mis=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Ranges-4fa0261d0b124ab281e43f095fc988b8.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/76j0g7PhL9mtYYIdnWn3pxh_mis=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Ranges-4fa0261d0b124ab281e43f095fc988b8.png" data-srcset="https://www.investopedia.com/thmb/5fD6qLgRztq_f8bJf2eE6WN3RgM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Ranges-4fa0261d0b124ab281e43f095fc988b8.png 750w" data-tracking-container="true" height="1096" id="mntl-sc-block-image_2-0" width="2480"/> <noscript> <img alt="Range of the Top 15 CD Rates per Term - May 1, 2024" class="img--noscript universal-image__image" height="1096" sizes="750px" src="https://www.investopedia.com/thmb/76j0g7PhL9mtYYIdnWn3pxh_mis=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Ranges-4fa0261d0b124ab281e43f095fc988b8.png" srcset="https://www.investopedia.com/thmb/5fD6qLgRztq_f8bJf2eE6WN3RgM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Ranges-4fa0261d0b124ab281e43f095fc988b8.png 750w" width="2480"/> </noscript> </div> </div> </figure> <span class="heading-toc" id="toc-longer-terms-will-secure-your-rate-to-2027or-beyond"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> Longer Terms Will Secure Your Rate to 2027—Or Beyond </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Choosing a CD term longer than two years is also a smart option, since it's possible U.S. interest rates could enter a declining period for the next 2-3 years. To lock in a rate that will last far into the future, you can choose a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-2-year-cd-rates-4801682">top 3-year CD</a> paying 5.00%, guaranteeing that return until 2027. Or you can opt to secure a rate in the mid-to-high 4% range for as far as 4 or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473">5 years</a> down the road. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_19-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 93px;"></colgroup> <colgroup span="1" style="width: 110px;"></colgroup> <colgroup span="1" style="width: 100px;"></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>CD Terms</b></td> <td><b>Yesterday's Top National Rate</b></td> <td><b>Today's Top National Rate</b></td> <td><b>Day's Change </b>(percentage points)</td> <td><b>Top Rate Provider</b></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-month-cd-rates-5272288" rel="noopener noreferrer">3 months</a></td> <td>5.65% APY</td> <td>5.65% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mutualone.com/client-services/rates-calculators/deposit-rates/&amp;lender=MutualOne%20Bank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">MutualOne Bank</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267" rel="noopener noreferrer">6 months</a></td> <td>5.55% APY</td> <td>5.55% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&amp;lender=Newtek%20Bank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Newtek Bank</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650" rel="noopener noreferrer">1 year</a></td> <td>5.60% APY</td> <td>5.40% APY</td> <td>- 0.20</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.applefcu.org/rates&amp;lender=Apple%20Federal%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Apple Federal Credit Union</a> and <a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nexbankpersonal.com/certificates-of-deposit-cds&amp;lender=NexBank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">NexBank</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-18-month-cd-rates-5272348" rel="noopener noreferrer">18 months</a></td> <td>5.40% APY</td> <td>5.40% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.northernbankdirect.com/cds&amp;lender=Northern%20Bank%20Direct&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Northern Bank Direct</a></td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.xcelfcu.org/Explore/Resources/Rates&amp;lender=XCEL%20Federal%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">2 years</a></td> <td>5.30% APY</td> <td>5.30% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&amp;lender=Credit%20Human&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Credit Human</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-year-cd-rates-4782938" rel="noopener noreferrer">3 years</a></td> <td>5.00% APY</td> <td>5.00% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.dollarsavingsdirect.com/securebanking/cdInfo.do&amp;lender=DollarSavingsDirect&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">DollarSavingsDirect</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473" rel="noopener noreferrer">4 years</a></td> <td>4.70% APY</td> <td>4.86% APY</td> <td>+ 0.16</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.wellbyfinancial.com/savings/certificates/&amp;lender=Wellby%20Financial&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Wellby Financial</a></td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lfcu.org/rates/personal-certificate-rates/&amp;lender=Lafayette%20Federal%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">5 years</a></td> <td>4.70% APY</td> <td>4.70% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&amp;lender=Credit%20Human&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Credit Human</a></td> </tr> </tbody> </table> <figcaption>To view the top 15–20 nationwide rates in any term, click on the desired term length in the left column above.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Today's high CD rates are a perfect antidote to stubborn inflation, with rates available in every CD term that far out-earn the current inflation rate of 3.5%. By putting money into one of these top-paying CDs today, you can stay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-beat-todays-stubborn-inflation-with-a-top-paying-cd-8610878">1 to 2 percentage points ahead of inflation</a>.</p></div></div></div> <span class="heading-toc" id="toc-cd-rates-are-still-near-record-highs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> CD Rates Are Still Near Record Highs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> CD rates have inched lower since they climbed to a historic peak of 6.50% in October. At the start of February, the number of CDs in our daily ranking that paid at least 5.50% APY was 30. Today that count sits at eight. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> But don't lose sight of how much <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificates of deposit (CDs)</a> still pay relative to the past 20 years. Locking in a yield in the 4% to 5% range for a year or more down the road is still a great earning opportunity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Also keep in mind that snagging the absolute <em>highest</em> APY isn't the only way to win with today's CDs. Since CD rates could fall quite substantially in 2024 and 2025, locking in a long-term rate now—before rates move lower—can be a smart move.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_30-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Xoxbs/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Top CD Rates Jan 2022 vs Fall 2023 peak vs. Current"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <span class="heading-toc" id="toc-jumbo-deposits-can-provide-more-cd-options"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> Jumbo Deposits Can Provide More CD Options </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The top two jumbo CDs let you earn more than you can with a standard CD. State Bank of Texas is paying 5.50% APY on a 12-month certificate, while My eBanc offers 5.49% APY for 6 months. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Beware that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-jumbo-cd-rates-4797766">the best jumbo CD rates</a> don't <em>always</em> pay more than standard certificates. Often, you can do just as well—or better—with a standard CD. That's the case right now in six of the eight terms below, so it's always wise to shop both certificate types before making a final decision. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_37-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 89px;"></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>CD Term</b></td> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bank-cd-rates-4801462" rel="noopener noreferrer">Today's Top National Bank Rate</a></b></td> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214" rel="noopener noreferrer">Today's Top National Credit Union Rate</a></b></td> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-jumbo-cd-rates-4797766" rel="noopener noreferrer">Today's Top National Jumbo Rate</a></b></td> </tr> <tr> <td>3 months</td> <td>5.65% APY*</td> <td>5.30% APY</td> <td>5.20% APY</td> </tr> <tr> <td>6 months</td> <td>5.55% APY*</td> <td>5.50% APY</td> <td>5.49% APY</td> </tr> <tr> <td>1 year</td> <td>5.40% APY</td> <td>5.40% APY</td> <td>5.50% APY*</td> </tr> <tr> <td>18 months</td> <td>5.40% APY</td> <td>5.40% APY</td> <td>5.41% APY*</td> </tr> <tr> <td>2 years</td> <td>4.90% APY</td> <td>5.30% APY*</td> <td>4.91% APY</td> </tr> <tr> <td>3 years</td> <td>5.00% APY*</td> <td>5.00% APY*</td> <td>4.97% APY</td> </tr> <tr> <td>4 years</td> <td>4.55% APY</td> <td>4.86% APY*</td> <td>4.48% APY</td> </tr> <tr> <td>5 years</td> <td>4.55% APY</td> <td>4.70% APY*</td> <td>4.37% APY</td> </tr> </tbody> </table> <figcaption>*Indicates the highest APY offered in each term. To view our lists of the top-paying CDs across terms for bank, credit union, and jumbo certificates, click on the column headers above.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-where-are-cd-rates-headed-in-2024"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-heading__text"> Where Are CD Rates Headed in 2024? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> To combat decades-high inflation, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve</a> aggressively hiked the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> between March 2022 and July 2023, raising the benchmark rate to its highest level in 22 years. That's important to savers because when the fed funds rate rises, banks and credit unions increase the interest rates they're willing to pay on customer deposits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> As a result, this past fall saw historically favorable conditions for CD shoppers, as well as for anyone holding cash in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">high-yield savings</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">money market account</a>. Rates on CDs rose to an October-November peak that was the highest we've seen in two decades. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-square figure-high-res" id="mntl-sc-block_44-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:88.8%;"> <img alt="Line graph showing the top CD rate by term each month from Dec 2021 to the present - May 1, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/4AugPxQ6QNlfZM2-QNPXMKMVv3c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Lines-0a25891689f94a299052e7f9954286fe.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/4AugPxQ6QNlfZM2-QNPXMKMVv3c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Lines-0a25891689f94a299052e7f9954286fe.png" data-srcset="https://www.investopedia.com/thmb/2Ks3de_2rpQLbiva348494bv8WQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Lines-0a25891689f94a299052e7f9954286fe.png 750w" data-tracking-container="true" height="2204" id="mntl-sc-block-image_3-0" width="2480"/> <noscript> <img alt="Line graph showing the top CD rate by term each month from Dec 2021 to the present - May 1, 2024" class="img--noscript universal-image__image" height="2204" sizes="750px" src="https://www.investopedia.com/thmb/4AugPxQ6QNlfZM2-QNPXMKMVv3c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Lines-0a25891689f94a299052e7f9954286fe.png" srcset="https://www.investopedia.com/thmb/2Ks3de_2rpQLbiva348494bv8WQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-1Lines-0a25891689f94a299052e7f9954286fe.png 750w" width="2480"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> But since its last rate hike in July, the Fed has been in a holding pattern. As was almost universally expected, the Federal Reserve's rate-setting committee <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952">announced this afternoon</a> that it is maintaining the federal funds rate at its current level.<span class="ql-inline-citation" data-cite="43"></span> It's the sixth meeting in a row in which the central bank has held its benchmark rate steady.<span class="ql-inline-citation" data-cite="32"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> That's because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> has been cooling, allowing the Fed to stop raising interest rates. But further inflation progress has been elusive, putting the central bank in wait-and-see mode as it looks for evidence that inflation is falling enough to justify lowering the federal funds rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Today's written comments left out discussion of projected rate cuts. When asked about this during his press conference following the statement's release, Fed Chair Jerome Powell responded that the stalled progress against inflation means it will take <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-may-1-8641676#toc-2024-05-01t185349358z">longer than originally expected</a> to lower the fed funds rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> "My colleagues and I today said that we didn't see progress in the first quarter," Powell said. "And I've said that it appears then that it's going to take longer for us to reach that point of confidence. So I don't know how long it will take. When we get that confidence, then rate cuts will be in scope."<span class="ql-inline-citation" data-cite="45"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> But Powell also indicated that, despite the uptick in recent inflation readings, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-may-1-8641676#toc-2024-05-01t191855036z">a rate hike is not expected</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> "I think it's unlikely that the next policy rate move will be a hike," Powell told reporters at Wednesday's press conference. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> It therefore seems likely the fed funds rate will stay where it is for some number of months, although with great uncertainty on when exactly the Fed will first cut rates. Following today's Fed statement and comments from Powell, a majority of fed funds futures traders are betting it will take three more meetings—until Sept. 18—for the first rate cut to be implemented, according to CME Group's FedWatch Tool.<span class="ql-inline-citation" data-cite="44"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> As a result, CD rates could continue their current plateau. If at some point it becomes clear the Fed is ready to make a first rate cut, that would drive CD rates down more quickly. But it appears that could be months away. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> The central bank will hold five more rate-setting meetings in 2024, with the next one scheduled to conclude June 12.<span class="ql-inline-citation" data-cite="42"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_64-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Best High-Yield Savings Accounts for May 2024—Up to 5.55%</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_66-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-cd-rates-4770214" id="mntl-sc-block-featuredlink__link_2-0" rel="nocaes"><span class="link__wrapper">Best CD Rates for May 2024: Up to 5.51%</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_68-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-money-market-accounts-5096917" id="mntl-sc-block-featuredlink__link_3-0" rel="nocaes"><span class="link__wrapper">Best Money Market Account Rates for May 2024—Up to 5.35%</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_70-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_71-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Note that the "top rates" quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher.</p></div></div></div> <span class="heading-toc" id="toc-how-we-find-the-best-cd-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_72-0"> <span class="mntl-sc-block-heading__text"> How We Find the Best CD Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic-insured-account.asp">FDIC</a> for banks, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua-insured-institution.asp">NCUA</a> for credit unions), and the CD's minimum initial deposit must not exceed $25,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816">read our full methodology</a>.<br/> </p></div>

![Top nationwide rate in each CD term from 3 months to 5 years, ranging from 4.70% to 5.65% APY. Rates current as of May 1, 2024.]() :max_bytes(150000):strip_icc()/5-1-13d91758099446ce8036568f835a49eb.png) ### Key Takeaways * The leading nationally available 1-year CD rate dropped today, from 5.60% to 5.40% APY, but the top 4-year rate climbed, moving up to 4.86% from 4.70%. * Overall, the top nationwide CD rate continues to 5.65% APY, available from [MutualOne Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mutualone.com/client-services/rates-calculators/deposit-rates/&lender=MutualOne%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) for a 3-month term. * Today's runner-up is [Newtek Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ), which is offering 5.55% APY on a slightly longer 6 months. * Want to lock your rate further into the future? You can snag rates as high as 5.40% for 12-15 months, up to 5.30% for 2 years, or between 4.70% and 5.00% for 3 to 5 years. * The [best CD rates](https://www.investopedia.com/best-cd-rates-4770214) have been gradually dipping for months, in anticipation of future Fed rate cuts. But recent inflation readings suggest it could be a while before the central bank feels comfortable lowering rates. Below you'll find featured rates available from our partners, followed by details from our ranking of the best CDs available nationwide. ## Lock In 5.30% to 5.65% APY for 3 to 23 Months The top rate you can earn with a nationally available CD continues to be 5.65% APY. MutualOne Bank renewed that rate after withdrawing it nationally two weeks earlier. But it's a short-term offer, providing only a 3-month rate lock. That's why you may prefer the next best rate of 5.55% APY, which is available from Newtek Bank for 6 months. For a longer duration, you can earn up to 5.40% with the [leading 1-year](https://www.investopedia.com/best-1-year-cd-rates-4796650) and [18-month rate](https://www.investopedia.com/best-18-month-cd-rates-5272348). In total, 13 CDs are paying 5.40% APY or better, with terms of 3 to 15 months. For a slightly longer lock, though, you might like [Credit Human's](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) offer of 5.30% on a take-your-pick term of 18-23 months. ![Range of the Top 15 CD Rates per Term - May 1, 2024]() :max_bytes(150000):strip_icc()/5-1Ranges-4fa0261d0b124ab281e43f095fc988b8.png) ## Longer Terms Will Secure Your Rate to 2027—Or Beyond Choosing a CD term longer than two years is also a smart option, since it's possible U.S. interest rates could enter a declining period for the next 2-3 years. To lock in a rate that will last far into the future, you can choose a [top 3-year CD](https://www.investopedia.com/best-2-year-cd-rates-4801682) paying 5.00%, guaranteeing that return until 2027. Or you can opt to secure a rate in the mid-to-high 4% range for as far as 4 or [5 years](https://www.investopedia.com/best-5-year-cd-rates-4801473) down the road. | **CD Terms** | **Yesterday's Top National Rate** | **Today's Top National Rate** | **Day's Change** (percentage points) | **Top Rate Provider** | | --- | --- | --- | --- | --- | | [3 months](https://www.investopedia.com/best-3-month-cd-rates-5272288) | 5.65% APY | 5.65% APY | No change | [MutualOne Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mutualone.com/client-services/rates-calculators/deposit-rates/&lender=MutualOne%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [6 months](https://www.investopedia.com/best-6-month-cd-rates-4783267) | 5.55% APY | 5.55% APY | No change | [Newtek Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [1 year](https://www.investopedia.com/best-1-year-cd-rates-4796650) | 5.60% APY | 5.40% APY | - 0.20 | [Apple Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.applefcu.org/rates&lender=Apple%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) and [NexBank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nexbankpersonal.com/certificates-of-deposit-cds&lender=NexBank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [18 months](https://www.investopedia.com/best-18-month-cd-rates-5272348) | 5.40% APY | 5.40% APY | No change | [Northern Bank Direct](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.northernbankdirect.com/cds&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [2 years](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.xcelfcu.org/Explore/Resources/Rates&lender=XCEL%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.30% APY | 5.30% APY | No change | [Credit Human](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [3 years](https://www.investopedia.com/best-3-year-cd-rates-4782938) | 5.00% APY | 5.00% APY | No change | [DollarSavingsDirect](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.dollarsavingsdirect.com/securebanking/cdInfo.do&lender=DollarSavingsDirect&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [4 years](https://www.investopedia.com/best-5-year-cd-rates-4801473) | 4.70% APY | 4.86% APY | + 0.16 | [Wellby Financial](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.wellbyfinancial.com/savings/certificates/&lender=Wellby%20Financial&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [5 years](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lfcu.org/rates/personal-certificate-rates/&lender=Lafayette%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 4.70% APY | 4.70% APY | No change | [Credit Human](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | To view the top 15–20 nationwide rates in any term, click on the desired term length in the left column above. ### Today's high CD rates are a perfect antidote to stubborn inflation, with rates available in every CD term that far out-earn the current inflation rate of 3.5%. By putting money into one of these top-paying CDs today, you can stay [1 to 2 percentage points ahead of inflation](https://www.investopedia.com/how-to-beat-todays-stubborn-inflation-with-a-top-paying-cd-8610878). ## CD Rates Are Still Near Record Highs CD rates have inched lower since they climbed to a historic peak of 6.50% in October. At the start of February, the number of CDs in our daily ranking that paid at least 5.50% APY was 30. Today that count sits at eight. But don't lose sight of how much [certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) still pay relative to the past 20 years. Locking in a yield in the 4% to 5% range for a year or more down the road is still a great earning opportunity. Also keep in mind that snagging the absolute *highest* APY isn't the only way to win with today's CDs. Since CD rates could fall quite substantially in 2024 and 2025, locking in a long-term rate now—before rates move lower—can be a smart move. ## Jumbo Deposits Can Provide More CD Options The top two jumbo CDs let you earn more than you can with a standard CD. State Bank of Texas is paying 5.50% APY on a 12-month certificate, while My eBanc offers 5.49% APY for 6 months. Beware that [the best jumbo CD rates](https://www.investopedia.com/best-jumbo-cd-rates-4797766) don't *always* pay more than standard certificates. Often, you can do just as well—or better—with a standard CD. That's the case right now in six of the eight terms below, so it's always wise to shop both certificate types before making a final decision. | **CD Term** | **[Today's Top National Bank Rate](https://www.investopedia.com/best-bank-cd-rates-4801462)** | **[Today's Top National Credit Union Rate](https://www.investopedia.com/best-cd-rates-4770214)** | **[Today's Top National Jumbo Rate](https://www.investopedia.com/best-jumbo-cd-rates-4797766)** | | --- | --- | --- | --- | | 3 months | 5.65% APY\* | 5.30% APY | 5.20% APY | | 6 months | 5.55% APY\* | 5.50% APY | 5.49% APY | | 1 year | 5.40% APY | 5.40% APY | 5.50% APY\* | | 18 months | 5.40% APY | 5.40% APY | 5.41% APY\* | | 2 years | 4.90% APY | 5.30% APY\* | 4.91% APY | | 3 years | 5.00% APY\* | 5.00% APY\* | 4.97% APY | | 4 years | 4.55% APY | 4.86% APY\* | 4.48% APY | | 5 years | 4.55% APY | 4.70% APY\* | 4.37% APY | \*Indicates the highest APY offered in each term. To view our lists of the top-paying CDs across terms for bank, credit union, and jumbo certificates, click on the column headers above. ## Where Are CD Rates Headed in 2024? To combat decades-high inflation, the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) aggressively hiked the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) between March 2022 and July 2023, raising the benchmark rate to its highest level in 22 years. That's important to savers because when the fed funds rate rises, banks and credit unions increase the interest rates they're willing to pay on customer deposits. As a result, this past fall saw historically favorable conditions for CD shoppers, as well as for anyone holding cash in a [high-yield savings](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) or [money market account](https://www.investopedia.com/best-money-market-accounts-5096917). Rates on CDs rose to an October-November peak that was the highest we've seen in two decades. ![Line graph showing the top CD rate by term each month from Dec 2021 to the present - May 1, 2024]() :max_bytes(150000):strip_icc()/5-1Lines-0a25891689f94a299052e7f9954286fe.png) But since its last rate hike in July, the Fed has been in a holding pattern. As was almost universally expected, the Federal Reserve's rate-setting committee [announced this afternoon](https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952) that it is maintaining the federal funds rate at its current level. It's the sixth meeting in a row in which the central bank has held its benchmark rate steady. That's because [inflation](https://www.investopedia.com/terms/i/inflation.asp) has been cooling, allowing the Fed to stop raising interest rates. But further inflation progress has been elusive, putting the central bank in wait-and-see mode as it looks for evidence that inflation is falling enough to justify lowering the federal funds rate. Today's written comments left out discussion of projected rate cuts. When asked about this during his press conference following the statement's release, Fed Chair Jerome Powell responded that the stalled progress against inflation means it will take [longer than originally expected](https://www.investopedia.com/us-economy-news-today-may-1-8641676#toc-2024-05-01t185349358z) to lower the fed funds rate. "My colleagues and I today said that we didn't see progress in the first quarter," Powell said. "And I've said that it appears then that it's going to take longer for us to reach that point of confidence. So I don't know how long it will take. When we get that confidence, then rate cuts will be in scope." But Powell also indicated that, despite the uptick in recent inflation readings, [a rate hike is not expected](https://www.investopedia.com/us-economy-news-today-may-1-8641676#toc-2024-05-01t191855036z). "I think it's unlikely that the next policy rate move will be a hike," Powell told reporters at Wednesday's press conference. It therefore seems likely the fed funds rate will stay where it is for some number of months, although with great uncertainty on when exactly the Fed will first cut rates. Following today's Fed statement and comments from Powell, a majority of fed funds futures traders are betting it will take three more meetings—until Sept. 18—for the first rate cut to be implemented, according to CME Group's FedWatch Tool. As a result, CD rates could continue their current plateau. If at some point it becomes clear the Fed is ready to make a first rate cut, that would drive CD rates down more quickly. But it appears that could be months away. The central bank will hold five more rate-setting meetings in 2024, with the next one scheduled to conclude June 12. [Best High-Yield Savings Accounts for May 2024—Up to 5.55%](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) [Best CD Rates for May 2024: Up to 5.51%](https://www.investopedia.com/best-cd-rates-4770214) [Best Money Market Account Rates for May 2024—Up to 5.35%](https://www.investopedia.com/best-money-market-accounts-5096917) ### Note that the "top rates" quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher. ## How We Find the Best CD Rates Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured ([FDIC](https://www.investopedia.com/terms/f/fdic-insured-account.asp) for banks, [NCUA](https://www.investopedia.com/terms/n/ncua-insured-institution.asp) for credit unions), and the CD's minimum initial deposit must not exceed $25,000. Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, [read our full methodology](https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816).

Key Takeaways The leading nationally available 1-year CD rate dropped today, from 5.60% to 5.40% APY, but the top 4-year rate climbed, moving up to 4.86% from 4.70%. Overall, the top nationwide CD rate continues to 5.65% APY, available from MutualOne Bank for a 3-month term. Today's runner-up is Newtek Bank, which is offering 5.55% APY on a slightly longer 6 months. Want to lock your rate further into the future? You can snag rates as high as 5.40% for 12-15 months, up to 5.30% for 2 years, or between 4.70% and 5.00% for 3 to 5 years. The best CD rates have been gradually dipping for months, in anticipation of future Fed rate cuts. But recent inflation readings suggest it could be a while before the central bank feels comfortable lowering rates. Below you'll find featured rates available from our partners, followed by details from our ranking of the best CDs available nationwide. Lock In 5.30% to 5.65% APY for 3 to 23 Months The top rate you can earn with a nationally available CD continues to be 5.65% APY. MutualOne Bank renewed that rate after withdrawing it nationally two weeks earlier. But it's a short-term offer, providing only a 3-month rate lock. That's why you may prefer the next best rate of 5.55% APY, which is available from Newtek Bank for 6 months. For a longer duration, you can earn up to 5.40% with the leading 1-year and 18-month rate. In total, 13 CDs are paying 5.40% APY or better, with terms of 3 to 15 months. For a slightly longer lock, though, you might like Credit Human's offer of 5.30% on a take-your-pick term of 18-23 months. Longer Terms Will Secure Your Rate to 2027—Or Beyond Choosing a CD term longer than two years is also a smart option, since it's possible U.S. interest rates could enter a declining period for the next 2-3 years. To lock in a rate that will last far into the future, you can choose a top 3-year CD paying 5.00%, guaranteeing that return until 2027. Or you can opt to secure a rate in the mid-to-high 4% range for as far as 4 or 5 years down the road. CD Terms Yesterday's Top National Rate Today's Top National Rate Day's Change (percentage points) Top Rate Provider 3 months 5.65% APY 5.65% APY No change MutualOne Bank 6 months 5.55% APY 5.55% APY No change Newtek Bank 1 year 5.60% APY 5.40% APY - 0.20 Apple Federal Credit Union and NexBank 18 months 5.40% APY 5.40% APY No change Northern Bank Direct 2 years 5.30% APY 5.30% APY No change Credit Human 3 years 5.00% APY 5.00% APY No change DollarSavingsDirect 4 years 4.70% APY 4.86% APY + 0.16 Wellby Financial 5 years 4.70% APY 4.70% APY No change Credit Human To view the top 15–20 nationwide rates in any term, click on the desired term length in the left column above. Today's high CD rates are a perfect antidote to stubborn inflation, with rates available in every CD term that far out-earn the current inflation rate of 3.5%. By putting money into one of these top-paying CDs today, you can stay 1 to 2 percentage points ahead of inflation. CD Rates Are Still Near Record Highs CD rates have inched lower since they climbed to a historic peak of 6.50% in October. At the start of February, the number of CDs in our daily ranking that paid at least 5.50% APY was 30. Today that count sits at eight. But don't lose sight of how much certificates of deposit (CDs) still pay relative to the past 20 years. Locking in a yield in the 4% to 5% range for a year or more down the road is still a great earning opportunity. Also keep in mind that snagging the absolute highest APY isn't the only way to win with today's CDs. Since CD rates could fall quite substantially in 2024 and 2025, locking in a long-term rate now—before rates move lower—can be a smart move. Jumbo Deposits Can Provide More CD Options The top two jumbo CDs let you earn more than you can with a standard CD. State Bank of Texas is paying 5.50% APY on a 12-month certificate, while My eBanc offers 5.49% APY for 6 months. Beware that the best jumbo CD rates don't always pay more than standard certificates. Often, you can do just as well—or better—with a standard CD. That's the case right now in six of the eight terms below, so it's always wise to shop both certificate types before making a final decision. CD Term Today's Top National Bank Rate Today's Top National Credit Union Rate Today's Top National Jumbo Rate 3 months 5.65% APY* 5.30% APY 5.20% APY 6 months 5.55% APY* 5.50% APY 5.49% APY 1 year 5.40% APY 5.40% APY 5.50% APY* 18 months 5.40% APY 5.40% APY 5.41% APY* 2 years 4.90% APY 5.30% APY* 4.91% APY 3 years 5.00% APY* 5.00% APY* 4.97% APY 4 years 4.55% APY 4.86% APY* 4.48% APY 5 years 4.55% APY 4.70% APY* 4.37% APY *Indicates the highest APY offered in each term. To view our lists of the top-paying CDs across terms for bank, credit union, and jumbo certificates, click on the column headers above. Where Are CD Rates Headed in 2024? To combat decades-high inflation, the Federal Reserve aggressively hiked the federal funds rate between March 2022 and July 2023, raising the benchmark rate to its highest level in 22 years. That's important to savers because when the fed funds rate rises, banks and credit unions increase the interest rates they're willing to pay on customer deposits. As a result, this past fall saw historically favorable conditions for CD shoppers, as well as for anyone holding cash in a high-yield savings or money market account. Rates on CDs rose to an October-November peak that was the highest we've seen in two decades. But since its last rate hike in July, the Fed has been in a holding pattern. As was almost universally expected, the Federal Reserve's rate-setting committee announced this afternoon that it is maintaining the federal funds rate at its current level. It's the sixth meeting in a row in which the central bank has held its benchmark rate steady. That's because inflation has been cooling, allowing the Fed to stop raising interest rates. But further inflation progress has been elusive, putting the central bank in wait-and-see mode as it looks for evidence that inflation is falling enough to justify lowering the federal funds rate. Today's written comments left out discussion of projected rate cuts. When asked about this during his press conference following the statement's release, Fed Chair Jerome Powell responded that the stalled progress against inflation means it will take longer than originally expected to lower the fed funds rate. "My colleagues and I today said that we didn't see progress in the first quarter," Powell said. "And I've said that it appears then that it's going to take longer for us to reach that point of confidence. So I don't know how long it will take. When we get that confidence, then rate cuts will be in scope." But Powell also indicated that, despite the uptick in recent inflation readings, a rate hike is not expected. "I think it's unlikely that the next policy rate move will be a hike," Powell told reporters at Wednesday's press conference. It therefore seems likely the fed funds rate will stay where it is for some number of months, although with great uncertainty on when exactly the Fed will first cut rates. Following today's Fed statement and comments from Powell, a majority of fed funds futures traders are betting it will take three more meetings—until Sept. 18—for the first rate cut to be implemented, according to CME Group's FedWatch Tool. As a result, CD rates could continue their current plateau. If at some point it becomes clear the Fed is ready to make a first rate cut, that would drive CD rates down more quickly. But it appears that could be months away. The central bank will hold five more rate-setting meetings in 2024, with the next one scheduled to conclude June 12. Best High-Yield Savings Accounts for May 2024—Up to 5.55% Best CD Rates for May 2024: Up to 5.51% Best Money Market Account Rates for May 2024—Up to 5.35% Note that the "top rates" quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher. How We Find the Best CD Rates Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD's minimum initial deposit must not exceed $25,000. Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.

https://www.investopedia.com/terms/n/next-generation-fixed-income-ngfi.asp

Next Generation Fixed Income (NGFI)

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-next-generation-fixed-income-ngfi"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Next Generation Fixed Income (NGFI)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedincome.asp" rel="noopener noreferrer">fixed income</a> strategies, from traditional, benchmark-oriented approaches to alternative tactics such as hedge funds and fully unconstrained strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of fixed income strategies.</li><li>Global diversification is a priority for many NGFI investment managers.</li><li>NGFI investing emerged as a response to the challenges posed by interest rate volatility and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-next-generation-fixed-income-ngfi"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Next Generation Fixed Income (NGFI) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> NGFI investing emerged as a response to the challenges posed by interest rate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance. As a result, innovative investment managers are now blending both traditional and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alternative_investment.asp">alternative investment</a> styles, and utilizing sophisticated investment tools and trading strategies, in an attempt to exploit all the factors of return that are available. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Today, more and more investment managers are moving away from traditional fixed income strategies, such as core and U.S. government products linked to broad market benchmark indexes and top-down macroeconomic views. Instead, innovative active managers are turning toward more contemporary ways to generate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alpha.asp">alpha</a> and develop sustainable income solutions. These investments include products that hedge against rising inflation and interest rates, local-currency and U.S.-dollar-denominated emerging-market debt vehicles, benchmark-agnostic unconstrained strategies and more. Global diversification is a priority for many NGFI investment managers. That’s because a majority of fixed income investors, especially those in workplace retirement plans, continue to be heavily exposed to the home country bias of the Bloomberg US Aggregate Bond Index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-next-generation-fixed-income-ngfi-investment-types"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Next Generation Fixed Income (NGFI) Investment Types </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The universe of NGFI investment products and vehicles is constantly expanding. Used alone or in conjunction with more traditional strategies, they represent a fast-growing component of diversified investment portfolios. The following is an overview of types of NGIF investments: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li><strong>Multisector bond investments</strong> – Seeks income by diversifying assets among several fixed-income sectors such as U.S. government and corporate bonds, international end emerging-market sovereign debt, and U.S. high-yield debt securities.</li> <li><strong>Unconstrained strategies</strong> – Eliminates the constraints of tracking a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp" rel="noopener noreferrer">benchmark</a>. Fixed income managers are not required to adhere to specific bond ratings, currencies or sectors, and they may use derivatives to hedge against price and rate ranges. They may also bet against the market by using put and call options.</li> <li><strong>Floating-rate bank loans</strong> – The underlying interest rate on most loans adjusts every 30-90 days, based on changes in the reference rate, such as LIBOR. Thus, the market value of a floating-rate loan will be less sensitive to changes in interest rates relative to most fixed-rate investments. </li> <li><strong>Absolute return</strong> – These fixed income strategies seek to generate a positive return by investing in opportunistic return sources such as currencies, long and short positions, interest rates and more.</li> </ul></div>

## What Is Next Generation Fixed Income (NGFI)? Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of [fixed income](https://www.investopedia.com/terms/f/fixedincome.asp) strategies, from traditional, benchmark-oriented approaches to alternative tactics such as hedge funds and fully unconstrained strategies. ### Key Takeaways * Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of fixed income strategies. * Global diversification is a priority for many NGFI investment managers. * NGFI investing emerged as a response to the challenges posed by interest rate volatility and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance. ## Understanding Next Generation Fixed Income (NGFI) NGFI investing emerged as a response to the challenges posed by interest rate [volatility](https://www.investopedia.com/terms/v/volatility.asp) and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance. As a result, innovative investment managers are now blending both traditional and [alternative investment](https://www.investopedia.com/terms/a/alternative_investment.asp) styles, and utilizing sophisticated investment tools and trading strategies, in an attempt to exploit all the factors of return that are available. Today, more and more investment managers are moving away from traditional fixed income strategies, such as core and U.S. government products linked to broad market benchmark indexes and top-down macroeconomic views. Instead, innovative active managers are turning toward more contemporary ways to generate [alpha](https://www.investopedia.com/terms/a/alpha.asp) and develop sustainable income solutions. These investments include products that hedge against rising inflation and interest rates, local-currency and U.S.-dollar-denominated emerging-market debt vehicles, benchmark-agnostic unconstrained strategies and more. Global diversification is a priority for many NGFI investment managers. That’s because a majority of fixed income investors, especially those in workplace retirement plans, continue to be heavily exposed to the home country bias of the Bloomberg US Aggregate Bond Index. ## Next Generation Fixed Income (NGFI) Investment Types The universe of NGFI investment products and vehicles is constantly expanding. Used alone or in conjunction with more traditional strategies, they represent a fast-growing component of diversified investment portfolios. The following is an overview of types of NGIF investments: * **Multisector bond investments** – Seeks income by diversifying assets among several fixed-income sectors such as U.S. government and corporate bonds, international end emerging-market sovereign debt, and U.S. high-yield debt securities. * **Unconstrained strategies** – Eliminates the constraints of tracking a [benchmark](https://www.investopedia.com/terms/b/benchmark.asp). Fixed income managers are not required to adhere to specific bond ratings, currencies or sectors, and they may use derivatives to hedge against price and rate ranges. They may also bet against the market by using put and call options. * **Floating-rate bank loans** – The underlying interest rate on most loans adjusts every 30-90 days, based on changes in the reference rate, such as LIBOR. Thus, the market value of a floating-rate loan will be less sensitive to changes in interest rates relative to most fixed-rate investments. * **Absolute return** – These fixed income strategies seek to generate a positive return by investing in opportunistic return sources such as currencies, long and short positions, interest rates and more.

What Is Next Generation Fixed Income (NGFI)? Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of fixed income strategies, from traditional, benchmark-oriented approaches to alternative tactics such as hedge funds and fully unconstrained strategies. Key Takeaways Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of fixed income strategies.Global diversification is a priority for many NGFI investment managers.NGFI investing emerged as a response to the challenges posed by interest rate volatility and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance. Understanding Next Generation Fixed Income (NGFI) NGFI investing emerged as a response to the challenges posed by interest rate volatility and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance. As a result, innovative investment managers are now blending both traditional and alternative investment styles, and utilizing sophisticated investment tools and trading strategies, in an attempt to exploit all the factors of return that are available. Today, more and more investment managers are moving away from traditional fixed income strategies, such as core and U.S. government products linked to broad market benchmark indexes and top-down macroeconomic views. Instead, innovative active managers are turning toward more contemporary ways to generate alpha and develop sustainable income solutions. These investments include products that hedge against rising inflation and interest rates, local-currency and U.S.-dollar-denominated emerging-market debt vehicles, benchmark-agnostic unconstrained strategies and more. Global diversification is a priority for many NGFI investment managers. That’s because a majority of fixed income investors, especially those in workplace retirement plans, continue to be heavily exposed to the home country bias of the Bloomberg US Aggregate Bond Index. Next Generation Fixed Income (NGFI) Investment Types The universe of NGFI investment products and vehicles is constantly expanding. Used alone or in conjunction with more traditional strategies, they represent a fast-growing component of diversified investment portfolios. The following is an overview of types of NGIF investments: Multisector bond investments – Seeks income by diversifying assets among several fixed-income sectors such as U.S. government and corporate bonds, international end emerging-market sovereign debt, and U.S. high-yield debt securities. Unconstrained strategies – Eliminates the constraints of tracking a benchmark. Fixed income managers are not required to adhere to specific bond ratings, currencies or sectors, and they may use derivatives to hedge against price and rate ranges. They may also bet against the market by using put and call options. Floating-rate bank loans – The underlying interest rate on most loans adjusts every 30-90 days, based on changes in the reference rate, such as LIBOR. Thus, the market value of a floating-rate loan will be less sensitive to changes in interest rates relative to most fixed-rate investments. Absolute return – These fixed income strategies seek to generate a positive return by investing in opportunistic return sources such as currencies, long and short positions, interest rates and more.

https://www.investopedia.com/astera-labs-raises-ipo-target-to-usd673-2-million-8610329

Astera Labs Raises IPO Target to $673.2 Million

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Astera Labs raised the amount the company and its investors aim to raise in its initial public offering (IPO) to $673.2 million from $534 million, according to a Securities and Exchange Commission filing Monday.</li><li>The IPO offering consists of a total of 19.8 million shares, up from 17.8 million shares.</li><li>Shares are expected to be priced between $32 and $34, increased from between $27 and $30.</li><li>The stock could start trading on the Nasdaq as soon as this week under the ticker "ALAB."</li><li>Astera Labs, which designs and delivers semiconductor-based connectivity solutions for cloud and AI infrastructure, could be the latest stock to benefit from AI enthusiasm.</li></ul><p><br/></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Astera Labs raised the amount the company and its investors aim to raise in its upcoming <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering (IPO)</a> to as much as $673.2 million <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-you-need-to-know-about-astera-labs-ipo-8608017">from $534 million</a>, with the company expected to ride the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a> wave.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> An amended <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec-form-s-1.asp">Form S-1</a> filed with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">U.S. Securities and Exchange Commission (SEC)</a> Monday showed the company boosted the number of shares and the anticipated price per share in its upcoming IPO. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The IPO offering consists of a total of 19.8 million shares, up from 17.8 million shares. Nearly 16.79 million shares are from the company and more than 3.01 million shares are being sold by existing shareholders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The shares are to be priced between $32 and $34, increased from between $27 and $30. The stock could start trading on the Nasdaq as soon as this week under the ticker "ALAB." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The company, which designs and delivers semiconductor-based connectivity solutions for cloud and AI infrastructure, could be the latest stock to benefit from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/magnificent-7-stocks-overcrowding-8576644">surge in investor interest in AI</a>.<br/> </p></div>

### Key Takeaways * Astera Labs raised the amount the company and its investors aim to raise in its initial public offering (IPO) to $673.2 million from $534 million, according to a Securities and Exchange Commission filing Monday. * The IPO offering consists of a total of 19.8 million shares, up from 17.8 million shares. * Shares are expected to be priced between $32 and $34, increased from between $27 and $30. * The stock could start trading on the Nasdaq as soon as this week under the ticker "ALAB." * Astera Labs, which designs and delivers semiconductor-based connectivity solutions for cloud and AI infrastructure, could be the latest stock to benefit from AI enthusiasm. Astera Labs raised the amount the company and its investors aim to raise in its upcoming [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) to as much as $673.2 million [from $534 million](https://www.investopedia.com/what-you-need-to-know-about-astera-labs-ipo-8608017), with the company expected to ride the [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) wave. An amended [Form S-1](https://www.investopedia.com/terms/s/sec-form-s-1.asp) filed with the [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) Monday showed the company boosted the number of shares and the anticipated price per share in its upcoming IPO. The IPO offering consists of a total of 19.8 million shares, up from 17.8 million shares. Nearly 16.79 million shares are from the company and more than 3.01 million shares are being sold by existing shareholders. The shares are to be priced between $32 and $34, increased from between $27 and $30. The stock could start trading on the Nasdaq as soon as this week under the ticker "ALAB." The company, which designs and delivers semiconductor-based connectivity solutions for cloud and AI infrastructure, could be the latest stock to benefit from the [surge in investor interest in AI](https://www.investopedia.com/magnificent-7-stocks-overcrowding-8576644).

Key Takeaways Astera Labs raised the amount the company and its investors aim to raise in its initial public offering (IPO) to $673.2 million from $534 million, according to a Securities and Exchange Commission filing Monday.The IPO offering consists of a total of 19.8 million shares, up from 17.8 million shares.Shares are expected to be priced between $32 and $34, increased from between $27 and $30.The stock could start trading on the Nasdaq as soon as this week under the ticker "ALAB."Astera Labs, which designs and delivers semiconductor-based connectivity solutions for cloud and AI infrastructure, could be the latest stock to benefit from AI enthusiasm. Astera Labs raised the amount the company and its investors aim to raise in its upcoming initial public offering (IPO) to as much as $673.2 million from $534 million, with the company expected to ride the artificial intelligence (AI) wave. An amended Form S-1 filed with the U.S. Securities and Exchange Commission (SEC) Monday showed the company boosted the number of shares and the anticipated price per share in its upcoming IPO. The IPO offering consists of a total of 19.8 million shares, up from 17.8 million shares. Nearly 16.79 million shares are from the company and more than 3.01 million shares are being sold by existing shareholders. The shares are to be priced between $32 and $34, increased from between $27 and $30. The stock could start trading on the Nasdaq as soon as this week under the ticker "ALAB." The company, which designs and delivers semiconductor-based connectivity solutions for cloud and AI infrastructure, could be the latest stock to benefit from the surge in investor interest in AI.

https://www.investopedia.com/tech/five-most-private-cryptocurrencies/

The 5 Most Private Cryptocurrencies

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-privacy-cryptocurrencies"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Are Privacy Cryptocurrencies? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Privacy-oriented cryptocurrencies are digital currencies with features that enhance privacy and anonymity. Many people are concerned about how governments and enterprises use their personal information and data, so they naturally want less scrutiny of their private lives. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> However, many privacy-oriented tokens have been removed from popular exchanges due to governmental and law enforcement concerns in many jurisdictions. Decentralized (DEX) and unregulated exchanges and self-hosted wallets are thus slowly becoming the only means for acquiring or using privacy cryptocurrencies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Here's a rundown of the top five most popular privacy-oriented <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a>, which have several built-in privacy features. These projects claim to offer enhanced security features or options that help to keep users' identities and activities concealed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>Regulators in many jurisdictions have put privacy tokens and privacy-enhancing techniques on notice because they are all too often used for illegal activities. In the U.S., cryptocurrency mixing service providers have been arrested, and their services shut down. The European Parliament finalized a regulation in April 2024, setting the stage for a ban on hosted privacy-oriented tokens and techniques and tightening regulations for crypto-service providers. In most cases, users are still allowed to self-custody these assets and use them in peer-to-peer transactions.<span class="ql-inline-citation" data-cite="16"></span><span class="ql-inline-citation" data-cite="15"></span></p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><ul><li>Several projects have emerged that employ certain techniques designed to protect user anonymity.</li><li>Many use mixing techniques like CoinJoin, encrypted addresses, randomized transactions, or others to disguise transactions.</li><li>Many privacy tokens are designed to address people's concerns about their private information and data.</li><li>Unfortunately, there are always bad actors ruining something good for everyone else. Most of these tokens have been used in illicit transactions, so law enforcement and regulators are targeting developers and providers.</li></ul></div></div></div> <span class="heading-toc" id="toc-1-monero-xmr"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> 1. Monero (XMR) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monero.asp">Monero (XMR)</a> is a cryptocurrency designed primarily for the ability to help anonymize users. Monero transactions are much more difficult to trace because they use ring signatures and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stealth-address-cryptocurrency.asp">stealth addresses</a>. These methods help to hide the identities of the sender and the receiver. Additionally, Ring Confidential Transactions, or RingCT, helps to conceal the transaction amount, providing more privacy.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Trading at $129.23 as of May 5, 2024, Monero was #48 by overall market value, coming in at roughly $2.4 billion.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-2-zcash-zec"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> 2. Zcash (ZEC) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/zcash.asp">Zcash (ZEC)</a> defines itself as "If Bitcoin is like http for money, Zcash is https," underlining its enhanced security and privacy features. Zcash has implemented a cryptographic tool called Zero-Knowledge proof and grants participants an option to shield transactions. It allows participants to transact without any of them revealing their addresses to the other(s). Zero-Knowledge proofs also hide transaction amounts.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Zcash ranked #171 in the list of cryptocurrencies with a market cap of $378 million and traded at $23.19 on May 5, 2024.<span class="ql-inline-citation" data-cite="18"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-3-dash-dash"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> 3. DASH (DASH) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Created in 2014, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/what-dash-cryptocurrency/">DASH</a> is a cryptocurrency that allows users to choose whether or not their transactions are anonymous and private using a protocol known as CoinJoin. The feature works by obscuring the origins of your funds. Choosing to use the feature will slightly raise the transaction fee. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> DASH achieves this through a mixing protocol utilizing an innovative decentralized network of servers called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/master-node-cryptocurrency.asp">master nodes</a>. Another feature DASH offers is Instant Send, which can process transactions as fast as a credit card.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> On May 5, 2024, Dash ranked #186 by market cap with a total value of $347 million. At the time of writing, it traded at about $29.47.<span class="ql-inline-citation" data-cite="19"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Cryptocurrency tumblers and mixers are increasingly used for money laundering and other illicit activities. Law enforcement and regulators in many jurisdictions are targeting these service providers as facilitators, so it's best to use caution and learn the rules in your country when considering a cryptocurrency or service that uses mixing techniques.</p></div></div></div> <span class="heading-toc" id="toc-4-0x0ai-0x0"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> 4. 0x0.ai (0x0) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> A controversial cryptocurrency tumbler, 0x0.ai is a cryptocurrency and digital asset platform that allows users to anonymize their transactions and identities by pooling transactions. These transactions are then mixed, and cryptocurrency is distributed to other users.<span class="ql-inline-citation" data-cite="20"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> On May 5, 2024, 0x0 traded at $0.36 and ranked #231 by market cap, with a total value of $313 million.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <span class="heading-toc" id="toc-5-mimblewimble-mwc"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-heading__text"> 5. MimbleWimble (MWC) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> MimbleWimble is a privacy-focused token with core features that allow complete control over your privacy. All transaction amounts are encrypted by default, and no addresses or other private information are stored on the blockchain. On the MimbleWimble blockchain, transactions appear as random inputs and outputs. Between the encryption, lack of addresses, and built-in randomness, there is no way to track users.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> On May 5, 2024, MWC was #305 by market cap, with $182.5 million, and tokens traded at $16.66.<span class="ql-inline-citation" data-cite="13"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-what-is-the-best-privacy-cryptocurrency"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Best Privacy Cryptocurrency?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Monero is the most popular privacy crypto, followed by ZCash and Dash. Each appeals to different users.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_43-0"><span class="heading-toc" id="toc-what-is-a-privacy-cryptocurrency"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Privacy Cryptocurrency?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A privacy cryptocurrency uses techniques to provide users with more anonymity and privacy.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-do-privacy-coins-have-a-future"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Privacy Coins Have a Future?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Privacy coins are being targeted in many jurisdictions because they can be used for nefarious purposes. Exchanges who rely on regulatory compliance are beginning to remove them, but decentralized exchanges that don't fall under any jurisdictions still list them. Privacy coins are likely not going anywhere as the people that want them will find ways to use them.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Privacy tokens have a place in the world, as privacy is something many people long for. These cryptocurrencies promise a life away from government and enterprise snooping that many people desire. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> However, privacy for average law-abiding citizens means more privacy for criminals, so it's difficult to say whether privacy cryptocurrencies will be available in the future. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&amp;sa=D&amp;source=editors&amp;ust=1714920039300190&amp;usg=AOvVaw135zDT3YRqNOO1clqiKEHb">warranty and liability disclaimer</a> for more info. As of the date this article was written, the author does not own any privacy cryptocurrencies.</em><br/> </p></div>

## What Are Privacy Cryptocurrencies? Privacy-oriented cryptocurrencies are digital currencies with features that enhance privacy and anonymity. Many people are concerned about how governments and enterprises use their personal information and data, so they naturally want less scrutiny of their private lives. However, many privacy-oriented tokens have been removed from popular exchanges due to governmental and law enforcement concerns in many jurisdictions. Decentralized (DEX) and unregulated exchanges and self-hosted wallets are thus slowly becoming the only means for acquiring or using privacy cryptocurrencies. Here's a rundown of the top five most popular privacy-oriented [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp), which have several built-in privacy features. These projects claim to offer enhanced security features or options that help to keep users' identities and activities concealed. ### Regulators in many jurisdictions have put privacy tokens and privacy-enhancing techniques on notice because they are all too often used for illegal activities. In the U.S., cryptocurrency mixing service providers have been arrested, and their services shut down. The European Parliament finalized a regulation in April 2024, setting the stage for a ban on hosted privacy-oriented tokens and techniques and tightening regulations for crypto-service providers. In most cases, users are still allowed to self-custody these assets and use them in peer-to-peer transactions. ### Key Takeaways * Several projects have emerged that employ certain techniques designed to protect user anonymity. * Many use mixing techniques like CoinJoin, encrypted addresses, randomized transactions, or others to disguise transactions. * Many privacy tokens are designed to address people's concerns about their private information and data. * Unfortunately, there are always bad actors ruining something good for everyone else. Most of these tokens have been used in illicit transactions, so law enforcement and regulators are targeting developers and providers. ## 1. Monero (XMR) [Monero (XMR)](https://www.investopedia.com/terms/m/monero.asp) is a cryptocurrency designed primarily for the ability to help anonymize users. Monero transactions are much more difficult to trace because they use ring signatures and [stealth addresses](https://www.investopedia.com/terms/s/stealth-address-cryptocurrency.asp). These methods help to hide the identities of the sender and the receiver. Additionally, Ring Confidential Transactions, or RingCT, helps to conceal the transaction amount, providing more privacy. Trading at $129.23 as of May 5, 2024, Monero was #48 by overall market value, coming in at roughly $2.4 billion. ## 2. Zcash (ZEC) [Zcash (ZEC)](https://www.investopedia.com/terms/z/zcash.asp) defines itself as "If Bitcoin is like http for money, Zcash is https," underlining its enhanced security and privacy features. Zcash has implemented a cryptographic tool called Zero-Knowledge proof and grants participants an option to shield transactions. It allows participants to transact without any of them revealing their addresses to the other(s). Zero-Knowledge proofs also hide transaction amounts. Zcash ranked #171 in the list of cryptocurrencies with a market cap of $378 million and traded at $23.19 on May 5, 2024. ## 3. DASH (DASH) Created in 2014, [DASH](https://www.investopedia.com/tech/what-dash-cryptocurrency/) is a cryptocurrency that allows users to choose whether or not their transactions are anonymous and private using a protocol known as CoinJoin. The feature works by obscuring the origins of your funds. Choosing to use the feature will slightly raise the transaction fee. DASH achieves this through a mixing protocol utilizing an innovative decentralized network of servers called [master nodes](https://www.investopedia.com/terms/m/master-node-cryptocurrency.asp). Another feature DASH offers is Instant Send, which can process transactions as fast as a credit card. On May 5, 2024, Dash ranked #186 by market cap with a total value of $347 million. At the time of writing, it traded at about $29.47. ### Cryptocurrency tumblers and mixers are increasingly used for money laundering and other illicit activities. Law enforcement and regulators in many jurisdictions are targeting these service providers as facilitators, so it's best to use caution and learn the rules in your country when considering a cryptocurrency or service that uses mixing techniques. ## 4. 0x0.ai (0x0) A controversial cryptocurrency tumbler, 0x0.ai is a cryptocurrency and digital asset platform that allows users to anonymize their transactions and identities by pooling transactions. These transactions are then mixed, and cryptocurrency is distributed to other users. On May 5, 2024, 0x0 traded at $0.36 and ranked #231 by market cap, with a total value of $313 million. ## 5. MimbleWimble (MWC) MimbleWimble is a privacy-focused token with core features that allow complete control over your privacy. All transaction amounts are encrypted by default, and no addresses or other private information are stored on the blockchain. On the MimbleWimble blockchain, transactions appear as random inputs and outputs. Between the encryption, lack of addresses, and built-in randomness, there is no way to track users. On May 5, 2024, MWC was #305 by market cap, with $182.5 million, and tokens traded at $16.66. ## What Is the Best Privacy Cryptocurrency? Monero is the most popular privacy crypto, followed by ZCash and Dash. Each appeals to different users. ## What Is a Privacy Cryptocurrency? A privacy cryptocurrency uses techniques to provide users with more anonymity and privacy. ## Do Privacy Coins Have a Future? Privacy coins are being targeted in many jurisdictions because they can be used for nefarious purposes. Exchanges who rely on regulatory compliance are beginning to remove them, but decentralized exchanges that don't fall under any jurisdictions still list them. Privacy coins are likely not going anywhere as the people that want them will find ways to use them. ## The Bottom Line Privacy tokens have a place in the world, as privacy is something many people long for. These cryptocurrencies promise a life away from government and enterprise snooping that many people desire. However, privacy for average law-abiding citizens means more privacy for criminals, so it's difficult to say whether privacy cryptocurrencies will be available in the future. *The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1714920039300190&usg=AOvVaw135zDT3YRqNOO1clqiKEHb) for more info. As of the date this article was written, the author does not own any privacy cryptocurrencies.*

What Are Privacy Cryptocurrencies? Privacy-oriented cryptocurrencies are digital currencies with features that enhance privacy and anonymity. Many people are concerned about how governments and enterprises use their personal information and data, so they naturally want less scrutiny of their private lives. However, many privacy-oriented tokens have been removed from popular exchanges due to governmental and law enforcement concerns in many jurisdictions. Decentralized (DEX) and unregulated exchanges and self-hosted wallets are thus slowly becoming the only means for acquiring or using privacy cryptocurrencies. Here's a rundown of the top five most popular privacy-oriented cryptocurrencies, which have several built-in privacy features. These projects claim to offer enhanced security features or options that help to keep users' identities and activities concealed. Regulators in many jurisdictions have put privacy tokens and privacy-enhancing techniques on notice because they are all too often used for illegal activities. In the U.S., cryptocurrency mixing service providers have been arrested, and their services shut down. The European Parliament finalized a regulation in April 2024, setting the stage for a ban on hosted privacy-oriented tokens and techniques and tightening regulations for crypto-service providers. In most cases, users are still allowed to self-custody these assets and use them in peer-to-peer transactions. Key Takeaways Several projects have emerged that employ certain techniques designed to protect user anonymity.Many use mixing techniques like CoinJoin, encrypted addresses, randomized transactions, or others to disguise transactions.Many privacy tokens are designed to address people's concerns about their private information and data.Unfortunately, there are always bad actors ruining something good for everyone else. Most of these tokens have been used in illicit transactions, so law enforcement and regulators are targeting developers and providers. 1. Monero (XMR) Monero (XMR) is a cryptocurrency designed primarily for the ability to help anonymize users. Monero transactions are much more difficult to trace because they use ring signatures and stealth addresses. These methods help to hide the identities of the sender and the receiver. Additionally, Ring Confidential Transactions, or RingCT, helps to conceal the transaction amount, providing more privacy. Trading at $129.23 as of May 5, 2024, Monero was #48 by overall market value, coming in at roughly $2.4 billion. 2. Zcash (ZEC) Zcash (ZEC) defines itself as "If Bitcoin is like http for money, Zcash is https," underlining its enhanced security and privacy features. Zcash has implemented a cryptographic tool called Zero-Knowledge proof and grants participants an option to shield transactions. It allows participants to transact without any of them revealing their addresses to the other(s). Zero-Knowledge proofs also hide transaction amounts. Zcash ranked #171 in the list of cryptocurrencies with a market cap of $378 million and traded at $23.19 on May 5, 2024. 3. DASH (DASH) Created in 2014, DASH is a cryptocurrency that allows users to choose whether or not their transactions are anonymous and private using a protocol known as CoinJoin. The feature works by obscuring the origins of your funds. Choosing to use the feature will slightly raise the transaction fee. DASH achieves this through a mixing protocol utilizing an innovative decentralized network of servers called master nodes. Another feature DASH offers is Instant Send, which can process transactions as fast as a credit card. On May 5, 2024, Dash ranked #186 by market cap with a total value of $347 million. At the time of writing, it traded at about $29.47. Cryptocurrency tumblers and mixers are increasingly used for money laundering and other illicit activities. Law enforcement and regulators in many jurisdictions are targeting these service providers as facilitators, so it's best to use caution and learn the rules in your country when considering a cryptocurrency or service that uses mixing techniques. 4. 0x0.ai (0x0) A controversial cryptocurrency tumbler, 0x0.ai is a cryptocurrency and digital asset platform that allows users to anonymize their transactions and identities by pooling transactions. These transactions are then mixed, and cryptocurrency is distributed to other users. On May 5, 2024, 0x0 traded at $0.36 and ranked #231 by market cap, with a total value of $313 million. 5. MimbleWimble (MWC) MimbleWimble is a privacy-focused token with core features that allow complete control over your privacy. All transaction amounts are encrypted by default, and no addresses or other private information are stored on the blockchain. On the MimbleWimble blockchain, transactions appear as random inputs and outputs. Between the encryption, lack of addresses, and built-in randomness, there is no way to track users. On May 5, 2024, MWC was #305 by market cap, with $182.5 million, and tokens traded at $16.66. What Is the Best Privacy Cryptocurrency? Monero is the most popular privacy crypto, followed by ZCash and Dash. Each appeals to different users. What Is a Privacy Cryptocurrency? A privacy cryptocurrency uses techniques to provide users with more anonymity and privacy. Do Privacy Coins Have a Future? Privacy coins are being targeted in many jurisdictions because they can be used for nefarious purposes. Exchanges who rely on regulatory compliance are beginning to remove them, but decentralized exchanges that don't fall under any jurisdictions still list them. Privacy coins are likely not going anywhere as the people that want them will find ways to use them. The Bottom Line Privacy tokens have a place in the world, as privacy is something many people long for. These cryptocurrencies promise a life away from government and enterprise snooping that many people desire. However, privacy for average law-abiding citizens means more privacy for criminals, so it's difficult to say whether privacy cryptocurrencies will be available in the future. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own any privacy cryptocurrencies.

https://www.investopedia.com/articles/active-trading/022415/how-use-commodity-futures-hedge.asp

How to Use Commodity Futures to Hedge

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">Futures</a> are a popular asset class used to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedge</a> against risk. Strictly speaking, investment risk can never be completely eliminated, though its impact can be mitigated or passed on. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/hedging-beginners-guide/">Hedging through future agreements</a> between two parties dates to the 1800s. The Chicago Board of Trade standardized futures contracts in 1865 to allow farmers and dealers to trade grain and other <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/softcommodity.asp">soft commodities</a> at future transaction dates throughout the year.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Hedging is a way to reduce risk exposure by taking an offsetting position in a closely related product or security.</li><li>In the world of commodities, both consumers and producers of them can use futures contracts to hedge.</li><li>Hedging with futures effectively locks in the price of a commodity today, even if it will actually be bought or sold in physical form in the future.</li></ul></div></div></div> <span class="heading-toc" id="toc-hedging-commodities"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Hedging Commodities </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Let’s look at some basic examples of the futures market, as well as the return prospects and risks.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> For simplicity's sake, we assume one unit of the commodity, which can be a bushel of corn, a liter of orange juice, or a ton of sugar.<em> </em>Let's look at a farmer who expects one unit of soybean to be ready for sale in six months’ time. Assume that the current spot price of soybeans is $10 per unit. After considering plantation costs and expected profits, he wants the minimum sale price to be $10.10 per unit, once his crop is ready. The farmer is concerned that oversupply or other uncontrollable factors might lead to price declines in the future, which would leave him with a loss. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Here are the parameters: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li>Price protection is expected by the farmer (minimum $10.10).</li><li>Protection is needed for a specified period of time (six months).</li><li>Quantity is fixed: the farmer knows that he will produce one unit of soybean during the stated time period.</li><li>His aim is to hedge (eliminate the risk/loss), not speculate.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Futures contracts, by their specifications, fit the above parameters: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <li>They can be bought or sold today for fixing a future price.</li><li>They are for a specified period of time, after which they expire.</li><li>The quantity of the futures contract is fixed.</li><li>They offer hedging.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Assume a futures contract on one unit of soybean with six months to expiry is available today for $10.10. The farmer can sell this futures contract (short sell) to gain the required protection (locking in the sale price). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <span class="heading-toc" id="toc-how-this-works-producer-hedge"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_20-0"> <span class="mntl-sc-block-heading__text"> How This Works: Producer Hedge </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> If the price of soybeans shoots up to say $13 in six months, the farmer will incur a loss of $2.90 (sell price-buy price = $10.10-$13.00) on the futures contract. He will be able to sell his actual crop produce at the market rate of $13, which will lead to a net sale price of $13 - $2.90 = $10.10. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If the price of soybeans remains at $10, the farmer will benefit from the futures contract ($10.10 - $10 = $0.10). He will sell his soybeans at $10, leaving his net sale price at $10 + $0.10 = $10.10 </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> If the price declines to $7.50, the farmer will benefit from the futures contract ($10.10 - $7.50 = $2.60). He will sell his crop produce at $7.50, making his net sale price $10.10 ($7.50 + $2.60). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> In all three cases, the farmer is able to shield his desired sale price by using futures contracts. The actual crop produce is sold at available market rates, but the fluctuation in prices is eliminated by the futures contract. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Hedging is not without costs and risks. Assume that in the first above-mentioned case, the price reaches $13, but the farmer did not take a futures contract. He would have benefited by selling at a higher price of $13. Because of futures position, he lost an extra $2.90. On the other hand, the situation could have been worse for him the third case, when he was selling at $7.50. Without futures, he would have suffered a loss. But in all cases, he is able to achieve the desired hedge. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <span class="heading-toc" id="toc-how-this-works-consumer-hedge"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> How This Works: Consumer Hedge </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Now assume a soybean oil manufacturer who needs one unit of soybean in six months’ time. He is worried that soybean prices may shoot up in the near future. He can buy (go long) the same soybean future contract to lock the buy price at his desired level of around $10, say $10.10. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If the price of soybean shoots up to say $13, the futures buyer will profit by $2.90 (sell price-buy price = $13 - $10.10) on the futures contract. He will buy the required soybean at the market price of $13, which will lead to a net buy price of -$13 + $2.90 = -$10.10 (negative indicates net outflow for buying). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> If the price of soybeans remains at $10, the buyer will lose on the futures contract ($10 - $10.10 = -$0.10). He will buy the required soybean at $10, taking his net buy price to -$10 - $0.10 = -$10.10 </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> If the price declines to $7.50, the buyer will lose on the futures contract ($7.50 - $10.10 = -$2.60). He will buy required soybean at the market price of $7.50, taking his net buy price to -$7.50 - $2.60 = -$10.10. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> In all three cases, the soybean oil manufacturer is able to get his desired buy price, by using a futures contract. Effectively, the actual crop produce is bought at available market rates. The fluctuation in prices is mitigated by the futures contract. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-risks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> Risks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Using the same futures contract at the same price, quantity, and expiry, the hedging requirements for both the soybean farmer (producer) and the soybean oil manufacturer (consumer) are met. Both were able to secure their desired price to buy or sell the commodity in the future. The risk did not pass anywhere but was mitigated—one was losing on higher profit potential at the expense of the other. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Both parties can mutually agree with this set of defined parameters, leading to a contract to be honored in the future (constituting a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forwardcontract.asp">forward</a> contract). The futures exchange matches the buyer or seller, enabling price discovery and standardization of contracts while taking away counter-party default risk, which is prominent in mutual forward contracts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-challenges-to-hedging"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> Challenges to Hedging </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> While hedging is encouraged, it does come with its own set of unique challenges and considerations. Some of the most common include the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margin.asp">Margin</a> money is required to be deposited, which may not be readily available. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margincall.asp">Margin calls</a> may also be required if the price in the futures market moves against you, even if you own the physical commodity.</li> <li>There may be daily <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marktomarket.asp">mark-to-market</a> requirements.</li> <li>Using futures takes away the higher profit potential in some cases (as cited above). It can lead to different perceptions in cases of large organizations, especially the ones having multiple owners or those listed on stock exchanges. For example, shareholders of a sugar company may be expecting higher profits due to an increase in sugar prices last quarter but may be disappointed when the announced quarterly results indicate that profits were nullified due to hedging positions.</li> <li>Contract size and specifications may not always perfectly fit the required hedging coverage. For example, one contract of Arabica coffee "C" futures covers 37,500 pounds of coffee and may be too large or disproportionate to fit the hedging requirements of a producer/consumer.<span class="ql-inline-citation" data-cite="2"></span> Small-sized <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emini.asp">mini-contracts</a>, if available, might be explored in this case.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li>Standard available futures contracts might not always match the physical commodity specifications, which could lead to hedging discrepancies. A farmer growing a different variant of coffee may not find a futures contract covering his quality, forcing him to take only available robusta or arabica contracts. At the time of expiry, his actual sale price may be different than the hedge available from the robusta or arabica contracts.</li> <li>If the futures market is not efficient and not well regulated, speculators can dominate and impact the futures prices drastically, leading to price discrepancies at entry and exit (expiration), which undo the hedge.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> With new asset classes opening up through local, national, and international exchanges, hedging is now possible for anything and everything. Commodity options are an alternative to futures that can be used for hedging. Care should be taken when assessing hedging securities to ensure they meet your needs. Bear in mind that hedgers should not get enticed by speculative gains. When hedging, careful consideration and focus can achieve the desired results. </p></div>

[Futures](https://www.investopedia.com/terms/f/futures.asp) are a popular asset class used to [hedge](https://www.investopedia.com/terms/h/hedge.asp) against risk. Strictly speaking, investment risk can never be completely eliminated, though its impact can be mitigated or passed on. [Hedging through future agreements](https://www.investopedia.com/trading/hedging-beginners-guide/) between two parties dates to the 1800s. The Chicago Board of Trade standardized futures contracts in 1865 to allow farmers and dealers to trade grain and other [soft commodities](https://www.investopedia.com/terms/s/softcommodity.asp) at future transaction dates throughout the year. ### Key Takeaways * Hedging is a way to reduce risk exposure by taking an offsetting position in a closely related product or security. * In the world of commodities, both consumers and producers of them can use futures contracts to hedge. * Hedging with futures effectively locks in the price of a commodity today, even if it will actually be bought or sold in physical form in the future. ## Hedging Commodities Let’s look at some basic examples of the futures market, as well as the return prospects and risks.  For simplicity's sake, we assume one unit of the commodity, which can be a bushel of corn, a liter of orange juice, or a ton of sugar.Let's look at a farmer who expects one unit of soybean to be ready for sale in six months’ time. Assume that the current spot price of soybeans is $10 per unit. After considering plantation costs and expected profits, he wants the minimum sale price to be $10.10 per unit, once his crop is ready. The farmer is concerned that oversupply or other uncontrollable factors might lead to price declines in the future, which would leave him with a loss. Here are the parameters: * Price protection is expected by the farmer (minimum $10.10). * Protection is needed for a specified period of time (six months). * Quantity is fixed: the farmer knows that he will produce one unit of soybean during the stated time period. * His aim is to hedge (eliminate the risk/loss), not speculate. Futures contracts, by their specifications, fit the above parameters: * They can be bought or sold today for fixing a future price. * They are for a specified period of time, after which they expire. * The quantity of the futures contract is fixed. * They offer hedging. Assume a futures contract on one unit of soybean with six months to expiry is available today for $10.10. The farmer can sell this futures contract (short sell) to gain the required protection (locking in the sale price). ## How This Works: Producer Hedge If the price of soybeans shoots up to say $13 in six months, the farmer will incur a loss of $2.90 (sell price-buy price = $10.10-$13.00) on the futures contract. He will be able to sell his actual crop produce at the market rate of $13, which will lead to a net sale price of $13 - $2.90 = $10.10. If the price of soybeans remains at $10, the farmer will benefit from the futures contract ($10.10 - $10 = $0.10). He will sell his soybeans at $10, leaving his net sale price at $10 + $0.10 = $10.10 If the price declines to $7.50, the farmer will benefit from the futures contract ($10.10 - $7.50 = $2.60). He will sell his crop produce at $7.50, making his net sale price $10.10 ($7.50 + $2.60). In all three cases, the farmer is able to shield his desired sale price by using futures contracts. The actual crop produce is sold at available market rates, but the fluctuation in prices is eliminated by the futures contract. Hedging is not without costs and risks. Assume that in the first above-mentioned case, the price reaches $13, but the farmer did not take a futures contract. He would have benefited by selling at a higher price of $13. Because of futures position, he lost an extra $2.90. On the other hand, the situation could have been worse for him the third case, when he was selling at $7.50. Without futures, he would have suffered a loss. But in all cases, he is able to achieve the desired hedge. ## How This Works: Consumer Hedge Now assume a soybean oil manufacturer who needs one unit of soybean in six months’ time. He is worried that soybean prices may shoot up in the near future. He can buy (go long) the same soybean future contract to lock the buy price at his desired level of around $10, say $10.10. If the price of soybean shoots up to say $13, the futures buyer will profit by $2.90 (sell price-buy price = $13 - $10.10) on the futures contract. He will buy the required soybean at the market price of $13, which will lead to a net buy price of -$13 + $2.90 = -$10.10 (negative indicates net outflow for buying). If the price of soybeans remains at $10, the buyer will lose on the futures contract ($10 - $10.10 = -$0.10). He will buy the required soybean at $10, taking his net buy price to -$10 - $0.10 = -$10.10 If the price declines to $7.50, the buyer will lose on the futures contract ($7.50 - $10.10 = -$2.60). He will buy required soybean at the market price of $7.50, taking his net buy price to -$7.50 - $2.60 = -$10.10. In all three cases, the soybean oil manufacturer is able to get his desired buy price, by using a futures contract. Effectively, the actual crop produce is bought at available market rates. The fluctuation in prices is mitigated by the futures contract. ## Risks Using the same futures contract at the same price, quantity, and expiry, the hedging requirements for both the soybean farmer (producer) and the soybean oil manufacturer (consumer) are met. Both were able to secure their desired price to buy or sell the commodity in the future. The risk did not pass anywhere but was mitigated—one was losing on higher profit potential at the expense of the other. Both parties can mutually agree with this set of defined parameters, leading to a contract to be honored in the future (constituting a [forward](https://www.investopedia.com/terms/f/forwardcontract.asp) contract). The futures exchange matches the buyer or seller, enabling price discovery and standardization of contracts while taking away counter-party default risk, which is prominent in mutual forward contracts. ## Challenges to Hedging While hedging is encouraged, it does come with its own set of unique challenges and considerations. Some of the most common include the following: * [Margin](https://www.investopedia.com/terms/m/margin.asp) money is required to be deposited, which may not be readily available. [Margin calls](https://www.investopedia.com/terms/m/margincall.asp) may also be required if the price in the futures market moves against you, even if you own the physical commodity. * There may be daily [mark-to-market](https://www.investopedia.com/terms/m/marktomarket.asp) requirements. * Using futures takes away the higher profit potential in some cases (as cited above). It can lead to different perceptions in cases of large organizations, especially the ones having multiple owners or those listed on stock exchanges. For example, shareholders of a sugar company may be expecting higher profits due to an increase in sugar prices last quarter but may be disappointed when the announced quarterly results indicate that profits were nullified due to hedging positions. * Contract size and specifications may not always perfectly fit the required hedging coverage. For example, one contract of Arabica coffee "C" futures covers 37,500 pounds of coffee and may be too large or disproportionate to fit the hedging requirements of a producer/consumer. Small-sized [mini-contracts](https://www.investopedia.com/terms/e/emini.asp), if available, might be explored in this case. * Standard available futures contracts might not always match the physical commodity specifications, which could lead to hedging discrepancies. A farmer growing a different variant of coffee may not find a futures contract covering his quality, forcing him to take only available robusta or arabica contracts. At the time of expiry, his actual sale price may be different than the hedge available from the robusta or arabica contracts. * If the futures market is not efficient and not well regulated, speculators can dominate and impact the futures prices drastically, leading to price discrepancies at entry and exit (expiration), which undo the hedge. ## The Bottom Line With new asset classes opening up through local, national, and international exchanges, hedging is now possible for anything and everything. Commodity options are an alternative to futures that can be used for hedging. Care should be taken when assessing hedging securities to ensure they meet your needs. Bear in mind that hedgers should not get enticed by speculative gains. When hedging, careful consideration and focus can achieve the desired results.

Futures are a popular asset class used to hedge against risk. Strictly speaking, investment risk can never be completely eliminated, though its impact can be mitigated or passed on. Hedging through future agreements between two parties dates to the 1800s. The Chicago Board of Trade standardized futures contracts in 1865 to allow farmers and dealers to trade grain and other soft commodities at future transaction dates throughout the year. Key Takeaways Hedging is a way to reduce risk exposure by taking an offsetting position in a closely related product or security.In the world of commodities, both consumers and producers of them can use futures contracts to hedge.Hedging with futures effectively locks in the price of a commodity today, even if it will actually be bought or sold in physical form in the future. Hedging Commodities Let’s look at some basic examples of the futures market, as well as the return prospects and risks.  For simplicity's sake, we assume one unit of the commodity, which can be a bushel of corn, a liter of orange juice, or a ton of sugar. Let's look at a farmer who expects one unit of soybean to be ready for sale in six months’ time. Assume that the current spot price of soybeans is $10 per unit. After considering plantation costs and expected profits, he wants the minimum sale price to be $10.10 per unit, once his crop is ready. The farmer is concerned that oversupply or other uncontrollable factors might lead to price declines in the future, which would leave him with a loss. Here are the parameters: Price protection is expected by the farmer (minimum $10.10).Protection is needed for a specified period of time (six months).Quantity is fixed: the farmer knows that he will produce one unit of soybean during the stated time period.His aim is to hedge (eliminate the risk/loss), not speculate. Futures contracts, by their specifications, fit the above parameters: They can be bought or sold today for fixing a future price.They are for a specified period of time, after which they expire.The quantity of the futures contract is fixed.They offer hedging. Assume a futures contract on one unit of soybean with six months to expiry is available today for $10.10. The farmer can sell this futures contract (short sell) to gain the required protection (locking in the sale price). How This Works: Producer Hedge If the price of soybeans shoots up to say $13 in six months, the farmer will incur a loss of $2.90 (sell price-buy price = $10.10-$13.00) on the futures contract. He will be able to sell his actual crop produce at the market rate of $13, which will lead to a net sale price of $13 - $2.90 = $10.10. If the price of soybeans remains at $10, the farmer will benefit from the futures contract ($10.10 - $10 = $0.10). He will sell his soybeans at $10, leaving his net sale price at $10 + $0.10 = $10.10 If the price declines to $7.50, the farmer will benefit from the futures contract ($10.10 - $7.50 = $2.60). He will sell his crop produce at $7.50, making his net sale price $10.10 ($7.50 + $2.60). In all three cases, the farmer is able to shield his desired sale price by using futures contracts. The actual crop produce is sold at available market rates, but the fluctuation in prices is eliminated by the futures contract. Hedging is not without costs and risks. Assume that in the first above-mentioned case, the price reaches $13, but the farmer did not take a futures contract. He would have benefited by selling at a higher price of $13. Because of futures position, he lost an extra $2.90. On the other hand, the situation could have been worse for him the third case, when he was selling at $7.50. Without futures, he would have suffered a loss. But in all cases, he is able to achieve the desired hedge. How This Works: Consumer Hedge Now assume a soybean oil manufacturer who needs one unit of soybean in six months’ time. He is worried that soybean prices may shoot up in the near future. He can buy (go long) the same soybean future contract to lock the buy price at his desired level of around $10, say $10.10. If the price of soybean shoots up to say $13, the futures buyer will profit by $2.90 (sell price-buy price = $13 - $10.10) on the futures contract. He will buy the required soybean at the market price of $13, which will lead to a net buy price of -$13 + $2.90 = -$10.10 (negative indicates net outflow for buying). If the price of soybeans remains at $10, the buyer will lose on the futures contract ($10 - $10.10 = -$0.10). He will buy the required soybean at $10, taking his net buy price to -$10 - $0.10 = -$10.10 If the price declines to $7.50, the buyer will lose on the futures contract ($7.50 - $10.10 = -$2.60). He will buy required soybean at the market price of $7.50, taking his net buy price to -$7.50 - $2.60 = -$10.10. In all three cases, the soybean oil manufacturer is able to get his desired buy price, by using a futures contract. Effectively, the actual crop produce is bought at available market rates. The fluctuation in prices is mitigated by the futures contract. Risks Using the same futures contract at the same price, quantity, and expiry, the hedging requirements for both the soybean farmer (producer) and the soybean oil manufacturer (consumer) are met. Both were able to secure their desired price to buy or sell the commodity in the future. The risk did not pass anywhere but was mitigated—one was losing on higher profit potential at the expense of the other. Both parties can mutually agree with this set of defined parameters, leading to a contract to be honored in the future (constituting a forward contract). The futures exchange matches the buyer or seller, enabling price discovery and standardization of contracts while taking away counter-party default risk, which is prominent in mutual forward contracts. Challenges to Hedging While hedging is encouraged, it does come with its own set of unique challenges and considerations. Some of the most common include the following: Margin money is required to be deposited, which may not be readily available. Margin calls may also be required if the price in the futures market moves against you, even if you own the physical commodity. There may be daily mark-to-market requirements. Using futures takes away the higher profit potential in some cases (as cited above). It can lead to different perceptions in cases of large organizations, especially the ones having multiple owners or those listed on stock exchanges. For example, shareholders of a sugar company may be expecting higher profits due to an increase in sugar prices last quarter but may be disappointed when the announced quarterly results indicate that profits were nullified due to hedging positions. Contract size and specifications may not always perfectly fit the required hedging coverage. For example, one contract of Arabica coffee "C" futures covers 37,500 pounds of coffee and may be too large or disproportionate to fit the hedging requirements of a producer/consumer. Small-sized mini-contracts, if available, might be explored in this case. Standard available futures contracts might not always match the physical commodity specifications, which could lead to hedging discrepancies. A farmer growing a different variant of coffee may not find a futures contract covering his quality, forcing him to take only available robusta or arabica contracts. At the time of expiry, his actual sale price may be different than the hedge available from the robusta or arabica contracts. If the futures market is not efficient and not well regulated, speculators can dominate and impact the futures prices drastically, leading to price discrepancies at entry and exit (expiration), which undo the hedge. The Bottom Line With new asset classes opening up through local, national, and international exchanges, hedging is now possible for anything and everything. Commodity options are an alternative to futures that can be used for hedging. Care should be taken when assessing hedging securities to ensure they meet your needs. Bear in mind that hedgers should not get enticed by speculative gains. When hedging, careful consideration and focus can achieve the desired results.

https://www.investopedia.com/terms/f/form_1098.asp

Form 1098: Mortgage Interest Statement and How to File

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-form-1098-mortgage-interest-statement"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Form 1098: Mortgage Interest Statement? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Form 1098, Mortgage Interest Statement, is an Internal Revenue Service (IRS) form used by taxpayers to report the amount of interest and related expenses paid on a mortgage during the tax year when the amount totals $600 or more. Related expenses include points paid on the purchase of the property. Points are prepaid interest made on a home loan to improve the rate on the mortgage offered by the lending institution.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Form 1098 serves two purposes: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <li>Lenders use it to report interest payments in excess of $600 they received for the year. The IRS collects this information to ensure proper financial reporting for lenders and other entities that receive interest payments.</li><li>Homeowners use it to determine the total amount of interest they paid for the year when figuring out their mortgage interest deduction for their annual tax returns.<span class="ql-inline-citation" data-cite="9"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways:</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Form 1098 is used to report mortgage interest paid for the year.</li><li>Lenders must issue Form 1098 when a homeowner has paid $600 or more in mortgage interest during the tax year.</li><li>To deduct mortgage interest, you must be the primary borrower on the loan and actively make payments.</li><li>If you are itemizing your deductions and plan to claim a mortgage interest deduction, Form 1098 helps you calculate the amount of your mortgage payments that have gone towards interest.</li><li>Other 1098 tax forms include Form 1098-C (charitable contributions), Form 1098-T (credit for education payments), and Form 1098-E (student loan interest payments).</li></ul><p><br/></p></div></div></div> <span class="heading-toc" id="toc-who-receives-form-1098"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Who Receives Form 1098? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Your lender is required to send Form 1098 to you if you paid $600 or more for the previous year in interest and points on a mortgage.<span class="ql-inline-citation" data-cite="1"></span> If you paid less than $600, you will not receive Form 1098. You can deduct <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-deductions-and-credits-4689689">these expenses</a> on a federal income tax form, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/schedulea.asp">Schedule A</a>, which reduces taxable income and the overall amount owed to the IRS. Form 1098 is issued and mailed by the lender—or other entity receiving the interest—to you, the borrower.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The IRS also requires the mortgage lender to provide Form 1098 to you if your property is considered <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/real-property.asp">real property</a>. Real property is land and anything built on, grown on, or attached to the land.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> Rules for Deducting Mortgage Interest </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> If you pay mortgage interest on a property, it must meet the IRS standards of a home to be deductible. These standards define a home as a space with basic living amenities: cooking and bathroom facilities and a sleeping area. Houses, condominiums, mobile homes, boats, cooperatives, and house trailers all qualify as homes.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The mortgage itself must be qualified. According to the IRS, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualified-mortgage.asp">qualified mortgages</a> include first and second mortgages, home equity loans, and refinanced mortgages.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Whether or not you need Form 1098 depends on whether or not you plan to itemize your deductions on the Schedule A Form. Claiming a deduction for mortgage interest paid can reduce your total taxable income. However, there are a few rules to know about deducting mortgage interest. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li>You must be the primary borrower and be making payments on the loan.</li><li>You’re limited to deducting interest on total mortgage debt of $750,000 or less if the debt originated on or after Dec. 16, 2017 (the limit for older mortgage debt is $1 million.)<span class="ql-inline-citation" data-cite="2"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If all of these apply to you, you need Form 1098 to deduct the mortgage interest you paid for your home loan for the current tax year. If you have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/061215/deducting-interest-your-second-mortgage.asp">more than one qualified mortgage</a>, you will receive a separate Form 1098 for each.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_26-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:64.3%;"> <img alt="Form 1098 Mortgage Interest Statement" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/1cgL0Yz4cKh8Kk4HagESO39QTdI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Form1098-30d7d922c32748bea2a293a28fbbe778.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/1cgL0Yz4cKh8Kk4HagESO39QTdI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Form1098-30d7d922c32748bea2a293a28fbbe778.jpg" data-srcset="https://www.investopedia.com/thmb/c1IWtLiUeJF6Ega7kHFyCfUXCV4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Form1098-30d7d922c32748bea2a293a28fbbe778.jpg 750w" data-tracking-container="true" height="1434" id="mntl-sc-block-image_1-0" width="2228"/> <noscript> <img alt="Form 1098 Mortgage Interest Statement" class="img--noscript universal-image__image" height="1434" sizes="750px" src="https://www.investopedia.com/thmb/1cgL0Yz4cKh8Kk4HagESO39QTdI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Form1098-30d7d922c32748bea2a293a28fbbe778.jpg" srcset="https://www.investopedia.com/thmb/c1IWtLiUeJF6Ega7kHFyCfUXCV4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Form1098-30d7d922c32748bea2a293a28fbbe778.jpg 750w" width="2228"/> </noscript> </div> </div> </figure> <span class="heading-toc" id="toc-how-to-claim-a-mortgage-interest-deduction"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> How to Claim a Mortgage Interest Deduction </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Taxpayers don't need to include Form 1098 with their tax returns because the information in the form has already been provided to the IRS. Instead, you use the information provided on Form 1098 if you plan to deduct your mortgage payments. If you plan to file your tax return electronically, enter the information from the form into the appropriate boxes on your tax return to record your interest deduction information.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> If you're receiving Form 1098 for the first time, you may wonder how to make sense of it. There are 11 boxes to take note of when reviewing your statement. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <li><strong>Box 1:</strong> Mortgage interest received from the borrower. This box shows how much interest you paid to your lender for the year.</li><li><strong>Box 2</strong>: Outstanding mortgage principal.<strong> </strong>This box shows how much is owed on the principal of the loan.</li><li><strong>Box 3</strong>: Mortgage origination date. This shows the date when your mortgage originated.</li><li><strong>Box 4</strong>: Refund of overpaid interest. If you overpaid the refunded mortgage interest, it would be listed here.</li><li><strong>Box 5</strong>: Mortgage insurance premiums.<strong> </strong>If you're paying private mortgage insurance or mortgage insurance premiums for the loan, those amounts are entered here.</li><li><strong>Box 6</strong>: Points paid on the purchase of the principal residence. This box shows mortgage points you may be able to deduct.</li><li><strong>Boxes 7 - 11</strong>:<strong> </strong>These boxes include information about the mortgage and the property itself.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> When reviewing Form 1098, it's important to verify that your personal information, including your name, address, and tax identification number, is accurate.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block download-link" data-tracking-container="true" id="mntl-sc-block_37-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.irs.gov/pub/irs-pdf/f1098.pdf" id="mntl-sc-block-featuredlink__link_1-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Download Now</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-other-1098-tax-forms"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-heading__text"> Other 1098 Tax Forms </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> There are several 1098 forms—they are all related to deductions. The three other versions of Form 1098 are Form 1098-C, Form 1098-E, and Form 1098-T. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Form 1098-C </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Form 1098-C details the donations of automobiles, boats, and airplanes to charitable organizations that give the vehicles to those in need or sell them at a below-market price. It is filed and reported by the recipient organization and includes the date of donation, type of vehicle, vehicle identification number (VIN), and vehicle value.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> Form 1098-E </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Form 1098-E reports the interest paid on qualified student loans during the tax year. The interest paid can be deducted by the taxpayer, who will receive the form detailing how much interest was paid that year. It is sent by the lending institution if at least $600 was paid in interest, although the taxpayer may get a form for sums less than $600.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-subheading__text"> Form 1098-T </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Form 1098-T provides information about post-secondary tuition and related fees during the year. The educational institution files it, and you can use it to calculate education-related tax deductions and credits. Some examples of these credits are the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/american-opportunity-tax-credit.asp">American Opportunity Tax Credit</a> (AOTC) and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifelearningcredit.asp">Lifetime Learning Credit</a> (LLC). The form also reports any scholarships and grants received through the school that may reduce the taxpayer’s allowable deduction or credit.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-subheading__text"> Form 1098-MA </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Taxpayers who have received assistance from the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund) receive Form 1098-MA, which they can use to report these payments.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-what-is-a-1098-tax-form-used-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a 1098 Tax Form Used for?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Form 1098 reports the total interest paid on a mortgage during the previous year. Taxpayers use it to calculate the size of the mortgage interest deduction they can take, if any, for that tax year.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_56-0"><span class="heading-toc" id="toc-how-do-i-get-my-1098-form"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Get My 1098 Form?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Your mortgage lender sends your Form 1098 to you, generally by the end of January of the filing year.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_58-0"><span class="heading-toc" id="toc-do-i-need-to-file-1098"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Need to File 1098?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, you don't have to file Form 1098 or submit it with your tax return. You only have to indicate the amount of interest reported by the form. And you generally only report this interest if you are itemizing deductions on your tax return.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-what-is-a-1098-tax-form-from-college"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a 1098 Tax Form From College?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Colleges and universities use Form 1098-T to report payments to students for qualified tuition and other expenses, like scholarships and grants. The educational institution files it with the IRS, and the student receives a copy. Taxpayers use the info on Form 1098-T to claim an education credit on Form 1040 (the tax return).<span class="ql-inline-citation" data-cite="8"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_62-0"><span class="heading-toc" id="toc-does-the-parent-or-student-claim-the-1098-t"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the Parent or Student Claim the 1098-T?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Either can do so (but not both). Generally, it depends on who is actually paying the educational expenses and if the student is still being listed and taken as a dependent on the parent's tax return. If they are, the parent usually claims the education credit based on the Form 1098-T info.<span class="ql-inline-citation" data-cite="8"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_64-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Form 1098: Mortgage Interest Deduction is an IRS form for notifying a borrower how much interest they have paid in one year on a qualified home mortgage. You should receive one in January if you have a mortgage, and are able to claim the interest as a deduction if you itemize your tax return.<br/> </p></div>

## What Is Form 1098: Mortgage Interest Statement? Form 1098, Mortgage Interest Statement, is an Internal Revenue Service (IRS) form used by taxpayers to report the amount of interest and related expenses paid on a mortgage during the tax year when the amount totals $600 or more. Related expenses include points paid on the purchase of the property. Points are prepaid interest made on a home loan to improve the rate on the mortgage offered by the lending institution. Form 1098 serves two purposes: * Lenders use it to report interest payments in excess of $600 they received for the year. The IRS collects this information to ensure proper financial reporting for lenders and other entities that receive interest payments. * Homeowners use it to determine the total amount of interest they paid for the year when figuring out their mortgage interest deduction for their annual tax returns. ### Key Takeaways: * Form 1098 is used to report mortgage interest paid for the year. * Lenders must issue Form 1098 when a homeowner has paid $600 or more in mortgage interest during the tax year. * To deduct mortgage interest, you must be the primary borrower on the loan and actively make payments. * If you are itemizing your deductions and plan to claim a mortgage interest deduction, Form 1098 helps you calculate the amount of your mortgage payments that have gone towards interest. * Other 1098 tax forms include Form 1098-C (charitable contributions), Form 1098-T (credit for education payments), and Form 1098-E (student loan interest payments). ## Who Receives Form 1098? Your lender is required to send Form 1098 to you if you paid $600 or more for the previous year in interest and points on a mortgage. If you paid less than $600, you will not receive Form 1098. You can deduct [these expenses](https://www.investopedia.com/tax-deductions-and-credits-4689689) on a federal income tax form, [Schedule A](https://www.investopedia.com/terms/s/schedulea.asp), which reduces taxable income and the overall amount owed to the IRS. Form 1098 is issued and mailed by the lender—or other entity receiving the interest—to you, the borrower. The IRS also requires the mortgage lender to provide Form 1098 to you if your property is considered [real property](https://www.investopedia.com/terms/r/real-property.asp). Real property is land and anything built on, grown on, or attached to the land. ### Rules for Deducting Mortgage Interest If you pay mortgage interest on a property, it must meet the IRS standards of a home to be deductible. These standards define a home as a space with basic living amenities: cooking and bathroom facilities and a sleeping area. Houses, condominiums, mobile homes, boats, cooperatives, and house trailers all qualify as homes. ### The mortgage itself must be qualified. According to the IRS, [qualified mortgages](https://www.investopedia.com/terms/q/qualified-mortgage.asp) include first and second mortgages, home equity loans, and refinanced mortgages. Whether or not you need Form 1098 depends on whether or not you plan to itemize your deductions on the Schedule A Form. Claiming a deduction for mortgage interest paid can reduce your total taxable income. However, there are a few rules to know about deducting mortgage interest. * You must be the primary borrower and be making payments on the loan. * You’re limited to deducting interest on total mortgage debt of $750,000 or less if the debt originated on or after Dec. 16, 2017 (the limit for older mortgage debt is $1 million.) If all of these apply to you, you need Form 1098 to deduct the mortgage interest you paid for your home loan for the current tax year. If you have [more than one qualified mortgage](https://www.investopedia.com/articles/personal-finance/061215/deducting-interest-your-second-mortgage.asp), you will receive a separate Form 1098 for each. ![Form 1098 Mortgage Interest Statement]() :max_bytes(150000):strip_icc()/Form1098-30d7d922c32748bea2a293a28fbbe778.jpg) ## How to Claim a Mortgage Interest Deduction Taxpayers don't need to include Form 1098 with their tax returns because the information in the form has already been provided to the IRS. Instead, you use the information provided on Form 1098 if you plan to deduct your mortgage payments. If you plan to file your tax return electronically, enter the information from the form into the appropriate boxes on your tax return to record your interest deduction information. If you're receiving Form 1098 for the first time, you may wonder how to make sense of it. There are 11 boxes to take note of when reviewing your statement. * **Box 1:** Mortgage interest received from the borrower. This box shows how much interest you paid to your lender for the year. * **Box 2**: Outstanding mortgage principal.This box shows how much is owed on the principal of the loan. * **Box 3**: Mortgage origination date. This shows the date when your mortgage originated. * **Box 4**: Refund of overpaid interest. If you overpaid the refunded mortgage interest, it would be listed here. * **Box 5**: Mortgage insurance premiums.If you're paying private mortgage insurance or mortgage insurance premiums for the loan, those amounts are entered here. * **Box 6**: Points paid on the purchase of the principal residence. This box shows mortgage points you may be able to deduct. * **Boxes 7 - 11**:These boxes include information about the mortgage and the property itself. When reviewing Form 1098, it's important to verify that your personal information, including your name, address, and tax identification number, is accurate. [Download Now](https://www.irs.gov/pub/irs-pdf/f1098.pdf) ## Other 1098 Tax Forms There are several 1098 forms—they are all related to deductions. The three other versions of Form 1098 are Form 1098-C, Form 1098-E, and Form 1098-T. ### Form 1098-C Form 1098-C details the donations of automobiles, boats, and airplanes to charitable organizations that give the vehicles to those in need or sell them at a below-market price. It is filed and reported by the recipient organization and includes the date of donation, type of vehicle, vehicle identification number (VIN), and vehicle value. ### Form 1098-E Form 1098-E reports the interest paid on qualified student loans during the tax year. The interest paid can be deducted by the taxpayer, who will receive the form detailing how much interest was paid that year. It is sent by the lending institution if at least $600 was paid in interest, although the taxpayer may get a form for sums less than $600. ### Form 1098-T Form 1098-T provides information about post-secondary tuition and related fees during the year. The educational institution files it, and you can use it to calculate education-related tax deductions and credits. Some examples of these credits are the [American Opportunity Tax Credit](https://www.investopedia.com/terms/a/american-opportunity-tax-credit.asp) (AOTC) and the [Lifetime Learning Credit](https://www.investopedia.com/terms/l/lifelearningcredit.asp) (LLC). The form also reports any scholarships and grants received through the school that may reduce the taxpayer’s allowable deduction or credit. ### Form 1098-MA Taxpayers who have received assistance from the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund) receive Form 1098-MA, which they can use to report these payments. ## What Is a 1098 Tax Form Used for? Form 1098 reports the total interest paid on a mortgage during the previous year. Taxpayers use it to calculate the size of the mortgage interest deduction they can take, if any, for that tax year. ## How Do I Get My 1098 Form? Your mortgage lender sends your Form 1098 to you, generally by the end of January of the filing year. ## Do I Need to File 1098? No, you don't have to file Form 1098 or submit it with your tax return. You only have to indicate the amount of interest reported by the form. And you generally only report this interest if you are itemizing deductions on your tax return. ## What Is a 1098 Tax Form From College? Colleges and universities use Form 1098-T to report payments to students for qualified tuition and other expenses, like scholarships and grants. The educational institution files it with the IRS, and the student receives a copy. Taxpayers use the info on Form 1098-T to claim an education credit on Form 1040 (the tax return). ## Does the Parent or Student Claim the 1098-T? Either can do so (but not both). Generally, it depends on who is actually paying the educational expenses and if the student is still being listed and taken as a dependent on the parent's tax return. If they are, the parent usually claims the education credit based on the Form 1098-T info. ## The Bottom Line Form 1098: Mortgage Interest Deduction is an IRS form for notifying a borrower how much interest they have paid in one year on a qualified home mortgage. You should receive one in January if you have a mortgage, and are able to claim the interest as a deduction if you itemize your tax return.

What Is Form 1098: Mortgage Interest Statement? Form 1098, Mortgage Interest Statement, is an Internal Revenue Service (IRS) form used by taxpayers to report the amount of interest and related expenses paid on a mortgage during the tax year when the amount totals $600 or more. Related expenses include points paid on the purchase of the property. Points are prepaid interest made on a home loan to improve the rate on the mortgage offered by the lending institution. Form 1098 serves two purposes: Lenders use it to report interest payments in excess of $600 they received for the year. The IRS collects this information to ensure proper financial reporting for lenders and other entities that receive interest payments.Homeowners use it to determine the total amount of interest they paid for the year when figuring out their mortgage interest deduction for their annual tax returns. Key Takeaways: Form 1098 is used to report mortgage interest paid for the year.Lenders must issue Form 1098 when a homeowner has paid $600 or more in mortgage interest during the tax year.To deduct mortgage interest, you must be the primary borrower on the loan and actively make payments.If you are itemizing your deductions and plan to claim a mortgage interest deduction, Form 1098 helps you calculate the amount of your mortgage payments that have gone towards interest.Other 1098 tax forms include Form 1098-C (charitable contributions), Form 1098-T (credit for education payments), and Form 1098-E (student loan interest payments). Who Receives Form 1098? Your lender is required to send Form 1098 to you if you paid $600 or more for the previous year in interest and points on a mortgage. If you paid less than $600, you will not receive Form 1098. You can deduct these expenses on a federal income tax form, Schedule A, which reduces taxable income and the overall amount owed to the IRS. Form 1098 is issued and mailed by the lender—or other entity receiving the interest—to you, the borrower. The IRS also requires the mortgage lender to provide Form 1098 to you if your property is considered real property. Real property is land and anything built on, grown on, or attached to the land. Rules for Deducting Mortgage Interest If you pay mortgage interest on a property, it must meet the IRS standards of a home to be deductible. These standards define a home as a space with basic living amenities: cooking and bathroom facilities and a sleeping area. Houses, condominiums, mobile homes, boats, cooperatives, and house trailers all qualify as homes. The mortgage itself must be qualified. According to the IRS, qualified mortgages include first and second mortgages, home equity loans, and refinanced mortgages. Whether or not you need Form 1098 depends on whether or not you plan to itemize your deductions on the Schedule A Form. Claiming a deduction for mortgage interest paid can reduce your total taxable income. However, there are a few rules to know about deducting mortgage interest. You must be the primary borrower and be making payments on the loan.You’re limited to deducting interest on total mortgage debt of $750,000 or less if the debt originated on or after Dec. 16, 2017 (the limit for older mortgage debt is $1 million.) If all of these apply to you, you need Form 1098 to deduct the mortgage interest you paid for your home loan for the current tax year. If you have more than one qualified mortgage, you will receive a separate Form 1098 for each. How to Claim a Mortgage Interest Deduction Taxpayers don't need to include Form 1098 with their tax returns because the information in the form has already been provided to the IRS. Instead, you use the information provided on Form 1098 if you plan to deduct your mortgage payments. If you plan to file your tax return electronically, enter the information from the form into the appropriate boxes on your tax return to record your interest deduction information. If you're receiving Form 1098 for the first time, you may wonder how to make sense of it. There are 11 boxes to take note of when reviewing your statement. Box 1: Mortgage interest received from the borrower. This box shows how much interest you paid to your lender for the year.Box 2: Outstanding mortgage principal. This box shows how much is owed on the principal of the loan.Box 3: Mortgage origination date. This shows the date when your mortgage originated.Box 4: Refund of overpaid interest. If you overpaid the refunded mortgage interest, it would be listed here.Box 5: Mortgage insurance premiums. If you're paying private mortgage insurance or mortgage insurance premiums for the loan, those amounts are entered here.Box 6: Points paid on the purchase of the principal residence. This box shows mortgage points you may be able to deduct.Boxes 7 - 11: These boxes include information about the mortgage and the property itself. When reviewing Form 1098, it's important to verify that your personal information, including your name, address, and tax identification number, is accurate. Download Now Other 1098 Tax Forms There are several 1098 forms—they are all related to deductions. The three other versions of Form 1098 are Form 1098-C, Form 1098-E, and Form 1098-T. Form 1098-C Form 1098-C details the donations of automobiles, boats, and airplanes to charitable organizations that give the vehicles to those in need or sell them at a below-market price. It is filed and reported by the recipient organization and includes the date of donation, type of vehicle, vehicle identification number (VIN), and vehicle value. Form 1098-E Form 1098-E reports the interest paid on qualified student loans during the tax year. The interest paid can be deducted by the taxpayer, who will receive the form detailing how much interest was paid that year. It is sent by the lending institution if at least $600 was paid in interest, although the taxpayer may get a form for sums less than $600. Form 1098-T Form 1098-T provides information about post-secondary tuition and related fees during the year. The educational institution files it, and you can use it to calculate education-related tax deductions and credits. Some examples of these credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The form also reports any scholarships and grants received through the school that may reduce the taxpayer’s allowable deduction or credit. Form 1098-MA Taxpayers who have received assistance from the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund) receive Form 1098-MA, which they can use to report these payments. What Is a 1098 Tax Form Used for? Form 1098 reports the total interest paid on a mortgage during the previous year. Taxpayers use it to calculate the size of the mortgage interest deduction they can take, if any, for that tax year. How Do I Get My 1098 Form? Your mortgage lender sends your Form 1098 to you, generally by the end of January of the filing year. Do I Need to File 1098? No, you don't have to file Form 1098 or submit it with your tax return. You only have to indicate the amount of interest reported by the form. And you generally only report this interest if you are itemizing deductions on your tax return. What Is a 1098 Tax Form From College? Colleges and universities use Form 1098-T to report payments to students for qualified tuition and other expenses, like scholarships and grants. The educational institution files it with the IRS, and the student receives a copy. Taxpayers use the info on Form 1098-T to claim an education credit on Form 1040 (the tax return). Does the Parent or Student Claim the 1098-T? Either can do so (but not both). Generally, it depends on who is actually paying the educational expenses and if the student is still being listed and taken as a dependent on the parent's tax return. If they are, the parent usually claims the education credit based on the Form 1098-T info. The Bottom Line Form 1098: Mortgage Interest Deduction is an IRS form for notifying a borrower how much interest they have paid in one year on a qualified home mortgage. You should receive one in January if you have a mortgage, and are able to claim the interest as a deduction if you itemize your tax return.

https://www.investopedia.com/briodirect-bank-review-5069892

BrioDirect Bank Review

<div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body"> <span class="comp external-content mntl-external-component" id="external-content_1-0"><div class="comp product-review-content product-review-content--finance product-review--base" id="product-review-content--finance_1-0"> <div class="comp js-toc-appear article-container article-intro mntl-block" id="article-intro_1-0"> <div class="comp product-card" data-tracking-container="true" data-tracking-id="product-card" id="product-card_1-0" style="--imgWidth: 0px"> <div class="product-card__content"> <div class="product-card__intro expert-content"> <figure class="comp figure-article figure-3x2 product-card__image litho-figure-article mntl-universal-primary-image primary-image" id="product-card__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="BD" class="primary-image__image mntl-primary-image--blurry" height="1000" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/p6OOUNtuggI7OHQQLIL4CMtA_WA=/fit-in/1500x1000/filters:format(png):fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhDgAFAPIAAEEffUEge2J9VH3JM37IM4CBhf///0EffSwAAAAADgAFAEIIKAANCBRIYKDBgQUMAAAwMIDCgw4DFBxQEKKBABIrQsR4kYAAAxoNBAQAOw==')" width="1500"/> <noscript> <img alt="BD" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="1000" src="https://www.investopedia.com/thmb/p6OOUNtuggI7OHQQLIL4CMtA_WA=/fit-in/1500x1000/filters:format(png):fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png" width="1500"/> </noscript> </div> </div> </figure><!-- end: comp figure-article figure-3x2 product-card__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0"> <a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.briodirectbanking.com/" id="commerce-button_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0"> BrioDirect Bank is an online bank offering competitive deposit accounts.<strong> </strong>BrioDirect is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/onlinebanking.asp">digital offshoot</a> of Sterling National Bank, which was founded in 1888 and is headquartered in New York.<span class="ql-inline-citation" data-cite="1"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div> <div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review"> <ul class="tabbed-sc-block__tabs"> <li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros &amp; Cons</span></li> <li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li> </ul> <div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1"> <span class="tabbed-sc-block__text">Pros &amp; Cons</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1"> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-2"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Low minimum deposit requirements</p></li> <li><p>No monthly fees </p></li> <li><p>Hassle-free bank</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Primarily for deposit accounts </p></li> <li><p>Higher rates for CDs elsewhere</p><p><br/></p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> </div> <div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2"> <span class="tabbed-sc-block__text">Company Overview</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2"> <div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-4"> <div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0"> <ul class="definition-list__container"> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Year Founded</span> <span class="definition-list__item-content definition-list__item-content-0"> 1888 </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Official Website</span> <span class="definition-list__item-content definition-list__item-content-1"> www.briodirectbanking.com </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Banking Products Offered</span> <span class="definition-list__item-content definition-list__item-content-2"> Savings, CDs </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Customer Service</span> <span class="definition-list__item-content definition-list__item-content-3"> Phone line: Monday–Friday, 8:30 a.m. to 5 p.m. (EST); Saturdays, 8:30 a.m. to 3 p.m. (EST): 877-369-BRIO. </span> </span> </li> </ul> </div><!-- end: comp product-spec-tool definition-list --> </div><!-- end: comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block --> </div> </div> </div> </div><!-- end: comp product-card --> </div><!-- end: comp js-toc-appear article-container article-intro mntl-block --> <div class="loc body-content article-container"> <div class="comp article-body article-content mntl-block" id="article-content_1-0"> <div class="comp left-nav js-sticky-container product-review__left-nav mntl-block" id="product-review__left-nav_1-0"> <div class="comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block" data-desktop-bp="54em" data-tracking-container="true" id="product-review__toc_1-0"> <div class="comp sticky-toc-widget__product-container mntl-block" id="sticky-toc-widget__product-container_1-0"> <figure class="comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image" id="sticky-toc-widget__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="BD" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/4iHltaE3vQZokaPxXtmRRtUSUzs=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhDgAFAPIAAEEffUEge2J9VH3JM37IM4CBhf///0EffSwAAAAADgAFAEIIKAANCBRIYKDBgQUMAAAwMIDCgw4DFBxQEKKBABIrQsR4kYAAAxoNBAQAOw==')" width="1500"/> <noscript> <img alt="BD" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/4iHltaE3vQZokaPxXtmRRtUSUzs=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png" width="1500"/> </noscript> </div> </div> </figure><!-- end: comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0"> <a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.briodirectbanking.com/" id="commerce-button_2-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp sticky-toc-widget__cta commerce-block mntl-block --> </div><!-- end: comp sticky-toc-widget__product-container mntl-block --> <div class="comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="sticky-toc-widget__toc_3-0"> <div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_3-0"> <div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_3-0"> <div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_5-0"> Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> <div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_3-0"> <button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="View All" id="mntl-toc-toggle__btn_3-0"> View All</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block --> </div><!-- end: comp mntl-toc-toggle mntl-block --> </div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block --> <div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-BrioDirect Bank Review" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0"> BrioDirect Bank Review</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> </div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block --> <ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0"> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-1"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-1"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Cons Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-cons-explained" id="mntl-toc__list-item-link_3-0-1" rel="nocaes"><span class="link__wrapper">Cons Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-2"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-2"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Best For" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-who-is-briodirect-best-for" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Best For</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-3"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-3"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bank Offerings" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-does-briodirect-bank-offer" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Bank Offerings</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-4"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-4"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Service" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-briodirect-bank-customer-service" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Customer Service</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-5"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-5"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-bank-with-briodirect-bank" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">How to Bank</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-6"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> </ul><!-- end: comp mntl-toc__list-heading expert-content mntl-toc__list --> </div><!-- end: comp mntl-toc__inner mntl-block --> </div><!-- end: comp toc-wrapper mntl-toc mntl-block --> </div><!-- end: comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block --> </div><!-- end: comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block --> </div><!-- end: comp left-nav js-sticky-container product-review__left-nav mntl-block --> <div class="comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block" data-tracking-container="true" id="product-review__content_1-0"> <span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-1"> <li><strong>Low minimums deposit requirements </strong>– To open a BrioDirect money market account requires just $100. If you’re interested in tucking a larger amount in a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificate of deposit (CD)</a>, then the minimum amount is $500.</li> <li><strong>No monthly fees </strong>– You won’t have to worry about keeping a certain amount of money at all times to avoid account maintenance fees. Nor do you have to meet a litany of criteria to get those fees waived. However, for CDs, if your balance is zero or your account isn't funded, then after 20 days BrioDirect can close your account.</li> <li><strong>Hassle-free bank </strong>–<strong> </strong>BrioDirect is supreme in its simplicity: It offers four deposit accounts, an online application process, and straightforward fees and rates.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-2"> <span class="mntl-sc-block-heading__text"> Cons Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-3"> <li><strong>Higher rates for CDs elsewhere </strong>–<strong> </strong>BrioDirect’s rates for its money market accounts and CDs are competitive and higher than the national average. However, as online banks are known to offer higher interest rates than their brick-and-mortar competitors, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bank-cd-rates-4801462">you can probably find even more-impressive CD rates</a> at some of the other digital banks that offer only deposit accounts, depending on the CD term.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-who-is-briodirect-best-for"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-4"> <span class="mntl-sc-block-heading__text"> Who Is BrioDirect Best For? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-5"> BrioDirect Bank should appeal to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp" rel="noopener noreferrer">customers who are comfortable banking online</a> and don’t have a need to step into a brick-and-mortar location. It might be a particularly good fit for those who: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6"> <li>Want to open a CD with a low minimum deposit </li><li>Want to open a money market account without worrying about monthly fees</li><li>Don’t want to be paralyzed by myriad choices</li><li>Want to work with a bank that’s backed by an established financial institution</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-what-does-briodirect-bank-offer"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-7"> <span class="mntl-sc-block-heading__text"> What Does BrioDirect Bank Offer? </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-8"> BrioDirect offers Federal Deposit Insurance Corporation (FDIC)-backed deposit accounts for those who want a safe place to stash their savings and earn some interest. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-9"> <span class="mntl-sc-block-subheading__text"> High-Yield Savings </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-10"> BrioDirect Bank’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings account</a> has a competitive rate of 5.35% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apy.asp">annual percentage yield (APY)</a>. You won’t have to worry about paying a monthly fee, and you’ll need $500 to get started.<span class="ql-inline-citation" data-cite="10"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11"> While there are no monthly maintenance fees, and the minimum amount to open makes it accessible, there are a few fees if you’re not careful: a $10 fee for withdrawals from your savings that are in excess of six per month and $35 for each overdraft. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-12"> While the FDIC protects your money up to $250,000 per account holder, if you’re an existing customer with BrioDirect’s parent bank, Webster Bank, you’ll need to consider the fact that the $250,000 is across all your deposit accounts for both banks.<span class="ql-inline-citation" data-cite="6"></span> For example, if you have a savings and checking account with Webster Bank and want to open a savings account and CD with BrioBank, you’ll be covered up to $250,000 for all your accounts. As this is per person, if you share joint accounts with someone, then the covered amount doubles to $500,000. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-13"> <span class="mntl-sc-block-subheading__text"> High-Rate CDs </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-14"> BrioDirect Bank’s high-yield CDs can be an appealing way for you to tuck away savings that you don’t need to touch for a period of time. CDs typically offer higher interest rates than a standard savings or checking account, and you’ll usually find that the longer the term of the CD, the higher the interest rate. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15"> BrioDirect offers CDs for anywhere from 30 days to five years, with interest rates that are higher than the national average. The APY starts at 0.05%, and you’ll need a minimum of $500 to open.<span class="ql-inline-citation" data-cite="9"></span> Should you neglect to fund the account or let the balance fall below $500, your account can be closed after 20 days.<span class="ql-inline-citation" data-cite="8"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-16"> Note that BrioDirect Bank’s CDs automatically renew upon maturity. You’ll need to opt to kick the funds over to another account or withdraw them. However, after the CD matures, there is a 10-day grace period for you to do so. Should you need to take money out of your CD before the maturity date, you’ll be hit with an early withdrawal penalty. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-17"> BrioDirect’s rates for its high-yield CDs are as follows:<span class="ql-inline-citation" data-cite="5"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-18"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">BrioDirect Bank High-Yield CD Rates</th> </tr> </thead> <tbody data-check="-1"> <tr> <td><b>Term</b></td> <td><b>APY</b></td> </tr> <tr> <td>30 days</td> <td>0.05%</td> </tr> <tr> <td>Three months</td> <td>0.25%</td> </tr> <tr> <td>Five months</td> <td>0.15%</td> </tr> <tr> <td>Nine Months</td> <td>0.30%</td> </tr> <tr> <td>One Year</td> <td>5.00%</td> </tr> <tr> <td>One Year Special</td> <td>5.00%</td> </tr> <tr> <td>Eighteen Months</td> <td>1.35%</td> </tr> <tr> <td>Two Years</td> <td>2.30%</td> </tr> <tr> <td>Thirty Months</td> <td>0.45%</td> </tr> <tr> <td>Three Years</td> <td>2.45%</td> </tr> <tr> <td>Four Years</td> <td>0.45%</td> </tr> <tr> <td>Five Years</td> <td>0.45%</td> </tr> </tbody> </table> <figcaption>(As of May 9, 2024)</figcaption> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-19"> The fees for BrioDirect Bank’s CDs are:  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-20"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">BrioDirect High-Yield CD Early Withdrawal Penalties</th> </tr> </thead> <tbody data-check="-1"> <tr> <td>Term</td> <td>Penalty</td> </tr> <tr> <td>30 days or less</td> <td>30 days interest, whether or not earned</td> </tr> <tr> <td>1 year or less</td> <td>90 days interest, whether or not earned</td> </tr> <tr> <td>18 months or more but less than five years</td> <td>9 months interest, whether or not earned</td> </tr> <tr> <td>5 years or more</td> <td>12 months interest, whether or not earned</td> </tr> </tbody> </table> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <span class="heading-toc" id="toc-briodirect-bank-customer-service"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-21"> <span class="mntl-sc-block-heading__text"> BrioDirect Bank Customer Service </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-22"> Potential and current customers can get a hold of a human by phone at 877-369-BRIO, six days a week. Its customer contact center is open Monday through Friday, 8:00 a.m. to 8:00 p.m. ET, and 8:30 a.m. to 3 p.m. ET on Saturdays. You can also reach out to BrioDirect Bank by way of snail mail. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-how-to-bank-with-briodirect-bank"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-23"> <span class="mntl-sc-block-heading__text"> How to Bank With BrioDirect Bank  </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-24"> As is the case for online banks, you can apply and open an account online. The process is fairly straightforward, and the application process can take a matter of minutes. You’ll need to have the standard information on hand: your driver’s license, a government-issued ID (e.g., a passport, a state-issued ID), Social Security number, and contact information. You can make an initial deposit by an external transfer through another bank, wiring money, or sending a check. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-25"> <span class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"> Verdict</span><!-- end: comp mntl-sc-block-callout-heading mntl-text-block --> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"> <p>BrioDirect Bank is a straightforward and simple way to park your money for savings. The interest rates are competitive, and there’s a low minimum to open an account. If you’re someone who isn’t keen on a digital-only bank and are more comfortable with an option that has physical locations, then it would probably be best for you to look elsewhere.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <span class="heading-toc" id="toc-methodology"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-26"> <span class="mntl-sc-block-heading__text"> Methodology </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27"> Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="false" data-link-closest-header="false" data-tracking-container="true" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_2-0-28"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-retailer-type="none" data-tracking-container="true" href="https://www.briodirectbanking.com/" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block --> </div><!-- end: comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block --> </div><!-- end: comp article-body article-content mntl-block --> </div> </div><!-- end: comp product-review-content product-review-content--finance product-review--base --> </span> </div><div class="loc content-bottom"><div class="comp prm-article-sources article-sources mntl-article-sources mntl-expandable-block" data-scroll-offset="100" id="prm-article-sources_1-0"><div class="loc toggle-content"><div class="comp mntl-article-sources__wrapper mntl-block article-sources__wrapper" data-click-tracked="true" id="mntl-article-sources__wrapper_1-0"><div class="comp mntl-article-sources__heading mntl-text-block article-sources__heading" id="mntl-article-sources__heading_1-0">Article Sources</div> <div class="comp mntl-article-sources__icon-wrapper mntl-block article-sources__icon-wrapper" id="mntl-article-sources__icon-wrapper_1-0"><div class="comp article-sources__show-icon mntl-block" id="article-sources__show-icon_1-0"></div> <div class="comp article-sources__hide-icon mntl-block" id="article-sources__hide-icon_1-0"></div></div></div> </div><div class="loc expandable-content"> <div class="comp article-sources__disclaimer mntl-block" id="article-sources__disclaimer_1-0">Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our <a class="article-sources__disclaimer-text-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/legal-4768893#EditorialPolicy" id="article-sources__disclaimer-text-link_1-0" rel="nocaes"><span class="link__wrapper">editorial policy.</span></a></div> <div class="comp mntl-article-sources__citation-sources-1 mntl-citation-sources mntl-sources" data-tracking-container="true" id="mntl-article-sources__citation-sources-1_1-0"> <ol class="mntl-sources__content"> <li class="mntl-sources__source" id="citation-10"><p>BrioDirect. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.briodirectbanking.com/wp-content/uploads/2022/09/saplus-truth-in-savings-disclosure.pdf" rel="nofollow sponsored">Savings Plus Account Disclosure</a>," Page 2.</p></li> <li class="mntl-sources__source" id="citation-6"><p>FDIC. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fdic.gov/resources/deposit-insurance/">Deposit Insurance.</a>"</p></li> <li class="mntl-sources__source" id="citation-9"><p>BrioDirect. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.briodirectbanking.com/high-rate-cds/" rel="nofollow sponsored">High-Yield CDs.</a>“</p></li> <li class="mntl-sources__source" id="citation-8"><p>BrioDirect. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.briodirectbanking.com/wp-content/uploads/2023/02/cd24-truth-in-savings-disclosure.pdf" rel="nofollow sponsored">24 Month Certificate of Deposit Disclosure for BrioDirect Clients</a>," Page 2.</p></li> <li class="mntl-sources__source" id="citation-5"><p>BrioDirect. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.briodirectbanking.com/high-rate-cds/" rel="nofollow sponsored">High-Yield CDs.</a>“</p></li> </ol> </div> </div></div> <div class="comp prm-recirc related-recirc-section--articles mntl-block" data-tracking-container="true" id="prm-recirc_1-0"><section class="comp related-articles" data-tracking-container="true" id="related-articles_1-0"> <span class="related-articles__header type--camel"> Related Articles </span> <div class="loc recirc-content"><div class="comp related-articles__card-list-1 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:fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png) :fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png) [Open Account](https://www.briodirectbanking.com/) BrioDirect Bank is an online bank offering competitive deposit accounts.BrioDirect is the [digital offshoot](https://www.investopedia.com/terms/o/onlinebanking.asp) of Sterling National Bank, which was founded in 1888 and is headquartered in New York. * Pros & Cons * Company Overview Pros & Cons Pros * Low minimum deposit requirements * No monthly fees * Hassle-free bank Cons * Primarily for deposit accounts * Higher rates for CDs elsewhere Company Overview * Year Founded 1888 * Official Website www.briodirectbanking.com * Banking Products Offered Savings, CDs * Customer Service Phone line: Monday–Friday, 8:30 a.m. to 5 p.m. (EST); Saturdays, 8:30 a.m. to 3 p.m. (EST): 877-369-BRIO. :fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png) :fill(white):max_bytes(150000):strip_icc()/briodirect-62c9b99695534747bdafae467bb6bd72.png) [Open Account](https://www.briodirectbanking.com/) Table of Contents View All BrioDirect Bank Review * [Pros Explained](#toc-pros-explained) * [Cons Explained](#toc-cons-explained) * [Best For](#toc-who-is-briodirect-best-for) * [Bank Offerings](#toc-what-does-briodirect-bank-offer) * [Customer Service](#toc-briodirect-bank-customer-service) * [How to Bank](#toc-how-to-bank-with-briodirect-bank) * [Methodology](#toc-methodology) ## Pros Explained * **Low minimums deposit requirements** – To open a BrioDirect money market account requires just $100. If you’re interested in tucking a larger amount in a [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp), then the minimum amount is $500. * **No monthly fees** – You won’t have to worry about keeping a certain amount of money at all times to avoid account maintenance fees. Nor do you have to meet a litany of criteria to get those fees waived. However, for CDs, if your balance is zero or your account isn't funded, then after 20 days BrioDirect can close your account. * **Hassle-free bank** –BrioDirect is supreme in its simplicity: It offers four deposit accounts, an online application process, and straightforward fees and rates. ## Cons Explained * **Higher rates for CDs elsewhere** –BrioDirect’s rates for its money market accounts and CDs are competitive and higher than the national average. However, as online banks are known to offer higher interest rates than their brick-and-mortar competitors, [you can probably find even more-impressive CD rates](https://www.investopedia.com/best-bank-cd-rates-4801462) at some of the other digital banks that offer only deposit accounts, depending on the CD term. ## Who Is BrioDirect Best For? BrioDirect Bank should appeal to [customers who are comfortable banking online](https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp) and don’t have a need to step into a brick-and-mortar location. It might be a particularly good fit for those who: * Want to open a CD with a low minimum deposit * Want to open a money market account without worrying about monthly fees * Don’t want to be paralyzed by myriad choices * Want to work with a bank that’s backed by an established financial institution ## What Does BrioDirect Bank Offer? BrioDirect offers Federal Deposit Insurance Corporation (FDIC)-backed deposit accounts for those who want a safe place to stash their savings and earn some interest. ### High-Yield Savings BrioDirect Bank’s [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) has a competitive rate of 5.35% [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp). You won’t have to worry about paying a monthly fee, and you’ll need $500 to get started. While there are no monthly maintenance fees, and the minimum amount to open makes it accessible, there are a few fees if you’re not careful: a $10 fee for withdrawals from your savings that are in excess of six per month and $35 for each overdraft. While the FDIC protects your money up to $250,000 per account holder, if you’re an existing customer with BrioDirect’s parent bank, Webster Bank, you’ll need to consider the fact that the $250,000 is across all your deposit accounts for both banks. For example, if you have a savings and checking account with Webster Bank and want to open a savings account and CD with BrioBank, you’ll be covered up to $250,000 for all your accounts. As this is per person, if you share joint accounts with someone, then the covered amount doubles to $500,000. ### High-Rate CDs BrioDirect Bank’s high-yield CDs can be an appealing way for you to tuck away savings that you don’t need to touch for a period of time. CDs typically offer higher interest rates than a standard savings or checking account, and you’ll usually find that the longer the term of the CD, the higher the interest rate. BrioDirect offers CDs for anywhere from 30 days to five years, with interest rates that are higher than the national average. The APY starts at 0.05%, and you’ll need a minimum of $500 to open. Should you neglect to fund the account or let the balance fall below $500, your account can be closed after 20 days. Note that BrioDirect Bank’s CDs automatically renew upon maturity. You’ll need to opt to kick the funds over to another account or withdraw them. However, after the CD matures, there is a 10-day grace period for you to do so. Should you need to take money out of your CD before the maturity date, you’ll be hit with an early withdrawal penalty. BrioDirect’s rates for its high-yield CDs are as follows: | BrioDirect Bank High-Yield CD Rates | | | --- | --- | | **Term** | **APY** | | 30 days | 0.05% | | Three months | 0.25% | | Five months | 0.15% | | Nine Months | 0.30% | | One Year | 5.00% | | One Year Special | 5.00% | | Eighteen Months | 1.35% | | Two Years | 2.30% | | Thirty Months | 0.45% | | Three Years | 2.45% | | Four Years | 0.45% | | Five Years | 0.45% | (As of May 9, 2024) The fees for BrioDirect Bank’s CDs are:  | BrioDirect High-Yield CD Early Withdrawal Penalties | | | --- | --- | | Term | Penalty | | 30 days or less | 30 days interest, whether or not earned | | 1 year or less | 90 days interest, whether or not earned | | 18 months or more but less than five years | 9 months interest, whether or not earned | | 5 years or more | 12 months interest, whether or not earned | ## BrioDirect Bank Customer Service Potential and current customers can get a hold of a human by phone at 877-369-BRIO, six days a week. Its customer contact center is open Monday through Friday, 8:00 a.m. to 8:00 p.m. ET, and 8:30 a.m. to 3 p.m. ET on Saturdays. You can also reach out to BrioDirect Bank by way of snail mail. ## How to Bank With BrioDirect Bank As is the case for online banks, you can apply and open an account online. The process is fairly straightforward, and the application process can take a matter of minutes. You’ll need to have the standard information on hand: your driver’s license, a government-issued ID (e.g., a passport, a state-issued ID), Social Security number, and contact information. You can make an initial deposit by an external transfer through another bank, wiring money, or sending a check. Verdict BrioDirect Bank is a straightforward and simple way to park your money for savings. The interest rates are competitive, and there’s a low minimum to open an account. If you’re someone who isn’t keen on a digital-only bank and are more comfortable with an option that has physical locations, then it would probably be best for you to look elsewhere. ## Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. [Open Account](https://www.briodirectbanking.com/) Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. BrioDirect. "[Savings Plus Account Disclosure](https://www.briodirectbanking.com/wp-content/uploads/2022/09/saplus-truth-in-savings-disclosure.pdf)," Page 2. 2. FDIC. "[Deposit Insurance.](https://www.fdic.gov/resources/deposit-insurance/)" 3. BrioDirect. “[High-Yield CDs.](https://www.briodirectbanking.com/high-rate-cds/)“ 4. BrioDirect. "[24 Month Certificate of Deposit Disclosure for BrioDirect Clients](https://www.briodirectbanking.com/wp-content/uploads/2023/02/cd24-truth-in-savings-disclosure.pdf)," Page 2. 5. BrioDirect. “[High-Yield CDs.](https://www.briodirectbanking.com/high-rate-cds/)“ Related Articles [![Regions Bank]() :max_bytes(150000):strip_icc()/regions-bank-260ece120ed749a2a89d384e566304dd.jpg) Regions Bank Review 2024](https://www.investopedia.com/regions-bank-review-8644041) [![KeyBank]() :max_bytes(150000):strip_icc()/Key_Bank-4e1550638a7b42548bcad15989a517a5.jpg) KeyBank Review 2024](https://www.investopedia.com/keybank-review-8638216) [![Live Oak Bank Review]() :max_bytes(150000):strip_icc()/Live_Oak_Bank_Recirccopy-248f6dd5f9a5418e8b42ca2498ae11b7.jpg) Live Oak Bank Review](https://www.investopedia.com/live-oak-bank-review-5069912) [![M&T Bank]() :max_bytes(150000):strip_icc()/MT_Bank-7840092bc5e1499aad776f1203f5eb56.jpg) M&T Bank Review 2024](https://www.investopedia.com/m-and-t-bank-review-8639263) [![Vio Bank]() :max_bytes(150000):strip_icc()/VIO_Bank_Recirc-69090be1321f4b459468a802013fd221.jpg) Vio Bank Review](https://www.investopedia.com/vio-bank-review-4842261) [![US Bank]() :max_bytes(150000):strip_icc()/US_Bank_Recirc-fbbf58e9f29e4d449449f96a588671c2.jpg) U.S. Bank Review](https://www.investopedia.com/us-bank-review-4801907)

Open Account BrioDirect Bank is an online bank offering competitive deposit accounts. BrioDirect is the digital offshoot of Sterling National Bank, which was founded in 1888 and is headquartered in New York. Pros & Cons Company Overview Pros & Cons Pros Low minimum deposit requirements No monthly fees  Hassle-free bank Cons Primarily for deposit accounts  Higher rates for CDs elsewhere Company Overview Year Founded 1888 Official Website www.briodirectbanking.com Banking Products Offered Savings, CDs Customer Service Phone line: Monday–Friday, 8:30 a.m. to 5 p.m. (EST); Saturdays, 8:30 a.m. to 3 p.m. (EST): 877-369-BRIO. Open Account Table of Contents View All BrioDirect Bank Review Pros Explained Cons Explained Best For Bank Offerings Customer Service How to Bank Methodology Pros Explained Low minimums deposit requirements – To open a BrioDirect money market account requires just $100. If you’re interested in tucking a larger amount in a certificate of deposit (CD), then the minimum amount is $500. No monthly fees – You won’t have to worry about keeping a certain amount of money at all times to avoid account maintenance fees. Nor do you have to meet a litany of criteria to get those fees waived. However, for CDs, if your balance is zero or your account isn't funded, then after 20 days BrioDirect can close your account. Hassle-free bank – BrioDirect is supreme in its simplicity: It offers four deposit accounts, an online application process, and straightforward fees and rates. Cons Explained Higher rates for CDs elsewhere – BrioDirect’s rates for its money market accounts and CDs are competitive and higher than the national average. However, as online banks are known to offer higher interest rates than their brick-and-mortar competitors, you can probably find even more-impressive CD rates at some of the other digital banks that offer only deposit accounts, depending on the CD term. Who Is BrioDirect Best For? BrioDirect Bank should appeal to customers who are comfortable banking online and don’t have a need to step into a brick-and-mortar location. It might be a particularly good fit for those who: Want to open a CD with a low minimum deposit Want to open a money market account without worrying about monthly feesDon’t want to be paralyzed by myriad choicesWant to work with a bank that’s backed by an established financial institution What Does BrioDirect Bank Offer? BrioDirect offers Federal Deposit Insurance Corporation (FDIC)-backed deposit accounts for those who want a safe place to stash their savings and earn some interest. High-Yield Savings BrioDirect Bank’s high-yield savings account has a competitive rate of 5.35% annual percentage yield (APY). You won’t have to worry about paying a monthly fee, and you’ll need $500 to get started. While there are no monthly maintenance fees, and the minimum amount to open makes it accessible, there are a few fees if you’re not careful: a $10 fee for withdrawals from your savings that are in excess of six per month and $35 for each overdraft. While the FDIC protects your money up to $250,000 per account holder, if you’re an existing customer with BrioDirect’s parent bank, Webster Bank, you’ll need to consider the fact that the $250,000 is across all your deposit accounts for both banks. For example, if you have a savings and checking account with Webster Bank and want to open a savings account and CD with BrioBank, you’ll be covered up to $250,000 for all your accounts. As this is per person, if you share joint accounts with someone, then the covered amount doubles to $500,000. High-Rate CDs BrioDirect Bank’s high-yield CDs can be an appealing way for you to tuck away savings that you don’t need to touch for a period of time. CDs typically offer higher interest rates than a standard savings or checking account, and you’ll usually find that the longer the term of the CD, the higher the interest rate. BrioDirect offers CDs for anywhere from 30 days to five years, with interest rates that are higher than the national average. The APY starts at 0.05%, and you’ll need a minimum of $500 to open. Should you neglect to fund the account or let the balance fall below $500, your account can be closed after 20 days. Note that BrioDirect Bank’s CDs automatically renew upon maturity. You’ll need to opt to kick the funds over to another account or withdraw them. However, after the CD matures, there is a 10-day grace period for you to do so. Should you need to take money out of your CD before the maturity date, you’ll be hit with an early withdrawal penalty. BrioDirect’s rates for its high-yield CDs are as follows: BrioDirect Bank High-Yield CD Rates Term APY 30 days 0.05% Three months 0.25% Five months 0.15% Nine Months 0.30% One Year 5.00% One Year Special 5.00% Eighteen Months 1.35% Two Years 2.30% Thirty Months 0.45% Three Years 2.45% Four Years 0.45% Five Years 0.45% (As of May 9, 2024) The fees for BrioDirect Bank’s CDs are:  BrioDirect High-Yield CD Early Withdrawal Penalties Term Penalty 30 days or less 30 days interest, whether or not earned 1 year or less 90 days interest, whether or not earned 18 months or more but less than five years 9 months interest, whether or not earned 5 years or more 12 months interest, whether or not earned BrioDirect Bank Customer Service Potential and current customers can get a hold of a human by phone at 877-369-BRIO, six days a week. Its customer contact center is open Monday through Friday, 8:00 a.m. to 8:00 p.m. ET, and 8:30 a.m. to 3 p.m. ET on Saturdays. You can also reach out to BrioDirect Bank by way of snail mail. How to Bank With BrioDirect Bank  As is the case for online banks, you can apply and open an account online. The process is fairly straightforward, and the application process can take a matter of minutes. You’ll need to have the standard information on hand: your driver’s license, a government-issued ID (e.g., a passport, a state-issued ID), Social Security number, and contact information. You can make an initial deposit by an external transfer through another bank, wiring money, or sending a check. Verdict BrioDirect Bank is a straightforward and simple way to park your money for savings. The interest rates are competitive, and there’s a low minimum to open an account. If you’re someone who isn’t keen on a digital-only bank and are more comfortable with an option that has physical locations, then it would probably be best for you to look elsewhere. Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. Open Account Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. BrioDirect. "Savings Plus Account Disclosure," Page 2. FDIC. "Deposit Insurance." BrioDirect. “High-Yield CDs.“ BrioDirect. "24 Month Certificate of Deposit Disclosure for BrioDirect Clients," Page 2. BrioDirect. “High-Yield CDs.“ Related Articles Regions Bank Review 2024 KeyBank Review 2024 Live Oak Bank Review M&T Bank Review 2024 Vio Bank Review U.S. Bank Review

https://www.investopedia.com/step-up-certificate-of-deposit-5271710

Step-Up Certificate of Deposit (CD)

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit (CDs)</a> can be a good way to earn interest on your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a>. However, unlike a traditional CD with a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed interest rate</a>, a step-up CD comes with the ability to increase your interest rate during the CD term, meaning you could earn even more money when the CD reaches <a class="pseudoStyle" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a>.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Though you are guaranteed a return, your money is tied up and inaccessible unless you pay an early-withdrawal penalty. </li><li>The annual percentage yield (APY), or interest rate, might be lower than you think. </li><li>Alternatives to step-up CDs could provide better returns. </li></ul></div></div></div> <span class="heading-toc" id="toc-what-are-step-up-cds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Are Step-Up CDs? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Like a traditional CD, a step-up CD means setting aside a fixed amount of money for a specific period of time. During the term of the CD, the interest rate could rise, meaning you’ll earn more on your money. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> With many step-up CDs, the rate increases are noted on a schedule so you know when they will go up and what the new interest rate will be. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> One key drawback to step-up CDs is that you typically cannot withdraw any of this money without incurring an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/withdrawal-penalty.asp">early-withdrawal penalty</a>. Therefore, it’s important to have enough cash on hand so you won’t need to rely on a step-up CD in case of any emergency. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-how-do-step-up-cds-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-heading__text"> How Do Step-Up CDs work?  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> On the surface, it looks like the interest rate increases for the CD term will yield a good return on your investment. However, step-up CDs often have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blended-rate.asp">blended rate</a>, or APY, which is a combination of the previous rate on the CD and the new rate. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> For example, at U.S. Bank, you could get a step-up CD with a 28-month term that increases its interest rate every seven months. According to the rate schedule, the interest rate starts at 0.05% and increases to 0.65% by the last rate increase in the CD term. However, the blended APY for the CD term is actually 0.35%.<span class="ql-inline-citation" data-cite="1"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Check the Blended APY</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The blended APY is the combined interest rate on a step-up CD. This is the rate of interest you will receive over the term of the CD.</p></div></div></div> <span class="heading-toc" id="toc-advantages-and-disadvantages-of-a-step-up-cd"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Advantages and Disadvantages of a Step-Up CD </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If you’re looking to diversify your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> and want a guaranteed return, a step-up CD might be the right fit. However, it’s important to remember that when your money is locked into a step-up CD, you cannot access it until the CD reaches maturity; otherwise, you will incur an early-withdrawal penalty. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Also, interest rates on step-up CDs are not great. You might find better rates on traditional CDs. In this case, you may want to build a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cd-ladder.asp">CD ladder</a> by purchasing several traditional CDs with various term lengths. These could provide guaranteed returns along the way that you could reinvest in either more CDs or other financial tools.  <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-step-up-cds-vs-bump-up-cds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Step-Up CDs vs. Bump-Up CDs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Many confuse a step-up CD with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bumpupcd.asp">bump-up CD</a> because they both involve an interest rate increase. However, they are not the same. With a step-up CD, interest rate increases usually occur according to a predetermined schedule for the term of the CD. Owners know how much the interest rate will go up and when. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> With a bump-up CD, the owner has the right to request an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apy.asp">annual percentage yield</a> increase once during the CD term. Because you have to request it yourself, it could be difficult to determine the right time to request it to maximize on higher rates.  <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-step-up-cd-alternatives"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> Step-Up CD Alternatives </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Because interest rates are so low on step-up CDs, a good alternative could be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings account</a> or a high-yield <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market account</a>. For example, using the U.S Bank step-up CD previously mentioned, the return on a 28-month step-up CD with a 0.35% APY and a $5,000 principal is just $41. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Many high-yield savings and money market accounts have rates of 0.50% APY or higher. A deposit of $5,000 with a 0.50% APY over 24 months is $50.13. Not only would you earn more in interest, but you also could tap into that money more easily than with a step-up CD. <br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-can-i-access-my-money-in-a-step-up-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Access My Money in a Step-Up CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The money in a step-up CD is tied up until the CD reaches maturity unless you are willing to pay an early-withdrawal penalty.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-when-does-the-rate-increase-on-my-step-up-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Does the Rate Increase on My Step-Up CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>That depends on the terms of the CD. Some may increase every few months, while others increase each year of the CD term.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-can-i-convert-my-step-up-cd-to-a-traditional-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Convert My Step-Up CD to a Traditional CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, when the step-up CD reaches maturity, you can reinvest the funds into a traditional CD.</p></div> </div></div>

[Certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) can be a good way to earn interest on your [savings](https://www.investopedia.com/terms/s/savings.asp). However, unlike a traditional CD with a [fixed interest rate](https://www.investopedia.com/terms/f/fixedinterestrate.asp), a step-up CD comes with the ability to increase your interest rate during the CD term, meaning you could earn even more money when the CD reaches [maturity](https://www.investopedia.com/terms/m/maturity.asp).  ### Key Takeaways * Though you are guaranteed a return, your money is tied up and inaccessible unless you pay an early-withdrawal penalty. * The annual percentage yield (APY), or interest rate, might be lower than you think. * Alternatives to step-up CDs could provide better returns. ## What Are Step-Up CDs? Like a traditional CD, a step-up CD means setting aside a fixed amount of money for a specific period of time. During the term of the CD, the interest rate could rise, meaning you’ll earn more on your money.  With many step-up CDs, the rate increases are noted on a schedule so you know when they will go up and what the new interest rate will be.  One key drawback to step-up CDs is that you typically cannot withdraw any of this money without incurring an [early-withdrawal penalty](https://www.investopedia.com/terms/w/withdrawal-penalty.asp). Therefore, it’s important to have enough cash on hand so you won’t need to rely on a step-up CD in case of any emergency.  ## How Do Step-Up CDs work? On the surface, it looks like the interest rate increases for the CD term will yield a good return on your investment. However, step-up CDs often have a [blended rate](https://www.investopedia.com/terms/b/blended-rate.asp), or APY, which is a combination of the previous rate on the CD and the new rate.  For example, at U.S. Bank, you could get a step-up CD with a 28-month term that increases its interest rate every seven months. According to the rate schedule, the interest rate starts at 0.05% and increases to 0.65% by the last rate increase in the CD term. However, the blended APY for the CD term is actually 0.35%. ### Check the Blended APY The blended APY is the combined interest rate on a step-up CD. This is the rate of interest you will receive over the term of the CD. ## Advantages and Disadvantages of a Step-Up CD If you’re looking to diversify your [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) and want a guaranteed return, a step-up CD might be the right fit. However, it’s important to remember that when your money is locked into a step-up CD, you cannot access it until the CD reaches maturity; otherwise, you will incur an early-withdrawal penalty.  Also, interest rates on step-up CDs are not great. You might find better rates on traditional CDs. In this case, you may want to build a [CD ladder](https://www.investopedia.com/terms/c/cd-ladder.asp) by purchasing several traditional CDs with various term lengths. These could provide guaranteed returns along the way that you could reinvest in either more CDs or other financial tools.   ## Step-Up CDs vs. Bump-Up CDs Many confuse a step-up CD with a [bump-up CD](https://www.investopedia.com/terms/b/bumpupcd.asp) because they both involve an interest rate increase. However, they are not the same. With a step-up CD, interest rate increases usually occur according to a predetermined schedule for the term of the CD. Owners know how much the interest rate will go up and when.  With a bump-up CD, the owner has the right to request an [annual percentage yield](https://www.investopedia.com/terms/a/apy.asp) increase once during the CD term. Because you have to request it yourself, it could be difficult to determine the right time to request it to maximize on higher rates.   ## Step-Up CD Alternatives Because interest rates are so low on step-up CDs, a good alternative could be a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) or a high-yield [money market account](https://www.investopedia.com/terms/m/moneymarketaccount.asp). For example, using the U.S Bank step-up CD previously mentioned, the return on a 28-month step-up CD with a 0.35% APY and a $5,000 principal is just $41.  Many high-yield savings and money market accounts have rates of 0.50% APY or higher. A deposit of $5,000 with a 0.50% APY over 24 months is $50.13. Not only would you earn more in interest, but you also could tap into that money more easily than with a step-up CD.  ## Can I Access My Money in a Step-Up CD? The money in a step-up CD is tied up until the CD reaches maturity unless you are willing to pay an early-withdrawal penalty. ## When Does the Rate Increase on My Step-Up CD? That depends on the terms of the CD. Some may increase every few months, while others increase each year of the CD term. ## Can I Convert My Step-Up CD to a Traditional CD? Yes, when the step-up CD reaches maturity, you can reinvest the funds into a traditional CD.

Certificates of deposit (CDs) can be a good way to earn interest on your savings. However, unlike a traditional CD with a fixed interest rate, a step-up CD comes with the ability to increase your interest rate during the CD term, meaning you could earn even more money when the CD reaches maturity.  Key Takeaways Though you are guaranteed a return, your money is tied up and inaccessible unless you pay an early-withdrawal penalty. The annual percentage yield (APY), or interest rate, might be lower than you think. Alternatives to step-up CDs could provide better returns.  What Are Step-Up CDs? Like a traditional CD, a step-up CD means setting aside a fixed amount of money for a specific period of time. During the term of the CD, the interest rate could rise, meaning you’ll earn more on your money.  With many step-up CDs, the rate increases are noted on a schedule so you know when they will go up and what the new interest rate will be.  One key drawback to step-up CDs is that you typically cannot withdraw any of this money without incurring an early-withdrawal penalty. Therefore, it’s important to have enough cash on hand so you won’t need to rely on a step-up CD in case of any emergency.  How Do Step-Up CDs work?  On the surface, it looks like the interest rate increases for the CD term will yield a good return on your investment. However, step-up CDs often have a blended rate, or APY, which is a combination of the previous rate on the CD and the new rate.  For example, at U.S. Bank, you could get a step-up CD with a 28-month term that increases its interest rate every seven months. According to the rate schedule, the interest rate starts at 0.05% and increases to 0.65% by the last rate increase in the CD term. However, the blended APY for the CD term is actually 0.35%. Check the Blended APY The blended APY is the combined interest rate on a step-up CD. This is the rate of interest you will receive over the term of the CD. Advantages and Disadvantages of a Step-Up CD If you’re looking to diversify your portfolio and want a guaranteed return, a step-up CD might be the right fit. However, it’s important to remember that when your money is locked into a step-up CD, you cannot access it until the CD reaches maturity; otherwise, you will incur an early-withdrawal penalty.  Also, interest rates on step-up CDs are not great. You might find better rates on traditional CDs. In this case, you may want to build a CD ladder by purchasing several traditional CDs with various term lengths. These could provide guaranteed returns along the way that you could reinvest in either more CDs or other financial tools.   Step-Up CDs vs. Bump-Up CDs Many confuse a step-up CD with a bump-up CD because they both involve an interest rate increase. However, they are not the same. With a step-up CD, interest rate increases usually occur according to a predetermined schedule for the term of the CD. Owners know how much the interest rate will go up and when.  With a bump-up CD, the owner has the right to request an annual percentage yield increase once during the CD term. Because you have to request it yourself, it could be difficult to determine the right time to request it to maximize on higher rates.   Step-Up CD Alternatives Because interest rates are so low on step-up CDs, a good alternative could be a high-yield savings account or a high-yield money market account. For example, using the U.S Bank step-up CD previously mentioned, the return on a 28-month step-up CD with a 0.35% APY and a $5,000 principal is just $41.  Many high-yield savings and money market accounts have rates of 0.50% APY or higher. A deposit of $5,000 with a 0.50% APY over 24 months is $50.13. Not only would you earn more in interest, but you also could tap into that money more easily than with a step-up CD.  Can I Access My Money in a Step-Up CD? The money in a step-up CD is tied up until the CD reaches maturity unless you are willing to pay an early-withdrawal penalty. When Does the Rate Increase on My Step-Up CD? That depends on the terms of the CD. Some may increase every few months, while others increase each year of the CD term. Can I Convert My Step-Up CD to a Traditional CD? Yes, when the step-up CD reaches maturity, you can reinvest the funds into a traditional CD.